UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No.: 0-50231

Federal National Mortgage Association

(Exact name of registrant as specified in its charter)

Fannie Mae

Federally chartered corporation 52-0883107

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

3900 Wisconsin Avenue, NW

Washington, DC

(Address of principal executive offices)

20016

(Zip Code)

Registrant’s telephone number, including area code:

(202) 752-7000

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

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

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

past 90 days. Yes ¥ No n

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web

site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of

Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the

registrant was required to submit and post such files). Yes ¥ No n

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

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

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

(Do not check if a smaller reporting company)

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

Act). Yes n No ¥

As of September 30, 2011, there were 1,158,227,237 shares of common stock of the registrant outstanding.
TABLE OF CONTENTS

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

Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Condensed Consolidated Statements of Operations and Comprehensive Loss . . . . . . . . . . . . . 102

Condensed Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

Note 1—Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

Note 2—Consolidations and Transfers of Financial Assets . . . . . . . . . . . . . . . . . . . . . . . . . 115

Note 3—Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

Note 4—Allowance for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

Note 5—Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Note 6—Financial Guarantees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

Note 7—Acquired Property, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

Note 8—Short-Term Borrowings and Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

Note 9—Derivative Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

Note 10—Segment Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

Note 11—Regulatory Capital Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Note 12—Concentration of Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Note 13—Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

Note 14—Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

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

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

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

Legislative and Regulatory Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Critical Accounting Policies and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Consolidated Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Business Segment Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Consolidated Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Supplemental Non-GAAP Information—Fair Value Balance Sheets . . . . . . . . . . . . . . . . . . . . 55

Liquidity and Capital Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Off-Balance Sheet Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Impact of Future Adoption of New Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . 97

Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . 177

Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

PART II—Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 188

Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

Item 4. [Removed and reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

i
MD&A TABLE REFERENCE

Table Description Page

1 Treasury Dividend Payments and Draw............................................ 4

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

Months of 2011 ............................................................. 6

3 Single-Family Serious Delinquency Rates by Year of Acquisition ........................ 8

4 Credit Profile of Single-Family Conventional Loans Acquired ........................... 9

5 Credit Statistics, Single-Family Guaranty Book of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

6 Level 3 Recurring Financial Assets at Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

7 Summary of Condensed Consolidated Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

8 Analysis of Net Interest Income and Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

9 Rate/Volume Analysis of Changes in Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

10 Impact of Nonaccrual Loans on Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

11 Fair Value (Losses) Gains, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

12 Total Loss Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

13 Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves). . . . . . . 32

14 Nonperforming Single-Family and Multifamily Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

15 Credit Loss Performance Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

16 Single-Family Credit Loss Sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

17 Single-Family Business Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

18 Multifamily Business Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

19 Capital Markets Group Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

20 Capital Markets Group’s Mortgage Portfolio Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

21 Capital Markets Group’s Mortgage Portfolio Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

22 Summary of Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

23 Summary of Mortgage-Related Securities at Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

24 Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities. . . . . . . . . 52

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

Securities (Including Wraps) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

26 Changes in Risk Management Derivative Assets (Liabilities) at Fair Value, Net . . . . . . . . . . . . . . 55

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

Value of Net Assets (Net of Tax Effect) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

28 Supplemental Non-GAAP Consolidated Fair Value Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . 58

29 Activity in Debt of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

30 Outstanding Short-Term Borrowings and Long-Term Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

31 Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year . . . . . . . . . . . . . 64

32 Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year . . . . . . . . 65

33 Cash and Other Investments Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

34 Fannie Mae Credit Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

35 Composition of Mortgage Credit Book of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

ii
Table Description Page

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

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

37 Delinquency Status of Single-Family Conventional Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

38 Single-Family Serious Delinquency Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

39 Single-Family Conventional Serious Delinquency Rate Concentration Analysis . . . . . . . . . . . . . . 79

40 Statistics on Single-Family Loan Workouts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

41 Single-Family Loan Modification Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

42 Single-Family Foreclosed Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

43 Single-Family Acquired Property Concentration Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

44 Multifamily Serious Delinquency Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

45 Multifamily Concentration Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

46 Multifamily Foreclosed Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

47 Mortgage Insurance Coverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

48 Unpaid Principal Balance of Financial Guarantees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

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

Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

50 Derivative Impact on Interest Rate Risk (50 Basis Points) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

iii
PART I—FINANCIAL INFORMATION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

our 2010 Form 10-K.

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

INTRODUCTION

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

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

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

in the primary mortgage market. Our most significant activity is securitizing mortgage loans originated by

lenders into Fannie Mae mortgage-backed securities that we guarantee, which we refer to as Fannie Mae

MBS. We also purchase mortgage loans and mortgage-related securities for our mortgage portfolio. We use

the term “acquire” in this report to refer to both our guarantees and our purchases of mortgage loans. We

obtain funds to support our business activities by issuing a variety of debt securities in the domestic and

international capital markets.

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

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

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

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

or other obligations.

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

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

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

market.

1
EXECUTIVE SUMMARY

In the first nine months of 2011, we continued our work to provide liquidity and support to the mortgage

market, grow the strong new book of business we have been acquiring since January 1, 2009, and minimize

losses on loans we acquired prior to 2009.

Providing Liquidity and Support to the Mortgage Market

Our Liquidity and Support Activities

We provide liquidity and support to the U.S. mortgage market in a number of important ways:

• We serve as a stable source of liquidity for purchases of homes and multifamily rental housing, as well as

for refinancing existing mortgages. We provided approximately $2.1 trillion in liquidity to the mortgage

market from January 1, 2009 through September 30, 2011 through our purchases and guarantees of loans,

including over 7.6 million single-family mortgage loans, which enabled borrowers to purchase homes or

refinance their mortgages, and multifamily loans that financed nearly 967,000 units of multifamily

housing.

• We are a consistent market presence as we continue to provide liquidity to the mortgage market even

when other sources of capital have exited the market, as evidenced by the events of the last few years. We

estimate that we, Freddie Mac and Ginnie Mae have collectively guaranteed more than 80% of the singlefamily mortgages originated in the United States since January 1, 2009.

• We have strengthened our underwriting and eligibility standards to support sustainable homeownership.

Our support enables borrowers to have access to a variety of conforming mortgage products, including

long-term, fixed-rate mortgages, such as the prepayable 30-year fixed-rate mortgage that protects

homeowners from interest rate swings.

• We helped more than 960,000 homeowners struggling to pay their mortgages work out their loans from

January 1, 2009 through September 30, 2011, which helped to support neighborhoods, home prices and

the housing market.

• We support affordability in the multifamily rental market. Over 85% of the multifamily units we financed

during 2009 and 2010 were affordable to families earning at or below the median income in their area.

• Borrowers typically pay a lower interest rate on loans eligible for purchase or guarantee by Fannie Mae,

Freddie Mac or Ginnie Mae. Mortgage originators are generally able to offer borrowers lower mortgage

rates on conforming loan products, including ours, in part because of the value investors place on GSEguaranteed mortgage-related securities.

• In addition to purchasing and guaranteeing loans, we provide funds to the mortgage market through shortterm financing and other activities. These activities are described in more detail in our 2010 Form 10-K in

“Business—Business Segments—Capital Markets.”

2011 Acquisitions and Market Share

In the first nine months of 2011, we purchased or guaranteed approximately $445 billion in loans, measured

by unpaid principal balance, which includes approximately $51 billion in delinquent loans we purchased from

our single-family MBS trusts. These activities enabled our lender customers to finance approximately

1,826,000 single-family conventional loans and loans for approximately 289,000 units in multifamily

properties during the first nine months of 2011.

We remained the largest single issuer of mortgage-related securities in the secondary market during the third

quarter of 2011, with an estimated market share of new single-family mortgage-related securities issuances of

43.3%. Our estimated market share of new single-family mortgage-related securities issuances was 43.2% in

the second quarter of 2011 and 44.5% in the third quarter of 2010.

2
We remained a constant source of liquidity in the multifamily market. We owned or guaranteed approximately

20% of the outstanding debt on multifamily properties as of June 30, 2011 (the latest date for which

information was available).

Summary of Our Financial Performance for the Third Quarter and First Nine Months of 2011

Our financial results for the third quarter and the first nine months of 2011 reflect the continued weakness in

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

underemployment and the prolonged decline in home prices since their peak in the third quarter of 2006.

Credit-related expenses continue to be a key driver of our net losses for each period presented. Our creditrelated expenses vary from period to period primarily based on changes in home prices, borrower payment

behavior, the types and volumes of loss mitigation activities completed, and actual and estimated recoveries

from our lender and mortgage insurer counterparties. The decline in interest rates during the third quarter of

2011 had a significant impact on the company’s derivative losses; however, these losses were mostly offset by

fair value gains in the period related to our hedged mortgage investments for which only a portion are

recorded at fair value in our financial statements. Derivative instruments are an integral part of how we

manage interest rate risk and an inherent part of the cost of funding and hedging our mortgage investments.

We expect high levels of period-to-period volatility in our results because our derivatives are recorded at fair

value in our financial statements while some of the instruments they hedge are not recorded at fair value in

our financial statements.

Comprehensive Loss

We recognized a total comprehensive loss of $5.3 billion in the third quarter of 2011, consisting of a net loss

of $5.1 billion and other comprehensive loss of $197 million. In comparison, we recognized a total

comprehensive loss of $2.9 billion in the second quarter of 2011, consisting of a net loss of $2.9 billion and

other comprehensive income of $2 million. We recognized a total comprehensive loss of $429 million in the

third quarter of 2010, consisting of a net loss of $1.3 billion and other comprehensive income of $902 million

(other comprehensive income in the third quarter of 2010 was primarily driven by a reduction in our

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

Our total comprehensive loss for the first nine months of 2011 was $14.5 billion, consisting of a net loss of

$14.4 billion and other comprehensive loss of $14 million. In comparison, we recognized a total

comprehensive loss of $10.1 billion in the first nine months of 2010, consisting of a net loss of $14.1 billion

and other comprehensive income of $3.9 billion (other comprehensive income in the first nine months of 2010

was primarily driven by a reduction in our unrealized losses due to significantly improved fair value of

available-for-sale securities).

Net Loss

Third Quarter 2011 vs. Second Quarter 2011. The $2.2 billion increase in our net loss was primarily due to

$4.5 billion in net fair value losses in the third quarter of 2011 primarily driven by losses on our risk

management derivatives due to a significant decline in swap interest rates during the quarter, compared with

$1.6 billion in net fair value losses in the second quarter of 2011 driven by losses on risk management

derivatives. In addition, we recognized foreclosed property expense of $733 million in the third quarter of

2011 compared with foreclosed property income of $478 million in the second quarter of 2011 because our

estimate of amounts due to us related to outstanding repurchase requests remained relatively flat during the

third quarter compared with a substantial increase in the second quarter of 2011. These losses and expenses

were partially offset by a $2.4 billion decrease in our provision for credit losses primarily driven by a lower

provision on individually impaired loans as the continued lower interest rate environment improved our

expected cash flow projections on those loans, therefore reducing our estimated impairment.

Third Quarter 2011 vs. Third Quarter 2010. The $3.8 billion increase in our net loss was primarily due to

$4.5 billion in net fair value losses in the third quarter of 2011 primarily driven by losses on our risk

management derivatives due to a significant decline in swap interest rates during the quarter, compared with

3
$525 million in net fair value gains in the third quarter of 2010 primarily driven by gains on our trading

securities. These losses were partially offset by a $677 million decrease in credit-related expenses which was

primarily driven by a lower provision on individually impaired loans as the continued lower interest rate

environment improved our expected cash flow projections on those loans, therefore reducing our estimated

impairment. Additionally, there was a $410 million increase in net interest income primarily from lower

interest expense on funding debt.

Nine Months of 2011 vs. Nine Months of 2010. Our net loss remained flat for the first nine months of 2011

compared with the first nine months of 2010. The key components of our net loss in both the first nine

months of 2011 and the first nine months of 2010 were credit-related expenses and fair value losses, which

were partially offset by net interest income.

See “Consolidated Results of Operations” for more information on our results.

Net Worth

Our net worth deficit of $7.8 billion as of September 30, 2011 reflects the recognition of our total

comprehensive loss of $5.3 billion and our payment to Treasury of $2.5 billion in senior preferred stock

dividends during the third quarter of 2011. The Acting Director of FHFA will submit a request to Treasury on

our behalf for $7.8 billion to eliminate our net worth deficit.

In the third quarter of 2011, we received $5.1 billion in funds from Treasury to eliminate our net worth deficit

as of June 30, 2011. Upon receipt of the additional funds requested to eliminate our net worth deficit as of

September 30, 2011, the aggregate liquidation preference on the senior preferred stock will be $112.6 billion,

which will require an annualized dividend payment of $11.3 billion. The amount of this dividend payment

exceeds our reported annual net income for any year since our inception. Through September 30, 2011, we

have paid an aggregate of $17.2 billion to Treasury in dividends on the senior preferred stock.

Table 1 below displays our senior preferred stock dividend payments to Treasury and Treasury draws since

entering conservatorship on September 6, 2008.

Table 1: Treasury Dividend Payments and Draw

2008 2009 2010

2011 to date

(first nine months)

Cumulative

Total

(Dollars in billions)

Senior preferred stock dividends(1) . . . . . . . . . . . . . . . . . . . $ — $ 2.5 $ 7.7 $ 7.0 $ 17.2

Treasury draws(2)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.2 60.0 15.0 21.4 111.6

Cumulative percentage of senior preferred stock dividends to

Treasury draws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2% 3.3% 11.3% 15.4% 15.4%

(1) Represents total quarterly cash dividends paid to Treasury, during the periods presented, based on an annual rate of

10% per year on the aggregate liquidation preference of the senior preferred stock.

(2) Represents the total draws received from Treasury and / or currently requested based on our quarterly net worth

deficits for the periods presented. Draw requests were funded in the quarter following each quarterly net worth deficit.

(3) Treasury draws do not include the initial $1.0 billion liquidation preference of the senior preferred stock, for which we

did not receive any cash proceeds.

Total Loss Reserves

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

book of business, increased to $75.6 billion as of September 30, 2011 from $74.8 billion as of June 30, 2011

and increased from $66.3 billion as of December 31, 2010. Our total loss reserve coverage to total

nonperforming loans was 37.07% as of September 30, 2011, compared with 36.91% as of June 30, 2011 and

30.85% as of December 31, 2010. The continued stress on a broad segment of borrowers from continued high

levels of unemployment and underemployment and the prolonged decline in home prices have caused our total

loss reserves to remain high for the past few years. Further, the shift in our nonperforming loan balance from

4
loans in our collective reserve to loans that are individually impaired has caused our coverage ratio to

increase.

Our Strong New Book of Business and Expected Losses on Our Legacy Book of Business

We refer to the single-family loans we have acquired since the beginning of 2009 as our “new single-family

book of business” and the single-family loans we acquired prior to 2009 as our “legacy book of business.” In

this section, we discuss our expectations regarding the profitability of our new single-family book of business,

as well as the performance and credit profile of these loans to date. We also discuss our expectations regarding

losses on the loans in our legacy book of business.

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

We present a number of estimates and expectations in this executive summary regarding the profitability of

single-family loans we have acquired, our single-family credit losses and credit-related expenses, and our

draws from and dividends to be paid to Treasury. These estimates and expectations are forward-looking

statements based on our current assumptions regarding numerous factors, including future home prices and the

future performance of our loans. Home prices are a key factor affecting the amount of credit losses and

profitability we expect. As home prices decline, the loan-to-value ratios on our loans shift higher, and both the

probability of default and the severity of loss increase. Furthermore, the level of regional variation in home

price declines affects our results, as we will incur greater credit losses if home prices decline more

significantly in regions where we have a greater concentration of loans. Our future estimates of our

performance, as well as the actual amounts, may differ materially from our current estimates and expectations

as a result of the timing, level and regional variation in home price changes, changes in interest rates,

unemployment, other macroeconomic variables, direct and indirect consequences resulting from failures by

servicers to follow proper procedures in the administration of foreclosure cases, government policy, changes in

generally accepted accounting principles (“GAAP”), credit availability, social behaviors, the volume of loans

we modify, the effectiveness of our loss mitigation strategies, management of our real-estate owned (“REO”)

inventory and pursuit of contractual remedies, changes in the fair value of our assets and liabilities,

impairments of our assets, and many other factors, including those discussed in “Risk Factors,” “ForwardLooking Statements” and elsewhere in this report and in “Risk Factors” in our 2010 Form 10-K. For example,

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

our current expectations.

Building a Strong New Single-Family Book of Business

Expected Profitability of Our Single-Family Acquisitions

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

too early to know how loans in our new single-family book of business will ultimately perform, given their

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

delinquency rates, we expect that, over their lifetime, these loans will be profitable, by which we mean our fee

income on these loans will exceed our credit losses and administrative costs for them. Table 2 provides

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

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

September 30, 2011. The expectations reflected in Table 2 are based on the credit risk profile of the loans we

have acquired, which we discuss in more detail in “Table 4: Credit Profile of Single-Family Conventional

Loans Acquired” and in “Table 36: Risk Characteristics of Single-Family Conventional Business Volume and

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

expectations regarding home price declines set forth in “Outlook” and other macroeconomic factors. As shown

in Table 2, we expect loans we have acquired in 2009, 2010 and the first nine months of 2011 to be profitable

over their lifetime. If future macroeconomic conditions turn out to be more adverse than our expectations,

these loans could become unprofitable. For example, we believe that credit losses on these loans would exceed

guaranty fee revenue if home prices declined nationally by approximately 10% from their September 2011

levels over the next five years based on our home price index. See “Outlook” for our expectations regarding

home price declines.

5
Table 2: Expected Lifetime Profitability of Single-Family Loans Acquired in 1991 through the First Nine Months

of 2011

Acquisition Year

Expectation for

Profitability

Percentage of

Single-Family Guaranty 

Book of Business as of

September 30, 2011 

2010 Profitable

2011 to date 

(nine months)

Profitable

1991 to 2000 Profitable

2001 Profitable

2002 Profitable

2003 Profitable

2004

2005

2006

2007

2008

2009 Profitable

Profitable

Profitable

13%

38%

49%

Not Profitable

Not Profitable

Not Profitable

Not Profitable

Not Profitable

As Table 2 shows, the years in which we acquired single-family loans that we expect will be unprofitable are

2004 through 2008. A substantial majority of our realized credit losses since the beginning of 2009 were

attributable to loans we acquired in 2005 through 2008. Although the 2004 vintage has been profitable to date,

we currently believe that this vintage will not be profitable over its lifetime. While we previously believed the

2004 vintage would perform close to break-even, in 2011 our expectations for long-term home price changes

have worsened, which has changed our expectation of future borrower behavior regarding these loans. We

expect the 2005 through 2008 vintages to be significantly more unprofitable than the 2004 vintage. The loans

we acquired in 2004 were originated under more conservative acquisition policies than loans we acquired from

2005 through 2008; however, because our 2004 acquisitions were made during a time when home prices were

rapidly increasing, their performance is expected to suffer from the significant decline in home prices since

2006. The ultimate long-term performance and profitability of the 2004 vintage will depend on many factors,

including changes in home prices, other economic conditions and borrower behavior.

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Loans we have acquired since the beginning of 2009 comprised 49% of our single-family guaranty book of

business as of September 30, 2011. Our 2005 to 2008 acquisitions are becoming a smaller percentage of our

single-family guaranty book of business, having decreased from 39% of our single-family guaranty book of

business as of December 31, 2010 to 33% as of September 30, 2011. Our 2004 acquisitions constituted 5% of

our single-family guaranty book of business as of September 30, 2011.

Serious Delinquency Rates by Year of Acquisition

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

the loans become seriously delinquent (three or more months past due or in the foreclosure process) within a

short period of time after acquisition. Loans we acquired in 2009 and 2010 have experienced historically low

levels of delinquencies shortly after their acquisition. Table 3 shows, for single-family loans we acquired in

each year from 2001 to 2010, the percentage that were seriously delinquent as of the end of the third quarter

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

originated so recently that many of them could not yet have become seriously delinquent. As Table 3 shows,

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

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

delinquency rate for loans acquired in 2005 through 2008. For loans originated in 2010, this percentage was

approximately ten times lower than the average comparable rate for loans acquired in 2005 through 2008.

Table 3 also shows serious delinquency rates for each year’s acquisitions as of September 30, 2011. Except for

2008 acquisitions, whose performance has been affected by changes in underwriting and eligibility standards

that became effective during the course of 2008, and more recent acquisition years, whose serious delinquency

rates are likely lower than they will be after the loans have aged, Table 3 shows that the current serious

delinquency rate generally tracks the trend of the serious delinquency rate as of the end of the third quarter

following the year of acquisition. Below the table we provide information about the economic environment in

which the loans were acquired, specifically home price appreciation and unemployment levels.

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Table 3: Single-Family Serious Delinquency Rates by Year of Acquisition

Home Price

Appreciation(1) 6.3% 7.5% 7.7% 10.6% 11.3% 2.9% (3.3)% (8.9)% (4.7)% (4.2)% (0.9)%

Unemployment

rate(2) 4.7% 5.8% 6.0% 5.5% 5.1% 4.6% 4.6% 5.8% 9.3% 9.6% 9.0%

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

SDQ Rate as of September 30, 2011

SDQ Rate as of end of 3rd quarter

following acquisition year

0.0%

0.8%

1.6%

2.4%

3.2%

4.0%

4.8%

5.6%

6.4%

7.2%

8.0%

8.8%

9.6%

10.4%

11.2%

12.0%

12.8%

13.6%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 *

SDQ Rate

* For 2010, the serious delinquency rate as of September 30, 2011 is the same as the serious delinquency rate as of the

end of the third quarter following the acquisition year.

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

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

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

available for October 2011. Previously reported data have been revised to reflect additional available historical data.

Including subsequently available data may lead to materially different results. We recently enhanced our home price

estimates to identify and exclude a greater portion of foreclosed home sales. As a result, some period to period

comparisons of home prices differ from those indicated by our prior estimates.

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

population survey (CPS), Bureau of Labor Statistics.

Credit Profile of Our Single-Family Acquisitions

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

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

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

8
below, by higher loan-to-value (“LTV”) ratios and lower FICO credit scores than loans we have acquired since

January 1, 2009. In addition, many of these loans were Alt-A loans or had other higher-risk loan attributes

such as interest-only payment features. As a result of the sharp declines in home prices, 34% of the loans that

we acquired from 2005 through 2008 had mark-to-market LTV ratios that were greater than 100% as of

September 30, 2011, which means the principal balance of the borrower’s primary mortgage exceeded the

current market value of the borrower’s home. This percentage is higher when second lien loans are included.

The sharp decline in home prices, the severe economic recession that began in December 2007 and continued

through June 2009, and continuing high unemployment and underemployment have significantly and adversely

impacted the performance of loans we acquired from 2005 through 2008. We are continuing to take a number

of actions to reduce our credit losses. We discuss these actions and our strategy in “Reducing Credit Losses on

Our Legacy Book of Business” and “Risk Management—Credit Risk Management—Single-Family Mortgage

Credit Risk Management.”

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

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

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

acquisitions of loans with higher-risk attributes. Compared with the loans we acquired in 2005 through 2008,

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

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

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

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

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

that may adjust over the term of the loan.

Table 4 shows the credit risk profile of the single-family loans we have acquired since January 1, 2009

compared to the loans we acquired from 2005 through 2008.

Table 4: Credit Profile of Single-Family Conventional Loans Acquired(1)

Acquisitions from 2009

through the first nine months of 2011

Acquisitions from 2005

through 2008

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

Weighted average FICO credit score at origination . . . . . . . 761 722

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

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

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

Original loan-to-value ratio H 90% . . . . . . . . . . . . . . . . . 6% 11%

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

* Represents less than 0.5% of the total acquisitions.

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

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

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

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

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

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

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

The credit risk profile of our acquisitions since the beginning of 2009 has been influenced further by the

significant percentage of refinanced loans. Historically, refinanced loans generally have better credit profiles

than purchase money loans. As we discuss in “Outlook” below, we expect fewer refinancings in 2011 and

2012 than in 2010.

Since 2009, our acquisitions have included a significant number of loans refinanced under our Refi PlusTM

initiative, which provides expanded refinance opportunities for eligible Fannie Mae borrowers. Our

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acquisitions under Refi Plus include our acquisitions under the Home Affordable Refinance Program

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

the mortgage loan on their primary residence due to a decline in home values. The approximately 536,000

loans we acquired under Refi Plus in the first nine months of 2011 constituted approximately 27% of our total

single-family acquisitions for the period, compared with approximately 23% of total single-family acquisitions

in all of 2010. Under Refi Plus we acquire refinancings of performing Fannie Mae loans that have current

LTV ratios up to 125% and, in some cases, lower FICO credit scores than we generally require. While it is too

early to determine whether loans with higher risk characteristics refinanced under the Refi Plus program will

perform differently from other refinanced loans, we expect Refi Plus loans will perform better than the loans

they replace because Refi Plus loans reduce the borrowers’ monthly payments or otherwise should provide

more sustainability than the borrowers’ old loans (for example, by having a fixed rate instead of an adjustable

rate). Loans refinanced through the Refi Plus initiative in the first nine months of 2011 reduced borrowers’

monthly mortgage payments by an average of $171. This figure reflects all refinancings under Refi Plus, even

those that involved a reduced term, and therefore higher monthly payments.

The LTV ratios at origination for our 2010 and 2011 acquisitions are higher than for our 2009 acquisitions,

primarily due to our acquisition of Refi Plus loans. The percentage of loans with LTV ratios at origination

greater than 90% has increased from 4% for 2009 acquisitions to 7% for 2010 acquisitions and 10% for

acquisitions in the first nine months of 2011. We expect our acquisition of loans with high LTV ratios will

increase in 2012 as a result of recently announced changes to HARP, which we discuss in “Legislative and

Regulatory Developments—Changes to the Home Affordable Refinance Program.”

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

2010 and 2011 acquisitions, like that of our 2009 acquisitions, is significantly stronger than the credit profile

of our 2005 through 2008 acquisitions. Whether the loans we acquire in the future will exhibit an overall

credit profile similar to our acquisitions since the beginning of 2009 will depend on a number of factors,

including our future eligibility standards and those of mortgage insurers, the percentage of loan originations

representing refinancings, the volume and characteristics of loans we acquire under the recently announced

changes to HARP terms, our future objectives, government policy, and market and competitive conditions.

Expected Losses on Our Legacy Book of Business

The single-family credit losses we realized from January 1, 2009 through September 30, 2011, combined with

the amounts we have reserved for single-family credit losses as of September 30, 2011, as described below,

total approximately $135 billion. A substantial majority of these losses are attributable to single-family loans

we purchased or guaranteed from 2005 through 2008.

While loans we acquired in 2005 through 2008 will give rise to additional credit losses that we will realize

when the loans are charged off (upon foreclosure or our acceptance of a short sale or deed-in-lieu of

foreclosure), we estimate that we have reserved for the substantial majority of the remaining losses on these

loans. Even though we believe a substantial majority of the credit losses we have yet to realize on these loans

has already been reflected in our results of operations as credit-related expenses, our credit-related expenses

remain high as weakness in the housing and mortgage markets continues. We also expect that future defaults

on loans in our legacy book of business and the resulting charge-offs will occur over a period of years. In

addition, given the large current and anticipated supply of single-family homes in the market, we anticipate

that it will take years before our REO inventory is reduced to pre-2008 levels.

We show how we calculate our realized credit losses in “Table 15: Credit Loss Performance Metrics.” Our

reserves for credit losses described in this discussion consist of (1) our allowance for loan losses, (2) our

allowance for accrued interest receivable, (3) our allowance for preforeclosure property taxes and insurance

receivables, and (4) our reserve for guaranty losses (collectively, our “total loss reserves”), plus the portion of

fair value losses on loans purchased out of unconsolidated MBS trusts reflected in our condensed consolidated

balance sheets that we estimate represents accelerated credit losses we expect to realize. For more information

on our reserves for credit losses, see “Table 12: Total Loss Reserves.”

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

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

transfers of financial assets and the consolidation of variable interest entities. Before we adopted these

standards, upon our acquisition of credit-impaired loans out of unconsolidated MBS trusts, we recorded fair

value loss charge-offs against our reserve for guaranty losses. The amount of these charge-offs was the amount

by which the acquisition cost of these loans exceeded their estimated fair value. We expect to realize a portion

of these fair value losses as credit losses in the future (for loans that eventually involve charge-offs or

foreclosure), yet these fair value losses have already reduced the mortgage loan balances reflected in our

condensed consolidated balance sheets and have effectively been recognized in our condensed consolidated

statements of operations and comprehensive loss through our provision for guaranty losses. We consider these

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

realize credit losses on the acquired loans in the future.

Reducing Credit Losses on Our Legacy Book of Business

To reduce the credit losses we ultimately incur on our legacy book of business, we have been focusing our

efforts on the following strategies:

• Reducing defaults by offering borrowers solutions that enable them to keep their homes (“home retention

solutions”);

• Pursuing “foreclosure alternatives,” which help borrowers avoid foreclosure, to reduce the severity of the

losses we incur;

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

• Improving servicing standards and execution;

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

• Pursuing contractual remedies from lenders, servicers and providers of credit enhancement.

As we work to reduce credit losses, we also seek to assist distressed borrowers, help stabilize communities,

and support the housing market. In dealing with distressed borrowers, we first seek home retention solutions

before turning to foreclosure alternatives. When there is no viable home retention solution or foreclosure

alternative that can be applied, we seek to move to foreclosure expeditiously. Prolonged delinquencies can hurt

local home values and destabilize communities, as these homes often go into disrepair. As a general rule, the

longer borrowers remain delinquent, the greater our costs.

Reducing Defaults. Home retention solutions are a key element of our strategy to reduce defaults, and the

majority of our home retention solutions are loan modifications. Successful modifications allow borrowers

who were having problems making their pre-modification mortgage payments to remain in their homes. While

loan modifications contribute to higher credit-related expenses in the near term, we believe that successful

modifications (those that enable borrowers to remain current on their loans) will ultimately reduce our credit

losses over the long term from what they otherwise would have been if we had taken the loans to foreclosure.

We completed approximately 161,000 loan modifications in the first nine months of 2011, bringing the total

number of loan modifications we have completed since January 2009 to over 660,000. The substantial

majority of these modifications involved deferring or lowering borrowers’ monthly mortgage payments, which

we believe increases the likelihood borrowers will be able to remain current on their modified loans. Whether

our modifications are ultimately successful depends heavily on economic factors, such as unemployment rates,

household wealth and income, and home prices. See “Table 40: Statistics on Single-Family Loan Workouts”

and the accompanying discussion for additional information on our home retention efforts, including our

modifications, as well as our foreclosure alternatives. For a description of the impact of modifications on our

credit-related expenses, see “Consolidated Results of Operations—Credit-Related Expenses—Provision for

Credit Losses.”

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

distressed borrower, we seek to offer a foreclosure alternative and complete it in a timely manner. Our

11
foreclosure alternatives are primarily preforeclosure sales, which are sometimes referred to as “short sales,” as

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

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

information about the volume of foreclosure alternatives we completed in the first nine months of 2011 in

“Table 5: Credit Statistics, Single-Family Guaranty Book of Business.”

Managing Timelines for Workouts and Foreclosures. We refer to home retention solutions and foreclosure

alternatives as “workouts.” We believe that home retention solutions are most effective in preventing defaults

when completed at an early stage of delinquency. Similarly, our foreclosure alternatives are more likely to be

successful in reducing our loss severity if they are executed expeditiously. Accordingly, it is important to us

for our servicers to work with delinquent borrowers early in the delinquency to determine whether home

retention solutions or foreclosure alternatives will be viable and, where no workout solution is viable, to

reduce delays in proceeding to foreclosure.

Circumstances in the foreclosure environment have resulted in foreclosures proceeding at a slow pace. As a

result of the housing market downturn that began in 2006 and significantly worsened in 2008, the volume of

foreclosures to be processed by servicers and states significantly increased in 2009 and the first nine months

of 2010. In October 2010, a number of single-family mortgage servicers temporarily halted some or all of the

foreclosures they were processing after discovering deficiencies in their foreclosure processes and the

processes of their service providers. In response to the foreclosure process deficiencies, some states changed

their foreclosure processes to require additional review and verification of the accuracy of pending and future

foreclosure filings. Some states also added requirements to the foreclosure process, including mediation

processes and requirements to file new affidavits. Further, some state courts have issued rulings calling into

question the validity of some existing foreclosure practices. These actions halted or significantly delayed not

only existing, but new foreclosures. As an example, in December 2010, the New Jersey Supreme Court halted

all uncontested residential foreclosure proceedings by six large loan servicers for a period of approximately

nine months until those servicers demonstrated that their foreclosure processes were compliant with law. New

Jersey also imposed a new requirement that counsel certify the accuracy of all pending and future foreclosure

complaints. In addition, in August 2011 a New Jersey appellate decision held that defects in notices of intent

to foreclose required dismissal and restart of the pending foreclosure process rather than simply correcting the

defective notices. We had more than 22,000 loans in foreclosure in New Jersey as of the beginning of the third

quarter of 2011, but foreclosures during the quarter led to our acquiring only 151 REO properties.

While servicers have generally ended their outright foreclosure halts, they continue to process foreclosures at a

slow pace as they update their procedures to remediate their process deficiencies and meet new legislative,

regulatory and judicial requirements. In addition, servicers and states are dealing with the backlog of

foreclosures resulting from these delays and from the elevated level of foreclosures resulting from the housing

market downturn. For foreclosures completed in the third quarter of 2011, measuring from the last monthly

period for which the borrowers fully paid their mortgages to when we added the related properties to our REO

inventory, the average number of days it took in each state to ultimately foreclose ranged from 374 days in

Missouri to 906 days in Florida. Florida accounted for 29% of our loans that were in the foreclosure process

as of September 30, 2011.

These extended time periods to complete foreclosures increase our costs of holding these loans. In addition, to

the extent home prices decline while foreclosure proceedings are drawn out, the proceeds we ultimately

receive from the sale of the foreclosed properties will be lower. Slower foreclosures also result in loans

remaining seriously delinquent in our book of business for a longer time, which has caused our serious

delinquency rate to decrease more slowly in the last year than it would have if the pace of foreclosures had

been faster. We believe the changes in the foreclosure environment discussed above will continue to negatively

affect our single-family serious delinquency rates, foreclosure timelines and credit-related expenses. Moreover,

we believe these conditions will delay the recovery of the housing market because it will take longer to clear

the market’s supply of distressed homes. Distressed homes typically sell at a discount compared to nondistressed homes and, therefore, a lingering population of distressed homes will continue to negatively affect

overall home prices. See “Risk Factors” for further information about the potential impact of the foreclosure

12
process deficiencies and resulting changes in the foreclosure environment on our business, results of

operations, financial condition and net worth.

Improving Servicing Standards and Execution. The performance of our mortgage servicers is critical to our

success in reducing defaults, completing foreclosure alternatives and managing workout and foreclosure

timelines efficiently, because servicers are the primary point of contact with borrowers. Improving servicing

standards is therefore a key aspect of our strategy to reduce our credit losses. We have taken a number of

steps to improve the servicing of our delinquent loans.

• In June 2011, we issued new standards for mortgage servicers under FHFA’s Servicing Alignment

Initiative. The initiative is aimed at establishing consistency in the servicing of delinquent loans owned or

guaranteed by Fannie Mae and Freddie Mac. Among other things, the new servicing standards, which

became effective October 1, 2011, are designed to result in earlier, more frequent and more effective

contact with borrowers and to improve servicer performance by providing servicers monetary incentives

for exceeding loan workout benchmarks and by imposing fees on servicers for failing to meet loan

workout benchmarks or foreclosure timelines.

• In some cases, we transfer servicing on loan populations that include loans with higher-risk characteristics

to special servicers with whom we have worked to develop high-touch protocols for servicing these loans.

These protocols include lowering the ratio of loans per servicer employee, prescribing borrower outreach

strategies to be used at earlier stages of delinquency, and providing distressed borrowers a single point of

contact to resolve issues. Transferring servicing on higher-risk loans enables the borrowers (and loans) to

benefit from these high-touch protocols while increasing the original servicer’s capacity to service the

remaining loans, creating an opportunity to improve service to the remaining borrowers.

• In September 2011, we issued our first ratings of servicers’ performance under our Servicer Total

Achievement and Rewards (“STAR”) program. The STAR program is designed to encourage

improvements in customer service and foreclosure prevention outcomes for homeowners by rating

servicers on their performance in these areas.

While we believe these steps will improve the servicing on our loans, ultimately we are dependent on

servicers’ willingness, efficiency and ability to implement our home retention solutions and foreclosure

alternatives, and to manage timelines for workouts and foreclosures.

Managing Our REO Inventory. Efficient management of our REO inventory of homes acquired through

deed-in-lieu of foreclosure or foreclosure is another critical element of our strategy for reducing credit losses.

Since January 2009, we have strengthened our REO sales capabilities by increasing resources in this area, as

we continue to manage our REO inventory to reduce costs and maximize sales proceeds. As Table 5 shows, in

the first nine months of 2011 we have already disposed of as many properties as we did in all of 2010, and

our dispositions in 2010 represented a 51% increase over our dispositions in 2009.

Neighborhood stabilization is a core principle in our approach to managing our REO inventory. In the first

nine months of 2011, we completed repairs to approximately 69,300 properties sold from our single-family

REO inventory, at an average cost of $6,122 per property. Repairing REO properties increases sales to owner

occupants and increases financing options for REO buyers. In addition, our “First Look” marketing period

contributes to neighborhood stabilization by encouraging homeownership. During this “First Look” period,

owner occupants, some nonprofit organizations and public entities may submit offers and purchase properties

without competition from investors. During the first nine months of 2011, approximately 113,900 of the

single-family properties we sold were purchased by owner-occupants, nonprofit organizations or public

entities.

We currently lease properties to tenants who occupied the properties before we acquired them into our REO

inventory, which can minimize disruption by providing additional time to find alternate housing, help stabilize

local communities, provide us with rental income, and support our compliance with federal and state laws

protecting tenants in foreclosed properties. As of September 30, 2011, approximately 10,000 tenants leased our

REO properties.

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The changing foreclosure environment discussed above has delayed our acquisitions of REO properties. Given

the large number of seriously delinquent loans in our single-family guaranty book of business and the large

existing and anticipated supply of single-family homes in the market, we expect it will take years before our

REO inventory approaches pre-2008 levels.

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

do not meet our underwriting or eligibility requirements, we may make demands for lenders to repurchase

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

repurchase or compensate us for loans for which the mortgage insurer rescinds coverage. The volume of our

repurchase requests rose in 2010 as compared with 2009 and has remained high through the first nine months

of 2011. During the first nine months of 2011, lenders repurchased from us or reimbursed us for losses on

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

obligations. In addition, as of September 30, 2011, we had outstanding requests for lenders to repurchase from

us or reimburse us for losses on $9.5 billion in loans, of which 25.4% had been outstanding for more than

120 days.

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

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

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

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

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

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

significantly lower than the unpaid principal balance of the loans.

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

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

$4.6 billion for the first nine months of 2011. See “Risk Management—Credit Risk Management—

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

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

counterparties fails to fulfill its obligations to us.

We believe the actions we have taken to stabilize the housing market and minimize our credit losses will

reduce our future credit losses below what they otherwise would have been. However, continuing change in

broader market conditions makes it difficult to predict how effective these actions ultimately will be in

reducing our credit losses. Moreover, it will be difficult to measure the ultimate impact of our actions, given

that current conditions in the housing market are unprecedented.

For more information on the strategies and actions we are taking to minimize our credit losses, see “Risk

Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management” in our 2010

Form 10-K and in this report.

Credit Performance

Table 5 presents information for each of the last seven quarters about the credit performance of mortgage

loans in our single-family guaranty book of business and our workouts. The workout information in Table 5

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

reflect trial modifications that have not become permanent.

