OFFERING CIRCULAR

8,000,000 Shares

5.81% Non-Cumulative Preferred Stock, Series H

(stated value $50 per share)

This OÅering Circular relates to the oÅer of 8,000,000 shares of the 5.81% Non-Cumulative Preferred Stock,

Series H (the ""Preferred Stock'') of the Federal National Mortgage Association (""Fannie Mae''). The Preferred

Stock has a stated value and liquidation preference of $50 per share. Dividends at the rate of 5.81% per year will

accrue from and including April 6, 2001. We will be required to pay dividends quarterly on March 31, June 30,

September 30 and December 31 of each year, commencing June 30, 2001. However, we will be required to pay

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

sole discretion out of funds legally available for such payment. The amount of dividends we will be required to

pay, if our Board declares them, may be increased if legislation is enacted that changes the Internal Revenue Code

of 1986, as amended, to reduce the dividends-received deduction applicable to dividends on the Preferred Stock as

set forth under ""Description of the Preferred StockÌDividendsÌChanges in the Dividends-Received

Percentage.''

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

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

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

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

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

On or after April 6, 2006, we may redeem the Preferred Stock, in whole or in part, at any time or from time to

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

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

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

StockÌVoting Rights; Amendments.''

We will apply to list the Preferred Stock on the New York Stock Exchange under the symbol ""FNMprH.'' If

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

period after the initial delivery of the Preferred Stock.

Our obligations under the terms of the Preferred Stock are only our obligations and are not those

of the United States or of any instrumentality thereof other than Fannie Mae.

Initial Public Underwriting Proceeds to

OÅering Price(1) DiscountFannie Mae(1)(2)

Per Share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $50.00 $0.4375 $49.5625

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $400,000,000 $3,500,000 $396,500,000

(1) Plus accrued dividends, if any, from April 6, 2001.

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

Bear, Stearns & Co. Inc. Lehman Brothers

First Tennessee Bank N.A.

Merrill Lynch & Co.

Ormes Capital Markets, Inc.

The date of this OÅering Circular is April 3, 2001.
We are not required to register the Preferred Stock under the U.S. Securities Act of 1933, as

amended. Accordingly, we have not Ñled a registration statement with the U.S. Securities and

Exchange Commission. The shares of Preferred Stock are ""exempted securities'' within the meaning

of the U.S. Securities Exchange Act of 1934, as amended. Neither the U.S. Securities and Exchange

Commission nor any state securities commission has approved or disapproved the Preferred Stock or

determined if this OÅering Circular is truthful or complete. 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 who come into possession of this OÅering

Circular must inform themselves about and observe any applicable restrictions.

This OÅering Circular is not an oÅer to sell or a solicitation of an oÅer to buy any securities other

than the Preferred Stock or an oÅer to sell or a solicitation of an oÅer to buy the Preferred Stock in

any jurisdiction or in any other circumstance in which an oÅer or solicitation is unlawful or not

authorized.

Because we are not subject to the periodic reporting requirements of the U.S. Securities Exchange

Act of 1934, we do not Ñle reports or other information with the U.S. Securities and Exchange

Commission.

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

those contained in this OÅering Circular and, if given or made, such information or representations

must not be relied upon as having been authorized. Neither the delivery of this OÅering Circular nor

any sale made hereunder shall, under any circumstances, create an implication that there has been no

change in the aÅairs of Fannie Mae since the date hereof, or in the case of facts set forth in the

documents incorporated by reference herein, since the respective dates thereof or that the information

contained herein or therein is correct as to any time subsequent thereto.

TABLE OF CONTENTS

Description Page

Summary of the OÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6

Use of Proceeds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6

Capitalization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7

Selected Financial Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8

Government Regulation and Charter Act ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10

Description of the Preferred Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13

Legality of Investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19

United States TaxationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20

Underwriting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22

Rating ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23

AccountantsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23

Validity of the Preferred StockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23

Additional Information About Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23

CertiÑcate of DesignationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Appendix A

Information Statement dated March 30, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Appendix B

2
SUMMARY OF THE OFFERING

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

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

Preferred Stock. You also should read the more detailed information contained elsewhere in this

OÅering Circular and in the documents incorporated herein by reference.

Fannie Mae

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

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

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

agency to provide supplemental liquidity to the mortgage market and were transformed into a

stockholder-owned and privately managed corporation by legislation enacted in 1968.

Description of the Preferred Stock

Issuer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fannie Mae

Securities OÅeredÏÏÏÏÏÏÏÏÏÏÏÏ 8,000,000 shares of 5.81% Non-Cumulative Preferred Stock,

Series H, no par value, with a stated value and liquidation preference of $50 per share.

Dividends:

Dividend Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.81% per annum. Non-cumulative quarterly cash dividends at the

rate of 5.81% per year will accrue from and including April 6, 2001.

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

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

payment of dividends.

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

commencing June 30, 2001.

DRD Protection ÏÏÏÏÏÏÏÏÏÏÏ If, prior to October 6, 2002, amendments to the Internal Revenue

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

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

amount of dividends payable in respect of the Preferred Stock will

be adjusted to oÅset the eÅect of such reduction. However, no

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

dividends-received deduction is reduced below 50%.

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

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

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

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

currently outstanding series of Fannie Mae preferred stock.

Optional Redemption ÏÏÏÏÏÏÏÏÏ On or after April 6, 2006, we may redeem the Preferred Stock, in

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

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

dividend for the then-current quarterly dividend period accrued to

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

without accumulation of any dividends for prior dividend periods).

Holders of Preferred Stock will have no right to require redemption

of Preferred Stock.

3
Liquidation Rights ÏÏÏÏÏÏÏÏÏÏÏ In the event of any dissolution or liquidation of Fannie Mae,

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

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

the dividend for the then-current quarterly dividend period accrued

through the liquidation payment date.

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

Preferred Stock

Preemptive and Conversion

Rights ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ None

Rating ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The Preferred Stock has been rated ""AA¿'' by Standard & Poor's

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

""aa3'' by Moody's Investors Service, Inc.

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

general corporate purposes, including the repurchase of outstanding

shares of our preferred stock.

Transfer Agent, Dividend

Disbursing Agent and

Registrar ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ First Chicago Trust Company a division of EquiServe

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

Exchange under the symbol ""FNMprH''. If approved for listing, we

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

period after the initial delivery of the Preferred Stock.

CUSIP Number ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 313586885

4
Summary Selected Financial Data

(Dollars in millions)

December 31,

2000 1999 1998 1997 1996

Balance Sheet Data:

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 607,399 $522,780 $415,223 $316,316 $286,259

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 675,072 575,167 485,014 391,673 351,041

Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 654,234 557,538 469,561 377,880 338,268

Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,838 17,629 15,453 13,793 12,773

Capital(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,645 18,430 16,244 14,575 13,520

Core capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,827 17,876 15,465 13,793 12,773

Year Ended December 31,

2000 1999 1998 1997 1996

Income Statement Data:

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,674 $ 4,894 $ 4,110 $ 3,949 $ 3,592

Guaranty fee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,351 1,282 1,229 1,274 1,196

Fee and other income (expense)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (44) 191 275 125 86

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,448 3,912 3,418 3,056 2,725

Year Ended December 31,

2000 1999 1998 1997 1996

Other Data:

Taxable-equivalent revenues(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,825 $ 6,975 $ 6,272 $ 5,735 $ 5,216

Net interest margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.01% 1.01% 1.03% 1.17% 1.18%

Ratio of earnings to combined fixed charges

and preferred stock dividends(4) ÏÏÏÏÏÏÏÏÏÏÏÏ 1.16:1 1.17:1 1.18:1 1.19:1 1.19:1

Mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 154,231 $195,210 $188,448 $ 70,465 $ 68,618

MBS issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211,662 300,689 326,148 149,429 149,869

MBS outstanding at year-end(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,057,750 960,883 834,518 709,582 650,780

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

(2) The sum of (a) the stated value of outstanding common stock, (b) the stated value of

outstanding non-cumulative perpetual preferred stock, (c) paid-in capital, and (d) retained

earnings.

(3) Includes revenues net of operating losses plus taxable-equivalent adjustments for tax-exempt

income and investment tax credits using the applicable federal income tax rate.

(4) ""Earnings'' consists of (a) income before federal income taxes and extraordinary item and

(b) Ñxed charges. ""Fixed charges'' represents interest expense.

(5) Includes MBS in portfolio of $351 billion, $282 billion, $197 billion, $130 billion, and

$103 billion at December 31, 2000, 1999, 1998, 1997, and 1996, respectively.

5
FANNIE MAE

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

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

Act''). See ""Government Regulation and Charter Act'' in this OÅering Circular and in the Information

Statement and ""Additional Information About Fannie Mae'' in this OÅering Circular. We are the

largest investor in home mortgage loans in the United States. We were established in 1938 as a United

States government agency to provide supplemental liquidity to the mortgage market and were

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

1968.

Fannie Mae provides funds to the mortgage market by purchasing mortgage loans from lenders,

thereby replenishing their funds for additional lending. We acquire 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, we are able to expand the total amount of funds available for housing.

Fannie Mae also issues mortgage-backed securities (""MBS''), receiving guaranty fees for our

guarantee of timely payment of principal and interest on MBS certiÑcates. We issue MBS primarily in

exchange for pools of mortgage loans from lenders. The issuance of MBS enables us to further our

statutory purpose of increasing the liquidity of residential mortgage loans.

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

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

originating and underwriting loans. See ""Business'' in the Information Statement and ""Additional

Information About Fannie Mae'' in this OÅering Circular.

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

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

USE OF PROCEEDS

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

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

anticipate the need for additional Ñnancing from time to time, including Ñnancing through various

types of equity and debt securities. The amount and nature of such Ñnancings will depend upon a

number of factors, including the volume of our maturing debt obligations, the volume of mortgage loan

prepayments, the volume and type of mortgage loans we purchase, and general market conditions.

6
CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2000, and it is adjusted to give

eÅect to the issuance of the Preferred Stock (before giving eÅect to the payment of estimated oÅering

expenses and underwriting discount), without giving eÅect to the redemption of our 6.41% NonCumulative Preferred Stock, Series A, on March 1, 2001.

Actual

Average Average Outstanding at

Maturity Cost(1) December 31, 2000 As Adjusted

(Dollars in millions)

Debentures, notes, and bonds, net:

Due within one year:

Short-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 mos. 6.50% $178,292 $178,292

Universal BenchmarkÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 mos. 5.71 6,984 6,984

Universal RetailÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 mos. 6.62 785 785

Universal Short-term ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 mos. 6.58 42,157 42,157

Universal StandardÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9 mos. 6.02 51,185 51,185

Other(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.57 919 919

Total due within one yearÏÏÏÏÏÏÏÏÏÏÏÏ 280,322 280,322

Due after one year:

Universal BenchmarkÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 yrs. 2 mos. 6.42% 185,771 185,771

Universal RetailÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 yrs. 9 mos. 6.82 7,083 7,083

Universal StandardÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 yrs. 6.42 165,680 165,680

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 yrs. 8.58 3,826 3,826

Total due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏ 362,360 362,360

Total debentures, notes, and bonds ÏÏÏÏÏÏÏ $642,682 $642,682

Stockholders' equity:

Preferred stock, $50 stated value;

100,000,000 shares authorizedÌ

45,550,000 shares issued at

December 31, 2000; 53,550,000 shares

issued as adjusted

Series A, 7,500,000 shares issued(3) ÏÏ $ 375 $ 375

Series B, 7,500,000 shares issuedÏÏÏÏÏ 375 375

Series C, 5,000,000 shares issuedÏÏÏÏÏ 250 250

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

Series E, 3,000,000 shares issuedÏÏÏÏÏ 150 150

Series F, 13,800,000 shares issuedÏÏÏÏ 690 690

Series G, 5,750,000 shares issuedÏÏÏÏÏ 288 288

Series H, 8,000,000 shares issuedÏÏÏÏÏ Ì 400

Common stock, $.525 stated value, no

maximum authorizationÌ

1,129,000,000 shares outstanding ÏÏÏÏÏÏÏ 593 593

Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,588 1,588

Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,619 21,619

Accumulated other comprehensive income 10 10

26,088 26,488

Less treasury stock, at costÌ

130,000,000 shares(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,250 5,250

Total stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 20,838 $ 21,238

(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) Average maturity is indeterminate because the outstanding amount includes investment agreements that have

varying maturities.

(3) Fannie Mae redeemed all of the outstanding shares of its 6.41% Non-Cumulative Preferred Stock, Series A, on

March 1, 2001 at $50.53 per share. The redemption price included dividends of $.53417 per share commencing

December 31, 2000, up to but excluding March 1, 2001.

(4) Does not reÖect any repurchases of our common stock that may be made using proceeds from the sale of the

Preferred Stock, Series H. See ""Use of Proceeds.''

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

redeem such debt obligations. The amount of debentures, notes, other debt obligations outstanding,

and stockholders' equity on any date subsequent to December 31, 2000 may diÅer from that shown in

the table above.

7
SELECTED FINANCIAL INFORMATION

The following selected Ñnancial data for the years 1996 through 2000 (which data are not covered

by the independent auditors' report) have been summarized or derived from our audited Ñnancial

statements and other Ñnancial information for such years. These data should be read in conjunction

with the audited Ñnancial statements and notes to the Ñnancial statements contained in the

Information Statement incorporated herein by reference and included in this OÅering Circular as

Appendix B.

(Dollars in millions, except per common share amounts)

Year Ended December 31,

2000 1999 1998 1997 1996

Income Statement Data:

Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 42,781 $ 35,495 $ 29,995 $ 26,378 $ 23,772

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (37,107) (30,601) (25,885) (22,429) (20,180)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,674 4,894 4,110 3,949 3,592

Guaranty fee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,351 1,282 1,229 1,274 1,196

Fee and other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (44) 191 275 125 86

Credit-related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (94) (127) (261) (375) (409)

Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (905) (800) (708) (636) (560)

Income before federal income taxes and

extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,982 5,440 4,645 4,337 3,905

Provision for federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,566) (1,519) (1,201) (1,269) (1,151)

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,416 3,921 3,444 3,068 2,754

Extraordinary itemÌgain (loss) on early

extinguishment of debt, net of tax eÅect ÏÏÏÏÏÏ 32 (9) (26) (12) (29)

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,448 $ 3,912 $ 3,418 $ 3,056 $ 2,725

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (121) (78) (66) (65) (42)

Net income available to common shareholders ÏÏÏ $ 4,327 $ 3,834 $ 3,352 $ 2,991 $ 2,683

Basic earnings per common share(1):

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏ $ 4.28 $ 3.75 $ 3.28 $ 2.87 $ 2.53

Extraordinary itemÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .03 Ì (.02) (.02) (.03)

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.31 $ 3.75 $ 3.26 $ 2.85 $ 2.50

Diluted earnings per common share(1):

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏ $ 4.26 $ 3.73 $ 3.26 $ 2.84 $ 2.51

Extraordinary itemÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .03 (.01) (.03) (.01) (.03)

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.29 $ 3.72 $ 3.23 $ 2.83 $ 2.48

Cash dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.12 $ 1.08 $ .96 $ .84 $ .76

December 31,

2000 1999 1998 1997 1996

Balance Sheet Data:

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $607,399 $522,780 $415,223 $316,316 $286,259

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54,968 39,751 58,515 64,596 56,606

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 675,072 575,167 485,014 391,673 351,041

Borrowings:

Due within one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 280,322 226,582 205,413 175,400 159,900

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 362,360 321,037 254,878 194,374 171,370

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 654,234 557,538 469,561 377,880 338,268

Stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,838 17,629 15,453 13,793 12,773

Capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,645 18,430 16,244 14,575 13,520

Core capital(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,827 17,876 15,465 13,793 12,773

8
Year Ended December 31,

2000 1999 1998 1997 1996

Other Data:

Taxable-equivalent revenues(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,825 $ 6,975 $ 6,272 $ 5,735 $ 5,216

Net interest margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.01% 1.01% 1.03% 1.17% 1.18%

Return on average common equity ÏÏÏÏÏÏÏÏÏÏÏÏ 25.6 25.2 25.2 24.6 24.1

Dividend payout ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.0 28.8 29.5 29.4 30.4

Average eÅective guaranty fee rate ÏÏÏÏÏÏÏÏÏÏÏÏ .195 .193 .202 .227 .224

Credit loss ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .007 .011 .027 .041 .053

Ratio of earnings to combined Ñxed charges

and preferred stock dividends(5) ÏÏÏÏÏÏÏÏÏÏÏ 1.16:1 1.17:1 1.18:1 1.19:1 1.19:1

Mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 154,231 $195,210 $188,448 $ 70,465 $ 68,618

MBS issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211,662 300,689 326,148 149,429 149,869

MBS outstanding at year-end(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,057,750 960,883 834,518 709,582 650,780

Weighted-average diluted common shares

outstanding, in millions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,009 1,031 1,037 1,056 1,080

(1) Earnings per common share amounts for 1996 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) The sum of (a) the stated value of outstanding common stock, (b) the stated value of non-cumulative

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

(4) Includes revenues net of operating losses plus taxable-equivalent adjustments for tax-exempt income

and investment tax credits using the applicable federal income tax rate.

(5) ""Earnings'' consists of (a) income before federal income taxes and extraordinary item and (b) Ñxed

charges. ""Fixed charges'' represents interest expense.

(6) Includes MBS in portfolio of $351 billion, $282 billion, $197 billion, $130 billion, and $103 billion at

December 31, 2000, 1999, 1998, 1997, and 1996, respectively.

9
GOVERNMENT REGULATION AND CHARTER ACT

Fannie Mae 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 Fannie Mae and the Government National Mortgage Association, a wholly

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

Ñnancing assistance and management and liquidation functions. Under the 1968 Act, Fannie Mae was

constituted as a federally chartered corporation and the entire equity interest in Fannie Mae became

stockholder-owned.

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

terminate government regulation of Fannie Mae. Under the Charter Act, approval of the Secretary of

the Treasury is required for Fannie Mae's issuance of its debt obligations and MBS. In addition, the

Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the ""1992 Act'') established the OÇce of Federal Housing Enterprise Oversight (""OFHEO''), an independent oÇce within

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

Fannie Mae and the Federal Home Loan Mortgage Corporation, or ""Freddie Mac,'' are adequately

capitalized and operating safely in accordance with the 1992 Act. The Director is authorized to levy,

pursuant to annual Congressional appropriations, annual assessments on Fannie Mae and Freddie

Mac to cover reasonable expenses of OFHEO. The 1992 Act established minimum capital, risk-based

capital, and critical capital requirements for Fannie Mae and required the Director to establish, by

regulation, a risk-based capital test to be used to determine the amount of total capital Fannie Mae

must hold to meet the risk-based capital standard on a quarterly basis. 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 formalized the interim capital standards applied by OFHEO, with which

Fannie Mae has been in compliance since their inception. See also ""Management's Discussion and

Analysis of Financial Condition and Results of OperationsÌBalance Sheet AnalysisÌRegulatory

Environment'' in the Information Statement.

OFHEO has proposed regulations to establish the risk-based capital test for Fannie Mae and

Freddie Mac in two parts. Part I speciÑes that ""benchmark loss experience'' will be combined with

other yet to be determined assumptions and applied each quarter to Fannie Mae's book of business to

establish credit losses under the risk-based capital standard for Fannie Mae. Part I also speciÑes the

house price index that OFHEO will use in connection with the risk-based capital standard. Fannie

Mae submitted comments on Part I stating that several aspects of the initial proposal require

adjustments or amendment, because it does not accurately capture Fannie Mae's credit history and

derives credit loss rates that are signiÑcantly worse than any reasonable representation of Fannie

10
Mae's and Freddie Mac's loss experience. Part II speciÑes, among other matters, remaining aspects of

the test and how the test will be used to determine Fannie Mae's and Freddie Mac's risk-based capital

requirements. The summary accompanying Part II noted that if Part II had been in eÅect as of

June 30, 1997, Fannie Mae's required risk-based capital would have been $17.73 billion, as compared

with $14.05 billion in actual capital at that time. OFHEO also noted that there were a variety of

means, such as hedging, that Fannie Mae could have used to reduce required risk-based capital to the

level of its actual capital. Fannie Mae submitted comments on Part II detailing three principal criteria

that management used to evaluate Part II of the proposed regulations: operational workability, the

ability to accommodate innovation, and linking of capital to risk. Management concluded that

OFHEO's proposed regulations failed to meet these three criteria and made suggestions for addressing

these points. Management believes that the Ñnal risk-based standard could be modiÑed substantially

from its current proposed form. The 1992 Act provides that the Ñnal regulations will be enforceable

one year after issuance. Management expects that Fannie Mae will be able to meet any reasonable

Ñnal test.

If Fannie Mae fails to meet one or more of the capital standards under the 1992 Act, the Director is

required to take certain remedial measures and may take others, depending on the standards Fannie

Mae fails to meet. The Director's enforcement powers include the power to impose temporary and final

cease-and-desist orders and civil penalties on Fannie Mae and on directors or executive officers of

Fannie Mae. If the Director determines that Fannie Mae is engaging in conduct not approved by the

Director that could result in a rapid depletion of core capital or that the value of the property subject to

mortgages held or securitized by Fannie Mae has decreased significantly, the Director is authorized to

treat Fannie Mae as not meeting one of the capital standards that it otherwise meets. In addition,

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

standards. If the Director does not approve the plan or determines that Fannie Mae has failed to make

reasonable efforts to comply with the plan, then the Director may treat Fannie Mae as not meeting one

of the capital standards that it otherwise meets. Also, if Fannie Mae fails to meet or is treated by the

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

that Fannie Mae or any executive officer or director of Fannie Mae is engaging in or about to engage in

any conduct that threatens to result in a significant depletion of Fannie Mae's core capital, then the

Director is authorized to commence proceedings pursuant to which, after a hearing, the Director could

issue a cease and desist order prohibiting such conduct. The Director could issue such an order without a

hearing, which would be effective until completion of the cease-and-desist proceedings, if the Director

determined that the conduct in question was likely to cause a significant depletion of core capital. Prior

approval of the Director is required for Fannie Mae to pay a dividend if the dividend would decrease

Fannie Mae's capital below risk-based capital or minimum capital levels established under the 1992 Act.

See ""Common and Preferred Stock'' in the Information Statement.

The 1992 Act gives the Director the authority to conduct on-site examinations of Fannie Mae for

purposes of ensuring Fannie Mae's Ñnancial safety and soundness. The Charter Act, as amended by

the 1992 Act, also authorizes the General Accounting OÇce to audit the programs, activities, receipts,

expenditures, and Ñnancial transactions of Fannie Mae. Fannie Mae is required to submit annual and

quarterly reports of the Ñnancial condition and operations of Fannie Mae to the Director. Fannie Mae

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

Secretary of HUD regarding Fannie Mae's performance in meeting housing goals 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. The Secretary of HUD has

recently proposed new housing goals for Fannie Mae. See ""Management's Discussion and Analysis of

Financial Condition and Results of Operations Ì Housing Goals'' in the Information Statement.

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

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

granted exclusively to the Director of OFHEO in the 1992 Act. The Secretary of HUD also must

11
approve any new conventional mortgage program that is signiÑcantly diÅerent from those approved or

engaged in prior to the 1992 Act. The Secretary is required to approve any new program unless it is

not authorized by the Charter Act of Fannie Mae or the Secretary Ñnds that it is not in the public

interest. However, until one year after the Ñnal regulations establishing the risk-based capital test are

in eÅect, the Secretary must disapprove a new program if the Director determines that the program

would risk signiÑcant deterioration of the Ñnancial condition of Fannie Mae. The Secretary has

adopted regulations related to the program approval requirement.

Thirteen members of Fannie Mae's eighteen-member Board of Directors are elected by the

holders of Fannie Mae's common stock, and the remaining Ñve members are appointed by the

President of the United States. The appointed directors must include one person from the home

building industry, one person from the mortgage lending industry, and one person from the real estate

industry. Under the 1992 Act, one appointed director also must be from an organization that has

represented consumer or community interests for not less than two years or a person who has

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

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

removed by the President for good cause.

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

Mae certain privileges. For instance, securities issued by Fannie Mae are deemed to be ""exempt

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

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

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

SEC. Fannie Mae also is not required to Ñle periodic reports with the SEC.

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

obligations of Fannie Mae up to a maximum of $2.25 billion outstanding at any one time. This facility

has not been used since Fannie Mae's transition from government ownership in 1968. Neither the

United States nor any agency thereof is obligated to Ñnance Fannie Mae's operations or to assist

Fannie Mae in any other manner. The Federal Reserve Banks are authorized to act as depositaries,

custodians, and Ñscal agents for Fannie Mae, for its own account, or as Ñduciary.

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

authority except for real property taxes. We are not exempt from payment of federal corporate income

taxes. Also, we may conduct our business without regard to any qualiÑcations or similar statute in any

state of the United States or the District of Columbia.

12
DESCRIPTION OF THE PREFERRED STOCK

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

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

to authorize Fannie Mae to issue up to 100,000,000 shares of preferred stock. To date, we have issued

the following:

‚ on March 1, 1996, 7,500,000 shares of 6.41% Non-Cumulative Preferred Stock, Series A

(stated value $50 per share) (the ""Series A Preferred Stock'');

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

value $50 per share) (the ""Series B Preferred Stock'');

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

(stated value $50 per share) (the ""Series C Preferred Stock'');

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

(stated value $50 per share) (the ""Series D Preferred Stock'');

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

value $50 per share) (the ""Series E Preferred Stock'');

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

Series F (stated value $50 per share) (the ""Series F Preferred Stock''); and

‚ on August 8, 2000, 5,750,000 shares of Variable Rate Non-Cumulative Preferred Stock,

Series G (stated value $50 per share) (the ""Series G Preferred Stock'').

We redeemed all of our outstanding Series A Preferred Stock on March 1, 2001. In this OÅering

Circular, we refer to the Series B Preferred Stock through the Series G Preferred Stock as the

""Outstanding Preferred Stock.''

The terms of the Preferred Stock will be established by a CertiÑcate of Designation of Terms of

5.81% Non-Cumulative Preferred Stock, Series H (the ""CertiÑcate of Designation''), adopted by a

duly authorized committee of our Board of Directors, which will be substantially in the form attached

as Appendix A to this OÅering Circular. The following is a brief description of the terms of the

Preferred Stock; you also should read the CertiÑcate of Designation for a full description of the

Preferred Stock.

General

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

or series of stock that rank, as to dividends, liquidation or otherwise, prior to, on parity with or junior

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

the shares of Outstanding Preferred Stock are the only shares of preferred stock of Fannie Mae

outstanding. The Preferred Stock will rank equally as to the payment of dividends and the distribution

of assets upon dissolution, liquidation or winding up of Fannie Mae with the Outstanding Preferred

Stock.

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

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

nonassessable.

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

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

any shares of Preferred Stock.

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

of Fannie Mae and will have no preemptive rights.

13
First Chicago Trust Company a division of EquiServe will be the transfer agent, dividend

disbursing agent, and registrar for the shares of Preferred Stock.

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

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

other than Fannie Mae.

Dividends

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

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

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

committee thereof, in its sole discretion out of funds legally available for dividend payments, noncumulative, quarterly cash dividends that will accrue from and including April 6, 2001 and will be

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

Payment Date''), commencing June 30, 2001, at the annual rate of $2.9052 per share (without taking

into account any adjustments as described below under ""Changes in the Dividends-Received Percentage''). We will pay dividends on the Preferred Stock to the Holders on the relevant record date 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 April 6, 2001 to but excluding June 30, 2001,

will be $.6778 per share and, thereafter, if declared, quarterly dividends will be $.7263 per share. After

the initial dividend, the dividend period relating to a Dividend Payment Date will be the period from

and including the preceding Dividend Payment Date to but excluding the Dividend Payment Date. If a

Dividend Payment Date is not a Business Day, we will pay dividends (if declared) on the Preferred

Stock on the succeeding Business Day, without interest from that Dividend Payment Date to the date

of actual payment. A ""Business Day'' is any day other than a Saturday, Sunday, or other day on which

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

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

period on the basis of a 360-day year consisting of twelve 30-day months. The amount of dividends per

share payable at redemption will be rounded to the fourth digit after the decimal point. (If the Ñfth

digit to the right of the decimal point is Ñve or greater, the fourth digit will be rounded up by one.)

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

payment of dividends to the extent provided in the CertiÑcate of Designation. As a result, unless

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

for the then current quarterly dividend period, no dividend may be declared or paid or set apart for

payment on Fannie Mae's common stock (or on any other stock of Fannie Mae ranking, as to the

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

shares of, or options, warrants or rights to subscribe for or purchase shares of, the common stock of

Fannie Mae or any other stock of Fannie Mae ranking junior to the Preferred Stock as to the payment

of dividends and the distribution of assets upon dissolution, liquidation or winding up of Fannie Mae.

When dividends are not paid in full upon the Preferred Stock and all other classes or series of stock of

Fannie Mae, 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 Fannie Mae will be

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

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

the shares of Preferred Stock (including any adjustment in the amount of dividends payable due to

changes in the Dividends-Received Percentage (as deÑned below) but without, in the case of any noncumulative preferred stock, accumulation of unpaid dividends for prior dividend periods) and each

other stock bear to each other.

14
Dividends on the Preferred Stock will not be cumulative. If we do not pay a dividend on the

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

long as no dividend (other than those referred to in the preceding paragraph) is paid on Fannie Mae's

common stock (or any other stock of Fannie Mae 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 Fannie Mae's common

stock (or any other stock of Fannie Mae 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 Fannie Mae ranking prior to the Preferred Stock with respect to

the payment of dividends. At the time of issuance of the Preferred Stock, there will be no class or

series of stock of Fannie Mae which ranks prior to the Preferred Stock with respect to the payment of

dividends.

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

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

interest, in respect of any dividend payment.

See also ""Regulatory Matters'' for a description of certain regulatory restrictions on Fannie Mae's

payment of dividends.

Changes in the Dividends-Received Percentage. If, prior to October 6, 2002, one or more

amendments to the Internal Revenue Code of 1986, as amended (the ""Code''), are enacted that

eliminate or reduce the percentage of the dividends-received deduction applicable to the Preferred

Stock (currently 70 percent) as speciÑed in section 243(a)(1) of the Code or any successor provision

(the ""Dividends-Received Percentage''), certain adjustments may be made in respect of the dividends

payable by Fannie Mae, and Post Declaration Date Dividends and Retroactive Dividends (as such

terms are deÑned below) may become payable, as described below.

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

payments made on or after the eÅective date of such change in the Code will be adjusted by

multiplying the amount of the dividend that would otherwise be payable (before adjustment) by a

factor, which will be the number determined in accordance with the following formula (the ""DRD

Formula''), and rounding the result to the nearest cent (with one-half cent rounded up):

1Ó.35(1Ó.70)

1Ó.35(1ÓDRP)

For purposes of the DRD Formula, ""DRP'' means the Dividends-Received Percentage (expressed as a

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

Percentage applicable to the dividend in question shall be less than 50%, then the DRP shall equal .50.

No amendment to the Code, other than a change in the percentage of the dividends-received deduction

applicable to the Preferred Stock as set forth in section 243 (a)(1) of the Code or any successor

provision, will give rise to an adjustment. Notwithstanding the foregoing provisions, if, with respect to

any such amendment, Fannie Mae receives either an unqualiÑed opinion of nationally recognized

independent tax counsel selected by Fannie Mae or a private letter ruling or similar form of assurance

from the Internal Revenue Service (the ""IRS'') to the eÅect that such an amendment does not apply

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

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

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

published pronouncement of the IRS addressing such legislation. Unless the context otherwise

requires, references to dividends in this OÅering Circular will mean dividends as adjusted by the DRD

15
Formula. Fannie Mae's calculation of the dividends payable as so adjusted shall be Ñnal and not

subject to review.

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

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

of the dividend payable on such Dividend Payment Date will not be increased; instead, additional

dividends (the ""Post Declaration Date Dividends''), equal to the excess, if any, of (1) the product of

the dividend paid by Fannie Mae on such Dividend Payment Date and the DRD Formula (where the

DRP used in the DRD Formula would be equal to the greater of the Dividends-Received Percentage

applicable to the dividend in question and .50) over (2) the dividend paid by Fannie Mae on such

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

applicable to the next succeeding Dividend Payment Date.

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

Percentage retroactively applies to a Dividend Payment Date as to which Fannie Mae previously paid

dividends on the Preferred Stock (each, an ""AÅected Dividend Payment Date''), Fannie Mae will pay

(if declared) additional dividends (the ""Retroactive Dividends'') to Holders of Preferred Stock on the

record date applicable to the next succeeding Dividend Payment Date (or, if such amendment is

enacted after the dividend payable on such Dividend Payment Date has been declared, to Holders of

Preferred Stock on the record date applicable to the second succeeding Dividend Payment Date

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

paid by Fannie Mae on each AÅected Dividend Payment Date and the DRD Formula (where the DRP

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

applied to each AÅected Dividend Payment Date) over (2) the sum of the dividend paid by Fannie

Mae on each AÅected Dividend Payment Date. Fannie Mae will only make one payment of

Retroactive Dividends for any such amendment. Notwithstanding the foregoing provisions, if, with

respect to any such amendment, Fannie Mae receives either an unqualiÑed opinion of nationally

recognized independent tax counsel selected by Fannie Mae or a private letter ruling or similar form of

assurance from the IRS to the eÅect that such amendment does not apply to a dividend payable on an

AÅected Dividend Payment Date for the Preferred Stock, then such amendment will not result in the

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

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

DRP or upon a published pronouncement of the IRS addressing such legislation.

Notwithstanding the foregoing, Fannie Mae will not make any adjustment in the dividends

payable by Fannie Mae, and Fannie Mae will not be required to pay Post Declaration Date Dividends

or Retroactive Dividends, in respect of the enactment on or after October 6, 2002 of any amendment

to the Code that eliminates or reduces the Dividends-Received Percentage.

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

pursuant to the DRD Formula and/or Post Declaration Date Dividends or Retroactive Dividends are

to be paid, Fannie Mae will give notice of each such adjustment and, if applicable, any Post

Declaration Date Dividends and Retroactive Dividends to the Holders of Preferred Stock.

Optional Redemption

The Preferred Stock will not be redeemable prior to April 6, 2006. On or after that date, subject to

the notice provisions set forth below and subject to any further limitations which may be imposed by

law, Fannie Mae, 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 per share plus

an amount equal to the dividend (whether or not declared) for the then-current quarterly dividend

period accrued to but excluding the date of redemption, including any adjustments in dividends

payable due to changes in the Dividends-Received Percentage but without accumulation of unpaid

dividends on the Preferred Stock for prior dividend periods. If less than all of the outstanding shares

of the Preferred Stock are to be redeemed, Fannie Mae will select shares to be redeemed from

16
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.

Fannie Mae 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 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.

Under certain circumstances, Fannie Mae may need the approval of the Director prior to

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

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

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

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

holders of the Preferred Stock will cease.

Liquidation Rights

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

payment or provision for the liabilities of Fannie Mae and the expenses of such dissolution, liquidation

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

the amount of $50 per share plus an amount equal to the dividend (whether or not declared) for the

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

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

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

the assets of Fannie Mae or proceeds thereof available for distribution to stockholders, before any

payment or distribution of assets is made to holders of Fannie Mae's common stock (or any other

stock of Fannie Mae ranking, as to the distribution of assets upon dissolution, liquidation or winding

up of Fannie Mae, junior to the Preferred Stock). If the assets of Fannie Mae 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 Fannie Mae, if any, ranking, as to the

distribution of assets upon dissolution, liquidation or winding up of Fannie Mae, equally with the

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

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

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

but without, in the case of any noncumulative preferred stock, accumulation of unpaid dividends for

prior dividend periods). After payment of the full amount of the distribution of assets upon

dissolution, liquidation or winding up of Fannie Mae to which they are entitled, the Holders of

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

Mae.

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 Fannie Mae until holders of any class

or series of stock of Fannie Mae ranking, as to the distribution of assets upon dissolution, liquidation

or winding up of Fannie Mae, prior to the Preferred Stock have been paid all amounts to which such

classes or series are entitled. At the time of issuance of the Preferred Stock, there will be no class or

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

assets upon dissolution, liquidation or winding up of Fannie Mae.