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Table 5: Credit Statistics, Single-Family Guaranty Book of Business(1)

Q3

YTD Q3 Q2 Q1

Full

Year Q4 Q3 Q2 Q1

2011 2010

(Dollars in millions)

As of the end of each period:

Serious delinquency rate(2) ........ 4.00% 4.00% 4.08% 4.27% 4.48% 4.48% 4.56% 4.99% 5.47%

Nonperforming loans(3)........... $ 202,522 $202,522 $200,793 $206,098 $ 212,858 $212,858 $212,305 $217,216 $222,892

Foreclosed property inventory:

Number of properties .......... 122,616 122,616 135,719 153,224 162,489 162,489 166,787 129,310 109,989

Carrying value .............. $ 11,039 $ 11,039 $ 12,480 $ 14,086 $ 14,955 $ 14,955 $ 16,394 $ 13,043 $ 11,423

Combined loss reserves(4) ......... $ 70,741 $ 70,741 $ 68,887 $ 66,240 $ 60,163 $ 60,163 $ 58,451 $ 59,087 $ 58,900

Total loss reserves(5) ............ $ 73,973 $ 73,973 $ 73,116 $ 70,466 $ 64,469 $ 64,469 $ 63,105 $ 64,877 $ 66,479

During the period:

Foreclosed property (number of

properties):

Acquisitions(6) ............. 152,440 45,194 53,697 53,549 262,078 45,962 85,349 68,838 61,929

Dispositions .............. (192,313) (58,297) (71,202) (62,814) (185,744) (50,260) (47,872) (49,517) (38,095)

Credit-related expenses(7) ......... $ 21,821 $ 4,782 $ 5,933 $ 11,106 $ 26,420 $ 4,064 $ 5,559 $ 4,871 $ 11,926

Credit losses(8) ................ $ 13,798 $ 4,384 $ 3,810 $ 5,604 $ 23,133 $ 3,111 $ 8,037 $ 6,923 $ 5,062

Loan workout activity (number of loans):

Home retention loan workouts(9) . . . 188,205 68,227 59,019 60,959 440,276 89,691 113,367 132,192 105,026

Preforeclosure sales and

deeds-in-lieu of foreclosure . .... 57,602 19,306 21,176 17,120 75,391 15,632 20,918 21,515 17,326

Total loan workouts ........... 245,807 87,533 80,195 78,079 515,667 105,323 134,285 153,707 122,352

Loan workouts as a percentage of

delinquent loans in our guaranty

book of business(10) .......... 26.58% 28.39% 25.71% 25.01% 37.30% 30.47% 37.86% 41.18% 31.59%

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

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

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

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

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

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

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

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

(“HSA”) first-lien loans. A troubled debt restructuring is a restructuring of a mortgage loan in which a concession is

granted to a borrower experiencing financial difficulty. HSA first-lien loans are unsecured personal loans in the

amount of past due payments used to bring mortgage loans current. We generally classify loans as nonperforming

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

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

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

in our condensed consolidated balance sheets and single-family loans that we have guaranteed under long-term

standby commitments. For additional information on the change in our loss reserves see “Consolidated Results of

Operations—Credit-Related Expenses—Provision for Credit Losses.”

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

preforeclosure property taxes and insurance receivables.

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

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

(income).

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

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

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

been initiated but not completed; (b) repayment plans and forbearances completed and (c) HomeSaver Advance firstlien loans. See “Table 40: Statistics on Single-Family Loan Workouts” in “Risk Management—Credit Risk

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

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

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

Our single-family serious delinquency rate has decreased each quarter since the first quarter of 2010. This

decrease is primarily the result of home retention solutions, as well as foreclosure alternatives and completed

foreclosures. The decrease is also attributable to our acquisition of loans with stronger credit profiles since the

beginning of 2009, as these loans have become an increasingly larger portion of our single-family guaranty

book of business, resulting in a smaller percentage of our loans becoming seriously delinquent.

Although our single-family serious delinquency rate has decreased significantly since the first quarter of 2010,

our serious delinquency rate and the period of time that loans remain seriously delinquent has been negatively

affected in recent periods by the increase in the average number of days it is taking to complete a foreclosure.

As described in “Reducing Credit Losses on Our Legacy Book of Business—Managing Timelines for

Workouts and Foreclosures,” high levels of foreclosures, continuing issues in the servicer foreclosure process,

changes in state foreclosure laws, and new court rules and proceedings have lengthened the time it takes to

foreclose on a mortgage loan in many states. We expect serious delinquency rates will continue to be affected

in the future by home price changes, changes in other macroeconomic conditions, the length of the foreclosure

process, the volume of loan modifications, and the extent to which borrowers with modified loans continue to

make timely payments.

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

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

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

Credit Risk Management.”

Housing and Mortgage Market and Economic Conditions

During the third quarter of 2011, economic activity picked up from the pace of the second quarter. The

inflation-adjusted U.S. gross domestic product, or GDP, rose by 2.5% on an annualized basis during the

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

estimated 389,000 jobs in the third quarter as a result of employment growth in the private sector. According

to the U.S. Bureau of Labor Statistics, as of October 2011, over the past 12 months through September there

has been an increase of 1.6 million non-farm jobs. The unemployment rate was 9.1% in September 2011,

compared with 9.2% in June 2011, based on data from the U.S. Bureau of Labor Statistics. Employment will

likely need to post sustained improvement for an extended period to have a positive impact on housing. We

estimate the likelihood of a recession by the end of next year at close to 50%.

Existing home sales remained weak during the third quarter of 2011, averaging slightly below second quarter

levels. Sales of foreclosed homes and short sales (“distressed sales”) continued to represent an outsized portion

of the market. Distressed sales accounted for 30% of existing home sales in September 2011, down from 35%

in September 2010, according to the National Association of REALTORS». New home sales during the third

quarter of 2011 were also below second quarter levels, remaining at historically low levels.

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

2009 but has remained historically high at 7.9% as of June 30, 2011, according to the Mortgage Bankers

Association National Delinquency Survey. While the supply of new single-family homes as measured by the

inventory/sales ratio declined to its long-term average level in September, the inventory/sales ratio for existing

single-family homes remained above average. Properties that are vacant and held off the market, combined

with the portion of properties backing seriously delinquent mortgages not currently listed for sale, represent a

significant shadow inventory putting downward pressure on home prices.

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We estimate that home prices on a national basis decreased by 0.2% in the third quarter of 2011 and have

declined by 21.0% from their peak in the third quarter of 2006. We recently enhanced our method for

estimating home price changes to exclude a greater portion of foreclosed home sales, as we discuss below in

“Outlook.” If these enhancements had been in place last quarter, instead of reporting a 21.6% decline in home

prices through the second quarter of 2011 from their peak, we would have reported a 20.9% decline. Our

home price estimates are based on preliminary data and are subject to change as additional data become

available. The decline in home prices has left many homeowners with “negative equity” in their mortgages,

which means their principal mortgage balance exceeds the current market value of their home. According to

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

equity position in the second quarter of 2011. This increases the risk that borrowers might walk away from

their mortgage obligations, causing the loans to become delinquent and proceed to foreclosure.

During the third quarter of 2011, national multifamily market fundamentals, which include factors such as

effective rents and vacancy rates, continued to improve, benefiting from rental demand. Based on preliminary

third-party data, we estimate that the national multifamily vacancy rate fell to 6.50% in the third quarter of

2011, after having fallen to 6.75% in the second quarter of 2011. In addition, we estimate that average asking

rents increased for the sixth quarter in a row, climbing by 1.0% in the third quarter of 2011 on a national

basis. As indicated by data from Axiometrics, Inc., multifamily concession rates, the rental discount rate as a

percentage of asking rents, declined to about -3.0% as of September 2011. The increase in overall rental

demand was also reflected in an estimated increase of 36,000 units in the net number of occupied rental units

during the third quarter of 2011, according to preliminary data from Reis, Inc. Although national multifamily

market fundamentals continued to improve, certain local markets and properties continued to underperform

compared to the rest of the country due to localized underlying economic conditions.

Outlook

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

fourth quarter of 2011. The high level of delinquent mortgage loans will ultimately result in high levels of

foreclosures, which is likely to add to the excess housing inventory. Home sales are unlikely to rise before the

unemployment rate improves further.

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

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

multifamily charge-offs in 2011 to remain generally commensurate with 2010 levels as certain local markets

and properties continue to exhibit weak fundamentals. Conditions may worsen if the unemployment rate

increases on either a national or regional basis.

Although we expect the recently announced changes to HARP will result in our acquiring more refinancings

in 2012 than we would have acquired in the absence of the changes, we expect fewer refinancings overall in

each of 2011 and 2012 than in 2010 as a result of the high number of mortgages that have already refinanced

to low rates in recent years. As a result, we expect the pace of our loan acquisitions for each of 2011 and for

2012 will be lower than in 2010. Our loan acquisitions also could be negatively affected by the decrease in the

fourth quarter of 2011 in the maximum size of loans we may acquire in specified high-cost areas from

$729,750 to $625,500. In addition, if the Federal Housing Administration (“FHA”) continues to be the lowercost option for some consumers, and in some cases the only option, for loans with higher LTV ratios, our

market share could be adversely impacted. As our acquisitions decline, our future revenues will be negatively

impacted.

We estimate that total originations in the U.S. single-family mortgage market in 2011 will decrease from 2010

levels by approximately 23%, from an estimated $1.7 trillion to an estimated $1.3 trillion, and that the amount

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

approximately $1.1 trillion to approximately $905 billion. Refinancings comprised approximately 74% of our

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

Home Price Declines. While the rate of decline in home prices has moderated in recent quarters, we

continue to expect that home prices on a national basis will decline further before stabilizing in 2012. We

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currently expect a peak-to-trough home price decline on a national basis ranging from 22% to 28%, and that it

would take the occurrence of an additional adverse economic event to reach the high end of the range. Future

home price changes may be very different from our estimates as a result of significant inherent uncertainty in

the current market environment, including uncertainty about the effect of actions the federal government has

taken and may take with respect to housing finance reform; the management of the Federal Reserve’s MBS

holdings; and the impact of those actions on home prices, unemployment and the general economic and

interest rate environment. Because of these uncertainties, the actual home price decline we experience may

differ significantly from these estimates. We also expect significant regional variation in home price declines

and stabilization.

Our estimates of home price declines are based on our home price index, which is calculated differently from

the S&P/Case-Shiller U.S. National Home Price Index and therefore results in different percentages for

comparable declines. Our 22% to 28% peak-to-trough home price decline estimate corresponds to an

approximate 32% to 40% peak-to-trough decline using the S&P/Case-Shiller index method. Our estimates

differ from the S&P/Case-Shiller index in two principal ways: (1) our estimates weight expectations by

number of properties, whereas the S&P/Case-Shiller index weights expectations based on property value,

causing home price declines on higher priced homes to have a greater effect on the overall result; and (2) the

S&P/Case-Shiller index includes sales of foreclosed homes while our estimates attempt to exclude foreclosed

home sales, because we believe that differing maintenance practices and the forced nature of the sales make

foreclosed home prices less representative of market values. We believe, however, that the impact of sales of

foreclosed homes is indirectly reflected in our estimates as a result of their impact on the pricing of nondistressed sales. We recently enhanced our home price estimates to identify and exclude a greater portion of

foreclosed home sales. As a result, some period to period comparisons of home prices differ from those

indicated by our prior estimates. We calculate the S&P/Case-Shiller comparison numbers by modifying our

internal home price estimates to account for weighting based on property value and the impact of foreclosed

property sales. In addition to these differences, our estimates are based on our own internally available data

combined with publicly available data, and are therefore based on data collected nationwide, whereas the

S&P/Case-Shiller index is based on publicly available data, which may be limited in certain geographic areas

of the country. Our comparative calculations to the S&P/Case-Shiller index provided above are not modified to

account for this data pool difference.

Credit-Related Expenses and Credit Losses. Our credit-related expenses, which include our provision for

credit losses, reflect our recognition of losses on our loans. Through our provision for credit losses, we

recognize credit-related expenses on loans in the period in which we determine that we have incurred a

probable loss on the loans as of the end of the period, or in which we have granted concessions to the

borrowers. Accordingly, our credit-related expenses are affected by changes in home prices, borrower payment

behavior, the types and volumes of loss mitigation activities we complete, and estimated recoveries from our

lender and mortgage insurer counterparties. Our credit losses, which include our charge-offs, net of recoveries,

reflect our realization of losses on our loans. We realize losses on loans, through our charge-offs, when

foreclosure sales are completed or when we accept short sales or deeds in lieu of foreclosure. We expect our

credit losses in 2011 to be lower than in 2010, as delays in foreclosures keep us from realizing credit losses

until later periods. We describe our credit loss outlook above under “Our Strong New Book of Business and

Expected Losses on our Legacy Book of Business—Expected Losses on Our Legacy Book of Business.”

Uncertainty Regarding our Long-Term Financial Sustainability and Future Status. There is significant

uncertainty in the current market environment, and any changes in the trends in macroeconomic factors that

we currently anticipate, such as home prices and unemployment, may cause our future credit-related expenses

and credit losses to vary significantly from our current expectations. Although Treasury’s funds under the

senior preferred stock purchase agreement permit us to remain solvent and avoid receivership, the resulting

dividend payments are substantial. We do not expect to earn profits in excess of our annual dividend

obligation to Treasury for the indefinite future. We expect to request additional draws under the senior

preferred stock purchase agreement in future periods, which will further increase the dividends we owe to

Treasury on the senior preferred stock. We expect that, over time, our dividend obligation to Treasury will

18
constitute an increasing portion of our future draws under the senior preferred stock purchase agreement. As a

result of these factors, there is significant uncertainty about our long-term financial sustainability.

In addition, there is significant uncertainty regarding the future of our company, including how long we will

continue to be in existence, the extent of our role in the market, what form we will have, and what ownership

interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is

terminated. We expect this uncertainty to continue. On February 11, 2011 Treasury and the Department of

Housing and Urban Development (“HUD”) released a report to Congress on reforming America’s housing

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

responsibly wind down both Fannie Mae and Freddie Mac. The report emphasizes the importance of providing

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

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

GSEs. See “Legislative and Regulatory Developments” in this report and “Legislation and GSE Reform” in

our 2010 Form 10-K for discussions of recent legislative reform of the financial services industry and

proposals for GSE reform that could affect our business. See “Risk Factors” in this report for a discussion of

the risks to our business relating to the uncertain future of our company.

LEGISLATIVE AND REGULATORY DEVELOPMENTS

GSE Reform

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

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

Fannie Mae and Freddie Mac and reforming the housing finance market. The report provides that the

Administration will work with FHFA to determine the best way to responsibly reduce Fannie Mae’s and

Freddie Mac’s role in the market and ultimately wind down both institutions.

The report identifies a number of policy steps that could be used to wind down Fannie Mae and Freddie Mac,

reduce the government’s role in housing finance and help bring private capital back to the mortgage market.

These steps include (1) increasing guaranty fees, (2) gradually increasing the level of required down payments

so that any mortgages insured by Fannie Mae or Freddie Mac eventually have at least a 10% down payment,

(3) reducing conforming loan limits to those established in the Federal Housing Finance Regulatory Reform

Act of 2008 (the “2008 Reform Act”), (4) encouraging Fannie Mae and Freddie Mac to pursue additional

credit loss protection and (5) reducing Fannie Mae’s and Freddie Mac’s portfolios, consistent with Treasury’s

senior preferred stock purchase agreements with the companies.

In addition, the report outlines three potential options for a new long-term structure for the housing finance

system following the wind-down of Fannie Mae and Freddie Mac. The first option would privatize housing

finance almost entirely. The second option would add a government guaranty mechanism that could scale up

during times of crisis. The third option would involve the government offering catastrophic reinsurance behind

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

FHA, the Department of Agriculture and the Veterans Administration to assist targeted groups of borrowers.

The report does not state whether or how the existing infrastructure or human capital of Fannie Mae may be

used in the establishment of such a reformed system. The report emphasizes the importance of proceeding

with a careful transition plan and providing the necessary financial support to Fannie Mae and Freddie Mac

during the transition period. A copy of the report can be found on the Housing Finance Reform section of

Treasury’s Web site, www.Treasury.gov. We are providing Treasury’s Web site address solely for your

information, and information appearing on Treasury’s Web site is not incorporated into this quarterly report on

Form 10-Q.

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

in 2012 on the future status of Fannie Mae and Freddie Mac. Several bills have been introduced that would

place the GSEs into receivership after a period of time and either grant federal charters to new entities to

engage in activities similar to those currently engaged in by the GSEs or leave secondary mortgage market

activities to entities in the private sector. For example, legislation has been introduced in both the House of

19
Representatives and the Senate that would require FHFA to make a determination within two years of

enactment whether the GSEs were financially viable and, if the GSEs were determined not to be financially

viable, to place them into receivership. As drafted, these bills may upon enactment impair our ability to issue

securities in the capital markets and therefore our ability to conduct our business, absent the federal

government providing an explicit guarantee of our existing and ongoing liabilities.

In addition to bills that seek to resolve the status of the GSEs, numerous bills have been introduced and

considered in the House of Representatives that could constrain the current operations of the GSEs or alter the

existing authority that FHFA or Treasury have over the enterprises. The Subcommittee on Capital Markets and

Government Sponsored Enterprises of the Financial Services Committee has approved bills that would:

• suspend current compensation packages and apply a government pay scale for GSE employees;

• require the GSEs to increase guaranty fees;

• subject GSE loans to the risk retention standards in the Dodd-Frank Act;

• require a quicker reduction of GSE portfolios than required under the senior preferred stock purchase

agreement;

• require Treasury to pre-approve all GSE debt issuances;

• repeal the GSEs’ affordable housing goals;

• provide additional authority to FHFA’s Inspector General;

• prohibit FHFA from approving any new GSE products during conservatorship or receivership, with certain

exceptions;

• prevent Treasury from amending the senior preferred stock purchase agreement to reduce the current

dividend rate on our senior preferred stock;

• abolish the Affordable Housing Trust Fund that the GSEs are required to fund except when such

contributions have been temporarily suspended by FHFA;

• require FHFA to identify mission critical assets of the GSEs and require the GSEs to dispose of nonmission critical assets;

• cap the maximum aggregate amount of funds Treasury or any other agency or entity of the federal

government can provide to the GSEs subject to certain qualifications;

• grant FHFA the authority to revoke the enterprises’ charters following receivership under certain

circumstances; and

• subject the GSEs to the Freedom of Information Act.

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

remainder of 2011 and in 2012. We cannot predict the prospects for the enactment, timing or content of

legislative proposals regarding the future status of the GSEs.

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

continue to be in existence, the extent of our role in the market, what form we will have, and what ownership

interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is

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

our company. Also see “Risk Factors” in our 2010 Form 10-K for a discussion of how the uncertain future of

our company may adversely affect our ability to retain and recruit well-qualified employees, including senior

management.

Changes to the Home Affordable Refinance Program

On October 24, 2011, FHFA, Fannie Mae, and Freddie Mac announced changes to HARP aimed at making

refinancing under the program easier and potentially less expensive for qualifying homeowners and

20
encouraging lenders to participate in the program. While HARP previously limited eligibility to borrowers

with mortgage loans that had LTV ratios no greater than 125%, the new HARP guidelines remove that ceiling

when a borrower refinances into a new fixed-rate mortgage. Other changes to HARP include:

• eliminating certain risk-based fees for borrowers who refinance into shorter-term loans and lowering fees

for other borrowers;

• eliminating the need for a new property appraisal in many cases;

• extending the ending date for HARP from June 2012 to December 2013; and

• reducing the extent to which lenders will be liable for violations of representations and warranties in

connection with refinancings under HARP.

We are working with FHFA to finalize the fees that we will charge for loans refinanced under HARP’s new

terms. We expect these fees to be announced in the fourth quarter of 2011. At this time, we do not know how

many eligible borrowers are likely to refinance under the program and, therefore, how many HARP loans we

will acquire.

We may incur additional credit-related expenses as a result of these changes to HARP. However, we believe

the expanded refinance opportunities for borrowers under HARP may help prevent future delinquencies and

defaults, because loans refinanced under the program reduce the borrowers’ monthly payments or otherwise

should provide more sustainability than the borrowers’ old loans (for example, by having a fixed rate instead

of an adjustable rate). The extent to which these factors will impact our results of operations will depend on a

number of factors, including the terms, credit profile and volume of our acquisitions under the revised

program. See “Risk Factors” for a discussion of how efforts we may undertake in support of the housing

market may affect us.

Discontinuation of Our Retained Attorney Network

On October 18, 2011, FHFA directed us to phase out the practice of requiring mortgage servicers to use our

network of retained attorneys to perform default- and foreclosure-related legal services for our loans. FHFA

also directed us to work with Freddie Mac, through FHFA’s Servicing Alignment Initiative, to develop and

implement consistent requirements, policies and processes for default- and foreclosure-related legal services.

As set forth in FHFA’s directive, we will conduct these activities over a transitional period and will seek to

minimize disruption to pending matters. During the transitional period, servicers will continue to be directly

responsible for managing the foreclosure process and monitoring network firm performance, in accordance

with our current requirements and contractual arrangements. Phasing out the use of our retained attorney

network may make it more difficult for us to oversee the performance of default- and foreclosure-related legal

services for our loans, which may adversely impact our efforts to reduce our credit losses.

Proposed Changes to Our Single-Family Guaranty Fee Pricing

Consistent with the recommendation in the Administration’s report on ending the conservatorships of Fannie

Mae and Freddie Mac, we expect that single-family guaranty fees will increase in the coming years, although

we do not know the timing, form or extent of these increases. There have been recent public discussions of

potential fee increases by the Administration, members of Congress, and FHFA. On September 23, 2011, the

Administration submitted a legislative proposal to the Joint Select Committee on Deficit Reduction which

would, among other matters, mandate FHFA to require Fannie Mae and Freddie Mac to impose an additional

fee, the Conservatorship Recoupment Guarantee Fee, on all single-family mortgages guaranteed on or after

January 1, 2013. The proposal requires that the new fee be not less than 10 basis points. The proposal also

provides discretion for FHFA to mandate the imposition of a delivery fee in lieu of a guaranty fee increase.

Certain members of Congress have also recommended that the Joint Select Committee on Deficit Reduction

mandate that FHFA require the GSEs to increase their guaranty fees. In addition, FHFA’s Acting Director

expressed in a public speech in September 2011 that he expects guaranty fees to increase beginning in 2012.

21
Servicing Compensation Initiative

In September 2011, FHFA issued a discussion paper to propose and seek comments on two new possible

mortgage servicing compensation structures in connection with its joint initiative on servicing compensation

announced earlier this year. The joint initiative, which FHFA directed Fannie Mae and Freddie Mac to work

on in coordination with FHFA and HUD, was established to consider alternatives for future mortgage servicing

structures and servicing compensation for single-family mortgage loans. One possible structure presented in

the discussion paper, which FHFA described as representing a modest change to the current model, provides

for a reduced minimum servicing fee accompanied by a reserve account. The reserve account would be

available to offset unexpectedly high servicing costs resulting from extraordinary deteriorations in industry

conditions. The second possible structure, which FHFA characterized as a fundamental change to the current

model, introduces a fee for service structure that provides for a base servicing fee for performing loans and

incentive compensation and compensatory fees for servicing non-performing loans, with the possibility of

avoiding capitalization of mortgage servicing rights. We provide additional information on FHFA’s initiative

on servicing compensation in “Business—Business Segments—Single-Family Business—Single-Family

Mortgage Servicing” in our 2010 Form 10-K.

For additional information on legislative and regulatory matters affecting us, refer to “Business—Legislation

and GSE Reform” and “Business—Our Charter and Regulation of Our Activities” in our 2010 Form 10-K,

“MD&A—Legislative and Regulatory Developments—Proposed Rules Implementing the Dodd-Frank Act” in

our quarterly report for the quarter ended March 31, 2011 (“First Quarter 2011 Form 10-Q”), and “MD&A—

Legislative and Regulatory Developments” in our quarterly report for the quarter ended June 30, 2011

(“Second Quarter 2011 Form 10-Q”).

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

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

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

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

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

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

Board of Directors. We have identified three of our accounting policies as critical because they involve

significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of

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

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

• Fair Value Measurement

• Total Loss Reserves

• Other-Than-Temporary Impairment of Investment Securities

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

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

liabilities as of September 30, 2011 as compared with December 31, 2010. We also describe any significant

changes in the judgments and assumptions we made during the first nine months of 2011 in applying our

critical accounting policies and significant changes to critical estimates.

Fair Value Measurement

The use of fair value to measure our assets and liabilities is fundamental to our financial statements and is a

critical accounting estimate because we account for and record a portion of our assets and liabilities at fair

22
value. In determining fair value, we use various valuation techniques. We describe the valuation techniques

and inputs used to determine the fair value of our assets and liabilities and disclose their carrying value and

fair value in “Note 13, Fair Value.”

Fair Value Hierarchy—Level 3 Assets and Liabilities

The assets and liabilities that we have classified as Level 3 consist primarily of financial instruments for

which there is limited market activity and therefore little or no price transparency. As a result, the valuation

techniques that we use to estimate the fair value of Level 3 instruments involve significant unobservable

inputs, which generally are more subjective and involve a high degree of management judgment and

assumptions. Our Level 3 assets and liabilities consist of certain mortgage- and asset-backed securities and

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

certain highly structured, complex derivative instruments.

Table 6 presents a comparison of the amount of financial assets carried in our condensed consolidated balance

sheets at fair value on a recurring basis (“recurring assets”) that were classified as Level 3 as of September 30,

2011 and December 31, 2010. The availability of observable market inputs to measure fair value varies based

on changes in market conditions, such as liquidity. As a result, we expect the amount of financial instruments

carried at fair value on a recurring basis and classified as Level 3 to vary each period.

Table 6: Level 3 Recurring Financial Assets at Fair Value

September 30,

2011

December 31,

2010

As of

(Dollars in millions)

Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,145 $ 4,576

Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,519 31,934

Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,284 2,207

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 247

Level 3 recurring assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,175 $ 38,964

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,213,877 $3,221,972

Total recurring assets measured at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 161,093 $ 161,696

Level 3 recurring assets as a percentage of total assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1% 1%

Level 3 recurring assets as a percentage of total recurring assets measured at fair value . . . 22% 24%

Total recurring assets measured at fair value as a percentage of total assets. . . . . . . . . . . . 5% 5%

Assets measured at fair value on a nonrecurring basis and classified as Level 3, which are not presented in the

table above, primarily include mortgage loans and acquired property. The fair value of Level 3 nonrecurring

assets totaled $62.2 billion during the nine months ended September 30, 2011 and $63.0 billion during the

year ended December 31, 2010.

Financial liabilities measured at fair value on a recurring basis and classified as Level 3 consisted of long-term

debt with a fair value of $1.1 billion as of September 30, 2011 and $1.0 billion as of December 31, 2010, and

other liabilities with a fair value of $173 million as of September 30, 2011 and $143 million as of

December 31, 2010.

Total Loss Reserves

Our total loss reserves consist of the following components:

• Allowance for loan losses;

• Allowance for accrued interest receivable;

• Reserve for guaranty losses; and

• Allowance for preforeclosure property tax and insurance receivable.

23
These components can be further divided into single-family portions, which collectively make up our singlefamily loss reserves, and multifamily portions, which collectively make up our multifamily loss reserves.

In the third quarter of 2011, we updated our allowance for loan loss models for individually impaired loans to

incorporate more home price data at the regional level rather than at the national level. We believe this

approach is a better estimation of possible home price paths and related default expectations; it has resulted in

a decrease to our allowance for loan losses and a reduction of credit-related expenses of approximately

$800 million.

In the second quarter of 2011, we updated our loan loss models to incorporate more recent data on

prepayments of modified loans, which resulted in an increase to our allowance for loan losses and an increase

to credit-related expenses of approximately $1.5 billion. The change resulted in slower expected prepayment

speeds, which extended the expected lives of modified loans and lowered the present value of cash flows on

those loans. Also in the second quarter of 2011, we updated our estimate of the reserve for guaranty losses

related to private-label mortgage-related securities that we have guaranteed to increase our focus on earlier

stage delinquency, rather than foreclosure trends, as the primary driver in estimating incurred losses. We

believe delinquencies are a better indicator of incurred losses compared to foreclosure trends because the

recent delays in the foreclosure process have interrupted the normal flow of delinquent mortgages into

foreclosure. This update resulted in an increase to our reserve for guaranty losses included within “Other

liabilities” and an increase to credit related-expenses of approximately $700 million.

CONSOLIDATED RESULTS OF OPERATIONS

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

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

accompanying notes.

Table 7 summarizes our condensed consolidated results of operations for the periods indicated.

Table 7: Summary of Condensed Consolidated Results of Operations

2011 2010 Variance 2011 2010 Variance

For the Three Months Ended

September 30,

For the Nine Months Ended

September 30,

(Dollars in millions)

Net interest income. . . . . . . . . . . . . . . . . . . . . $ 5,186 $ 4,776 $ 410 $ 15,118 $ 11,772 $ 3,346

Fee and other income . . . . . . . . . . . . . . . . . . . 291 304 (13) 793 831 (38)

Net revenues......................... $ 5,477 $ 5,080 $ 397 $ 15,911 $ 12,603 $ 3,308

Investment gains, net . . . . . . . . . . . . . . . . . . . 73 82 (9) 319 271 48

Net other-than-temporary impairments . . . . . . . (262) (326) 64 (362) (699) 337

Fair value (losses) gains, net . . . . . . . . . . . . . . (4,525) 525 (5,050) (5,870) (877) (4,993)

Administrative expenses . . . . . . . . . . . . . . . . . (591) (730) 139 (1,765) (2,005) 240

Credit-related expenses(1) . . . . . . . . . . . . . . . . (4,884) (5,561) 677 (21,985) (22,296) 311

Other non-interest expenses(2) . . . . . . . . . . . . . (373) (410) 37 (787) (1,147) 360

Loss before federal income taxes . . . . . . . . . . . (5,085) (1,340) (3,745) (14,539) (14,150) (389)

Benefit for federal income taxes . . . . . . . . . . . . — 9 (9) 91 67 24

Net loss ............................ (5,085) (1,331) (3,754) (14,448) (14,083) (365)

Less: Net income attributable to the

noncontrolling interest . . . . . . . . . . . . . . . . . — (8) 8 (1) (4) 3

Net loss attributable to Fannie Mae ........ $(5,085) $(1,339) $(3,746) $(14,449) $(14,087) $ (362)

Total comprehensive loss attributable to Fannie

Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(5,282) $ (437) $(4,845) $(14,463) $(10,143) $(4,320)

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

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

24
Net Interest Income

Table 8 presents an analysis of our net interest income, average balances, and related yields earned on assets

and incurred on liabilities for the periods indicated. For most components of the average balances, we used a

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

for mortgage loans, we used monthly averages. Table 9 presents the change in our net interest income between

periods and the extent to which that variance is attributable to: (1) changes in the volume of our interestearning assets and interest-bearing liabilities or (2) changes in the interest rates of these assets and liabilities.

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

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

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

Table 8: Analysis of Net Interest Income and Yield

Average

Balance

Interest

Income/

Expense

Average

Rates

Earned/Paid

Average

Balance

Interest

Income/

Expense

Average

Rates

Earned/Paid

2011 2010

For the Three Months Ended September 30,

(Dollars in millions)

Interest-earning assets:

Mortgage loans of Fannie Mae(1) ........... $ 386,067 $ 3,701 3.83% $ 408,523 $ 3,859 3.78%

Mortgage loans of consolidated trusts(1) ....... 2,598,264 30,633 4.72 2,565,431 32,807 5.12

Total mortgage loans.................. 2,984,331 34,334 4.60 2,973,954 36,666 4.93

Mortgage-related securities . .............. 312,482 3,930 5.03 368,886 4,681 5.08

Elimination of Fannie Mae MBS held in

portfolio . . ........................ (199,691) (2,520) 5.05 (236,355) (3,120) 5.28

Total mortgage-related securities, net . . . .... 112,791 1,410 5.00 132,531 1,561 4.71

Non-mortgage securities(2) ................ 72,333 24 0.13 102,103 62 0.24

Federal funds sold and securities purchased under

agreements to resell or similar arrangements . . 27,217 7 0.10 14,193 10 0.28

Advances to lenders . ................... 3,417 19 2.18 3,643 21 2.26

Total interest-earning assets . . .............. $3,200,089 $35,794 4.47% $3,226,424 $38,320 4.75%

Interest-bearing liabilities:

Short-term debt(3) ..................... $ 181,495 $ 63 0.14% $ 244,823 $ 190 0.30%

Long-term debt ....................... 552,191 3,385 2.45 578,775 4,472 3.09

Total short-term and long-term funding debt . . 733,686 3,448 1.88 823,598 4,662 2.26

Debt securities of consolidated trusts ......... 2,650,256 29,680 4.48 2,624,253 32,002 4.88

Elimination of Fannie Mae MBS held in

portfolio . . ........................ (199,691) (2,520) 5.05 (236,355) (3,120) 5.28

Total debt securities of consolidated trusts held

by third parties . ................... 2,450,565 27,160 4.43 2,387,898 28,882 4.84

Total interest-bearing liabilities .............. $3,184,251 $30,608 3.84% $3,211,496 $33,544 4.18%

Impact of net non-interest bearing funding . . . .... $ 15,838 0.02% $ 14,928 0.02%

Net interest income/net interest yield . ......... $ 5,186 0.65% $ 4,776 0.59%

Net interest income/net interest yield of

consolidated trusts(4) . . . . . . . . . . . . . . . . . . . $ 953 0.15% $ 805 0.13%

25
Average

Balance

Interest

Income/

Expense

Average

Rates

Earned/Paid

Average

Balance

Interest

Income/

Expense

Average

Rates

Earned/Paid

2011 2010

For the Nine Months Ended September 30,

(Dollars in millions)

Interest-earning assets:

Mortgage loans of Fannie Mae(1) ........... $ 395,686 $ 11,146 3.76% $ 348,835 $ 11,107 4.25%

Mortgage loans of consolidated trusts(1) ...... 2,601,710 94,111 4.82 2,634,064 100,810 5.10

Total mortgage loans . . ............... 2,997,396 105,257 4.68 2,982,899 111,917 5.00

Mortgage-related securities............... 321,979 12,204 5.05 399,890 15,271 5.09

Elimination of Fannie Mae MBS held in

portfolio ......................... (206,176) (7,956) 5.15 (259,740) (10,306) 5.29

Total mortgage-related securities, net. . ..... 115,803 4,248 4.89 140,150 4,965 4.72

Non-mortgage securities(2) ............... 76,266 99 0.17 93,548 165 0.23

Federal funds sold and securities purchased

under agreements to resell or similar

arrangements . . .................... 20,980 20 0.13 33,849 54 0.21

Advances to lenders ................... 3,548 59 2.19 2,947 57 2.55

Total interest-earning assets . ............... $3,213,993 $109,683 4.55% $3,253,393 $117,158 4.80%

Interest-bearing liabilities:

Short-term debt(3) ..................... $ 160,961 $ 246 0.20% $ 221,665 $ 470 0.28%

Long-term debt . . .................... 591,126 11,383 2.57 574,280 14,528 3.37

Total short-term and long-term funding debt . . 752,087 11,629 2.06 795,945 14,998 2.51

Debt securities of consolidated trusts . . . ..... 2,652,057 90,892 4.57 2,694,986 100,694 4.98

Elimination of Fannie Mae MBS held in

portfolio ......................... (206,176) (7,956) 5.15 (259,740) (10,306) 5.29

Total debt securities of consolidated trusts

held by third parties . ............... 2,445,881 82,936 4.52 2,435,246 90,388 4.95

Total interest-bearing liabilities.............. $3,197,968 $ 94,565 3.94% $3,231,191 $105,386 4.35%

Impact of net non-interest bearing funding . ..... $ 16,025 0.02% $ 22,202 0.03%

Net interest income/net interest yield .......... $ 15,118 0.63% $ 11,772 0.48%

Net interest income/net interest yield of

consolidated trusts(4) ................... $ 3,219 0.16% $ 116 0.01%

Selected benchmark interest rates(5) 2011 2010

As of September 30,

3-month LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.37% 0.30%

2-year swap interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.58 0.60

5-year swap interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.26 1.51

30-year Fannie Mae MBS par coupon rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.96 3.39

(1) Interest income includes interest income on acquired credit-impaired loans of $545 million and $466 million for the

three months ended September 30, 2011 and 2010, respectively, and $1.5 billion and $1.6 billion for the nine months

ended September 30, 2011 and 2010, respectively. These amounts include accretion income of $288 million and

$231 million for the three months ended September 30, 2011 and 2010, respectively, and $769 million and

$785 million for the nine months ended September 30, 2011 and 2010, respectively, relating to a portion of the fair

value losses recorded upon the acquisition of the loans. Average balance includes loans on nonaccrual status, for which

interest income is recognized when collected.

(2) Includes cash equivalents.

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

26
(4) Net interest income of consolidated trusts represents interest income from mortgage loans of consolidated trusts less

interest expense from debt securities of consolidated trusts. Net interest yield is calculated based on net interest

income from consolidated trusts divided by average balance of mortgage loans of consolidated trusts.

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

Table 9: Rate/Volume Analysis of Changes in Net Interest Income

Total

Variance Volume Rate

Total

Variance Volume Rate

Variance Due to:(1) Variance Due to:(1)

For the Three Months Ended

September 30, 2011 vs. 2010

For the Nine Months Ended

September 30, 2011 vs. 2010

(Dollars in millions)

Interest income:

Mortgage loans of Fannie Mae . . . . . . . . . . . . . . . $ (158) $(215) $ 57 $ 39 $ 1,399 $ (1,360)

Mortgage loans of consolidated trusts. . . . . . . . . . . (2,174) 415 (2,589) (6,699) (1,226) (5,473)

Total mortgage loans . . . . . . . . . . . . . . . . . . . . (2,332) 200 (2,532) (6,660) 173 (6,833)

Mortgage-related securities . . . . . . . . . . . . . . . . . . (751) (710) (41) (3,067) (2,954) (113)

Elimination of Fannie Mae MBS held in portfolio . . 600 467 133 2,350 2,074 276

Total mortgage-related securities, net . . . . . . . . . (151) (243) 92 (717) (880) 163

Non-mortgage securities(2) . . . . . . . . . . . . . . . . . . (38) (15) (23) (66) (27) (39)

Federal funds sold and securities purchased under

agreements to resell or similar arrangements . . . . (3) 6 (9) (34) (17) (17)

Advances to lenders . . . . . . . . . . . . . . . . . . . . . . . (2) (1) (1) 2 11 (9)

Total interest income . . . . . . . . . . . . . . . . . . . . . . . . (2,526) (53) (2,473) (7,475) (740) (6,735)

Interest expense:

Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . (127) (40) (87) (224) (111) (113)

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . (1,087) (198) (889) (3,145) 415 (3,560)

Total short-term and long-term funding debt . . . . (1,214) (238) (976) (3,369) 304 (3,673)

Debt securities of consolidated trusts . . . . . . . . . . . (2,322) 314 (2,636) (9,802) (1,583) (8,219)

Elimination of Fannie Mae MBS held in portfolio . . 600 467 133 2,350 2,074 276

Total debt securities of consolidated trusts held

by third parties . . . . . . . . . . . . . . . . . . . . . . . (1,722) 781 (2,503) (7,452) 491 (7,943)

Total interest expense . . . . . . . . . . . . . . . . . . . . . . . (2,936) 543 (3,479) (10,821) 795 (11,616)

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . $ 410 $(596) $ 1,006 $ 3,346 $(1,535) $ 4,881

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

(2) Includes cash equivalents.

Net interest income increased in the third quarter and first nine months of 2011, as compared with the third

quarter and first nine months of 2010, due to lower interest expense on debt, which was partially offset by

lower interest income on loans and securities. The primary drivers of these changes were:

• a reduction in the interest expense of debt of consolidated trusts driven by a decrease in rates. The rate on

debt of consolidated trusts is generally driven by mortgage rates of loans securitized in the MBS, and

these mortgage rates declined in 2011.

• lower interest expense on funding debt due to lower borrowing rates which allowed us to continue to

replace higher-cost debt with lower-cost debt;

• lower interest income on mortgage securities due to a decrease in the balance of our mortgage securities,

as we continue to manage our portfolio requirements; and

27
• lower yields on mortgage loans as new business acquisitions continue to replace higher-yielding loans

with loans issued at lower mortgage rates. The reduction in interest income on loans due to lower yields

was partially offset by a reduction in the amount of interest income not recognized for nonaccrual

mortgage loans, due to a decline in the balance of nonaccrual loans in our condensed consolidated

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

Additionally, our net interest income and net interest yield were higher than they would have otherwise been

in both the third quarter and first nine months of 2011 and 2010 because our debt funding needs were lower

than would otherwise have been required as a result of funds we received from Treasury under the senior

preferred stock purchase agreement. Further, dividends paid to Treasury are not recognized in interest expense.

Table 10 displays the interest income not recognized for loans on nonaccrual status and the resulting reduction

in our total yield from mortgage loans.

Table 10: Impact of Nonaccrual Loans on Net Interest Income

Interest

Income not

Recognized

for

Nonaccrual

Loans(1)

Reduction

in Net

Interest

Yield(2)

Interest

Income not

Recognized

for

Nonaccrual

Loans(1)

Reduction

in Net

Interest

Yield(2)

Interest

Income not

Recognized

for

Nonaccrual

Loans(1)

Reduction

in Net

Interest

Yield(2)

Interest

Income not

Recognized

for

Nonaccrual

Loans(1)

Reduction

in Net

Interest

Yield (2)

2011 2010 2011 2010

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(Dollars in millions)

Mortgage loans of Fannie Mae . . . . $(1,078) $(1,512) $(3,623) $(3,317)

Mortgage loans of consolidated

trusts . . ................. (212) (326) (690) (3,393)

Total mortgage loans........... $(1,290) (16)bp $(1,838) (23)bp $(4,313) (18)bp $(6,710) (28)bp

(1) Amount includes cash received for loans on nonaccrual status.

(2) Calculated based on annualized interest income not recognized divided by total interest-earning assets, expressed in

basis points.

For a discussion of the interest income from the assets we have purchased and the interest expense from the

debt we have issued, see the discussion of our Capital Markets group’s net interest income in “Business

Segment Results.”

28
Fair Value (Losses) Gains, Net

Table 11 presents the components of our fair value gains and losses.

Table 11: Fair Value (Losses) Gains, Net

2011 2010 2011 2010

For the Three Months

Ended September 30,

For the Nine Months

Ended September 30,

(Dollars in millions)

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

Net contractual interest expense accruals on interest rate swaps . . . . $ (497) $(673) $(1,790) $(2,264)

Net change in fair value during the period . . . . . . . . . . . . . . . . . . . (3,570) 732 (3,777) 342

Total risk management derivatives fair value (losses) gains, net . . (4,067) 59 (5,567) (1,922)

Mortgage commitment derivatives fair value losses, net . . . . . . . . . . . (188) (183) (226) (1,361)

Total derivatives fair value losses, net. . . . . . . . . . . . . . . . . . . . . . . . (4,255) (124) (5,793) (3,283)

Trading securities (losses) gains, net . . . . . . . . . . . . . . . . . . . . . . . . (214) 889 146 2,587

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56) (240) (223) (181)

Fair value (losses) gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,525) $ 525 $(5,870) $ (877)

2011 2010

5-year swap interest rate:

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

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

As of June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.03 2.06

As of September 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.26 1.51

Risk Management Derivatives Fair Value Gains (Losses), Net

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

prepayment risks. We recorded risk management derivative fair value losses in the third quarter and first nine

months of 2011 primarily as a result of a decrease in the fair value of our pay-fixed derivatives due to a

significant decline in swap interest rates during the period.

We recorded risk management derivative gains in the third quarter of 2010 primarily due to gains on our

foreign currency swaps, which were partially offset by time decay on our purchased options. Gains on our

foreign currency swaps generally offset the fair value losses on our foreign currency denominated debt.

We recorded risk management derivative losses in the first nine months of 2010 primarily as a result of:

(1) time decay on our purchased options; (2) a decrease in the fair value of our pay-fixed derivatives during

the first quarter of 2010 due to a decline in swap interest rates during that period; and (3) a decrease in

implied interest rate volatility, which reduced the fair value of our purchased options.

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

nine months ended September 30, 2011 and 2010 in “Note 9, Derivative Instruments.”

Mortgage Commitment Derivatives Fair Value Gains (Losses), Net

Commitments to purchase or sell some mortgage-related securities and to purchase single-family mortgage

loans are generally accounted for as derivatives. For open mortgage commitment derivatives, we include

changes in their fair value in our condensed consolidated statements of operations and comprehensive loss.

When derivative purchase commitments settle, we include the fair value of the commitment on the settlement

date in the cost basis of the loan or security we purchase. When derivative commitments to sell securities

settle, we include the fair value of the commitment on the settlement date in the cost basis of the security we

sell. Purchases of securities issued by our consolidated MBS trusts are treated as extinguishments of debt; we

29
recognize the fair value of the commitment on the settlement date as a component of debt extinguishment

gains and losses. Sales of securities issued by our consolidated MBS trusts are treated as issuances of

consolidated debt; we recognize the fair value of the commitment on the settlement date as a component of

debt in the cost basis of the debt issued.

We recognized losses on our mortgage commitments in the third quarter and first nine months of both 2011

and 2010 primarily due to losses on commitments to sell mortgage-related securities as a result of a decline in

interest rates during the commitment period.

Trading Securities Gains (Losses), Net

Losses from our trading securities in the third quarter of 2011 were primarily driven by the widening of credit

spreads on commercial mortgage-backed securities (“CMBS”). However, these credit spreads narrowed over

the first nine months of 2011, which primarily drove gains on trading securities for the nine-month period.

Gains from our trading securities in the third quarter and first nine months of 2010 were primarily driven by a

decrease in interest rates and narrowing of credit spreads on CMBS.

Credit-Related Expenses

We refer to our provision for loan losses and the provision for guaranty losses collectively as our “provision

for credit losses.” Credit-related expenses consist of our provision for credit losses and foreclosed property

expense.

Provision for Credit Losses

Our total loss reserves provide for an estimate of credit losses incurred in our guaranty book of business as of

each balance sheet date. We establish our loss reserves through the provision for credit losses for losses that

we believe have been incurred and will eventually be reflected over time in our charge-offs. When we

determine that a loan is uncollectible, typically upon foreclosure, we record a charge-off against our loss

reserves. We record recoveries of previously charged-off amounts as a reduction to charge-offs, which results

in an increase to our loss reserves.

Table 12 displays the components of our total loss reserves and our total fair value losses previously

recognized on loans purchased out of unconsolidated MBS trusts reflected in our condensed consolidated

balance sheets. Because these fair value losses lowered our recorded loan balances, we have fewer inherent

losses in our guaranty book of business and consequently require lower total loss reserves. For these reasons,

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

that we expect to realize credit losses on the acquired loans in the future. We estimate that approximately twothirds of this amount, as of September 30, 2011, represents credit losses we expect to realize in the future and

approximately one-third will eventually be recovered, either through net interest income for loans that cure or

through foreclosed property income for loans where the sale of the collateral exceeds our recorded investment

in the loan. We exclude these fair value losses from our credit loss calculation as described in “Credit Loss

Performance Metrics.”

30
Table 12: Total Loss Reserves

September 30, 2011 December 31, 2010

As of

(Dollars in millions)

Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $71,435 $61,556

Reserve for guaranty losses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 916 323

Combined loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,351 61,879

Allowance for accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,179 3,414

Allowance for preforeclosure property taxes and insurance receivable(2) . . . . . . . 1,111 958

Total loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,641 66,251

Fair value losses previously recognized on acquired credit impaired loans(3) . . . . 16,961 19,171

Total loss reserves and fair value losses previously recognized on acquired

credit-impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $92,602 $85,422

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

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

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

consolidated balance sheets.

We refer to our allowance for loan losses and reserve for guaranty losses collectively as our combined loss

reserves. We summarize the changes in our combined loss reserves in Table 13.

31
Table 13: Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)

Of

Fannie

Mae

Of

Consolidated

Trusts Total

Of

Fannie

Mae

Of

Consolidated

Trusts Total

2011 2010

For the Three Months Ended September 30,

(Dollars in millions)

Changes in combined loss reserves:

Allowance for loan losses:

Beginning balance . . . . . . . . . . . . . . . . . . $55,966 $13,540 $69,506 $42,844 $17,738 $60,582

Provision for loan losses . . . . . . . . . . . . (196) 4,355 4,159 2,144 2,552 4,696

Charge-offs(1)(5) . . . . . . . . . . . . . . . . . . (3,853) (260) (4,113) (5,946) (1,243) (7,189)

Recoveries . . . . . . . . . . . . . . . . . . . . . . 848 35 883 205 304 509

Transfers(2). . . . . . . . . . . . . . . . . . . . . . 1,770 (1,770) — 5,131 (5,131) —

Other(3) . . . . . . . . . . . . . . . . . . . . . . . . 863 137 1,000 895 247 1,142

Ending balance(4) . . . . . . . . . . . . . . . . . . . $55,398 $16,037 $71,435 $45,273 $14,467 $59,740

Reserve for guaranty losses:

Beginning balance . . . . . . . . . . . . . . . . . . $ 960 $ — $ 960 $ 246 $ — $ 246

Provision (benefit) for guaranty losses . . . (8) — (8) 78 — 78

Charge-offs . . . . . . . . . . . . . . . . . . . . . (38) — (38) (48) — (48)

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

Ending balance . . . . . . . . . . . . . . . . . . . . $ 916 $ — $ 916 $ 276 $ — $ 276

Combined loss reserves:

Beginning balance . . . . . . . . . . . . . . . . . . $56,926 $13,540 $70,466 $43,090 $17,738 $60,828

Total provision for credit losses . . . . . . . (204) 4,355 4,151 2,222 2,552 4,774

Charge-offs(1)(5) . . . . . . . . . . . . . . . . . . (3,891) (260) (4,151) (5,994) (1,243) (7,237)

Recoveries . . . . . . . . . . . . . . . . . . . . . . 850 35 885 205 304 509

Transfers(2). . . . . . . . . . . . . . . . . . . . . . 1,770 (1,770) — 5,131 (5,131) —

Other(3) . . . . . . . . . . . . . . . . . . . . . . . . 863 137 1,000 895 247 1,142

Ending balance(4) . . . . . . . . . . . . . . . . . . . $56,314 $16,037 $72,351 $45,549 $14,467 $60,016

32
Of

Fannie

Mae

Of

Consolidated

Trusts Total

Of

Fannie

Mae

Of

Consolidated

Trusts Total

2011 2010

For the Nine Months Ended September 30,

(Dollars in millions)

Changes in combined loss reserves:

Allowance for loan losses:

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

Adoption of new accounting

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

Provision for loan losses . . . . . . . . . . 10,003 10,545 20,548 11,008 9,922 20,930

Charge-offs(1)(5) . . . . . . . . . . . . . . . . (15,018) (1,466) (16,484) (12,097) (6,645) (18,742)

Recoveries. . . . . . . . . . . . . . . . . . . . 3,197 1,537 4,734 367 872 1,239

Transfers(2) . . . . . . . . . . . . . . . . . . . 7,739 (7,739) — 41,606 (41,606) —

Other(3) . . . . . . . . . . . . . . . . . . . . . . 947 134 1,081 (3,689) 6,501 2,812

Ending balance(4). . . . . . . . . . . . . . . . . $ 55,398 $16,037 $ 71,435 $ 45,273 $ 14,467 $ 59,740

Reserve for guaranty losses:

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

Adoption of new accounting

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

Provision for guaranty losses . . . . . . . 694 — 694 111 — 111

Charge-offs . . . . . . . . . . . . . . . . . . . (106) — (106) (165) — (165)

Recoveries. . . . . . . . . . . . . . . . . . . . 5 — 5 3 — 3

Ending balance . . . . . . . . . . . . . . . . . . $ 916 $ — $ 916 $ 276 $ — $ 276

Combined loss reserves:

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

Adoption of new accounting

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

Total provision for credit losses . . . . . 10,697 10,545 21,242 11,119 9,922 21,041

Charge-offs(1)(5) . . . . . . . . . . . . . . . . (15,124) (1,466) (16,590) (12,262) (6,645) (18,907)

Recoveries. . . . . . . . . . . . . . . . . . . . 3,202 1,537 4,739 370 872 1,242

Transfers(2) . . . . . . . . . . . . . . . . . . . 7,739 (7,739) — 41,606 (41,606) —

Other(3) . . . . . . . . . . . . . . . . . . . . . . 947 134 1,081 (3,689) 6,501 2,812

Ending balance(4). . . . . . . . . . . . . . . . . $ 56,314 $16,037 $ 72,351 $ 45,549 $ 14,467 $ 60,016

33
September 30,

2011

December 31,

2010

(Dollars in millions)

As of

Allocation of combined loss reserves:

Balance at end of each period attributable to:

Single-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,741 $60,163

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,610 1,716

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72,351 $61,879

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

guaranty book of business:

Single-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.49% 2.10%

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

Combined loss reserves as a percentage of:

Total guaranty book of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.38% 2.03%

Total nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.46 28.81

(1) Includes accrued interest of $289 million and $811 million for the three months ended September 30, 2011 and 2010,

respectively, and $1.1 billion and $2.0 billion for the nine months ended September 30, 2011 and 2010, respectively.

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

(3) Amounts represent the net activity recorded in our allowances for accrued interest receivable and preforeclosure

property taxes and insurance receivable from borrowers. The provision for credit losses, charge-offs, recoveries and

transfer activity included in this table reflects all changes for both the allowance for loan losses and the valuation

allowances for accrued interest and preforeclosure property taxes and insurance receivable that relate to the mortgage

loans.

(4) Includes $334 million and $397 million as of September 30, 2011 and 2010, respectively, for acquired credit-impaired

loans.

(5) While we purchase the substantial majority of loans that are four or more months delinquent from our MBS trusts, we

do not exercise this option to purchase loans during a forbearance period. Accordingly, charge-offs of consolidated

trusts generally represent loans that remained in our consolidated trusts at the time of default.

The continued stress on a broad segment of borrowers from continued high levels of unemployment and

underemployment and the prolonged decline in home prices have caused our total loss reserves to remain high

for the past few years. Our provision for credit losses continues to be a key driver of our net losses for each

period presented. The amount of provision for credit losses varies from period to period based on changes in

home prices, borrower payment behavior, the types and volumes of loss mitigation activities completed, and

actual and estimated recoveries from our lender and mortgage insurer counterparties.

Our provision for credit losses decreased in the third quarter of 2011 compared with the third quarter of 2010

primarily due to a lower provision on individually impaired loans. The lower provision was driven, in part, by

accelerated expected prepayment speeds due to the lower interest rate environment, which reduced the

expected lives of loans and increased the present value of cash flows expected on those loans. In addition, our

provision decreased in the third quarter of 2011 compared with the third quarter of 2010 because of an

increase in estimated amounts due to us or received by us for outstanding repurchase requests. The decrease in

the provision for credit losses in the third quarter of 2011 was partially offset by: (1) the implementation of a

new accounting standard that increased our troubled debt restructuring (“TDR”) population, which increased

the number of loans that are individually impaired; and (2) a decrease in the estimated recovery amount from

mortgage insurance coverage. A TDR is a loan restructuring that grants a concession to a borrower

experiencing financial difficulties. For a detailed discussion of our mortgage insurer counterparties and the

estimated recovery of mortgage insurance, see “Risk Management—Credit Risk Management—Institutional

Counterparty Risk Management—Mortgage Insurers.”

Our provision for credit losses slightly increased in the first nine months of 2011 compared with the first nine

months of 2010. In addition to the reasons described above, our provision for credit losses in the first nine

34
months of 2011 was negatively impacted by higher loss severity rates and an increase in the average number

of days loans remain delinquent.

In addition, during the third quarter and first nine months of 2011 and 2010 our provision for credit losses and

loss reserves have been impacted by updates to our allowance for loan loss models that we use to estimate our

loss reserves. For further information on estimates and assumptions that are used to calculate our loan loss

reserves and the impacts of specific changes in estimates during 2010 and the first nine months of 2011, see

“MD&A—Critical Accounting Policies and Estimates” in our 2010 Form 10-K and “Critical Accounting

Policies and Estimates” in this report.

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

trial modification period in 2010 and the first nine months of 2011, approximately two-thirds of our total loss

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

impairment for a TDR is based on the restructured loan’s expected cash flows over the life of the loan, taking

into account the effect of any concessions granted to the borrower, discounted at the loan’s original effective

interest rate. The individual impairment model includes forward-looking assumptions using multiple scenarios

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

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

combined with the forward-looking assumptions used in our model, the allowance calculated for an

individually impaired loan has generally been greater than the allowance that would be calculated under the

collective reserve. Further, if we expect to recover our recorded investment in an individually impaired loan

through probable foreclosure of the underlying collateral, we measure the impairment based on the fair value

of the collateral.

In April 2011, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard

regarding TDRs effective for the third quarter of 2011 that applies retrospectively to January 1, 2011. In the

third quarter of 2011, we recognized an incremental increase of $514 million in our provision for credit losses

due to loans that were reassessed as TDRs upon adoption of the new TDR standard. For additional

information on the new TDR accounting standard, see “Note 1, Summary of Significant Accounting Policies.”

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

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

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

Our balance of nonperforming single-family loans remained high as of September 30, 2011 due to both high

levels of delinquencies and an increase in TDRs. When a TDR occurs, the loan may return to a current status,

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

the original terms. The composition of our nonperforming loans is shown in Table 14, which is based on the

carrying value of both our single-family and multifamily held-for-investment and held-for-sale mortgage loans.

For individually impaired loans, the amount displayed is net of any impairment amount. For information on

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

Mortgage Loans.”

35
Table 14: Nonperforming Single-Family and Multifamily Loans

September 30,

2011

December 31,

2010

As of

(Dollars in millions)

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

trusts:

Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $127,178 $152,756

Troubled debt restructurings on accrual status(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,729 61,907

Total on-balance sheet nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203,907 214,663

Off-balance sheet nonperforming loans in unconsolidated

Fannie Mae MBS trusts(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 89

Total nonperforming loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $204,054 $214,752

Accruing on-balance sheet loans past due 90 days or more(3) . . . . . . . . . . . . . . . . . . . . . $ 769 $ 896

For the

Nine Months Ended

September 30,

2011

For The

Year Ended

December 31,

2010

(Dollars in millions)

Interest related to on-balance sheet nonperforming loans:

Interest income forgone(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,475 $8,185

Interest income recognized for the period(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,760 7,995

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

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

(3) Recorded investment in loans as of the end of each period that are 90 days or more past due and continuing to accrue

interest. The majority of this amount consists of loans insured or guaranteed by the U.S. government and loans where

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

(4) Represents the amount of interest income that would have been recorded during the period for on-balance sheet

nonperforming loans as of the end of each period had the loans performed according to their original contractual

terms.

(5) Represents interest income recognized during the period for on-balance sheet loans classified as nonperforming as of

the end of each period. Includes primarily amounts accrued while loan was performing and cash payments received on

nonaccrual loans.

Foreclosed Property Expense

Foreclosed property expense is displayed in Table 15. The decrease in foreclosed property expense in the third

quarter and first nine months of 2011 compared with the third quarter and first nine months of 2010 was due,

in part, to an increase in estimated amounts due to or received by us for outstanding repurchase requests.

These amounts were recognized in our provision for credit losses and foreclosed property expense. In addition,

we recorded lower valuation adjustments on our acquired property inventory in the third quarter and first nine

months of 2011 because: (1) the rate of decline in home prices has moderated in recent quarters; and (2) the

decrease in our REO inventory compared with the third quarter and first nine months of 2010 resulted in

fewer properties subject to valuation adjustments. The decrease in foreclosed property expense was partially

offset by a decrease in the estimated recovery amount from mortgage insurance coverage.

Foreclosed property expense in the first nine months of 2010 reflected the recognition of cash fees of

$796 million from the cancellation and restructuring of some of our pool mortgage insurance coverage. The

cancelled and restructured policies covered approximately $42 billion in unpaid principal balance. The fees

represented an acceleration of, and discount on, claims expected to be received pursuant to the coverage net of

premiums expected to be paid. These cancellations and restructurings resulted in operational savings from

36
reduced claims processing and mitigated our counterparty credit risk given the weakened financial condition of

our mortgage insurer counterparties.

Credit Loss Performance Metrics

Our credit-related expenses should be considered in conjunction with our credit loss performance. Our credit

loss performance metrics, however, are not defined terms within GAAP and may not be calculated in the same

manner as similarly titled measures reported by other companies. Because management does not view changes

in the fair value of our mortgage loans as credit losses, we adjust our credit loss performance metrics for the

impact associated with the acquisition of credit-impaired loans. We also exclude interest forgone on

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

deterioration in the credit quality of our mortgage-related securities and accretion of interest income on

acquired credit-impaired loans from credit losses.

Historically, management viewed our credit loss performance metrics, which include our historical credit

losses and our credit loss ratio, as indicators of the effectiveness of our credit risk management strategies. As

our credit losses are now at such high levels, management has shifted focus to our loss mitigation strategies

and the reduction of our total credit losses and away from the credit loss ratio to measure performance.

However, we believe that credit loss performance metrics may be useful to investors as the losses are

presented as a percentage of our book of business and have historically been used by analysts, investors and

other companies within the financial services industry. They also provide a consistent treatment of credit

losses for on- and off-balance sheet loans. Moreover, by presenting credit losses with and without the effect of

fair value losses associated with the acquisition of credit-impaired loans, investors are able to evaluate our

credit performance on a more consistent basis among periods. Table 15 details the components of our credit

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

37
Table 15: Credit Loss Performance Metrics

Amount Ratio(1) Amount Ratio(1) Amount Ratio(1) Amount Ratio(1)(2)

2011 2010 2011 2010

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(Dollars in millions)

Charge-offs, net of recoveries . . . . . $3,266 42.8 bp $6,728 88.4 bp $11,851 51.6 bp $17,665 76.9 bp

Foreclosed property expense . . . . . . 733 9.6 787 10.3 743 3.2 1,255 5.5

Credit losses including the effect of

fair value losses on acquired

credit- impaired loans . . . . . . . . . 3,999 52.4 7,515 98.7 12,594 54.8 18,920 82.4

Less: Fair value losses resulting

from acquired credit-impaired

loans . . . . . . . . . . . . . . . . . . . . (31) (0.4) (41) (0.5) (93) (0.4) (146) (0.6)

Plus: Impact of acquired creditimpaired loans on charge-offs and

foreclosed property expense . . . . 492 6.5 750 9.9 1,577 6.9 1,642 7.1

Credit losses and credit loss ratio . . $4,460 58.5 bp $8,224 108.1 bp $14,078 61.3 bp $20,416 88.9 bp

Credit losses attributable to:

Single-family. . . . . . . . . . . . . . . $4,384 $8,037 $13,798 $20,022

Multifamily . . . . . . . . . . . . . . . . 76 187 280 394

Total . . . . . . . . . . . . . . . . . . . . $4,460 $8,224 $14,078 $20,416

Average single-family default rate . . 0.44% 0.63% 1.34% 1.63%

Average single-family initial chargeoff severity rate(3) . . . . . . . . . . . 34.20% 33.30% 35.00% 34.20%

Average multifamily default rate . . . 0.08% 0.24% 0.38% 0.48%

Average multifamily initial chargeoff severity rate(3) . . . . . . . . . . . 32.49% 39.31% 35.40% 39.63%

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

business during the period.

(2) Beginning in the second quarter of 2010, expenses relating to preforeclosure taxes and insurance were recorded as

charge-offs. These expenses were recorded as foreclosed property expense in the first quarter of 2010. The impact of

including these costs in charge-offs was 4.6 basis points for the nine months ended September 30, 2010.

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

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

excludes charge-offs from preforeclosure sales.

The decrease in our credit losses in the third quarter and first nine months of 2011 compared with the third

quarter and first nine months of 2010 was driven by a decrease in net charge-offs primarily due to a decrease

in the number of defaults and an increase in estimated amounts due to or received by us related to outstanding

repurchase requests. While charge-offs remain high, charge-offs in the third quarter and first nine months of

2011 were lower than they otherwise would have been due to delays in the foreclosure process.

Our 2009, 2010 and 2011 vintages accounted for approximately 3% of our single-family credit losses for the

third quarter of 2011 and 2% of our single-family credit losses for the first nine months of 2011. Typically,

credit losses on mortgage loans do not peak until later years in the loan cycle following origination. We

provide more detailed credit performance information, including serious delinquency rates by geographic

region, statistics on nonperforming loans and foreclosure activity in “Risk Management—Credit Risk

Management—Mortgage Credit Risk Management.”

Regulatory Hypothetical Stress Test Scenario

Under a September 2005 agreement with FHFA’s predecessor, the Office of Federal Housing Enterprise

Oversight, we are required to disclose on a quarterly basis the present value of the change in future expected

38
credit losses from our existing single-family guaranty book of business from an immediate 5% decline in

single-family home prices for the entire United States. Although other provisions of the September 2005

agreement were suspended in March 2009 by FHFA until further notice, this disclosure requirement was not

suspended. For purposes of this calculation, we assume that, after the initial 5% shock, home price growth

rates return to the average of the possible growth rate paths used in our internal credit pricing models. The

sensitivity results represent the difference between future expected credit losses under our base case scenario,

which is derived from our internal home price path forecast, and a scenario that assumes an instantaneous

nationwide 5% decline in home prices.

Table 16 compares the credit loss sensitivities for the periods indicated for first lien single-family whole loans

we own or that back Fannie Mae MBS, before and after consideration of projected credit risk sharing

proceeds, such as private mortgage insurance claims and other credit enhancements.

Table 16: Single-Family Credit Loss Sensitivity(1)

September 30,

2011

December 31,

2010

As of

(Dollars in millions)

Gross single-family credit loss sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,925 $ 25,937

Less: Projected credit risk sharing proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,907) (2,771)

Net single-family credit loss sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,018 $ 23,166

Outstanding single-family whole loans and loans underlying Fannie Mae MBS . . . . . . . . . $2,764,981 $2,782,512

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

loans and Fannie Mae MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.76% 0.83%

(1) Represents total economic credit losses, which consist of credit losses and forgone interest. Calculations are based on

97% of our total single-family guaranty book of business as of September 30, 2011 and December 31, 2010,

respectively. The mortgage loans and mortgage-related securities that are included in these estimates consist of:

(a) single-family Fannie Mae MBS (whether held in our mortgage portfolio or held by third parties), excluding certain

whole loan REMICs and private-label wraps; (b) single-family mortgage loans, excluding mortgages secured only by

second liens, subprime mortgages, manufactured housing chattel loans and reverse mortgages; and (c) long-term

standby commitments. We expect the inclusion in our estimates of the excluded products may impact the estimated

sensitivities set forth in this table.

Because these sensitivities represent hypothetical scenarios, they should be used with caution. Our regulatory

stress test scenario is limited in that it assumes an instantaneous uniform 5% nationwide decline in home

prices, which is not representative of the historical pattern of changes in home prices. Changes in home prices

generally vary on a regional, as well as a local, basis. In addition, these stress test scenarios are calculated

independently without considering changes in other interrelated assumptions, such as unemployment rates or

other economic factors, which are likely to have a significant impact on our future expected credit losses.

Financial Impact of the Making Home Affordable Program on Fannie Mae

Home Affordable Refinance Program

Because we already own or guarantee the original mortgages that we refinance under HARP, our expenses

under that program have consisted mostly of limited administrative costs. However, under recently announced

changes to HARP we may incur additional losses. See “Legislative and Regulatory Developments,” for a

discussion on the recent changes to HARP.

Home Affordable Modification Program

We reduced our individually impaired allowance that relates to loans that had entered a trial modification under

the Home Affordable Modification Program (“HAMP”) by $906 million during the third quarter of 2011

compared with impairments of $2.0 billion during the third quarter of 2010. Loans receiving a trial modification

under HAMP are accounted for as TDRs and assessed individually for impairment. The reduction of our

39
allowance on HAMP loans in the third quarter of 2011 was due to improved cash flow projections on existing

HAMP loans, which more than offset the volume of new HAMP trial modifications during the period. We

incurred impairments related to loans that had entered a trial modification under HAMP of $4.3 billion during the

first nine months of 2011, compared with $11.8 billion during the first nine months of 2010. These include

impairments on loans that entered into a trial modification under the program but that have not yet received, or

that have been determined to be ineligible for, a permanent modification under the program. These impairments

have been included in the calculation of our provision for loan losses in our condensed consolidated results of

operations and comprehensive loss. The impairments do not include the reduction in our collective loss reserves

which occurred as a result of beginning to individually assess the loan for impairment upon entering a trial

modification. Please see “MD&A—Consolidated Results of Operations—Financial Impact of the Making Home

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

We paid or accrued HAMP incentive fees for servicers of $86 million during the third quarter of 2011 compared

with $93 million during the third quarter of 2010. We paid or accrued HAMP incentive fees for servicers of

$254 million during the first nine months of 2011, compared with $276 million during the first nine months of

2010. These fees were related to loans modified under HAMP, which we recorded as part of “Other expenses.”

Borrower incentive payments are included in the calculation of our allowance for loan losses for individually

impaired loans. Additionally, our expenses under HAMP also include administrative costs.

Overall Impact of the Making Home Affordable Program

Because of the unprecedented nature of the circumstances that led to the Making Home Affordable Program,

we cannot quantify what the impact would have been on Fannie Mae if the Making Home Affordable Program

had not been introduced. We do not know how many loans we would have modified under alternative

programs, what the terms or costs of those modifications would have been, how many foreclosures would have

resulted nationwide, and at what pace, or the impact on housing prices if the program had not been put in

place. As a result, the amounts we discuss above are not intended to measure how much the program is

costing us in comparison to what it would have cost us if we did not have the program at all. See “Risk

Factors” for a discussion of how efforts we may undertake in support of the housing market may affect us.

BUSINESS SEGMENT RESULTS

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

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

not equal our condensed consolidated results of operations as we separate the activity related to our

consolidated trusts from the results generated by our three segments. In addition, because we apply accounting

methods that differ from our condensed consolidated results for segment reporting purposes, we include an

eliminations/adjustments category to reconcile our business segment results and the activity related to our

consolidated trusts to our condensed consolidated results of operations. We describe the management reporting

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

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

function rather than by business in order to improve our operational efficiencies and effectiveness. In future

periods, we may change some of our management reporting and how we report our business segment results.

In this section, we summarize our segment results for the third quarter and first nine months of 2011 and 2010

in the tables below and provide a comparative discussion of these results. This section should be read together

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

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

our condensed consolidated results.

Single-Family Business Results

Table 17 summarizes the financial results of our Single-Family business for the periods indicated. The primary

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

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

40
Table 17: Single-Family Business Results

2011 2010 Variance 2011 2010 Variance

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(Dollars in millions)

Net interest loss . . . . . . . . . . . . . . . . . . . . $ (374) $ (1,108) $ 734 $ (1,952) $ (4,438) $2,486

Guaranty fee income(1) . . . . . . . . . . . . . . . 1,867 1,804 63 5,618 5,367 251

Credit-related expenses(2) . . . . . . . . . . . . . (4,782) (5,559) 777 (21,821) (22,356) 535

Other expenses(3) . . . . . . . . . . . . . . . . . . . (456) (592) 136 (1,414) (1,713) 299

Loss before federal income taxes . . . . . . . . (3,745) (5,455) 1,710 (19,569) (23,140) 3,571

(Provision) benefit for federal income

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 1 (2) 106 53 53

Net loss attributable to Fannie Mae . . . . . . $ (3,746) $ (5,454) $1,708 $ (19,463) $ (23,087) $3,624

Single-family effective guaranty fee rate (in

basis points)(4) . . . . . . . . . . . . . . . . . . . 26.1 25.2 26.1 24.9

Single-family average charged guaranty fee

on new acquisitions (in basis points)(5) . . 31.1 25.3 29.0 26.4

Average single-family guaranty book of

business(6) . . . . . . . . . . . . . . . . . . . . . . $2,859,814 $2,857,917 $2,870,557 $2,875,952

Single-family Fannie Mae MBS issues(7) . . . $ 111,808 $ 155,940 $ 381,135 $ 391,754

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

comprehensive loss.

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

(3) Consists of investment gains and losses, fair value losses, fee and other income, administrative expenses and other

expenses.

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

guaranty book of business, expressed in basis points.

(5) Calculated based on the average contractual fee rate for our single-family guaranty arrangements entered into during

the period plus the recognition of any upfront cash payments ratably over an estimated average life, expressed in basis

points.

(6) Consists of single-family mortgage loans held in our mortgage portfolio, single-family mortgage loans held by

consolidated trusts, single-family Fannie Mae MBS issued from unconsolidated trusts held by either third parties or

within our retained portfolio, and other credit enhancements that we provide on single-family mortgage assets.

Excludes non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a

guaranty.

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

period. Includes Housing Finance Agency (HFA) new issue bond program issuances, none of which occurred in 2011.

There were HFA new issue bond program issuances of $3.1 billion in the first nine months of 2010, of which none

occurred in the third quarter of 2010.

Net Interest Loss

Net interest loss for the Single-Family business segment primarily consists of: (1) the cost to reimburse the

Capital Markets group for interest income not recognized for loans in our mortgage portfolio on nonaccrual

status; (2) the cost to reimburse MBS trusts for interest income not recognized for loans in consolidated trusts

on nonaccrual status; and (3) income from cash payments received on loans that have been placed on

nonaccrual status.

Net interest loss decreased in the third quarter and first nine months of 2011 compared with the third quarter

and first nine months of 2010 primarily due to a significant decrease in interest income not recognized for

loans on nonaccrual status because of a decline in the total number of loans on nonaccrual status. This decline

is due to loan workouts and foreclosures since the third quarter of 2010.

41
Guaranty Fee Income

Guaranty fee income increased in the third quarter and first nine months of 2011 compared with the third

quarter and first nine months of 2010 due to an increase in the amortization of risk based pricing adjustments,

reflecting the impact of higher risk based pricing associated with our more recent acquisition vintages.

Our average single-family guaranty book of business was relatively flat period over period despite our

continued high market share because of the decline in U.S. residential mortgage debt outstanding, which is

primarily due to foreclosures. Our estimated market share of new single-family mortgage-related securities

issuances, which is based on publicly available data and excludes previously securitized mortgages, remained

high at 43.3% for the third quarter and 45.5% for the first nine months of 2011.

Credit-Related Expenses

Credit-related expenses and credit losses in the Single-Family business represent the substantial majority of

our consolidated totals. We provide a discussion of our credit-related expenses and credit losses in

“Consolidated Results of Operations—Credit-Related Expenses.”

Multifamily Business Results

Table 18 summarizes the financial results of our Multifamily business for the periods indicated. The primary

sources of revenue for our Multifamily business are guaranty fee income and fee and other income. Expenses

and other items that impact income or loss primarily include credit-related expenses, administrative expenses

and net operating losses from our partnership investments.

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Table 18: Multifamily Business Results

2011 2010 Variance 2011 2010 Variance

For the Three Months Ended

September 30,

For the Nine Months Ended

September 30,

(Dollars in millions)

Guaranty fee income(1) . . . . . . . . . . . . . . . . . . . . $ 226 $ 205 $ 21 $ 651 $ 594 $ 57

Fee and other income . . . . . . . . . . . . . . . . . . . . . 51 35 16 166 98 68

(Losses) gains from partnership investments(2) . . . . (30) 39 (69) (8) (41) 33

Credit-related (expense) income(3) . . . . . . . . . . . . (102) (2) (100) (164) 60 (224)

Other expenses(4) . . . . . . . . . . . . . . . . . . . . . . . . (73) (97) 24 (178) (298) 120

Income before federal income taxes . . . . . . . . . . . 72 180 (108) 467 413 54

Benefit (provision) for federal income taxes. . . . . . — 1 (1) (61) (14) (47)

Net income attributable to Fannie Mae . . . . . . . . . $ 72 $ 181 $(109) $ 406 $ 399 $ 7

Multifamily effective guaranty fee rate (in basis

points)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47.0 43.9 45.4 42.5

Credit loss performance ratio (in basis points)(6) . . . 15.8 40.1 19.5 28.2

Average multifamily guaranty book of business(7) . . $192,357 $186,766 $191,185 $186,234

Multifamily new business volumes(8) . . . . . . . . . . 6,500 4,540 16,963 11,411

Multifamily units financed from new business

volumes(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000 84,000 289,000 199,000

Fannie Mae multifamily MBS issuances(10) . . . . . . $ 7,756 $ 4,437 $ 24,466 $ 11,238

Fannie Mae multifamily structured securities

issuances (issued by Capital Markets group)(11). . 1,495 1,122 4,517 3,715

Additional net interest income earned on Fannie

Mae multifamily mortgage loans and MBS

(included in Capital Markets Group’s

results)(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 206 662 608

Average Fannie Mae multifamily mortgage loans

and MBS in Capital Markets Group’s

portfolio(13) . . . . . . . . . . . . . . . . . . . . . . . . . . 109,608 116,096 112,092 116,744

September 30

2011

December 31

2010

As of

(Dollars in millions)

Multifamily serious delinquency rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.57% 0.71%

Percentage of guaranty book of business with credit enhancement . . . . . . . . . . . . . . . . . . . 90 89

Fannie Mae percentage of total multifamily mortgage debt outstanding(14) . . . . . . . . . . . . . 20.8 20.5

Fannie Mae multifamily MBS outstanding(15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $94,398 $77,251

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

comprehensive loss.

(2) (Losses) gains from partnership investments is included in other expenses in our condensed consolidated statements of

operations and comprehensive loss.

(3) Consists of the benefit (provision) for loan losses, benefit (provision) for guaranty losses and foreclosed property

expense.

(4) Consists of net interest income or loss, investment gains, other income or expenses, and administrative expenses.

(5) Calculated based on annualized Multifamily segment guaranty fee income divided by the average multifamily

guaranty book of business, expressed in basis points.

(6) Calculated based on the annualized credit losses divided by the average multifamily guaranty book of business,

expressed in basis points.

(7) Consists of multifamily mortgage loans held in our mortgage portfolio, multifamily mortgage loans held by

consolidated trusts, multifamily Fannie Mae MBS issued from unconsolidated trusts held by either third parties or

43
within our retained portfolio, and other credit enhancements that we provide on multifamily mortgage assets.

Excludes non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a

guaranty.

(8) Reflects unpaid principal balance of multifamily Fannie Mae MBS issued (excluding portfolio securitizations) and

multifamily loans purchased during the period. Includes HFA new issue bond program issuances, none of which

occurred in 2011. There were HFA new issue bond program issuances of $1.0 billion in the first nine months of 2010,

of which none occurred in the third quarter of 2010.

(9) Excludes HFA new issue bond program.

(10) Reflects unpaid principal balance of multifamily Fannie Mae MBS issued during the period. Includes: (a) issuances of

new MBS, (b) $1.3 billion and $7.6 billion of Fannie Mae portfolio securitization transactions for the third quarter

and first nine months of 2011, and (c) $69 million and $188 million of conversions of adjustable-rate loans to fixedrate loans and DMBS securities to MBS securities for the third quarter and first nine months of 2011. There were

$9 million and $265 million of new MBS issuances as a result of converting adjustable rate loans to fixed rate loans

in the third quarter and first nine months of 2010. There were no Fannie Mae multifamily portfolio securitizations

transactions for the third quarter or first nine months of 2010.

(11) Reflects original unpaid principal balance of out-of-portfolio multifamily structured securities issuances by our Capital

Markets Group.

(12) Interest expense estimate based on allocated duration-matched funding costs. Net interest income was reduced by

guaranty fees allocated to Multifamily from the Capital Markets Group on multifamily loans in Fannie Mae’s

portfolio.

(13) Based on unpaid principal balance.

(14) Includes mortgage loans and Fannie Mae MBS issued and guaranteed by the Multifamily segment. Information as of

September 30, 2011 is through June 30, 2011 and is based on the Federal Reserve’s September 2011 mortgage debt

outstanding release, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for

multifamily residences. Prior period amount may have been changed to reflect revised historical data from the Federal

Reserve.

(15) Includes $26.5 billion and $19.9 billion of Fannie Mae multifamily MBS held in the mortgage portfolio, the vast

majority of which have been consolidated to loans in our condensed consolidated balance sheets, as of September 30,

2011 and December 31, 2010, respectively; and $1.4 billion of bonds issued by HFAs as of both September 30, 2011

and December 31, 2010.

Guaranty Fee Income

Multifamily guaranty fee income increased in the third quarter and first nine months of 2011 compared with

the third quarter and first nine months of 2010 primarily due to higher fees charged on new acquisitions in

recent years. New acquisitions with higher guaranty fees have become an increasingly large part of our

multifamily guaranty book of business.

Credit-Related (Expense) Income

Multifamily credit-related expenses increased in the third quarter and the first nine months of 2011 compared

with 2010 primarily due to a stable allowance for loan losses in 2011 compared to a decrease in 2010.

Although national multifamily market fundamentals continued to improve in the third quarter and first nine

months of 2011, certain local markets and properties continued to underperform compared to the rest of the

country due to localized economic conditions. In comparison, Multifamily credit-related expense in the third

quarter of 2010 and credit-related income in the first nine months of 2010 were due to a decrease in the

allowance for loan losses as credit trends stabilized.

Multifamily credit losses, which consist of net charge-offs and foreclosed property expense, were $76 million

for the third quarter of 2011 compared with $187 million for the third quarter of 2010, and $280 million for

the first nine months of 2011 compared with $394 million for the first nine months of 2010.

44
(Losses) Gains from Partnership Investments

We incurred losses from partnership investments in the third quarter of 2011 compared with gains in the third

quarter of 2010. Overall, the multifamily market has shown improvement but certain properties continued to

show stress in the third quarter of 2011 resulting in a loss from partnership investments for the current quarter.

Losses from partnership investments were lower in the first nine months of 2011 compared with the first nine

months of 2010 as properties experienced improved operating performance due to stronger national

multifamily market fundamentals.