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

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

combination of Fannie Mae into or with any other corporation, nor the merger, consolidation or

17
combination of any other corporation or entity into or with Fannie Mae, shall be deemed to be a

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

on liquidation rights.

Regulatory Matters

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

Board of Directors, 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

requirements for Fannie Mae. OFHEO has released proposed risk-based capital regulations for public

review and comment. Until one year after the Ñnal regulations establishing the risk-based capital test

are in eÅect, a dividend may be paid without the prior approval of the Director of OFHEO if Fannie

Mae meets the minimum capital level and the dividend payment would not decrease Fannie Mae's

base capital below such level. See ""Government Regulation and Charter Act.''

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

be paid without the prior approval of the Director if Fannie Mae meets both the risk-based capital and

minimum capital levels and the dividend payment would not decrease Fannie Mae's total capital below

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

either the risk-based capital standard or the minimum capital standard, it may make a dividend

payment without obtaining the approval of the Director only if the dividend payment would not cause

Fannie Mae to fail to meet another capital standard. At any time when Fannie Mae does not meet the

risk-based capital standard but meets the minimum capital standard, Fannie Mae is prohibited from

making a dividend payment that would cause Fannie Mae to fail to meet the minimum capital

standard. If Fannie Mae meets neither the risk-based capital standard nor the minimum capital

standard but does meet the critical capital standard established under the 1992 Act, it may make a

dividend payment only if Fannie Mae would not fail to meet the critical capital standard as a result of

such payment and the Director approves the payment after Ñnding that it satisÑes certain statutory

conditions. The Director has the authority to require Fannie Mae to submit a report to the Director

regarding any capital distribution (including any dividend) declared by Fannie Mae before Fannie

Mae makes the distribution. See ""Government Regulation and Charter Act'' and ""Management's

Discussion and Analysis of Financial Condition and Results of OperationsÌBalance Sheet AnalysisÌ

Regulatory Environment'' in the Information Statement regarding the capital standards applicable to

Fannie Mae.

Voting Rights; Amendments

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

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

repeal any terms of the Preferred Stock:

‚ to cure any ambiguity, or to cure, correct or supplement any provision contained in the

CertiÑcate of Designation that may be defective or inconsistent; or

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

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

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

Preferred Stock.

18
The following are deemed not to materially and adversely aÅect the interests of the Holders of

Preferred Stock:

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

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

or series of stock of Fannie Mae, whether ranking prior to, on a parity with or junior to the

Preferred Stock as to dividends or liquidation or otherwise.

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

only with the consent of the Holders of at least two-thirds of the outstanding shares of Preferred

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

share.

New York Stock Exchange Listing

We will apply to list the Preferred Stock on the NYSE under the symbol ""FNMprH''. If approved

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

period after the initial delivery of the Preferred Stock.

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 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 Fannie Mae (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 Fannie

Mae. To the best of our knowledge, 18 states currently have legislation limiting to varying extents the

ability of certain entities (in most cases, insurance companies) to invest in securities issued or

guaranteed by Fannie Mae, including the shares of Preferred Stock.

19
Notwithstanding the above, investors should consult their legal advisors to determine whether

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

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

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

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

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

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

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

subject to their jurisdiction. An institution under the jurisdiction of the Comptroller of the Currency,

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

the 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.

UNITED STATES TAXATION

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

should consider the tax consequences of owning Preferred Stock before acquiring it.

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

describes the principal aspects of the U.S. federal income tax treatment of U.S. Persons (as deÑned

below) that are beneÑcial holders of the Preferred Stock (""Shareholders''). This discussion does not

address the U.S. federal income tax treatment of Shareholders that are not U.S. Persons. This

discussion is based on the Internal Revenue Code of 1986, as amended (the ""Code''), its legislative

history, existing and proposed Treasury regulations, revenue rulings and judicial decisions, changes to

any of which subsequent to the date of this OÅering Circular may aÅect, possibly on a retroactive

basis, the tax consequences described herein.

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

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

U.S. federal income tax consequences that may be applicable to particular investors in light of their

individual circumstances or to Shareholders subject to special rules, such as dealers in securities, taxexempt organizations, life insurance companies, persons liable for alternative minimum tax, persons

that hold the Preferred Stock as part of a straddle or a hedging or conversion transaction, certain

Ñnancial institutions and certain securities traders. In addition, this discussion does not address taxes

imposed by any state, local or foreign taxing jurisdiction. In all cases, investors are advised to consult

their own tax advisors regarding the U.S. federal tax consequences to them of holding, owning and

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

other taxing jurisdiction.

For purposes of this discussion, ""U.S. Person'' generally means (1) a citizen or individual

resident of the United States, (2) a corporation or partnership created or organized in or under the

laws of the United States or any political subdivision thereof, (3) an estate the income of which is

includible in its gross income for U.S. federal income tax purposes without regard to its source, or

(4) a trust if a court within the United States is able to exercise primary supervision over its

administration and at least one U.S. Person has the authority to control all substantial decisions of the

trust.

Dividends

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

purposes to the extent paid out of our current or accumulated earnings and proÑts, as determined for

federal income tax purposes, and will be taxable as ordinary income. Although we expect that our

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, we cannot guarantee that

20
result. Our accumulated earnings and proÑts and our current earnings and proÑts in future years will

depend in signiÑcant part on our future proÑts or losses, which we cannot accurately predict. To the

extent that the amount of any dividend paid on a share of Preferred Stock exceeds our current or

accumulated earnings and proÑts for federal income tax purposes attributable to that share, the

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

against and reduce the Shareholder's adjusted tax basis in that share of Preferred Stock. The amount

of any such dividend in excess of the Shareholder's adjusted tax basis will then be taxed as capital

gain. For purposes of the remainder of this discussion, it is assumed that dividends paid with respect

to the Preferred Stock will constitute dividends for U.S. federal income tax purposes.

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

percent dividends-received deduction under section 243 of the Code. The 70-percent dividendsreceived deduction will not be available with respect to a dividend received on Preferred Stock that a

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

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

the Preferred Stock becomes ex-dividend. If the dividend is attributable to a period or periods

aggregating more than 366 days, the dividends-received deduction will be available only if the

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

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

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

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

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

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

corporate shareholder cannot exceed 70 percent of its taxable income (with certain adjustments).

Moreover, the dividends-received deduction may be reduced if the stock is ""debt Ñnanced.'' Stock is

""debt Ñnanced'' 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 realized

upon the disposition and the Shareholder's adjusted tax basis in the Preferred Stock. Such gain or loss

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

Preferred Stock exceeds one year. Tax rates on capital gain for individual Shareholders vary

depending on each Shareholder's income and holding period for the Preferred Stock. Shareholders

that are individuals should contact their own tax advisors for more information or for the capital gains

tax rate applicable to 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 Shareholder within the meaning of section 302(b)(1) of the Code, ""is in complete

redemption of all of the stock'' of Fannie Mae held by the Shareholder as described in section

302(b)(3) of the Code or otherwise meets the requirements of one of the other exceptions from

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

must take into account not only the Preferred Stock and other stock of Fannie Mae that it owns

directly, but also the Preferred Stock and other stock in Fannie Mae that it constructively owns within

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

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

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

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

21
Information Reporting and Backup Withholding

Payments of dividends on shares of Preferred Stock and payments of proceeds upon the sale or

redemption of Preferred Stock generally are required to be reported to the IRS except in the case of a

beneÑcial holder that is an ""exempt recipient.'' Individuals generally are not exempt recipients,

whereas corporations and certain other entities generally are exempt recipients.

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

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

shares of Preferred Stock, to Shareholders that are not exempt recipients and that fail to provide

certain identifying information (such as the taxpayer identiÑcation number of the Shareholder) in the

manner required.

The U.S. federal income tax discussion set forth above is included for general information only and may not be applicable depending upon a Shareholder's particular situation.

Each Shareholder should consult its own tax advisor with respect to the tax consequences

to it of the ownership and disposition of the Preferred Stock, including the tax consequences under the tax laws of the United States, states, localities, countries other than the

United States and any other taxing jurisdiction and the possible eÅects of changes in such

tax laws.

UNDERWRITING

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

Agreement''), Fannie Mae has agreed to sell to each of the Underwriters named below, and each of the

Underwriters, for whom Bear, Stearns & Co. Inc. and Lehman Brothers Inc. (the ""Representatives'')

are acting as representatives, has severally agreed to purchase, the number of shares of Preferred

Stock set forth opposite its name below:

Underwriter Number of Shares

Bear, Stearns & Co. Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,200,000

Lehman Brothers Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,400,000

First Tennessee Bank National Association ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 800,000

Merrill Lynch, Pierce, Fenner & Smith

IncorporatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 800,000

Ormes Capital Markets, Inc.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 800,000

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,000,000

In the Underwriting Agreement, the Underwriters have severally agreed, subject to the terms and

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

The Representatives have advised Fannie Mae that the Underwriters propose initially to oÅer the

Preferred Stock to the public at the initial public oÅering price set forth on the cover page of this

OÅering Circular, and to certain dealers at such price less a concession not in excess of $0.2625 per

share. The Underwriters may allow, and such dealers may reallow, a discount not in excess of

$0.25 per share on sales to certain other dealers. After the initial public oÅering, the public oÅering

price, concession and discount may be changed.

22
Prior to this oÅering, there has been no public market for the Preferred Stock. We will apply to

list the Preferred Stock on the New York Stock Exchange under the symbol ""FNMprH.'' If accepted

for listing, we expect that trading of the Preferred Stock on the New York Stock Exchange will

commence within a thirty-day period after the initial delivery of the Preferred Stock. The Representatives have advised Fannie Mae that they intend to make a market in the Preferred Stock prior to the

commencement of trading on the New York Stock Exchange, but are not obligated to do so and may

discontinue any such market making at any time without notice.

In the Underwriting Agreement, Fannie Mae and the Underwriters have agreed to indemnify each

other against and contribute toward certain liabilities.

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

for Fannie Mae in the ordinary course of business.

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

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

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

Stock. Neither we nor the Underwriters make any representation or prediction as to the direction or

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

Stock. The Underwriters are not required to engage in any of these transactions. When so doing, the

Underwriters act on their own behalf and not as our representatives. Any such transactions, if

commenced, may be discontinued at any time.

RATING

Standard & Poor's Ratings Group, a Division of the McGraw-Hill Companies, has assigned the

Preferred Stock a rating of ""AA¿'' and Moody's Investors Service, Inc. has assigned a rating of ""aa3.''

A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision

or may be withdrawn at any time by the assigning rating organization.

ACCOUNTANTS

The Ñnancial statements of Fannie Mae as of December 31, 2000 and for each of the years in the

three-year period ended December 31, 2000, included in Appendix B and incorporated herein by

reference, have been included in reliance upon the report of KPMG LLP, independent certiÑed public

accountants, and upon the authority of that Ñrm as experts in accounting and auditing.

VALIDITY OF THE PREFERRED STOCK

The validity of the Preferred Stock will be passed upon for Fannie Mae by O'Melveny & Myers

LLP, New York, New York, and for the Underwriters by Sullivan & Cromwell, Washington, D.C.

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

Washington, D.C.

ADDITIONAL INFORMATION ABOUT FANNIE MAE

This OÅering Circular should be read only in conjunction with our Information Statement dated

March 30, 2001 (the ""Information Statement''), which is included in this OÅering Circular as

Appendix B and incorporated herein by this reference. This OÅering Circular, together with the

Information Statement and any other documents incorporated herein by reference, are referred to as

the ""OÅering Circular.'' Any Information Statement, supplement to it, or proxy statement published

by us 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. You should rely only

23
on the information provided or incorporated by reference in this OÅering Circular, and you should rely

only on the most current information.

You can obtain copies of any or all documents incorporated in this OÅering Circular by reference

without charge from the OÇce of Investor Relations, Fannie Mae, 3900 Wisconsin Avenue, N.W.,

Washington, D.C. 20016 (telephone: (202) 752-7115) or by accessing our World Wide Web site at

www.fanniemae.com/investors. Except for the documents incorporated herein by reference, information on our World Wide Web site does not constitute part of this OÅering Circular. In addition, copies

of such documents can be obtained from any of the Underwriters. You can read the Information

Statement, proxy statements and other information concerning us at the oÇces of the New York

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

24
APPENDIX A

CERTIFICATE OF DESIGNATION OF TERMS OF

5.81% NON-CUMULATIVE PREFERRED STOCK, SERIES H

1. Designation, Par Value and Number of Shares.

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

(""Fannie Mae'') created by this resolution shall be ""5.81% Non-Cumulative Preferred Stock,

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

Series H Preferred Stock is Eight Million (8,000,000). Shares of Series H Preferred Stock will have

no par value and a stated value and liquidation preference of $50 per share. The Board of Directors of

Fannie Mae, or a duly authorized committee thereof, in its sole discretion, may reduce the number of

shares of Series H Preferred Stock, provided such reduction is not below the number of shares of

Series H Preferred Stock then outstanding.

2. Dividends.

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

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

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

therefor, non-cumulative quarterly cash dividends which will accrue from and including April 6, 2001

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

""Dividend Payment Date''), commencing June 30, 2001 at the annual rate of $2.9052 per share or

5.81% of the stated value and liquidation preference of $50 per share (without taking into account any

adjustments referred to in clause (b) below). If a Dividend Payment Date is not a Business Day, the

related dividend (if declared) will be paid on the next succeeding Business Day with the same force

and eÅect as though paid on the Dividend Payment Date, without any increase to account for the

period from such Dividend Payment Date through the date of actual payment. A ""Business Day'' shall

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

New York are authorized by law to close. Dividends will be paid to Holders on the record date 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 April 6, 2001 to but excluding June 30, 2001, will be

$0.6778 per share and will be payable on June 30, 2001 and, thereafter, if declared, quarterly dividends

will be $0.7263 per share. After the initial dividend, the dividend period relating to a Dividend

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

excluding the related Dividend Payment Date. If Fannie Mae redeems the Series H Preferred Stock,

the dividend that would otherwise be payable for the then-current quarterly dividend period accrued to

but excluding the date of redemption will be included in the redemption price of the shares redeemed

and will not be separately payable. Dividends payable on the Series H Preferred Stock for any period

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

twelve 30-day months. The amount of dividends per share payable at redemption will be rounded to

the fourth digit after the decimal point. (If the Ñfth digit to the right of the decimal point is Ñve or

greater, the fourth digit will be rounded up by one.)

(b) If, prior to October 6, 2002, one or more amendments to the Internal Revenue Code of 1986,

as amended (the ""Code''), are enacted that eliminate or reduce the percentage of the dividendsreceived deduction applicable to the Series H Preferred Stock as speciÑed in section 243(a)(1) of the

Code or any successor provision thereto (the ""Dividends-Received Percentage''), certain adjustments

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

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

The amount of each dividend payable (if declared) per share of Series H Preferred Stock for

dividend payments made on or after the eÅective date of such change in the Code will be adjusted by

1
multiplying the amount of the dividend payable pursuant to clause (a) of this Section 2 (before

adjustment) by a factor, which will be the number determined in accordance with the following

formula (the ""DRD Formula''), and rounding the result to the nearest cent (with one-half cent

rounded up):

1Ó.35(1Ó.70)

1Ó.35(1ÓDRP)

For purposes of the DRD Formula, ""DRP'' means the Dividends-Received Percentage (expressed as a

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

Percentage applicable to the dividend in question shall be less than 50%, then the DRP shall equal .50.

No amendment to the Code, other than a change in the percentage of the dividends-received deduction

applicable to the Series H Preferred Stock as set forth in section 243(a)(1) of the Code or any

successor provision thereto, will give rise to an adjustment. Notwithstanding the foregoing provisions,

if, with respect to any such amendment, Fannie Mae receives either an unqualiÑed opinion of

nationally recognized independent tax counsel selected by Fannie Mae or a private letter ruling or

similar form of assurance from the Internal Revenue Service (the ""IRS'') to the eÅect that such an

amendment does not apply to a dividend payable on the Series H Preferred Stock, then such

amendment will not result in the adjustment provided for pursuant to the DRD Formula with respect

to such dividend. The opinion referenced in the previous sentence shall be based upon the legislation

amending or establishing the DRP or upon a published pronouncement of the IRS addressing such

legislation. Unless the context otherwise requires, references to dividends herein will mean dividends

as adjusted by the DRD Formula. Fannie Mae's calculation of the dividends payable as so adjusted

shall be Ñnal and not subject to review.

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

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

of the dividend payable on such Dividend Payment Date will not be increased; instead, additional

dividends (the ""Post Declaration Date Dividends''), equal to the excess, if any, of (1) the product of

the dividend paid by Fannie Mae on such Dividend Payment Date and the DRD Formula (where the

DRP used in the DRD Formula would be equal to the greater of the Dividends-Received Percentage

applicable to the dividend in question and .50) over (2) the dividend paid by Fannie Mae on such

Dividend Payment Date, will be payable (if declared) to Holders on the record date applicable to the

next succeeding Dividend Payment Date.

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

Percentage retroactively applies to a Dividend Payment Date as to which Fannie Mae previously paid

dividends on the Series H Preferred Stock (each, an ""AÅected Dividend Payment Date''), Fannie

Mae will pay (if declared) additional dividends (the ""Retroactive Dividends'') to Holders on the

record date applicable to the next succeeding Dividend Payment Date (or, if such amendment is

enacted after the dividend payable on such Dividend Payment Date has been declared, to Holders on

the record date applicable to the second succeeding Dividend Payment Date following the date of

enactment), in an amount equal to the excess of (1) the product of the dividend paid by Fannie Mae

on each AÅected Dividend Payment Date and the DRD Formula (where the DRP used in the DRD

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

AÅected Dividend Payment Date) over (2) the sum of the dividend paid by Fannie Mae on each

AÅected Dividend Payment Date. Fannie Mae will only make one payment of Retroactive Dividends

for any such amendment. Notwithstanding the foregoing provisions, if, with respect to any such

amendment, Fannie Mae receives either an unqualiÑed opinion of nationally recognized independent

tax counsel selected by Fannie Mae or a private letter ruling or similar form of assurance from the IRS

2
to the eÅect that such amendment does not apply to a dividend payable on an AÅected Dividend

Payment Date for the Series H Preferred Stock, then such amendment will not result in the payment

of Retroactive Dividends with respect to such AÅected Dividend Payment Date. The opinion

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

or upon a published pronouncement of the IRS addressing such legislation.

Notwithstanding the foregoing, no adjustment in the dividends payable by Fannie Mae shall be

made, and no Post Declaration Date Dividends or Retroactive Dividends shall be payable by Fannie

Mae, in respect of the enactment of any amendment to the Code on or after October 6, 2002 that

eliminates or reduces the Dividends-Received Percentage.

In the event that the amount of dividends payable per share of Series H Preferred Stock is

adjusted pursuant to the DRD Formula and/or Post Declaration Date Dividends or Retroactive

Dividends are to be paid, Fannie Mae will cause notice of each such adjustment and, if applicable, Post

Declaration Date Dividends and Retroactive Dividends to be given as soon as practicable to the

Holders of Series H Preferred Stock.

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

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

Fannie Mae ranking, as to the payment of dividends and the distribution of assets upon dissolution,

liquidation or winding up of Fannie Mae, junior to the Series H Preferred Stock) may be declared or

paid or set apart for payment on Fannie Mae's common stock (or on any other stock of Fannie Mae

ranking, as to the payment of dividends, junior to the Series H Preferred Stock) unless dividends have

been declared and paid or set apart (or ordered to be set apart) on the Series H 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 H 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 H Preferred Stock in respect of any prior dividend period. If the

full dividend on the Series H Preferred Stock is not paid for any quarterly dividend period, the

Holders of Series H Preferred Stock will have no claim in respect of the unpaid amount so long as no

dividend (other than those referred to above) is paid on Fannie Mae's common stock (or any other

stock of Fannie Mae ranking, as to the payment of dividends, junior to the Series H Preferred Stock)

for such dividend period.

(d) The Board of Directors of Fannie Mae, or a duly authorized committee thereof, may, in its

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

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

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

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

Mae ranking, as to the payment of dividends, on a parity with the Series H Preferred Stock for any

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

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

upon the Series H Preferred Stock and all other classes or series of stock of Fannie Mae, if any,

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

declared upon shares of Series H Preferred Stock and all such other stock of Fannie Mae will be

declared pro rata so that the amount of dividends declared per share of Series H 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 H Preferred Stock (including any adjustments in dividends payable due to changes in the

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

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

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

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

any outstanding class or series of stock of Fannie Mae ranking, as to the payment of dividends, prior

to the Series H Preferred Stock.

3
(g) Holders of Series H 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) The Series H Preferred Stock shall not be redeemable prior to April 6, 2006. On or after that

date, subject to the notice provisions set forth in Section 3(b) below and subject to any further

limitations which may be imposed by law, Fannie Mae may redeem the Series H Preferred Stock, in

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

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

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

redemption, including any adjustments in dividends payable due to changes in the Dividends-Received

Percentage but without accumulation of unpaid dividends on the Series H Preferred Stock for prior

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

redeemed, Fannie Mae will select the shares to be redeemed from the outstanding shares not

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

the Board of Directors of Fannie Mae, or a duly authorized committee thereof, in its sole discretion

deems equitable.

(b) In the event Fannie Mae shall redeem any or all of the Series H Preferred Stock as aforesaid,

Fannie Mae will give notice of any such redemption to Holders of Series H Preferred Stock not less

than 30 days prior to the date Ñxed by the Board of Directors of Fannie Mae, or duly authorized

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

Series H Preferred Stock to be redeemed and, if fewer than all of the shares of Series H 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 H Preferred Stock must be presented upon such redemption. Failure to give notice, or any defect in the notice, to any Holder of Series H Preferred Stock shall

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

Preferred Stock being redeemed.

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

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

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 H Preferred Stock will cease. Upon

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

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

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

shares shall be redeemed by Fannie Mae at the redemption price aforesaid. Any shares of Series H

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 H Preferred Stock will not be subject to any mandatory redemption, sinking fund

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

require redemption of any shares of Series H Preferred Stock.

4. Liquidation Rights.

(a) Upon any voluntary or involuntary dissolution, liquidation or winding up of Fannie Mae,

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

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

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

stockholders, before any payment or distribution of assets is made to holders of Fannie Mae's common

stock (or any other stock of Fannie Mae ranking, as to the distribution of assets upon dissolution,

4
liquidation or winding up of Fannie Mae, junior to the Series H Preferred Stock), the amount of $50

per share plus an amount equal to the dividend (whether or not declared) for the then-current

quarterly dividend period accrued to but excluding the date of such liquidation payment, including any

adjustments in dividends payable due to changes in the Dividends-Received Percentage but without

accumulation of unpaid dividends on the Series H Preferred Stock for prior dividend periods.

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

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

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

dissolution, liquidation or winding up of Fannie Mae, on a parity with the Series H Preferred Stock,

the assets will be distributed to the Holders of Series H Preferred Stock and holders of all such other

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

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

without, in the case of any noncumulative preferred stock, accumulation of unpaid dividends for prior

dividend periods).

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

paid any amount in respect of a dissolution, liquidation or winding up of Fannie Mae until holders of

any classes or series of stock of Fannie Mae ranking, as to the distribution of assets upon dissolution,

liquidation or winding up of Fannie Mae, prior to the Series H Preferred Stock have been paid all

amounts to which such classes or series are entitled.

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

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

combination of any other corporation or entity into or with Fannie Mae, shall be deemed to be a

dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 4.

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

winding up of Fannie Mae to which they are entitled pursuant to paragraphs (a), (b) and (c) of this

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

any distribution of assets by Fannie Mae.

5. No Conversion Or Exchange Rights.

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

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

or classes, of stock or obligations of Fannie Mae.

6. No Pre-Emptive Rights.

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

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

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

any other shares, rights, options or other securities of any class whatsoever, whether now or hereafter

authorized and whether issued for cash or other consideration or by way of dividend.

7. Voting Rights; Amendments.

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

voting rights, either general or special.

(b) Without the consent of the Holders of Series H Preferred Stock, Fannie Mae will have the

right to amend, alter, supplement or repeal any terms of this CertiÑcate or the Series H Preferred

Stock (1) to cure any ambiguity, or to cure, correct or supplement any provision contained in this

CertiÑcate of Designation that may be defective or inconsistent with any other provision herein or

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

Series H 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 H

5
Preferred Stock; provided, however, that any increase in the amount of authorized or issued Series H

Preferred Stock or the creation and issuance, or an increase in the authorized or issued amount, of any

other class or series of stock of Fannie Mae, whether ranking prior to, on a parity with or junior to the

Series H Preferred Stock, as to the payment of dividends or the distribution of assets upon

dissolution, liquidation or winding up of Fannie Mae, or otherwise, will not be deemed to materially

and adversely aÅect the interests of the Holders of Series H Preferred Stock.

(c) Except as set forth in paragraph (b) of this Section 7, the terms of this CertiÑcate or the

Series H 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 H 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 H

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

Series H 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

Fannie Mae, or a duly authorized committee thereof, in its discretion, may adopt from time to time,

which rules and procedures shall conform to the requirements of any national securities exchange on

which the Series H Preferred Stock are listed at the time.

8. Additional Classes or Series of Stock.

The Board of Directors of Fannie Mae, or a duly authorized committee thereof, shall have the

right at any time in the future to authorize, create and issue, by resolution or resolutions, one or more

additional classes or series of stock of Fannie Mae, and to determine and 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 H Preferred

Stock as to the payment of dividends or the distribution of assets upon dissolution, liquidation or

winding up of Fannie Mae, or otherwise.

9. Priority.

For purposes of this CertiÑcate of Designation, any stock of any class or series of Fannie Mae

shall be deemed to rank:

(a) Prior to the shares of Series H Preferred Stock, either as to the payment of dividends or the

distribution of assets upon dissolution, liquidation or winding up of Fannie Mae, if the holders of such

class or series shall be entitled to the receipt of dividends or of amounts distributable upon dissolution,

liquidation or winding up of Fannie Mae, as the case may be, in preference or priority to the Holders of

shares of Series H Preferred Stock.

(b) On a parity with shares of Series H Preferred Stock, either as to the payment of dividends or

the distribution of assets upon dissolution, liquidation or winding up of Fannie Mae, whether or not

the dividend rates or amounts, dividend payment dates or redemption or liquidation prices per share,

if any, be diÅerent from those of the Series H Preferred Stock, if the holders of such class or series

shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or

winding up of Fannie Mae, as the case may be, in proportion to their respective dividend rates or

amounts or liquidation prices, without preference or priority, one over the other, as between the

holders of such class or series and the Holders of shares of Series H Preferred Stock.

(c) Junior to shares of Series H Preferred Stock, either as to the payment of dividends or the

distribution of assets upon dissolution, liquidation or winding up of Fannie Mae, if such class shall be

common stock of Fannie Mae or if the Holders of shares of Series H Preferred Stock shall be entitled

to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of

Fannie Mae, as the case may be, in preference or priority over the holders of such class or series.

6
(d) The shares of Preferred Stock of Fannie Mae designated ""6.50% Non-Cumulative Preferred

Stock, Series B'' (the ""Series B Preferred Stock''), ""6.45% Non-Cumulative Preferred Stock,

Series C'' (the ""Series C Preferred Stock''), ""5.25% Non-Cumulative Preferred Stock, Series D'' (the

""Series D Preferred Stock''), ""5.10% Non-Cumulative Preferred Stock, Series E'' (the ""Series E

Preferred Stock''), ""Variable Rate Non-Cumulative Preferred Stock, Series F'' (the ""Series F

Preferred Stock'') and ""Variable Rate Non-Cumulative Preferred Stock, Series G'' (the ""Series G

Preferred Stock'') shall be deemed to rank on a parity with shares of Series H Preferred Stock as to

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

Fannie Mae. Accordingly, the holders of record of Series B Preferred Stock, the holders of record of

Series C Preferred Stock, the holders of record of Series D Preferred Stock, the holders of record of

Series E Preferred Stock, the holders of record of Series F Preferred Stock, the holders of record of

Series G Preferred Stock and the Holders of Series H Preferred Stock shall be entitled to the receipt of

dividends and of amounts distributable upon dissolution, liquidation or winding up of Fannie Mae, as

the case may be, in proportion to their respective dividend rates or amounts or liquidation prices,

without preference or priority, one over the other.

10. Transfer Agent, Dividend Disbursing Agent and Registrar.

Fannie Mae hereby appoints First Chicago Trust Company a division of EquiServe as its initial

transfer agent, dividend disbursing agent and registrar for the Series H Preferred Stock. Fannie Mae

may at any time designate an additional or substitute transfer agent, dividend disbursing agent and

registrar for the Series H 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 H Preferred Stock by Fannie Mae shall be made by Ñrst-class mail,

postage prepaid, to the addresses of such Holders as they appear on the books and records of Fannie

Mae. Such notice shall be deemed to have been 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 Fannie Mae's

judgment, to give notice by mail, then such notiÑcation may be made, in Fannie Mae's discretion, by

publication in a newspaper of general circulation in The City of New York or by hand delivery to the

addresses of Holders as they appear on the books and records of Fannie Mae.

Receipt and acceptance of a share or shares of the Series H Preferred Stock by or on

behalf of a Holder shall constitute the unconditional acceptance by such Holder (and all

others having beneÑcial ownership of such share or shares) of all of the terms and

provisions of this CertiÑcate of Designation. No signature or other further manifestation of

assent to the terms and provisions of this CertiÑcate of Designation shall be necessary for

its operation or eÅect as between Fannie Mae and the Holder (and all such others).

7
APPENDIX B

INFORMATION STATEMENT DATED MARCH 30, 2001
Information Statement

This Information Statement describes the business and operations of the Federal National

Mortgage Association (""Fannie Mae'') as of March 30, 2001 and its Ñnancial condition as of

December 31, 2000. It contains Fannie Mae's audited Ñnancial statements for the year ended

December 31, 2000.

In connection with oÅerings of securities, Fannie Mae distributes oÅering circulars, prospectuses,

or other oÅering documents that describe securities oÅered, their selling arrangements and other

information. 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 current Information

Statement, any supplements, and other available information from Fannie Mae as provided under

""Available Information'' on page 2. Fannie Mae updates its Information Statement quarterly.

Fannie Mae is a federally chartered corporation. Its principal oÇce is located at 3900 Wisconsin

Avenue, NW, Washington, DC 20016 (202/752-7000). Its Internal Revenue Service employer

identiÑcation number is 52-0883107.

Fannie Mae's securities are not required to be registered under the Securities Act of 1933. At the

close of business on February 28, 2001, approximately 1,000 million shares of Fannie Mae's common

stock (without par value) were outstanding.

The delivery of this Information Statement shall not at any time under any circumstances create an implication that there has been no change in the aÅairs of Fannie Mae

since the date hereof or that the information contained herein is correct as of any time

subsequent to its date.

March 30, 2001
TABLE OF CONTENTS

Caption Page

Documents Incorporated by Reference ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2

Available Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2

Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

General ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

Mortgage Loan Portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

Mortgage-Backed SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7

AÅordable Housing InitiativesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8

Housing Goals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8

Delinquencies and REO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9

Fee-Based ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9

Competition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9

Facilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10

Employees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11

Government Regulation and Charter Act ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11

Recent Developments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14

Interest Rate Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14

Credit RiskÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15

Risk-Based Capital Stress TestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15

Legal ProceedingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16

Common and Preferred Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16

Forward-Looking InformationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18

Selected Financial Information: 1996-2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20

Management's Discussion and Analysis of Financial Condition and Results of OperationsÏÏÏ 21

Index to Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49

Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85

DOCUMENTS INCORPORATED BY REFERENCE

Fannie Mae's Proxy Statement for the May 2001 Annual Meeting of Shareholders is incorporated

by reference herein under ""ManagementÌAdditional Information.'' Prior to the date of the Proxy

Statement for the May 2001 Annual Meeting of Shareholders, the Proxy Statement for the May 2000

Annual Meeting of Shareholders 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. If Fannie Mae

modiÑes or updates information in the Information Statement in a later supplement or in a document

incorporated by reference in this Information Statement, the information as modiÑed or updated

replaces the information initially reported by Fannie Mae in this Information Statement.

AVAILABLE INFORMATION

Fannie Mae periodically makes available statistical information on its mortgage purchase and

mortgage-backed securities volumes as well as other relevant information about Fannie Mae. You may

obtain copies of this Information Statement and any supplements, as well as Fannie Mae's annual

reports to stockholders, proxy statement, quarterly Ñnancial releases, the Federal National Mortgage

Association Charter Act, Fannie Mae's bylaws and other information regarding Fannie Mae without

charge from the OÇce of Investor Relations, Fannie Mae, 3900 Wisconsin Avenue, NW, Washington,

DC 20016 (telephone: (202/752-7115)). This Information Statement and supplements to it are also

available by accessing Fannie Mae's Web site at http://www.fanniemae.com/investors. You may

inspect reports and other information concerning Fannie Mae at the oÇces of the New York Stock

Exchange, the Chicago Stock Exchange, and the PaciÑc Exchange. Fannie Mae does not Ñle reports

or other information with the Securities and Exchange Commission.

2
BUSINESS

General

Fannie Mae is a federally chartered, stockholder-owned corporation, and the largest investor in

home mortgage loans in the United States. Fannie Mae was established in 1938 as a United States

government agency to provide supplemental liquidity to the mortgage market. It became a stockholder-owned and privately managed corporation by legislation enacted in 1968.

Fannie Mae provides funds to the mortgage market by purchasing mortgage loans from lenders,

thereby replenishing their funds for additional lending. Fannie Mae acquires funds to purchase these

loans by issuing debt securities to capital market investors, many of whom ordinarily would not invest

in mortgages. In this manner, Fannie Mae is able to expand the total amount of funds available for

housing.

Fannie Mae also issues Mortgage-Backed Securities (""MBS''), receiving guaranty fees for its

guarantee of timely payment of principal and interest on MBS certiÑcates. Fannie Mae issues MBS

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

Mae to further its statutory purpose of increasing the liquidity of residential mortgage loans.

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

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

originating and underwriting loans. For information regarding Fannie Mae's mortgage loan, MBS,

and other activities in 2000, see ""Management's Discussion and Analysis of Financial Condition and

Results of Operations.''

In this document, both whole loans and participation interests in loans are referred to as ""loans,''

""mortgage loans'' and ""mortgages.'' (Fannie Mae purchases participation interests that range from

50 to 99 percent.) The term ""mortgage'' also is used to refer to the deed of trust or other security

instrument securing a loan rather than the loan itself. Mortgage loans secured by four or fewer

dwelling units are referred to as ""single-family'' mortgage loans and mortgage loans secured by more

than four dwelling units are referred to as ""multifamily'' mortgage loans.

Mortgage Loan Portfolio

Mortgage Loans Purchased

Fannie Mae purchases primarily single-family, conventional (i.e., not federally insured or

guaranteed), Ñxed- or adjustable-rate, Ñrst mortgage loans. It also purchases other types of residential

mortgage loans for its portfolio, including mortgage loans insured by the Federal Housing Administration (""FHA''), mortgage loans guaranteed by the Department of Veterans AÅairs (""VA'') or the

Rural Housing Service, multifamily mortgage loans and subordinate mortgage loans (i.e., loans

secured by second liens, etc.). Fannie Mae's purchases have a variety of maturities and are designed

to provide a secondary market for a variety of loans that may be attractive to homeowners. Fannie

Mae's mortgage loan purchases for its portfolio include purchases of mortgage-backed securities.

The composition of Fannie Mae's loan portfolio at the end of each of the last Ñve years is shown

in the table under ""Portfolio Composition.'' The composition of its purchases during the last three

years is shown in Table 10 of ""Management's Discussion and Analysis of Financial Condition and

Results of OperationsÌBalance Sheet AnalysisÌMortgage Portfolio.'' Approximately 81 percent of

the mortgage loans and mortgage-backed securities that Fannie Mae purchased in 2000 (measured by

unpaid principal balance (""UPB'')) were from investment banking companies, 6 percent were from

mortgage banking companies, 5 percent were from savings and loan associations, 2 percent were from

commercial and mutual savings banks, and 6 percent were from other institutions.

Principal Balance Limits. Maximum principal balance limits apply to Fannie Mae's mortgage

loan purchases. For 2000, Fannie Mae could not purchase conventional mortgage loans on

3
single-family dwellings if the loan's original principal balance exceeded $252,700, 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 conventional mortgage loans secured by one- to

four-family dwellings can be adjusted by Fannie Mae annually based on the national average price of a

single-family dwelling as surveyed by the Federal Housing Finance Board. In January 2001, the

maximum principal balance limit was increased to $275,000.

Mortgage loans insured by the FHA or guaranteed by the Rural Housing Service are subject to

statutory maximum amount limitations. Fannie Mae will not purchase VA-guaranteed mortgage

loans in excess of principal amounts that Fannie Mae speciÑes from time to time. There are no

statutory limits on the maximum principal balance of multifamily mortgage loans that Fannie Mae

purchases; however, most purchases are within limits established by Fannie Mae based on per unit

dollar amounts set forth in the National Housing Act.

Maturity/Balloon Payments. Fannie Mae currently purchases conventional, single-family Ñxedand adjustable-rate mortgages (""ARMs'') with original maturities of up to 30 years and 40 years,

respectively. Only a small portion of ARMs purchased have maturities of more than 30 years. The

multifamily mortgage loans that Fannie Mae currently purchases for its portfolio generally are

conventional Ñxed-rate loans that have maturities of up to 30 years.

Substantially all Ñxed-rate mortgage loans purchased by Fannie Mae provide for level monthly

installments of principal and interest. Some of these loans have balloon payments due 5, 7 or 10 years

after origination, but with monthly payments based on longer (e.g. 30-year) amortization schedules.

Most of the 7-year balloon single-family mortgage loans permit the borrower to reÑnance the balloon

payment at maturity with a 23-year Ñxed-rate mortgage loan if certain requirements are satisÑed.

Many of the multifamily mortgage loans have balloon payments due 5, 7, 10 or 15 years after

origination, but with payments based on 25- or 30-year amortization schedules.

Adjustable Rate. The interest rates on ARMs are determined by formulas providing for

automatic adjustment, up or down, at speciÑed intervals in accordance with changes in speciÑed

indices. Fixed-period ARMs have a stable interest rate for the Ñrst three to ten years, which then is

adjusted at speciÑed intervals thereafter. Substantially all ARMs provide for monthly installments of

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. Fannie Mae

currently purchases single-family ARMs only if the ARMs have a cap on the amount the interest rate

may change over the life of the loan. A substantial number of the ARMs purchased provide the

borrower with the option, at speciÑed times or during speciÑed periods of time, to convert the ARM to

a Ñxed-rate mortgage loan with the payment of a small fee.

Fannie Mae also purchases certain ARMs, called reverse mortgages, that provide for monthly

installments of principal to be paid to the borrower. Over the life of the loan, interest and certain

other fees accrue on the balance of the payments made to the borrower. Fannie Mae currently

purchases reverse mortgages only if the reverse mortgages are subject to a cap on the amount the

interest rate may change over the life of the loan. Generally, the loan is due when the borrower no

longer occupies the property.

Prepayments

Substantially all of the single-family mortgage loans in Fannie Mae's portfolio are prepayable by

the borrower without penalty. Therefore, Fannie Mae bears the risk that prepayments may increase

when interest rates decline signiÑcantly or as a result of other factors. Fannie Mae manages this risk

as described in ""Management's Discussion and Analysis of Financial Condition and Results of

OperationsÌRisk ManagementÌInterest Rate Risk Management.'' Most multifamily loans in

Fannie Mae's portfolio provide for defeasance of the loan or require a prepayment premium that is

4
calculated under a formula intended to protect Fannie Mae from loss of yield on its investment if the

mortgage loan is prepaid.

Portfolio Composition

The following table shows the composition of Fannie Mae'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 Fannie Mae's mortgage loan portfolio.

Mortgage Loan Portfolio Composition

December 31,

2000 1999 1998 1997 1996

(Dollars in millions)

Single-family:

Government insured or guaranteedÏÏÏÏÏÏÏÏÏÏÏÏ $ 44,166 $ 41,029 $ 21,805 $ 19,478 $ 15,912

Conventional:

Long-term, Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 454,349 385,321 297,106 211,541 177,070

Intermediate-term, Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,619 69,019 71,560 61,571 66,284

Adjustable-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,135 14,107 11,873 11,373 12,783

Second ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 480176 206 268 323

MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,373 14,289 11,965 12,447 14,680

Total UPB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $610,122 $523,941 $414,515 $316,678 $287,052

YieldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.24% 7.08% 7.12% 7.60% 7.69%

Commitments

Fannie Mae issues commitments to purchase a speciÑed dollar amount of mortgage loans during a

speciÑed term. Fannie Mae purchases mortgage loans through standard product commitments with

posted yields and through negotiated commitments.

Most of the mortgage loans Fannie Mae purchases for its portfolio are acquired pursuant to

mandatory delivery commitments. Under such commitments, lenders are obligated to sell loans to

Fannie Mae at the commitment yield. Mandatory delivery commitments are available for standard

product and negotiated transactions. If a lender is not able to deliver the mortgage loans required

under a mandatory delivery commitment during its term, the lender may buy back the commitment at

any time during the commitment term at a market price.

Fannie Mae issues master commitments to lenders to facilitate the delivery of mortgages into

MBS pools or portfolio. In order to deliver under a master commitment, a lender must either deliver

mortgages in exchange for MBS or enter into a mandatory delivery portfolio commitment with the

yield established upon execution of the portfolio commitment.

Fannie Mae also issues to lenders negotiated standby commitments that commit Fannie Mae to

purchase a designated dollar amount of single-family mortgage loans from the lenders if they convert

their standby commitments to mandatory delivery portfolio commitments. Standby commitments do

not obligate the lenders to sell the loans to Fannie Mae; they are obligated to do so only after such

commitments are converted to mandatory delivery portfolio commitments. The yield on the mortgage

loans is established at the time of conversion of the standby commitments. See ""Management's

Discussion and Analysis of Financial Condition and Results of OperationsÌBalance Sheet AnalysisÌ

Liquidity and Capital Resources.''

Underwriting Guidelines

Fannie Mae has established certain underwriting guidelines for purchases of conventional

mortgage loans to help reduce the risk of loss from borrower defaults. These guidelines are designed to

assess the creditworthiness of the borrower, as well as the value of the mortgaged property relative to

the amount of the mortgage loan. Fannie Mae, in its discretion, accepts waivers from the guidelines.

5
Fannie Mae also reviews and changes its guidelines from time to time. As part of its aÅordable

housing initiatives, Fannie Mae continues to introduce new underwriting criteria that could make the

mortgage Ñnance system more accessible to minorities, low-and moderate-income families, underserved and rural residents and people with special housing needs. In addition, Fannie Mae is

continuing its underwriting initiatives involving alternative methods of assessing the creditworthiness

of potential borrowers, among other factors. See ""AÅordable Housing Initiatives.''

Fannie Mae generally relies on lender representations to ensure that the mortgage loans it

purchases conform to its applicable underwriting guidelines. Fannie Mae also performs quality control

reviews of selected loans to monitor compliance with the guidelines. In the event that a lender is found

to have breached its representations with respect to a loan's compliance with the guidelines, Fannie

Mae can demand that the lender repurchase the loan or indemnify Fannie Mae against any loss.

Over the last several years, Fannie Mae has enhanced Desktop Underwriter», its automated

underwriting system, to assist lenders in meeting its underwriting standards. Desktop Underwriter is

designed to help lenders process mortgage applications in a more eÇcient and accurate manner and to

apply Fannie Mae's underwriting criteria consistently, objectively, and in a more customized manner

to all prospective borrowers. If Desktop Underwriter provides an ""approve'' recommendation to a

loan application, Fannie Mae waives certain representations as long as the loan is originated in

accordance with the information that was submitted to Desktop Underwriter.

Risk Sharing

Risk sharing through credit enhancement is an integral part of Fannie Mae's credit risk

management strategy. In addition, Fannie Mae's charter requires that conventional single-family

mortgage loans with a UPB in excess of 80 percent of the value of the mortgaged property be subject to

one of three alternative credit enhancement structures in order to be eligible for purchase by Fannie

Mae. Fannie Mae uses all three alternative structures. The most commonly used credit enhancement

is primary mortgage insurance in at least the amount of the loan over the 80 percent level, provided by

an insurance company acceptable to Fannie Mae. Fannie Mae also has obtained credit enhancement

for a majority of the mortgage loans in its multifamily loan portfolio. In addition, Fannie Mae

contracts for and manages credit enhancements at, or subsequent to, acquisition of loans to optimize

credit risk management. Fannie Mae bears the risk that in some cases parties assuming credit

enhancement obligations may be unable to meet their contractual obligations. Fannie Mae regularly

monitors this risk and follows speciÑc criteria in evaluating and accepting credit enhancement

arrangements in order to minimize its exposure to credit loss. See ""Management's Discussion and

Analysis of Financial Condition and Results of OperationsÌRisk ManagementÌCredit Risk

Management.''

Servicing

Fannie Mae does not service mortgage loans, except for some government-insured multifamily

loans or on an interim basis for loans after termination of a servicer that are serviced under a

subservicing arrangement with a major servicing entity. Fannie Mae generally manages and markets

properties acquired through foreclosure. Mortgage loans held in portfolio or backing MBS can be

serviced only by a servicer approved by Fannie Mae, and they must be serviced subject to Fannie

Mae's guidelines. Lenders who sell single-family mortgage loans and conventional multifamily loans

to Fannie Mae typically are approved servicers and initially service the mortgage loans they sell to

Fannie Mae. Servicing includes the collection and remittance of principal and interest payments,

administration of escrow accounts, evaluation of transfers of ownership interests, responding to

requests for partial releases of security, handling proceeds from casualty losses, negotiating problem

loan workouts and, if necessary, processing of foreclosures. In the case of multifamily loans, servicing

also may include performing property inspections, evaluating the Ñnancial condition of owners, and

administering various types of agreements (including agreements regarding replacement reserves,

completion or repair, and operations and maintenance). Fannie Mae compensates servicers in a

6
number of ways, including in many cases permitting them to retain a speciÑed portion of each interest

payment on a serviced mortgage loan. Fannie Mae reserves the right to remove servicing responsibility from a lender.

Mortgage-Backed Securities

MBS are mortgage pass-through trust certiÑcates issued and guaranteed by Fannie Mae that

represent beneÑcial interests in pools of mortgage loans or other MBS. Fannie Mae serves as trustee

for each trust.

MBS are backed by loans from one of three sources: a single lender, multiple lenders, or Fannie

Mae's portfolio. Single-lender MBS generally are issued through lender swap transactions in which a

lender exchanges pools of mortgage loans for MBS. Multiple-lender MBS allow several lenders to pool

mortgage loans together and, in return, receive MBS representing a proportionate share of a larger

pool (called Fannie Majors»). MBS may back other securities, including Fannie Megas» (""Megas''),

Stripped MBS (""SMBS''), real estate mortgage investment conduit securities (""REMICs''), and

other mortgage securities utilizing a ""grantor trust'' structure.

MBS are not assets of Fannie Mae, except when acquired for portfolio investment purposes, nor

are MBS recorded as liabilities. Fannie Mae, however, is liable under its guarantee to make timely

payments to investors of principal and interest on the MBS, even if Fannie Mae has not received

payments of principal or interest on the mortgage loans in the underlying pools. MBS enable Fannie

Mae to further its statutory purpose of increasing the liquidity of residential mortgage loans and

create a source of guaranty fee income. Because Fannie Mae guarantees the timely payment of

principal and interest, it assumes the ultimate credit risk of borrowers' defaults on mortgage loans

underlying MBS. See ""Management's Discussion and Analysis of Financial Condition and Results of

OperationsÌRisk ManagementÌCredit Risk Management.''

Fannie Mae issues MBS backed by single-family or multifamily Ñrst or subordinate mortgage

loans with Ñxed or adjustable rates. Generally, the mortgage loans are either conventional mortgage

loans, or FHA-, VA- or Rural Housing Service-guaranteed mortgage loans. The conventional

mortgage loans are subject to the maximum principal balance limits applicable to Fannie Mae's

purchases as described under ""Mortgage Loan PortfolioÌMortgage Loans PurchasedÌPrincipal

Balance Limits.'' The mortgage loans also are subject to the underwriting guidelines applicable to

Fannie Mae's purchases as described under ""Mortgage Loan PortfolioÌUnderwriting Guidelines.''

The majority of Fannie Mae's MBS outstanding represents beneÑcial interests in conventional

Ñxed-rate Ñrst mortgage loans on single-family dwellings.

Fannie Mae issues and guarantees several forms of MBS that involve only a single class of

certiÑcates (principally its standard MBS and Fannie Majors), with each investor receiving a portion

of the payments of principal and interest on the underlying mortgage loans equal to its undivided

interest in the pool. With these standard MBS, an investor has an undivided interest in a pool of

underlying mortgage loans that generally are provided either by one lender or by Fannie Mae out of its

mortgage loan portfolio. Megas represent undivided interests in a pool of MBS, REMIC tranches, or

Government National Mortgage Association (""Ginnie Mae'') guaranteed pass-through certiÑcates

(""Ginnie Mae certiÑcates'') of the same type. In addition, Fannie Mae issues and guarantees MBS in

the form of single-class ""grantor trust'' securities representing an undivided interest in a pool of MBS,

Ginnie Mae certiÑcates, other mortgage-backed securities, or mortgage loans.

Fannie Mae also issues and guarantees other mortgage-backed securities that involve more than

one class of certiÑcates and, therefore, require special allocations of cash Öows. SMBS are issued in

series with one or more classes, each of which is entitled to diÅerent cash Öows and may represent

(1) an undivided interest solely in the principal payments, (2) an undivided interest solely in the

interest payments, or (3) diÅerent percentage interests in principal and interest payments to be made

on a pool of mortgage loans, MBS, REMICs, other SMBS and/or Ginnie Mae certiÑcates. REMICs

represent beneÑcial interests in a trust having multiple classes of certiÑcates entitled to diÅerent cash

7
Öows from the underlying mortgage loans, MBS, SMBS, Megas, Ginnie Mae certiÑcates and/or

certiÑcates from other REMICs. Pursuant to the guaranty provided to REMICs and SMBS certiÑcate

holders, Fannie Mae is obligated to make timely distribution of required installments of principal

and/or interest and, in the case of REMICs, to distribute the principal balance in full by a speciÑed

date, whether or not suÇcient funds are available in the related REMIC trust. Fannie Mae has issued

a limited amount of subordinated REMIC classes that are not guaranteed by Fannie Mae.

Fannie Mae receives guaranty fees for a signiÑcant portion of its MBS (principally its standard

MBS and Fannie Majors). Such fees generally are paid monthly until the underlying mortgage loans

have been repaid or otherwise liquidated from the pool (usually as a result of prepayment or

delinquency). The aggregate amount of guaranty fees Fannie Mae receives depends upon the amount

of MBS outstanding and on the guaranty fee rate. The amount of MBS outstanding is inÖuenced by

the rates at which the underlying mortgage loans are repaid or liquidated from the pool and by the rate

at which Fannie Mae issues new MBS. In general, when the prevailing interest rates decline

signiÑcantly below the interest rates on loans underlying MBS, the rate of single-family prepayments

is likely to increase, as is the issuance of new MBS; conversely, when interest rates rise above the

interest rates on loans underlying MBS, the rate of single-family prepayments and new MBS issuance

is likely to slow down. In addition, the rate of principal prepayments is inÖuenced by a variety of

economic, demographic, and other factors. Fannie Mae also generally receives one-time fees for

swapping SMBS, REMICs, Megas, grantor trust securities for MBS, mortgage loans, Ginnie Mae

certiÑcates, SMBS, REMIC certiÑcates, or other mortgage-backed securities.

Fannie Mae typically does not service the loans in an MBS pool. Fannie Mae, however, reserves

the right to remove the servicing responsibility from a lender at any time if it considers such removal

to be in the best interest of MBS certiÑcate holders. In such event, Fannie Mae Ñnds a replacement

lender that will service the loans. Generally, Fannie Mae 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

In 2000, Fannie Mae met its ""Trillion Dollar Commitment'' to help Ñnance over 10 million homes

for families and communities most in need during the seven years from 1994 through 2000. On

March 15, 2000, Fannie Mae announced its ""American Dream CommitmentSM''Ìa pledge to invest

$2 trillion over the next ten years to help Ñnance housing for 18 million home buyers and renters and

join with housing partners to reverse decay in inner cities and older suburbs and expand the

availability of livable, aÅordable rental housing. The new plan will focus on (i) promoting mortgage

consumer rights, including broader, more equal access to lowest-cost mortgage credit; (ii) Ñghting

mortgage discrimination and leading the housing market in serving minority families, including a

pledge to provide $420 billion in Ñnancing for 3 million minority households; (iii) addressing the

unique housing needs of women-headed households, young families, new immigrants, seniors, and

urban and rural dwellers; (iv) strengthening inner city and older suburban areas through new capital

investments and expanded Partnership OÇces; (v) providing new technologies to mortgage lenders

and consumers in order to lower the costs of mortgage Ñnancing; and (vi) increasing the supply of

aÅordable rental housing.

Housing Goals

Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the ""1992

Act''), Fannie Mae has certain goals to promote aÅordable housing for moderate-, low- and very

low-income families and to serve the housing needs of those in underserved areas. In 2000, Fannie

Mae exceeded the applicable goals. In October 2000 the Secretary of the U.S. Department of Housing

and Urban Development (""HUD'') issued new housing goals for 2001 and thereafter. See ""Management's Discussion and Analysis of Financial Condition and Results of OperationsÌHousing Goals.''

8
Delinquencies and REO

When a mortgage loan for which Fannie Mae bears the default risk is liquidated through

foreclosure, Fannie Mae 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 a repayment plan, loan modiÑcation, preforeclosure sale, or other options), contractual provisions in credit

enhancements, and a variety of other factors. Fannie Mae manages the risk of delinquencies and REO

as described in ""Management's Discussion and Analysis of Financial Condition and Results of

OperationsÌRisk ManagementÌCredit Risk Management.''

Fee-Based Services

Fannie Mae oÅers certain services to lenders and other customers in return for a fee. These

include issuing REMICs, SMBS, Fannie Megas and grantor trust securities, providing technology

services for originating and underwriting loans, and the facilitation of securities transactions. Fannie

Mae receives fee income from dealers in exchange for creating and issuing REMICs, SMBS, grantor

trust securities, and Megas. In addition to issuing these securities, Fannie Mae is responsible for all

tax reporting and administration costs associated with these securities.

Fannie Mae also receives fee income in return for providing technology related services such as

Desktop Underwriter, Desktop Originator», Desktop Trader», and other on-line services. These

services provide lenders the ability to underwrite mortgage loans electronically, communicate with

third-party originators, access Fannie Mae loan pricing schedules, and enter into sale commitments

with Fannie Mae on a real-time basis.

Fannie Mae also simultaneously purchases and sells MBS and certain other mortgage-related

securities, such as Ginnie Mae certiÑcates, with the intention of earning a spread on such trades or as

a service to customers. In addition, Fannie Mae receives fee income through other activities, such as

repurchase transactions, and by providing credit enhancements and other investment alternatives for

customers.

Competition

Fannie Mae competes, within the limits prescribed by its Charter Act, for the purchase of

mortgage loans for portfolio and the issuance of mortgage-backed securities in the secondary mortgage

market. For single-family products, Fannie Mae competes primarily with the Federal Home Loan

Mortgage Corporation (""Freddie Mac''), another government-sponsored enterprise also regulated by

HUD and the OÇce of Federal Housing Enterprise Oversight (""OFHEO'') 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 other companies that purchase single-family mortgage loans for their own portfolio or

pool single-family mortgage loans for sale to investors as whole loans or mortgage-backed securities. A

number of Federal Home Loan Banks (""FHLBs'') began a program in 1997, as a ""pilot'' initiative, for

the Ñnancing and servicing of single-family mortgage loans. The ""pilot'' was expanded in 1998 and

1999 and the volume cap was removed in 2000, making it a regular program. The pace of development

of the program to date has not positioned the FHLBs as signiÑcant competitors, but the structure of

the program presents the potential for signiÑcant competition in the future.

Fannie Mae competes with the 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 Ginnie Mae, with Ginnie Mae as well. The Ñscal year 1999 federal budget

increased the base maximum principal balance for loans eligible for the FHA insurance program to

48 percent from 38 percent of Fannie Mae's loan limits. The loan limit for FHA-insured loans in high

cost areas was increased from 75 percent and now can be as high as 87 percent of Fannie Mae's limits.

The higher FHA limits may result in increased competition for Fannie Mae's guaranty business. For

9
additional information on the maximum principal balances for loans purchased by Fannie Mae, see

""Mortgage Loan PortfolioÌMortgage Loans PurchasedÌPrincipal Balance Limits.''

In the case of multifamily products, Fannie Mae generally competes with government housing

programs, Freddie Mac, insurance companies, and the same kinds of entities it competes with in the

single-family market. Competition for multifamily mortgage loans is intense from certain entities

typically sponsored by investment banks that 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 has increased signiÑcantly over the last Ñve years.

Conduits continue to be a strong source of competition.

Competition is particularly intense for multifamily mortgage loans eligible for government

subsidies, which have low-income rent and occupancy restrictions. As a prerequisite to expansion or

merger plans, commercial banks must fund such loans to meet certain obligations under the

Community Reinvestment Act, and they often are willing to do so at or below their own cost of funds.

Fannie Mae competes for these same investment opportunities to meet its housing goals.

Fannie Mae competes primarily on the basis of price, products, structures, and services oÅered.

Competition based on advances in technology-related and other fee-based services continues to

increase, as do the types and nature of the products oÅered by Fannie Mae, Freddie Mac, and other

market participants. Fannie Mae's market share of loans purchased for cash or swapped for MBS is

aÅected by the volume of mortgage loans oÅered for sale in the secondary market by loan originators

and other market participants and the amount purchased by other market participants that compete

with Fannie Mae.

Under the 1992 Act, the Secretary of HUD must approve any new Fannie Mae or Freddie Mac

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

to that Act's enactment. The ability of Fannie Mae and Freddie Mac to compete with other

competitors possibly could be aÅected by this requirement. See ""Government Regulation and Charter

Act.''

Competition also is a consideration in connection with the issuance of Fannie Mae's debt

securities. Fannie Mae competes with Freddie Mac, the FHLB system, the Student Loan Marketing

Association, 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 Fannie Mae's unsecured debt or result in the issuance of such debt

at higher interest rates than would otherwise be the case. In addition, the availability and cost of

funds raised through the issuance of certain types of unsecured debt may be adversely aÅected by

regulatory initiatives that tend to reduce investments by certain depository institutions in unsecured

debt with greater than normal volatility or interest-rate sensitivity.

Facilities

Fannie Mae owns its principal oÇce, which is located at 3900 Wisconsin Avenue, NW, Washington, DC, oÇces at 3939 Wisconsin Avenue, NW and 4250 Connecticut Avenue, NW, Washington, DC,

and two facilities in Herndon, Virginia. These owned facilities total 802,000 square feet. In addition,

Fannie Mae leases approximately 379,000 square feet of oÇce space at 4000 Wisconsin Avenue, NW,

which is adjacent to Fannie Mae'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

Fannie Mae has options to extend the lease for up to 15 additional years, in 5-year increments. The

lease for 2115 Wisconsin Avenue expires in 2002. Fannie Mae 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 Fannie Mae's mortgage loan portfolio by lenders, assist in supervising or

managing the handling and disposition of REO, and provide training to the staÅs of lenders. In

10
addition to the regional oÇces, Fannie Mae has 48 ""Fannie Mae Partnership OÇces'' in leased

premises around the country which work with cities, rural areas and other underserved communities.

Fannie Mae also plans to establish Ñve additional Partnership OÇces in 2001. There currently are

Fannie Mae Partnership OÇces in Birmingham, Alabama; Phoenix, Arizona; Los Angeles, California;

San Francisco, California; Denver, Colorado; Hartford, Connecticut; Washington, D.C.; Miami,

Florida; Orlando, Florida; Atlanta, Georgia; Chicago, Illinois; Indianapolis, Indiana; Des Moines, Iowa;

Lexington, Kentucky; New Orleans, Louisiana; Baltimore, Maryland; Boston, Massachusetts; Detroit,

Michigan; St. Paul, Minnesota; Jackson, Mississippi; Kansas City, Missouri; St. Louis, Missouri;

Helena, Montana; Lincoln, Nebraska; Las Vegas, Nevada; Manchester, New Hampshire; Newark,

New Jersey; Albuquerque, New Mexico; BuÅalo, New York; New York, New York; Charlotte, North

Carolina; Bismarck, North Dakota; Oklahoma City, Oklahoma; Cleveland, Ohio; Columbus, Ohio;

Portland, Oregon; Pittsburgh, Pennsylvania; Columbia, South Carolina; Sioux Falls, South Dakota;

Nashville, Tennessee; Houston, Texas; San Antonio, Texas (two oÇces, one of which is responsible

for border region issues); Salt Lake City, Utah; Arlington, Virginia; Seattle, Washington; Milwaukee,

Wisconsin; and Cheyenne, Wyoming.

Employees

At December 31, 2000, Fannie Mae employed approximately 4,100 full-time personnel.

GOVERNMENT REGULATION AND CHARTER ACT

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

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

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

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

secondary market for residential mortgages (including activities relating to mortgages on housing for

low- and moderate-income families involving a reasonable economic return that may be less than the

return earned on other activities) by increasing the liquidity of mortgage investments and improving

the distribution of investment capital available for residential mortgage Ñnancing, and (4) promote

access to mortgage credit throughout the nation (including central cities, rural areas and underserved

areas) by increasing the liquidity of mortgage investments and improving the distribution of

investment capital available for residential mortgage Ñnancing.

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

as a wholly owned government corporation 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 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 Fannie Mae and the Government National

Mortgage Association, a wholly owned corporate instrumentality of the United States within HUD,

which carried on certain special Ñnancing assistance and management and liquidation functions.

Under the 1968 Act, Fannie Mae was constituted as a federally chartered corporation and the entire

equity interest in Fannie Mae became stockholder-owned.

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

terminate government regulation of Fannie Mae. Under the Charter Act, approval of the Secretary of

the Treasury is required for Fannie Mae's issuance of its debt obligations and MBS. In addition, the

1992 Act established OFHEO, an independent oÇce within HUD under the management of a Director

(the ""Director'') who is responsible for ensuring that Fannie Mae is adequately capitalized and

operating safely in accordance with the 1992 Act. The Director is authorized to levy, pursuant to

annual Congressional appropriations, annual assessments on Fannie Mae and Freddie Mac to cover

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

11
critical capital requirements for Fannie Mae and required the Director to establish, by regulation, a

risk-based capital test to be used to determine the amount of total capital Fannie Mae must hold to

meet the risk-based capital standard on a quarterly basis. 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 formalized the interim capital standards applied by OFHEO, with which

Fannie Mae has been in compliance since their inception. See also ""Management's Discussion and

Analysis of Financial Condition and Results of OperationsÌBalance Sheet AnalysisÌRegulatory

Environment.''

OFHEO has proposed regulations to establish the risk-based capital test for Fannie Mae and

Freddie Mac in two parts. Part I speciÑes that ""benchmark loss experience'' will be combined with

other yet to be determined assumptions and applied each quarter to Fannie Mae's book of business to

establish credit losses under the risk-based capital standard for Fannie Mae. Part I also speciÑes the

house price index that OFHEO will use in connection with the risk-based capital standard. Fannie

Mae submitted comments on Part I stating that several aspects of the initial proposal require

adjustments or amendment, because it does not accurately capture Fannie Mae'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. Part II speciÑes, among other matters, remaining aspects of

the test and how the test will be used to determine Fannie Mae's and Freddie Mac's risk-based capital

requirements. The summary accompanying Part II noted that if Part II had been in eÅect as of

June 30, 1997, Fannie Mae's required risk-based capital would have been $17.73 billion, as compared

with $14.05 billion in actual capital at that time. OFHEO also noted that there were a variety of

means, such as hedging, that Fannie Mae could have used to reduce required risk-based capital to the

level of its actual capital. Fannie Mae submitted comments on Part II detailing three principal criteria

that management used to evaluate Part II of the proposed regulations: operational workability, the

ability to accommodate innovation, and linking of capital to risk. Management concluded that

OFHEO's proposed regulations failed to meet these three criteria and made suggestions for addressing

these points. Management believes that the Ñnal risk-based standard could be modiÑed substantially

from its current proposed form. The 1992 Act provides that the Ñnal regulations will be enforceable

one year after issuance. Management expects that Fannie Mae will be able to meet any reasonable

Ñnal test.

If Fannie Mae fails to meet one or more of the capital standards under the 1992 Act, the Director

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

Fannie Mae fails to meet. The Director's enforcement powers include the power to impose temporary

and Ñnal cease-and-desist orders and civil penalties on Fannie Mae and on directors or executive

oÇcers of Fannie Mae. If the Director determines that Fannie Mae is engaging in conduct not

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

property subject to mortgages held or securitized by Fannie Mae has decreased signiÑcantly, the

Director is authorized to treat Fannie Mae as not meeting one of the capital standards that it

otherwise meets. In addition, Fannie Mae is required to submit a capital restoration plan if it fails to

meet any of the capital standards. If the Director does not approve the plan or determines that Fannie

Mae has failed to make reasonable eÅorts to comply with the plan, then the Director may treat Fannie

Mae as not meeting one of the capital standards that it otherwise meets. Also, if Fannie Mae fails to

meet or is treated by the Director as not meeting one of the capital standards and the Director has

reasonable cause to believe that Fannie Mae or any executive oÇcer or director of Fannie Mae is

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

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

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

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

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

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

12
to pay a dividend if the dividend would decrease Fannie Mae's capital below risk-based capital or

minimum capital levels established under the 1992 Act. See ""Common and Preferred Stock.''

The 1992 Act gives the Director the authority to conduct on-site examinations of Fannie Mae for

purposes of ensuring Fannie Mae's Ñnancial safety and soundness. The Charter Act, as amended by

the 1992 Act, also authorizes the General Accounting OÇce to audit the programs, activities, receipts,

expenditures, and Ñnancial transactions of Fannie Mae. Fannie Mae is required to submit annual and

quarterly reports of the Ñnancial condition and operations of Fannie Mae to the Director. Fannie Mae

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

Secretary of HUD regarding Fannie Mae's performance in meeting housing goals established by the

Secretary of HUD relating to the purchase of mortgages on housing for low- and moderate-income

families, mortgages on rental and owner-occupied housing for low-income families in low-income areas

or for very-low-income families, and mortgages on housing located in rural or other underserved areas.

The Secretary of HUD has recently proposed new housing goals for Fannie Mae. See ""Management's

Discussion and Analysis of Financial Condition and Results of OperationsÌHousing Goals.''

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

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

granted exclusively to the Director of OFHEO in the 1992 Act. The Secretary of HUD also must

approve any new conventional mortgage program that is signiÑcantly diÅerent from those approved or

engaged in prior to the 1992 Act. The Secretary is required to approve any new program unless it is

not authorized by the Charter Act of Fannie Mae or the Secretary Ñnds that it is not in the public

interest. However, until one year after the Ñnal regulations establishing the risk-based capital test are

in eÅect, the Secretary must disapprove a new program if the Director determines that the program

would risk signiÑcant deterioration of the Ñnancial condition of Fannie Mae. The Secretary has

adopted regulations related to the program approval requirement.

Thirteen members of Fannie Mae's eighteen-member Board of Directors are elected by the

holders of Fannie Mae's common stock, and the remaining Ñve members are appointed by the

President of the United States. The appointed directors must include one person from the home

building industry, one person from the mortgage lending industry, and one person from the real estate

industry. Under the 1992 Act, one appointed director also must be from an organization that has

represented consumer or community interests for not less than two years or a person who has

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

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

removed by the President for good cause.

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

Mae certain privileges. For instance, securities issued by Fannie Mae are deemed to be ""exempt

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

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

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

SEC. Fannie Mae also is not required to Ñle periodic reports with the SEC.

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

obligations of Fannie Mae up to a maximum of $2.25 billion outstanding at any one time. This facility

has not been used since Fannie Mae's transition from government ownership in 1968. Neither the

United States nor any agency thereof is obligated to Ñnance Fannie Mae's operations or to assist

Fannie Mae in any other manner. The Federal Reserve Banks are authorized to act as depositories,

custodians, and Ñscal agents for Fannie Mae, for its own account, or as Ñduciary.

Fannie Mae is exempt from all taxation by any state or by any county, municipality, or local

taxing authority except for real property taxes. Fannie Mae is not exempt from payment of federal

corporate income taxes. Also, Fannie Mae may conduct its business without regard to any

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

13
RECENT DEVELOPMENTS

Fannie Mae made initial disclosures of interest rate risk and credit risk sensitivities and results of

a self-implemented interim risk-based capital test as part of its voluntary initiatives announced in

October 2000. See ""Management's Discussion and Analysis of Financial Condition and Results of

OperationsÌBalance Sheet AnalysisÌRegulatory Environment'' for an overview of the voluntary

initiatives. The following is a detailed description of the interest rate risk and credit risk sensitivity

analyses and disclosures and the results of the interim risk-based capital stress test.

Interest Rate Risk

Net interest income at risk compares Fannie Mae's projected net interest income under a 50 basis

point increase or decrease in interest rates and a 25 basis point increase or decrease in the slope of the

yield curve with projected net interest income without these interest rate changes. Fannie Mae's net

interest income at risk incorporates future activities in line with Fannie Mae's one- and four-year

business projections. Yield curve slope sensitivity is calculated assuming a 25 basis point Öattening or

steepening between one-year and ten-year maturities, with the Ñve-year yield held constant. A 50 basis

point change in interest rates and a 25 basis point change in the slope of the yield curve encompass

about 95 percent of the actual changes that are likely to occur over a monthly reporting period, in

management's estimate. Fannie Mae generally expects its net interest income at risk measures to

range between 1 and 5 percent.

As of February 28, 2001, Fannie Mae's net interest income at risk from a 50 basis point

instantaneous change in interest rates was 3.0 percent over the next year and 2.1 percent over the next

four years. The company's net interest income at risk from a 25 basis point change in the slope of the

yield curve was 3.2 percent over the next year and 5.2 percent over the next four years.

EÅective asset/liability duration gap is a measure of the sensitivity of a portfolio's value to

changes in interest rates. In computing duration gap, Fannie Mae uses a modiÑed option-adjusted

duration calculation. See ""Management's Discussion and Analysis of Financial Condition and Results

of OperationsÌRisk ManagementÌInterest Rate Risk Management'' for further information on how

Fannie Mae uses duration gap to help monitor interest rate risk and its level at year-end 2000.

As of February 28, 2001, the eÅective duration gap of Fannie Mae's mortgage portfolio was a

negative two months. A negative duration gap indicates that the eÅective duration of a portfolio's

liabilities exceeds the eÅective duration of its assets by that amount, while a positive duration gap

indicates the opposite. Fannie Mae's eÅective duration gap was a negative three months at both

December 31, 2000 and January 31, 2001.

14
The table below presents monthly duration gap and net interest income at risk results from

December 1999 to February 2001.