Provision for Federal Income Taxes

In the second quarter of 2011, we reached an effective settlement of issues with the Internal Revenue Service

relating to tax years 2007 and 2008, which reduced our total corporate tax liability. However, the reduction in

our tax liability also reduced the low-income housing tax credits we were able to use, resulting in a provision

for federal income taxes for the Multifamily segment in the first nine months of 2011.

Capital Markets Group Results

Table 19 summarizes the financial results of our Capital Markets group for the periods indicated. Following

the table we discuss the Capital Markets group’s financial results and describe the Capital Markets group’s

mortgage portfolio. For a discussion of the debt issued by the Capital Markets group to fund its investment

activities, see “Liquidity and Capital Management.” For a discussion of the derivative instruments that Capital

Markets uses to manage interest rate risk, see “Consolidated Balance Sheet Analysis—Derivative Instruments”

in this report and “Risk Management—Market Risk Management, Including Interest Rate Risk Management—

Derivative Instruments” and “Notes to Consolidated Financial Statements—Note 10, Derivative Instruments

and Hedging Activities” in our 2010 Form 10-K. The primary sources of revenue for our Capital Markets

group are net interest income and fee and other income. Expenses and other items that impact income or loss

primarily include fair value gains and losses, investment gains and losses, allocated guaranty fee expense,

other-than-temporary impairment and administrative expenses.

Table 19: Capital Markets Group Results

2011 2010 Variance 2011 2010 Variance

For the Three Months

Ended September 30,

For the Nine Months

Ended September 30,

(Dollars in millions)

Net interest income(1) . . . . . . . . . . . . . . . . . . . . . . . $ 3,904 $4,065 $ (161) $11,481 $10,671 $ 810

Investment gains, net(2) . . . . . . . . . . . . . . . . . . . . . . 801 1,270 (469) 2,589 2,841 (252)

Net other-than-temporary impairments . . . . . . . . . . . . (262) (323) 61 (361) (696) 335

Fair value (losses) gains, net(3) . . . . . . . . . . . . . . . . . (4,670) 436 (5,106) (5,959) (119) (5,840)

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . 125 130 (5) 309 370 (61)

Other expenses(4) . . . . . . . . . . . . . . . . . . . . . . . . . . (610) (755) 145 (1,723) (1,716) (7)

(Losses) income before federal income taxes . . . . . . . (712) 4,823 (5,535) 6,336 11,351 (5,015)

Benefit for federal income taxes . . . . . . . . . . . . . . . . 1 7 (6) 46 28 18

Net (loss) income attributable to Fannie Mae . . . . . . . $ (711) $4,830 $(5,541) $ 6,382 $11,379 $(4,997)

(1) Includes contractual interest income, excluding recoveries, on nonaccrual loans received from the Single-Family

segment of $1.6 billion for the third quarter of 2011 compared with $2.1 billion for the third quarter of 2010. Includes

contractual interest income, excluding recoveries, on nonaccrual loans received from the Single-Family segment of

$5.1 billion for the first nine months of 2011 compared with $4.4 billion for the first nine months of 2010. Capital

Markets net interest income is reported based on the mortgage-related assets held in the segment’s portfolio and

excludes interest income on mortgage-related assets held by consolidated MBS trusts that are owned by third parties

and the interest expense on the corresponding debt of such trusts.

(2) We include the securities that we own regardless of whether the trust has been consolidated in reporting of gains and

losses on securitizations and sales of available-for-sale securities.

45
(3) Includes primarily fair value gains or losses on derivatives and trading securities that we own, regardless of whether

the trust has been consolidated.

(4) Includes allocated guaranty fee expense, debt extinguishment gains or losses, net, administrative expenses, and other

income or expenses. Gains or losses related to the extinguishment of debt issued by consolidated trusts are excluded

from the Capital Markets group’s results because purchases of securities are recognized as such.

Net Interest Income

The Capital Markets group reports interest income and amortization of cost basis adjustments only on

securities and loans that are held in our portfolio. For mortgage loans held in our mortgage portfolio, when

interest income is no longer recognized in accordance with our nonaccrual accounting policy, the Capital

Markets group recognizes interest income reimbursements that the group receives, primarily from SingleFamily, for the contractual interest due. The interest expense recognized on the Capital Markets group’s

statement of operations is limited to our funding debt, which is reported as “Debt of Fannie Mae” in our

condensed consolidated balance sheets. Net interest expense also includes a cost of capital charge allocated

among the three business segments.

The Capital Markets group’s net interest income decreased in the third quarter of 2011 compared with the

third quarter of 2010 primarily due to a decline in interest income from our mortgage portfolio that more than

offset the decline in funding costs as we replaced higher cost debt with lower cost debt. Interest income from

our mortgage portfolio decreased primarily due to the reduction in our balance of mortgage-related securities.

Additionally, the interest rate earned on our mortgage loans decreased due to the decrease in the contractual

rate of modified loans. Loan modifications subsequently led to a decrease in reimbursements from the SingleFamily business for contractual interest income on non-accrual loans.

The Capital Markets group’s net interest income increased in the first nine months of 2011 compared with the

first nine months of 2010 primarily due to a decline in funding costs as we replaced higher cost debt with

lower cost debt. This increase in net interest income due to lower funding costs was partially offset by a

decline in interest income from our mortgage portfolio. The reimbursements of contractual interest due on

nonaccrual loans from the Single-Family business were a significant portion of the Capital Markets group’s

interest income during the first nine months of 2011. However, the increase in these reimbursements was

offset by the decline in interest income on our mortgage-related securities because our securities portfolio

balance has declined.

Our net interest income and net interest yield were higher than they would have otherwise been in the third

quarter and first nine months of both 2011 and 2010 because our debt funding needs were lower than would

otherwise have been required as a result of funds we received from Treasury under the senior preferred stock

purchase agreement. Further, dividends paid to Treasury are not recognized in interest expense.

We supplement our issuance of debt with interest rate-related derivatives to manage the prepayment and

duration risk inherent in our mortgage investments. The effect of these derivatives, in particular the periodic

net interest expense accruals on interest rate swaps, is not reflected in Capital Markets’ net interest income but

is included in our results as a component of “Fair value (losses) gains, net” and is shown in “Table 11: Fair

Value (Losses) Gains, Net.” If we had included the economic impact of adding the net contractual interest

accruals on our interest rate swaps in our Capital Markets’ interest expense, Capital Markets’ net interest

income would have decreased by $497 million for the third quarter of 2011 compared with a decrease of

$673 million for the third quarter of 2010, and would have decreased $1.8 billion for the first nine months of

2011 compared with a decrease of $2.3 billion for the first nine months of 2010.

Investments Gains, Net

Investment gains decreased in the third quarter of 2011 compared with the third quarter of 2010 primarily due

to a higher volume of securitizations in 2010. Investment gains decreased in the first nine months of 2011

compared with the first nine months of 2010 primarily due to decreased gains on sale of available-for-sale

securities.

46
Net Other-Than-Temporary Impairments

The net other-than-temporary impairments recognized by the Capital Markets group are consistent with the

amount reported in our condensed consolidated results of operations. See “Note 5, Investments in Securities”

for information on our other-than-temporary impairments by major security type and primary drivers for

other-than-temporary impairments recorded in the third quarter and first nine months of 2011.

Fair Value (Losses) Gains, Net

The derivative gains and losses that are reported for the Capital Markets group are consistent with the

derivative gains and losses reported in our condensed consolidated results of operations. We discuss details of

these components of fair value gains and losses in “Consolidated Results of Operations—Fair Value (Losses)

Gains, Net.”

The Capital Markets Group’s Mortgage Portfolio

The Capital Markets group’s mortgage portfolio consists of mortgage loans and mortgage-related securities

that we own. Mortgage-related securities held by Capital Markets include Fannie Mae MBS and non-Fannie

Mae mortgage-related securities. The Fannie Mae MBS that we own are maintained as securities on the

Capital Markets group’s balance sheets. Mortgage-related assets held by consolidated MBS trusts are not

included in the Capital Markets group’s mortgage portfolio.

We are restricted by our senior preferred stock purchase agreement with Treasury in the amount of mortgage

assets that we may own. Each year on December 31, we are required to reduce our mortgage assets to 90% of

the maximum allowable amount that we were permitted to own as of December 31 of the immediately

preceding calendar year, until the amount of our mortgage assets reaches $250 billion. The maximum

allowable amount of mortgage assets we may own was reduced to $810 billion as of December 31, 2010 and

will be reduced to $729 billion as of December 31, 2011. As of September 30, 2011, we owned $722.2 billion

in mortgage assets, compared with $788.8 billion as of December 31, 2010.

Table 20 summarizes our Capital Markets group’s mortgage portfolio activity for the periods indicated.

Table 20: Capital Markets Group’s Mortgage Portfolio Activity(1)

2011 2010 2011 2010

For the Three Months

Ended September 30,

For the Nine Months

Ended September 30,

(Dollars in millions)

Mortgage loans:

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $405,417 $426,185 $427,074 $ 281,162

Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,169 54,136 102,533 254,725

Securitizations(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,420) (24,052) (64,962) (52,218)

Liquidations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,361) (26,436) (60,840) (53,836)

Mortgage loans, ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . 403,805 429,833 403,805 429,833

Mortgage securities:

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $326,384 $391,615 $361,697 $ 491,566

Purchases(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,964 3,677 15,587 37,541

Securitizations(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,420 24,052 64,962 52,218

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,936) (25,598) (74,997) (140,986)

Liquidations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,479) (20,728) (48,896) (67,321)

Mortgage securities, ending balance . . . . . . . . . . . . . . . . . . . . . . . . 318,353 373,018 318,353 373,018

Total Capital Markets mortgage portfolio . . . . . . . . . . . . . . . . . . . . $722,158 $802,851 $722,158 $ 802,851

(1) Based on unpaid principal balance.

47
(2) Includes portfolio securitization transactions that do not qualify for sale treatment under the accounting standards on

the transfers of financial assets.

(3) Includes scheduled repayments, prepayments, foreclosures and lender repurchases.

(4) Includes purchases of Fannie Mae MBS issued by consolidated trusts.

Purchases of mortgage loans decreased in the third quarter and first nine months of 2011 compared with both

the third quarter and first nine months of 2010 because we purchased fewer loans that were four or more

months delinquent from MBS trusts in the third quarter and first nine months of 2011. We significantly

increased our purchases of delinquent loans in 2010 and purchased the substantial majority of our delinquent

loan population during the first half of 2010, which included $127 billion of loans that were four or more

months delinquent as of December 31, 2009.

We expect to continue to purchase loans from MBS trusts as they become four or more consecutive monthly

payments delinquent subject to market conditions, economic benefit, servicer capacity, and other factors

including the limit on the mortgage assets that we may own pursuant to the senior preferred stock purchase

agreement. We purchased approximately 293,000 delinquent loans with an unpaid principal balance of

approximately $51 billion from our single-family MBS trusts in the first nine months of 2011. As of

September 30, 2011, the total unpaid principal balance of all loans in single-family MBS trusts that were

delinquent as to four or more consecutive monthly payments was $5.9 billion. In October 2011, we purchased

approximately 31,000 delinquent loans with an unpaid principal balance of $5.3 billion from our single-family

MBS trusts.

Table 21 shows the composition of the Capital Markets group’s mortgage portfolio as of September 30, 2011

and December 31, 2010.

48
Table 21: Capital Markets Group’s Mortgage Portfolio Composition(1)

September 30,

2011

December 31,

2010

As of

(Dollars in millions)

Capital Markets group’s mortgage loans:

Single-family loans

Government insured or guaranteed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,619 $ 51,783

Conventional:

Long-term, fixed-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,282 237,096

Intermediate-term, fixed-rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,644 11,446

Adjustable-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,092 31,526

Total single-family conventional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280,018 280,068

Total single-family loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321,637 331,851

Multifamily loans

Government insured or guaranteed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 431

Conventional:

Long-term, fixed-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,746 4,413

Intermediate-term, fixed-rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,538 71,010

Adjustable-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,505 19,369

Total multifamily conventional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,789 94,792

Total multifamily loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,168 95,223

Total Capital Markets group’s mortgage loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403,805 427,074

Capital Markets group’s mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224,687 260,429

Freddie Mac. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,516 17,332

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,087 1,425

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,286 22,283

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,909 18,038

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,219 25,052

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,365 12,525

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,284 4,613

Total Capital Markets group’s mortgage-related securities(2) . . . . . . . . . . . . . . . . . . . 318,353 361,697

Total Capital Markets group’s mortgage portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . $722,158 $788,771

(1) Based on unpaid principal balance.

(2) The fair value of these mortgage-related securities was $324.7 billion and $365.8 billion as of September 30, 2011 and

December 31, 2010, respectively.

The Capital Markets group’s mortgage portfolio decreased from December 31, 2010 to September 30, 2011

primarily due to liquidations and sales, partially offset by purchases of delinquent loans from MBS trusts. The

total unpaid principal balance of nonperforming loans in the Capital Markets group’s mortgage portfolio was

$233.0 billion as of September 30, 2011 and $228.0 billion as of December 31, 2010. This population includes

loans that have been modified and have been classified as TDRs, as well as unmodified delinquent loans that

are on nonaccrual status in our condensed consolidated financial statements. We expect our mortgage portfolio

to continue to decrease due to the restrictions on the amount of mortgage assets we may own under the terms

of our senior preferred stock purchase agreement with Treasury.

49
CONSOLIDATED BALANCE SHEET ANALYSIS

The section below provides a discussion of our condensed consolidated balance sheets as of the dates

indicated. You should read this section together with our condensed consolidated financial statements,

including the accompanying notes.

Table 22 displays a summary of our condensed consolidated balance sheets as of September 30, 2011 and

December 31, 2010.

Table 22: Summary of Condensed Consolidated Balance Sheets

September 30,

2011

December 31,

2010 Variance

As of

(Dollars in millions)

Assets

Cash and cash equivalents and federal funds sold and securities purchased

under agreements to resell or similar arrangements . . . . . . . . . . . . . . . . . . $ 60,257 $ 29,048 $ 31,209

Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,961 63,678 (7,717)

Investments in securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,859 151,248 (389)

Mortgage loans

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385,503 407,482 (21,979)

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,583,752 2,577,794 5,958

Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (71,435) (61,556) (9,879)

Mortgage loans, net of allowance for loan losses. . . . . . . . . . . . . . . . . . . . 2,897,820 2,923,720 (25,900)

Other assets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,980 54,278 (5,298)

Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,213,877 $3,221,972 $ (8,095)

Liabilities and stockholders’ deficit

Debt

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 744,803 $ 780,044 $(35,241)

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,446,973 2,416,956 30,017

Other liabilities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,892 27,489 2,403

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,221,668 3,224,489 (2,821)

Senior preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,787 88,600 16,187

Other deficit(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (112,578) (91,117) (21,461)

Total stockholders’ deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,791) (2,517) (5,274)

Total liabilities and stockholders’ deficit. . . . . . . . . . . . . . . . . . . . . . . . . . $3,213,877 $3,221,972 $ (8,095)

(1) Includes $43.2 billion as of September 30, 2011 and $32.8 billion as of December 31, 2010 of non-mortgage-related

securities that are included in our other investments portfolio, which we present in “Table 33: Cash and Other

Investments Portfolio.”

(2) Consists of accrued interest receivable, net; acquired property, net; and other assets.

(3) Consists of accrued interest payable, federal funds purchased and securities sold under agreements to repurchase, and

other liabilities.

(4) Consists of preferred stock, common stock, accumulated deficit, accumulated other comprehensive loss, treasury stock,

and noncontrolling interest.

Cash and Other Investments Portfolio

Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or

similar arrangements are included in our cash and other investments portfolio. See “Liquidity and Capital

50
Management—Liquidity Management—Cash and Other Investments Portfolio” for additional information on

our cash and other investments portfolio.

Restricted Cash

Restricted cash primarily includes unscheduled borrower payments received by the servicer or consolidated

trusts due to be remitted to the MBS certificateholders in the subsequent month. Our restricted cash decreased

as of September 30, 2011 compared with the balance as of December 31, 2010 primarily due to a decline in

refinance activity, resulting in a decrease in unscheduled payments received.

Investments in Mortgage-Related Securities

Our investments in mortgage-related securities are classified in our condensed consolidated balance sheets as

either trading or available-for-sale and are measured at fair value. Unrealized and realized gains and losses on

trading securities are included as a component of “Fair value (losses) gains, net” and unrealized gains and

losses on available-for-sale securities are included in “Other comprehensive (loss) income” in our condensed

consolidated statements of operations and comprehensive loss. Realized gains and losses on available-for-sale

securities are recognized when securities are sold in “Investment gains, net” in our condensed consolidated

statements of operations and comprehensive loss. See “Note 5, Investments in Securities” for additional

information on our investments in mortgage-related securities, including the composition of our trading and

available-for-sale securities at amortized cost and fair value and the gross unrealized gains and losses related

to our available-for-sale securities as of September 30, 2011. Table 23 displays the fair value of our

investments in mortgage-related securities, including trading and available-for-sale securities, as of

September 30, 2011 and December 31, 2010.

Table 23: Summary of Mortgage-Related Securities at Fair Value

September 30,

2011

December 31,

2010

As of

(Dollars in millions)

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,767 $ 30,226

Freddie Mac. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,615 18,322

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,236 1,629

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,741 15,573

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,205 11,513

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,990 25,608

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,325 11,650

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,760 3,974

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $107,639 $118,495

Investments in Private-Label Mortgage-Related Securities

We classify private-label securities as Alt-A, subprime, multifamily or manufactured housing if the securities

were labeled as such when issued. We have also invested in private-label subprime mortgage-related securities

that we have resecuritized to include our guaranty (“wraps”).

The continued negative impact of the current economic environment, including sustained weakness in the

housing market and high unemployment, has adversely affected the performance of our Alt-A and subprime

private-label securities. The unpaid principal balance of our investments in Alt-A and subprime securities was

$37.2 billion as of September 30, 2011, of which $30.9 billion was rated below investment grade. Table 24

displays the unpaid principal balance and the fair value of our investments in Alt-A and subprime private-label

securities along with an analysis of the cumulative losses on these investments as of September 30, 2011. As

of September 30, 2011, we had realized actual cumulative principal shortfalls of approximately 5% compared

51
with 2% as of December 31, 2010 of the total cumulative credit losses reported in this table and reflected in

our condensed consolidated financial statements.

Table 24: Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities

Unpaid

Principal

Balance

Fair

Value

Total

Cumulative

Losses(1)

Noncredit

Component(2)

Credit

Component(3)

As of September 30, 2011

(Dollars in millions)

Trading securities:(4)

Alt-A private-label securities . . . . . . . . . . . . . . $ 2,806 $ 1,454 $ (1,309) $ (139) $(1,170)

Subprime private-label securities . . . . . . . . . . . 2,630 1,318 (1,312) (404) (908)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,436 $ 2,772 $ (2,621) $ (543) $(2,078)

Available-for-sale securities:(4)

Alt-A private-label securities . . . . . . . . . . . . . . $17,480 $12,287 $ (5,574) $(2,012) $(3,562)

Subprime private-label securities . . . . . . . . . . . 14,279 7,887 (6,431) (2,480) (3,951)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,759 $20,174 $(12,005) $(4,492) $(7,513)

Grand Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,195 $22,946 $(14,626) $(5,035) $(9,591)

(1) Amounts reflect the difference between the fair value and unpaid principal balance net of unamortized premiums,

discounts and certain other cost basis adjustments.

(2) Represents the estimated portion of the total cumulative losses that is noncredit-related. We have calculated the credit

component based on the difference between the amortized cost basis of the securities and the present value of expected

future cash flows. The remaining difference between the fair value and the present value of expected future cash flows

is classified as noncredit-related.

(3) For securities classified as trading, amounts reflect the estimated portion of the total cumulative losses that is creditrelated. For securities classified as available-for-sale, amounts reflect the estimated portion of total cumulative

other-than-temporary credit impairment losses, net of accretion, that are recognized in earnings.

(4) Excludes resecuritizations, or wraps, of private-label securities backed by subprime loans that we have guaranteed and

hold in our mortgage portfolio as Fannie Mae securities.

Table 25 displays the 60 days or more delinquency rates and average loss severities for the loans underlying

our Alt-A and subprime private-label mortgage-related securities for the most recent remittance period of the

current reporting quarter. The delinquency rates and average loss severities are based on available data

provided by Intex Solutions, Inc. (“Intex”) and CoreLogic, LoanPerformance (“CoreLogic”). We also present

the average credit enhancement and monoline financial guaranteed amount for these securities as of

September 30, 2011. Based on the stressed condition of some of our financial guarantors, we believe some of

these counterparties will not fully meet their obligation to us in the future. See “Risk Management—Credit

Risk Management—Institutional Counterparty Credit Risk Management—Financial Guarantors” for additional

information on our financial guarantor exposure and the counterparty risk associated with our financial

guarantors.

52
Table 25: Credit Statistics of Loans Underlying Alt-A and Subprime Private-Label Mortgage-Related Securities

(Including Wraps)

Trading

AvailableforSale Wraps(1) 60 Days

Delinquent(2)(3)

Average

Loss

Severity(3)(4)

Average

Credit

Enhancement(3)(5)

Monoline

Financial

Guaranteed

Amount(6)

Unpaid Principal Balance

As of September 30, 2011

(Dollars in millions)

Private-label mortgage- related securities backed by:(7)

Alt-A mortgage loans:

Option ARM Alt-A

mortgage loans:

2004 and prior . . . . . . . . $ — $ 487 $ — 31.8% 58.1% 16.3% $ —

2005 . . . . . . . . . . . . . . . — 1,324 — 44.9 60.9 39.0 257

2006 . . . . . . . . . . . . . . . — 1,241 — 46.7 62.2 26.4 117

2007 . . . . . . . . . . . . . . . 1,949 — — 45.4 70.4 55.8 684

Other Alt-A mortgage

loans:

2004 and prior . . . . . . . . — 6,309 — 10.5 51.6 12.4 12

2005 . . . . . . . . . . . . . . . 85 4,131 119 23.3 61.0 5.6 —

2006 . . . . . . . . . . . . . . . 65 3,868 — 28.3 61.6 0.6 —

2007 . . . . . . . . . . . . . . . 707 — 177 43.3 70.8 27.6 286

2008(8) . . . . . . . . . . . . . — 120 — — — — —

Total Alt-A mortgage

loans: . . . . . . . . . . . . . . 2,806 17,480 296 1,356

Subprime mortgage loans:

2004 and prior . . . . . . . . — 1,699 975 24.2 78.2 60.7 645

2005(8) . . . . . . . . . . . . . — 179 1,327 42.0 77.1 58.2 226

2006 . . . . . . . . . . . . . . . — 11,792 — 47.6 78.7 17.8 52

2007 . . . . . . . . . . . . . . . 2,630 609 5,516 47.8 77.4 22.2 177

Total subprime mortgage

loans: . . . . . . . . . . . . . . 2,630 14,279 7,818 1,100

Total Alt-A and subprime

mortgage loans: . . . . . . . $5,436 $31,759 $8,114 $2,456

(1) Represents our exposure to private-label Alt-A and subprime mortgage-related securities that have been resecuritized

(or wrapped) to include our guarantee.

(2) Delinquency data provided by Intex, where available, for loans backing Alt-A and subprime private-label mortgagerelated securities that we own or guarantee. The reported Intex delinquency data reflect information from September

2011 remittances for August 2011 payments. For consistency purposes, we have adjusted the Intex delinquency data,

where appropriate, to include all bankruptcies, foreclosures and REO in the delinquency rates.

(3) The average delinquency, severity and credit enhancement metrics are calculated for each loan pool associated with

securities where Fannie Mae has exposure and are weighted based on the unpaid principal balance of those securities.

(4) Severity data obtained from CoreLogic, where available, for loans backing Alt-A and subprime private-label mortgagerelated securities that we own or guarantee. The CoreLogic severity data reflect information from September 2011

remittances for August 2011 payments. For consistency purposes, we have adjusted the severity data, where

appropriate.

(5) Average credit enhancement percentage reflects both subordination and financial guarantees. Reflects the ratio of the

current amount of the securities that will incur losses in the securitization structure before any losses are allocated to

securities that we own or guarantee. Percentage generally calculated based on the quotient of the total unpaid principal

balance of all credit enhancements in the form of subordination or financial guarantee of the security divided by the

53
total unpaid principal balance of all of the tranches of collateral pools from which credit support is drawn for the

security that we own or guarantee.

(6) Reflects amount of unpaid principal balance supported by financial guarantees from monoline financial guarantors.

(7) Vintages are based on series date and not loan origination date.

(8) The unpaid principal balance includes private-label REMIC securities that have been resecuritized totaling

$120 million for the 2008 vintage of other Alt-A loans and $17 million for the 2005 vintage of subprime loans. These

securities are excluded from the delinquency, severity and credit enhancement statistics reported in this table.

Mortgage Loans

The decrease in mortgage loans, net of an allowance for loan losses, in the first nine months of 2011 was

primarily driven by lower acquisition volumes. For additional information on our mortgage loans, see “Note 3,

Mortgage Loans.” For additional information on the mortgage loan purchase and sale activities reported by our

Capital Markets group, see “Business Segment Results—Capital Markets Group Results.”

Debt Instruments

Debt of Fannie Mae is the primary means of funding our mortgage investments. Debt of consolidated trusts

represents our liability to third-party beneficial interest holders when we have included the assets of a

corresponding trust in our condensed consolidated balance sheets. We provide a summary of the activity of the

debt of Fannie Mae and a comparison of the mix between our outstanding short-term and long-term debt in

“Liquidity and Capital Management—Liquidity Management—Debt Funding.” Also see “Note 8, Short-Term

Borrowings and Long-Term Debt” for additional information on our outstanding debt.

The increase in debt of consolidated trusts in the first nine months of 2011 was primarily driven by the sale of

Fannie Mae MBS, which are accounted for as reissuances of debt of consolidated trusts in our condensed

consolidated balance sheets, since the MBS certificate ownership is transferred from us to a third party.

Derivative Instruments

We supplement our issuance of debt with interest rate related derivatives to manage the prepayment and

duration risk inherent in our mortgage investments. We aggregate, by derivative counterparty, the net fair value

gain or loss, less any cash collateral paid or received, and report these amounts in our condensed consolidated

balance sheets as either assets or liabilities.

Our derivative assets and liabilities consist of these risk management derivatives and our mortgage

commitments. We refer to the difference between the derivative assets and derivative liabilities recorded in our

condensed consolidated balance sheets as our net derivative asset or liability. We present, by derivative

instrument type, the estimated fair value of derivatives recorded in our condensed consolidated balance sheets

and the related outstanding notional amounts as of September 30, 2011 and December 31, 2010 in “Note 9,

Derivative Instruments.” Table 26 provides an analysis of the factors driving the change from December 31,

2010 to September 30, 2011 in the estimated fair value of our net derivative liability related to our risk

management derivatives recorded in our condensed consolidated balance sheets.

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Table 26: Changes in Risk Management Derivative Assets (Liabilities) at Fair Value, Net

For the Nine

Months Ended

September 30, 2011

(Dollars in millions)

Net risk management derivative liability as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . $ (789)

Effect of cash payments:

Fair value at inception of contracts entered into during the period(1) . . . . . . . . . . . . . . . . . . . 51

Fair value at date of termination of contracts settled during the period(2) . . . . . . . . . . . . . . . . 1,214

Net collateral received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17)

Periodic net cash contractual interest payments(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,755

Total cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,003

Statement of operations impact of recognized amounts:

Net contractual interest expense accruals on interest rate swaps . . . . . . . . . . . . . . . . . . . . . . (1,790)

Net change in fair value during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,777)

Risk management derivatives fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,567)

Net risk management derivative liability as of September 30, 2011 . . . . . . . . . . . . . . . . . . . . . . $(3,353)

(1) Cash receipts from sale of derivative option contracts increase the derivative liability recorded in our condensed

consolidated balance sheets. Cash payments made to purchase derivative option contracts (purchased option premiums)

increase the derivative asset recorded in our condensed consolidated balance sheets.

(2) Cash payments made to terminate derivative contracts reduce the derivative liability recorded in our condensed

consolidated balance sheets. Primarily represents cash paid (received) upon termination of derivative contracts.

(3) Interest is accrued on interest rate swap contracts based on the contractual terms. Accrued interest income increases

our derivative asset and accrued interest expense increases our derivative liability. The offsetting interest income and

expense are included as components of derivatives fair value losses, net in our condensed consolidated statements of

operations and comprehensive loss. Net periodic interest receipts reduce the derivative asset and net periodic interest

payments reduce the derivative liability. Also includes cash paid (received) on other derivatives contracts.

For additional information on our derivative instruments, see “Consolidated Results of Operations—Fair Value

(Losses) Gains, Net,” “Risk Management—Market Risk Management, Including Interest Rate Risk

Management” and “Note 9, Derivative Instruments.”

Stockholders’ Deficit

Our net deficit increased as of September 30, 2011 compared with December 31, 2010. See Table 27 in

“Supplemental Non-GAAP Information—Fair Value Balance Sheets” for details of the change in our net

deficit.

SUPPLEMENTAL NON-GAAP INFORMATION—FAIR VALUE BALANCE SHEETS

As part of our disclosure requirements with FHFA, we disclose on a quarterly basis supplemental non-GAAP

consolidated fair value balance sheets, which reflect our assets and liabilities at estimated fair value.

Table 27 summarizes changes in our stockholders’ deficit reported in our GAAP condensed consolidated

balance sheets and in the fair value of our net assets in our non-GAAP consolidated fair value balance sheets

for the nine months ended September 30, 2011. The estimated fair value of our net assets is calculated based

on the difference between the fair value of our assets and the fair value of our liabilities, adjusted for

noncontrolling interests. We use various valuation techniques to estimate fair value, some of which incorporate

internal assumptions that are subjective and involve a high degree of management judgment. We describe the

specific valuation techniques used to determine fair value and disclose the carrying value and fair value of our

financial assets and liabilities in “Note 13, Fair Value.”

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Table 27: Comparative Measures—GAAP Change in Stockholders’ Deficit and Non-GAAP Change in Fair Value

of Net Assets (Net of Tax Effect)

For the

Nine Months Ended

September 30, 2011

(Dollars in millions)

GAAP consolidated balance sheets:

Fannie Mae stockholders’ deficit as of December 31, 2010(1) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,599)

Total comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,462)

Capital transactions:(2)

Funds received from Treasury under the senior preferred stock purchase agreement . . . . . . . . 16,187

Senior preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,992)

Capital transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,195

Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Fannie Mae stockholders’ deficit as of September 30, 2011(1) . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,853)

Non-GAAP consolidated fair value balance sheets:

Estimated fair value of net assets as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . $(120,294)

Capital transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,195

Change in estimated fair value of net assets, excluding capital transactions . . . . . . . . . . . . . . . . (2,270)

Increase in estimated fair value of net assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,925

Estimated fair value of net assets as of September 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . $(113,369)

(1) Our net worth, as defined under the senior preferred stock purchase agreement, is equivalent to the “Total deficit”

amount reported in our condensed consolidated balance sheets. Our net worth, or total deficit, consists of “Total

Fannie Mae’s stockholders’ deficit” and “Noncontrolling interests” reported in our condensed consolidated balance

sheets.

(2) Represents capital transactions, which are reported in our condensed consolidated financial statements.

During the first nine months of 2011, the fair value of our net assets, excluding capital transactions, decreased

$2.3 billion which was attributable to a net decrease in the fair value of the net portfolio principally related to

widening of the option-adjusted spread levels, which were partially offset by an increase in fair value

attributable to the positive impact of the spread between mortgage assets and associated debt and derivatives.

Fair value decreases during the first half of 2011 were primarily attributable to credit-related items, principally

related to declining actual and expected home prices. These fair value decreases have been reduced in the

third quarter primarily by a decline in interest rates, which decreased the probability of default due to a higher

expectation of prepayments.

Cautionary Language Relating to Supplemental Non-GAAP Financial Measures

In reviewing our non-GAAP consolidated fair value balance sheets, there are a number of important factors

and limitations to consider. The estimated fair value of our net assets is calculated as of a particular point in

time based on our existing assets and liabilities. It does not incorporate other factors that may have a

significant impact on our long-term fair value, including revenues generated from future business activities in

which we expect to engage, the value from our foreclosure and loss mitigation efforts or the impact that

legislation or potential regulatory actions may have on us. As a result, the estimated fair value of our net

assets presented in our non-GAAP consolidated fair value balance sheets does not represent an estimate of our

net realizable value, liquidation value or our market value as a whole. Amounts we ultimately realize from the

disposition of assets or settlement of liabilities may vary materially from the estimated fair values presented in

our non-GAAP consolidated fair value balance sheets.

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In addition, the fair value of our net assets attributable to common stockholders presented in our fair value

balance sheet does not represent an estimate of the value we expect to realize from operating the company or

what we expect to draw from Treasury under the terms of our senior preferred stock purchase agreement,

primarily because:

• The estimated fair value of our credit exposures significantly exceeds our projected credit losses as fair

value takes into account certain assumptions about liquidity and required rates of return that a market

participant may demand in assuming a credit obligation. Because we do not intend to have another party

assume the credit risk inherent in our book of business, and therefore would not be obligated to pay a

market premium for its assumption, we do not expect the current market premium portion of our current

estimate of fair value to impact future Treasury draws;

• The fair value balance sheet does not reflect amounts we expect to draw in the future to pay dividends on

the senior preferred stock; and

• The fair value of our net assets reflects a point in time estimate of the fair value of our existing assets and

liabilities, and does not incorporate the value associated with new business that may be added in the

future.

The fair value of our net assets is not a measure defined within GAAP and may not be comparable to

similarly titled measures reported by other companies.

Supplemental Non-GAAP Consolidated Fair Value Balance Sheets

We present our non-GAAP fair value balance sheets in Table 28 below.

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Table 28: Supplemental Non-GAAP Consolidated Fair Value Balance Sheets

GAAP

Carrying

Value

Fair Value

Adjustment(1) Estimated

Fair Value

GAAP

Carrying

Value

Fair Value

Adjustment(1) EstimatedFair Value

As of September 30, 2011 As of December 31, 2010

(Dollars in millions)

Assets:

Cash and cash equivalents . .............. $ 80,268 $ — $ 80,268 $ 80,975 $ — $ 80,975

Federal funds sold and securities purchased under

agreements to resell or similar arrangements . . 35,950 — 35,950 11,751 — 11,751

Trading securities . . ................... 68,149 — 68,149 56,856 — 56,856

Available-for-sale securities. .............. 82,710 — 82,710 94,392 — 94,392

Mortgage loans:

Mortgage loans held for sale . . . . . . . . . . . . 309 — 309 915 — 915

Mortgage loans held for investment, net of

allowance for loan losses:

Of Fannie Mae. ................... 329,848 (25,895) 303,953 358,698 (39,331) 319,367

Of consolidated trusts . .............. 2,567,663 95,780(2) 2,663,443(3) 2,564,107 46,038(2) 2,610,145(3)

Total mortgage loans . . . .............. 2,897,820 69,885 2,967,705(4) 2,923,720 6,707 2,930,427(4)

Advances to lenders ................... 5,145 (116) 5,029(5)(6) 7,215 (225) 6,990(5)(6)

Derivative assets at fair value . . . . . . . . . . . . . 723 — 723(5)(6) 1,137 — 1,137(5)(6)

Guaranty assets and buy-ups, net . . . . . . . . . . . 480 378 858(5)(6) 458 356 814(5)(6)

Total financial assets . . . .............. 3,171,245 70,147 3,241,392(7) 3,176,504 6,838 3,183,342(7)

Credit enhancements . . . . . . . . . . . . . . . . . . . 469 2,502 2,971(5)(6) 479 3,286 3,765(5)(6)

Other assets . ........................ 42,163 (281) 41,882(5)(6) 44,989 (261) 44,728(5)(6)

Total assets........................ $3,213,877 $ 72,368 $3,286,245 $3,221,972 $ 9,863 $3,231,835

Liabilities:

Federal funds purchased and securities sold under

agreements to repurchase. . . . . . . . . . . . . . . $ — $ — $ — $ 52 $ (1) $ 51

Short-term debt:

Of Fannie Mae . . ................... 193,718 41 193,759 151,884 90 151,974

Of consolidated trusts . . . .............. 5,004 — 5,004 5,359 — 5,359

Long-term debt:

Of Fannie Mae . . ................... 551,085(8) 29,153 580,238 628,160(8) 21,524 649,684

Of consolidated trusts . . . .............. 2,441,969(8) 146,581(2) 2,588,550 2,411,597(8) 103,332(2) 2,514,929

Derivative liabilities at fair value . . ......... 4,273 — 4,273(9)(10) 1,715 — 1,715(9)(10)

Guaranty obligations . . . . . . . . . . . . . . . . . . . 765 3,155 3,920(9)(10) 769 3,085 3,854(9)(10)

Total financial liabilities . .............. 3,196,814 178,930 3,375,744(7) 3,199,536 128,030 3,327,566(7)

Other liabilities . . . ................... 24,854 (1,046) 23,808(9)(10) 24,953 (472) 24,481(9)(10)

Total liabilities . . ................... 3,221,668 177,884 3,399,552 3,224,489 127,558 3,352,047

Equity (deficit):

Fannie Mae stockholders’ equity (deficit):

Senior preferred(11) .................... 104,787 — 104,787 88,600 — 88,600

Preferred . . . ........................ 19,130 (17,784) 1,346 20,204 (19,829) 375

Common . . . ........................ (131,770) (87,732) (219,502) (111,403) (97,866) (209,269)

Total Fannie Mae stockholders’ deficit/nonGAAP fair value of net assets ......... $ (7,853) $(105,516) $ (113,369) $ (2,599) $(117,695) $ (120,294)

Noncontrolling interests . . . . . . . . . . . . . . . 62 — 62 82 — 82

Total deficit ....................... (7,791) (105,516) (113,307) (2,517) (117,695) (120,212)

Total liabilities and equity (deficit) ........ $3,213,877 $ 72,368 $3,286,245 $3,221,972 $ 9,863 $3,231,835

Explanation and Reconciliation of Non-GAAP Measures to GAAP Measures

(1) Each of the amounts listed as a “fair value adjustment” represents the difference between the carrying value included in our GAAP

condensed consolidated balance sheets and our best judgment of the estimated fair value of the listed item.

(2) Fair value exceeds carrying value of consolidated loans and consolidated debt as a significant portion of these were consolidated at

unpaid principal balance as of January 1, 2010, upon adoption of accounting standards on transfers of financial assets and

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consolidation of variable interest entities (“VIEs”). Also impacting the difference between fair value and carrying value of the

consolidated loans is the credit component included in consolidated loans, which has no corresponding impact on the consolidated

debt.

(3) Includes certain mortgage loans that we elected to report at fair value in our GAAP condensed consolidated balance sheets of

$3.4 billion and $3.0 billion as of September 30, 2011 and December 31, 2010, respectively.

(4) Performing loans had a fair value of $2.8 trillion and an unpaid principal balance of $2.7 trillion as of both September 30, 2011 and

December 31, 2010. Nonperforming loans, which include loans that are delinquent by one or more payments, had a fair value of

$133.8 billion and an unpaid principal balance of $232.1 billion as of September 30, 2011 compared with a fair value of

$168.5 billion and an unpaid principal balance of $287.4 billion as of December 31, 2010. See “Note 13, Fair Value” for additional

information on valuation techniques for performing and nonperforming loans.

(5) The following line items: (a) Advances to lenders; (b) Derivative assets at fair value; (c) Guaranty assets and buy-ups, net; (d) Credit

enhancements; and (e) Other assets, together consist of the following assets presented in our GAAP condensed consolidated balance

sheets: (a) Accrued interest receivable, net; (b) Acquired property, net; and (c) Other assets.

(6) “Other assets” include the following GAAP condensed consolidated balance sheets line items: (a) Accrued interest receivable, net

and (b) Acquired property, net. The carrying value of these items in our GAAP condensed consolidated balance sheets totaled

$23.1 billion and $27.5 billion as of September 30, 2011 and December 31, 2010, respectively. “Other assets” in our GAAP

condensed consolidated balance sheets include the following: (a) Advances to Lenders; (b) Derivative assets at fair value;

(c) Guaranty assets and buy-ups, net; and (d) Credit enhancements. The carrying value of these items totaled $6.8 billion and

$9.3 billion as of September 30, 2011 and December 31, 2010, respectively.

(7) We determined the estimated fair value of these financial instruments in accordance with the fair value accounting standard as

described in “Note 13, Fair Value.”

(8) Includes certain long-term debt instruments that we elected to report at fair value in our GAAP condensed consolidated balance

sheets of $4.7 billion and $3.2 billion as of September 30, 2011 and December 31, 2010, respectively.

(9) The following line items: (a) Derivative liabilities at fair value; (b) Guaranty obligations; and (c) Other liabilities, consist of the

following liabilities presented in our GAAP condensed consolidated balance sheets: (a) Accrued interest payable and (b) Other

liabilities.

(10) “Other liabilities” include Accrued interest payable in our GAAP condensed consolidated balance sheets. The carrying value of this

item in our GAAP condensed consolidated balance sheets totaled $12.9 billion and $13.8 billion as of September 30, 2011 and

December 31, 2010, respectively. We assume that certain other liabilities, such as deferred revenues, have no fair value. Although we

report the “Reserve for guaranty losses” as part of “Other liabilities” in our GAAP condensed consolidated balance sheets, it is

incorporated into and reported as part of the fair value of our guaranty obligations in our non-GAAP supplemental consolidated fair

value balance sheets. “Other liabilities” in our GAAP condensed consolidated balance sheets include the following: (a) Derivative

liabilities at fair value and (b) Guaranty obligations. The carrying value of these items totaled $5.0 billion and $2.5 billion as of

September 30, 2011 and December 31, 2010, respectively.

(11) The amount included in “estimated fair value” of the senior preferred stock is the liquidation preference, which is the same as the

GAAP carrying value, and does not reflect fair value.

LIQUIDITY AND CAPITAL MANAGEMENT

Liquidity Management

Our business activities require that we maintain adequate liquidity to fund our operations. Our liquidity risk

management policy is designed to address our liquidity risk. Liquidity risk is the risk that we will not be able

to meet our funding obligations in a timely manner. Liquidity risk management involves forecasting funding

requirements, maintaining sufficient capacity to meet our needs based on our ongoing assessment of financial

market liquidity and adhering to our regulatory requirements.

Our Treasury group is responsible for implementing our liquidity and contingency planning strategies. We

conduct liquidity contingency planning to prepare for an event in which our access to the unsecured debt

markets becomes limited. We plan for alternative sources of liquidity that are designed to allow us to meet our

cash obligations without relying upon the issuance of unsecured debt. While our liquidity contingency

planning attempts to address stressed market conditions and our status under conservatorship and Treasury

support arrangements, we believe that our liquidity contingency plan may be difficult or impossible to execute

for a company of our size in our circumstances. See “Liquidity and Capital Management—Liquidity

Management—Liquidity Risk Management Practices and Contingency Planning” in our 2010 Form 10-K for a

discussion of our liquidity contingency plans. Also see “Risk Factors” in this report for a description of the

risks associated with our liquidity contingency planning.

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Our liquidity position could be adversely affected by many causes, both internal and external to our business,

including: actions taken by the conservator, the Federal Reserve, U.S. Treasury or other government agencies;

legislation relating to us or our business; a U.S. government payment default on its debt obligations; a

downgrade in the credit ratings of our senior unsecured debt or the U.S. government’s debt from any of the

major ratings organizations; a systemic event leading to the withdrawal of liquidity from the market; an

extreme market-wide widening of credit spreads; public statements by key policy makers; a significant further

decline in our net worth; loss of demand for our debt, or certain types of our debt, from a major group of

investors; a significant credit event involving one of our major institutional counterparties; a sudden

catastrophic operational failure in the financial sector; or elimination of our GSE status.

Debt Funding

We fund our business primarily through the issuance of short-term and long-term debt securities in the

domestic and international capital markets. Because debt issuance is our primary funding source, we are

subject to “roll-over,” or refinancing, risk on our outstanding debt.

We have a diversified funding base of domestic and international investors. Purchasers of our debt securities

are geographically diversified and include fund managers, commercial banks, pension funds, insurance

companies, foreign central banks, corporations, state and local governments, and other municipal authorities.

Although our funding needs may vary from quarter to quarter depending on market conditions, we currently

expect our debt funding needs will decline in future periods as we reduce the size of our mortgage portfolio in

compliance with the requirement of the senior preferred stock purchase agreement that we reduce our

mortgage portfolio 10% per year until it reaches $250 billion.

Fannie Mae Debt Funding Activity

Table 29 summarizes the activity in the debt of Fannie Mae for the periods indicated. This activity includes

federal funds purchased and securities sold under agreements to repurchase but excludes the debt of

consolidated trusts as well as intraday loans. The reported amounts of debt issued and paid off during the

period represent the face amount of the debt at issuance and redemption, respectively. Activity for short-term

debt of Fannie Mae relates to borrowings with an original contractual maturity of one year or less while

activity for long-term debt of Fannie Mae relates to borrowings with an original contractual maturity of

greater than one year.

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Table 29: Activity in Debt of Fannie Mae

2011 2010 2011 2010

For the Three Months

Ended September 30,

For the Nine Months

Ended September 30,

(Dollars in millions)

Issued during the period:

Short-term:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $134,500 $102,778 $362,752 $389,709

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.12% 0.25% 0.12% 0.25%

Long-term:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 81,284 $138,672 $162,708 $341,526

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.39% 1.62% 1.81% 2.04%

Total issued:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $215,784 $241,450 $525,460 $731,235

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.60% 1.03% 0.65% 1.08%

Paid off during the period: (1)

Short-term:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $102,760 $139,706 $320,962 $370,713

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.16% 0.23% 0.21% 0.23%

Long-term:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,274 $132,407 $242,852 $316,009

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.96% 2.91% 2.49% 3.15%

Total paid off:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $196,034 $272,113 $563,814 $686,722

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.01% 1.54% 1.19% 1.57%

(1) Consists of all payments on debt, including regularly scheduled principal payments, payments at maturity, payments

resulting from calls and payments for any other repurchases.

Debt funding activity in the third quarter and first nine months of 2011 decreased compared with the third

quarter and first nine months of 2010 primarily due to lower funding needs as a result of (1) a reduction in the

size of our mortgage portfolio pursuant to the requirements of the senior preferred stock purchase agreement,

(2) a decrease in our redemption of debt with higher interest rates, which we replaced with issuances of debt

with lower interest rates, and (3) a decrease in our purchases of delinquent loans from MBS trusts.

Additionally, our debt funding needs were lower than would otherwise have been required as a result of funds

we received from Treasury under the senior preferred stock purchase agreement.

We believe that continued federal government support of our business and the financial markets, as well as our

status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in the

government’s support could materially adversely affect our ability to refinance our debt as it becomes due,

which could have a material adverse impact on our liquidity, financial condition and results of operations. On

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

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

responsibly wind down both Fannie Mae and Freddie Mac. The report emphasizes the importance of

proceeding with a careful transition plan and providing the necessary financial support to Fannie Mae and

Freddie Mac during the transition period. For more information on GSE reform, see “Legislative and

Regulatory Developments—GSE Reform.”

In addition, due to our reliance on the U.S. government’s support, our access to debt funding or the cost of our

debt funding also could be materially adversely affected by a change or perceived change in the

creditworthiness of the U.S. government. A downgrade in our credit ratings could reduce demand for our debt

securities and increase our borrowing costs. Standard & Poor’s Ratings Services’ (“S&P”) downgrade of our

credit rating on August 8, 2011, which was a result of a similar action on the U.S. government’s sovereign

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credit rating, has not adversely affected our access to debt funding or the cost of our debt funding. See our

discussion of credit ratings in “Risk Factors” for information about factors that may lead to the

U.S. government’s long-term debt rating being lowered, and “Credit Ratings” below for further discussion of

our dependence on our credit ratings.

Future changes or disruptions in the financial markets could significantly change the amount, mix and cost of

funds we obtain, which also could increase our liquidity and roll-over risk and have a material adverse impact

on our liquidity, financial condition and results of operations. See “Risk Factors” for a discussion of the risks

we face relating to (1) the uncertain future of our company; (2) our reliance on the issuance of debt securities

to obtain funds for our operations; and (3) our liquidity contingency plans.

Outstanding Debt

Total outstanding debt of Fannie Mae includes federal funds purchased and securities sold under agreements to

repurchase and short-term and long-term debt, excluding debt of consolidated trusts.

As of September 30, 2011, our outstanding short-term debt, based on its original contractual maturity, as a

percentage of our total outstanding debt increased to 26% from 19% as of December 31, 2010. For

information on our outstanding debt maturing within one year, including the current portion of our long-term

debt, as a percentage of our total debt, see “Maturity Profile of Outstanding Debt of Fannie Mae.” In addition,

the weighted-average interest rate on our long-term debt, based on its original contractual maturity, decreased

to 2.58% as of September 30, 2011 from 2.77% as of December 31, 2010.

Pursuant to the terms of the senior preferred stock purchase agreement, our outstanding debt limit is 120% of

the amount of mortgage assets we were allowed to own on December 31 of the immediately preceding

calendar year. Our debt limit under the senior preferred stock purchase agreement was reduced to $972 billion

in 2011. As of September 30, 2011, our aggregate indebtedness totaled $755.2 billion, which was

$216.8 billion below our debt limit. The calculation of our indebtedness for purposes of complying with our

debt limit reflects the unpaid principal balance and excludes debt basis adjustments and debt of consolidated

trusts. Because of our debt limit, we may be restricted in the amount of debt we issue to fund our operations.

Table 30 displays information as of September 30, 2011 and December 31, 2010 on our outstanding short-term

and long-term debt based on its original contractual terms.

62
Table 30: Outstanding Short-Term Borrowings and Long-Term Debt(1)

Maturities Outstanding

WeightedAverage

Interest

Rate Maturities Outstanding

WeightedAverage

Interest

Rate

September 30, 2011 December 31, 2010

As of

(Dollars in millions)

Federal funds purchased and securities sold

under agreements to repurchase . . . . . . . . — $ — —% — $ 52 2.20%

Short-term debt:

Fixed-rate:

Discount notes .................. — $ 193,385 0.13% — $ 151,500 0.32%

Foreign exchange discount notes . . . . . . — 333 2.01 — 384 2.43

Total short-term debt of Fannie Mae(2) ..... 193,718 0.14 151,884 0.32

Debt of consolidated trusts . . ......... — 5,004 0.19 — 5,359 0.23

Total short-term debt . . . .............. $ 198,722 0.14% $ 157,243 0.32%

Long-term debt:

Senior fixed:

Benchmark notes and bonds ......... 2011 - 2030 $ 281,876 2.90% 2011 - 2030 $ 300,344 3.20%

Medium-term notes . .............. 2011 - 2021 153,166 1.81 2011 - 2020 199,266 2.13

Foreign exchange notes and bonds . .... 2021 - 2028 667 5.22 2017 - 2028 1,177 6.21

Other(3) ...................... 2011 - 2040 44,241 5.59 2011 - 2040 44,893 5.64

Total senior fixed .............. 479,950 2.80 545,680 3.02

Senior floating:

Medium-term notes . .............. 2011 - 2016 62,970 0.30 2011 - 2015 72,039 0.31

Other(3) ...................... 2020 - 2037 421 6.61 2020 - 2037 386 4.92

Total senior floating ............. 63,391 0.33 72,425 0.34

Subordinated fixed-rate:

Qualifying subordinated(4) .......... 2012 - 2014 4,893 5.08 2011 - 2014 7,392 5.47

Subordinated debentures . . ......... 2019 2,851 9.91 2019 2,663 9.91

Total subordinated fixed-rate . . . .... 7,744 6.86 10,055 6.65

Total long-term debt of Fannie Mae(5) ...... 551,085 2.58 628,160 2.77

Debt of consolidated trusts(3) .......... 2011 - 2051 2,441,969 4.40 2011 - 2051 2,411,597 4.59

Total long-term debt . . . .............. $2,993,054 4.06% $3,039,757 4.22%

Outstanding callable debt of Fannie Mae(6). . . $ 158,150 2.40% $ 219,804 2.53%

(1) Outstanding debt amounts and weighted-average interest rates reported in this table include the effect of unamortized

discounts, premiums and other cost basis adjustments. Reported amounts include fair value gains and losses associated

with debt that we elected to carry at fair value. The unpaid principal balance of outstanding debt of Fannie Mae,

which excludes unamortized discounts, premiums and other cost basis adjustments and debt of consolidated trusts,

totaled $754.2 billion and $792.6 billion as of September 30, 2011 and December 31, 2010, respectively.

(2) Short-term debt of Fannie Mae consists of borrowings with an original contractual maturity of one year or less and,

therefore, does not include the current portion of long-term debt. Reported amounts include a net discount and other

cost basis adjustments of $77 million and $128 million as of September 30, 2011 and December 31, 2010,

respectively.

(3) Includes a portion of structured debt instruments that is reported at fair value.

(4) Consists of subordinated debt with an interest deferral feature.

(5) Long-term debt of Fannie Mae consists of borrowings with an original contractual maturity of greater than one year.

Reported amounts include the current portion of long-term debt that is due within one year, which totaled $99.9 billion

and $95.4 billion as of September 30, 2011 and December 31, 2010, respectively. Reported amounts also include

63
unamortized discounts, premiums and other cost basis adjustments of $9.5 billion and $12.4 billion as of

September 30, 2011 and December 31, 2010, respectively. The unpaid principal balance of long-term debt of Fannie

Mae, which excludes unamortized discounts, premiums, fair value adjustments and other cost basis adjustments and

amounts related to debt of consolidated trusts, totaled $560.4 billion and $640.5 billion as of September 30, 2011 and

December 31, 2010, respectively.

(6) Consists of long-term callable debt of Fannie Mae that can be paid off in whole or in part at our option at any time on

or after a specified date. Includes the unpaid principal balance, and excludes unamortized discounts, premiums and

other cost basis adjustments.

Maturity Profile of Outstanding Debt of Fannie Mae

Table 31 presents the maturity profile, as of September 30, 2011, of our outstanding debt maturing within one

year, by month, including amounts we have announced for early redemption. Our outstanding debt maturing

within one year, including the current portion of our long-term debt, increased as a percentage of our total

outstanding debt, excluding debt of consolidated trusts and federal funds purchased and securities sold under

agreements to repurchase, to 39% as of September 30, 2011, compared with 32% as of December 31, 2010.

The weighted-average maturity of our outstanding debt that is maturing within one year was 139 days as of

September 30, 2011, compared with 116 days as of December 31, 2010.

Table 31: Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year(1)

Long-Term

Short-Term

$41.8 $27.4 $36.9 $25.6 $20.0 $18.8 $6.2 $4.1 $4.2 $2.7 $1.4 $4.6

$6.0

$11.2 $0.1 $9.1

$3.3 $6.1

$8.1 $6.1 $5.3

$10.0

$16.4 $18.2

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

$60

$65

$70

Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12

(Dollars in billions)

(1) Includes unamortized discounts, premiums and other cost basis adjustments of $212 million as of September 30, 2011.

Excludes debt of consolidated trusts maturing within one year of $8.0 billion as of September 30, 2011.

Table 32 presents the maturity profile, as of September 30, 2011, of the portion of our long-term debt that

matures in more than one year, on a quarterly basis for one year and on an annual basis thereafter, excluding

amounts we have announced for early redemption within one year. The weighted-average maturity of our

outstanding debt maturing in more than one year was approximately 57 months as of September 30, 2011

compared with approximately 58 months as of December 31, 2010.

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Table 32: Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year(1)

$51.2

$25.0 $18.6

$42.4

$110.8

$45.6

$68.1

$89.5

$0

$50

$100

$150

Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2014 -

Q3 2015

Q4 2015 -

Q3 2016

Q4 2016 &

thereafter

(Dollars in billions)

Q4 2013 -

Q3 2014

(1) Includes unamortized discounts, premiums and other cost basis adjustments of $9.3 billion as of September 30, 2011.

Excludes debt of consolidated trusts of $2.4 trillion as of September 30, 2011.

We intend to repay our short-term and long-term debt obligations as they become due primarily through

proceeds from the issuance of additional debt securities. We also intend to use funds we receive from Treasury

under the senior preferred stock purchase agreement to pay our debt obligations and to pay dividends on the

senior preferred stock.

Cash and Other Investments Portfolio

Table 33 provides information on the composition of our cash and other investments portfolio for the periods

indicated.

Table 33: Cash and Other Investments Portfolio

September 30,

2011

December 31,

2010

As of

(Dollars in millions)

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,307 $17,297

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

arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,950 11,751

Non-mortgage-related securities:

U.S. Treasury securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,755 27,432

Asset-backed securities(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,465 5,321

Total non-mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,220 32,753

Total cash and other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $103,477 $61,801

(1) Excludes $1.1 billion and $4.0 billion of U.S. Treasury securities which are a component of cash equivalents as of

September 30, 2011 and December 31, 2010, respectively, as these securities had a maturity at the date of acquisition

of three months or less.

(2) Includes securities primarily backed by credit cards loans, student loans and automobile loans.

Our cash and other investments portfolio increased from December 31, 2010 to September 30, 2011. We have

increased the amount of cash and highly liquid non-mortgage securities held in our portfolio to further bolster

our liquidity position.

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Credit Ratings

Our credit ratings from the major credit ratings organizations, as well as the credit ratings of the

U.S. government, are primary factors that could affect our ability to access the capital markets and our cost of

funds. In addition, our credit ratings are important when we seek to engage in certain long-term transactions,

such as derivative transactions.

On August 5, 2011, S&P lowered the long-term sovereign credit rating on the U.S. to “AA+.” As a result of

this action, and because we directly rely on the U.S. government for capital support, on August 8, 2011, S&P

lowered our long-term senior debt rating to “AA+” with a negative outlook. Previously, our long-term senior

debt had been rated by S&P as “AAA” and had been on CreditWatch Negative. S&P affirmed our short-term

senior debt rating of “A-1+” and removed it from CreditWatch Negative. If S&P further lowers the

U.S. government’s sovereign credit rating, we expect that it would lower our long-term debt rating

correspondingly.

Fitch Ratings (“Fitch”) affirmed its rating and stable outlook of our long-term debt and Moody’s Investors

Service (“Moody’s”) confirmed the U.S. government’s rating and our long-term debt ratings. Moody’s also

removed the designation that these ratings were under review for possible downgrade and revised the rating

outlook for both the U.S. government’s rating and our long-term debt ratings to negative.

S&P, Moody’s and Fitch have all indicated that, if they were to lower the sovereign credit ratings on the U.S,

they would likely lower their ratings on the debt of Fannie Mae and certain other government-related entities.

We cannot predict whether one or more of these ratings agencies will lower our debt ratings in the future. See

“Risk Factors” for a discussion of the possibility of further downgrades and the risks to our business relating

to a decrease in our credit ratings, which could include an increase in our borrowing costs, limits on our

ability to issue debt, and additional collateral requirements under our derivatives contracts and other borrowing

arrangements.

Table 34 displays the credit ratings issued by the three major credit rating agencies as of November 3, 2011.

Table 34: Fannie Mae Credit Ratings

S&P Moody’s Fitch

As of November 3, 2011

Long-term senior debt . . . . . AA+ Aaa AAA

Short-term senior debt . . . . . A-1+ P-1 F1+

Qualifying subordinated

debt . . . . . . . . . . . . . . . .

A Aa2 AAPreferred stock . . . . . . . . . . C Ca C/RR6

Bank financial strength

rating . . . . . . . . . . . . . . .

— E+ —

Outlook . . . . . . . . . . . . . . . Negative

(for Long Term Senior Debt

and Qualifying

Subordinated Debt)

Negative

(for Long Term Senior Debt

and Qualifying

Subordinated Debt)

Stable

(for AAA rated Long Term

Issuer

Default Rating)

Cash Flows

Nine Months Ended September 30, 2011. Cash and cash equivalents increased from December 31, 2010 by

$7.0 billion to $24.3 billion as of September 30, 2011. Net cash generated from investing activities totaled

$327.8 billion, resulting primarily from proceeds received from repayments of loans held for investment.

These net cash inflows were offset by net cash used in operating activities of $6.7 billion and net cash used in

financing activities of $314.1 billion primarily attributable to a significant amount of debt redemptions in

excess of proceeds received from the issuances of debt as well as proceeds received from Treasury under the

senior preferred stock purchase agreement.

Nine Months Ended September 30, 2010. Cash and cash equivalents increased from December 31, 2009 by

$4.6 billion to $11.4 billion as of September 30, 2010. Net cash generated from investing activities totaled

66
$381.4 billion, resulting primarily from proceeds received from repayments of loans held for investment.

These net cash inflows were partially offset by net cash used in operating activities of $42.4 billion resulting

primarily from purchases of trading securities. The net cash used in financing activities of $334.4 billion was

primarily attributable to a significant amount of debt redemptions in excess of proceeds received from the

issuances of debt as well as proceeds received from Treasury under the senior preferred stock purchase

agreement.

Capital Management

Regulatory Capital

FHFA has announced that, during the conservatorship, our existing statutory and FHFA-directed regulatory

capital requirements will not be binding and FHFA will not issue quarterly capital classifications. We submit

capital reports to FHFA during the conservatorship and FHFA monitors our capital levels. We report our

minimum capital requirement, core capital and GAAP net worth in our periodic reports on Form 10-Q and

Form 10-K, and FHFA also reports them on its website. FHFA is not reporting on our critical capital, riskbased capital or subordinated debt levels during the conservatorship. For information on our minimum capital

requirements see “Note 11, Regulatory Capital Requirements.”

Senior Preferred Stock Purchase Agreement

As a result of the covenants under the senior preferred stock purchase agreement, Treasury’s ownership of the

warrant to purchase up to 79.9% of the total shares of our common stock outstanding and the uncertainty

regarding our future, we effectively no longer have access to equity funding except through draws under the

senior preferred stock purchase agreement.

Under the senior preferred stock purchase agreement, Treasury made a commitment to provide funding, under

certain conditions, to eliminate deficits in our net worth. We have received a total of $103.8 billion from

Treasury pursuant to the senior preferred stock purchase agreement as of September 30, 2011. The Acting

Director of FHFA will submit a request for $7.8 billion from Treasury under the senior preferred stock

purchase agreement to eliminate our net worth deficit as of September 30, 2011, and request the receipt of

those funds on or prior to December 31, 2011. Upon receipt of the requested funds, the aggregate liquidation

preference of the senior preferred stock, including the initial aggregate liquidation preference of $1.0 billion,

will equal $112.6 billion.

We expect to have a net worth deficit in future periods and therefore will be required to obtain additional

funding from Treasury pursuant to the senior preferred stock purchase agreement.

The senior preferred stock purchase agreement provides that the $200 billion maximum amount of the

commitment from Treasury will increase as necessary to accommodate any net worth deficiencies attributable

to periods during 2010, 2011 and 2012. If we do not have a positive net worth as of December 31, 2012, then

the amount of funding available under the senior preferred stock purchase agreement after 2012 will be

$124.8 billion ($200 billion less $75.2 billion in cumulative draws for net worth deficiencies through

December 31, 2009).

In the event we have a positive net worth as of December 31, 2012, then the amount of funding available after

2012 under the senior preferred stock purchase agreement will depend on the size of that positive net worth

relative to the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011 and 2012,

as follows:

• If our positive net worth as of December 31, 2012 is less than the cumulative draws for net worth

deficiencies attributable to periods during 2010, 2011 and 2012, then the amount of available funding

will be $124.8 billion less our positive net worth as of December 31, 2012.

• If our positive net worth as of December 31, 2012 is greater than the cumulative draws for net worth

deficiencies attributable to periods during 2010, 2011 and 2012, then the amount of available funding

will be $124.8 billion less the cumulative draws attributable to periods during 2010, 2011 and 2012.

67
As of November 7, 2011, the amount of the quarterly commitment fee payable by us to Treasury under the

senior preferred stock purchase agreement had not been established; however, Treasury has waived the

quarterly commitment fee under the senior preferred stock purchase agreement for each quarter of 2011 due to

the continued fragility of the U.S. mortgage market and Treasury’s belief that imposing the commitment fee

would not generate increased compensation for taxpayers. Treasury stated that it will reevaluate the situation

during the next calendar quarter to determine whether to set the quarterly commitment fee for the first quarter

of 2012.

Dividends

Holders of the senior preferred stock are entitled to receive, when, as and if declared by our Board of

Directors, cumulative quarterly cash dividends at the annual rate of 10% per year on the then-current

liquidation preference of the senior preferred stock. Treasury is the current holder of our senior preferred

stock. As conservator and under our charter, FHFA has authority to declare and approve dividends on the

senior preferred stock. If at any time we do not pay cash dividends on the senior preferred stock when they

are due, then immediately following the period we did not pay dividends and for all dividend periods

thereafter until the dividend period following the date on which we have paid in cash full cumulative

dividends (including any unpaid dividends added to the liquidation preference), the dividend rate will be 12%

per year. Dividends on the senior preferred stock that are not paid in cash for any dividend period will accrue

and be added to the liquidation preference of the senior preferred stock.

Our third quarter dividend of $2.5 billion was declared by the conservator and paid by us on September 30,

2011. Upon receipt of the additional funds from Treasury in December 2011 that FHFA will request on our

behalf, the annualized dividend on the senior preferred stock will be $11.3 billion based on the 10% dividend

rate. The level of dividends on the senior preferred stock will increase in future periods if, as we expect, the

conservator requests additional funds on our behalf from Treasury under the senior preferred stock purchase

agreement.

OFF-BALANCE SHEET ARRANGEMENTS

Our maximum potential exposure to credit losses relating to our outstanding and unconsolidated Fannie Mae

MBS and other financial guarantees is primarily represented by the unpaid principal balance of the mortgage

loans underlying outstanding and unconsolidated Fannie Mae MBS and other financial guarantees of

$58.9 billion as of September 30, 2011 and $56.9 billion as of December 31, 2010.

Under the temporary credit and liquidity facilities program in which we provide assistance to housing finance

agencies (“HFAs”) and in which Treasury has purchased participation interests, our outstanding commitments

totaled $3.3 billion as of September 30, 2011 and $3.7 billion as of December 31, 2010. Our total outstanding

liquidity commitments to advance funds for securities backed by multifamily housing revenue bonds totaled

$17.4 billion as of September 30, 2011 and $17.8 billion as of December 31, 2010. As of both September 30,

2011 and December 31, 2010, there were no liquidity guarantee advances outstanding. For a description of

these programs, see “MD&A—Off-Balance Sheet Arrangements—Treasury Housing Finance Agency

Initiative” in our 2010 Form 10-K.

RISK MANAGEMENT

Our business activities expose us to the following three major categories of financial risk: credit risk, market

risk (including interest rate and liquidity risk) and operational risk. We seek to manage these risks and

mitigate our losses by using an established risk management framework. Our risk management framework is

intended to provide the basis for the principles that govern our risk management activities. In addition to these

financial risks, there is significant uncertainty regarding the future of our company, including how long we

will continue to be in existence, which we discuss in more detail in “Legislative and Regulatory

Developments—GSE Reform” and “Risk Factors.” We are also subject to a number of other risks that could

adversely impact our business, financial condition, earnings and cash flow, including model, legal and

68
reputational risks that may arise due to a failure to comply with laws, regulations or ethical standards and

codes of conduct applicable to our business activities and functions.

In this section we provide an update on our management of our major risk categories. For a more complete

discussion of the financial risks we face and how we manage credit risk, market risk and operational risk, see

“MD&A—Risk Management” in our 2010 Form 10-K and “Risk Factors” in our 2010 Form 10-K and in this

report.

Credit Risk Management

We are generally subject to two types of credit risk: mortgage credit risk and institutional counterparty credit

risk. Continuing adverse market conditions have resulted in significant exposure to mortgage and institutional

counterparty credit risk. The metrics used to measure credit risk are generated using internal models. Our

internal models require numerous assumptions and there are inherent limitations in any methodology used to

estimate macroeconomic factors such as home prices, unemployment and interest rates and their impact on

borrower behavior. When market conditions change rapidly and dramatically, the assumptions of our models

may no longer accurately capture or reflect the changing conditions. On a continuous basis, management

makes judgments about the appropriateness of the risk assessments indicated by the models. See “Risk

Factors” in our 2010 Form 10-K for a discussion of the risks associated with our use of models.

Mortgage Credit Risk Management

Mortgage credit risk is the risk that a borrower will fail to make required mortgage payments. We are exposed

to credit risk on our mortgage credit book of business because we either hold mortgage assets, have issued a

guaranty in connection with the creation of Fannie Mae MBS backed by mortgage assets or provided other

credit enhancements on mortgage assets. While our mortgage credit book of business includes all of our

mortgage-related assets, both on- and off-balance sheet, our guaranty book of business excludes non-Fannie

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

Mortgage Credit Book of Business

Table 35 displays the composition of our entire mortgage credit book of business as of the dates indicated.

Our total single-family mortgage credit book of business accounted for 93% of our total mortgage credit book

of business as of both September 30, 2011 and December 31, 2010.

Table 35: Composition of Mortgage Credit Book of Business(1)

Single-Family Multifamily Total Single-Family Multifamily Total

As of September 30, 2011 As of December 31, 2010

(Dollars in millions)

Mortgage loans and Fannie Mae MBS(2) . . $2,803,667 $174,779 $2,978,446 $2,826,994 $170,552 $2,997,546

Unconsolidated Fannie Mae MBS, held by

third parties(3) . . . . . . . . . . . . . . . . . . 17,899 1,754 19,653 19,468 1,855 21,323

Other credit guarantees(4) . . . . . . . . . . . . 22,556 16,726 39,282 18,625 16,994 35,619

Guaranty book of business. . . . . . . . . . $2,844,122 $193,259 $3,037,381 $2,865,087 $189,401 $3,054,488

Agency mortgage-related securities(5) . . . . 16,574 33 16,607 18,797 24 18,821

Other mortgage-related securities . . . . . . . 44,330 32,732 77,062 48,678 34,205 82,883

Mortgage credit book of business . . . . . $2,905,026 $226,024 $3,131,050 $2,932,562 $223,630 $3,156,192

Guaranty Book of Business Detail:

Conventional Guaranty Book of

Business(6) . . . . . . . . . . . . . . . . . . . $2,771,191 $190,760 $2,961,951 $2,790,590 $186,712 $2,977,302

Government Guaranty Book of

Business(7) . . . . . . . . . . . . . . . . . . . $ 72,931 $ 2,499 $ 75,430 $ 74,497 $ 2,689 $ 77,186

69
(1) Based on unpaid principal balance. Prior period amounts have been reclassified to conform to the current period

presentation.

(2) Consists of mortgage loans and Fannie Mae MBS recognized in our condensed consolidated balance sheets. The

principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.

(3) Reflects unpaid principal balance of unconsolidated Fannie Mae MBS, held by third-party investors. The principal

balance of resecuritized Fannie Mae MBS is included only once in the reported amount.

(4) Includes single-family and multifamily credit enhancements that we have provided and that are not otherwise reflected

in the table.

(5) Consists of mortgage-related securities issued by Freddie Mac and Ginnie Mae.

(6) Refers to mortgage loans and mortgage-related securities that are not guaranteed or insured, in whole or in part, by the

U.S. government or one of its agencies.

(7) Refers to mortgage loans and mortgage-related securities guaranteed or insured, in whole or in part, by the U.S.

government or one of its agencies.

In the following sections, we discuss the mortgage credit risk of the single-family and multifamily loans in our

guaranty book of business. The credit statistics reported below, unless otherwise noted, pertain generally to the

portion of our guaranty book of business for which we have access to detailed loan-level information, which

constituted approximately 99% of both our single-family conventional guaranty book of business and our

multifamily guaranty book of business, excluding defeased loans, as of September 30, 2011 and December 31,

2010. We typically obtain this data from the sellers or servicers of the mortgage loans in our guaranty book of

business and receive representations and warranties from them as to the accuracy of the information. While we

perform various quality assurance checks by sampling loans to assess compliance with our underwriting and

eligibility criteria, we do not independently verify all reported information and we rely on lender

representations regarding the accuracy of the characteristics of loans in our guaranty book of business. See

“Risk Factors” in our 2010 Form 10-K for a discussion of the risk that we could experience mortgage fraud as

a result of this reliance on lender representations.

Single-Family Mortgage Credit Risk Management

Our strategy in managing single-family mortgage credit risk consists of four primary components: (1) our

acquisition and servicing policies and underwriting and servicing standards, including the use of credit

enhancements; (2) portfolio diversification and monitoring; (3) management of problem loans; and (4) REO

management. These strategies, which we discuss below, may increase our expenses and may not be effective

in reducing our credit-related expenses or credit losses. We provide information on our credit-related expenses

and credit losses in “Consolidated Results of Operations—Credit-Related Expenses.”

The credit risk profile of our single-family mortgage credit book of business is influenced by, among other

things, the credit profile of the borrower, features of the loan, loan product type, the type of property securing

the loan and the housing market and general economy. We focus more on loans that we believe pose a higher

risk of default, which typically have been loans associated with higher mark-to-market LTV ratios, loans to

borrowers with lower FICO credit scores and certain higher risk loan product categories, such as Alt-A loans.

These and other factors affect both the amount of expected credit loss on a given loan and the sensitivity of

that loss to changes in the economic environment.

Because we believe we have limited credit exposure on our government loans, the single-family credit

statistics we focus on and report in the sections below generally relate to our single-family conventional

guaranty book of business, which represents the substantial majority of our total single-family guaranty book

of business.

We provide information on the performance of non-Fannie Mae mortgage-related securities held in our

portfolio, including the impairment that we have recognized on these securities, in “Consolidated Balance

Sheet Analysis—Investments in Mortgage-Related Securities—Investments in Private-Label Mortgage-Related

Securities.”

70
Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards

In evaluating our single-family mortgage credit risk, we closely monitor changes in housing and economic

conditions and the impact of those changes on the credit risk profile of our single-family mortgage credit book

of business. We regularly update our underwriting standards and eligibility guidelines to take into

consideration changing market conditions.

Our mortgage servicers are the primary points of contact for borrowers and perform a vital role in our efforts

to reduce defaults and pursue foreclosure alternatives. In the second quarter of 2011, we issued new standards

for mortgage servicers regarding the management of delinquent loans, default prevention and foreclosure time

frames under FHFA’s directive to align GSE policies for servicing delinquent mortgages. The new standards,

reinforced by new incentives and compensatory fees, require servicers to take a more consistent approach for

homeowner communications, loan modifications and other workouts, and, when necessary, foreclosures. The

new standards are designed to: (1) achieve effective contact with the borrower, including creating a uniform

standard for communicating with the homeowner, determining reasons for delinquency and assessing their

ability to pay, and educating homeowners on the availability of foreclosure prevention options; (2) set clear

timelines and establish clear and consistent policies in the foreclosure process; and (3) provide incentives to

servicers to complete loan workouts earlier in the homeowner’s delinquency and charge servicers

compensatory fees when they fail to have the proper contact with the borrower. We believe these standards,

which became effective October 1, 2011, will bring greater consistency, clarity, fairness and efficiency to the

process, help improve servicer performance, and hold servicers accountable for their effectiveness in assisting

homeowners.

In addition to these new standards, we have taken other steps to improve the servicing of our delinquent loans

including: (1) updating our Servicing Guide, which should improve our servicers’ ability to understand and

comply with our requirements and allow them to complete workouts earlier in the delinquency process,

thereby avoiding foreclosure; (2) implementing our STAR program, a servicer performance management

system designed to encourage improvements in customer service and foreclosure prevention outcomes for

homeowners by rating servicers on their performance in these areas; and (3) transferring servicing on loan

populations that include loans with higher-risk characteristics to special servicers with whom we have worked

to develop high-touch protocols for servicing these loans. For example, in the third quarter of 2011, we agreed

to purchase from Bank of America, N.A. the mortgage servicing rights associated with up to $74 billion in

unpaid principal balance of mortgage loans in our single-family guaranty book of business, which represented

approximately 11% of our servicing portfolio with Bank of America as of September 30, 2011. We believe

retaining special servicers to service these loans using high-touch protocols will reduce our future credit losses

on the transferred loan portfolio, while enabling Bank of America to better focus on our remaining portfolio

with them.

For discussion of our acquisition policy, underwriting standards, and use of mortgage insurance as a form of

credit enhancement, see “MD&A—Risk Management—Credit Risk Management—Single-Family Mortgage

Credit Risk Management” in our 2010 Form 10-K. For a discussion of our aggregate mortgage insurance

coverage as of September 30, 2011 and December 31, 2010, see “Risk Management—Credit Risk

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

Single-Family Portfolio Diversification and Monitoring

Diversification within our single-family mortgage credit book of business by product type, loan characteristics

and geography is an important factor that influences credit quality and performance and may reduce our credit

risk. We monitor various loan attributes, in conjunction with housing market and economic conditions, to

determine if our pricing and our eligibility and underwriting criteria accurately reflect the risk associated with

loans we acquire or guarantee. In some cases, we may decide to significantly reduce our participation in

riskier loan product categories. We also review the payment performance of loans in order to help identify

potential problem loans early in the delinquency cycle and to guide the development of our loss mitigation

strategies.

71
Table 36 presents our single-family conventional business volumes and our single-family conventional

guaranty book of business for the periods indicated, based on certain key risk characteristics that we use to

evaluate the risk profile and credit quality of our single-family loans.

Table 36: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1)

2011 2010 2011 2010 September 30, 2011 December 31, 2010

For the

Three Months

Ended

September 30,

For the

Nine Months

Ended

September 30,

Percent of Single-Family

Conventional Guaranty

Book of Business(3)(4)

As of

Percent of Single-Family

Conventional Business Volume(2)

Original LTV ratio:(5)

G= 60% . . . . . . . . . . . . . . 26% 30% 28% 30% 24% 24%

60.01% to 70% . . . . . . . . . 14 16 15 15 16 16

70.01% to 80% . . . . . . . . . 38 40 38 39 40 41

80.01% to 90%(6) . . . . . . . . 10 8 9 9 10 9

90.01% to 100%(6) ....... 9 5 7 5 9 9

Greater than 100%(6) ..... 3 1 3 2 1 1

Total . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

Weighted average . . . . . . 71% 68% 70% 69% 71% 71%

Average loan amount . . . . . . . $202,476 $218,328 $205,186 $219,551 $155,769 $155,531

Estimated mark-to-market

LTV ratio:(7)

G= 60% . . . . . . . . . . . . . . 28% 28%

60.01% to 70% . . . . . . . . . 13 13

70.01% to 80% . . . . . . . . . 19 19

80.01% to 90% . . . . . . . . . 15 15

90.01% to 100% . . . . . . . . 9 9

Greater than 100% . . . . . . . 16 16

Total . . . . . . . . . . . . . . . 100% 100%

Weighted average . . . . . . 78% 77%

Product type:

Fixed-rate:(8)

Long-term . . . . . . . . . . . 67% 72% 69% 72% 72% 74%

Intermediate-term . . . . . . 25 22 24 21 15 14

Interest-only . . . . . . . . . . * * * * 2 2

Total fixed-rate . . . . . . 92 94 93 93 89 90

Adjustable-rate:

Interest-only . . . . . . . . . . 1 1 1 2 3 4

Other ARMs . . . . . . . . . 7 5 6 5 8 6

Total adjustable-rate. . . 8 6 7 7 11 10

Total . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

72
2011 2010 2011 2010 September 30, 2011 December 31, 2010

For the

Three Months

Ended

September 30,

For the

Nine Months

Ended

September 30,

Percent of Single-Family

Conventional Guaranty

Book of Business(3)(4)

As of

Percent of Single-Family

Conventional Business Volume(2)

Number of property units:

1 unit . . . . . . . . . . . . . . . . . . . . . . . . . . 97% 98% 97% 98% 97% 97%

2-4 units . . . . . . . . . . . . . . . . . . . . . . . . 3 2 3 2 3 3

Total . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

Property type:

Single-family homes . . . . . . . . . . . . . . . . 91% 92% 91% 91% 91% 91%

Condo/Co-op . . . . . . . . . . . . . . . . . . . . . 9 8 9 9 9 9

Total . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

Occupancy type:

Primary residence . . . . . . . . . . . . . . . . . . 88% 92% 88% 91% 89% 90%

Second/vacation home. . . . . . . . . . . . . . . 5 4 5 4 5 4

Investor . . . . . . . . . . . . . . . . . . . . . . . . . 7 4 7 5 6 6

Total . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

FICO credit score at origination:

G 620 . . . . . . . . . . . . . . . . . . . . . . . . . 1% *% 1% 1% 3% 4%

620 to G 660 . . . . . . . . . . . . . . . . . . . . 2 2 2 2 7 7

660 to G 700 . . . . . . . . . . . . . . . . . . . . 8 6 8 7 14 15

700 to G 740 . . . . . . . . . . . . . . . . . . . . 17 16 17 17 21 21

H= 740 . . . . . . . . . . . . . . . . . . . . . . . . 72 76 72 73 55 53

Total . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

Weighted average . . . . . . . . . . . . . . . . 759 764 760 760 737 735

Loan purpose:

Purchase . . . . . . . . . . . . . . . . . . . . . . . . 32% 27% 26% 26% 32% 33%

Cash-out refinance . . . . . . . . . . . . . . . . . 15 19 17 20 28 29

Other refinance . . . . . . . . . . . . . . . . . . . 53 54 57 54 40 38

Total . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

Geographic concentration:(9)

Midwest . . . . . . . . . . . . . . . . . . . . . . . . 15% 16% 15% 15% 15% 15%

Northeast. . . . . . . . . . . . . . . . . . . . . . . . 19 19 20 20 19 19

Southeast. . . . . . . . . . . . . . . . . . . . . . . . 19 18 20 18 24 24

Southwest . . . . . . . . . . . . . . . . . . . . . . . 16 15 16 15 15 15

West . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 32 29 32 27 27

Total . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

Origination year:

G= 2001. . . . . . . . . . . . . . . . . . . . . . . . 2% 2%

2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 11

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 12

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 9

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 21

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 18

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 —

Total . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100%

73
* Represents less than 0.5% of single-family conventional business volume or book of business.