Rate Level Shock (50bp) Rate Slope Shock (25bp)

Net Interest Net Interest Net Interest Net Interest

Month-end Income at Risk: Income at Risk: Income at Risk: Income at Risk:

For the Month ending Duration Gap 1 year Portfolio 4 year Portfolio 1 year Portfolio 4 year Portfolio

December 31, 1999 7 0.2% 4.0% 0.7% 2.1%

January 31, 2000 8 0.2 4.6 0.7 2.3

February 29, 2000 6 0.2 2.8 0.9 2.8

March 31, 2000 5 0.1 4.3 1.0 3.0

April 30, 2000 6 0.0 4.8 1.0 2.9

May 31, 2000 6 0.4 5.1 1.0 2.9

June 30, 2000 4 0.6 4.8 1.0 3.0

July 31, 2000 4 0.9 5.0 0.9 2.8

August 31, 2000 2 0.8 4.3 0.9 3.1

September 30, 2000 2 0.8 4.3 1.0 3.1

October 31, 2000 1 0.8 3.9 1.1 3.4

November 30, 2000 ¿1 1.2 3.2 1.3 3.9

December 31, 2000 ¿3 0.5 2.0 3.0 4.3

January 31, 2001 ¿3 3.9 3.6 3.6 5.2

February 28, 2001 ¿2 3.0 2.1 3.2 5.2

Credit Risk

Fannie Mae's credit risk sensitivity analysis estimates the change in projected credit losses

assuming a Ñve percent decline in home prices. Fannie Mae's credit risk sensitivity is presented both

on a net basis (including the beneÑcial eÅect of credit enhancements) and a gross basis (excluding the

eÅect of credit enhancements). In calculating credit risk sensitivity, Fannie Mae Ñrst projects the

present value of all future credit losses using internal credit models, then calculates the present value

of losses assuming an immediate Ñve percent decline in the value of all single-family properties

securing mortgages owned or guaranteed by Fannie Mae. Following this decline, home prices are

assumed to increase at the same long-run rate projected by Fannie Mae's credit pricing models.

Projected default incidence and severity are consistent with the assumed changes in home prices.

As of December 31, 2000, Fannie Mae's net sensitivity of future credit losses from a Ñve percent

decline in home prices, taking into account the eÅect of credit enhancements, was $295 million. This

amount reÖects a gross credit loss sensitivity of $1,065 million without the eÅect of credit enhancements. Fannie Mae's net credit risk sensitivity can be expected to vary over time based on a number of

factors, including the composition of Fannie Mae's credit portfolio, recent home price changes, the

level of interest rates, and the amount of mortgage insurance and other credit enhancements that

reduce Fannie Mae's losses.

Risk-Based Capital Stress Test

For purposes of voluntary disclosure, Fannie Mae has implemented an internal, interim version of

the risk-based capital stress test detailed in the 1992 Act. This internal risk-based capital stress test

uses as its basis Part II of OFHEO's proposed regulations, modiÑed to reÖect subsequent changes

published by OFHEO, changes suggested in Fannie Mae's comment letter on Part II, and certain

additional adjustments to the calculation of the Treasury yield curve slope, Fannie Mae's borrowing

costs, home price inÖation, debt refunding, capital distributions, administrative expenses, and

calculation of required capital. See ""Government Regulation and Charter Act'' for further information

on the 1992 Act and OFHEO's proposed regulations. OFHEO has not commented on, nor given any

indication that it supports, Fannie Mae's interim version of the risk-based capital stress test. Fannie

15
Mae will disclose this interim implementation only until the Ñnal risk-based capital standard is

adopted by OFHEO.

Fannie Mae passed its internal, interim risk-based capital stress test as of December 31, 2000. Its

capital cushion on December 31, 2000 was between 10 and 30 percent of total capital. Fannie Mae's

intent was to manage its risks so that the cushion between total capital and calculated risk-based

capital would be at least 10 percent of total capital.

LEGAL PROCEEDINGS

In the ordinary course of business, Fannie Mae is involved in legal proceedings that arise in

connection with properties acquired either through foreclosure on properties securing delinquent

mortgage loans owned by Fannie Mae or by receiving deeds to such properties in lieu of foreclosure.

For example, claims related to possible tort liability and compliance with applicable environmental

requirements arise from time to time, primarily in the case of single-family REO.

Fannie Mae is a party to legal proceedings from time to time arising from its relationships with its

seller/servicers. Disputes with lenders concerning their loan origination or servicing obligations to

Fannie Mae, or disputes concerning termination by Fannie Mae (for any of a variety of reasons) of a

lender's authority to do business with Fannie Mae as a seller and/or servicer, can result in litigation.

Also, loan servicing issues have resulted from time to time in claims against Fannie Mae brought as

putative class actions for borrowers.

Fannie Mae also is a party to legal proceedings from time to time arising from other aspects of its

business and administrative policies. Claims and proceedings of all types are subject to many

uncertain factors that generally cannot be predicted with assurance. However, in the case of the legal

proceedings and claims that are currently pending against Fannie Mae, management believes that

their outcome will not have a material adverse eÅect on Fannie Mae's Ñnancial condition or results of

operations.

COMMON AND PREFERRED STOCK

Section 303(a) of the Charter Act provides that Fannie Mae shall have common stock, without

par value. 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 shareholder

vote. 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 Fannie Mae of its own common stock, holding such common stock

in its treasury, and reselling such stock. In the event of liquidation of Fannie Mae, holders of common

stock are entitled to share ratably, in accordance with their holdings, in the remaining assets of Fannie

Mae after payment of all liabilities and amounts payable to the holders of preferred stock. The holders

of the common stock elect thirteen directors, and the President of the United States appoints the

remaining Ñve directors. The Charter Act, Fannie Mae's governing instrument, cannot be amended by

the stockholders, but only by an Act of Congress.

Fannie Mae also is authorized by the Charter Act to have preferred stock on such terms and

conditions as the Board of Directors of Fannie Mae may prescribe. No common stockholder approval

is required to issue preferred stock. Fannie Mae issued $1 billion of non-cumulative preferred stock in

1996, $150 million in 1998, $150 million in 1999 and $978 million in 2000 that is redeemable at Fannie

Mae's option beginning in 2001, 1999, 2004 and 2002, respectively. Holders of these preferred stock

issues are entitled to receive noncumulative, quarterly dividends when, and if, declared by Fannie

Mae's Board of Directors. Payment of dividends on preferred stock is not mandatory, but has priority

over payment of dividends on common stock. Preferred stock is redeemable at its stated value at the

option of Fannie Mae on or after speciÑed dates. Fannie Mae redeemed its outstanding Series A

16
preferred stock issued in 1996 on March 1, 2001. See ""Notes to Financial StatementsÌNote 12'' for

additional information on preferred stock.

The Charter Act contains no limitation on the amount of stock that may be issued except that, if

Fannie Mae fails to meet certain minimum capital standards, the Director of OFHEO could require

the right to approve Fannie Mae's issuance of stock or securities convertible into stock. At

February 28, 2001, there were outstanding approximately 1,000 million shares of common stock. As of

December 31, 2000, there were approximately 26,000 stockholders of record. Based on the number of

requests for proxies and quarterly reports, Fannie Mae estimates that there are approximately

350,000 additional stockholders who held shares through banks, brokers and nominees.

Holders of common and preferred stock are entitled to receive cash dividends if, as, and when

declared by the Board of Directors. However, certain provisions of the 1992 Act may operate to

restrict the ability of the Board of Directors to declare dividends in certain circumstances. The 1992

Act established risk-based capital, minimum capital and critical capital requirements for Fannie Mae.

OFHEO has released proposed risk-based capital regulations for public review and comment. Until

one year after the Ñnal regulations establishing the risk-based capital test are in eÅect, a dividend may

be paid without the prior approval of the Director of OFHEO if Fannie Mae meets the minimum

capital level and the dividend payment would not decrease Fannie Mae's base capital below such level.

See ""Government Regulation and Charter Act.'' One year after Ñnal regulations establishing the riskbased capital test take eÅect, a dividend may be paid without the prior approval of the Director if

Fannie Mae meets both the risk-based capital and minimum capital levels and the dividend payment

would not decrease Fannie Mae's total capital below the risk-based capital level or its core capital

below the minimum capital level. If Fannie Mae meets either the risk-based capital standard or the

minimum capital standard, it may make a dividend payment without obtaining the approval of the

Director only if the dividend payment would not cause Fannie Mae to fail to meet another capital

standard. At any time when Fannie Mae does not meet the risk-based capital standard but meets the

minimum capital standard, Fannie Mae is prohibited from making a dividend payment that would

cause Fannie Mae to fail to meet the minimum capital standard. If Fannie Mae meets neither the

risk-based capital standard nor the minimum capital standard but does meet the critical capital

standard established under the 1992 Act, it may make a dividend payment only if Fannie Mae would

not fail to meet the critical capital standard as a result of such payment and the Director approves the

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

require Fannie Mae to submit a report to the Director regarding any capital distribution (including

any dividend) declared by Fannie Mae before Fannie Mae makes the distribution. See ""Government

Regulation and Charter Act'' and ""Management's Discussion and Analysis of Financial Condition and

Results of OperationsÌBalance Sheet AnalysisÌRegulatory Environment'' regarding the capital

standards applicable to Fannie Mae.

The payment of dividends on common stock also is subject to the payment of dividends on any

preferred stock outstanding. No cash dividend may be declared or paid or set apart for payment on

common stock unless cash dividends have been declared and paid or set apart (or ordered to be set

apart) on preferred stock outstanding for the current dividend period.

Dividends on common stock have been declared and paid for each quarter during Fannie Mae's

two most recent Ñscal years. See ""Quarterly Results of Operations'' for quarterly dividends paid on

common stock during 2000 and 1999.

This description is summarized from the Charter Act, the 1992 Act, the bylaws and certain

resolutions of the Board of Directors and stockholders of Fannie Mae. This description does not

purport to be complete, and is qualiÑed in its entirety by reference to the Charter Act, the 1992 Act,

the bylaws of Fannie Mae, and such resolutions. Copies of the Charter Act, the bylaws of Fannie Mae,

and any applicable resolutions may be obtained from Fannie Mae.

Fannie Mae's common stock is publicly traded on the New York, PaciÑc, and Chicago stock

exchanges and is identiÑed by the ticker symbol ""FNM.'' The transfer agent and registrar for the

17
common stock is First Chicago Trust Company of New York, a division of EquiServe, P.O. Box 2598,

Jersey City, New Jersey 07303. The following table shows, for the periods indicated, the high and low

prices per share of Fannie Mae's common stock on the New York Stock Exchange Composite

Transactions as reported in the Bloomberg Financial Markets service.

Quarterly Common Stock Data

2000 1999

Quarter High Low High Low

1st ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $64.88 $47.88 $75.88 $65.50

2nd ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 65.63 51.25 73.81 62.44

3rdÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72.88 48.13 71.63 58.56

4thÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 89.38 66.13 73.25 59.94

The closing price of Fannie Mae's common stock on March 28, 2001, as so reported, was $78.40.

FORWARD-LOOKING INFORMATION

From time to time, Fannie Mae may make forward-looking statements relating to matters such as

Fannie Mae's anticipated Ñnancial performance, business prospects, future business plans, Ñnancial

condition, or other matters. For example, ""Management's Discussion and Analysis of Financial

Condition and Results of Operations'' includes forward-looking statements, which are statements

therein that are not historical facts or explanations of historical data. The words ""believes,''

""anticipates,'' ""expects,'' ""should'' and similar expressions generally identify forward-looking

statements.

Forward-looking statements reÖect management's expectations based on various assumptions

and management's estimates of trends and economic factors in the markets in which Fannie Mae is

active, as well as Fannie Mae's business plans. As such, forward-looking statements are subject to

risks and uncertainties, and Fannie Mae's actual results may diÅer (possibly signiÑcantly) from those

indicated in such statements. Among the factors that may aÅect the performance, development, or

results of Fannie Mae's business, and thereby cause actual results to diÅer from management's

expressed expectations, are the following:

‚ signiÑcant changes in borrower preferences for Ñxed- or adjustable-rate mortgages, originator preferences for selling mortgages in the secondary market, investor preferences for

Fannie Mae's securities versus other investments, the availability of funding at attractive

spreads in the Ñnancial markets (in particular from callable debt), and other factors

aÅecting the overall mix of mortgage loans available for purchase, Fannie Mae's funding

opportunities, or Fannie Mae's net interest margins;

‚ signiÑcant changes in employment rates, housing price appreciation, or other factors

aÅecting delinquency or foreclosure levels and credit losses;

‚ signiÑcant changes in Fannie Mae's policies or strategies, such as its underwriting

requirements or its interest rate risk management, credit loss mitigation, or investment

strategies;

‚ regulatory or legislative changes aÅecting Fannie Mae, its competitors, or the markets in

which Fannie Mae is active, including changes in taxes or capital requirements applicable

to Fannie Mae or its activities (see ""Government Regulation and Charter Act,'' and

""Management's Discussion and Analysis of Financial Condition and Results of OperationsÌBalance Sheet AnalysisÌRegulatory Environment'' regarding certain matters currently being considered by regulators, legislators, or the Administration);

18
‚ 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 Fannie Mae's expenses, and the

costs (and eÅects) of legal or administrative proceedings (see ""Legal Proceedings'') or

changes in accounting policies or practices;

‚ signiÑcant changes in general economic conditions or the monetary or Ñscal policy of the

United States; and

‚ unanticipated, substantial changes in interest rates. It is possible that sudden, severe

swings in interest rates could have at least a short-term signiÑcant eÅect on Fannie Mae's

results.

Fannie Mae does not undertake to update any forward-looking statement herein or that may be

made from time to time on behalf of Fannie Mae.

19
SELECTED FINANCIAL INFORMATION: 1996-2000

The following selected Ñnancial data for the years 1996 through 2000 (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)

Income Statement Data for the year ended December 31: 2000 1999 1998 1997 1996

Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 42,781 $ 35,495 $ 29,995 $ 26,378 $ 23,772

Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (37,107) (30,601) (25,885) (22,429) (20,180)

Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,674 4,894 4,1103,949 3,592

Guaranty fee incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,351 1,282 1,229 1,274 1,196

Fee and other income (expense)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (44) 191 275 125 86

Credit-related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (94) (127) (261) (375) (409)

Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (905) (800) (708) (636) (560)

Income before federal income taxes and

extraordinary itemÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,982 5,4404,645 4,337 3,905

Provision for federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,566) (1,519) (1,201) (1,269) (1,151)

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,416 3,921 3,444 3,068 2,754

Extraordinary itemÌgain (loss) on early extinguishment

of debt, net of tax effectÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32 (9) (26) (12) (29)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,448 $ 3,912 $ 3,418 $ 3,056 $ 2,725

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (121) (78) (66) (65) (42)

Net income available to common shareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,327 $ 3,834 $ 3,352 $ 2,991 $ 2,683

Basic earnings per common share(1):

Earnings before extraordinary itemÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.28 $ 3.75 $ 3.28 $ 2.87 $ 2.53

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .03 Ì (.02) (.02) (.03)

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.31 $ 3.75 $ 3.26 $ 2.85 $ 2.50

Diluted earnings per common share(1):

Earnings before extraordinary itemÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.26 $ 3.73 $ 3.26 $ 2.84 $ 2.51

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .03 (.01) (.03) (.01) (.03)

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.29 $ 3.72 $ 3.23 $ 2.83 $ 2.48

Cash dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.12 $ 1.08 $ .96 $ .84 $ .76

Balance Sheet Data at December 31:

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 607,399 $ 522,780$ 415,223 $ 316,316 $ 286,259

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54,968 39,751 58,515 64,596 56,606

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 675,072 575,167 485,014 391,673 351,041

Borrowings:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 280,322 226,582 205,413 175,400 159,900

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 362,360321,037 254,878 194,374 171,370

Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 654,234 557,538 469,561 377,880338,268

Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,838 17,629 15,453 13,793 12,773

Capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,645 18,43016,244 14,575 13,520

Other Data for the year ended December 31:

Average net interest marginÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.01% 1.01% 1.03% 1.17% 1.18%

Return on average common equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25.6 25.2 25.2 24.6 24.1

Dividend payout ratioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.028.8 29.5 29.4 30.4

Average effective guaranty fee rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .195 .193 .202 .227 .224

Credit loss ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .007 .011 .027 .041 .053

Ratio of earnings to combined fixed charges

and preferred stock dividends(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.16:1 1.17:1 1.18:1 1.19:1 1.19:1

Mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 154,231 $ 195,210$ 188,448 $ 70,465 $ 68,618

MBS issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211,662 300,689 326,148 149,429 149,869

MBS outstanding at year-end(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,057,750 960,883 834,518 709,582 650,780

Weighted-average diluted common shares outstanding, in

millionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,009 1,031 1,037 1,056 1,080

(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.

(4) Includes $351 billion, $282 billion, $197 billion, $130 billion, and $103 billion of MBS in portfolio at December 31,

2000, 1999, 1998, 1997, and 1996, respectively.

20
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

Fannie Mae is active, as well as the corporation's business plans. In light of securities law developments, including the ""safe harbor'' provisions of the Private Securities Litigation Reform Act of 1995,

Fannie Mae 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 Fannie Mae. The ""Forward-Looking Information'' section discusses

certain factors that may cause such diÅerences to occur.

Overview

Fannie Mae generated earnings of $4.448 billion in 2000, an increase of $536 million over 1999,

and posted its 14th consecutive year of record earnings. Diluted earnings per common share increased

15 percent to $4.29 per share in 2000, keeping Fannie Mae on track to reach its Ñve-year goal of

doubling earnings per share by 2003.

Fannie Mae's earnings performance in 2000 was driven by a 12 percent increase in total taxableequivalent revenues, up one percentage point compared with 1999. The solid growth in taxableequivalent revenues was paced by 18 percent growth in the average retained mortgage portfolio

combined with a stable average net interest margin. Earnings also beneÑted from a 28 percent decline

in credit losses to their lowest level since 1983, when Fannie Mae's total book of business (the retained

mortgage portfolio and Fannie Mae guaranteed mortgage-backed securities held by third-party

investors) was a tenth of its current size.

The remainder of Management's Discussion and Analysis (MD&A) includes detailed information

on Fannie Mae's results of operations, risk management, balance sheet, mortgage-backed securities,

and housing goals in 2000 compared with 1999 and should be read in conjunction with the Ñnancial

statements and the notes to the Ñnancial statements. In addition, MD&A includes forward-looking

statements about 2001, information about the expected impact of new accounting standards, and a

comparison of results of operations in 1999 with 1998.

Results of Operations

Taxable-Equivalent Revenues

Taxable-equivalent revenues totaled $7.825 billion in 2000, up 12 percent over 1999. Taxableequivalent revenues include revenues net of operating losses on certain tax-advantaged investments

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

applicable federal income tax rate. The $850 million increase in 2000 was largely attributable to solid

growth in net interest income, an increase in tax credits from investments in aÅordable housing, and

interest income from investments in tax-exempt securities. Management expects that taxableequivalent revenues will grow at a somewhat faster pace in 2001 primarily because of projected

increases in net interest income, tax credits from aÅordable housing investments, and income from

tax-exempt investments. Table 1 presents a comparison of taxable-equivalent revenues for 2000 and

1999.

21
Table 1: Taxable-Equivalent Revenues

Year Ended December 31,

2000 1999

(Dollars in millions)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,674 $4,894

Guaranty fee incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,351 1,282

Fee and other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (44) 191

Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,981 6,367

Taxable-equivalent adjustments(1):

Investment tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 430267

Tax-exempt investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 414 341

Total taxable-equivalent revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $7,825 $6,975

(1) Adjusted using the applicable federal income tax rate.

Net Interest Income

Net interest income increased $780 million to $5.674 billion in 2000, a 16 percent increase over

1999, as the average retained mortgage portfolio grew 18 percent and the average net interest margin

remained stable. Retained mortgage portfolio growth was particularly strong in the second half of the

year as interest rates trended downward, boosting Ñxed-rate mortgage origination volumes in the

primary market and improving mortgage-to-debt spreads. Mortgage-to-debt spread is the diÅerence

between the yield on a mortgage and the cost of debt that funds it. Retained portfolio growth during

the second half of the year was fueled by Ñnancial institutions selling a large amount of new and

seasoned mortgages into the secondary market. This created attractive investment opportunities at

solid mortgage-to-debt spreads. Management expects the growth rate in net interest income to

increase in 2001 in line with projected retained mortgage portfolio growth.

Additional information on mortgage portfolio volumes and yields as well as the cost of debt is

presented in MD&A under ""Balance Sheet Analysis.''

Guaranty Fee Income

Guaranty fee income increased $69 million in 2000 to $1.351 billion, up 5 percent over 1999. This

gain was due to 4 percent growth in average net Fannie Mae MBS outstanding (exclusive of MBS held

in Fannie Mae's mortgage portfolio) together with a slight increase in the average eÅective guaranty

fee rate. Guaranty fees compensate Fannie Mae for the assumption of credit risk associated with its

guarantee of the timely payment of principal and interest to MBS investors. Guaranty fee income

includes only fees received on MBS that Fannie Mae does not hold in portfolio. The average guaranty

fee rate increased slightly because of slower growth in the percentage of MBS with credit-sharing

arrangements, an increase in higher fee-rate business, and a decline in the liquidation of older, higher

fee-rate business. For 2001, management anticipates guaranty fee income growth will slow because of a

decline in the average eÅective guaranty fee rate due to the impact of higher projected prepayments.

Table 2 presents the average eÅective guaranty fee rate for the past three years.

22
Table 2: Guaranty Fee Data

Year Ended December 31,

2000 1999 1998

(Dollars in millions)

Guaranty fee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,351 $ 1,282 $ 1,229

Average balance of net MBS outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 694,165 664,672 609,513

Average eÅective guaranty fee rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .195% .193% .202%

Additional information on Fannie Mae's MBS and guaranty fees is presented in MD&A under

""Mortgage-Backed Securities.''

Fee and Other Income (Expense)

Fee and other income (expense) declined to an expense of $44 million in 2000 from income of

$191 million in 1999. Fee and other income (expense) consists of technology fees, transaction fees,

multifamily fees, as well as other miscellaneous items, and is net of operating losses from certain taxadvantaged investments. The $235 million decline was primarily because of an increase in net

operating losses from certain tax-advantaged investments and a decline in other miscellaneous

income. Net operating losses from certain tax-advantaged investments increased $134 million because

of a higher volume of equity investments in aÅordable housing projects. Investments in aÅordable

housing projects generate tax credits that reduce Fannie Mae's eÅective federal income tax rate, with

the tax beneÑts recorded as a reduction in the provision for federal income taxes and an increase in

taxable-equivalent revenues. Other miscellaneous income decreased $85 million primarily because of a

hedging loss on an anticipated Benchmark Note issuance. The hedge fell out of correlation due to a

dislocation in the agency markets early in the second quarter of 2000.

Management expects that fee and other income (expense) will improve in 2001. Fannie Mae does

not expect a recurrence of the hedging loss recorded in 2000, and it anticipates slower growth in net

operating losses from equity investments in aÅordable housing projects as well as an increase in

technology fees from greater usage of Fannie Mae's Desktop Underwriter and Desktop Originator

systems. 

Additional information about structured transactions is presented in MD&A under ""MortgageBacked Securities.'' Additional information about multifamily investments is presented in MD&A

under ""Risk ManagementÌCredit Risk Management.''

Credit-Related Expenses

Credit-related expenses, which include foreclosed property expenses and the provision for losses,

declined $33 million to $94 million in 2000 from $127 million in 1999 despite continued growth in

Fannie Mae's total book of business. Credit-related losses, which include foreclosed property expenses

and charge-oÅs (net of recoveries), fell as a percentage of Fannie Mae's average book of business to .7

basis points in 2000 from 1.1 basis points in 1999.

The improvement in credit performance was attributable to continued strength in the nation's

economy and housing markets combined with successful credit risk management strategies, including

increased usage of automated underwriting technology, eÅective use of credit enhancements, and wellexecuted loss mitigation strategies. Foreclosed property expenses decreased $33 million in 2000, or

13 percent compared with 1999, to $214 million largely because of a decline in the number of

foreclosed single-family property acquisitions to 14,351 in 2000 from 16,806 in 1999. The provision

for losses remained stable in 2000 at a negative provision of $120 million, following Fannie Mae's

current policy of recording a negative loss provision in line with recoveries on charged-oÅ properties.

Management expects that credit-related expenses will increase somewhat in 2001 from their low levels

in 2000; however, Fannie Mae's credit performance should remain strong in 2001 with credit losses as

a percentage of its average book of business up slightly from 2000 levels.

23
Additional information on credit-related expenses and credit-related losses is presented in MD&A

under ""Risk ManagementÌCredit Risk Management.''

Administrative Expenses

Administrative expenses grew 13 percent to $905 million in 2000, compared with $800 million in

1999, primarily because of increased investment in our eBusiness technology, Single-family Mortgage

Business infrastructure, and housing and community development initiatives. However, the ratio of

administrative expenses to total taxable-equivalent revenues increased only slightly to 11.6 percent in

2000 from 11.5 percent in 1999 and the ratio of administrative expenses to the average book of

business increased slightly to 7.2 basis points in 2000 from 7.1 basis points in 1999. Compensation

expense increased to $541 million in 2000 from $496 million in 1999 as part of the aforementioned

investments. Management expects that administrative expenses will increase at a somewhat slower

rate than taxable-equivalent revenues in 2001.

Income Taxes

The provision for federal income taxes, net of the tax impact from debt extinguishments,

increased to $1.583 billion in 2000 from $1.514 billion in 1999. The eÅective federal income tax rate

decreased to 26 percent in 2000 from 28 percent in 1999. The reduction in the 2000 eÅective federal

income tax rate was primarily attributable to increased tax credits from a higher volume of

investments in aÅordable housing projects. Management expects the eÅective tax rate will continue to

decline in 2001 largely because of tax credits from increased investments in aÅordable housing.

Extraordinary Item

For 2000, Fannie Mae recognized extraordinary gains of $49 million ($32 million after tax),

compared with extraordinary losses of $14 million ($9 million after tax) in 1999, attributable to the

extinguishment of debt. Fannie Mae recognized most of the extraordinary gains in the second quarter

of 2000 when it repurchased debt that was trading at a low market price relative to historical levels.

The same market conditions that caused the hedging loss in the second quarter of 2000 created the

opportunity to repurchase debt at a favorable price.

Extraordinary gains or losses are recognized when debt and related interest rate swaps are

repurchased or called. The repurchase and call of debt and related interest rate swaps are part of

Fannie Mae's interest rate risk management strategy and are designed to beneÑt Fannie Mae's future

cost of funds.

During 2000, Fannie Mae retired $18 billion in debt and notional principal of interest rate swaps

carrying a weighted-average cost of 7.10 percent. The comparable amount in 1999 was $42 billion at

6.80 percent.

Risk Management

Fannie Mae is subject to three major areas of risk: interest rate risk, credit risk, and operations

risk. Active management of these risks is an essential part of Fannie Mae's operations and a key

determinant of its ability to maintain steady earnings growth. The following discussion highlights

Fannie Mae's strategies to manage these three risks.

Interest Rate Risk Management

Fannie Mae is exposed to interest rate risk because changes in interest rates may aÅect mortgage

portfolio cash Öows in a way that will adversely impact earnings or long-term value. Fannie Mae's

management of interest rate risk involves analyses and actions that position the company to meet its

objective of consistent earnings growth in a wide range of interest rate environments. Fannie Mae's

interest rate risk is concentrated primarily in the retained mortgage portfolio, where exposure to

24
changes in interest rates is managed to achieve stable earnings growth and a competitive 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 rebalancing actions in the context of a well-deÑned risk management process.

The Ñrst element of interest rate risk management is the funding of mortgage assets with

liabilities that have similar cash Öow patterns to those assets through time and across diÅerent

interest rate paths. To achieve the desired liability durations, Fannie Mae issues debt across a broad

spectrum of Ñnal maturities. Because the durations of mortgage assets change as interest rates change,

callable debt and interest rate derivatives are frequently used to alter the durations of liabilities. The

duration of callable debt, like that of a mortgage, shortens when interest rates decrease and lengthens

when interest rates increase. Fannie Mae also uses oÅ-balance-sheet derivative Ñnancial instruments,

including interest rate swaps and other derivatives with embedded interest rate options, to achieve its

desired liability structure and to better match the prepayment risk of the mortgage portfolio. These

instruments are close substitutes for callable debt.

Because the assets in Fannie Mae's mortgage portfolio are not perfectly matched with the

liabilities funding those assets, the portfolio's projected performance changes with movements in

interest rates. Accordingly, the second element of interest rate risk management involves regularly

assessing the portfolio's risk using a diverse set of analyses and measures, including net interest

income at risk, duration and convexity analysis, portfolio value analyses, and stress testing. Risk

measures and assumptions are regularly evaluated and modeling tools are enhanced as management

Ñnds appropriate.

Portfolio net interest income is projected for a wide range of interest rate environments, including

speciÑc rising and falling interest rate paths, using stochastic interest rate simulations based on

historical interest rate volatility. Stochastic simulations generate probability distributions of future

interest rates based on historic behavior. These analyses generally include assumptions about new

business activity to provide a more realistic assessment of possible portfolio performance. Fannie Mae

also regularly conducts narrower assessments of interest rate risk by analyzing the interest rate

sensitivity of only the existing retained mortgage portfolio (assuming no new business).

The duration and convexity of the portfolio, along with portfolio value and net interest income at

risk analyses, are the primary risk assessment tools used to analyze the existing portfolio. The

portfolio duration gapÌthe diÅerence between the durations of portfolio assets and liabilitiesÌ

summarizes for management the extent to which estimated cash Öows for assets and liabilities are

matched, on average, through time and across interest rate scenarios. A positive duration gap

indicates more of an exposure to rising interest rates, and a negative duration gap indicates more of an

exposure to declining interest rates. The portfolio's convexityÌor the diÅerence between the duration

sensitivities of the portfolio's assets and liabilitiesÌprovides management with information on how

quickly and by how much the portfolio's duration gap will change in diÅerent interest rate environments. Management regularly monitors the portfolio's duration and convexity under current market

conditions and for a series of hypothetical interest rate shocks. In addition, management tracks the

portfolio's long-term value and the amount of value that is at risk over a broad range of potential

interest rate scenarios.

Net interest income at risk, duration, convexity, and portfolio value analyses all provide key

information about risk across a wide range of interest rates. Because future events may not be

consistent with recent experience, Fannie Mae has constructed a further series of tests using highly

stressful assumptions of changes in interest rates.

Many of the projections of mortgage cash Öows depend on prepayment models. Fannie Mae is

highly conÑdent in the quality of these models, but is aware that the models are based on historical

patterns that may not continue in the future. The models contain many assumptions, including some

regarding the reÑnanceability of mortgages and relocation rates. Other assumptions are implicit in the

25
projections of interest rates and include projections of the shape of the yield curve and volatility.

Fannie Mae constructs ""worst-case'' assumptions of dramatic changes in interest rates, combined

with substantial adverse changes in prepayments, volatility, and the shape of the yield curve. The

stress tests provide extreme measures of potential risk in highly improbable environments and

contribute to the evaluation of risk strategies.

The third element of Fannie Mae's interest rate risk management is a framework that sets the

parameters for rebalancing actions to help attain corporate objectives. The Board of Directors

oversees interest rate risk management through the adoption of corporate goals and objectives and the

review of regular reports on performance against them. Senior management is responsible for ensuring

that appropriate long-term strategies are in place to achieve the goals and objectives. Management

establishes reference points for the key performance measures that are used to signal material changes

in risk and to assist in determining whether adjustments in portfolio strategy are required to achieve

long-term objectives. These measures and reference points are reported regularly to the Board of

Directors. Comparing the performance measures with the reference points helps management decide

about the necessity or desirability of portfolio rebalancing. Short-term strategies, including rebalancing actions, are formulated in weekly meetings of senior mortgage portfolio management on the basis

of recent Ñnancial market information and the portfolio's standing relative to its long-term objectives.

Fannie Mae's practice of employing a variety of risk measures and assumptions continued to

prove beneÑcial during 2000. Although interest rates were not as volatile as in the previous two years,

there was still signiÑcant movement in interest rates during 2000. The ten-year Fannie Mae debt cost

rose brieÖy but sharply in the spring of 2000 and trended lower throughout the rest of the year. Fannie

Mae's ten-year debt cost fell by more than 100 basis points between year-end 1999 and year-end 2000.

Management was able to meet its interest rate risk management objectives despite these movements

in interest rates.

Fannie Mae's duration gap was negative three months at December 31, 2000, within its target

range of plus or minus six months, and was an improvement from a positive seven month duration gap

at December 31, 1999. Fannie Mae's duration gap declined as a result of the decrease in interest rates

during 2000.

Fannie Mae also eÅectively managed its convexity risk to optimize the earnings potential of its

portfolio while staying comfortably within corporate risk guidelines. Fluctuations in interest rate

volatility and market pricing during 2000 provided Fannie Mae an opportunity to vary the purchase

pattern of option protection used to hedge the convexity risk of the portfolio. During the Ñrst three

quarters of the year, Fannie Mae reduced the portfolio's convexity exposure by increasing the total

amount of option-embedded debt. By the end of the third quarter, option-embedded debt as a

percentage of the retained mortgage portfolio increased to 49 percent from 47 percent at year-end

1999. As a result, Fannie Mae increased mortgage purchases and modestly raised convexity exposure

during the latter part of 2000.

Net Interest Income at Risk

Fannie Mae's net interest income at risk analyses estimate that the portfolio's forecasted net

interest income has very limited exposure to projected changes in interest rates over a one-year

horizon and a fairly limited exposure over a four-year horizon. Table 3 presents Fannie Mae's

assessment of the impact of changes in interest rates on the portfolio's forecasted net interest income

using stochastic interest rate simulations based on historical interest rate volatility.

26
Table 3: Net Interest Income at Risk

Percentage Percentage

of of

One-year Four-year

Forecast Forecast

Assuming a 100 basis point increaseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 98% 95%

Assuming a 100 basis point decrease ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 98 91

The interest rate simulations are based upon a 100 basis point instantaneous change in interest

rates followed by a stochastic interest rate distribution for the one-year and four-year periods. For

2001, Fannie Mae's net interest income at risk is estimated to be 2 percent of the portfolio's forecasted

net interest income for the period assuming a 100 basis point increase or decrease in interest rates.

Over a four-year period, Fannie Mae projects that its net interest income at risk should not exceed

9 percent of the portfolio's forecasted net interest income assuming a 100 basis point decrease in

interest rates. Actual portfolio net interest income may diÅer from these estimates because of speciÑc

interest rate movements, changing business conditions, changing prepayments, and management

actions.

Interest Rate Sensitivity of Net Asset Value

Another indicator of the interest rate exposure of Fannie Mae's existing business is the sensitivity

of the fair value of net assets (net asset value) to changes in interest rates. Table 4 presents Fannie

Mae's estimated net asset value as of December 31, 2000 and two estimates of net asset value that are

based on hypothetical plus and minus 100 basis point instantaneous shocks in interest rates.

Table 4: Interest Rate Sensitivity of Net Asset Value

Percentage of

Net December 31, 2000

Asset Value Net Asset Value

(Dollars in millions)

December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $20,677 Ì

Assuming a 100 basis point increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,204 98%

Assuming a 100 basis point decrease ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,822 72

The net asset value of Fannie Mae on December 31, 2000, as presented in the above table, is the

same as that disclosed in the Notes to Financial Statements under Note 15, ""Disclosures of Fair Value

of Financial Instruments.'' The net asset values for the hypothetical interest rate scenarios were

derived in a manner consistent with the estimation procedures described in that note. The net asset

value sensitivities do not necessarily represent the changes in Fannie Mae's net asset value that would

actually occur for the given interest rate scenarios because the sensitivities neither reÖect the eÅects of

new business nor consider prospective asset/liability rebalancing or other hedging actions Fannie Mae

might take in the future. Consequently, net interest income at risk more closely reÖects the near-term

interest rate risk exposure that Fannie Mae faces as a going concern.

Changes in net asset value take into account several factors, including changes in the values of all

mortgage assets and the debt funding these assets, changes in the value of net guaranty fee income

from oÅ-balance-sheet obligations, and changes in the value of interest rate derivatives. As indicated

in Table 4, the net asset value of Fannie Mae's December 31, 2000 book of business would decline an

estimated 2 percent from an instantaneous 100 basis point increase in interest rates and would decline

an estimated 28 percent from an instantaneous 100 basis point decrease in interest rates. These

sensitivities are consistent with Fannie Mae's overall greater exposure to declining interest rates as

reÖected both by its three month negative duration gap and its net interest income at risk exposure at

year-end 2000.

27
Additional information on interest rate risk management is presented in MD&A under ""Balance

Sheet AnalysisÌFinancing Activities.''

Credit Risk Management

Fannie Mae actively manages credit risk because credit losses could have a signiÑcant impact on

Ñnancial performance. Fannie Mae's primary credit risk is the possibility of failing to recover amounts

due from borrowers on mortgages in its retained portfolio or mortgages underlying guaranteed MBS.

Fannie Mae's secondary credit risk is that counterparties in other transactions, such as derivatives,

mortgage insurance, recourse, liquidity investments, or mortgage servicing, may be unable to meet

their contractual obligations.

Fannie Mae's overall objective in managing credit risk is to deliver consistent earnings and target

returns on capital for the risks it retains and manages. Fannie Mae's credit risk management

organization and strategy are integrated within each business unit, which helps provide a consistent

and aggregate view of credit risk to achieve corporate objectives. Fannie Mae regularly monitors credit

risk trends and explores risk management options. Analytical tools are used extensively to measure

credit risk exposures and evaluate risk management alternatives. Fannie Mae continually reÑnes its

methods of measuring credit risk, setting risk and return targets, and transferring risk to third parties.

Accordingly, Fannie Mae employs various types of credit enhancements to rebalance credit risks in its

total book of business.

Fannie Mae's Credit Committee has primary oversight and approval of its credit risk management strategy. The committee ensures that Fannie Mae's credit risks are appropriately identiÑed,

measured, and managed in a consistent manner. Fannie Mae's Chief Credit OÇcer chairs the

committee and is joined by leaders of Fannie Mae's credit risk management team and business unit

credit oÇcers. Three main credit risk management teams support the Chief Credit OÇcer and the

committee:

‚ Policy and StandardsÌEstablishes and monitors credit policies, standards, and delegation of

credit authority throughout the organization.

‚ Credit Portfolio ManagementÌResponsible for understanding and managing the aggregate risk

exposure, risk sensitivity, and usage of risk capital, including the identiÑcation of risk

concentrations and the usage of risk sharing tools. Also responsible for translating key elements

of loan performance and credit pricing methodologies into Ñnancial models and applications.

‚ Counterparty Risk ManagementÌResponsible for identifying exposure to contractual

counterparties and aggregating Fannie Mae's overall counterparty risk position. Also develops

counterparty risk management policies that identify relevant risks and acceptable exposure

limits for Fannie Mae.

These credit risk management teams work in concert with designated credit oÇcers in the

following business units: Mortgage Portfolio, eBusiness, Single-family, Multifamily, and Housing and

Community Development. The business unit credit oÇcers help ensure that the management of credit

risk and return is eÅectively integrated into Fannie Mae's business activities. The business unit credit

oÇcers have been delegated credit approval authority up to certain thresholds for speciÑc transactions

in their respective lines of business.

The credit risk management teams also work closely with Fannie Mae's Ñve regional oÇces. The

regional oÇces are responsible for managing Fannie Mae's customer relationships. The regional oÇces

ensure that Fannie Mae's transactions with lender partners meet established policies and standards,

are appropriately priced, and are eÅectively managed. The regional oÇces have been delegated credit

authority up to certain thresholds to develop customized mortgage product solutions for lenders while

maintaining Fannie Mae's track record for prudent credit risk management.

28
The discussion that follows addresses how Fannie Mae speciÑcally manages the risk that it will

not recover amounts due from borrowers on conventional single-family and multifamily mortgage

loans in the retained portfolio or underlying guaranteed MBS as well as the risk that other

counterparties may be unable to meet their contractual obligations.

Single-Family

Fannie Mae actively manages credit risk from the point of acquisition until the termination of

single-family mortgages to reduce the risk that it will not recover amounts due from borrowers. Fannie

Mae establishes sound underwriting policies to ensure that purchased and securitized mortgages

perform in accordance with the level of compensation we receive for the credit risk of the loans. Fannie

Mae also deploys portfolio management and loss mitigation strategies to control credit risk throughout

the life of purchased and securitized mortgages.

Fannie Mae has developed an automated underwriting tool, Desktop Underwriter, to help lenders

consistently and objectively apply Fannie Mae's underwriting standards to prospective borrowers.

Desktop Underwriter provides a comprehensive analysis of the unique characteristics of a borrower

and mortgage, including such factors as a borrower's credit history and property value. Close to

56 percent of newly originated mortgages sold to Fannie Mae in 2000 were evaluated through Desktop

Underwriter, up from 38 percent in 1999. Management expects the usage of Desktop Underwriter by

lenders to continue to increase in 2001. To date, loans approved by Desktop Underwriter typically

have had lower default rates than those approved using alternate methods.

Fannie Mae continues to explore new ways of using Desktop Underwriter to grow its total book of

business while carefully balancing the risk and return of mortgage purchases and securitizations. As

the precision of Fannie Mae's risk assessment capabilities in Desktop Underwriter has increased,

loans to borrowers formerly obtaining Ñnancing in higher cost markets (for example, Alternative A

loans and A minus loans) have become eligible for purchase by Fannie Mae. Management plans to

continue investing in research and technology to produce tools that help Fannie Mae and lenders

assess and manage credit risk, thereby expanding homeownership opportunities. 

After purchase, Fannie Mae works closely with its lender partners to minimize credit losses. Many

servicers employ Risk ProÑlerSM, a default prediction model created by Fannie Mae, to enhance their

loss mitigation eÅorts on loans serviced for Fannie Mae. Risk ProÑler uses credit risk indicators, such

as updated borrower credit data, current property values, and mortgage product characteristics, to

predict the likelihood that a loan will default. Currently, servicers are using Risk ProÑler to evaluate

close to 90 percent of the loans Fannie Mae owns or guarantees. In addition, Fannie Mae employs Risk

ProÑler to monitor default probability trends in its total book of business.

In the event mortgages have the potential to become seriously delinquent, Fannie Mae employs

strategies to reduce its exposure to loss through resolutions other than foreclosure. Fannie Mae

pursues early intervention in a delinquency through mortgage servicers to keep borrowers in their

homes and reduce credit-related losses. Borrowers typically are contacted early in a delinquency to

determine whether a repayment plan, temporary forbearance, or modiÑcation of terms might resolve

the delinquency. If this proves unsuccessful, the servicer may arrange a preforeclosure sale to reduce

credit-related costs. The beneÑts of a preforeclosure sale include avoidance of the costs of foreclosure

and a tendency for the property to sell at a higher price because the home is usually occupied. Loan

workouts outpaced foreclosed property acquisitions for the second year in a row. If a loan modiÑcation

or preforeclosure sale is not possible, Fannie Mae's goal is to expeditiously and cost eÅectively handle

the foreclosure process to minimize both the time it retains a nonearning asset and the total loss from

disposition.

Fannie Mae frequently updates critical data on every mortgage, including the current estimated

market value of the property, the amount of equity in the property, and the credit strength of the

borrower, to ascertain the current level of credit risk in its total book of business. Fannie Mae uses

updated data to analyze the sensitivity of mortgages it owns or guarantees to a wide range of projected

29
changes in interest rates and home prices. Based on the sensitivity analysis and loan performance

analytics, Fannie Mae employs various credit enhancement contracts to protect itself against losses on

higher risk loans, including loans with high loan-to-value ratios. Fannie Mae reassesses the eÇciency

and eÅectiveness of its credit enhancement contracts and rebalances credit risk to optimize risk

management and Ñnancial performance. Credit enhancements include primary loan-level mortgage

insurance, pool mortgage insurance, recourse arrangements with lenders, and customized contracts,

which provided protection against credit losses on 38 percent of single-family mortgages at year-end

2000. In 2000, credit enhancements absorbed $349 million, or 80 percent, of $435 million in gross

single-family credit losses.

The application of various credit risk management strategies throughout a loan's life has

contributed to continued reductions in credit-related losses. As shown in Table 5, single-family creditrelated losses dropped 27 percent in 2000, or $32 million, compared with 1999. Fannie Mae's credit

loss ratio (the ratio of credit-related losses to the average amount of mortgages owned or guaranteed)

on its single-family book of business decreased to .7 basis points in 2000 from 1.1 basis points in 1999.

Table 5: Single-Family Credit-Related Losses

Year Ended December 31,

2000 1999 1998

(Dollars in millions)

Recoveries, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(127) $(126) $(57)

Foreclosed property expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 213 244 306

Credit-related lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 86 $ 118 $249

Credit loss ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .007% .011% .027%

Single-family credit-related losses fell in 2000 compared with 1999 because of a decline in

foreclosed property expenses and a slight increase in net recoveries. Foreclosed property expenses

decreased $31 million in 2000, or 13 percent, reÖecting a 15 percent decline in the number of acquired

properties to 14,351 in 2000 versus 16,806 in 1999, which was primarily attributable to strong

economic conditions nationwide. Net recoveries on foreclosed properties increased $1 million in 2000

because of continued strength in housing markets and higher levels of mortgage insurance coverage on

mortgages in foreclosure. Fannie Mae's average credit-related loss per foreclosed single-family

property acquisition fell to $3,800 in 2000 from $4,800 in 1999.

Fannie Mae tracks various trends in its total book of business to monitor credit risk, including

delinquencies, geographical concentrations, loan-to-value ratios, mortgage product mix, and loan age.

The risk proÑle for conventional single-family mortgages in Fannie Mae's portfolio and underlying

MBS at the end of 2000 bodes well for credit performance in 2001.

At year-end 2000 Fannie Mae's conventional single-family serious delinquency rate was .45 percent, compared with .48 percent at year-end 1999. This serious delinquency rate is based on the

number of single-family mortgages in Fannie Mae's retained portfolio or mortgages underlying MBS

for which it retains the primary risk of loss and which are 90 or more days delinquent or in foreclosure.

Fannie Mae's serious delinquency rate fell in 2000 as healthy economic conditions lowered delinquency rates in the Northeast and West regions. Table 6 summarizes the single-family serious

delinquency rates by region.

30
Table 6: Single-Family Serious Delinquency Rates

December 31,

2000 1999 1998

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .57% .67% .83%

Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .49 .50.57

Midwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .39 .37 .41

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .40.41 .46

West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .38 .46 .61

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .45 .48 .58

The average current loan-to-value ratio on loans owned or guaranteed by Fannie Mae decreased

to 58 percent at year-end 2000 from 60 percent at year-end 1999. The level of equity in homes

underlying mortgages is inversely correlated with the incidence and severity of default. Fannie Mae's

conventional single-family book of business is predominantly composed of long-term and intermediate-term Ñxed-rate loans, which have a lower incidence of default than ARMs. At year-end 2000,

93 percent of Fannie Mae's conventional single-family book of business was long-term or intermediate-term Ñxed-rate loans, which was comparable with year-end 1999.

Table 7 provides a detailed overview of the distribution of Fannie Mae's conventional single-family mortgages by product type and loan-to-value ratios.

31
Table 7: Distribution of Conventional Single-Family Loans

by Product Type and Loan-to-Value Ratios

Outstanding at

December 31, Percentage of Business Volumes

2000 1999 2000 1999 1998

Product:

Long-term, Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74% 72% 73% 76% 77%

Intermediate-term, Ñxed-rate(1)ÏÏÏÏÏ 19 22 11 19 19

Adjustable-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 6 16 5 4

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100% 100% 100%

Original loan-to-value ratio:

Greater than 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14% 14% 17% 15% 10%

81% to 90%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15 15 15 14 12

71% to 80%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41 40 44 42 43

61% to 70%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 14 11 14 16

Less than 61% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 17 13 15 19

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100% 100% 100%

Average original loan-to-value ratio ÏÏÏÏ 75% 74% 77% 75% 74%

Current loan-to-value ratio:

Greater than 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3% 3%

81% to 90%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 8

71% to 80%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 22

61% to 70%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 23

Less than 61% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51 44

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100%

Average current loan-to-value ratio ÏÏÏÏ 58% 60%

Average loan amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $92,800 $90,200 $118,100 $115,700 $112,800

(Maximum $252,700 in 2000)

(1) Contractual maturities of 20 years or less at purchase for portfolio loans and 15 years or less

at issue date for MBS issuances.

Multifamily

Fannie Mae also actively manages credit risk throughout the life of its multifamily loans. There

are two primary risks in the underwriting and management of a multifamily loan. First, the underlying

property cash Öows may be insuÇcient to service the loan. Second, the proceeds from the sale or

reÑnancing of a property may be insuÇcient to repay the loan at maturity.

Fannie Mae centralizes responsibility for managing credit risk in the multifamily portfolio to

ensure that the aggregate risk is properly identiÑed and managed and to promote consistent

application of risk management policies and procedures. SpeciÑc areas of responsibility include

portfolio credit risk management, lender assessment, counterparty risk evaluation, regular asset

management of earning assets, special asset management of troubled investments, and contract

compliance monitoring for structured transactions.

Fannie Mae maintains rigorous loan-underwriting guidelines and extensive real estate due

diligence examinations for the loans it acquires or guarantees. The loan-underwriting guidelines

include speciÑc occupancy rate, loan-to-value, and debt service coverage criteria. The due diligence

examinations typically include property condition and property valuation reviews as well as investiga32
tions into the quality of property management. Because of the size of multifamily loans, management

generally requires servicers to submit periodic operating information and property condition reviews

to monitor the performance of individual loans. Fannie Mae uses this information to evaluate the

credit quality of the portfolio, identify potential problem loans, and initiate appropriate loss mitigation activities.

Fannie Mae has dedicated due diligence, portfolio monitoring, and loss mitigation teams to

manage credit risk throughout the life of a multifamily loan. The due diligence team specializes in

assessing transactions prior to purchase or securitization, particularly with large loans or structured

transactions, and performs post-purchase reviews when the underwriting has been delegated to

lenders. Under its Delegated Underwriting and Servicing (DUS) product line, Fannie Mae purchases

or securitizes mortgages under $20 million from approved lenders without prior review of the

mortgages by Fannie Mae. The portfolio monitoring team performs detailed portfolio loss reviews,

addresses borrower and geographic concentration risks, assesses lender qualiÑcations, evaluates

counterparty risk, and tracks property performance and contract compliance. Fannie Mae is enhancing its quantitative tools to provide earlier indications of any deterioration in the credit quality of the

multifamily portfolio. The loss mitigation team manages troubled assets from default through

foreclosure and property disposition, if necessary.

Fannie Mae supplements its multifamily credit risk management eÅorts with various forms of

credit enhancement on the majority of loans purchased or guaranteed. Fannie Mae has shared risk

arrangements whereby lenders in its DUS product line bear losses on the Ñrst Ñve percent of unpaid

principal balance (UPB) and share in remaining losses up to a prescribed limit. On structured

transactions, Fannie Mae generally has full or partial recourse to lenders or third parties for loan

losses. Letters of credit, investment agreements, or pledged collateral may secure the recourse. Thirdparty recourse providers for structured and other transactions include government and private

mortgage insurers. Table 8 presents the credit risk-sharing proÑle, by UPB, of multifamily loans in

portfolio and underlying MBS at December 31, 2000, 1999, and 1998.

Table 8: Multifamily Risk ProÑle

December 31,

2000 1999 1998

Fannie Mae risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13% 12% 11%

Shared risk(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59 56 52

Recourse(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28 32 37

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

(1) Includes loans in which the lender initially bears losses of up to 5 percent of UPB and shares

any remaining losses with Fannie Mae up to a prescribed limit.

(2) Includes loans not included in ""shared risk'' that have government mortgage insurance, or

full or partial recourse to lenders or third parties.

Multifamily credit performance remained strong in 2000. Favorable economic conditions, strong

occupancy rates, and high multifamily property values resulted in credit-related losses declining by

$4 million in 2000 from 1999. Foreclosed property acquisitions decreased to three properties in 2000

from seven properties in 1999. At year-end 2000, there were four primary risk multifamily properties

in Fannie Mae's inventory of foreclosed properties, compared with one property at year-end 1999.

Management anticipates an increase in multifamily credit losses in 2001 because of the growth of the

portfolio in recent years, but expects the multifamily credit loss ratio to remain near 2000 levels. Table

9 provides a detailed breakdown of credit-related losses and the ratio of credit-related losses to average

UPB outstanding for multifamily loans in portfolio and underlying MBS.

33
Table 9: Multifamily Credit-Related Losses

Year Ended December 31,

2000 1999 1998

(Dollars in millions)

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2 $ 4 $ 8

Foreclosed property expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 3 5

Credit-related lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3 $ 7 $ 13

Credit loss ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .007% .015% .036%

Multifamily serious delinquencies reached a record year-end low of .05 percent at year-end 2000,

down from .12 percent at year-end 1999. Multifamily serious delinquencies are those loans for which

Fannie Mae has primary risk of loss (including those with shared risk) and that are 60 days or more

delinquent. The multifamily serious delinquency percentage is based on the UPB of these delinquent

loans compared with the total amount of multifamily loans in portfolio and underlying MBS for which

Fannie Mae is at risk.

Allowance for Losses

Fannie Mae establishes an allowance for losses on mortgages in the retained portfolio and

mortgages underlying MBS outstanding. Management sets the allowance for losses at a level it

believes is adequate to cover estimated losses inherent in the total book of business. Fannie Mae

considers delinquency levels, loss experience, economic conditions in areas of geographic concentration, and mortgage characteristics in establishing the allowance for losses. The allowance for losses is

established by recording an expense for the provision for losses. The allowance for losses is

subsequently reduced through charge-oÅs on foreclosed properties, and it is increased through

recoveries on foreclosed properties. Senior management reviews the adequacy of the allowance for

losses on a quarterly basis.

The allowance for losses was $809 million at December 31, 2000, compared with $804 million at

December 31, 1999. The allowance for losses declined as a percentage of Fannie Mae's total book of

business to .062 percent in 2000 from .067 percent in 1999, primarily because of improved credit

performance and favorable economic conditions.

Changes in the allowance for losses for the years 1996-2000 are presented in the following table.

34
Allowance for Losses

Total

(Dollars in millions)

Balance, January 1, 1996 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 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

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (50)

Net recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49

Balance, December 31, 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 802

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (120)

Net recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 122

Balance, December 31, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 804

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (120)

Net recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 125

Balance, December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 809

Counterparty Risk

Fannie Mae actively manages the counterparty credit risk that arises from several sources,

including derivatives, mortgage insurance, recourse, Liquid Investment Portfolio, and mortgage

servicing transactions. Fannie Mae's credit risk is that counterparties in these transactions will not

fulÑll their contractual obligations to make payments due to Fannie Mae. Fannie Mae has a dedicated

Counterparty Risk Management team that is responsible for quantifying aggregate counterparty risk

exposures across business activities, maintaining a corporate credit policy framework for managing

counterparty risk, and directly managing the counterparty risk associated with mortgage insurance

companies. Individual business units are responsible for managing the counterparty exposures

routinely associated with their business activities. The Counterparty Risk Management team reviews

business unit policies, procedures, and approval authorities, and the Credit Committee approves these

internal controls.

The primary credit risk posed by Fannie Mae's derivatives transactions is that a counterparty

might default on its payments to Fannie Mae, which could result in Fannie Mae having to replace

derivatives with a diÅerent counterparty at a higher cost. Fannie Mae regularly monitors credit

exposures on its derivatives by determining the market value of positions via dealer quotes and

internal pricing models. Fannie Mae enters into master agreements that provide for netting of

amounts due to Fannie Mae and amounts due to counterparties under those agreements. Fannie Mae's

gross oÅ-balance-sheet exposure on derivatives (based upon estimated fair values and taking into

account master agreements that allow for netting of payments) was $.2 billion at December 31, 2000,

compared with $3.9 billion at December 31, 1999.

Derivatives counterparties are subject to master agreements that may require posting of collateral

if Fannie Mae is exposed to credit losses exceeding an agreed-upon threshold. The amount of required

collateral is based on counterparty credit rating and the level of credit exposure. Fannie Mae generally

requires overcollateralization from counterparties whose credit ratings have dropped below predetermined levels. Fannie Mae held $70 million of collateral through custodians for derivative instruments

at December 31, 2000.

35
Fannie Mae also manages derivatives counterparty credit risk by contracting only with experienced counterparties that have high credit ratings. At year-end 2000, over 99 percent of both the

notional amount of Fannie Mae's outstanding derivatives transactions and Fannie Mae's gross oÅbalance-sheet derivatives exposure were with counterparties rated A or better by Standard & Poor's.

Fannie Mae diversiÑes its derivative instruments among counterparties to lower credit risk concentrations. At year-end 2000, nine counterparties represented approximately 86 percent of the total

notional amount of outstanding derivatives transactions, and each had a credit rating of A or better.

At year-end 2000, Ñve counterparties comprised approximately 99 percent of gross oÅ-balance-sheet

exposure on derivatives, and each had a credit rating of A or better.

The primary credit risk presented by Fannie Mae's mortgage insurance counterparties is that

they will be unable to meet their contractual obligations to compensate Fannie Mae for credit losses on

insured mortgages. Before approving a mortgage insurance company, Fannie Mae conducts a

comprehensive counterparty analysis, which generally includes a review of the mortgage insurer's

business plan, insurance portfolio characteristics, master insurance policies, reinsurance treaties, and

ratings on ability to pay claims. Fannie Mae monitors approved insurers through a reporting and

analysis process performed on a quarterly basis. At year-end 2000, Fannie Mae was the beneÑciary on

primary mortgage insurance coverage of $302 billion for single-family loans in portfolio or underlying

MBS. Seven mortgage insurance companies, all rated AA or higher by Standard & Poor's, provided

98 percent of the total coverage.

The primary credit risk associated with recourse transactions is that lenders will be unable to

fulÑll their obligations to absorb losses on mortgage loans that default. Fannie Mae sometimes retains

recourse to lenders for loan losses on mortgages it purchases or mortgages underlying guaranteed

MBS. Fannie Mae held an estimated $40 billion in total recourse to lenders on single-family loans at

year-end 2000, and 62 percent of the recourse providers were rated investment grade or higher (a

rating of BBB-/Baa- or higher by Standard & Poor's and Moody's Investor Service, respectively).

The recourse providers that were not investment grade or were not rated constituted 38 percent of

Fannie Mae's single-family recourse exposure. Fannie Mae can mitigate the risk associated with

recourse transactions through various means, including requiring lenders to pledge collateral to secure

their obligations. In addition, Fannie Mae can protect itself against losses from a lender's nonperformance by terminating a lender's contractual status as a Fannie Mae seller/servicer, selling the lender's

rights to service Fannie Mae loans, and retaining sale proceeds.

The primary credit risk associated with the Liquid Investment Portfolio is that counterparties

will not repay Fannie Mae in accordance with contractual terms. The level of credit risk in the

portfolio is low because the liquidity investments are primarily high-quality short-term investments,

such as asset-backed securities, commercial paper, and federal funds. The majority of asset-backed

securities in the Liquid Investment Portfolio are rated AAA by Standard & Poor's. Unsecured

investments in the portfolio are generally rated A or higher by Standard & Poor's.

The primary credit risk associated with mortgage servicers is that they will not fulÑll their

contractual servicing obligations. On behalf of Fannie Mae, mortgage servicers collect mortgage and

escrow payments from borrowers, pay taxes and insurance costs from escrow accounts, monitor and

report delinquencies, and perform other required activities. A servicing contract breach could result in

credit losses for Fannie Mae, or Fannie Mae could incur the cost of Ñnding a replacement servicer.

Fannie Mae mitigates this risk by requiring mortgage servicers to maintain a minimum servicing fee

rate that Fannie Mae could assume or transfer to compensate a replacement servicer in the event of a

servicing contract breach. Fannie Mae also manages this risk by requiring servicers to follow speciÑc

servicing guidelines and by monitoring each servicer's performance using loan-level data. Fannie Mae

conducts on-site reviews of compliance with servicing guidelines and mortgage servicing performance.

Fannie Mae also works on-site with nearly all of its major servicers to facilitate loan loss mitigation

eÅorts and improve the default management process. In addition, Fannie Mae reviews quarterly

Ñnancial information on servicers. At year-end 2000, Fannie Mae's 25 largest mortgage servicers

serviced 80 percent of its single-family book of business.

36
Additional information on counterparty credit risk is presented in the Notes to Financial

Statements under Note 13, ""Financial Instruments with OÅ-Balance-Sheet Risk'' and Note 14,

""Concentrations of Credit Risk.''

Operations Risk Management

Operations risk is the risk of potential loss resulting from a breakdown in established controls and

procedures, examples of which include circumvention of internal controls, fraud, human error, and

systems malfunction or failure. Fannie Mae has established extensive policies and procedures to

decrease the potential likelihood of such occurrences. Fannie Mae's internal OÇce of Auditing tests

the adequacy of and adherence to internal controls and established policies and procedures. Financial

system data are regularly reconciled to source documents to ensure the accuracy of Ñnancial system

outputs. In addition, Fannie Mae has a comprehensive disaster recovery plan that is designed to

restore critical operations with minimal interruption in the event of a natural disaster.

The use of Ñnancial forecast models is another potential operations risk. To mitigate the risk

associated with the use of Ñnancial models, Fannie Mae regularly reconciles forecasted results to

actual results and recalibrates models for the diÅerences.

Fannie Mae evaluates key performance indicators for elements of operations risk to monitor

trends and identify early warning signals. Each key performance indicator is based on clearly deÑned

and quantiÑable performance thresholds. Senior managers are responsible for monitoring key performance indicators, addressing the monthly results, and taking corrective actions as necessary.

Balance Sheet Analysis

Fannie Mae's primary balance sheet activities are purchasing mortgages and other investments

with proceeds from debt issuances and from repayments of mortgages and other investments. Fannie

Mae's liquidity and capital resources are critical to its activities and its regulatory capital requirements. The following analysis describes trends in these aspects of Fannie Mae's business activities.

Mortgage Portfolio

Fannie Mae's retained mortgage portfolio, net, grew 16 percent to $607 billion at December 31,

2000 from $523 billion at December 31, 1999. Retained mortgage portfolio growth was relatively

modest in the Ñrst half of the year as higher mortgage interest rates and strong mortgage portfolio

growth at depository institutions dampened secondary market activity. Retained mortgage portfolio

growth accelerated in the second half of the year as lower interest rates, a falling adjustable-rate

mortgage share of originations, and considerable selling of mortgages by depository institutions

accelerated secondary market activity and widened mortgage-to-debt spreads. Management expects

retained mortgage portfolio growth to be in the high teens in 2001.

Additional information on mortgage portfolio composition is presented in the Notes to Financial

Statements under Note 2, ""Mortgage Portfolio, Net.''

The average yield on the retained mortgage portfolio increased to 7.16 percent during 2000 from

7.04 percent during 1999. The increase in yield resulted largely from the general rise in mortgage rates

on loans sold into the secondary market and a decline in the annual rate of liquidations. The

liquidation rate on mortgages in portfolio (excluding sales) fell to 10 percent in 2000 from 17 percent

in 1999. Total mortgage liquidations decreased to $57 billion in 2000 from $80 billion in 1999 due

largely to higher mortgage interest rates in the Ñrst half of the year, which decreased the level of

mortgage prepayments. Management expects the average yield on the retained portfolio in 2001 to

decline slightly from the level attained in 2000.

Table 10 summarizes mortgage portfolio activity and average yields from 1998 through 2000.

37
Table 10: Mortgage Portfolio Activity

Purchases Sales Repayments(1)

2000 1999 1998 2000 1999 1998 2000 1999 1998

(Dollars in millions)

Single-family:

Government insured or

guaranteed ÏÏÏÏÏÏÏÏÏÏÏ $ 6,940$ 23,575 $ 6,016 $ 521 $ 360$ Ì $ 3,423 $ 4,092 $ 3,729

Conventional:

Long-term, Ñxed-rate 113,444 146,679 147,615 9,219 5,779 1,383 35,208 52,707 60,718

Intermediate-term,

Ñxed-rate ÏÏÏÏÏÏÏÏÏÏ 11,271 15,292 28,703 599 9 1 13,073 17,825 18,713

Adjustable-rate ÏÏÏÏÏÏÏ 17,683 6,073 3,507 374 Ì Ì 4,293 3,829 2,965

Second ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 336 23 22 Ì Ì Ì 32 53 84

Total single-familyÏÏÏÏÏÏ 149,674 191,642 185,863 10,713 6,148 1,384 56,029 78,506 86,209

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,557 3,568 2,585 269 Ì 409 1,204 1,244 2,658

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $154,231 $195,210$188,448 $10,982 $6,148 $1,793 $57,233 $79,750$88,867

Average net yield ÏÏÏÏÏÏÏÏÏ 7.62% 6.88% 6.61% 7.18% 7.39% 7.66%

Repayments as a

percentage of average

mortgage portfolio ÏÏÏÏÏÏ 10.3 16.9 25.0

(1) Includes mortgage loan prepayments, scheduled amortization, and foreclosures.

Investments

Fannie Mae's investments increased 38 percent to $55 billion at December 31, 2000 from

$40 billion at December 31, 1999. Fannie Mae's Liquid Investment Portfolio comprises the bulk of its

investments, and it totaled $52 billion at year-end 2000. The Liquid Investment Portfolio primarily

consists of high-quality short-term investments in nonmortgage assets, such as asset-backed securities, commercial paper, and federal funds. The Liquid Investment Portfolio serves as a source of

liquidity and an investment vehicle for Fannie Mae's surplus capital.

In 2000 investments grew signiÑcantly because of an increase in Fannie Mae's surplus capital and

a more normal mortgage portfolio growth rate compared to last year. The average yield on investments

rose to 6.60 percent in 2000 from 5.52 percent in 1999 because of an increase in average short-term

interest rates.

Additional information on the Liquid Investment Portfolio is presented in MD&A in the

""Counterparty Risk'' section under ""Risk ManagementÌCredit Risk Management'' and the Notes to

Financial Statements under Note 1, ""Summary of SigniÑcant Accounting Policies'' and Note 4,

""Investments.''

Financing Activities

Fannie Mae's total debt outstanding increased 17 percent to $643 billion at year-end 2000 from

$548 billion at year-end 1999. Fannie Mae's average cost of debt increased to 6.35 percent in 2000

from 6.11 percent in 1999 because of higher interest rates. EÅective long-term debt decreased to

85 percent of total debt outstanding at December 31, 2000, from 87 percent at year-end 1999, taking

into consideration the eÅect of derivative instruments on the eÅective maturity of long-term and

short-term debt. Fannie Mae's eÅective long-term debt as a percentage of its retained mortgage

portfolio decreased to 90 percent at year-end 2000 from 91 percent at year-end 1999. The weightedaverage maturity of eÅective long-term, Ñxed-rate debt outstanding at December 31, 2000 was

79 months versus 80 months at December 31, 1999. Interest rate swaps eÅectively lengthened the Ñnal

maturity of Fannie Mae's liabilities by 24 months at December 31, 2000 and 28 months at

December 31, 1999.

38
Table 11 provides a summary of debt issuances and repayments during 2000 compared with the

previous two years as well as the average cost of debt outstanding at year-end.

Table 11: Short-Term and Long-Term Debt Activity

2000 1999 1998

(Dollars in millions)

Issued during the year:

Short-term(1):

Amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,143,131 $1,136,001 $695,495

Average cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.27% 5.17% 5.42%

Long-term(1):

Amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 110,215 $ 139,020 $147,430

Average cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.92% 6.07% 5.81%

Repaid during the year:

Short-term(1):

Amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,106,956 $1,125,748 $657,308

Average cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.15% 5.10% 5.51%

Long-term(1):

Amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 50,335 $ 61,790 $ 94,728

Average cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.33% 6.51% 6.40%

Outstanding at year-end:

Due within one year:

Net amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 280,322 $ 226,582 $205,413

Average cost(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.40% 5.80% 5.33%

Due after one year:

Net amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 362,360$ 321,037 $254,878

Average cost(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.46% 6.22% 6.25%

Total debt:

Net amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 642,682 $ 547,619 $460,291

Average cost(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.47% 6.18% 6.10%

(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.

Fannie Mae's Benchmark SecuritiesSM program continued to grow in 2000. The Benchmark

Securities program encompasses large issues of noncallable and callable debt designed to provide

liquidity and performance to investors while reducing Fannie Mae's cost of debt. The Benchmark

Securities program has served to consolidate much of Fannie Mae's debt issuances from a large

number of small unscheduled issues to a smaller number of larger, more liquid scheduled issues.

During 2000, Fannie Mae issued Benchmark Notes» and Benchmark BondsSM with speciÑc

maturities in each month of the year and began building and maintaining a noncallable Benchmark

yield curve. Benchmark BillsSM became Fannie Mae's weekly source for all of its three-month and sixmonth discount debt securities for the entire year in 2000. In October 2000, Fannie Mae introduced

the one-year Benchmark Bill, which will be regularly issued on a bi-weekly schedule. Fannie Mae

39
issued a total of $413 billion in debt under the Benchmark Securities program in 2000, with maturities

ranging from 3 months to 30 years, compared with $114 billion in 1999. The growth of the Benchmark

Bills program drove most of the increase in the Benchmark Securities program as issuances rose to

$334 billion in 2000 versus $42 billion in 1999.

As described in the MD&A section entitled ""Risk ManagementÌInterest Rate Risk Management,'' Fannie Mae strives to match the durations of its mortgages with the durations of liabilities

funding those mortgages. Fannie Mae uses debt instruments with varied maturities and embedded

option characteristics, or hedges debt with interest rate swaps, caps, and swaptions to match the

durations of its mortgages. The total amount of option-embedded debt outstanding as a percentage of

the retained mortgage portfolio declined slightly to 46 percent at year-end 2000 from 47 percent at

year-end 1999. Table 12 presents option-embedded debt instruments as a percentage of mortgage

purchases and the retained mortgage portfolio for the past three years. Option-embedded debt

instruments include derivative instruments.

Table 12: Option-Embedded Debt Instruments

2000 1999 1998

(Dollars in billions)

Issued during the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 65 $114 $113

Percentage of total mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42% 58% 60%

Outstanding at year-end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $280$247 $174

Percentage of total net mortgage portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46% 47% 42%

Fannie Mae employs derivative instruments as hedges of debt to increase the Öexibility of its

funding alternatives. Derivative instruments often can provide the speciÑc cash Öows or characteristics that the portfolio requires at a lower cost than the standard debt market. Fannie Mae does not

speculate using derivatives and does not engage in derivatives trading.

Fannie Mae primarily uses four types of derivative instruments: swaps, basis swaps, swaptions,

and interest rate caps. Swaps provide for the exchange of Ñxed and variable interest payments based

on contractual notional principal amounts. These may include callable swaps, which give counterparties or Fannie Mae the right to terminate interest rate swaps before their stated maturities, and

foreign currency swaps, in which Fannie Mae and counterparties exchange payments in diÅerent types

of currencies. Basis swaps provide for the exchange of variable payments that have maturities similar

to hedged debt, but the payments are based on diÅerent interest rate indices. Swaptions give Fannie

Mae the option to enter into swaps at a future date, thereby mirroring the economic eÅect of callable

debt. Interest rate caps provide ceilings on the interest rates of variable-rate debt.

Table 13 summarizes Fannie Mae's derivative activity for the years ended December 31, 2000 and

1999. Table 13 includes the expected maturities and weighted-average interest rates to be received and

paid on these derivative instruments. Fannie Mae's interest rate swaps had a weighted-average term of

106 months at December 31, 2000 versus 112 months at December 31, 1999.

40
Table 13: Derivative Activity and Maturity Data(1)

Generic-Pay Fixed/ Pay Receive Variable Swaps(2) Variable/

Pay Receive Receive Fixed Basis Caps and

Notional Rate(3) Rate(3) Swaps Swaps Swaptions Total

(Dollars in millions)

Balance on January 1, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 96,014 6.53% 5.30% $29,470 $16,919 $27,165 $169,568

Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,532 6.76 5.52 21,859 19,445 25,700 122,536

Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,142 6.99 4.99 19,707 16,820 4,750 53,419

Balance on December 31, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 139,404 6.55 6.03 31,622 19,544 48,115 238,685

Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,1706.83 6.74 48,482 14,600 42,163 142,415

Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,837 5.75 6.63 20,930 19,585 7,750 71,102

Balance on December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $153,737 6.74% 6.79% $59,174 $14,559 $82,528 $309,998

Future Maturities(4)

2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 12,525 6.11% 6.74% $42,816 $13,075 $11,520 $ 79,936

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,045 6.23 6.64 6,789 904 15,850 36,588

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,525 6.16 6.74 1,431 Ì 15,908 26,864

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,720 7.19 6.81 350 100 5,950 17,120

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,075 6.99 6.83 650 Ì 5,200 16,925

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 96,847 6.86 6.82 7,138 48028,100132,565

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $153,737 6.74% 6.79% $59,174 $14,559 $82,528 $309,998

(1) Dollars represent notional amounts that only indicate the amount on which payments are

being calculated and do not represent the amount at risk of loss.