(1) We reflect second lien mortgage loans in the original LTV ratio calculation only when we own both the first and second lien

mortgage loans or we own only the second lien mortgage loan. Second lien mortgage loans represented less than 0.5% of our singlefamily conventional guaranty book of business as of both September 30, 2011 and December 31, 2010. Second lien mortgage loans

held by third parties are not reflected in the original LTV or mark-to-market LTV ratios in this table.

(2) Calculated based on unpaid principal balance of single-family loans for each category at time of acquisition. Single-Family business

volume refers to both single-family mortgage loans we purchase for our mortgage portfolio and single-family mortgage loans we

guarantee.

(3) Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the aggregate unpaid

principal balance of loans in our single-family conventional guaranty book of business as of the end of each period.

(4) Our single-family conventional guaranty book of business includes jumbo-conforming and high-balance loans that represented

approximately 4.6% of our single-family conventional guaranty book of business as of September 30, 2011 and 3.9% as of

December 31, 2010. See “Business—Our Charter and Regulation of Our Activities—Charter Act—Loan Standards” in our 2010

Form 10-K and “Risk Management—Credit Risk Management—Single Family Mortgage Credit Risk Management—Credit Profile

Summary” in this report for additional information on loan limits.

(5) The original LTV ratio generally is based on the original unpaid principal balance of the loan divided by the appraised property value

reported to us at the time of acquisition of the loan. Excludes loans for which this information is not readily available.

(6) We purchase loans with original LTV ratios above 80% to fulfill our mission to serve the primary mortgage market and provide

liquidity to the housing system. Except as permitted under Refi Plus, our charter generally requires primary mortgage insurance or

other credit enhancement for loans that we acquire that have a LTV ratio over 80%.

(7) The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of each reported

period divided by the estimated current value of the property, which we calculate using an internal valuation model that estimates

periodic changes in home value. Excludes loans for which this information is not readily available.

(8) Long-term fixed-rate consists of mortgage loans with maturities greater than 15 years, while intermediate-term fixed-rate has

maturities equal to or less than 15 years. Loans with interest-only terms are included in the interest-only category regardless of their

maturities.

(9) Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD and WI. Northeast includes CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI,

VT and VI. Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA and WV. Southwest consists of AZ, AR, CO, KS,

LA, MO, NM, OK, TX and UT. West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.

Credit Profile Summary

We continue to see the positive effects of actions we took beginning in 2008 to significantly strengthen our

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

stability in the housing market. The single-family loans we purchased or guaranteed in the first nine months of

2011 have a strong credit profile with a weighted average original LTV ratio of 70%, a weighted average

FICO credit score of 760, and a product mix with a significant percentage of fully amortizing fixed-rate

mortgage loans. Due to lower acquisition volume and the relatively high volume of Refi Plus loans (including

HARP loans), the LTV ratios at origination for our 2011 acquisitions to date are higher than for our 2009 and

2010 acquisitions.

Whether our future acquisitions will exhibit the same credit profile as our recent acquisitions depends on

many factors, including our future pricing and eligibility standards, our future objectives, mortgage insurers’

eligibility standards, our future volume of Refi Plus acquisitions, which typically include higher LTV ratios

and lower FICO credit scores, and future market conditions. We expect the ultimate performance of all our

loans will be affected by macroeconomic trends, including unemployment, the economy, and home prices.

The credit profile of our acquisitions in the first nine months of 2011 was further influenced by our

acquisitions of refinanced loans. Refinanced loans, which include Refi Plus loans, comprised 74% of our

single-family acquisitions in the first nine months of 2011. Refinanced loans generally have a strong credit

profile because refinancing indicates borrowers’ ability to make their mortgage payment and desire to maintain

homeownership, but Refi Plus loans, which may have original LTV ratios as high as 125% and in some cases

lower FICO credit scores than we generally require, may not ultimately perform as well as traditional

refinanced loans. However, it is too early to determine whether the performance of loans with higher risk

characteristics refinanced under the Refi Plus program will perform differently from other refinanced loans.

Refi Plus offers expanded refinance opportunities for eligible Fannie Mae borrowers that may help prevent

74
future delinquencies and defaults. In the first quarter of 2011, our regulator granted our request for an

extension of our ability to acquire loans under Refi Plus with LTV ratios greater than 80% and up to 125% for

loans originated through June 2012. Approximately 19% of our total single-family conventional business

volume for the first nine months of 2011 consisted of loans with LTV ratios higher than 80% at the time of

purchase compared with 16% for the first nine months of 2010.

On October 24, 2011, FHFA, Fannie Mae, and Freddie Mac announced changes to HARP. While HARP

previously limited eligibility to borrowers with mortgage loans that had LTV ratios no greater than

125 percent, the new HARP guidelines remove that ceiling when the refinancing is into a new fixed-rate

mortgage. See “Legislative and Regulatory Developments” for a discussion on the changes to HARP.

The prolonged and severe decline in home prices has resulted in the overall estimated weighted average

mark-to-market LTV ratio of our single-family conventional guaranty book of business to remain high at 78%

as of September 30, 2011, and 77% as of December 31, 2010. The portion of our single-family conventional

guaranty book of business with an estimated mark-to-market LTV ratio greater than 100% was 16% as of

September 30, 2011 and December 31, 2010. If home prices decline further, more loans may have

mark-to-market LTV ratios greater than 100%, which increases the risk of delinquency and default.

Alt-A and Subprime Loans

Our exposure to Alt-A and subprime loans included in our single-family conventional guaranty book of

business, as defined in this section, does not include (1) our investments in private-label mortgage-related

securities backed by Alt-A and subprime loans or (2) resecuritizations, or wraps, of private-label mortgagerelated securities backed by Alt-A mortgage loans that we have guaranteed. See “Consolidated Balance Sheet

Analysis—Investments in Mortgage-Related Securities—Investments in Private-Label Mortgage-Related

Securities” for a discussion of our exposure to private-label mortgage-related securities backed by Alt-A and

subprime loans. As a result of our decision to discontinue the purchase of newly originated Alt-A loans,

except for those that represent the refinancing of an existing Fannie Mae loan, we expect our acquisitions of

Alt-A mortgage loans to continue to be minimal in future periods and the percentage of the book of business

attributable to Alt-A will continue to decrease over time. We are also not currently acquiring newly originated

subprime loans.

We have classified a mortgage loan as Alt-A if the lender that delivered the loan to us classified the loan as

Alt-A based on documentation or other features. We have classified a mortgage loan as subprime if the loan

was originated by a lender specializing in subprime business or by a subprime division of a large lender. We

exclude from the subprime classification loans originated by these lenders if we acquired the loans in

accordance with our standard underwriting criteria, which typically require compliance by the seller with our

Selling Guide (including standard representations and warranties) and/or evaluation of the loans through our

Desktop Underwriter system. We apply our classification criteria in order to determine our Alt-A and

subprime loan exposures; however, we have other loans with some features that are similar to Alt-A and

subprime loans that we have not classified as Alt-A or subprime because they do not meet our classification

criteria. The unpaid principal balance of Alt-A loans included in our single-family conventional guaranty book

of business of $188.4 billion as of September 30, 2011, represented approximately 6.8% of our single-family

conventional guaranty book of business. The unpaid principal balance of subprime loans included in our

single-family conventional guaranty book of business of $6.0 billion as of September 30, 2011, represented

approximately 0.2% of our single-family conventional guaranty book of business. See “Table 36: Risk

Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” for

additional information on our single-family book of business.

Jumbo-Conforming and High-Balance Loans

The outstanding unpaid principal balance of our jumbo-conforming and high-balance loans was $125.8 billion,

or 4.6% of our single-family conventional guaranty book of business, as of September 30, 2011 and

$109.7 billion, or 3.9% of our single-family conventional guaranty book of business, as of December 31, 2010.

The standard conforming loan limit for a one-unit property was $417,000 in 2011 and 2010. Our loan limits

75
were higher in specified high-cost areas, reaching as high as $729,750 for one-unit properties; however, our

loan limits for loans originated after September 30, 2011 decreased in specified high-cost areas to an amount

not to exceed $625,500 for one-unit properties. Unlike FHA, which is not subject to current loan limits for

refinancing its existing loans above current limits, our current loan limits apply to all new acquisitions.

Therefore, we expect refinances of our existing loans above current limits to be significantly reduced. See

“Business—Our Charter and Regulation of Our Activities—Charter Act—Loan Standards” in our 2010

Form 10-K for additional information on our loan limits.

Reverse Mortgages

The outstanding unpaid principal balance of reverse mortgage whole loans and Fannie Mae MBS backed by

reverse mortgage loans in our guaranty book of business was $50.9 billion as of September 30, 2011 and

$50.8 billion as of December 31, 2010. The balance of our reverse mortgage loans could increase over time,

as each month the scheduled and unscheduled payments, interest, mortgage insurance premium, servicing fee,

and default-related costs accrue to increase the unpaid principal balance. The majority of these loans are home

equity conversion mortgages insured by the federal government through the FHA. Because home equity

conversion mortgages are insured by the federal government, we believe that we have limited exposure to

losses on these loans. In December 2010, we communicated to our lenders that we are exiting the reverse

mortgage business and will no longer acquire newly originated home equity conversion mortgages.

Problem Loan Management

Our problem loan management strategies are primarily focused on reducing defaults to avoid losses that would

otherwise occur and pursuing foreclosure alternatives to attempt to minimize the severity of the losses we

incur. If a borrower does not make required payments, or is in jeopardy of not making payments, we work

with the servicers of our loans to offer workout solutions to minimize the likelihood of foreclosure as well as

the severity of loss. Our loan workouts reflect our various types of home retention strategies, including loan

modifications, repayment plans and forbearances, and foreclosure alternatives, including preforeclosure sales

and deeds-in-lieu of foreclosure. When appropriate, we seek to move to foreclosure expeditiously. For

additional discussion on our efforts to reduce defaults and credit losses, see “Executive Summary—Reducing

Credit Losses on Our Legacy Book of Business.”

In the following section, we present statistics on our problem loans, describe specific efforts undertaken to

manage these loans and prevent foreclosures and provide metrics regarding the performance of our loan

workout activities. We generally define single-family problem loans as loans that have been identified as being

at imminent risk of payment default; early stage delinquent loans that are either 30 days or 60 days past due;

and seriously delinquent loans, which are loans that are three or more monthly payments past due or in the

foreclosure process. Unless otherwise noted, single-family delinquency data is calculated based on number of

loans. We include single-family conventional loans that we own and that back Fannie Mae MBS in the

calculation of the single-family delinquency rate. Percentage of book outstanding calculations are based on the

unpaid principal balance of loans for each category divided by the unpaid principal balance of our total singlefamily guaranty book of business for which we have detailed loan-level information.

76
Problem Loan Statistics

The following table displays the delinquency status of loans in our single-family conventional guaranty book

of business (based on number of loans) as of the dates indicated.

Table 37: Delinquency Status of Single-Family Conventional Loans

September 30,

2011

December 31,

2010

September 30,

2010

As of

As of period end:

Delinquency status:

30 to 59 days delinquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.16% 2.32% 2.40%

60 to 89 days delinquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.75 0.87 0.91

Seriously delinquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.00 4.48 4.56

Percentage of seriously delinquent loans that have been delinquent

for more than 180 days. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71% 67% 66%

The number of loans at risk of becoming seriously delinquent has diminished in 2011 as early stage

delinquencies have decreased. As of September 30, 2011, the percentage and number of our single-family

conventional loans that were seriously delinquent decreased, as compared with December 31, 2010, and has

decreased every quarter since the first quarter of 2010. The decrease in our serious delinquency rate in 2010

and the first nine months of 2011 was primarily the result of home retention solutions, as well as foreclosure

alternatives and completed foreclosures. The decrease is also attributable to our acquisition of loans with

stronger credit profiles since the beginning of 2009, as these loans have become an increasingly larger portion

of our single-family guaranty book of business, resulting in a smaller percentage of our loans becoming

seriously delinquent.

Although our single-family serious delinquency rate has decreased since the first quarter of 2010, our serious

delinquency rate and the period of time that loans remain seriously delinquent have been negatively affected in

recent periods by the increase in the average number of days it is taking to complete a foreclosure. Continuing

issues in the servicer foreclosure process, changes in state foreclosure laws, and new court rules and

proceedings have lengthened the time it takes to foreclose on a mortgage loan in many states. In addition,

servicers and states are dealing with the backlog of foreclosures resulting from these delays and from the

elevated level of foreclosures resulting from the housing market downturn. For more information on the delays

in the foreclosure process, see “Executive Summary—Reducing Credit Losses on Our Legacy Book of

Business.” We expect serious delinquency rates will continue to be affected in the future by home price

changes, changes in other macroeconomic conditions, the length of the foreclosure process, and the extent to

which borrowers with modified loans continue to make timely payments.

Table 38 provides a comparison, by geographic region and by loans with and without credit enhancement, of

the serious delinquency rates as of the dates indicated for single-family conventional loans in our single-family

guaranty book of business.

77
Table 38: Single-Family Serious Delinquency Rates

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

September 30, 2011 December 31, 2010 September 30, 2010

As of

Single-family conventional

delinquency rates by geographic

region:(1)

Midwest. . . . . . . . . . . . . . . . . . 15% 3.89% 15% 4.16% 16% 4.16%

Northeast . . . . . . . . . . . . . . . . . 19 4.36 19 4.38 19 4.27

Southeast . . . . . . . . . . . . . . . . . 24 5.78 24 6.15 24 6.19

Southwest . . . . . . . . . . . . . . . . 15 2.34 15 3.05 15 3.19

West . . . . . . . . . . . . . . . . . . . . 27 3.04 27 4.06 26 4.35

Total single-family

conventional loans . . . . . . . 100% 4.00% 100% 4.48% 100% 4.56%

Single-family conventional loans:

Credit enhanced . . . . . . . . . . . . 14% 9.43% 15% 10.60% 15% 10.66%

Non-credit enhanced . . . . . . . . . 86 3.10 85 3.40 85 3.45

Total single-family

conventional loans . . . . . . . 100% 4.00% 100% 4.48% 100% 4.56%

(1) See footnote 9 to “Table 36: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book

of Business” for states included in each geographic region.

While loans across our single-family guaranty book of business have been affected by the weak market

conditions, loans in certain states, certain higher-risk loan categories, such as Alt-A loans, subprime loans and

loans with higher mark-to-market LTVs, and our 2006 and 2007 loan vintages continue to exhibit higher than

average delinquency rates and/or account for a disproportionate share of our credit losses. Some states in the

Midwest have experienced prolonged economic weakness and California, Florida, Arizona and Nevada have

experienced the most significant declines in home prices coupled with unemployment rates that remain high.

Table 39 presents the serious delinquency rates and other financial information for our single-family

conventional loans with some of these higher-risk characteristics as of the periods indicated. The reported

categories are not mutually exclusive.

78
Table 39: Single-Family Conventional Serious Delinquency Rate Concentration Analysis

Unpaid

Principal

Balance

Percentage

of Book

Outstanding

Serious

Delinquency

Rate

Estimated

Mark-toMarket

LTV

Ratio(1)

Unpaid

Principal

Balance

Percentage

of Book

Outstanding

Serious

Delinquency

Rate

Estimated

Mark-toMarket

LTV

Ratio(1)

Unpaid

Principal

Balance

Percentage

of Book

Outstanding

Serious

Delinquency

Rate

Estimated

Mark-toMarket

LTV

Ratio(1)

September 30, 2011 December 31, 2010 September 30, 2010

As of

(Dollars in millions)

States:

Arizona . . . . . . . $ 67,562 2% 3.78% 110% $ 71,052 2% 6.23% 105% $ 71,636 2% 6.39% 104%

California . . . . . 510,199 19 2.70 79 507,598 18 3.89 76 498,462 18 4.28 75

Florida . . . . . . . 178,036 6 11.90 107 184,101 7 12.31 107 186,010 7 12.10 104

Nevada . . . . . . . 29,200 1 7.53 135 31,661 1 10.66 128 32,195 1 11.24 127

Select Midwest

states(2) . . . . . 286,389 10 4.55 82 292,734 11 4.80 80 294,174 11 4.78 78

All other states . . 1,691,570 62 3.20 71 1,695,615 61 3.46 71 1,684,827 61 3.51 69

Product type:

Alt-A . . . . . . . . 188,385 7 12.71 99 211,770 8 13.87 96 219,968 8 13.79 93

Subprime . . . . . . 5,968 * 23.91 108 6,499 * 28.20 103 6,665 * 28.50 100

Vintages:

2006 . . . . . . . . . 196,843 7 11.81 108 232,009 8 12.19 104 246,502 9 11.84 101

2007 . . . . . . . . . 283,866 10 12.63 109 334,110 12 13.24 104 356,063 13 13.04 100

All other

vintages . . . . . 2,282,247 83 2.41 71 2,216,642 80 2.62 70 2,164,739 78 2.64 68

Estimated

mark-to-market

LTV ratio:

Greater than

100%(1) . . . . . 463,241 16 14.53 131 435,991 16 17.70 130 400,998 15 18.57 130

Select combined risk

characteristics:

Original LTV ratio

H 90% and FICO

score G 620 . . . . 19,587 1 18.99 112 21,205 1 21.41 109 21,806 1 21.80 107

* Percentage is less than 0.5%.

(1) Second lien mortgage loans held by third parties are not included in the calculation of the estimated mark-to-market

LTV ratios.

(2) Consists of Illinois, Indiana, Michigan and Ohio.

Loan Workout Metrics

The efforts of our mortgage servicers are critical in keeping people in their homes, preventing foreclosures and

providing homeowner assistance. We continue to work with our servicers to implement our foreclosure

prevention initiatives effectively and to find ways to enhance our workout protocols and their workflow

processes. Partnering with our servicers, civic and community leaders and housing industry partners, we have

launched a series of Mortgage Help Centers nationwide to accelerate the response time for struggling

borrowers with loans owned by us. As of September 30, 2011, we have established 11 Mortgage Help Centers

which completed nearly 4,100 home retention solutions in the first nine months of 2011. Additionally, we

currently offer up to twelve months forbearance for those homeowners who are unemployed as an additional

tool to help homeowners avoid foreclosure.

Our approach to workouts continues to focus on the large number of borrowers facing financial hardships.

Accordingly, the vast majority of loan modifications we completed during the first nine months of 2011 were,

as in recent periods, concentrated on deferring or lowering the borrowers’ monthly mortgage payments to

allow borrowers to work through their hardships.

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In addition, we continue to focus on alternatives to foreclosure for borrowers who are unable to retain their

homes. Our servicers work with a borrower to sell their home prior to foreclosure in a preforeclosure sale or

accept a deed-in-lieu of foreclosure whereby the borrower voluntarily signs over the title to their property to

the servicer. These alternatives are designed to reduce our credit losses while helping borrowers avoid having

to go through a foreclosure. Further, in cooperation with several Multiple Listing Services across the nation,

we developed the Short Sale Assistance Desk to assist real estate professionals in handling post-offer short

sale issues that may relate to servicer responsiveness, the existence of a second lien, or issues involving

mortgage insurance.

Table 40 provides statistics on our single-family loan workouts that were completed, by type, for the periods

indicated. These statistics include loan modifications but do not include trial modifications or repayment and

forbearance plans that have been initiated but not completed.

Table 40: Statistics on Single-Family Loan Workouts

Unpaid

Principal

Balance

Number

of Loans

Unpaid

Principal

Balance

Number

of Loans

Unpaid

Principal

Balance

Number

of Loans

For the

Nine Months Ended

September 30, 2011

For the

Year Ended

December 31, 2010

For the

Nine Months Ended

September 30, 2010

(Dollars in millions)

Home retention strategies:

Modifications . . . . . . . . . . . . . . . . . . . . . . . . . $32,658 161,404 $ 82,826 403,506 $66,206 321,814

Repayment plans and forbearances completed . . . 3,769 26,801 4,385 31,579 3,258 23,606

HomeSaver Advance first-lien loans. . . . . . . . . . — — 688 5,191 661 5,165

36,427 188,205 87,899 440,276 70,125 350,585

Foreclosure alternatives:

Preforeclosure sales . . . . . . . . . . . . . . . . . . . . . 11,231 50,966 15,899 69,634 12,775 55,788

Deeds-in-lieu of foreclosure . . . . . . . . . . . . . . . 1,179 6,636 1,053 5,757 732 3,971

12,410 57,602 16,952 75,391 13,507 59,759

Total loan workouts . . . . . . . . . . . . . . . . . . . . . . . $48,837 245,807 $104,851 515,667 $83,632 410,344

Loan workouts as a percentage of single-family

guaranty book of business(1) . . . . . . . . . . . . . . . 2.29% 1.84% 3.66% 2.87% 3.91% 3.05%

(1) Calculated based on annualized loan workouts during the period as a percentage of our single-family guaranty book of

business as of the end of the period.

The volume of workouts completed in the first nine months of 2011 decreased compared with the first nine

months of 2010, primarily because we began to require that non-HAMP modifications go through a trial

period, which initially lowers the number of modifications that can become permanent in any particular

period. The number of foreclosure alternatives we agreed to during the first nine months of 2011 remains high

as these are favorable solutions for a large number of borrowers. We expect the volume of our foreclosure

alternatives to remain high throughout the remainder of 2011.

During the first nine months of 2011, we initiated approximately 165,000 trial modifications, including HAMP

and non-HAMP, compared with approximately 135,000 trial modifications during the first nine months of

2010. We also initiated other types of workouts, such as repayment plans and forbearances. It is difficult to

predict how many of these trial modifications and initiated plans will be completed.

Table 41 displays the profile of loan modifications (HAMP and non-HAMP) provided to borrowers for the

periods indicated.

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Table 41: Single-Family Loan Modification Profile

YTD Q3 Q2 Q1

Full Year

2010

2011

Term extension, interest rate reduction, or combination of both(1) . . . . . . . . . . . . . 98% 100% 99% 96% 93%

Initial reduction in monthly payment(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 97 97 94 91

Estimated mark-to-market LTV ratio H 100% . . . . . . . . . . . . . . . . . . . . . . . . . . 62 61 62 64 53

Troubled debt restructurings(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 100 98 97 94

(1) Reported statistics for term extension, interest rate reduction or the combination include subprime adjustable-rate

mortgage loans that have been modified to a fixed-rate loan.

(2) These modification statistics do not include subprime adjustable-rate mortgage loans that were modified to a fixed-rate

loan and were current at the time of the modification.

(3) Percentage for the nine months ended September 30, 2011 reflects the impact of the new TDR accounting standard

which was retrospectively adopted beginning January 1, 2011. Prior periods have not been revised.

The majority of our modifications in 2010 and the first nine months of 2011 were made to loans with a

mark-to-market LTV ratio greater than 100% because these borrowers are typically unable to refinance their

mortgages or sell their homes for a price that allows them to pay off their mortgage obligation as their

mortgages are greater than the value of their homes. Additionally, the serious delinquency rate for these loans

tends to be significantly higher than the overall average serious delinquency rate. As of September 30, 2011,

the serious delinquency rate for loans with a mark-to-market LTV ratio greater than 100% was 15%, compared

with our overall average single-family serious delinquency rate of 4.00%.

Approximately 69% of loans modified during the first nine months of 2010 were current or had paid off as of

one year following the loan modification date. In comparison, 44% of loans modified during the first nine

months of 2009 were current or had paid off as of one year following the loan modification date. There is

significant uncertainty regarding the ultimate long term success of our current modification efforts and we

believe the performance of our workouts will be highly dependent on economic factors, such as

unemployment rates, household wealth and income, and home prices. Modifications, even those with reduced

monthly payments, may also not be sufficient to help borrowers with second liens and other significant nonmortgage debt obligations. FHFA, other agencies of the U.S. government or Congress may ask us to undertake

new initiatives to support the housing and mortgage markets should our current modification efforts ultimately

not perform in a manner that results in the stabilization of these markets. See “Risk Factors” for a discussion

of efforts we may be required or asked to undertake and their potential affect on us.

REO Management

Foreclosure and REO activity affect the level of credit losses. Table 42 compares our foreclosure activity, by

region, for the periods indicated. Regional REO acquisition and charge-off trends generally follow a pattern

that is similar to, but lags, that of regional delinquency trends.

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Table 42: Single-Family Foreclosed Properties

2011 2010

For the Nine Months

Ended September 30,

Single-family foreclosed properties (number of properties):

Beginning of period inventory of single-family foreclosed properties (REO)(1) . . . . . . . . . . . . 162,489 86,155

Acquisitions by geographic area:(2)

Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,074 48,930

Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,091 12,022

Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,433 66,313

Southwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,324 44,378

West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,518 44,473

Total properties acquired through foreclosure(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,440 216,116

Dispositions of REO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (192,313) (135,484)

End of period inventory of single-family foreclosed properties (REO)(1) . . . . . . . . . . . . . . . . . 122,616 166,787

Carrying value of single-family foreclosed properties (dollars in millions)(3) . . . . . . . . . . . . . . $ 11,039 $ 16,394

Single-family foreclosure rate(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.15% 1.61%

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

(2) See footnote 9 to “Table 36: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book

of Business” for states included in each geographic region.

(3) Excludes foreclosed property claims receivables, which are reported in our condensed consolidated balance sheets as a

component of “Acquired property, net.”

(4) Estimated based on the annualized total number of properties acquired through foreclosure or deeds-in-lieu of

foreclosure as a percentage of the total number of loans in our single-family conventional guaranty book of business as

of the end of each respective period.

The continued weak economy, as well as high unemployment rates, continues to result in a high level of

mortgage loans that transition from delinquent to REO status, either through foreclosure or deed-in-lieu of

foreclosure. Our foreclosure rates remain high; however, foreclosure levels were lower than what they

otherwise would have been during the first nine months of 2011 due to delays in the processing of

foreclosures caused by continuing foreclosure process issues encountered by our servicers, changes in state

foreclosure laws, and new court rules and proceedings. Additionally, foreclosure levels were affected by our

directive to servicers to delay foreclosure sales until the loan servicer verifies that the borrower is ineligible

for a HAMP modification and that all other home retention and foreclosure prevention alternatives have been

exhausted. The delay in potential foreclosures, as well as an increase in the number of dispositions of REO

properties, has resulted in a decrease in the ending inventory of foreclosed properties since December 31,

2010.

The percentage of our single-family foreclosed properties that we determined were unable to market for sale

was 46% as of September 30, 2011 compared with 41% as of December 31, 2010. The two largest

concentrations of the unable to market for sale inventory are: (1) properties that are still occupied by the

person or personal property, and the eviction process is not yet complete (“occupied status”); and

(2) properties that are within the period during which state law allows the former mortgagor and second lien

holders to redeem the property (“redemption status”). Being in occupied status lengthens the time a property

remains in our REO inventory by an average of one to three months, and occupied status properties

represented approximately 32% of our unable to market for sale inventory as of September 30, 2011 compared

with approximately 40% as of December 31, 2010. Being in redemption status lengthens the time a property

remains in our REO inventory by an average of two to six months, and redemption status properties

represented approximately 26% of our unable to market for sale inventory as of September 30, 2011 compared

with approximately 27% as of December 31, 2010. As we are unable to market a higher portion of our

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inventory, it slows the pace at which we can dispose of our properties and increases our foreclosed property

expense related to costs associated with ensuring that the property is vacant and maintaining the property.

As shown in Table 43 we have experienced a disproportionate share of foreclosures in certain states as

compared with their share of our guaranty book of business. This is primarily because these states have had

significant home price depreciation or weak economies and, in the case of California and Florida specifically,

a significant number of Alt-A loans.

Table 43: Single-Family Acquired Property Concentration Analysis

Percentage of

Book

Outstanding(1)

Percentage of

Book

Outstanding(1)

Percentage of

Properties

Acquired

by Foreclosure(2)

Percentage of

Properties

Acquired

by Foreclosure(2)

September 30, 2011 December 31, 2010

September 30, 2011 September 30, 2010 As of

For the Nine Months Ended

States:

Arizona, California, Florida, and Nevada. . 28% 28% 35% 36%

Illinois, Indiana, Michigan, and Ohio . . . . 10 11 16 18

(1) Calculated based on the unpaid principal balance of loans, where we have detailed loan-level information, for each

category divided by the unpaid principal balance of our single-family conventional guaranty book of business.

(2) Calculated based on the number of properties acquired through foreclosure during the period divided by the total

number of properties acquired through foreclosure.

Multifamily Mortgage Credit Risk Management

The credit risk profile of our multifamily mortgage credit book of business is influenced by: the structure of

the financing; the type and location of the property; the condition and value of the property; the financial

strength of the borrower and lender; market and sub-market trends and growth; and the current and anticipated

cash flows from the property. These and other factors affect both the amount of expected credit loss on a

given loan and the sensitivity of that loss to changes in the economic environment. We provide information on

our credit-related expenses and credit losses in “Consolidated Results of Operations—Credit-Related

Expenses.”

While our multifamily mortgage credit book of business includes all of our multifamily mortgage-related

assets, both on- and off-balance sheet, our guaranty book of business excludes non-Fannie Mae multifamily

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

guaranty book of business consists of: multifamily mortgage loans held in our mortgage portfolio; Fannie Mae

MBS held in our portfolio or by third parties; and other credit enhancements that we provide on mortgage

assets.

Multifamily Acquisition Policy and Underwriting Standards

Our Multifamily business, in conjunction with our Enterprise Risk Management division, is responsible for

pricing and managing the credit risk on multifamily mortgage loans we purchase and on Fannie Mae MBS

backed by multifamily loans (whether held in our portfolio or held by third parties). Our primary multifamily

delivery channel is the Delegated Underwriting and Servicing, or DUS», program, which is comprised of

multiple lenders that span the spectrum from large financial institutions to smaller independent multifamily

lenders. Multifamily loans that we purchase or that back Fannie Mae MBS are either underwritten by a Fannie

Mae-approved lender or subject to our underwriting review prior to closing, depending on the product type

and/or loan size. Loans delivered to us by DUS lenders and their affiliates represented 85% of our multifamily

guaranty book of business as of September 30, 2011 compared with 84% as of December 31, 2010.

We use various types of credit enhancement arrangements for our multifamily loans, including lender risksharing, lender repurchase agreements, pool insurance, subordinated participations in mortgage loans or

structured pools, cash and letter of credit collateral agreements, and cross-collateralization/cross-default

provisions. The most prevalent form of credit enhancement on multifamily loans is lender risk-sharing.

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Lenders in the DUS program typically share in loan-level credit losses in one of two ways: (1) they bear

losses up to the first 5% of unpaid principal balance of the loan and share in remaining losses up to a

prescribed limit; or (2) they share up to one-third of the credit losses on an equal basis with us. Other nonDUS lenders typically share or absorb credit losses based on a negotiated percentage of the loan or the pool

balance.

For our purchase or guarantee of multifamily mortgage loans, we and our lender partners rely significantly on

sound underwriting standards, which often include third party appraisals and actual cash flow analysis. Our

standards for multifamily loans specify maximum original LTV ratio and minimum debt service coverage ratio

(“DSCR”) that vary based on the loan characteristics. Original LTV reflects the borrower equity in the

transaction. Similarly, original DSCR reflects the anticipated cash flow on the transaction at underwriting, with

additional measures taken to address higher risk loans. Original LTV and DSCR values have proven to be

reliable indicators of future credit performance.

Multifamily Portfolio Diversification and Monitoring

Diversification within our multifamily mortgage credit book of business by geographic concentration,

term-to-maturity, interest rate structure, borrower concentration and credit enhancement arrangement is an

important factor that influences credit quality and performance and helps reduce our credit risk.

The weighted average original LTV ratio for our multifamily guaranty book of business was 66% as of

September 30, 2011 and 67% as of December 31, 2010. The percentage of our multifamily guaranty book of

business with an original LTV ratio greater than 80% was 5% as of both September 30, 2011 and

December 31, 2010. We present the current risk profile of our multifamily guaranty book of business in

“Note 6, Financial Guarantees.”

We and our lender partners monitor the performance and risk concentrations of our multifamily loans and the

underlying properties on an ongoing basis throughout the life of the investment at the loan, property and

portfolio level. We track the physical condition of the property, the relevant local market and economic

conditions that may signal changing risk or return profiles and other risk factors. For example, we closely

monitor the rental payment trends and vacancy levels in local markets to identify loans that merit closer

attention or loss mitigation actions, in addition to capitalization rates. We are managing our exposure to

refinancing risk for multifamily loans maturing in the next several years. We have a team that proactively

manages upcoming loan maturities to minimize losses on maturing loans. This team assists lenders and

borrowers with timely and appropriate refinancing of maturing loans with the goal of reducing defaults and

foreclosures related to loans maturing in the near term. For our investments in multifamily loans, the primary

asset management responsibilities are performed by our DUS and other multifamily lenders. We periodically

evaluate these lenders’ and our other third party service providers’ performance for compliance with our asset

management criteria.

As a part of our ongoing credit risk management process, we have worked with our lender partners over the

last two years to collect limited quarterly property operating measures from borrowers, in addition to more

complete annual financial updates, for those loans where we are entitled contractually to receive such

information. As part of our asset management process, we focus on loans with an estimated current DSCR

below 1.0, as that is an indicator of heightened default risk. The percentage of loans in our multifamily

guaranty book of business with a current debt service coverage ratio less than 1.0 was approximately 8% as of

September 30, 2011 and approximately 10% as of December 31, 2010. Our estimates of current DSCRs are

based on the latest available income information for these properties and our assessments of market

conditions. Although we use the most recently available results of our multifamily borrowers, there is a

significant lag in reporting as they prepare their results in the normal course of business.

Problem Loan Management and Foreclosure Prevention

The number of multifamily loans at risk of becoming seriously delinquent has decreased in 2011, as earlystage delinquencies have decreased. Since delinquency rates are a lagging indicator, we expect to continue to

incur additional credit losses. We periodically refine our underwriting standards in response to market

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conditions and enact proactive portfolio management and monitoring which are each designed to keep credit

losses to a low level relative to our multifamily guaranty book of business.

Problem Loan Statistics

Table 44 provides a comparison of our multifamily serious delinquency rates for loans with and without credit

enhancement in our multifamily guaranty book of business. We classify multifamily loans as seriously

delinquent when payment is 60 days or more past due. We include the unpaid principal balance of multifamily

loans that we own or that back Fannie Mae MBS and any housing bonds for which we provide credit

enhancement in the calculation of the multifamily serious delinquency rate.

Table 44: Multifamily Serious Delinquency Rates

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

September 30, 2011 December 31, 2010 September 30, 2010

As of

Multifamily loans:

Credit enhanced . . . . . . . . 90% 0.54% 89% 0.67% 89% 0.60%

Non-credit enhanced . . . . . 10 0.86 11 1.01 11 1.06

Total multifamily

loans . . . . . . . . . . . . 100% 0.57% 100% 0.71% 100% 0.65%

The multifamily serious delinquency rate decreased as of September 30, 2011 compared with both

December 31, 2010 and September 30, 2010 as national multifamily market fundamentals continued to

improve. Table 45 provides a comparison of our multifamily serious delinquency rates for loans acquired

through DUS lenders and loans acquired through non-DUS lenders.

Table 45: Multifamily Concentration Analysis

Percentage

of Book

Outstanding

Serious

Delinquency

Rate

Percentage

of Book

Outstanding

Serious

Delinquency

Rate

Percentage

of Book

Outstanding

Serious

Delinquency

Rate 2011 2010

September 30, 2011 December 31, 2010 September 30, 2010

As of

Percentage

of

Multifamily

Credit

Losses

For the Nine

Months

Ended

September 30,

DUS small balance loans(1) . . . . . 8% 0.64% 8% 0.55% 8% 0.57% 7% 7%

DUS non small balance loans(2) . . 72 0.46 70 0.56 69 0.46 72 63

Non-DUS small balance loans(1) . . 9 1.27 10 1.47 11 1.58 14 6

Non-DUS non small balance

loans(2) . . . . . . . . . . . . . . . . 11 0.67 12 0.97 12 0.95 7 24

(1) Loans with original unpaid principal balances less than or equal to $3 million as well as loans in high cost markets

with original unpaid principal balances less than or equal to $5 million.

(2) Loans with original unpaid principal balances greater than $3 million as well as loans in high cost markets with

original unpaid principal balances greater than $5 million.

The DUS loans in our guaranty book of business have lower delinquency rates when compared with the nonDUS loans in our guaranty book primarily due to the DUS model, which has several features that align our

interest with those of the borrowers and lenders. Smaller balance non-DUS loans continue to represent a

disproportionate share of delinquencies but they are generally covered by loss sharing arrangements, which

limit the credit losses incurred by us.

In addition, Florida, Michigan, Nevada and Ohio have a disproportionate share of seriously delinquent loans

compared with their share of the multifamily guaranty book of business as a result of slow economic recovery

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in certain areas of these states. These states accounted for 45% of multifamily serious delinquencies but only

9% of the multifamily guaranty book of business as of September 30, 2011.

REO Management

Foreclosure and REO activity affect the level of credit losses. Table 46 compares our held for sale multifamily

REO balances for the periods indicated.

Table 46: Multifamily Foreclosed Properties

2011 2010

For the Nine

Months Ended

September 30,

Multifamily foreclosed properties (number of properties):

Beginning of period inventory of multifamily foreclosed properties (REO) . . . . . . . . . . . . . . . . . . . . . . 222 73

Total properties acquired through foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 160

Disposition of REO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (138) (49)

End of period inventory of multifamily foreclosed properties (REO). . . . . . . . . . . . . . . . . . . . . . . . . . . 274 184

Carrying value of multifamily foreclosed properties (dollars in millions) . . . . . . . . . . . . . . . . . . . . . . . . $ 561 $523

The increase in our multifamily foreclosed property inventory reflects the continuing stress on our multifamily

guaranty book of business as certain local markets and properties continue to exhibit weak fundamentals,

though national multifamily market fundamentals have continued to improve in 2011.

Institutional Counterparty Credit Risk Management

We rely on our institutional counterparties to provide services and credit enhancements, including primary and

pool mortgage insurance coverage, risk sharing agreements with lenders and financial guaranty contracts that

are critical to our business. Institutional counterparty credit risk is the risk that these institutional

counterparties may fail to fulfill their contractual obligations to us, including seller/servicers who are obligated

to repurchase loans from us or reimburse us for losses in certain circumstances. Defaults by a counterparty

with significant obligations to us could result in significant financial losses to us.

See “MD&A—Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk

Management” in our 2010 Form 10-K for additional information about our institutional counterparties,

including counterparty risk we face from mortgage originators and investors, from debt security and mortgage

dealers and from document custodians.

Mortgage Seller/Servicers

Our business with our mortgage seller/servicers is concentrated. Our ten largest single-family mortgage

servicers, including their affiliates, serviced 75% of our single-family guaranty book of business as of

September 30, 2011, compared to 77% as of December 31, 2010. Our largest mortgage servicer is Bank of

America, N.A. which, together with its affiliates, serviced approximately 24% of our single-family guaranty

book of business as of September 30, 2011, compared with 26% as of December 31, 2010. In addition, we

had two other mortgage servicers, JPMorgan Chase & Co. and Wells Fargo Bank, N.A., that, with their

affiliates, each serviced over 10% of our single-family guaranty book of business as of September 30, 2011. In

addition, Wells Fargo Bank serviced over 10% of our multifamily guaranty book of business as of both

September 30, 2011 and December 31, 2010. Because we delegate the servicing of our mortgage loans to

mortgage servicers and do not have our own servicing function, servicers’ lack of appropriate process controls

or the loss of business from a significant mortgage servicer counterparty could pose significant risks to our

ability to conduct our business effectively. During the first nine months of 2011, our primary mortgage

servicers have generally continued to meet their financial obligations to us. However, many of our largest

servicer counterparties continue to reevaluate the effectiveness of their process controls. Many servicers are

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subject to consent orders by their regulators that require the servicers to correct foreclosure process

deficiencies and improve their servicing and foreclosure practices. This has resulted in extended foreclosure

timelines and therefore, additional holding costs for us, such as property taxes and insurance, repairs and

maintenance, and valuation adjustments due to home price changes.

Our mortgage seller/servicers are obligated to repurchase loans or foreclosed properties, or reimburse us for losses

if the foreclosed property has been sold, under certain circumstances, such as if it is determined that the mortgage

loan did not meet our underwriting or eligibility requirements, if loan representations and warranties are violated

or if mortgage insurers rescind coverage. We refer to our demands that seller/servicers meet these obligations

collectively as “repurchase requests.” The number of our repurchase requests remained high during the first nine

months of 2011. The aggregate unpaid principal balance of loans repurchased by our seller/servicers pursuant to

their contractual obligations was approximately $8.8 billion in the first nine months of 2011, compared with

$4.7 billion during the first nine months of 2010. In addition, as of September 30, 2011, we had $9.5 billion in

outstanding repurchase requests related to loans that had been reviewed for potential breaches of contractual

obligations, compared with $5.0 billion as of December 31, 2010. As of September 30, 2011, approximately 45%

of our total outstanding repurchase requests had been made to one of our seller/servicers, compared with 41% as

of December 31, 2010. As of September 30, 2011, 25% of our outstanding repurchase requests had been

outstanding for more than 120 days from either the original repurchase request date or, for lenders remitting after

the REO is disposed, the date of our final loss determination, compared with 30% as of December 31, 2010. As

of September 30, 2011, approximately 48% of our repurchase requests outstanding for more than 120 days had

been made to one of our seller/servicers, compared with 37% as of December 31, 2010.

The amount of our outstanding repurchase requests provided above is based on the unpaid principal balance of

the loans underlying the repurchase request issued, not the actual amount we have requested from the lenders.

In some cases, we allow lenders to remit payment equal to our loss, including imputed interest, on the loan

after we have disposed of the REO, which is less than the unpaid principal balance of the loan. As a result,

we expect our actual cash receipts relating to these outstanding repurchase requests to be significantly lower

than the unpaid principal balance of the loan. In addition, amounts relating to repurchase requests originating

from missing documentation or loan files are excluded from the total requests outstanding until the completion

of a full underwriting review, once the documents and loan files are received.

In June 2011, we issued an announcement that (1) reminded lenders of their existing obligations with respect to

mortgage insurance; (2) required lenders to report to us mortgage insurance rescissions, mortgage insurer-initiated

cancellations, and claim denials; (3) confirmed our repurchase policies with respect to these actions;

(4) temporarily extended from 30 to 90 days our timeframe within which lenders must repurchase loans and

provided an appeal process; (5) required that all outstanding mortgage insurance-related repurchase demands as of

April 30, 2011 be satisfactorily resolved by September 30, 2011; (6) reiterated our process for the redelivery of

certain repurchased loans; and (7) reiterated our remedies if a lender fails to meet our repurchase requirements.

Not all outstanding mortgage insurance related repurchase demands as of April 30, 2011 were resolved by

September 30, 2011. We entered into “tolling agreements” with three of our major lenders that required these

lenders to post collateral based on their maximum exposure in exchange for an extension until June 2012 to

resolve their outstanding mortgage insurance related repurchase demands. In addition, we provided some of

our lenders that did not have a substantial amount of unresolved mortgage insurance related demands, an

extension until December 2011. One of our mortgage seller/servicers has disputed these demands and accounts

for nearly half of these unresolved mortgage insurance related requests.

We continue to aggressively pursue our contractual rights associated with these repurchase requests. If we are

unable to resolve these matters to our satisfaction, we may seek additional remedies. Failure by a seller/

servicer to repurchase a loan or to otherwise make us whole for our losses, may result in the imposition of

certain sanctions including, but not limited to:

• requiring the posting of collateral,

• denying transfer of servicing requests or denying pledged servicing requests,

• imposing limits on trading desk transactions,

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• imposing compensatory fees,

• modifying or suspending any contract or agreement with a lender, or

• suspending or terminating a lender or imposing some other formal sanction on a lender.

If we are unable to resolve our repurchase requests, either through collection or additional remedies, we will

not recover the losses we have recognized from the associated loans.

We continue to work with our mortgage seller/servicers to fulfill outstanding repurchase requests; however, as

the volume of repurchase requests increases, the risk increases that affected seller/servicers will not be willing

or able to meet the terms of their repurchase obligations and we may be unable to recover on all outstanding

loan repurchase obligations resulting from seller/servicers’ breaches of contractual obligations. We expect that

the amount of our outstanding repurchase requests will remain high.

If a significant seller/servicer counterparty, or a number of seller/servicers, fails to fulfill its repurchase

obligations to us, it could result in a significant increase in our credit losses and have a material adverse effect

on our results of operations and financial condition. We estimate our allowance for loan losses assuming the

benefit of repurchase demands only from those counterparties we determine have the financial capacity to

fulfill this obligation. Accordingly, as of September 30, 2011, we do not believe that we have any exposure to

seller/servicers that lacked the financial capacity to honor their contractual obligations as we assumed no

benefit from repurchase demands due to us from these counterparties in estimating our allowance for loan

loss.

We are exposed to the risk that a mortgage seller/servicer or another party involved in a mortgage loan

transaction will engage in mortgage fraud by misrepresenting the facts about the loan. We have experienced

financial losses in the past and may experience significant financial losses and reputational damage in the

future as a result of mortgage fraud. See “Risk Factors” in our 2010 Form 10-K for additional discussion on

risks of mortgage fraud to which we are exposed.

Mortgage Insurers

Table 47 presents our maximum potential loss recovery for the primary and pool mortgage insurance coverage

on single-family loans in our guaranty book of business and our unpaid principal balance covered by insurance

for our mortgage insurer counterparties as of September 30, 2011 and December 31, 2010. The table includes

our top eight mortgage insurer counterparties, which provided over 99% of our total mortgage insurance

coverage on single-family loans in our guaranty book of business as of both September 30, 2011 and

December 31, 2010.

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Table 47: Mortgage Insurance Coverage

Counterparty:(3) Primary Pool Total

As of September 30,

2011 As of

December 31,

2010

As of

September 30,

2011

As of

December 31,

2010

Maximum Coverage(1) Unpaid Principal Balance

Covered By Insurance(2)

(Dollars in millions)

Mortgage Guaranty Insurance Corporation. . . . $20,322 $1,681 $22,003 $23,277 $ 94,620 $101,823

Radian Guaranty, Inc. . . . . . . . . . . . . . . . . . 14,683 449 15,132 15,370 62,060 64,042

United Guaranty Residential Insurance

Company . . . . . . . . . . . . . . . . . . . . . . . . . 13,913 202 14,115 14,044 58,345 58,416

Genworth Mortgage Insurance Corporation . . . 13,655 66 13,721 14,331 55,161 57,845

PMI Mortgage Insurance Co. . . . . . . . . . . . . 11,387 265 11,652 12,359 50,132 53,768

Republic Mortgage Insurance Company . . . . . 8,736 925 9,661 10,566 41,218 46,660

Triad Guaranty Insurance Corporation. . . . . . . 2,612 892 3,504 3,809 14,620 16,974

CMG Mortgage Insurance Company(4) . . . . . . 1,936 — 1,936 1,938 8,166 8,174

Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434 — 434 209 2,143 1,140

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $87,678 $4,480 $92,158 $95,903 $386,465 $408,842

Total as a percentage of single-family guaranty

book of business . . . . . . . . . . . . . . . . . . . . 3% 3% 14% 14%

(1) Maximum coverage refers to the aggregate dollar amount of insurance coverage (i.e., “risk in force”) on single-family

loans in our guaranty book of business and represents our maximum potential loss recovery under the applicable

mortgage insurance policies.

(2) Represents the unpaid principal balance of single-family loans in our guaranty book of business covered under the

applicable mortgage insurance policies (i.e., “insurance in force”).

(3) Insurance coverage amounts provided for each counterparty may include coverage provided by consolidated affiliates

and subsidiaries of the counterparty.

(4) CMG Mortgage Insurance Company is a joint venture owned by PMI Mortgage Insurance Co. and CUNA Mutual

Insurance Society.

See “Risk Management—Credit Risk Management—Institutional Counterparty Risk Management—Mortgage

Insurers” in our 2010 Form 10-K for a discussion on the credit ratings of our mortgage insurers.

We evaluate our mortgage insurer counterparties individually to determine whether or under what conditions

they will remain eligible to insure new mortgages sold to us. Following issuance by the Arizona Department

of Insurance of a supervisory order directing PMI Mortgage Insurance Co. (“PMI”) and its subsidiary PMI

Insurance Co. (“PIC”) to cease offering new commitments for insurance after August 19, 2011 and to cease

issuing certificates after September 16, 2011, we notified PMI on August 22, 2011 that, effective immediately,

PMI and its subsidiaries, PIC and PMI Mortgage Assurance Co. (“PMAC”), were suspended nationwide as

approved mortgage insurers. We simultaneously notified our mortgage sellers and servicers that we would not

accept any mortgage loan insured by PMI, PIC or PMAC that is delivered after December 30, 2011, except for

refinanced Fannie Mae loans where continuation of the coverage is effected through modification of an

existing mortgage insurance certificate.

As reported by PMI, on October 20, 2011, PMI received from its regulator an order under which the regulator

now has full possession, management and control of PMI. The regulator is also seeking to place PMI into

receivership. Pursuant to the order, effective October 24, 2011, the regulator instituted a partial claim payment

plan whereby all valid claims under PMI mortgage guaranty insurance policies will be paid 50% in cash and

50% deferred as a policyholder claim. It is uncertain when, and if, PMI’s regulator will allow PMI to begin

paying its deferred policyholder claims and/or increase the amount of cash PMI pays on claims.

On July 29, 2011, we notified Republic Mortgage Insurance Company (“RMIC”) that, effective immediately,

both RMIC and its affiliate, Republic Mortgage Insurance Company of North Carolina (“RMIC-NC”), were

suspended nationwide as approved mortgage insurers. We also notified our mortgage sellers and servicers that

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we would not accept any mortgage loan insured by RMIC or RMIC-NC that is delivered after November 30,

2011, except for refinanced Fannie Mae loans where continuation of the coverage is effected through

modification of an existing mortgage insurance certificate. On October 12, 2011, RMIC and RMIC-NC each

voluntarily entered into an agreement with their regulator to discontinue writing or assuming any new

mortgage guaranty insurance business in all states. RMIC’s parent company has indicated that it is more likely

than not that the capital contributed to RMIC by its parent company will “continue on a path toward full

depletion in relatively short order.”

The already weak financial condition of many of our mortgage insurer counterparties deteriorated at an

accelerated pace during the third quarter of 2011, which increased the significant risk that these counterparties

will fail to fulfill their obligations to reimburse us for claims under insurance policies. In addition to PMI and

its subsidiaries, the claims obligations of Triad Guaranty Insurance Corporation (“Triad”) have been partially

deferred since June 2009 pursuant to an order from its regulator. The state regulator for RMIC and RMIC-NC

could take additional corrective action following their orders to cease writing new business, which may

include issuing an order to defer partial payment of claims and/or placing the entities into receivership. While

our remaining mortgage insurers have continued to pay claims owed to us, there can be no assurance that they

will continue do so given their current financial condition.

As of November 7, 2011, four of our mortgage insurers (Triad, RMIC, PMI and Genworth Mortgage

Insurance Corporation) have publicly disclosed that they are either in run-off or, absent a waiver, estimate they

would not meet state regulatory capital requirements for their main writing entity as of September 30, 2011.

An additional two of our mortgage insurers (Mortgage Guaranty Insurance Corporation and Radian Guaranty,

Inc.) have disclosed that, in the absence of additional capital contributions to their writing entity, their capital

might fall below state regulatory capital requirements in the future. These six mortgage insurers provided a

combined $75.7 billion, or 82%, of our risk in force mortgage insurance coverage of our single-family

guaranty book of business as of September 30, 2011. If mortgage insurers are not able to raise capital and

they exceed their risk-to-capital limits, they will likely be forced into run-off or receivership unless they can

secure and maintain a waiver from their state regulator. In 2010, the parent companies of several of our largest

mortgage insurer counterparties raised capital or made contributions in various forms to their respective

mortgage insurance subsidiaries. While these actions improved the insurers’ ability to meet state-imposed

risk-to-capital limits and their ability to continue paying our claims in full as they came due to the extent of

the capital raised or contributions made by the parent companies, our mortgage insurer counterparties’ current

financial condition is weak. We are unable to determine how long certain of our mortgage insurer

counterparties will remain below their state-imposed risk-to-capital limits.

Our mortgage insurer counterparties have increased the number of mortgage loans for which they have

rescinded coverage. In those cases where the mortgage insurer has rescinded coverage, we generally require

the seller/servicer to repurchase the loan or indemnify us against loss. In 2010, some mortgage insurers

disclosed that they entered into agreements with lenders whereby they agreed to waive certain rights to

investigate claims for some of the lenders’ insured loans in return for some compensation against loss.

Although these agreements do not affect our rights to demand repurchase in the event of violations of lender

representations and warranties, these agreements are likely to result in fewer mortgage insurance rescissions

for certain groups of loans.

As a result, in April 2011, we issued an announcement which prohibited servicers from entering into any

agreement that modifies the terms of an approved mortgage insurance master policy on loans delivered to us.

We also required servicers to disclose any such agreements with mortgage insurers to us. With respect to our

mortgage insurance counterparties, changes to the substance of their master policies have required our prior

approval since 2005. In October 2010, we required our top mortgage insurers to notify us promptly of any

agreement that affects their investigative or rescission rights. In April 2011, we further clarified and amended

our mortgage insurer requirements to prohibit any agreement that has the effect of modifying a master policy,

including any investigative or rescission rights, absent our approval. By taking these steps, we expect to

mitigate the risk of loss for loans that would have resulted in mortgage insurance rescission, and—as a

result—a lender repurchase, for loan defects that we may not have otherwise uncovered in our independent

review process.

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We evaluate the financial condition of our mortgage insurer counterparties to assess whether we have incurred

probable losses in connection with our coverage. As of September 30, 2011, our allowance for loan losses of

$71.4 billion, allowance for accrued interest receivable of $2.2 billion and reserve for guaranty losses of

$916 million incorporated an estimated recovery amount of approximately $12.7 billion from mortgage

insurance related both to loans that are individually measured for impairment and those that are collectively

reserved. This amount is comprised of the contractual recovery of approximately $15.1 billion as of

September 30, 2011 and an adjustment of approximately $2.4 billion which reduces the contractual recovery

for our assessment of our mortgage insurer counterparties’ inability to fully pay those claims. As of

December 31, 2010, our allowance for loan losses of $61.6 billion, allowance for accrued interest receivable

of $3.4 billion and reserve for guaranty losses of $323 million incorporated an estimated recovery amount of

approximately $16.4 billion from mortgage insurance related both to loans that are individually measured for

impairment and those that are collectively reserved. This amount is comprised of the contractual recovery of

approximately $17.5 billion as of December 31, 2010 and an adjustment of approximately $1.2 billion, which

reduces the contractual recovery for our assessment of our mortgage insurer counterparties’ inability to fully

pay those claims. Our valuation allowance for these receivables increased significantly from December 31,

2010 to September 30, 2011 as a result of our determination that our mortgage insurer counterparties’

financial condition has deteriorated.

When an insured loan held in our mortgage portfolio subsequently goes into foreclosure, we charge off the

loan, eliminating any previously-recorded loss reserves, and record REO and a mortgage insurance receivable

for the claim proceeds deemed probable of recovery, as appropriate. However, if a mortgage insurer rescinds

insurance coverage, the initial receivable becomes due from the mortgage seller/servicer. We had outstanding

receivables of $3.7 billion as of September 30, 2011 and $4.4 billion as of December 31, 2010 related to

amounts claimed on insured, defaulted loans that we have not yet received, of which $494 million as of

September 30, 2011 and $648 million as of December 31, 2010 was due from our mortgage seller/servicers.

We assessed the total outstanding receivables for collectibility, and they were recorded net of a valuation

allowance of $589 million as of September 30, 2011 and $317 million as of December 31, 2010 in “Other

assets.” These mortgage insurance receivables are short-term in nature, having an average duration of

approximately six months, and the valuation allowance reduces our claim receivable to the amount that we

consider probable of collection. We received proceeds under our primary and pool mortgage insurance policies

for single-family loans of $1.4 billion for the third quarter of 2011, $4.6 billion for the first nine months of

2011 and $6.4 billion for the year ended December 31, 2010.

Financial Guarantors

We are the beneficiary of financial guarantees on non-agency securities held in our investment portfolio and

on non-agency securities that have been resecuritized to include a Fannie Mae guaranty and sold to third

parties. Table 48 displays the total unpaid principal balance of guaranteed non-agency securities in our

portfolio as of September 30, 2011, and December 31, 2010.

Table 48: Unpaid Principal Balance of Financial Guarantees

September 30, 2011 December 31, 2010

As of

(Dollars in millions)

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,356 $1,544

Subprime private-label securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,425 1,487

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,003 5,264

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . 324 347

Non mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 172

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,166 $8,814

With the exception of Ambac Assurance Corporation (“Ambac”), none of our financial guarantor

counterparties has failed to repay us for claims under guaranty contracts. Ambac provided coverage on

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$3.4 billion, or 41%, of our total guarantees, as of September 30, 2011. Based on the stressed financial

condition of our financial guarantor counterparties, we believe that all but one of our other financial guarantor

counterparties may not be able to fully meet their obligations to us in the future. We model our securities

without assuming the benefit of financial guarantees. We then adjust results for those external financial

guarantees from guarantors that we determine are creditworthy, although we continue to seek collection of any

amounts due to us from all counterparties. As of September 30, 2011, when modeling our securities for

impairments we did not assume the benefit of external financial guarantees from any counterparty.

We are also the beneficiary of financial guarantees included in securities issued by Freddie Mac, the federal

government and its agencies that totaled $32.6 billion as of September 30, 2011 and $25.7 billion as of

December 31, 2010.

Lenders with Risk Sharing

We enter into risk sharing agreements with lenders pursuant to which the lenders agree to bear all or some

portion of the credit losses on the covered loans. Our maximum potential loss recovery from lenders under

these risk sharing agreements on single-family loans was $13.3 billion as of September 30, 2011 and

$15.6 billion as of December 31, 2010. As of September 30, 2011, 58% of our maximum potential loss

recovery on single-family loans was from three lenders and as of December 31, 2010, 56% of our maximum

potential loss recovery on single-family loans was from three lenders. Our maximum potential loss recovery

from lenders under these risk sharing agreements on DUS and non-DUS multifamily loans was $31.6 billion

as of September 30, 2011 and $30.3 billion as of December 31, 2010. As of September 30, 2011, 40% of our

maximum potential loss recovery on multifamily loans was from three DUS lenders. As of December 31,

2010, 41% of our maximum potential loss recovery on multifamily loans was from three DUS lenders.

Unfavorable market conditions have adversely affected, and continue to adversely affect, the liquidity and

financial condition of our lender counterparties. The percentage of single-family recourse obligations to

lenders with investment grade credit ratings (based on the lower of S&P, Moody’s and Fitch ratings) was 47%

as of September 30, 2011 and 46% as of December 31, 2010. The percentage of these recourse obligations to

lender counterparties rated below investment grade was 24% as of September 30, 2011 and 23% as of

December 31, 2010. The remaining percentage of these recourse obligations were to lender counterparties that

were not rated by rating agencies, which was 29% as of September 30, 2011 and 31% as of December 31,

2010. Given the stressed financial condition of some of our lenders, we expect in some cases we will recover

less, perhaps significantly less, than the amount the lender is obligated to provide us under our risk sharing

arrangement with them. Depending on the financial strength of the counterparty, we may require a lender to

pledge collateral to secure its recourse obligations.

As noted above in “Multifamily Credit Risk Management,” our primary multifamily delivery channel is our

DUS program, which is comprised of lenders that span the spectrum from large depositories to independent

non-bank financial institutions. As of September 30, 2011, approximately 53% of the unpaid principal balance

of loans in our multifamily guaranty book of business serviced by our DUS lenders were from institutions

with an external investment grade credit rating or a guarantee from an affiliate with an external investment

grade credit rating. Given the recourse nature of the DUS program, the lenders are bound by eligibility

standards that dictate, among other items, minimum capital and liquidity levels, and the posting of collateral at

a highly rated custodian to secure a portion of the lenders’ future obligations. We actively monitor the

financial condition of these lenders to help ensure the level of risk remains within our standards.

Custodial Depository Institutions

A total of $52.1 billion in deposits for single-family payments were received and held by 286 institutions in

the month of September 2011 and a total of $75.4 billion in deposits for single-family payments were received

and held by 289 institutions in the month of December 2010. Of these total deposits, 93% as of September 30,

2011 and 92% as of December 31, 2010 were held by institutions rated as investment grade by S&P, Moody’s

and Fitch. Our ten largest custodial depository institutions held 93% of these deposits as of both

September 30, 2011 and December 31, 2010.

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If a custodial depository institution were to fail while holding remittances of borrower payments of principal

and interest due to us in our custodial account, we would be an unsecured creditor of the depository for

balances in excess of the deposit insurance protection and might not be able to recover all of the principal and

interest payments being held by the depository on our behalf, or there might be a substantial delay in

receiving these amounts. If this were to occur, we would be required to replace these amounts with our own

funds to make payments that are due to Fannie Mae MBS certificate holders. Accordingly, the insolvency of

one of our principal custodial depository counterparties could result in significant financial losses to us. In the

month of September 2011, approximately $3.6 billion or 7% of our total deposits for single-family payments

received and held by these institutions was in excess of the deposit insurance protection limit compared with

approximately $6.2 billion or 8% in the month of December 2010. These amounts can vary as they are

calculated based on individual payments of mortgage borrowers and we must estimate which borrowers are

paying their regular principal and interest payments and other types of payments, such as prepayments from

refinancing or sales.

Issuers of Investments Held in our Cash and Other Investments Portfolio

Our cash and other investments portfolio primarily consists of cash and cash equivalents, federal funds sold

and securities purchased under agreements to resell or similar arrangements, U.S. Treasury securities and

asset-backed securities. Our cash and other investment counterparties are primarily financial institutions and

the Federal Reserve Bank. See “Liquidity and Capital Management—Liquidity Management—Cash and Other

Investments Portfolio” for more detailed information on our cash and other investments portfolio.

Our cash and other investments portfolio, which totaled $103.5 billion as of September 30, 2011, included

$41.9 billion of U.S. Treasury securities and $5.0 billion of unsecured positions. As of December 31, 2010,

our cash and other investments portfolio totaled $61.8 billion and included $31.5 billion of U.S. Treasury

securities and $10.3 billion of unsecured positions. As of both September 30, 2011 and December 31, 2010,

all of our unsecured positions were short-term deposits with financial institutions which had short-term credit

ratings of A-1, P-1, F1 (or equivalent) or higher from Standard & Poor’s, Moody’s and Fitch ratings,

respectively.

Derivatives Counterparties

Our derivative credit exposure relates principally to interest rate and foreign currency derivatives contracts. We

estimate our exposure to credit loss on derivative instruments by calculating the replacement cost, on a present

value basis, to settle at current market prices all outstanding derivative contracts in a net gain position by

counterparty where the right of legal offset exists, such as master netting agreements, and by transaction where

the right of legal offset does not exist. The fair value of derivatives in a gain position is included in our

condensed consolidated balance sheets in “Other assets.” Typically, we seek to manage credit exposure by

contracting with experienced counterparties that are rated A- (or its equivalent) or better by the major ratings

organizations. We also manage our exposure by requiring counterparties to post collateral. The collateral

includes cash, U.S. Treasury securities, agency debt and agency mortgage-related securities.

Our net credit exposure on derivatives contracts increased to $164 million as of September 30, 2011, from

$152 million as of December 31, 2010. We had outstanding interest rate and foreign currency derivative

transactions with 15 counterparties as of both September 30, 2011 and December 31, 2010. Derivatives

transactions with nine of our counterparties accounted for approximately 90% of our total outstanding notional

amount as of September 30, 2011, with each of these counterparties accounting for between approximately 6%

and 16% of the total outstanding notional amount. In addition to the 15 counterparties with whom we had

outstanding notional amounts and master netting agreements as of September 30, 2011, we had a master

netting agreement with one more counterparty with whom we may enter into interest rate derivative or foreign

currency derivative transactions in the future.

We expect that, under the Dodd-Frank Act, we will be required in the future to submit certain interest rate

swaps for clearing to a derivatives clearing organization. In anticipation of those requirements, we have

cleared a small number of new interest rate swap transactions with the Chicago Mercantile Exchange, Inc.

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(“CME”), a derivatives clearing organization. As a result, we are exposed to the institutional credit risk of

CME and its members that execute and submit our transactions for clearing. Our institutional credit risk

exposure to the CME or other comparable exchanges or trading facilities, as well as their members, is likely to

increase in the future.

See “Note 9, Derivative Instruments” for information on the outstanding notional amount and additional

information on our risk management derivative contracts as of September 30, 2011 and December 31, 2010, as

well as a discussion of our collateral requirements under our derivatives contracts. See “Risk Factors” for a

discussion of the impact of decreases in our credit ratings on our collateral obligations under our derivatives

contracts. Also see “Risk Factors” in our 2010 Form 10-K for a discussion of the risks to our business posed

by interest rate risk and a discussion of the risks to our business as a result of the concentration of our

institutional counterparties.

Market Risk Management, Including Interest Rate Risk Management

We are subject to market risk, which includes interest rate risk, spread risk and liquidity risk. These risks arise

from our mortgage asset investments. Interest rate risk is the risk of loss in value or expected future earnings

that may result from changes to interest rates. Spread risk is the resulting impact of changes in the spread

between our mortgage assets and our debt and derivatives we use to hedge our position. Liquidity risk is the

risk that we will not be able to meet our funding obligations in a timely manner. We describe our sources of

interest rate risk exposure and our strategy for managing interest rate risk and spread risk in “MD&A—Risk

Management—Market Risk Management, Including Interest Rate Risk Management” in our 2010 Form 10-K.

Measurement of Interest Rate Risk

Below we present two quantitative metrics that provide estimates of our interest rate exposure: (1) fair value

sensitivity of net portfolio to changes in interest rate levels and slope of yield curve; and (2) duration gap. The

metrics presented are calculated using internal models that require standard assumptions regarding interest

rates and future prepayments of principal over the remaining life of our securities. These assumptions are

derived based on the characteristics of the underlying structure of the securities and historical prepayment

rates experienced at specified interest rate levels, taking into account current market conditions, the current

mortgage rates of our existing outstanding loans, loan age and other factors. On a continuous basis,

management makes judgments about the appropriateness of the risk assessments and will make adjustments as

necessary to properly assess our interest rate exposure and manage our interest rate risk. The methodologies

used to calculate risk estimates are periodically changed on a prospective basis to reflect improvements in the

underlying estimation process.

Interest Rate Sensitivity to Changes in Interest Rate Level and Slope of Yield Curve

As part of our disclosure commitments with FHFA, we disclose on a monthly basis the estimated adverse

impact on the fair value of our net portfolio that would result from the following hypothetical situations:

• A 50 basis point shift in interest rates.

• A 25 basis point change in the slope of the yield curve.

In measuring the estimated impact of changes in the level of interest rates, we assume a parallel shift in all

maturities of the U.S. LIBOR interest rate swap curve.

In measuring the estimated impact of changes in the slope of the yield curve, we assume a constant 7-year

rate and a shift of 16.7 basis points for the 1-year rate and 8.3 basis points for the 30-year rate. We believe the

aforementioned interest rate shocks for our monthly disclosures represent moderate movements in interest

rates over a one-month period.

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Duration Gap

Duration gap measures the price sensitivity of our assets and liabilities to changes in interest rates by

quantifying the difference between the estimated durations of our assets and liabilities. Our duration gap

analysis reflects the extent to which the estimated maturity and repricing cash flows for our assets are

matched, on average, over time and across interest rate scenarios to the estimated cash flows of our liabilities.

A positive duration gap indicates that the duration of our assets exceeds the duration of our liabilities. We

disclose duration gap on a monthly basis under the caption “Interest Rate Risk Disclosures” in our Monthly

Summaries, which are available on our website and announced in a press release.

The sensitivity measures presented in Table 49, which we disclose on a quarterly basis as part of our

disclosure commitments with FHFA, are an extension of our monthly sensitivity measures. There are three

primary differences between our monthly sensitivity disclosure and the quarterly sensitivity disclosure

presented below: (1) the quarterly disclosure is expanded to include the sensitivity results for larger rate level

shocks of plus or minus 100 basis points; (2) the monthly disclosure reflects the estimated pre-tax impact on

the market value of our net portfolio calculated based on a daily average, while the quarterly disclosure

reflects the estimated pre-tax impact calculated based on the estimated financial position of our net portfolio

and the market environment as of the last business day of the quarter; and (3) the monthly disclosure shows

the most adverse pre-tax impact on the market value of our net portfolio from the hypothetical interest rate

shocks, while the quarterly disclosure includes the estimated pre-tax impact of both up and down interest rate

shocks.

In addition, Table 49 also provides the average, minimum, maximum and standard deviation for duration gap

and for the most adverse market value impact on the net portfolio for non-parallel and parallel interest rate

shocks for the three months ended September 30, 2011 and 2010.

Table 49: Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve(1)

September 30, 2011 December 31, 2010

As of

(Dollars in billions)

Rate level shock:

-100 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.1 $(0.8)

-50 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (0.2)

+50 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (0.2)

+100 basis points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (0.5)

Rate slope shock:

-25 basis points (flattening) . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (0.1)

+25 basis points (steepening) . . . . . . . . . . . . . . . . . . . . . . . . . . . — 0.1

Duration

Gap

Rate Slope Shock

25 Bps

Rate Level Shock

50 Bps

For the Three Months Ended September 30, 2011

Exposure

(In months) (Dollars in billions)

Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 $0.1 $0.2

Minimum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.7) — —

Maximum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 0.2 0.3

Standard deviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 0.1 0.1

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Duration

Gap

Rate Slope Shock

25 Bps

Rate Level Shock

50 Bps

For the Three Months Ended September 30, 2010

Exposure

(In months) (Dollars in billions)

Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 $ — $0.2

Minimum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.6) — —

Maximum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 0.1 0.4

Standard deviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 — 0.1

(1) Computed based on changes in LIBOR swap rates.

A majority of the interest rate risk associated with our mortgage-related securities and loans is hedged with

our debt issuance, which includes callable debt. We use derivatives to help manage the residual interest rate

risk exposure between our assets and liabilities. Derivatives have enabled us to keep our interest rate risk

exposure at consistently low levels in a wide range of interest-rate environments. Table 50 shows an example

of how derivatives impacted the net market value exposure for a 50 basis point parallel interest rate shock.

Table 50: Derivative Impact on Interest Rate Risk (50 Basis Points)

Before

Derivatives

After

Derivatives

Effect of

Derivatives

(Dollars in billions)

As of September 30, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1.4) $ — $1.4

As of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(0.9) $(0.2) $0.7

Other Interest Rate Risk Information

The interest rate risk measures discussed above exclude the impact of changes in the fair value of our net

guaranty assets resulting from changes in interest rates. We exclude our guaranty business from these

sensitivity measures based on our current assumption that the guaranty fee income generated from future

business activity will largely replace guaranty fee income lost due to mortgage prepayments.

In “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management—

Measurement of Interest Rate Risk—Other Interest Rate Risk Information” in our 2010 Form 10-K, we

provided additional interest rate sensitivities including separate disclosure of the potential impact on the fair

value of our trading assets and other financial instruments. As of September 30, 2011, these sensitivities were

relatively unchanged as compared with December 31, 2010. The fair value of our trading financial instruments

and our other financial instruments as of September 30, 2011 and December 31, 2010 can be found in

“Note 13, Fair Value.”

Liquidity Risk Management

See “Liquidity and Capital Management—Liquidity Management” for a discussion on how we manage

liquidity risk.

96
IMPACT OF FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

We identify and discuss the expected impact on our condensed consolidated financial statements of recently

issued accounting pronouncements in “Note 1, Summary of Significant Accounting Policies.”

FORWARD-LOOKING STATEMENTS

This report includes statements that constitute forward-looking statements within the meaning of Section 21E

of the Securities Exchange Act of 1934 (“Exchange Act”). In addition, our senior management may from time

to time make forward-looking statements orally to analysts, investors, the news media and others. Forwardlooking statements often include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,”

“estimate,” “forecast,” “project,” “would,” “should,” “could,” “likely,” “may,” or similar words.

Among the forward-looking statements in this report are statements relating to:

• Our expectation that loans in our new single-family book of business will be profitable over their lifetime;

• Our belief that credit losses on loans we have acquired since 2009 would exceed guaranty fee revenue if

home prices declined nationally by approximately 10% from their September 2011 levels over the next

five years, based on our home price index;

• Our expectations regarding whether loans we acquired in specific years will be profitable or unprofitable;

• Our expectations regarding the performance and profitability of loans we acquired in 2004 and the factors

that will impact the performance and profitability of these loans;

• Our expectation that our 2005 through 2008 vintages will be significantly more unprofitable than our

2004 vintage;

• Our expectation that our acquisitions of loans with high LTV ratios will increase in 2012 as a result of

recently announced changes to HARP;

• Our expectations regarding the credit profile of loans we acquire in the future, and the factors that will

influence their credit profile;

• Our estimate that, while single-family loans that we acquired from 2005 through 2008 will give rise to

additional credit losses that we will realize when the loans are charged off (upon foreclosure or our

acceptance of a short sale or deed-in-lieu of foreclosure), we have reserved for the substantial majority of

the remaining losses on these loans;

• Our expectation that future defaults on loans in our legacy book of business and the resulting charge-offs

will occur over a period of years;

• Our expectation that it will take years before our REO inventory is reduced to pre-2008 levels;

• Our expectation that we will realize as credit losses an estimated two-thirds of the fair value losses on

loans purchased out of MBS trusts that are reflected in our condensed consolidated balance sheets, and

eventually recover the remaining one-third, either through net interest income for loans that cure or

through foreclosed property income for loans where the sale of the collateral exceeds our recorded

investment in the loan;

• Our belief that successful modifications will ultimately reduce our credit losses over the long term from

what they otherwise would have been if we had taken the loans to foreclosure;

• Our expectation that serious delinquency rates will continue to be affected in the future by home price

changes, changes in other macroeconomic conditions, the length of the foreclosure process, the volume of

loan modifications and the extent to which borrowers with modified loans continue to make timely

payments;

97
• Our belief that foreclosure delays resulting from changes in the foreclosure environment will continue to

negatively impact our foreclosure timelines, credit-related expenses and single-family serious delinquency

rates, and will delay the recovery of the housing market;

• Our expectation that employment will likely need to post sustained improvement for an extended period

to have a positive impact on housing;

• Our expectation that weakness in the housing and mortgage markets will continue in the fourth quarter of

2011;

• Our expectation that home sales are unlikely to increase until the unemployment rate improves further;

• Our estimate that the likelihood of a recession by the end of next year is close to 50%;

• Our expectation that single-family default and severity rates, as well as the level of single-family

foreclosures, will remain high in 2011;

• Our expectation that multifamily charge-offs in 2011 will remain generally commensurate with 2010

levels as certain local markets and properties continue to exhibit weak fundamentals;

• Our expectations that the recently announced changes to HARP will result in our acquiring more

refinancings in 2012 than we would have acquired in the absence of the changes, but that we will acquire

fewer refinancings overall in each of 2011 and 2012 than in 2010 as a result of the high number of

mortgages that have already refinanced to low rates in recent years;

• Our expectation that the pace of our loan acquisitions overall for each of 2011 and 2012 will be lower

than in 2010;

• Our belief that our loan acquisitions could be negatively affected by the decrease in our maximum loan

limit in the fourth quarter of 2011;

• Our expectation that if FHA continues to be the lower-cost option for some consumers, and in some cases

the only option, for loans with higher LTV ratios, our market share could be adversely impacted;

• Our expectation that our future revenues will be negatively impacted to the extent our acquisitions

decline;

• Our estimation that total originations in the U.S. single-family mortgage market in 2011 will decrease

from 2010 levels by approximately 23%, from an estimated $1.7 trillion to an estimated $1.3 trillion, and

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

decline from approximately $1.1 trillion to approximately $905 billion;

• Our expectation that home prices on a national basis will decline further, with greater declines in some

geographic areas than others, before stabilizing in 2012;

• Our expectations regarding regional variations in home price declines and stabilization;

• Our expectation of a peak-to-trough home price decline on a national basis ranging from 22% to 28%,

and our expectation that it would take the occurrence of an additional adverse economic event to reach

the high end of the range;

• Our expectation that our credit losses will be lower in 2011 than in 2010;

• Our expectation that we will not earn profits in excess of our annual dividend obligation to Treasury for

the indefinite future;

• Our expectation that the Acting Director of FHFA will submit a request to Treasury on our behalf for

$7.8 billion to eliminate our net worth deficit as of September 30, 2011;

98
• Our expectation that we will request additional draws under the senior preferred stock purchase agreement

in future periods, which will further increase the dividends we owe to Treasury on the senior preferred

stock;

• Our expectation that over time our dividend obligation to Treasury will constitute an increasing portion of

our future draws under the senior preferred stock purchase agreement;

• Our expectation that uncertainty regarding the future of our company will continue;

• Our expectation that Congress will continue to hold hearings and consider legislation in the remainder of

2011 and in 2012 on the future status of Fannie Mae and Freddie Mac;

• Our belief that, as drafted, bills introduced in Congress that would require FHFA to make a determination

within two years of enactment whether the GSEs were financially viable and, if the GSEs were

determined to be not financially viable, to place them into receivership may upon enactment impair our

ability to issue securities in the capital markets and therefore our ability to conduct our business, absent

the federal government providing an explicit guarantee of our existing and ongoing liabilities;

• Our expectations regarding when fees for loans refinanced under HARP’s revised terms will be

announced;

• Our expectation that our single-family guaranty fees will increase in the coming years;

• Our expectations regarding a transitional period as we phase out the practice of requiring mortgage

servicers to use our network of retained attorneys to perform default- and foreclosure-related legal

services for our loans;

• Our expectation that we will continue to purchase loans from MBS trusts as they become four or more

consecutive monthly payments delinquent subject to market conditions, economic benefit, servicer

capacity, and other factors, including the limit on mortgage assets that we may own pursuant to the senior

preferred stock purchase agreement;

• Our expectation that our mortgage portfolio will continue to decrease due to the restrictions on the

amount of mortgage assets we may own under the terms of our senior preferred stock purchase agreement

with Treasury;

• Our expectation that the current market premium portion of our current estimate of fair value will not

impact future Treasury draws, which is based on our intention not to have another party assume the credit

risk inherent in our book of business;

• Our expectation that our debt funding needs will decline in future periods as we reduce the size of our

mortgage portfolio in compliance with the requirement of the senior preferred stock purchase agreement;

• Our intention to repay our short-term and long-term debt obligations as they become due primarily

through proceeds from the issuance of additional debt securities;

• Our intention to use funds we receive from Treasury under the senior preferred stock purchase agreement

to pay our debt obligations and to pay dividends on the senior preferred stock;

• Our expectations regarding our credit ratings and their impact on us;

• Our expectation that our acquisitions of Alt-A mortgage loans will continue to be minimal in future

periods and the percentage of the book of business attributable to Alt-A will continue to decrease over

time;

• Our expectation that the volume of our foreclosure alternatives will remain high throughout the remainder

of 2011;

• Our belief that the performance of our workouts will be highly dependent on economic factors, such as

unemployment rates, household wealth and income, and home prices;

99
• Our expectation that the amount of our outstanding repurchase requests to seller/servicers will remain

high, and that we may be unable to recover on all outstanding loan repurchase obligations resulting from

seller/servicers’ breaches of contractual obligations;

• Our expectations regarding recoveries from our lenders under risk sharing arrangements, and the

possibility that we may require a lender to pledge collateral to secure its recourse obligations;

• Our belief that one or more of our financial guarantor counterparties may not be able to fully meet their

obligations to us in the future;

• Our expectation that we will be required to submit certain interest rate swaps for clearing to a derivatives

clearing organization in the future and that our institutional credit risk exposure to the Chicago Mercantile

Exchange or other comparable exchanges or trading facilities and their members is likely to increase in

the future;

• Our expectation that we will continue to need funding from Treasury to avoid triggering FHFA’s

obligation to place us into receivership; and

• Our belief that continued federal government support of our business and the financial markets, as well as

our status as a GSE, are essential to maintaining our access to debt funding.