(2) Included in the notional amounts are callable swaps and swaptions of $70 billion and

$47 billion with weighted-average pay rates of 6.63 percent and 5.08 percent and weightedaverage receive rates of 6.83 percent and 6.06 percent at December 31, 2000 and December 31, 1999, respectively.

(3) The weighted-average interest rate payable and receivable is as of the date indicated. The

interest rates of the swaps may be variable-rate, so these rates may change as prevailing

interest rates change.

(4) Based on stated maturities. Assumes that variable interest rates remain constant at December 31, 2000 levels.

Fannie Mae also hedges against Öuctuations in interest rates on planned debt issuances with

derivative instruments that simulate the short sale of U.S. Treasury and agency securities, interest

rate swaps, 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 Fannie Mae to maintain an orderly and cost-eÅective debt issuance schedule so it

can fund daily loan purchase commitments without signiÑcantly increasing its interest rate risk or

exposure to changes in the spread of its funding costs versus benchmark interest rates.

Additional information on interest rate swaps and other oÅ-balance-sheet Ñnancial instruments

are presented in MD&A under ""Risk Management'' and in the Notes to Financial Statements under

Note 13, ""Financial Instruments with OÅ-Balance-Sheet Risk'' and Note 15, ""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 mortgages. Fannie Mae therefore must continually raise funds to support its mortgage

purchase activity. The capital markets have traditionally treated Fannie Mae's obligations as ""federal

agency'' debt even though the U.S. government does not guarantee, directly or indirectly, Fannie

Mae's debt. As a result, Fannie Mae has had ready access to funding at relatively favorable spreads.

41
Fannie Mae's primary sources of cash are issuances of debt obligations, mortgage repayments,

interest income, and MBS guaranty fees. In addition, Fannie Mae had cash and cash equivalents and

short-term investments totaling $56 billion at year-end 2000. Primary uses of cash include the

purchase of mortgages and other securities, repayment of debt, interest payments, administrative

expenses, and taxes.

At December 31, 2000, Fannie Mae had $16 billion in outstanding mandatory commitments to

purchase mortgages and $2 billion in outstanding optional commitments for delivery in 2001. At

December 31, 1999, Fannie Mae had $7 billion in outstanding mandatory commitments to purchase

mortgages and $2 billion in outstanding optional commitments for delivery in 2000.

Fannie Mae's capital base (stockholders' equity plus the general allowance for losses) grew to

$21.6 billion at year-end 2000, compared with $18.4 billion at year-end 1999. At year-end 2000,

999 million shares of common stock were outstanding, net of shares held in treasury. Common stock

issuances totaled 5 million shares for employee and other stock compensation plans in 2000. Fannie

Mae raised $978 million in additional equity in 2000 by issuing variable-rate non-cumulative preferred

stock twice during the year. In March 2000, Fannie Mae issued 13.8 million shares of Series F

preferred stock with an initial rate of 6.30 percent at a stated value of $50 per share. In August 2000,

Fannie Mae issued 5.75 million shares of Series G preferred stock with an initial rate of 6.02 percent at

a stated value of $50 per share. The initial rate resets every two years for Series F and Series G, and

each of these series is callable every two years.

In January 2001 the Board of Directors approved a quarterly common stock dividend for 2001 of

$.30 per common share. In 2000 the quarterly dividend rate was $.28 per common share. The Board of

Directors also approved preferred stock dividends for the period commencing December 31, 2000, up

to, but excluding, March 31, 2001 as identiÑed in Table 14.

Table 14: Preferred Stock Dividends

Dividend

Preferred Stock Series per Share

Series A(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $.80125

Series B ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .81250

Series C ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .80625

Series D ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .65625

Series E ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .63750

Series F ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .78690

Series G ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .77880

(1) Fannie Mae redeemed all of the outstanding shares of its 6.41 percent Series A preferred

stock on March 1, 2001 at $50.53 per share. The redemption price included dividends of

$.53417 per share for the period commencing December 31, 2000, up to, but excluding,

March 1, 2001.

Fannie Mae continued its capital restructuring program in 2000, repurchasing 25 million shares of

common stock. In 1999 Fannie Mae repurchased 10 million shares of common stock. The stock

repurchases were made pursuant to the Board's approval to repurchase up to an additional 6 percent

of outstanding common shares as of December 27, 1995 (adjusted for a stock split) and to repurchase

shares to oÅset the dilutive eÅect of common shares issued in conjunction with various stock

compensation plans.

Fannie Mae's Portfolios and Capital Committee, chaired by the Chief Financial OÇcer, determines interest rate risk and credit risk pricing thresholds, formulates corporate hedging strategies, and

ensures compliance with economic and regulatory risk-based capital requirements. Fannie Mae

assesses capital adequacy using an internally developed stress test methodology. The stress test model

42
calculates the amount of capital required under diÅerent economic scenarios. Fannie Mae uses this

model to estimate the potential amount of capital needed to carry out the company's mission during a

period of economic distress. Based on the results of this model and other factors, Fannie Mae makes

decisions on the risk structure of its business.

Regulatory Environment

Fannie Mae is subject to capital adequacy standards established by the Federal Housing

Enterprises Financial Safety and Soundness Act of 1992 (1992 Act) and continuous examination by

the OÇce of Federal Housing Enterprise Oversight (OFHEO), which was also established by the 1992

Act. The capital adequacy standards require that Fannie Mae's core capital equal or exceed a

minimum capital standard and a critical capital standard. Table 15 shows Fannie Mae's core capital at

year-end 2000 and 1999 compared with the requirements.

Table 15: Capital Requirements

December 31,

2000 1999

(Dollars in millions)

Core capital(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $20,827 $17,876

Required minimum capital(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,294 17,770

Excess of core capital over minimum capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 533 $ 106

Required critical capital(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,337 $ 9,127

Excess of core capital over required critical capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,490 8,748

(1) The sum of (a) the stated value of outstanding common stock; (b) the stated value of

outstanding noncumulative perpetual preferred stock; (c) paid-in capital; and (d) retained

earnings.

(2) The sum of (a) 2.50 percent of on-balance-sheet assets; (b) .45 percent of outstanding MBS;

and (c) .45 percent of other oÅ-balance-sheet obligations, which may be adjusted by the

Director of OFHEO under certain circumstances (See 12 CFR 1750.4 for existing adjustments made by the Director of OFHEO).

(3) The sum of (a) 1.25 percent of on-balance-sheet assets; (b) .25 percent of outstanding MBS;

and (c) .25 percent of other oÅ-balance-sheet obligations, which may be adjusted by the

Director of OFHEO under certain circumstances.

The Director of OFHEO has proposed a risk-based capital standard as required by the 1992 Act.

The risk-based capital standard includes capital requirements for credit risk, interest rate risk, and

management and operations risk. To meet the proposed capital standard, Fannie Mae would have to

hold capital based on the occurrence of extreme credit and interest rate conditions over a ten-year

horizon, plus an additional 30 percent of that amount for management and operations risk.

OFHEO released Part I of the proposed risk-based capital regulations for public comment in

1996. Part I proposed benchmarks for credit stress testing and speciÑed the housing price index that

would be used in connection with this standard. Part II of the proposed risk-based capital regulations

was released for public comment in March 1999, and it proposed the use of a speciÑc model to assess

capital requirements for credit risk and interest rate risk. Fannie Mae submitted comments on both

parts of the risk-based capital proposal to OFHEO. The 1992 Act provides that the Ñnal regulation

will be enforceable one year after issuance of a Ñnal regulation.

In March 2000, U.S. Representative Richard Baker (R-LA) introduced a bill, H.R. 3703, that

proposed to consolidate the regulation of Fannie Mae, Freddie Mac, and the Federal Home Loan

43
Banks under a new Ñve-member regulatory board. The bill proposed other changes to the regulation of

Fannie Mae and Freddie Mac and was the subject of several hearings by a House Subcommittee. The

bill was never brought to a vote in the Subcommittee.

In October 2000, Fannie Mae and Freddie Mac announced, with Rep. Baker and a group of

bipartisan members of Congress, the adoption of a series of voluntary measures to enhance disclosure,

capital, and market discipline. Fannie Mae began implementing and disclosing these measures during

the Ñrst quarter of 2001. The two companies committed to the following measures:

‚ Issue publicly traded, externally rated subordinated debt on at least a semi-annual basis such

that the sum of core capital and outstanding subordinated debt for each company will equal or

exceed four percent of on-balance sheet assets following a three-year phase in period. This is

intended to promote market discipline and supplement capital to further strengthen the

companies' Ñnancial positions. Fannie Mae intends to issue Subordinated Benchmark Notes on

a quarterly basis during 2001 and on at least a semi-annual basis thereafter. In February 2001,

Fannie Mae issued $1.5 billion of 10-year Subordinated Benchmark Notes. The Subordinated

Benchmark Notes received ratings of Aa2 from Moody's Investors Service and AA- from

Standard & Poor's.

‚ Maintain more than three months worth of liquidity, assuming no access to the new issue debt

markets, to reduce the possibility that the companies' operations could be disrupted during a

signiÑcant Ñnancial crisis. The companies also committed to maintain at least Ñve percent of

on-balance sheet assets in a liquid, marketable portfolio of nonmortgage securities and to

maintain additional highly liquid securities in unencumbered form to facilitate liquidity. On

March 12, 2001, Fannie Mae announced that it had a contingency plan in place to ensure that it

could meet its obligations for three months without access to the debt markets. In addition,

Fannie Mae reported that liquid investments were 8.1 percent of on-balance sheet assets at

year-end 2000.

‚ Implement an interim risk-based capital stress test on a quarterly basis using parameters

contained in the 1992 Act, and publicly disclose the outcome and parameters of this test,

pending OFHEO's release of permanent risk-based capital regulations.

‚ Publicly disclose the results of interest rate risk sensitivity analyses on a monthly basis.

‚ Publicly disclose the results of credit risk sensitivity analyses on a quarterly basis.

‚ Obtain and publicly disclose a ""risk to the government'' or independent Ñnancial strength

rating from a nationally recognized statistical rating organization on an annual basis. On

February 27, 2001, Fannie Mae received an AA- rating from Standard & Poor's. This rating is

based on Standard & Poor's evaluation of Fannie Mae's underlying credit quality, without

assuming direct support from the federal government. Fannie Mae announced that Standard &

Poor's will evaluate the rating on a continuous basis, and Standard & Poor's will publicly report

if the company's Ñnancial strength changes.

Mortgage-Backed Securities

Total MBS outstanding grew 10 percent to $1.058 trillion at year-end 2000 from $961 billion at

year-end 1999, which was comparable to the growth in the overall mortgage market. MBS issuances

totaled $212 billion in 2000, down from $301 billion in 1999. MBS liquidations slowed to $115 billion

in 2000, compared with $174 billion in 1999. The reductions in MBS issuances and liquidations in

2000 were attributable to the increase in mortgage interest rates during the Ñrst half of the year.

Fannie Mae issues MBS that are backed by mortgage loans purchased from a single lender or

from multiple lenders, or that are transferred from Fannie Mae's mortgage portfolio. Single-lender

MBS are issued through lender swap transactions whereby a lender exchanges pools of mortgages for

MBS. Multiple-lender MBS allow several lenders to pool mortgages and receive, in return, MBS

44
(called Fannie Majors) representing a proportionate share of a larger pool. Lenders may retain the

MBS or sell them to other investors. MBS are not assets of Fannie Mae except when acquired for

investment purposes, nor are the MBS recorded as liabilities. In some instances Fannie Mae buys

mortgage loans and concurrently enters into a forward sale commitment. These loans are designated

as held for sale when acquired and sold from the portfolio as MBS.

Sellers of pools of mortgage loans may retain or transfer to one or more third parties the primary

default risk on loans constituting the MBS pools, or they may elect to transfer this credit risk to

Fannie Mae. Fannie Mae receives a guaranty fee for assuming the credit risk and guaranteeing timely

payment of principal and interest to MBS investors. The guaranty fee paid by the lender varies,

depending on the risk proÑle of the loans securitized as well as the level of credit risk assumed by

Fannie Mae. Fannie Mae is ultimately responsible for guaranteeing timely payment of principal and

interest to MBS investors whether or not Fannie Mae shares primary default risk on loans underlying

MBS. Fannie Mae accrues a liability on its balance sheet for its guarantee obligation based on the

probability that mortgages underlying MBS will not perform according to contractual terms and the

level of credit risk it has assumed.

Table 16 summarizes the risk distribution for MBS issued and outstanding for the years ended

December 31, 2000, 1999, and 1998.

Table 16: MBS Risk Distribution

Issued(1) Outstanding(1)

Lender or Fannie Mae Lender or Fannie Mae

Shared Risk Risk Total Shared Risk(2) Risk Total(3)

(Dollars in millions)

2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $27,295 $184,367 $211,662 $222,595 $835,155 $1,057,750

1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75,187 225,502 300,689 209,190 751,693 960,883

1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90,694 235,454 326,148 160,223 674,295 834,518

(1) Based on primary default risk category. MBS outstanding includes MBS that have been

pooled to back Fannie Megas, SMBS, or REMICs.

(2) Included in lender risk are $173 billion, $163 billion, and $123 billion at December 31, 2000,

1999, and 1998, respectively, on which the lender or a third party has agreed to bear default

risk limited to a certain portion or percentage of the loans delivered and, in some cases, on

which the lender has pledged collateral to secure that obligation. Fannie Mae is ultimately

responsible for bearing default risk if the lender or third party fails to fulÑll its obligation.

(3) Included are $351 billion, $282 billion, and $197 billion at December 31, 2000, 1999, and

1998, respectively, of MBS in Fannie Mae's portfolio.

Fannie Mae also issues Real Estate Mortgage Investment Conduits (REMICs) backed by MBS,

Stripped MBS (SMBS), Government National Mortgage Association (Ginnie Mae) mortgage-backed

securities, other REMIC securities, or whole loans. REMICs backed by MBS or SMBS provide an

additional source of fee income from issuances that do not subject Fannie Mae to added credit risk. In

2000, REMIC issuances were $34 billion, compared with $51 billion in 1999. Fannie Mae REMIC

issuances declined along with the rest of the REMIC market in 2000. REMIC market volumes fell

primarily because of a Öatter yield curve. In addition, higher interest rates contributed to fewer

mortgage-backed securities issuances and decreased collateral available for REMICs. The outstanding

balance of REMICs at December 31, 2000 was $292 billion, compared with $294 billion at December 31, 1999. REMICs are not assets of Fannie Mae except when acquired for investment purposes,

nor are the REMICs recorded as liabilities.

45
Housing Goals

The 1992 Act gives the HUD Secretary authority to establish low- and moderate-income,

underserved areas, and special aÅordable housing goals for Fannie Mae. Table 17 shows that Fannie

Mae exceeded its goals for 2000 and 1999.

Table 17: Housing Goals

Year Ended December 31,

2000 1999

Goal(1) Result Goal(1) Result

(Dollars in billions)

Low- and moderate-income housing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42.0% 49.5% 42.0% 45.9%

Underserved areas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24.031.0 24.026.7

Special aÅordable housing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.022.3 14.018.7

Targeted multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.3 $ 3.8 $ 1.3 $ 4.1

(1) Goals are expressed as a percentage of Fannie Mae's conventional mortgage business during

the period, except for the targeted multifamily goal.

In October 2000, HUD issued a Ñnal rule with new housing goals that are eÅective in 2001 and

represent signiÑcant increases over current goals. The low- and moderate-income housing goal

increased to 50 percent from 42 percent. The underserved areas housing goal increased to 31 percent

from 24 percent. The special aÅordable housing goal, a more targeted measure, increased to 20 percent

from 14 percent. The targeted multifamily subgoal more than doubled to $2.85 billion from $1.30 billion. The Ñnal rule also includes certain provisions that reduce penalties for missing data, increase

recognition for special products serving small but needy markets, and provide incentive points for

serving small multifamily and owner-occupied rental housing. The new goals represent a signiÑcant

increase above Fannie Mae's historic level of performance, yet management has made a commitment

to meet these goals in 2001.

American Dream Commitment

The American Dream Commitment, announced by Fannie Mae on March 15, 2000, is a six-point

plan to invest $2 trillion and serve 18 million households over 10 years to close homeownership gaps,

strengthen communities and stabilize neighborhoods, and Ñght discrimination and unfair practices in

the mortgage marketplace.

The American Dream Commitment is Fannie Mae's next aÅordable housing challenge after

surpassing its Trillion Dollar Commitment to serve 10 million households by the end of 2000. The

Trillion Dollar Commitment was a signiÑcant targeted housing Ñnance commitment that served

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. Fannie Mae

surpassed the commitment to serve 10 million households in August 1999 and exceeded the $1 trillion

Ñnancing goal in the spring of 2000, both well before the year-end 2000 goal.

New Accounting Standards

Financial Accounting Standard No. 133 (FAS 133), Accounting for Derivative Instruments and

Hedging Activities, as amended by FAS 138, was eÅective for Fannie Mae beginning January 1, 2001.

FAS 133 requires that all derivatives be recognized as either assets or liabilities on the balance sheet at

their fair value. Subject to certain qualifying conditions, a derivative may be designated as either a

hedge of the fair value of a Ñxed-rate instrument (fair value hedge) or a hedge of the cash Öows of a

variable-rate instrument or anticipated transaction (cash Öow hedge). For a derivative qualifying as a

fair value hedge, fair value gains or losses on the derivative would be reported in earnings along with

46
the fair value losses or gains on the hedged item attributable to the risk being hedged. For a derivative

qualifying as a cash Öow hedge, fair value gains or losses on the derivative associated with the risk

being hedged would be reported in a separate component of stockholders' equity (other comprehensive

income) and then amortized into earnings in the period(s) in which the hedged item aÅects income.

For a derivative not qualifying as a hedge, or components of a derivative that are excluded from any

hedge eÅectiveness assessment, fair value gains and losses on the derivative would be reported in

earnings. On January 1, 2001, the cumulative after-tax eÅect of the adoption of FAS 133 was

$168 million of income and a $3.9 billion loss in the other comprehensive income component of

stockholders' equity.

In September 2000, the Financial Accounting Standards Board issued Financial Accounting

Standard No. 140 (FAS 140), a replacement of FAS 125, Accounting for Transfers and Servicing of

Financial Assets and Extinguishment of Liabilities. The collateral and disclosure provisions of FAS

140 were eÅective for Fannie Mae for the Ñscal year ending December 31, 2000. The provisions

governing transfers and servicing of Ñnancial assets and extinguishment of liabilities become eÅective

April 1, 2001. In management's opinion, these provisions of FAS 140 will not have a material impact

on Fannie Mae.

Comparison of 1999 with 1998

The following discussion and analysis compares Fannie Mae's results of operations for the years

ended December 31, 1999 and 1998.

Results of Operations

Net income increased 14 percent to $3.912 billion in 1999 from $3.418 billion in 1998. Diluted

earnings per common share rose 15 percent to $3.72, up from $3.23 in 1998.

Total taxable-equivalent revenues grew 11 percent to $6.975 billion in 1999 from $6.272 billion in

1998. The growth was primarily attributable to an increase in net interest income.

Net interest income increased $784 million, or 19 percent, to $4.894 billion in 1999 because of a

33 percent increase in the average mortgage portfolio balance, which more than oÅset a 2 basis point

decrease in the average net interest margin. Retained mortgage portfolio growth was attributable to

strong mortgage origination volumes in the primary market during the Ñrst half of 1999.

Guaranty fee income increased $53 million, or 4 percent, to $1.282 billion in 1999 from

$1.229 billion in 1998. The increase in guaranty fee income primarily resulted from a 9 percent

increase in average net Fannie Mae MBS outstanding, which more than oÅset a .9 basis point decline

in the average eÅective guaranty fee rate.

Fee and other income (expense) declined $84 million to income of $191 million in 1999 from

income of $275 million in 1998. The decrease resulted largely from a decline in multifamily fees and an

increase in net operating losses from certain tax-advantaged investments, which more than oÅset an

increase in technology fees.

Credit-related expenses decreased $134 million to $127 million in 1999 from $261 million in 1998.

The provision for losses fell $70 million primarily due to an increase in recoveries on charged-oÅ loans.

Foreclosed property expenses dropped $64 million with a decline in the number of foreclosed property

acquisitions. The decrease in credit-related expenses resulted from strength in the economy and

housing markets, a signiÑcant degree of risk sharing on higher risk loans, and continued loss

mitigation eÅorts.

Administrative expenses grew $92 million in 1999, or 13 percent, to $800 million from $708 million in 1998. The increase in administrative expenses resulted primarily from increased investment in

technology and resources for the Portfolio Investment and Credit Guaranty business infrastructures

47
and in housing and community development initiatives. Compensation expense was $496 million in

1999, compared with $453 million in 1998.

The provision for federal income taxes, net of the tax beneÑt from extraordinary losses, was

$1.514 billion in 1999, compared with $1.187 billion in 1998. The eÅective federal income tax rate was

28 percent in 1999 versus 26 percent in 1998. The eÅective federal income tax rate in 1998 reÖected

the implementation of improved systems and information that accelerated the timing of the recognition of the tax beneÑts associated with investments qualifying for low-income housing tax credits.

During 1999, the amount of long-term debt called or repurchased and the notional principal of

related interest rate swaps called was $42 billion, with a weighted-average cost of 6.80 percent. The

comparable amount in 1998 was $77 billion, with a weighted-average cost of 6.71 percent. As a result

of repurchase and call activity, Fannie Mae recognized net extraordinary losses of $14 million

($9 million after tax) in 1999, compared with net extraordinary losses of $40 million ($26 million

after tax) in 1998. The repurchase or call of high-coupon debt favorably aÅects Fannie Mae's future

cost of funds.

48
FANNIE MAE

INDEX TO FINANCIAL STATEMENTS

Page

Independent Auditors' Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50

Statements of Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51

Balance SheetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52

Statements of Changes in Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53

Statements of Cash FlowsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54

Notes to Financial StatementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55

Quarterly Results of Operations (Unaudited) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 81

Net Interest Income and Average Balances (Unaudited) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83

Rate/Volume Analysis (Unaudited)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84

49
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, 2000 and

1999, 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, 2000. These Ñnancial statements are the

responsibility of Fannie Mae's management. Our responsibility is to express an opinion on these

Ñnancial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United

States of America. Those standards require that we plan and perform the audit to obtain reasonable

assurance about whether the Ñnancial statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial

statements. An audit also includes assessing the accounting principles used and signiÑcant estimates

made by management, as well as evaluating the overall Ñnancial statement presentation. We believe

that our audits provide a reasonable basis for our opinion.

In our opinion, the Ñnancial statements referred to above present fairly, in all material respects,

the Ñnancial position of Fannie Mae as of December 31, 2000 and 1999, and the results of its

operations and its cash Öows for each of the years in the three-year period ended December 31, 2000,

in conformity with accounting principles generally accepted in the United States of America.

We also have audited in accordance with auditing standards generally accepted in the United

States of America the supplemental fair value balance sheets of Fannie Mae as of December 31, 2000

and 1999, 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 accounting principles generally accepted in the United States of America. In addition, the

supplemental fair value balance sheets do not purport to present the net realizable, liquidation, or

market value of Fannie Mae as a whole. Furthermore, amounts ultimately realized by Fannie Mae

from the disposal of assets may vary signiÑcantly from the fair values presented. In our opinion, the

supplemental fair value balance sheets included in Note 15 present fairly, in all material respects, the

information set forth therein.

KPMG LLP

Washington, DC

January 11, 2001

50
FANNIE MAE

FINANCIAL STATEMENTS AND REPORTS

STATEMENTS OF INCOME

Year Ended December 31,

2000 1999 1998

(Dollars and shares in millions,

except per common share amounts)

Interest income:

Mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $39,403 $32,672 $25,676

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,378 2,823 4,319

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,781 35,495 29,995

Interest expense:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,204 3,952 4,809

Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,903 26,649 21,076

Total interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,107 30,601 25,885

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,674 4,894 4,110

Other income:

Guaranty fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,351 1,282 1,229

Fee and other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (44) 191 275

Total other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,307 1,473 1,504

Other expenses:

Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (120) (120) (50)

Foreclosed property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 214 247 311

Administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 905 800 708

Total other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 999 927 969

Income before federal income taxes and extraordinary item ÏÏÏÏÏÏÏÏÏÏ 5,982 5,4404,645

Provision for federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,566 1,519 1,201

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,416 3,921 3,444

Extraordinary itemÌgain (loss) on early extinguishment of debt (net

of tax expense of $17 million in 2000 and tax beneÑts of $5 million

in 1999 and $14 million in 1998)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32 (9) (26)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,448 $ 3,912 $ 3,418

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 121 78 66

Net income available to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,327 $ 3,834 $ 3,352

Basic earnings per common share:

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.28 $ 3.75 $ 3.28

Extraordinary gain (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .03 Ì (.02)

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.31 $ 3.75 $ 3.26

Diluted earnings per common share:

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.26 $ 3.73 $ 3.26

Extraordinary gain (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .03 (.01) (.03)

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.29 $ 3.72 $ 3.23

Cash dividends per common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.12 $ 1.08 $ .96

Weighted-average common shares outstanding:

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,003 1,024 1,029

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,009 1,031 1,037

See Notes to Financial Statements.

51
FANNIE MAE

BALANCE SHEETS

December 31,

2000 1999

(Dollars in millions,

except share stated

values)

Assets

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $607,399 $522,780

Investments:

Held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,832 21,660

Available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,136 18,091

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 617 2,099

Accrued interest receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,529 3,530

Acquired property and foreclosure claims, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 636 708

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,923 6,299

Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $675,072 $575,167

Liabilities and Stockholders' Equity

Liabilities:

Debentures, notes and bonds, net:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $280,322 $226,582

Due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 362,360321,037

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 642,682 547,619

Accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,236 6,784

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,316 3,135

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 654,234 557,538

Stockholders' Equity:

Preferred stock, $50 stated value, 100 million shares authorizedÌ

46 million shares outstanding in 2000 and 26 million shares

outstanding in 1999. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,278 1,300

Common stock, $.525 stated value, no maximum authorizationÌ

1,129 million shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 593 593

Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,588 1,585

Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,619 18,417

Accumulated other comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10(246)

26,088 21,649

Less: Treasury stock, at cost, 130 million shares in 2000 and

110 million shares in 1999. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,250 4,020

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,838 17,629

Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $675,072 $575,167

See Notes to Financial Statements.

52
FANNIE MAE

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Accumulated

Additional Other Total

Common Shares Preferred Common Paid-In Retained Comprehensive Treasury Stockholders'

Outstanding Stock Stock Capital Earnings Income Stock Equity

(Dollars and shares in millions)

Balance, January 1, 1998 ÏÏÏÏÏÏÏÏ 1,037 $1,000 $593 $1,495 $13,326 $ (1) $(2,620) $13,793

Comprehensive income:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 3,418 Ì Ì 3,418

Other comprehensive income:

Unrealized losses on availablefor-sale securities, net of tax

eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì (12) Ì (12)

Total comprehensive income ÏÏÏÏÏ 3,406

Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (1,055) Ì Ì (1,055)

Shares repurchased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17) Ì Ì Ì Ì Ì (1,051) (1,051)

Preferred stock issuedÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 150Ì Ì Ì Ì Ì 150

Treasury stock issued for stock

options and beneÑt plans ÏÏÏÏÏÏÏÏ 5 Ì Ì 38 Ì Ì 172 210

Balance, December 31, 1998 ÏÏÏÏÏ 1,025 1,150 593 1,533 15,689 (13) (3,499) 15,453

Comprehensive income:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 3,912 Ì Ì 3,912

Other comprehensive income:

Unrealized losses on availablefor-sale securities, net of tax

eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì (233) Ì (233)

Total comprehensive income ÏÏÏÏÏ 3,679

Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (1,184) Ì Ì (1,184)

Shares repurchased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10) Ì Ì Ì Ì Ì (653) (653)

Preferred stock issuedÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 150Ì (2) Ì Ì Ì 148

Treasury stock issued for stock

options and beneÑt plans ÏÏÏÏÏÏÏÏ 4 Ì Ì 54 Ì Ì 132 186

Balance, December 31, 1999 ÏÏÏÏÏ 1,019 1,300 593 1,585 18,417 (246) (4,020) 17,629

Comprehensive income:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 4,448 Ì Ì 4,448

Other comprehensive income:

Unrealized gains on availablefor-sale securities, net of tax

eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 256 Ì 256

Total comprehensive income ÏÏÏÏÏ 4,704

Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (1,246) Ì Ì (1,246)

Shares repurchased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (25) Ì Ì Ì Ì Ì (1,406) (1,406)

Preferred stock issuedÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 978 Ì (10) Ì Ì Ì 968

Treasury stock issued for stock

options and beneÑt plans ÏÏÏÏÏÏÏÏ 5 Ì Ì 13 Ì Ì 176 189

Balance, December 31, 2000 ÏÏÏÏÏ 999 $2,278 $593 $1,588 $21,619 $ 10$(5,250) $20,838

See Notes to Financial Statements.

53
FANNIE MAE

STATEMENTS OF CASH FLOWS

Year Ended December 31,

2000 1999 1998

(Dollars in millions)

Cash Öows from operating activities:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,448 $ 3,912 $ 3,418

Adjustments to reconcile net income to net cash provided

by operating activities:

Discount amortization on short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,368 6,929 5,828

Negative provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (120) (120) (50)

(Gain) loss on early extinguishment of debtÏÏÏÏÏÏÏÏÏÏÏÏ (49) 14 40

Other (decreases) increases, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,138) 1,120(1,540)

Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,509 11,855 7,696

Cash Öows from investing activities:

Purchases of mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (152,075) (193,434) (189,721)

Proceeds from sales of mortgagesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,599 5,950 1,824

Mortgage principal repaymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,193 77,789 86,918

Net proceeds from disposition of foreclosed propertiesÏÏÏ 2,019 2,462 2,890

Net (increase) decrease in held-to-maturity investments ÏÏ (12,172) 20,639 16,391

Net increase in available-for-sale investmentsÏÏÏÏÏÏÏÏÏÏÏ (3,045) (1,875) (10,310)

Net cash used in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (98,481) (88,469) (92,008)

Cash Öows from Ñnancing activities:

Proceeds from issuance of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 110,298 138,491 149,034

Payments to redeem long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (50,320) (62,464) (95,920)

Proceeds from issuance of short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,130,698 1,129,246 682,524

Payments to redeem short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,104,694) (1,125,754) (650,961)

Net payments from stock activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,492) (1,549) (1,827)

Net cash provided by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84,49077,97082,850

Net (decrease) increase in cash and cash equivalents ÏÏÏÏÏ (1,482) 1,356 (1,462)

Cash and cash equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏ 2,099 743 2,205

Cash and cash equivalents at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 617 $ 2,099 $ 743

Supplemental disclosures of cash Öow information:

Cash paid during the year for:

Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 34,863 $ 28,447 $ 24,415

Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,595 1,276 555

See Notes to Financial Statements.

54
FANNIE MAE

NOTES TO FINANCIAL STATEMENTS

1. Summary of SigniÑcant Accounting Policies

Fannie Mae is a federally chartered and stockholder-owned corporation operating in the residential mortgage Ñnance industry.

The accounting and reporting policies of Fannie Mae conform with accounting principles

generally accepted in the United States of America. Certain amounts in prior years' Ñnancial

statements have been reclassiÑed to conform to the current presentation.

The preparation of Ñnancial statements in conformity with accounting principles generally

accepted in the United States of America requires management to make estimates and assumptions

that aÅect the reported amounts of assets and liabilities and disclosure of contingent assets and

liabilities at the date of the Ñnancial statements and the reported amounts of revenues and expenses

during the reporting period. Actual results could diÅer from those estimates.

Mortgage Portfolio

Mortgages and mortgage-backed securities that Fannie Mae has the ability and positive intent to

hold to maturity are classiÑed as ""held-to-maturity'' and are carried at their unpaid principal balance

(UPB) adjusted for unamortized purchase discount or premium and other deferred price adjustments.

Mortgage loans held for sale are carried at the lower of cost or fair value, with any unrealized losses

included in current period earnings. Mortgage-backed securities that Fannie Mae intends to hold for

an undetermined period, but not necessarily to maturity, are classiÑed as ""available-for-sale'' and are

carried at fair value, with any valuation adjustments reported as a component of other comprehensive

income, net of deferred taxes, in stockholders' equity.

Fannie Mae uses actual principal prepayment experience and estimates of future principal

prepayments in calculating the constant eÅective yield necessary to apply the interest method in the

amortization of purchase discount or premium and other deferred price adjustments. In evaluating

prepayments, loans are aggregated by similar characteristics (e.g., loan type, acquisition date, and

maturity). Factors used in determining estimates of future prepayments include historical prepayment

data and expected prepayment performance under varying interest rate scenarios.

Interest income is not accrued on nonperforming loans. Conventional single-family and multifamily loans are classiÑed as nonperforming and previously accrued interest is reversed against current

period income when payment on the loan is 90 days or more delinquent. Once loans become

performing, they are placed on accrual status and all reversed income is recognized in the period the

loans become performing.

Investments

Investments consist of Fannie Mae's Liquid Investment Portfolio and other investments.

Investments are classiÑed as either held-to-maturity or available-for-sale. Investments classiÑed as

held-to-maturity are carried at historical cost, adjusted for unamortized discount or premium.

Investments classiÑed as available-for-sale are carried at fair value as of the balance sheet date, with

any valuation adjustments reported as a component of other comprehensive income, net of deferred

taxes, in stockholders' equity. Interest income is recognized on an accrual basis unless the collection of

interest income is considered doubtful, in which case interest income is recognized on a cash basis.

55
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Guaranteed Mortgage-Backed Securities

Fannie Mae guarantees the timely payment of principal and interest on most Fannie Mae

Mortgage-Backed Securities (MBS). These securities represent beneÑcial interests in pools of

mortgages or other MBS held in trust by Fannie Mae. The pools of mortgages or MBS are not assets

of Fannie Mae, except when acquired for investment purposes, nor are the related outstanding

securities liabilities; accordingly, neither are reÖected on the accompanying balance sheets. Fannie

Mae receives monthly guaranty fees for each MBS mortgage pool based on a percentage of the pool's

outstanding balance. Adjustments to the guaranty fee rate eÅected through an upfront payment at

securitization are deferred and amortized into guaranty fee income over the estimated life of the

underlying loans using the interest method. For MBS pools held in Fannie Mae's portfolio, the

guaranty fee is reÖected as interest income.

Allowance for Losses

The allowance for losses is based on an analysis of portfolio loans and MBS outstanding and

provides for known probable losses and losses inherent in the mortgage portfolio and MBS.

Management's analysis considers current delinquency levels, historical loss experience, current

economic conditions, payment performance in areas of geographic concentration, and mortgage

characteristics. The allowance for losses is established by recording an expense for the provision for

losses and may be reduced by recording a negative provision if management believes the allowance

amount exceeds expected losses. The allowance for losses is subsequently reduced through charge-oÅs

on foreclosed properties and is increased through recoveries on foreclosed properties. In management's judgment, the allowance for losses is adequate to provide for expected losses. The primary

components of the allowance for losses are an allowance for losses on loans in the retained mortgage

portfolio, which is included in the balance sheet under ""Mortgage portfolio, net,'' and an allowance for

losses on loans underlying guaranteed MBS, which is included in the balance sheet under ""Other

liabilities.''

Acquired Property

Foreclosed assets are carried at the lower of cost or fair value less estimated costs to sell. Cost is

determined based on the fair value of the collateral at the date of the foreclosure and represents the

amount that a willing seller could reasonably expect from a willing buyer in an arm's-length

transaction. The diÅerence between the estimated fair value of the collateral at foreclosure and the

principal owed on the underlying loan is recorded as either a charge-oÅ or recovery against the

allowance for losses at foreclosure. Foreclosure, holding, and disposition costs are charged directly to

earnings.

Hedging Instruments

Fannie Mae uses certain derivative instruments, such as interest rate swaps, swaptions, derivative

instruments that simulate the short sale of U.S. Treasury securities, interest rate caps, deferred ratesetting agreements, and foreign currency swaps, to achieve a speciÑc Ñnancing or investment objective

at a desired cost or yield. Fannie Mae does not engage in trading or other speculative use of these

derivative instruments. SpeciÑc criteria must be met for a derivative instrument to qualify as a hedge

on either an accrual or a deferred basis. Derivative instruments not qualifying as hedges are marked to

market through earnings. Derivative instruments used as hedges must maintain a high correlation

between the hedging instrument and the item being hedged, both at inception and throughout the

hedge period.

56
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

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.

Fannie Mae 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 longterm debt obligations. Fannie Mae 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 yields 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 hedged 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

interest rate swap agreements and changes in these fair values are not recognized in the Ñnancial

statements.

Swaptions are derivative instruments that provide Fannie Mae with the option to enter into an

interest rate swap at a future date, thereby mirroring the economic eÅect of callable debt. Swaptions

are used to hedge planned debt issuances or existing debt instruments. The fair value of the swaptions

and changes in these fair values are not recognized in the Ñnancial statements. The premium paid for

a swaption is amortized over the estimated life of the swaption.

Derivative instruments that simulate short sales of U.S. Treasury and agency securities and

interest rate swaps 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 costs over the

life of the hedged debt issuances.

Interest rate caps are agreements with a counterparty to eÅectively cap Fannie Mae's exposure on

a variable-rate debt instrument in a rising interest rate environment. In exchange for a premium paid

to a counterparty for the cap, the counterparty agrees to pay Fannie Mae an amount equal to any

interest on the notional amount in excess of the agreed-upon rate. Interest rate caps are used for

upward rate protection on variable-rate debt. The fair value of the interest rate caps and changes in

these fair values are not recognized in the Ñnancial statements. The premium paid for a cap is

amortized over the life of the cap.

Fannie Mae enters into deferred rate-setting agreements when Ñxed-rate debt is issued prior to

the commitment for mortgages that the debt will fund. Under these agreements, Fannie Mae 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, Fannie Mae 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.

Fannie Mae 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, Fannie Mae enters into currency swaps that convert the proceeds of certain borrowings

into dollars or provide for scheduled exchanges of the currencies to insulate Fannie Mae 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.

57
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Cash and Cash Equivalents

Fannie Mae considers highly liquid investment instruments, generally with an original maturity of

three months or less, to be cash equivalents. Cash equivalents are carried at cost, which approximates

fair value.

Income Taxes

Deferred federal income tax assets and liabilities are established for temporary diÅerences

between Ñnancial and taxable income and are measured using the current marginal statutory tax rate.

Investment and other tax credits are generally recognized when recorded on the tax return.

Comprehensive Income

Comprehensive income is deÑned as the change in equity of a business enterprise from transactions and other events and circumstances from nonowner sources during a period. It includes all

changes in equity during a period except those resulting from investments by owners and distributions

to owners.

New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued Financial Accounting Standard

No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities, as amended by

FAS 138. FAS 133 requires that all derivatives 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 a hedge of the cash

Öows of a variable-rate instrument or anticipated transaction (cash Öow hedge). For a derivative

qualifying as a fair value hedge, fair value gains or losses on the derivative are reported in earnings

along with oÅsetting fair value gains or losses on the hedge item attributable to the risk being hedged.

For a derivative 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 (other comprehensive

income) and then amortized into earnings in the period(s) in which the hedged item aÅects income.

For a derivative not qualifying as a hedge, or components of a derivative that are excluded from any

hedge eÅectiveness assessment, fair value gains and losses are reported in earnings. This statement

was eÅective for Fannie Mae beginning January 1, 2001. The cumulative after-tax eÅect on January 1,

2001 of the adoption of FAS 133 was $168 million of income and a $3.9 billion loss in the other

comprehensive income component of stockholders' equity.

In September 2000, the Financial Accounting Standards Board issued Financial Accounting

Standard No. 140 (FAS 140), a replacement of FAS 125, Accounting for Transfers and Servicing of

Financial Assets and Extinguishment of Liabilities. The collateral and disclosure provisions of

FAS 140 were eÅective for Fannie Mae for the Ñscal year ending December 31, 2000. The provisions

governing transfers and servicing of Ñnancial assets and extinguishment of liabilities become eÅective

April 1, 2001. In management's opinion, these provisions of FAS 140 will not have a material impact

on Fannie Mae.

58
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

2. Mortgage Portfolio, Net

The mortgage portfolio consisted of the following at December 31, 2000 and 1999.

2000 1999

(Dollars in millions)

Single-family mortgages:

Government insured or guaranteed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 44,166 $ 41,029

Conventional:

Long-term, Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 454,349 385,321

Intermediate-term, Ñxed-rate(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,619 69,019

Adjustable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,135 14,107

Second ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 480176

592,749 509,652

Multifamily mortgages:

Government insured ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,184 4,345

Conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,189 9,944

17,373 14,289

Total unpaid principal balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 610,122 523,941

Less:

Unamortized discount and deferred price adjustments, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,520964

Allowance for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 203 197

Mortgage portfolio, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $607,399 $522,780

(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 $455 billion and $374 billion of MBS and other mortgagerelated securities at December 31, 2000 and 1999, respectively, with fair values of $459 billion and

$362 billion, respectively. MBS held in portfolio at December 31, 2000 and 1999 included $114 billion

and $100 billion, respectively, of Real Estate Mortgage Investment Conduits (REMICs) and Stripped

MBS (SMBS). REMICs and SMBS backed by MBS do not subject Fannie Mae to added credit risk

but generally have diÅerent interest rate risks than MBS. At December 31, 2000, these securities had

aggregate gross unrealized losses of $716 million and gross unrealized gains of $1.8 billion. At

December 31, 1999, the aggregate gross unrealized losses and gains on these securities were $3.8 billion

and $743 million, respectively.

Mortgage securities and loans held for sale were $11 billion with unrealized losses of $3 million at

December 31, 2000 and $9 billion with unrealized losses of $377 million at December 31, 1999.

The UPB of impaired loans at December 31, 2000 was $186 million, of which $67 million had a

speciÑc loss allowance. At December 31, 1999, the UPB of impaired loans was $225 million, of which

$64 million had a speciÑc loss allowance. The average balance of impaired loans during 2000 and 1999

was $210 million and $232 million, respectively. A loan is impaired when, based on current

information and events, it is probable that all of the contractual principal and interest payments will

59
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

not be collected as scheduled in the loan agreement. All of Fannie Mae's impaired loans are

multifamily loans.

Nonperforming loans outstanding totaled $1.9 billion at the end of 2000, compared with

$2.6 billion at the end of 1999. If nonperforming loans had been fully performing at year end, they

would have contributed an additional $43 million to net interest income in 2000 and $108 million in

1999.

3. Allowance for Losses

Changes in the allowance for the years 1998 through 2000 are summarized below.

Total

(Dollars in millions)

Balance, January 1, 1998.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 803

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (50)

Net recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49

Balance, December 31, 1998. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 802

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (120)

Net recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 122

Balance, December 31, 1999. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 804

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (120)

Net recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 125

Balance, December 31, 2000. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 809

At December 31, 2000, $203 million of the allowance for losses was included in the balance sheet

under ""Mortgage portfolio, net,'' which represents the allocation for portfolio loan losses; $603 million

was included in liabilities under ""Other'' for estimated losses on MBS; and the remainder, or

$3 million, which relates to unrecoverable losses on Federal Housing Administration loans, was

included in ""Acquired property and foreclosure claims, net.'' The corresponding amounts at December 31, 1999 were $197 million, $604 million, and $3 million, respectively. The allowance for losses at

December 31, 2000 included $2 million of speciÑc allowances for impaired loans with a UPB of $67

million, compared with $3 million of speciÑc allowances for impaired loans with a UPB of $64 million

at December 31, 1999. During 2000, Fannie Mae established $11 million of speciÑc allowances for

impaired loans, compared with $4 million in 1999.

60
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

4. Investments

Presented below are the amortized cost and fair value of the Liquid Investment Portfolio and

other investments classiÑed as held-to-maturity at December 31, 2000 and 1999.

2000 1999

Gross Gross Gross Gross

Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair

Cost Gains Losses Value Cost Gains Losses Value

(Dollars in millions)

Held-to-maturity

investments:

Asset-backed

 securities ÏÏÏÏÏÏÏÏÏ $ 9,043 $23 $Ì $ 9,066 $ 8,974 $Ì $19 $ 8,955

Commercial paperÏÏÏÏ 8,893 2 Ì 8,895 1,723 2 Ì 1,725

Eurodollar time

deposits ÏÏÏÏÏÏÏÏÏÏÏ 4,046 Ì Ì 4,046 350 Ì Ì 350

Federal funds ÏÏÏÏÏÏÏÏ 3,493 Ì Ì 3,493 4,487 Ì Ì 4,487

Repurchase

agreements ÏÏÏÏÏÏÏÏ 2,722 Ì Ì 2,722 2,574 Ì Ì 2,574

Auction rate preferred

stock ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,812 Ì Ì 1,812 1,042 Ì Ì 1,042

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,823 29 Ì 3,852 2,510Ì 20 2,490

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏ $33,832 $54 $Ì $33,886 $21,660$ 2 $39 $21,623

Presented below are the amortized cost and fair value of the Liquid Investment Portfolio and

other investments classiÑed as available-for-sale at December 31, 2000 and 1999.

2000 1999

Gross Gross Gross Gross

Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair

Cost Gains Losses Value Cost Gains Losses Value

(Dollars in millions)

Available-for-sale

investments:

Asset-backed

securities ÏÏÏÏÏÏÏÏÏ $ 8,469 $Ì $Ì $ 8,469 $10,240 $Ì $ 7 $10,233

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,680Ì 13 12,667 7,852 6 Ì 7,858

Total ÏÏÏÏÏÏÏÏÏÏÏÏ $21,149 $Ì $13 $21,136 $18,092 $ 6 $ 7 $18,091

The following table shows the amortized cost, fair value, and yield of the Liquid Investment

Portfolio and other investments by remaining maturity at December 31, 2000 and 1999.

2000 1999

Amortized Fair Amortized Fair

Cost Value Yield Cost Value Yield

(Dollars in millions)

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $27,026 $27,010 6.85% $12,660 $12,659 6.19%

Due after one year through Ñve yearsÏÏÏÏÏÏÏÏÏÏÏ 10,443 10,477 7.12 8,033 8,022 6.37

37,469 37,487 6.93 20,693 20,681 6.26

Asset-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,512 17,535 6.84 19,059 19,033 6.30

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $54,981 $55,022 6.90% $39,752 $39,714 6.28%

(1) Contractual maturity of asset-backed securities is not a reliable indicator of their expected

life because borrowers generally have the right to repay their obligations at any time.

61
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, 2000 and 1999 are summarized below. Amounts

are net of unamortized discount and premium.

2000 1999

Outstanding Average Outstanding Average Maximum Maximum at Outstanding at Outstanding Outstanding Outstanding December 31 During Year December 31 During Year at any at any

Amount Cost(1) Amount Cost(1) Month-end Amount Cost(1) Amount Cost(1) Month-end

(Dollars in millions)

Short-term notesÏÏÏÏÏÏ $178,292 6.50% $150,242 6.33% $178,292 $147,598 5.68% $135,919 5.18% $148,593

Other short-term

debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,157 6.58 37,8806.36 42,157 37,455 6.01 33,798 5.19 37,455

Current portion of

borrowings due after

one year(2):

Universal Standard

debt ÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,185 6.02 40,869 6.04

Universal Benchmark

debt ÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,984 5.71 Ì Ì

Universal Retail

debt ÏÏÏÏÏÏÏÏÏÏÏÏÏ 785 6.62 127 6.06

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 919 6.57 533 6.03

Total due within

one year ÏÏÏÏÏÏÏ $280,322 6.38% $226,582 5.80%

(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.

62
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Borrowings Due After One Year

Borrowings due after one year at December 31, 2000 and 1999 consisted of the following:

2000 1999

Maturity Amount Average Amount Average

Date Outstanding Cost(1) Outstanding Cost(1)

(Dollars in millions)

Universal Benchmark debt, net of

$1,106 of discount for 2000

($1,057 for 1999) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001-2030 $185,771 6.42% $113,405 6.02%

Universal Standard debt, net of

$404 of discount for 2000 ($683

for 1999)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001-2038 165,680 6.42 197,963 6.29

Universal Retail debt, net of $52 of

discount for 2000 ($37 for 1999) ÏÏ 2001-2016 7,083 6.82 5,524 6.52

Long-term other, net of $14,749 of

discount for 2000 ($15,280 for

1999) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001-2021 4,788 8.58 4,561 8.16

363,322 6.46% 321,453 6.22%

Adjustment for foreign currency

translation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (962) (416)

Total due after one year ÏÏÏÏÏÏÏÏÏÏÏ $362,360$321,037

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

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

Universal debt represents a consolidation of Fannie Mae's outstanding debt agreements for its

various funding programs into one comprehensive oÅering document, the Universal Debt Facility,

which supersedes and replaces the Global Debt Facility, Medium-Term Notes, Short-Term Notes and

Debenture Programs and applies to debt settling after January 3, 2000.

Debentures, notes, and bonds at December 31, 2000 included $173 billion of callable debt, which

generally is redeemable, in whole or in part, at the option of Fannie Mae any time on or after a

speciÑed date. At December 31, 2000, debentures, notes, and bonds did not include any debt

instruments that are subject to mandatory redemptions tied to certain indices or rates after an initial

nonredemption period.

63
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, other redeemable debt and swaps, and other option-embedded Ñnancial

instruments, excluding $11 billion of callable debt that was swapped to variable-rate debt. Universal

debt that is redeemable at Fannie Mae's option is also included in the table.

Year of Amount Average

Call Date Maturity Outstanding Cost

(Dollars in millions)

Callable debt and callable swaps:

Currently callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001-2025 $ 90,528 6.04%

2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001-2026 60,355 6.53

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003-2027 34,525 6.79

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005-2028 17,594 6.54

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007-2014 21,480 6.75

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2010-2030 5,675 7.20

2006 and later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2012-2029 3,045 7.36

233,202 6.42%

Other option-embedded Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏ 47,213

Total option-embedded Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏ $280,415

Principal amounts at December 31, 2000 of total debt payable in the years 2002-2006, assuming

callable debt is paid at maturity and assuming callable debt is redeemed at the initial call date, were as

follows:

Assuming

Total Debt by Callable Debt

Year of Redeemed at Initial

Maturity(1) Call Date(1)

(Dollars in millions)

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $55,769 $57,026

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53,924 27,723

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,501 36,476

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,767 27,467

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,792 2,812

(1) Excludes $11 billion of callable debt that was swapped to variable-rate debt.

Fannie Mae repurchased or called $18 billion of debt and swaps with an average cost of

7.10 percent in 2000 and $42 billion of debt and swaps with an average cost of 6.80 percent in 1999.

Fannie Mae recorded extraordinary gains of $49 million ($32 million after tax) in 2000 and

extraordinary losses of $14 million ($9 million after tax) in 1999 on the early extinguishment of debt.

Pursuant to Fannie Mae's Charter Act, approval of the Secretary of the Treasury is required for

Fannie Mae's issuance of its debt obligations.

64
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

6. Income Taxes

Components of the provision for federal income taxes for the years ended December 31, 2000,

1999, and 1998 were as follows:

2000 1999 1998

(Dollars in millions)

CurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,412 $1,289 $ 692

Deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 154 230509

1,566 1,519 1,201

Tax expense (beneÑt) of extraordinary gain (loss) ÏÏÏ 17 (5) (14)

Net federal income tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,583 $1,514 $1,187

The tax eÅects of temporary diÅerences that gave rise to signiÑcant portions of the deferred tax

assets and deferred tax liabilities at December 31, 2000 and 1999 consisted of the following:

2000 1999

(Dollars in millions)

Deferred tax assets:

MBS guaranty and REMIC fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 633 $ 592

Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317 335

Unrealized (gains) losses on available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6) 132

Other items, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124 114

Deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,068 1,173

Deferred tax liabilities:

Debt-related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 576 588

Purchase discount and deferred fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 490351

BeneÑts from tax-advantaged investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 108 115

Other items, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43 44

Deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,217 1,098

Net deferred tax (liability) asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (149) $ 75

Management anticipates it is more likely than not that the results of future operations will

generate suÇcient taxable income to realize the entire balance of deferred tax assets.

65
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Fannie Mae's eÅective tax rates diÅered from statutory federal rates for the years ended

December 31, 2000, 1999, and 1998 as follows:

2000 1999 1998

Statutory corporate rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35% 35% 35%

Tax-exempt interest and dividends received deductionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5) (4) (4)

Equity investments in aÅordable housing projectsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4) (3) (5)

EÅective rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26% 28% 26%

Fannie Mae is exempt from state and local taxes, except for real estate taxes.

7. Earnings per Common Share

The following table sets forth the computation of basic and diluted earnings per common share.

Year Ended December 31,

2000 1999 1998

Basic Diluted Basic Diluted Basic Diluted

(Dollars and shares in millions, except

per share amounts)

Net income before extraordinary item ÏÏÏÏÏÏÏ $ 4,416 $ 4,416 $ 3,921 $ 3,921 $ 3,444 $ 3,444

Less: Extraordinary gain (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 32 32 (9) (9) (26) (26)

Preferred stock dividend ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (121) (121) (78) (78) (66) (66)

Net income available to common

stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,327 $ 4,327 $ 3,834 $ 3,834 $ 3,352 $ 3,352

Weighted-average common sharesÏÏÏÏÏÏÏÏÏÏÏ 1,003 1,003 1,024 1,024 1,029 1,029

Dilutive potential common shares(1) ÏÏÏÏÏÏÏ Ì 6 Ì 7 Ì 8

Average number of common shares

outstanding used to calculate earnings

per common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,003 1,009 1,024 1,031 1,029 1,037

Earnings per common share before

extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.28 $ 4.26 $ 3.75 $ 3.73 $ 3.28 $ 3.26

Net earnings per common share ÏÏÏÏÏÏÏÏÏÏ 4.31 4.29 3.75 3.72 3.26 3.23

(1) Dilutive potential common shares consist primarily of the dilutive eÅect from employee stock

options and other stock compensation plans.

For additional disclosures regarding Fannie Mae's stock compensation plans and the outstanding

preferred stock, refer to Notes 8 and 12, respectively.

8. Stock Compensation Plans

At December 31, 2000, Fannie Mae had Ñve stock-based compensation plans, which are described

below. Financial Accounting Standard No. 123 (FAS 123), Accounting for Stock-Based Compensation, gives companies the option of either recording an expense for all stock compensation awards

based on the fair value at grant date or continuing to follow Accounting Principles Board Opinion

No. 25 (APB Opinion 25) with the additional requirement that they disclose, in a footnote, pro forma

66
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

net income and earnings per share as if they had adopted the expense recognition provisions of

FAS 123. Fannie Mae elected to apply APB Opinion 25 and related interpretations in accounting for

its plans. Thus, no compensation expense has been recognized for the nonqualiÑed stock options and

Employee Stock Purchase Plan. If compensation expense had been recognized for beneÑts under all

Ñve plans, based on their fair value at grant date and consistent with FAS 123, Fannie Mae's net

income and net earnings per common share would have been $4.187 billion and $4.15, $3.840 billion

and $3.65, and $3.312 billion and $3.19 for the years ended December 31, 2000, 1999, and 1998,

respectively.

Fannie Mae determined the fair value of beneÑts under its stock-based plans using a BlackScholes pricing model. The following table summarizes the major assumptions used in the model.

2000 1999 1998

Risk-free rate(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.97 - 6.81% 4.56 - 6.02% 4.04 - 5.79%

Volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29 - 34 27 - 29 25 - 30

Forfeiture ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15 15 15

Dividend(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.12 $1.08 $.96

ExpirationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 - 10 yrs. 1 - 10 yrs. 1 - 10 yrs.

(1) The closing yield on the comparable average life U.S. Treasury on the day prior to grant.

(2) Dividend rate on common stock at date of grant. Dividend rate assumed to remain constant

over the option life.

Employee Stock Purchase Plan

Fannie Mae has an Employee Stock Purchase Plan that allows issuance of up to 41 million shares

of common stock to qualiÑed employees at a price equal to 85 percent of the fair market value on the

grant date. In 2000, Fannie Mae granted each qualiÑed employee, excluding certain oÇcers and other

highly compensated employees, the right to purchase up to 419 shares of common stock in January 2001. Under the 2000 oÅering, 1,522,869 shares were purchased at $50.68 per share, compared

with 9,566 common shares purchased at $60.99 per share under the 1999 oÅering. The Board of

Directors approved a 2001 oÅering under the plan, granting each qualiÑed employee the right to

purchase 321 common shares at $66.00 per share in January 2002.

Employee Stock Ownership Plan

Fannie Mae has an Employee Stock Ownership Plan (ESOP) for qualiÑed employees. Fannie

Mae may contribute to the ESOP an amount based on deÑned earnings goals, not to exceed 4 percent

of the aggregate base salary for all participants. The contribution is made in the subsequent year either

in shares of Fannie Mae common stock or in cash that is used to purchase such stock.

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 Fannie Mae attains the goals set for the award

period. At the end of such time, the awards generally are payable in common stock, in either two or

three installments over a period not longer than three years. The outstanding contingent grants made

67
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

for the 2001-2003, 2000-2002, and 1999-2001 periods were 453,130 common shares, 408,645 common

shares, and 331,254 common shares, respectively.

NonqualiÑed Stock Options

Stock options may be granted to eligible employees and nonmanagement members of the Board of

Directors. The options generally do not become exercisable until at least one year after the grant date

for employees and on the grant date for nonmanagement directors and generally expire ten years from

the grant date. The exercise price of the common stock covered by each option is equal to the fair

value of the stock on the date the option is granted.

Under the NonqualiÑed Stock Option plan, Fannie Mae's Board of Directors approved the EPS

Challenge Option Grant in January 2000 for all regular full-time and part-time Fannie Mae employees.

All employees, other than management group employees, received an option grant of 350 shares at a

price of $62.50 per share, the fair market value of the stock on the grant date. Management group

employees received option grants equivalent to a percentage of their November 1999 stock grants.

Vesting for options granted is tied to achievement of an earnings per share (EPS) goal, which is $6.46

by the end of 2003. If Fannie Mae's EPS for 2003 is $6.46 or greater, then 100 percent of the EPS

Challenge options will vest in January 2004. If Fannie Mae does not reach an EPS of $6.46 by the end

of 2003, vesting is delayed one year and then begins at a rate of 25 percent per year. The Board of

Directors may choose, at its discretion, to oÅset future option grants or other forms of compensation if

the goal is not reached. Options expire January 18, 2010.

The following table summarizes stock option activity for the years 1998-2000.

2000 1999 1998

Weighted-Average Weighted-Average Weighted-Average

Options Exercise Price Options Exercise Price Options Exercise Price

(Options in thousands)

Balance, January 1, ÏÏÏÏÏÏÏÏ 22,349 $40.90 21,994 $34.55 22,777 $27.15

Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,741 66.79 3,224 71.203,381 67.63

Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,003) 23.88 (2,499) 22.52 (3,712) 19.15

Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (777) 61.98 (370) 51.85 (452) 35.60

Balance, December 31, ÏÏÏÏÏ 25,310 $50.86 22,349 $40.90 21,994 $34.55

Options vested,

December 31, ÏÏÏÏÏÏÏÏÏÏÏÏ 13,551 $36.83 14,727 $29.26 13,729 $23.89

The following table summarizes information about stock options outstanding at December 31,

2000.

Options Outstanding Options Exercisable

Number Weighted-Average

Range of of Remaining Weighted-Average Number Weighted-Average

Exercise Prices Options Contractual Life Exercise Price of Options Exercise Price

(Options in thousands)

$13.00 Ó $26.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,421 3.2 yrs. $18.45 4,421 $18.45

26.01 Ó 48.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,138 5.4 33.09 5,049 32.95

48.01 Ó 65.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,537 8.3 58.13 2,112 53.63

65.01 Ó 85.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,214 8.9 72.75 1,969 70.05

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,310 7.0 yrs. $50.86 13,551 $36.83

68
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Restricted Stock

In 2000, 192,301 shares of restricted stock were awarded, issued, and placed in escrow under the

Stock Compensation Plans and the Restricted Stock Plan for Directors (140,460 shares in 1999);

92,141 shares were released as vesting of participants occurred (76,060 shares in 1999).

9. Employee Retirement BeneÑts

Retirement Savings Plan

All regular employees of Fannie Mae scheduled to work 1,000 hours or more in a calendar year are

eligible to participate in the company's Retirement Savings Plan, which includes a 401(k) option. In

2000, employees could contribute up to the lesser of 15 percent of their base salary or the current

annual dollar cap established and revised annually by the Internal Revenue Service. Fannie Mae

matches employee contributions up to 3 percent of base salary.

Postretirement BeneÑt Plans

All regular employees of Fannie Mae scheduled to work 1,000 hours or more in a calendar year are

covered by a noncontributory corporate retirement plan or by the contributory Civil Service Retirement Law. BeneÑts payable under the corporate plan are based on years of service and compensation

using the average pay during the 36 consecutive highest-paid months of the last 120 months of

employment. Fannie Mae's policy is to contribute an amount no less than the minimum required

employer contribution under the Employee Retirement Income Security Act of 1974. Contributions to

the corporate plan reÖect beneÑts attributed to employees' service to date and compensation expected

to be paid in the future. No contribution was made to the corporate plan in 2000. Corporate plan

assets consist primarily of listed stocks, Ñxed-income securities, and other liquid assets.

At December 31, 2000 and 1999, the projected beneÑt obligations for services rendered were

$263 million and $200 million, respectively, while the plan assets were $261 million and $277 million,

respectively. The pension liability (included in liabilities under ""Other'') at December 31, 2000 and

1999 was $51 million and $46 million, respectively. Net periodic pension costs were $5 million,

$8 million, and $9 million for the years ended December 31, 2000, 1999, and 1998, respectively. Fannie

Mae uses the straight-line method of amortization for prior service costs.

At December 31, 2000 and 1999, the weighted-average discount rates used in determining the

actuarial present value of the projected beneÑt obligation were 7.75 percent and 8.00 percent,

respectively. The assumptions used in determining the net periodic pension costs were as follows:

2000 1999 1998

Weighted-average discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.00% 7.13% 7.25%

Average rate of increase in

future compensation levelsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.505.75 5.75

Expected long-term weighted-average

rate of return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.00 9.25 9.25

Fannie Mae also has an Executive Pension Plan and a Supplemental Pension Plan, which

supplement the beneÑts payable under the retirement plan for key senior oÇcers. Accrued beneÑts

under the Executive Pension Plan generally are funded through a Rabbi trust. Estimated beneÑts

under the supplementary plans are accrued as an expense over the period of employment.

69
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Fannie Mae sponsors a Postretirement Health Care Plan that covers substantially all full-time

employees. The plan pays stated percentages of most necessary medical expenses incurred by retirees,

after subtracting payments by Medicare or other providers and after a stated deductible has been met.

Participants become eligible for the subsidized beneÑts as follows: (1) for employees hired prior to

January 1, 1998, if they retire from Fannie Mae after reaching age 55 with Ñve or more years of

service; or (2) for employees hired January 1, 1998, or later, if they retire from Fannie Mae after

reaching age 55 with ten or more years of service. Employees hired January 1, 1998 or later who retire

with less than ten years of service may purchase coverage by paying the full premium. The plan is

contributory, with retiree contributions adjusted annually. The expected cost of these postretirement

beneÑts is charged to expense during the years that employees render service. Cost-sharing percentages are based on length of service with Fannie Mae, eligibility for and date of retirement, and a

deÑned dollar beneÑt cap. Fannie Mae does not fund this plan.

Fannie Mae's accrued postretirement health care cost liability for the years ending December 31,

2000 and 1999 was $46 million and $40 million, respectively. The net postretirement health care costs

were $8 million, $9 million, and $8 million for the years ended December 31, 2000, 1999, and 1998,

respectively. In determining the net postretirement health care cost for 2000, a 5.00 percent annual

rate of increase in the per capita cost of covered health care claims was assumed with the rate

decreasing gradually over the next two years to 4.50 percent and remaining at that level thereafter. In

determining the net postretirement health care cost for 1999, a 5.25 percent annual rate of increase in

the per capita cost of covered health care claims was assumed with the rate decreasing gradually over

the next three years to 4.50 percent and remaining at that level thereafter. In determining the net

postretirement health care cost for 1998, a 5.50 percent annual rate of increase in the per capita cost

of covered health care claims was assumed with the rate decreasing gradually over the next four years

to 4.50 percent and remaining at that level thereafter. The health care cost trend rate assumption has

a signiÑcant eÅect on the amounts reported. To illustrate, increasing the assumed health care cost

trend rates by one percentage point in each year would increase the accumulated postretirement

beneÑt obligation as of December 31, 2000 by $8 million and the aggregate of the service and interest

cost components of net postretirement health care cost for the year by $1 million.

The weighted-average discount rates used in determining the health care cost and the year-end

accumulated postretirement beneÑt obligation were 7.75 percent at December 31, 2000, 8.00 percent

at December 31, 1999, and 6.75 percent at December 31, 1998.

10. Line of Business Reporting

Management analyzes corporate performance on the basis of two lines of business: Portfolio

Investment and Credit Guaranty.

The Portfolio Investment business includes the management of asset purchases and funding

activities for Fannie Mae's mortgage portfolio and investment portfolio. Income is derived primarily

from the diÅerence, or spread, between the yield on mortgage loans and investments, and the

borrowing costs related to those loans and investments.

The Credit Guaranty business involves guaranteeing the credit performance of both single-family

and multifamily 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

70
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

mortgages prior to remittance to investors, and it is net of interest charges paid to the Portfolio

Investment business for delinquent loans.

Fannie Mae assigns actual direct revenues and expenses among its lines of business and uses

estimates to apportion overhead and other corporate items. For instance, administrative expenses are

allocated on the basis of direct expenses for the line of business or, where not assignable to a particular

associated business, are based on revenues, proÑts, or volumes, as applicable. Capital is allocated to

the lines of business through an assessment of the interest rate and credit risk associated with each

business.

The following table sets forth Fannie Mae's Ñnancial performance by line of business for the years

ended December 31, 2000, 1999, and 1998.

2000 1999 1998(1)

Portfolio Credit Portfolio Credit Portfolio Credit

Investment Guaranty Total Investment Guaranty Total Investment Guaranty Total

(Dollars in millions)

Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,055 $ 619 $ 5,674 $4,317 $ 577 $ 4,894 $3,460 $ 650 $ 4,110

Guaranty fee incomeÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,079) 2,430 1,351 (974) 2,256 1,282 (823) 2,052 1,229

Fee and other income (expense) ÏÏ 27 (71) (44) 12071 191 158 117 275

Credit-related expenses ÏÏÏÏÏÏÏÏÏÏ Ì (94) (94) Ì (127) (127) Ì (261) (261)

Administrative expenses ÏÏÏÏÏÏÏÏÏ (254) (651) (905) (233) (567) (800) (184) (524) (708)

Federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏ (1,036) (530) (1,566) (906) (613) (1,519) (707) (494) (1,201)

Extraordinary itemÌgain (loss) on

early extinguishment of debt ÏÏÏÏÏ 32 Ì 32 (9) Ì (9) (26) Ì (26)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,745 $1,703 $ 4,448 $2,315 $1,597 $ 3,912 $1,878 $1,540 $ 3,418

(1) Results include the recognition of additional non-recurring tax beneÑts associated with

investments qualifying for low-income housing tax credits and additional amortization of

premiums or discounts and deferred or prepaid guaranty fees that were recorded in the

fourth quarter of 1998.

11. Dividend Restrictions

Fannie Mae's payment of dividends is subject to certain statutory restrictions, including approval

of the Director of the OÇce of Federal Housing Enterprise Oversight of any dividend payment that

would cause Fannie Mae's capital to fall below speciÑed capital levels.

Fannie Mae has exceeded the applicable capital standard since the adoption of these restrictions

in 1992 and, consequently, has been making dividend payments without the need for Director

approval.

Payment of dividends on common stock is also subject to payment of dividends on preferred stock

outstanding.

71
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

12. Preferred Stock

The following table presents preferred stock outstanding as of December 31, 2000 and 1999.

Shares Issued Stated Annual

and Value Dividend Redeemable

Issue Date Outstanding per Share Rate on or After

Series A(1) March 1, 1996 7,500,000 $50 6.41% March 1, 2001

Series B ÏÏÏÏ April 12, 1996 7,500,000 50 6.50 April 12, 2001

Series C ÏÏÏÏ September 20, 1996 5,000,000 50 6.45 September 20, 2001

Series DÏÏÏÏ September 30, 1998 3,000,000 50 5.25 September 30, 1999

Series E ÏÏÏÏ April 15, 1999 3,000,000 50 5.10 April 15, 2004

Series F ÏÏÏÏ March 20, 2000 13,800,000 50 6.30(2) March 31, 2002(4)

Series GÏÏÏÏ August 8, 2000 5,750,000 50 6.02(3) September 30, 2002(4)

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45,550,000

(1) Fannie Mae redeemed all of the outstanding shares of its 6.41 percent Series A preferred

stock on March 1, 2001 at $50.53 per share. The redemption price included dividends of

$.53417 per share for the period commencing December 31, 2000, up to, but excluding,

March 1, 2001.

(2) Initial rate. Variable dividend rate that resets every two years thereafter at the Constant

Maturity Treasury Rate minus .16 percent with a cap of 11 percent per year.

(3) Initial rate. Variable dividend rate that resets every two years thereafter at the Constant

Maturity Treasury Rate minus .18 percent with a cap of 11 percent per year.

(4) Initial call date and every two years thereafter.

Holders of preferred stock are entitled to receive noncumulative, quarterly dividends when, and if,

declared by Fannie Mae's Board of Directors. Payment of dividends on preferred stock is not

mandatory, but has priority over payment of dividends on common stock. After the speciÑed period,

preferred stock is redeemable at its stated value at the option of Fannie Mae. All outstanding preferred

stock is nonvoting.

13. Financial Instruments with OÅ-Balance-Sheet Risk

Fannie Mae is a party to transactions involving Ñnancial instruments with oÅ-balance-sheet risk.

Fannie Mae uses these instruments to fulÑll its statutory purpose of meeting the Ñnancing needs of the

secondary mortgage market and to reduce its own exposure to Öuctuations in interest rates. These

Ñnancial instruments include guaranteed MBS, commitments to purchase mortgages or to issue and

guarantee MBS, certain hedging instruments, and credit enhancements. These instruments involve, to

varying degrees, elements of credit and interest rate risk in excess of amounts recognized on the

balance sheet.

Guaranteed Mortgage-Backed Securities

As issuer and guarantor of MBS, Fannie Mae is obligated to disburse scheduled monthly

installments of principal and interest (at the certiÑcate rate) and the full UPB of any foreclosed

mortgage to MBS investors, whether or not any such amounts have been received. Fannie Mae is also

obligated to disburse unscheduled principal payments received from borrowers.

72
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Fannie Mae's credit risk is mitigated to the extent that sellers of pools of mortgages elect to

remain at risk for the loans sold to the company or other credit enhancement, such as recourse, is

provided to protect against the risk of loss from borrower default. Lenders have the option to retain

the primary default risk, in whole or in part, in exchange for a lower guaranty fee. Fannie Mae,

however, bears the ultimate risk of default.

Commitments

Fannie Mae enters into master delivery commitments with lenders on either a mandatory or an

optional basis. Under a mandatory master commitment, a lender must either deliver loans under an

MBS contract at a speciÑed guaranty fee rate or enter into a mandatory portfolio commitment with

the yield established upon executing the portfolio commitment.

Fannie Mae will also accept mandatory or lender-option delivery commitments not issued

pursuant to a master commitment. These commitments may be for portfolio or MBS. The guaranty

fee rate on MBS lender-option commitments is speciÑed in the contract, while the yield for portfolio

lender-option commitments is set at the date of conversion to a mandatory commitment.

The cost of funding future portfolio purchases generally is hedged upon issuance of, or conversion

to, a mandatory commitment. Therefore, the interest rate risk relating to loans purchased pursuant to

those commitments is largely mitigated.

Hedging Instruments

Fannie Mae typically uses derivative instruments, such as those that simulate short sales of U.S.

Treasury and agency securities, interest rate swaps, swaptions, interest rate caps, and deferred ratesetting agreements to hedge against interest rate movements. Changes in the value of these hedging

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)

interest rate riskÌchanges in the value of the item hedged will not substantially oÅset changes in the

value of the hedging instrument; and, (2) credit riskÌthe counterparty to the agreement will be

unable or unwilling to meet the terms of the agreement.

Credit risk on derivative instruments that simulate short sales of U.S. Treasury and agency

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 evaluation of the creditworthiness of counterparties and continuous monitoring of hedge positions. There were no deferrable net unrealized amounts on open hedge positions at

December 31, 2000, compared with $46 million of net unrealized gains at December 31, 1999. Total

deferred gains and losses on closed positions were $449 million and $729 million, respectively, at

December 31, 2000, compared with $392 million and $541 million, respectively, at December 31, 1999.

Fannie Mae reduces credit risk on interest rate swaps, swaptions, and interest rate caps by dealing

only with experienced counterparties of high credit quality, diversifying these derivative instruments

across counterparties, and ensuring that these derivative instruments generally are executed under

master agreements that provide for netting of certain amounts payable by each party. Fannie Mae

regularly monitors the exposures on its derivative instruments by valuing the positions via dealer

quotes and internal pricing models. In addition, counterparties are obligated to post collateral if

Fannie Mae is exposed to credit loss on the related derivative instruments exceeding an agreed-upon

threshold. The amount of required collateral is based on counterparty credit ratings and the level of

credit exposure. Fannie Mae generally requires overcollateralization from counterparties whose credit

73
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

ratings have dropped below predetermined levels. Fannie Mae held $70 million of collateral through

custodians for derivative instruments at December 31, 2000.

At December 31, 2000, over 99 percent of both the notional amount of Fannie Mae's outstanding

derivative transactions and Fannie Mae's gross oÅ-balance-sheet derivatives exposure were with

counterparties rated A or better by Standard & Poor's. At December 31, 2000, nine counterparties

represented approximately 86 percent of the total notional amount of outstanding derivative transactions, and each had a credit rating of A or better. At December 31, 2000, Ñve counterparties comprised

approximately 99 percent of gross oÅ-balance-sheet exposure on derivatives, and each had a credit

rating of A or better.

Credit risk on deferred rate-setting arrangements is limited to the cash receivable, if any, due

from counterparties under the deferred rate-setting agreement. This risk is reduced through evaluating the creditworthiness of counterparties.

Credit Enhancements

Fannie Mae provides credit enhancement and, in some cases, liquidity support for certain

Ñnancings involving taxable or tax-exempt housing bonds issued by state and local governmental

entities to Ñnance multifamily housing for low- and moderate-income families. In these transactions,

Fannie Mae issues MBS, pledges an interest in certain mortgages it owns, or otherwise provides

contractual assurance of payment to a trustee for the bonds or another credit party in the transaction.

Fannie Mae's direct credit enhancement in a multifamily housing bond transaction improves the

rating on the bond, thus resulting in lower-cost Ñnancing for multifamily housing.

74
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Credit Exposure for OÅ-Balance-Sheet Financial Instruments

The following table presents the contractual or notional amount of oÅ-balance-sheet Ñnancial

instruments at December 31, 2000 and 1999.

2000 1999

(Dollars in billions)

Contractual amounts:

MBS outstanding(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,057.2 $ 960.3

MBS in portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (351.1) (281.7)

Net MBS outstanding(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 706.1 $ 678.6

Master commitments:

MandatoryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 25.3 $ 46.5

OptionalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.7 17.4

Portfolio commitments:

MandatoryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.7 6.6

OptionalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.9 1.7

Other investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.9 1.5

Notional amounts(2):

Interest rate swaps(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 161.1 $ 139.0

Debt swaps(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66.4 51.6

Interest rate capsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33.7 28.9

U.S. Treasury repurchase agreement options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 20.0

Swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48.9 19.2

Forward rate agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1.4

Simulated short sales of U.S. Treasury securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1.2

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .2 2.2

Credit enhancements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.6 7.2

Other guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.8 3.5

(1) Net of $603 million in allowance for losses in 2000 and $604 million in 1999. Includes

$223 billion and $209 billion of MBS with lender or third-party recourse at December 31,

2000 and 1999, respectively.

(2) Notional amounts do not necessarily represent the interest rate or credit risk of the

positions.

(3) The weighted-average interest rate being received under these swaps was 6.78 percent and

the weighted-average interest rate being paid was 6.74 percent at December 31, 2000,

compared with 6.04 percent and 6.56 percent, respectively, at December 31, 1999.

(4) The weighted-average interest rate being received under these swaps was 6.58 percent and

the weighted-average interest rate being paid was 6.59 percent at December 31, 2000,

compared with 5.72 percent and 5.90 percent, respectively, at December 31, 1999.

Contractual or notional amounts do not necessarily represent the interest rate or credit risk of the

derivative instrument positions. The notional amounts of the derivative instruments are used to

calculate contractual cash Öows to be exchanged. In addition, any measurement of risk is meaningful

75
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

only to the extent that oÅsetting arrangements, such as master netting agreements and the value of

related collateral, are included.

Fannie Mae's exposure to credit loss for derivative instruments can be estimated by calculating

the cost, on a present value basis, to replace at current market rates all those derivative instruments

outstanding for which the company was in a gain position. Fannie Mae's net exposure (taking into

account master netting agreements) was $.2 billion at December 31, 2000 and $3.9 billion at

December 31, 1999. Fannie Mae 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 the regional geographic distribution of properties underlying

mortgages in the portfolio and underlying MBS outstanding by primary default risk at December 31,

2000 and 1999.

Geographic Distribution

2000 Gross UPB Northeast Southeast Midwest Southwest West Total

(Dollars in millions)

Fannie Mae risk ÏÏÏÏ $1,049,657 19% 20% 19% 16% 26% 100%

Lender or shared risk 267,149 14 2022 17 27 100

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,316,806 19% 20% 19% 16% 26% 100%

Geographic Distribution

1999 Gross UPB Northeast Southeast Midwest Southwest West Total

(Dollars in millions)

Fannie Mae risk ÏÏÏÏ $ 952,005 20% 20% 19% 15% 26% 100%

Lender or shared risk 251,105 15 20 23 16 26 100

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,203,110 19% 20% 19% 16% 26% 100%

No signiÑcant concentration existed at the state level at December 31, 2000, except for California

where 18 percent of the gross UPB of mortgages in portfolio and underlying MBS were located, the

same level as December 31, 1999.

To minimize credit risk, Fannie Mae requires primary mortgage insurance or other credit

protection if the loan-to-value (LTV) ratio of a single-family conventional mortgage loan (the UPB of

the loan divided by the value of the mortgaged property) is greater than 80 percent when the loan is

delivered to Fannie Mae.

At December 31, 2000, $302 billion in current UPB of single-family conventional mortgage loans

in portfolio and underlying MBS outstanding was covered by primary insurance at acquisition. Seven

mortgage insurance companies, all rated AA or higher by Standard & Poor's, provided approximately

98 percent of the total coverage. Fannie Mae monitors the performance and Ñnancial strength of its

mortgage insurers on a regular basis.

76
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

The following table presents the distribution of single-family loans in portfolio and underlying

MBS outstanding by original LTV and primary default risk at December 31, 2000 and 1999.

Original Loan-to-Value Ratio

60% Over

2000 Gross UPB or less 61Ó70% 71Ó75% 76Ó80% 81Ó90% 90% Total

(Dollars in millions)

Fannie Mae riskÏÏÏÏÏÏÏ $1,003,068 19% 15% 15% 26% 14% 11% 100%

Lender or shared risk ÏÏ 208,464 5 8 11 34 22 20 100

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,211,532 16% 14% 15% 27% 15% 13% 100%

Original Loan-to-Value Ratio

60% Over

1999 Gross UPB or less 61Ó70% 71Ó75% 76Ó80% 81Ó90% 90% Total

(Dollars in millions)

Fannie Mae riskÏÏÏÏÏÏÏ $ 912,458 20% 16% 16% 24% 13% 11% 100%

Lender or shared risk ÏÏ 194,931 5 8 12 34 22 19 100

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,107,389 17% 15% 15% 26% 15% 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-rate

mortgage loans will prepay at a slower rate. The following table presents the distribution of Ñxed-rate,

single-family loans in the mortgage portfolio or underlying MBS by note rate at December 31, 2000

and 1999.

Fixed-Rate Loans by Note Rate(1)

7.00% 8.00% 9.00% 10.00%

Under to to to and

Gross UPB at December 31, 7.00% 7.99% 8.99% 9.99% over Total

(Dollars in billions)

2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $285 $536 $218 $28 $10$1,077

Percent of total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26% 50% 20% 3% 1% 100%

1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $312 $530 $130 $22 $11 $1,005

Percent of total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31% 53% 13% 2% 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, 2000 and 1999. In certain cases,

fair values are not subject to precise quantiÑcation or veriÑcation and may change as economic and

market factors, and management's evaluation of those factors, change.

Although management uses its best judgment in estimating the fair value of these Ñnancial

instruments, there are inherent limitations in any estimation technique. Therefore, these fair value

estimates are not necessarily indicative of the amounts that Fannie Mae would realize in a market

transaction. The accompanying Fair Value Balance Sheets do not represent an estimate of the overall

77
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

market value of Fannie Mae as a going concern, which would take into account future business

opportunities.

Fair Value Balance Sheets

Assets

December 31, 2000 December 31, 1999

Carrying Estimated Carrying Estimated

Amount Fair Value Amount Fair Value

(Dollars in millions)

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $607,399 $613,095 $522,780 $508,674

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54,968 55,022 39,751 39,714

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 617 617 2,099 2,099

Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,088 9,418 10,537 8,139

675,072 678,152 575,167 558,626

OÅ-balance-sheet items:

Guaranty fee income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 5,915 Ì 6,609

Swaps in gain position, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 518 Ì 4,694

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 50

Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $675,072 $684,585 $575,167 $569,979

Liabilities and Net Assets

Liabilities:

Noncallable debt:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $252,537 $252,619 $220,756 $219,413

Due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 217,735 226,764 159,929 157,663

Callable debt:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,785 22,412 5,826 5,202

Due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 144,625 148,277 161,108 156,728

642,682 650,072 547,619 539,006

Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,552 10,169 9,919 10,439

OÅ-balance-sheet items:

Swaps in loss position, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3,667 Ì 9

Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 654,234 663,908 557,538 549,454

Net assets, net of tax eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 20,838 $ 20,677 $ 17,629 $ 20,525

See accompanying Notes to Fair Value Balance Sheets.

78
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Notes to Fair Value Balance Sheets

The following discussion summarizes the signiÑcant methodologies and assumptions used in

estimating the fair values presented in the accompanying Fair Value Balance Sheets.

Mortgage Portfolio, Net

The fair value calculations of Fannie Mae's mortgage portfolio considered such variables as

interest rates, credit quality, and loan collateral. Because an active market does not exist for a portion

of mortgage loans in the portfolio, the portfolio's unsecuritized mortgages were aggregated into pools

by product type, coupon, and maturity and converted into notional MBS. A normal guaranty fee that

Fannie Mae's securitization business would charge for a pool of loans with similar characteristics was

subtracted from the weighted-average coupon rate less servicing fees. The method for estimating this

guaranty fee and the credit risk associated with the mortgage portfolio is described under ""Guaranty

Fee Income, Net.''

Fannie Mae then employed an option-adjusted spread (OAS) approach to estimate fair values for

both notional MBS and MBS held in portfolio. The OAS approach represents the risk premium or

incremental interest spread over Fannie Mae debt rates that is included in a security's yield to

compensate an investor for the uncertain eÅects of embedded prepayment options on mortgages. The

OAS was calculated using quoted market values for selected benchmark securities and provided a

generally applicable return measure that considers the eÅect of prepayment risk and interest rate

volatility.

Investments

Fair values of Fannie Mae's investment portfolio were based on actual quoted prices or prices

quoted for similar Ñnancial instruments.

Cash and Cash Equivalents

The carrying amount of cash and cash equivalents was used as a reasonable estimate of their fair

value.

Other Assets

Other assets include accrued interest receivable, net currency swap receivables, and several other

smaller asset categories. The fair value of other assets, excluding certain deferred items that have no

fair value and net currency swap receivables, approximates their carrying amount. The fair value of

net currency swap receivables was estimated based on either the expected cash Öows or quoted market

values of these instruments.

Guaranty Fee Income, Net

MBS are not assets owned by Fannie Mae, except when acquired for investment purposes, nor are

MBS recorded as liabilities of Fannie Mae. Fannie Mae receives a guaranty fee calculated on the

outstanding principal balance of the related mortgages for guaranteed MBS held by third-party

investors. The guaranty fee represents a future income stream for Fannie Mae. Under generally

accepted accounting principles, this guaranty fee is recognized as income over the life of the securities.

The Fair Value Balance Sheets reÖect the present value of guaranty fees, net of estimated future

administrative costs and credit losses, and taking into account estimated prepayments.

79
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Fannie Mae estimates the credit loss exposure attached to the notional amount of guaranteed

MBS held by third-party investors where Fannie Mae has the primary risk of default. Fannie Mae

deducts estimated credit losses from the projected guaranty fee cash Öows to arrive at the fair value.

Estimated credit losses were calculated with an internal forecasting model based on actual historical

loss experience for the company. The net guaranty fee cash Öows were then valued through an OAS

method similar to that described under ""Mortgage Portfolio, Net.''

Swap Obligations, Net

Fannie Mae enters into interest rate swaps, including callable swaps that, in general, extend or

adjust the eÅective maturity of certain debt obligations. Under these swaps, Fannie Mae generally

pays a Ñxed rate and receives a Öoating rate based on a notional amount. Fannie Mae also enters into

interest rate swaps that are linked to speciÑc investments (asset swaps) or speciÑc debt issues (debt

swaps). The fair value of interest rate swaps was estimated based on either the expected cash Öows or

quoted market values of these instruments. The eÅect of netting under master agreements was

included in determining swap obligations in a gain position or loss position.

In addition, Fannie Mae enters into swaptions and interest rate caps. Under a swaption, Fannie

Mae has the option to enter into a swap, as described above, at a future date. Fannie Mae uses interest

rate caps to eÅectively manage its interest expense in a period of rising interest rates by entering into

an agreement whereby a counterparty makes payments to the company for interest rates above a

speciÑed rate. The fair values of these derivative instruments were estimated based on either the

expected cash Öows or the quoted market values of these instruments.

Noncallable and Callable Debt

The fair value of Fannie Mae's noncallable debt was estimated by using quotes for selected debt

securities of the company with similar terms. Similar to the valuation of the mortgage portfolio, the

fair value of callable debt was estimated with an OAS model.

Other Liabilities

Other liabilities include accrued interest payable, amounts payable to MBS holders, estimated

losses on guaranteed MBS, net currency swap payables, and several other smaller liability categories.

The fair value of other liabilities, excluding certain deferred items that have no fair value, net currency

swap payables, and credit loss exposure for guaranteed MBS, which is included as a component of the

net MBS guaranty fee, approximates their carrying amount. The fair value of net currency swap

payables was estimated based on either the expected cash Öows or quoted market values of these

instruments.

The fair value amount also includes the estimated eÅect on deferred income taxes of providing for

federal income taxes for the diÅerence between net assets at fair value and at cost at the statutory

corporate tax rate of 35 percent.

80
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.

2000 Quarter Ended

December September June March

(Dollars in millions, except per common share amounts)

Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,581 $10,862 $10,365 $9,973

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,096 9,434 8,966 8,611

Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,485 1,428 1,399 1,362

Guaranty fee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 339 341 339 332

Fee and other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 (46) Ì

Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30303030

Foreclosed property expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (51) (52) (51) (60)

Administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (232) (232) (224) (217)

Income before federal income taxes and

extraordinary itemÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,572 1,516 1,447 1,447

Provision for federal income taxes ÏÏÏÏÏÏÏÏÏÏÏ (405) (393) (383) (385)

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏ 1,167 1,123 1,064 1,062

Extraordinary itemÌ(loss) gain on early

extinguishment of debt, net of tax eÅect ÏÏÏÏ (2) 1 33 Ì

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,165 $ 1,124 $ 1,097 $1,062

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (36) (33) (32) (20)

Net income available to common stockholders $ 1,129 $ 1,091 $ 1,065 $1,042

Basic earnings per common share(1):

Earnings before extraordinary itemÏÏÏÏÏÏÏ $ 1.13 $ 1.09 $ 1.03 $ 1.03

Extraordinary gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì .03 Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.13 $ 1.09 $ 1.06 $ 1.03

Diluted earnings per common share(1):

Earnings before extraordinary itemÏÏÏÏÏÏÏ $ 1.13 $ 1.09 $ 1.02 $ 1.02

Extraordinary (loss) gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.01) Ì .03 Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.12 $ 1.09 $ 1.05 $ 1.02

Cash dividends per common share ÏÏÏÏÏÏÏÏÏÏÏ $ .28 $ .28 $ .28 $ .28

(1) The total of the four quarters may not equal the amount for the year because the amount for

each period is calculated independently based on the weighted-average number of common

shares outstanding during the period.

81
FANNIE MAE

QUARTERLY RESULTS OF OPERATIONS (Unaudited)Ì(continued)

The following unaudited results of operations include, in the opinion of management, all

adjustments necessary for a fair presentation of the results of operations for such periods.

1999 Quarter Ended

December September June March

(Dollars in millions, except per common share amounts)

Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,569 $9,079 $8,564 $8,283

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,263 7,838 7,376 7,124

Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,306 1,241 1,188 1,159

Guaranty fee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 325 320320317

Fee and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45 34 54 58

Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35 4025 20

Foreclosed property expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (54) (61) (65) (67)

Administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (206) (203) (199) (192)

Income before federal income taxes and

extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,451 1,371 1,323 1,295

Provision for federal income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏ (413) (380) (365) (361)

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,038 991 958 934

Extraordinary itemÌloss on early

extinguishment of debt, net of tax eÅect ÏÏÏÏÏ Ì Ì Ì (9)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,038 $ 991 $ 958 $ 925

Preferred stock dividendsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (20) (20) (20) (18)

Net income available to common stockholders ÏÏ $1,018 $ 971 $ 938 $ 907

Basic earnings per common share(1):

Earnings before extraordinary itemÏÏÏÏÏÏÏÏ $ 1.00 $ .95 $ .92 $ .89

Extraordinary loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì (.01)

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.00 $ .95 $ .92 $ .88

Diluted earnings per common share(1):

Earnings before extraordinary itemÏÏÏÏÏÏÏÏ $ .99 $ .94 $ .91 $ .88

Extraordinary loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .99 $ .94 $ .91 $ .88

Cash dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏ $ .27 $ .27 $ .27 $ .27

(1) The total of the four quarters may not equal the amount for the year because the amount for

each period is calculated independently based on the weighted-average number of common

shares outstanding during the period.

82
FANNIE MAE

NET INTEREST INCOME AND AVERAGE BALANCES (Unaudited)

2000 1999 1998

(Dollars in millions)

Interest income:

Mortgage portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 39,403 $ 32,672 $ 25,676

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,378 2,823 4,319

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,781 35,495 29,995

Interest expense(1):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,204 3,952 4,809

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,903 26,649 21,076

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,107 30,601 25,885

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,674 4,894 4,110

Taxable-equivalent adjustment(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 414 341 304

Net interest income taxable-equivalent basis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,088 $ 5,235 $ 4,414

Average balances:

Interest-earning assets(3):

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $553,531 $468,320$352,169

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,49051,459 75,369

Total interest-earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $605,021 $519,779 $427,538

Interest-bearing liabilities(1):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 73,351 $ 81,028 $ 89,890

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 511,075 419,538 319,638

Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 584,426 500,566 409,528

Interest-free fundsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,595 19,213 18,010

Total interest-bearing liabilities and interest-free funds ÏÏÏÏÏÏÏÏÏÏÏÏ $605,021 $519,779 $427,538

Average interest rates(2)

Interest-earning assets:

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.16% 7.04% 7.38%

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.605.52 5.76

Total interest-earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.11 6.89 7.09

Interest-bearing liabilities(1):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.704.84 5.29

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.44 6.35 6.60

Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.35 6.11 6.31

Investment spread(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .76 .78 .78

Interest-free return(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .25 .23 .25

Net interest margin(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.01% 1.01% 1.03%

(1) ClassiÑcation of interest expense and interest-bearing liabilities as short-term or long-term is

based on eÅective maturity or repricing date, taking into consideration the eÅect of

derivative Ñnancial instruments.

(2) ReÖects pro forma adjustments to permit comparison of yields on tax-advantaged and

taxable assets.

(3) Includes average balance of nonperforming loans of $2.1 billion in 2000, $3.1 billion in 1999,

and $2.6 billion in 1998.

(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 taxable-equivalent basis, as a percentage of the average mortgage

and investment portfolios.

83
FANNIE MAE

RATE/VOLUME ANALYSIS (Unaudited)

Attributable to

Changes in(1) Increase

(Decrease) Volume Rate

(Dollars in millions)

2000 vs. 1999

Interest income:

Mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,731 $ 6,053 $ 678

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 555 2 553

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,286 6,055 1,231

Interest expense(2):

Short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 252 (398) 650

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,254 5,889 365

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,506 5,491 1,015

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 780$ 564 $ 216

1999 vs. 1998

Interest income:

Mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,996 $ 8,145 $(1,149)

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,496) (1,319) (177)

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,500 6,826 (1,326)

Interest expense(2):

Short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (857) (452) (405)

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,573 6,371 (798)

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,716 5,919 (1,203)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 784 $ 907 $ (123)

(1) Combined rate/volume variances, a third element of the calculation, are allocated to the rate

and volume variances based on their relative size.

(2) ClassiÑcation of interest expense and interest-bearing liabilities as short-term or long-term is

based on the eÅective maturity or repricing date, taking into consideration the eÅect of

derivative Ñnancial instruments.

84
MANAGEMENT

Directors

The age and background, as of March 27, 2001, of each of the members of the Board of Directors

of Fannie Mae are as follows:

First

Principal Occupation and Became Other

Name and Age Business Experience Director Directorships(1)

Stephen B. Ashley, 61 Chairman and Chief Executive OÇcer, The 1995 Exeter Fund, Inc.; The GeneAshley Group, a group of commercial and see Corporation; Hahn Automultifamily real estate, brokerage and in- motive Warehouse, Inc.;

vestment companies, since January 1997; Manning & Napiers Insurance

Chairman and Chief Executive OÇcer, Sib- Fund, Inc.

ley Mortgage Corporation, a mortgage banking company, from 1985 to 1996; Chairman

and Chief Executive OÇcer, Sibley Real Estate Services, Inc., a property management

company, 1985 to 1996.

Roger E. Birk, 70Former President and Chief Operating Of- 1985

Ñcer of Fannie Mae from November 1987

until his retirement in January 1992.

Kenneth M. Duberstein, 56 Chairman and Chief Executive OÇcer, The 1998 The Boeing Company; Conoco

Duberstein Group, an independent strategic Inc.; Global Vacation Group;

planning and consulting company, since St. Paul Companies, Inc.

July 1989; Chief of StaÅ to the President of

the United States from 1988 to 1989.

Stephen Friedman, 63 Senior Principal, Marsh McLennan Risk 1996 Wal-Mart Stores, Inc.

Capital Corp., an insurance brokerage,

money management and consulting Ñrm,

since March 1998; Limited Partner since

1994, Senior Chairman from 1994 to 1998,

and Co-Chairman or Chairman from 1990

to 1994, Goldman, Sachs & Co., an investment banking Ñrm.

Thomas P. Gerrity, 59 Professor of Management since 1990, Direc- 1991 CVS Corporation; Reliance

tor since 1999 (Wharton Electronic Busi- Group Holdings, Inc.; Sunoco,

ness Initiative), Dean from 1990 to 1999, Inc.; Knight-Ridder, Inc.; InThe Wharton School of the University of ternet Capital Group, Inc.;

Pennsylvania; President of CSC Consulting MAS Funds

and Vice President of Computer Sciences

Corporation from 1989 to 1990; Chairman

and Chief Executive OÇcer, Index Group, a

technology-oriented consulting company,

from 1969 to 1989.

Jamie S. Gorelick, 50Vice Chair of Fannie Mae since May 1997; 1997 United Technologies Corp.

Deputy Attorney General of the United

States from 1994 to 1997; General Counsel

to the U.S. Department of Defense from

1993 to 1994; Partner, Miller, Cassidy, Larroca & Lewin, a law Ñrm, from 1981 to 1993.

Maynard Jackson, 63 Chairman of Jackson Securities Inc., a full

service broker-dealer headquartered in Atlanta, Georgia, since 1990; Mayor of Atlanta

from 1990 to 1994 and from 1974 to 1982.

Vincent A. Mai, 60Chairman since 1999, Chairman and Chief 1991 Dal-Tile International, Inc.

Executive OÇcer from 1998 to 1999 and

President and Chief Executive OÇcer from

1989 to 1998 of AEA Investors Inc., a private investment company; Managing Director, Shearson Lehman Brothers, Inc., an

investment banking Ñrm, from 1974 to

1989.

85
First

Principal Occupation and Became Other

Name and Age Business Experience Director Directorships(1)

Gary Mauro, Esq.(2), 53 Attorney in private practice in Austin, 1999

Texas, since January 1999; Commissioner of

the Texas General Land OÇce from 1983 to

1999.

Ann McLaughlin Korologos, Chairman Emeritus since August 2000, 1994 AMR Corporation (and its

59 Chairman from October 1996 to Au- subsidiary, American Airgust 2000, Vice Chairman from 1993 to lines); Donna Karan Interna1996, The Aspen Institute, a nonproÑt or- tional Inc.; Harman

ganization; Senior Advisor, Benedetto, International Industries, Inc.;

Gartland & Company, Inc., an investment Host Marriott Corporation;

banking Ñrm; President of the Federal City Kellogg Company; Microsoft

Council, a nonproÑt organization, from Corporation; Nordstrom Inc.;

1990 to 1995; Visiting Fellow, The Urban Vulcan Materials Company.

Institute, a nonproÑt organization; Chairman, President's Commission on Aviation

Security and Terrorism, from 1989 to 1990;

U.S. Secretary of Labor from 1987 to 1989.

Daniel H. Mudd, 42 Vice Chairman and Chief Operating OÇcer 2000

of Fannie Mae since February, 2000; President and Chief Executive OÇcer of GE Capital, Japan from 1999 to 2000. He was with

GE Capital, a diversiÑed Ñnancial services

company and subsidiary of General Electric

Company, since 1991 in a variety of positions including President and Chief Executive OÇcer of GE Capital, Asia PaciÑc from

1996 to 1999.

Anne M. Mulcahy, 48 President and Chief Operating OÇcer since 2000 Target Corporation; Xerox

May 2000, President, General Markets Op- Corporation

erations from January 1998 to May 2000, of

the Xerox Corporation, a global company

serving document processing markets. She

has been with Xerox since 1976 in a variety

of positions including Senior Vice President

and Chief StaÅ OÇcer.

Joe K. Pickett, 55 Chairman since February 2001, Chairman 1996

and Chief Executive OÇcer, from February

1996 to February 2001, HomeSide International, Inc. and Chairman of its subsidiary,

HomeSide Lending, Inc. (successor entity

to BancBoston Mortgage Corporation), a

mortgage banking company, since 1990.

Jack Quinn(2), 51 Co-Chairman, Quinn Gillespie & Associates 1998

LLC, a strategic consulting Ñrm, since January 2000; Partner, Arnold & Porter, a law

Ñrm, from 1982 to 1992 and from 1997 to

2000; Counsel to the President of the United

States from 1995 to 1997; Chief of StaÅ and

Counsel to the Vice President of the United

States from 1993 to 1995.

Franklin D. Raines, 52 Chairman of the Board of Directors and 1991 AOL Time Warner Inc.;

Chief Executive OÇcer of Fannie Mae since PÑzer Inc.; Pepsico, Inc.

January 1999; Chairman of the Board and

Chief Executive OÇcer-Designate, from

May 1998 to December 1998; Director, U.S.

OÇce of Management and Budget, from

1996 to 1998; Vice Chairman of Fannie

Mae, from 1991 to 1996.

86
First

Principal Occupation and Became Other

Name and Age Business Experience Director Directorships(1)

Eli J. Segal(2), 58 Chairman of Steering Committee since De- 1997 Hasbro, Inc., Hotel Reservacember 2000, President and Chief Executive tions Network

OÇcer from February 1997 to December 2000, The Welfare to Work Partnership,

a nonproÑt organization; Assistant to the

President of the United States and CEO of

the Corporation for National Service

(AmeriCorp) from 1993 to 1996.

H. Patrick Swygert, 58 President of Howard University since 1995. 1999 The Hartford Financial SerPresident of the State University of New vices Group, Inc.; The Victory

York at Albany from 1995 to 1999. Funds

Esteban Torres(2), 71 Economic Development Consultant; Member of the U.S. House of Representatives,

California 34th Congressional District from

1982 to 1998.

(1) Companies with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934

or subject to the requirements of Section 15(d) of that Act or any company registered as an investment

company under the Investment Company Act of 1940. Certain directorships of other companies also are noted

in the principal occupation column.

(2) Appointed by the President of the United States, who has authority to appoint Ñve directors.

The term of each director will end on the date of the May 2001 annual meeting of stockholders,

except that the President of the United States may remove any director that the President appointed

for good cause.

Executive OÇcers

The age and business experience, as of March 27, 2001, of each of the executive oÇcers of Fannie

Mae, are as follows:

Franklin D. Raines, 52, has been Chairman of the Board of Directors and Chief Executive OÇcer

since January 1999. Mr. Raines was Chairman of the Board and Chief Executive OÇcer-Designate

from May 1998 to December 1998. Mr. Raines was Director, OÇce of Management and Budget from

September 1996 to May 1998, and Vice Chairman of Fannie Mae from September 1991 to

August 1996.

Daniel H. Mudd, 42, has been Vice Chairman and Chief Operating OÇcer since February 2000.

Mr. Mudd was with GE Capital from 1991 to 2000 in a variety of positions including, most recently,

President and Chief Executive OÇcer of GE Capital, Japan, from 1999 to 2000 and of GE Capital,

Asia PaciÑc, from 1996 to 1999.

Jamie S. Gorelick, 50, has been Vice Chair since May 1997. Ms. Gorelick was Deputy Attorney

General of the United States from March 1994 to April 1997. Ms. Gorelick served as General Counsel

to the United States Department of Defense from May 1993 to March 1994.

J. Timothy Howard, 52, has been Executive Vice President and Chief Financial OÇcer since

February 1990.

Thomas E. Donilon, 45, has been Executive Vice PresidentÌLaw and Policy since May 2000. He

was Senior Vice President, General Counsel and Secretary from September 1999 to May 2000. Mr.

Donilon was a partner with the law Ñrm of O'Melveny & Myers from 1991 to 1993 and 1997 to 1999.

He was Assistant Secretary of State for Public AÅairs and Chief of StaÅ to the Secretary of State from

1993 to 1996.

Louis W. Hoyes, 52, has been Executive Vice PresidentÌSingle Family Mortgage Business since

May, 2000. Mr. Hoyes was Senior Vice PresidentÌMultifamily Lending and Investment from July

1995 to May 2000. Prior to his employment with Fannie Mae, Mr. Hoyes was with Citicorp Real

87
Estate from 1982 until 1995, in various positions, including a managing director of the residential

segment of Citicorp's real estate business in North America.

Robert J. Levin, 45, has been Executive Vice PresidentÌHousing and Community Development

since June 1998. Mr. Levin was Executive Vice PresidentÌMarketing from June 1990 to June 1998.

Adolfo Marzol, 40, has been Executive Vice President and Chief Credit OÇcer since July 1998.

Mr. Marzol was Senior Vice PresidentÌSingle-Family Business Management from July 1996 to July

1998. Mr. Marzol was Senior Vice PresidentÌCapital Markets from February 1996 to July 1996.

Julie St. John, 49, has been Executive Vice President and Chief Technology OÇcer since July

2000. She was Senior Vice PresidentÌMortgage Business Technology (previously Senior Vice

PresidentÌGuaranty and Franchise Technologies and Senior Vice President of Transaction Processing and Management Systems) from June 1993 to July 2000.

Kenneth J. Bacon, 46, has been Senior Vice PresidentÌMultifamily Lending and Investment

since November 2000. He was Senior Vice PresidentÌAmerican Communities Fund from September

1998 to November 2000 and Senior Vice PresidentÌNortheastern Regional OÇce from April 1993 to

September 1998.

Ann M. Kappler, 44, has been Senior Vice President and General Counsel since May 2000.

Ms. Kappler was Senior Vice President and Deputy General Counsel from January 1999 to May 2000

and a partner in the law Ñrm of Jenner & Block from 1994 to 1998.

Linda K. Knight, 51, has been Senior Vice President and Treasurer since February 1993.

Thomas A. Lawler, 48, has been Senior Vice PresidentÌPortfolio Management since

November 1989.

Thomas A. Lund, 42, has been Senior Vice PresidentÌInvestor Channel since August 2000.

Mr. Lund was Senior Vice PresidentÌSouthwestern Regional OÇce from July 1996 to August 2000

and Vice PresidentÌMarketing in the Southwestern Regional OÇce from January 1995 to July 1996.

Peter Niculescu, 41, has been Senior Vice PresidentÌPortfolio Strategy since March 1999. Prior

to his employment with Fannie Mae, Mr. Niculescu was a Managing Director and Co-Head of Fixed

Income Research for Goldman Sachs. He joined Goldman Sachs in 1990 and held a variety of

positions including Managing DirectorÌMortgage Research, Vice PresidentÌMortgage Research and

Corporate Bond Strategist.

Thomas R. Nides, 40, has been Senior Vice PresidentÌAdministration since July 2000. He was

Senior Vice PresidentÌHuman Resources from November 1997 to July 2000 and was Vice PresidentÌHuman Resources from May 1997 to November 1997. Mr. Nides was a Principal with Morgan

Stanley from April 1996 to May 1997. Mr. Nides was Fannie Mae's Vice PresidentÌHousing Impact

from January 1995 to April 1996.

Michael A. Quinn, 46, has been Senior Vice PresidentÌSingle Family Mortgage Business since

June 1998. He was Senior Vice PresidentÌCredit Loss Management from April 1994 to June 1998.

Mr. Quinn was Senior Vice President and Controller from March 1991 to April 1994.

Michael J. Williams, 43, has been PresidentÌFannie Mae e-Business since January 2001. He was

Senior Vice PresidentÌe-commerce from February 2000 to January 2001 and Senior Vice PresidentÌCustomer Applications and Technology Integration from 1993 to 2000.

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 Fannie Mae, reference is made to the proxy statement for Fannie Mae's

2001 annual meeting of stockholders and any later proxy statement published prior to Fannie Mae's

88
publication of a new Information Statement, which are incorporated herein by this reference. The

proxy statement for Fannie Mae's 2001 annual meeting of stockholders will be available in April 2001.

Fannie Mae will provide without charge a copy of Fannie Mae's most recent proxy statement to

each person to whom this Information Statement has been delivered, upon the written or oral request

of such person. Requests for such copies should be directed to the oÇce speciÑed on page 2 of this

Information Statement.

89
LE014L02/01
8,000,000 Shares

5.81% Non-Cumulative Preferred Stock, Series H

(stated value $50 per share)

OFFERING CIRCULAR

Bear, Stearns & Co. Inc.

Lehman Brothers

First Tennessee Bank N.A.

Merrill Lynch & Co.

Ormes Capital Markets, Inc.