Forward-looking statements reflect our management’s expectations, forecasts or predictions of future

conditions, events or results based on various assumptions and management’s estimates of trends and

economic factors in the markets in which we are active, as well as our business plans. They are not guarantees

of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. Our

actual results and financial condition may differ, possibly materially, from the anticipated results and financial

condition indicated in these forward-looking statements. There are a number of factors that could cause actual

conditions, events or results to differ materially from those described in the forward-looking statements

contained in this report, including, but not limited to the following: the uncertainty of our future; legislative

and regulatory changes affecting us; challenges we face in retaining and hiring qualified employees; the

deteriorated credit performance of many loans in our guaranty book of business; the conservatorship and its

effect on our business; the investment by Treasury and its effect on our business; adverse effects from

activities we undertake to support the mortgage market and help borrowers; a decrease in our credit ratings;

limitations on our ability to access the debt capital markets; further disruptions in the housing and credit

markets; defaults by one or more institutional counterparties; our reliance on mortgage servicers; deficiencies

in servicer foreclosure processes and the consequences of those deficiencies; guidance by the FASB;

operational control weaknesses; our reliance on models; the level and volatility of interest rates and credit

spreads; changes in the structure and regulation of the financial services industry; and those factors described

in “Risk Factors” in this report and in our 2010 Form 10-K, as well as the factors described in “Executive

Summary—Our Strong New Book of Business and Expected Losses on our Legacy Book of Business—

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

this report.

Readers are cautioned to place forward-looking statements in this report or that we make from time to time

into proper context by carefully considering the factors discussed in “Risk Factors” in our 2010 Form 10-K

and in this report. Our forward-looking statements speak only as of the date they are made, and we undertake

no obligation to update any forward-looking statement because of new information, future events or otherwise,

except as required under the federal securities laws.

100
Item 1. Financial Statements

FANNIE MAE

(In conservatorship)

Condensed Consolidated Balance Sheets—(Unaudited)

(Dollars in millions, except share amounts)

September 30,

2011

December 31,

2010

As of

ASSETS

Cash and cash equivalents (includes $3 and $348, respectively, related to consolidated trusts) . . ..... $ 24,307 $ 17,297

Restricted cash (includes $51,774 and $59,619, respectively, related to consolidated trusts)......... 55,961 63,678

Federal funds sold and securities purchased under agreements to resell or similar arrangements . ..... 35,950 11,751

Investments in securities:

Trading, at fair value (includes $20 and $21, respectively, related to consolidated trusts) . . ..... 68,149 56,856

Available-for-sale, at fair value (includes $1,429 and $1,055, respectively, related to consolidated

trusts) ........................................................... 82,710 94,392

Total investments in securities . . ........................................ 150,859 151,248

Mortgage loans:

Loans held for sale, at lower of cost or fair value (includes $53 and $661, respectively, related to

consolidated trusts) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309 915

Loans held for investment, at amortized cost:

Of Fannie Mae . . . .................................................. 385,247 407,228

Of consolidated trusts (includes $3,361 and $2,962, respectively, at fair value and loans pledged

as collateral that may be sold or repledged of $6,993 and $2,522, respectively) .......... 2,583,699 2,577,133

Total loans held for investment . . . ........................................ 2,968,946 2,984,361

Allowance for loan losses . ............................................. (71,435) (61,556)

Total loans held for investment, net of allowance ............................. 2,897,511 2,922,805

Total mortgage loans . . . ............................................. 2,897,820 2,923,720

Accrued interest receivable, net (includes $8,451 and $8,910, respectively, related to consolidated trusts) . . . 10,862 11,279

Acquired property, net . . . .................................................. 12,195 16,173

Other assets ............................................................ 25,923 26,826

Total assets ........................................................... $3,213,877 $3,221,972

LIABILITIES AND DEFICIT

Liabilities:

Accrued interest payable (includes $9,449 and $9,712, respectively, related to consolidated trusts) . . $ 12,928 $ 13,764

Federal funds purchased and securities sold under agreements to repurchase. . . . . . . . . . . . . . . . . — 52

Debt:

Of Fannie Mae (includes $845 and $893, respectively, at fair value) .................... 744,803 780,044

Of consolidated trusts (includes $3,840 and $2,271, respectively, at fair value) . . . .......... 2,446,973 2,416,956

Other liabilities (includes $674 and $893, respectively, related to consolidated trusts) . .......... 16,964 13,673

Total liabilities ....................................................... 3,221,668 3,224,489

Commitments and contingencies (Note 14) ........................................ — —

Fannie Mae stockholders’ equity (deficit):

Senior preferred stock, 1,000,000 shares issued and outstanding . . . .................... 104,787 88,600

Preferred stock, 700,000,000 shares are authorized—555,374,922 and 576,868,139 shares issued

and outstanding, respectively ............................................ 19,130 20,204

Common stock, no par value, no maximum authorization—1,308,762,703 and 1,270,092,708 shares

issued, respectively; 1,157,757,042 and 1,118,504,194 shares outstanding, respectively . . . . . . . . . . 687 667

Accumulated deficit . .................................................. (123,359) (102,986)

Accumulated other comprehensive loss ....................................... (1,696) (1,682)

Treasury stock, at cost, 151,005,661 and 151,588,514 shares, respectively. . ............... (7,402) (7,402)

Total Fannie Mae stockholders’ deficit ....................................... (7,853) (2,599)

Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 82

Total deficit . . ....................................................... (7,791) (2,517)

Total liabilities and deficit . .................................................. $3,213,877 $3,221,972

See Notes to Condensed Consolidated Financial Statements

101
FANNIE MAE

(In conservatorship)

Condensed Consolidated Statements of Operations and Comprehensive Loss—(Unaudited)

(Dollars and shares in millions, except per share amounts)

2011 2010 2011 2010

For the Three

Months Ended

September 30,

For the Nine

Months Ended

September 30,

Interest income:

Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 274 $ 310 $ 822 $ 955

Available-for-sale securities ........................................ 1,160 1,313 3,525 4,175

Mortgage loans (includes $30,633 and $32,807, respectively, for the three months ended

and $94,111 and $100,810, respectively, for the nine months ended related to

consolidated trusts) . . . ......................................... 34,334 36,666 105,257 111,917

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 31 79 111

Total interest income . . ......................................... 35,794 38,320 109,683 117,158

Interest expense:

Short-term debt (includes $3 and $4, respectively, for the three months ended and $8

and $9, respectively, for the nine months ended related to consolidated trusts) . . . . . . 66 194 254 479

Long-term debt (includes $27,157 and $28,878, respectively, for the three months ended

and $82,928 and $90,379, respectively, for the nine months ended related to

consolidated trusts) . . . ......................................... 30,542 33,350 94,311 104,907

Total interest expense. . ......................................... 30,608 33,544 94,565 105,386

Net interest income . .............................................. 5,186 4,776 15,118 11,772

Provision for loan losses . . . ......................................... (4,159) (4,696) (20,548) (20,930)

Net interest income (loss) after provision for loan losses . . ..................... 1,027 80 (5,430) (9,158)

Investment gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 82 319 271

Other-than-temporary impairments . .................................... (232) (366) (317) (600)

Noncredit portion of other-than-temporary impairments recognized in other comprehensive

income . . . ................................................... (30) 40 (45) (99)

Net other-than-temporary impairments ................................... (262) (326) (362) (699)

Fair value (losses) gains, net ......................................... (4,525) 525 (5,870) (877)

Debt extinguishment losses, net . . . .................................... (119) (214) (149) (497)

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291 304 793 831

Non-interest (loss) income ......................................... (4,542) 371 (5,269) (971)

Administrative expenses:

Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 325 953 973

Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 305 531 759

Occupancy expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 43 131 124

Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 57 150 149

Total administrative expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 591 730 1,765 2,005

(Benefit) provision for guaranty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) 78 694 111

Foreclosed property expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 733 787 743 1,255

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254 196 638 650

Total expenses . .............................................. 1,570 1,791 3,840 4,021

Loss before federal income taxes . . .................................... (5,085) (1,340) (14,539) (14,150)

Benefit for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 9 91 67

Net loss....................................................... (5,085) (1,331) (14,448) (14,083)

Other comprehensive (loss) income:

Changes in unrealized losses on available-for-sale securities, net of reclassification

adjustments and taxes. . ......................................... (198) 901 (20) 3,938

Other ....................................................... 1 1 6 6

Total other comprehensive (loss) income .............................. (197) 902 (14) 3,944

Total comprehensive loss. . . ......................................... (5,282) (429) (14,462) (10,139)

Less: Comprehensive income attributable to the noncontrolling interest . . . . . . . . . . . . — (8) (1) (4)

Total comprehensive loss attributable to Fannie Mae .......................... $ (5,282) $ (437) $ (14,463) $ (10,143)

Net loss....................................................... $ (5,085) $ (1,331) $ (14,448) $ (14,083)

Less: Net income attributable to the noncontrolling interest . . . . . . . . . . . . . . . . . . . . — (8) (1) (4)

Net loss attributable to Fannie Mae . .................................... (5,085) (1,339) (14,449) (14,087)

Preferred stock dividends . . ......................................... (2,494) (2,116) (6,992) (5,550)

Net loss attributable to common stockholders .............................. $ (7,579) $ (3,455) $ (21,441) $ (19,637)

Loss per share—Basic and Diluted . .................................... $ (1.32) $ (0.61) $ (3.74) $ (3.45)

Weighted-average common shares outstanding—Basic and Diluted ................ 5,760 5,695 5,730 5,694

See Notes to Condensed Consolidated Financial Statements

102
FANNIE MAE

(In conservatorship)

Condensed Consolidated Statements of Cash Flows—(Unaudited)

(Dollars in millions)

2011 2010

For the Nine Months

Ended September 30,

Net cash used in operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,714) $ (42,447)

Cash flows provided by investing activities:

Purchases of trading securities held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,483) (7,984)

Proceeds from maturities and paydowns of trading securities held for investment . . . . . . . . . . 1,672 1,997

Proceeds from sales of trading securities held for investment . . . . . . . . . . . . . . . . . . . . . . . . 837 21,488

Purchases of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) (262)

Proceeds from maturities and paydowns of available-for-sale securities . . . . . . . . . . . . . . . . . 9,995 12,927

Proceeds from sales of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,590 7,096

Purchases of loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44,276) (52,048)

Proceeds from repayments of loans held for investment of Fannie Mae . . . . . . . . . . . . . . . . . 18,467 14,749

Proceeds from repayments of loans held for investment of consolidated trusts. . . . . . . . . . . . . 364,500 378,662

Net change in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,717 (11,111)

Advances to lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43,363) (44,951)

Proceeds from disposition of acquired property and preforeclosure sales . . . . . . . . . . . . . . . . 36,280 28,079

Net change in federal funds sold and securities purchased under agreements to resell or similar

agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,199) 33,219

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 (476)

Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327,830 381,385

Cash flows used in financing activities:

Proceeds from issuance of debt of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572,828 890,570

Payments to redeem debt of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (609,399) (848,438)

Proceeds from issuance of debt of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,280 191,665

Payments to redeem debt of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (444,160) (587,963)

Payments of cash dividends on senior preferred stock to Treasury . . . . . . . . . . . . . . . . . . . . . (6,992) (5,554)

Proceeds from senior preferred stock purchase agreement with Treasury . . . . . . . . . . . . . . . . 16,187 25,200

Net change in federal funds purchased and securities sold under agreements to repurchase . . . . — 185

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 (33)

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (314,106) (334,368)

Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,010 4,570

Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,297 6,812

Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,307 $ 11,382

Cash paid during the period for interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,592 $ 107,537

See Notes to Condensed Consolidated Financial Statements

103
FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Summary of Significant Accounting Policies

Organization

We are a stockholder-owned corporation organized and existing under the Federal National Mortgage

Association Charter Act (the “Charter Act” or our “charter”). We are a government-sponsored enterprise

(“GSE”) and subject to government oversight and regulation. Our regulators include the Federal Housing

Finance Agency (“FHFA”), the U.S. Department of Housing and Urban Development (“HUD”), the

U.S. Securities and Exchange Commission (“SEC”), and the U.S. Department of the Treasury (“Treasury”).

The U.S. government does not guarantee our securities or other obligations.

Conservatorship

On September 7, 2008, the Secretary of the Treasury and the Director of FHFA announced several actions

taken by Treasury and FHFA regarding Fannie Mae, which included: (1) placing us in conservatorship; (2) the

execution of a senior preferred stock purchase agreement by our conservator, on our behalf, and Treasury,

pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase common stock;

and (3) Treasury’s agreement to establish a temporary secured lending credit facility that was available to us

and the other GSEs regulated by FHFA under identical terms until December 31, 2009.

Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the

Federal Housing Finance Regulatory Reform Act of 2008, (together, the “GSE Act”), the conservator

immediately succeeded to (1) all rights, titles, powers and privileges of Fannie Mae, and of any stockholder,

officer or director of Fannie Mae with respect to Fannie Mae and its assets, and (2) title to the books, records

and assets of any other legal custodian of Fannie Mae. The conservator has since delegated specified

authorities to our Board of Directors and has delegated to management the authority to conduct our day-to-day

operations. The conservator retains the authority to withdraw its delegations at any time.

We were directed by FHFA to voluntarily delist our common stock and each listed series of our preferred

stock from the New York Stock Exchange and the Chicago Stock Exchange. The last trading day for the listed

securities on the New York Stock Exchange and the Chicago Stock Exchange was July 7, 2010, and since

July 8, 2010, the securities have been traded on the over-the-counter market.

The conservator has the power to transfer or sell any asset or liability of Fannie Mae (subject to limitations

and post-transfer notice provisions for transfers of qualified financial contracts) without any approval,

assignment of rights or consent of any party. The GSE Act, however, provides that mortgage loans and

mortgage-related assets that have been transferred to a Fannie Mae mortgage-backed securities (“MBS”) trust

must be held by the conservator for the beneficial owners of the Fannie Mae MBS and cannot be used to

satisfy the general creditors of the company. As of November 8, 2011, FHFA has not exercised this power.

Neither the conservatorship nor the terms of our agreements with Treasury change our obligation to make

required payments on our debt securities or perform under our mortgage guaranty obligations.

On June 20, 2011, FHFA issued a final rule establishing a framework for conservatorship and receivership

operations for the GSEs. The final rule, which became effective on July 20, 2011, establishes procedures for

conservatorship and receivership, and priorities of claims for contract parties and other claimants. The final

rule is part of FHFA’s implementation of the powers provided by the Federal Housing Finance Regulatory

Reform Act of 2008, and does not seek to anticipate or predict future conservatorships or receiverships.

The conservatorship has no specified termination date and there continues to be uncertainty regarding the

future of our company, including how long we will continue to be in existence, the extent of our role in the

market, what form we will have, and what ownership interest, if any, our current common and preferred

104
stockholders will hold in us after the conservatorship is terminated. Under the GSE Act, FHFA must place us

into receivership if the Director of FHFA makes a written determination that our assets are less than our

obligations or if we have not been paying our debts, in either case, for a period of 60 days. In addition, the

Director of FHFA may place us in receivership at his discretion at any time for other reasons, including

conditions that FHFA has already asserted existed at the time the former Director of FHFA placed us into

conservatorship. Placement into receivership would have a material adverse effect on holders of our common

stock, preferred stock, debt securities and Fannie Mae MBS. Should we be placed into receivership, different

assumptions would be required to determine the carrying value of our assets, which could lead to substantially

different financial results. We are not aware of any plans of FHFA to significantly change our business model

or capital structure in the near-term.

Impact of U.S. Government Support

We are dependent upon the continued support of Treasury to eliminate our net worth deficit, which avoids our

being placed into receivership. Based on consideration of all the relevant conditions and events affecting our

operations, including our dependence on the U.S. government, we continue to operate as a going concern and

in accordance with our delegation of authority from FHFA.

Pursuant to the amended senior preferred stock purchase agreement, Treasury has committed to provide us

with funding as needed to help us maintain a positive net worth thereby avoiding the mandatory receivership

trigger described above. We have received a total of $103.8 billion as of September 30, 2011 under Treasury’s

funding commitment and the Acting Director of FHFA will submit a request for an additional $7.8 billion

from Treasury to eliminate our net worth deficit as of September 30, 2011. The aggregate liquidation

preference of the senior preferred stock was $104.8 billion as of September 30, 2011 and will increase to

$112.6 billion as a result of FHFA’s request on our behalf for funds to eliminate our net worth deficit as of

September 30, 2011.

The amended senior preferred stock purchase agreement provides that the $200 billion maximum amount of

the commitment from Treasury will increase as necessary to accommodate any net worth deficiencies

attributable to periods during 2010, 2011, and 2012. If we do not have a positive net worth as of

December 31, 2012, then the amount of funding available under the amended senior preferred stock purchase

agreement after 2012 will be $124.8 billion ($200 billion less $75.2 billion in cumulative draws for net worth

deficiencies through December 31, 2009).

In the event we have a positive net worth as of December 31, 2012, then the amount of funding available after

2012 under the amended senior preferred stock purchase agreement will depend on the size of that positive net

worth relative to the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011,

and 2012, as follows:

• If our positive net worth as of December 31, 2012 is less than the cumulative draws for net worth

deficiencies attributable to periods during 2010, 2011, and 2012, then the amount of available funding

will be $124.8 billion less our positive net worth as of December 31, 2012.

• If our positive net worth as of December 31, 2012 is greater than the cumulative draws for net worth

deficiencies attributable to periods during 2010, 2011, and 2012, then the amount of available funding

will be $124.8 billion less the cumulative draws attributable to periods during 2010, 2011, and 2012.

As of November 7, 2011, the amount of the quarterly commitment fee payable by us to Treasury under the

senior preferred stock purchase agreement had not been established; however, Treasury has waived the

quarterly commitment fee under the senior preferred stock purchase agreement for each quarter of 2011 due to

the continued fragility of the U.S. mortgage market and Treasury’s belief that imposing the commitment fee

105

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
would not generate increased compensation for taxpayers. Treasury stated that it will reevaluate the situation

during the next calendar quarter to determine whether to set the quarterly commitment fee for the first quarter

of 2012.

We fund our business primarily through the issuance of short-term and long-term debt securities in the

domestic and international capital markets. Because debt issuance is our primary funding source, we are

subject to “roll-over,” or refinancing, risk on our outstanding debt. Our ability to issue long-term debt has been

strong primarily due to actions taken by the federal government to support us and the financial markets.

We believe that continued federal government support of our business and the financial markets, as well as our

status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in the

government’s support could materially adversely affect our ability to refinance our debt as it becomes due,

which could have a material adverse impact on our liquidity, financial condition and results of operations. In

addition, due to our reliance on the U.S. government’s support, our access to debt funding or the cost of debt

funding also could be materially adversely affected by a change or perceived change in the creditworthiness of

the U.S. government. A downgrade in our credit ratings could reduce demand for our debt securities and

increase our borrowing costs. Standard & Poor’s Ratings Services’ (“S&P”) downgrade of our credit rating on

August 8, 2011, which was a result of a similar action on the U.S. government’s sovereign credit rating, has

not adversely affected our access to debt funding or the cost of our debt funding. Future changes or

disruptions in the financial markets could significantly change the amount, mix and cost of funds we obtain,

which also could increase our liquidity and roll-over risk and have a material adverse impact on our liquidity,

financial condition and results of operations.

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

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

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

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

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

Congress will continue to hold hearings and consider legislation in 2011 on the future status of Fannie Mae

and Freddie Mac, including proposals that would result in a substantial change to our business structure, or

our operations, or that involve Fannie Mae’s liquidation or dissolution. We cannot predict the prospects for the

enactment, timing or content of legislative proposals regarding the future status of the GSEs.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in

accordance with accounting principles generally accepted in the United States of America (“GAAP”) for

interim financial information and with the SEC’s instructions to Form 10-Q and Article 10 of Regulation S-X.

Accordingly, they do not include all of the information and note disclosures required by GAAP for complete

consolidated financial statements. In the opinion of management, all adjustments of a normal recurring nature

considered necessary for a fair presentation have been included. Intercompany accounts and transactions have

been eliminated. Results for the three and nine months ended September 30, 2011 may not necessarily be

indicative of the results for the year ending December 31, 2011. The unaudited interim condensed

consolidated financial statements as of and for the three and nine months ended September 30, 2011 should be

read in conjunction with our audited consolidated financial statements and related notes included in our

Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”), filed with the SEC

on February 24, 2011.

106

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Related Parties

As a result of our issuance to Treasury of the warrant to purchase shares of Fannie Mae common stock equal

to 79.9% of the total number of shares of Fannie Mae common stock, we and the Treasury are deemed related

parties. As of September 30, 2011, Treasury held an investment in our senior preferred stock with an

aggregate liquidation preference of $104.8 billion. Our administrative expenses were reduced by $30 million

and $90 million for the three and nine months ended September 30, 2011, respectively, due to reimbursements

from Treasury and Freddie Mac for expenses incurred as program administrator for the Home Affordable

Modification Program (“HAMP”) and other initiatives under the Making Home Affordable Program.

During the nine months ended September 30, 2011, we received a refund of $1.1 billion from the Internal

Revenue Service (“IRS”), a bureau of Treasury, related to the carryback of our 2009 operating loss to the 2008

and 2007 tax years. In addition, in June 2011, we effectively settled our 2007 and 2008 tax years with the IRS

and as a result, we have recognized an income tax benefit of $90 million in our condensed consolidated

statements of operations and comprehensive loss for the nine months ended September 30, 2011.

Under a temporary credit and liquidity facilities (“TCLF”) program, we had $3.3 billion and $3.7 billion

outstanding, which include principal and interest, of three-year standby credit and liquidity support as of

September 30, 2011 and December 31, 2010, respectively. Treasury has purchased participating interests in

these temporary credit and liquidity facilities. Under a new issue bond (“NIB”) program, we had $7.5 billion

and $7.6 billion outstanding of pass-through securities backed by single-family and multifamily housing bonds

issued by housing finance agencies (“HFAs”) as of September 30, 2011 and December 31, 2010, respectively.

Treasury bears the initial loss of principal under the TCLF program and the NIB program up to 35% of the

total principal on a combined program-wide basis.

FHFA’s control of both us and Freddie Mac has caused us and Freddie Mac to be related parties. No

transactions outside of normal business activities have occurred between us and Freddie Mac. As of

September 30, 2011 and December 31, 2010, we held Freddie Mac mortgage-related securities with a fair

value of $16.6 billion and $18.3 billion, respectively, and accrued interest receivable of $76 million and

$93 million, respectively. We recognized interest income on Freddie Mac mortgage-related securities held by

us of $174 million and $239 million for the three months ended September 30, 2011 and 2010, respectively,

and $534 million and $851 million for the nine months ended September 30, 2011 and 2010, respectively. In

addition, Freddie Mac may be an investor in variable interest entities that we have consolidated, and we may

be an investor in variable interest entities that Freddie Mac has consolidated.

Use of Estimates

Preparing condensed consolidated financial statements in accordance with GAAP requires management to

make estimates and assumptions that affect our reported amounts of assets and liabilities, and disclosure of

contingent assets and liabilities as of the dates of our condensed consolidated financial statements, as well as

our reported amounts of revenues and expenses during the reporting periods. Management has made

significant estimates in a variety of areas including, but not limited to, valuation of certain financial

instruments, and other assets and liabilities, the allowance for loan losses and reserve for guaranty losses, and

other-than-temporary impairment of investment securities. Actual results could be different from these

estimates.

In the three months ended September 30, 2011, we updated our allowance for loan loss models for

individually impaired loans to incorporate more home price data at the regional level rather than at the

national level. We believe this approach is a better estimation of possible home price paths and related default

107

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
expectations; it has resulted in a decrease to our allowance for loan losses and a reduction in our provision for

loan losses of approximately $800 million.

In the three months ended June 30, 2011, we updated our loan loss models to incorporate more recent data on

prepayments of modified loans which contributed to an increase to our allowance of loan losses of

approximately $1.5 billion. The change resulted in slower expected prepayment speeds, which extended the

expected lives of modified loans and lowered the present value of cash flows on those loans. Also in the three

months ended June 30, 2011, we updated our estimate of the reserve for guaranty losses related to privatelabel mortgage-related securities that we have guaranteed to increase our focus on earlier stage delinquency,

rather than foreclosure trends, as the primary driver in estimating incurred losses. We believe delinquencies are

a better indicator of incurred losses compared to foreclosure trends because the recent delays in the

foreclosure process have interrupted the normal flow of delinquent mortgages into foreclosure. This update

resulted in an increase to our reserve for guaranty losses included within “Other liabilities” of approximately

$700 million.

In addition, in the three months ended June 30, 2011, we revised our estimate for amounts due to us related to

outstanding repurchase requests to incorporate additional loan-level attributes which resulted in a decrease in

our provision for loan losses and foreclosed property expense of $1.5 billion.

Principles of Consolidation

Our condensed consolidated financial statements include our accounts as well as the accounts of other entities

in which we have a controlling financial interest. All intercompany balances and transactions have been

eliminated. The typical condition for a controlling financial interest is ownership of a majority of the voting

interests of an entity. A controlling financial interest may also exist in entities through arrangements that do

not involve voting interests, such as a variable interest entity (“VIE”).

Cash and Cash Equivalents and Statements of Cash Flows

During 2010, we identified certain servicer and consolidation related transactions that were not appropriately

reflected in our condensed consolidated statements of cash flows for the nine months ended September 30,

2010. We evaluated the effects of these misstatements, both quantitatively and qualitatively, on our previously

reported condensed consolidated statements of cash flows for the nine months ended September 30, 2010 and

concluded that this previously reported prior period was not materially misstated. We also reclassified amounts

in our condensed consolidated statements of cash flows for the nine months ended September 30, 2010. The

following table displays the line item adjustments and reclassifications in our condensed consolidated

statement of cash flows for the nine months ended September 30, 2010. As a result of the adjustments, our

condensed consolidated statement of cash flows for the nine months ended September 30, 2010 includes a

$6.6 billion adjustment to increase net cash used in operating activities, a $7.0 billion adjustment to increase

108

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
net cash provided by investing activities, and a $357 million adjustment to increase net cash used in financing

activities.

As Previously

Reported Adjustments Reclassifications As Adjusted

For the Nine Months Ended September 30, 2010

(Dollars in millions)

Reclassified and adjusted line items:

Cash flows used in operating activities:

Other, net ............................. $ (6,222) $(6,601) $ — $ (12,823)

Cash flows provided by investing activities:

Proceeds from sales of available-for-sale

securities ............................ 6,680 416 — 7,096

Purchases of loans held for investment ........ (59,145) 7,097 — (52,048)

Proceeds from repayments of loans held for

investment of Fannie Mae ............... 15,025 (276) — 14,749

Proceeds from repayments of loans held for

investment of consolidated trusts .......... 378,941 (279) — 378,662

Cash flows used in financing activities:

Proceeds from issuance of short-term debt of

Fannie Mae .......................... 555,422 — (555,422) —

Proceeds from issuance of long-term debt of

Fannie Mae .......................... 335,115 — (335,148) —

Proceeds from issuance of debt of Fannie Mae . . — — 890,570 890,570

Payments to redeem short-term debt of Fannie

Mae. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (537,181) — 537,181 —

Payments to redeem long-term debt of Fannie

Mae. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (311,257) — 311,257 —

Payments to redeem debt of Fannie Mae ...... — — (848,438) (848,438)

Proceeds from issuance of short-term debt of

consolidated trusts ..................... 10,067 — (10,067) —

Proceeds from issuance of long-term debt of

consolidated trusts ..................... 182,014 (416) (181,598) —

Proceeds from issuance of debt of consolidated

trusts ............................... — — 191,665 191,665

Payments to redeem short-term debt of

consolidated trusts ..................... (27,852) — 27,852 —

Payments to redeem long-term debt of

consolidated trusts ..................... (560,170) 59 560,111 —

Payments to redeem debt of consolidated

trusts ............................... — — (587,963) (587,963)

Other, net ............................. — — (33) (33)

109

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Collateral

Cash Collateral

The following table displays cash collateral accepted and pledged as of September 30, 2011 and December 31,

2010.

September 30, 2011 December 31, 2010

As of

(Dollars in millions)

Cash collateral accepted(1) ........................... $3,360 $3,101

Cash collateral pledged ............................. $6,199 $5,884

Cash collateral pledged related to derivatives activities ...... 3,486 3,453

Total cash collateral pledged........................ $9,685 $9,337

(1) Includes restricted cash of $2.7 billion and $2.5 billion as of September 30, 2011 and December 31, 2010,

respectively.

Non-Cash Collateral

The following table displays non-cash collateral pledged and accepted as of September 30, 2011 and

December 31, 2010.

September 30, 2011 December 31, 2010

As of

(Dollars in millions)

Non-cash collateral pledged where the secured party has the

right to sell or repledge:

Held-for-investment loans of consolidated trusts .......... $ 6,993 $2,522

Non-cash collateral accepted with the right to sell or repledge(1) . . . $20,050 $7,500

Non-cash collateral accepted without the right to sell or repledge . . $28,256 $6,744

(1) None of this collateral was sold or repledged as of September 30, 2011 and December 31, 2010.

Additionally, we provide early funding to lenders on a collateralized basis and account for the advances as

secured lending arrangements in “Other assets” in our condensed consolidated balance sheets. These amounts

totaled $5.1 billion as of September 30, 2011 and $7.2 billion at December 31, 2010.

Our liability to third-party holders of Fannie Mae MBS that arises as the result of a consolidation of a

securitization trust is collateralized by the underlying loans and/or mortgage-related securities.

When securities sold under agreements to repurchase meet all of the conditions of a secured financing, we

report the collateral of the transferred securities at fair value, excluding accrued interest. The fair value of

these securities is classified in “Investments in securities” in our condensed consolidated balance sheets. We

had no repurchase agreements outstanding as of September 30, 2011 and $49 million in repurchase

agreements outstanding as of December 31, 2010.

110

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Mortgage Loans

Nonaccrual Loans

We discontinue accruing interest on loans when we believe collectability of principal or interest is not

reasonably assured, which for single-family loans we have determined, based on our historical experience, to

be when the loan becomes two months or more past due according to its contractual terms. We place

multifamily loans on nonaccrual status when the loan is deemed to be individually impaired, unless the loan is

well secured such that collectability of principal and accrued interest is reasonably assured.

When a loan is placed on nonaccrual status, interest previously accrued but not collected becomes part of our

recorded investment in the loan and is collectively reviewed for impairment. For single-family loans, we

recognize interest income for loans on non-accrual status when cash is received. For multifamily loans that are

individually impaired, we apply any payment received on a cost recovery basis to reduce principal on the

mortgage loan unless the loan is determined to be well secured.

We return a single-family loan to accrual status at the point that the borrower has made sufficient payments to

reduce their delinquency below our nonaccrual threshold. For modified single-family loans, the loan is not

returned to accrual status until the borrower successfully makes all required payments during the trial period

(generally three to four months) and the modification is made permanent. We return a multifamily loan to

accrual status when the borrower cures the delinquency of the loan or we otherwise determine that the loan is

well secured such that collectability is reasonably assured.

Restructured Loans

A modification to the contractual terms of a loan that results in granting a concession to a borrower

experiencing financial difficulties is considered a troubled debt restructuring (“TDR”). Our loss mitigation

programs primarily include modifications that result in the capitalization of past due amounts in combination

with interest rate reductions below market and/or the extension of the loan’s maturity date. Such restructurings

are granted to borrowers in financial difficulty on either a permanent or contingent basis, as in the case of

modifications with a trial period. We consider these types of loan restructurings to be TDRs.

We do not currently include principal or past due interest forgiveness as part of our loss mitigation programs,

and as a result, we do not charge off any outstanding principal or accrued interest amounts at the time of loan

modification. We believe that the loan underwriting activities we perform as a part of our loan modification

process coupled with the borrower’s successful performance during any required trial period provide us

reasonable assurance regarding the collectability of the principal and interest due in accordance with the loan’s

modified terms, which include any past due interest amounts that are capitalized at the time of modification.

As such, the loan is returned to accrual status when the loan modification is completed (i.e., at the end of the

trial period), and we accrue interest thereafter in accordance with our interest accrual policy. If the loan was

on nonaccrual status prior to entering the trial period, it remains on nonaccrual status until the borrower

demonstrates performance via the trial period and the modification is finalized.

In addition to these loan modifications, we also engage in other loss mitigation activities with troubled

borrowers, which include repayment plans, forbearance arrangements, and the capitalization only of past due

amounts. Repayment plans and forbearance arrangements are informal agreements with the borrower that do

not result in the legal modification of the loan. For all of these activities, we consider the deferral or

capitalization of three or fewer missed payments to represent only an insignificant delay, and thus not a TDR.

If we defer or capitalize more than three missed payments, the delay is no longer considered insignificant, and

the restructuring is accounted for as a TDR.

111

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
We measure impairment of a loan restructured in a TDR individually based on the excess of the recorded

investment in the loan over the present value of the expected future cash inflows discounted at the loan’s

original effective interest rate. Costs incurred to complete a TDR are expensed as incurred.

In April 2011, the Financial Accounting Standards Board (“FASB”) issued a new standard effective for the

three months ended September 30, 2011 that applies retrospectively to the beginning of the annual period of

adoption. The new guidance clarifies how to determine when a borrower is experiencing financial difficulty,

when a concession is granted by a creditor, and when a delay in payment is considered insignificant. The

primary impact to us of adopting this new guidance was the refinement of how we define an insignificant

delay. As a result, we lowered our threshold for an insignificant delay from approximately nine missed

payments to three missed payments and thus this type of additional loss mitigation activity that had previously

been excluded is now considered a TDR. This refinement was necessary in order to conform our policy to the

new guidance on insignificant delay provided by the FASB.

As a result of adopting the new TDR accounting standard, we identified approximately 22,000 loan

restructurings for the nine months ended September 30, 2011 that had not defaulted as of September 30, 2011

and were not previously considered TDRs. The impact of this was an increase in our provision for loan losses

of $514 million in our condensed consolidated statements of operations and comprehensive loss for the three

months ended September 30, 2011. This amount includes the net increase in our allowance for loan losses due

to identifying these restructurings as TDRs and measuring their impairment on an individual basis offset by

the elimination of our allowance for loan loss measured on a collective basis related to these loans.

Fair Value (Losses) Gains, Net

The following table displays the composition of “Fair value (losses) gains, net” for the three and nine months

ended September 30, 2011 and 2010.

2011 2010 2011 2010

For the Three

Months Ended

September 30,

For the Nine

Months Ended

September 30,

(Dollars in millions)

Derivatives fair value losses, net .................... $(4,255) $(124) $(5,793) $(3,283)

Trading securities (losses) gains, net ................. (214) 889 146 2,587

Other, net ..................................... (56) (240) (223) (181)

Fair value (losses) gains, net ..................... $(4,525) $ 525 $(5,870) $ (877)

112

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Reclassifications

To conform to our current period presentation, we have reclassified and condensed certain amounts reported in

our condensed consolidated financial statements. The following table displays the line items that were

reclassified and condensed in our condensed consolidated balance sheet as of December 31, 2010.

Before

Reclassification

After

Reclassification

As of December 31, 2010

(Dollars in millions)

Reclassified lines to:

Assets:

Servicer and MBS trust receivable . . . . . . . . . . . . . . . . . . . . . . $ 951 $

Other assets ....................................... 25,875 26,826

Liabilities:

Short-term debt:

Of Fannie Mae . . ................................. 151,884

Of consolidated trusts .............................. 5,359

Long-term debt:

Of Fannie Mae . . ................................. 628,160

Of consolidated trusts .............................. 2,411,597

Debt:

Of Fannie Mae . . ................................. 780,044

Of consolidated trusts .............................. 2,416,956

Reserve for guaranty losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 323

Servicer and MBS trust payable ........................ 2,950

Other liabilities . . . ................................. 10,400 13,673

113

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
The following table represents the line items that we reclassified and condensed in our condensed consolidated

statements of operations and comprehensive loss for the three and nine months ended September 30, 2010.

Before

Reclassification

After

Reclassification

Before

Reclassification

After

Reclassification

For the Three Months Ended

September 30, 2010

For the Nine Months Ended

September 30, 2010

(Dollars in millions)

Reclassified lines to:

Interest income:

Mortgage loans:

Of Fannie Mae ................. $ 3,859 $ $ 11,107 $

Of consolidated trusts ............ 32,807 100,810

Mortgage loans (includes $32,807 and

$100,810, respectively, related to

consolidated trusts) .............. 36,666 111,917

Interest expense:

Short-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . 190 470

Of consolidated trusts ............ 4 9

Long-term debt:

Of Fannie Mae ................. 4,472 14,528

Of consolidated trusts ............ 28,878 90,379

Short-term debt (includes $4 and $9,

respectively, related to consolidated

trusts) . . . . . . . . . . . . . . . . . . . . . . . . 194 479

Long-term debt (includes $28,878 and

$90,379, respectively, related to

consolidated trusts) .............. 33,350 104,907

Guaranty fee income . . . . . . . . . . . . . . . . . 51 157

Fee and other income . . . . . . . . . . . . . . . . 253 304 674 831

Income (losses) from partnership

investments . . . . . . . . . . . . . . . . . . . . . . 47 (37)

Other expenses . . . . . . . . . . . . . . . . . . . . . 243 196 613 650

New Accounting Pronouncements

In May 2011, the FASB issued amendments to the guidance pertaining to fair value measurement and

disclosure. The amendments create a common definition of fair value for GAAP and International Financial

Reporting Standards (“IFRS”) and align the measurement and disclosure requirements. These amendments

provide further guidance on some of the principles for measuring fair value and expand the disclosure

requirements specifically for Level 3 fair value measurements. The new requirements are effective for us on

January 1, 2012 and will be applied prospectively. We do not expect that the adoption of these amendments

will have a material impact on our consolidated financial statements.

114

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
2. Consolidations and Transfers of Financial Assets

We have interests in various entities that are considered to be VIEs. The primary types of entities are

securitization trusts guaranteed by us via lender swap and portfolio securitization transactions, mortgage and

asset-backed trusts that were not created by us, as well as housing partnerships that are established to finance

the acquisition, construction, development or rehabilitation of affordable multifamily and single-family

housing. These interests include investments in securities issued by VIEs, such as Fannie Mae MBS created

pursuant to our securitization transactions and our guaranty to the entity. We consolidate the substantial

majority of our single-class securitization trusts.

As of September 30, 2011, we consolidated certain Fannie Mae securities that were not consolidated as of

December 31, 2010 because we now hold in our portfolio a substantial portion of the certificates. As a result

of consolidating these securities, which had combined total assets of $2.9 billion in unpaid principal balance

as of September 30, 2011, we derecognized our investment in these trusts and recognized the assets and

liabilities of the consolidated trusts at their fair value.

As of September 30, 2011, we deconsolidated VIEs that were consolidated as of December 31, 2010. These

VIEs were Fannie Mae securitization trusts and were deconsolidated because we no longer hold in our

portfolio a substantial portion of the certificates. As a result of deconsolidating these trusts, which had

combined total assets of $446 million in unpaid principal balance as of December 31, 2010, we derecognized

the assets and liabilities of the trusts and recognized at fair value our retained interests as securities in our

condensed consolidated balance sheet.

Unconsolidated VIEs

We also have interests in VIEs that we do not consolidate because we are not deemed to be the primary

beneficiary. These unconsolidated VIEs include securitization trusts, as well as other investment entities. The

following table displays the carrying amount and classification of our assets and liabilities that relate to our

involvement with unconsolidated VIEs as of September 30, 2011 and December 31, 2010, as well as our

maximum exposure to loss and the total assets of those unconsolidated VIEs.

Mortgage-Backed

Trusts

Asset-Backed

Trusts

Limited

Partnership

Investments

As of September 30, 2011

(Dollars in millions)

Assets and liabilities recorded in our condensed

consolidated balance sheets:

Assets:

Available-for-sale securities(1) . . . . . . . . . . . . . . . . . . . . $ 73,814 $ — $ —

Trading securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,862 2,465 —

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 — 131

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,257 — 150

Net carrying amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,689 $ 2,465 $ (19)

Maximum exposure to loss(1) . . . . . . . . . . . . . . . . . . . . . . . $104,477 $ 2,465 $ 117

Total assets of unconsolidated VIEs(1) . . . . . . . . . . . . . . . . . $674,599 $323,035 $13,119

115

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Mortgage-Backed

Trusts

Asset-Backed

Trusts

Limited

Partnership

Investments

As of December 31, 2010(2)

(Dollars in millions)

Assets and liabilities recorded in our condensed

consolidated balance sheets:

Assets:

Available-for-sale securities(1) . . . . . . . . . . . . . . . . . . . . $ 84,770 $ — $ —

Trading securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,021 5,321 —

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 — 94

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 773 — 170

Net carrying amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . $108,275 $ 5,321 $ (76)

Maximum exposure to loss(1) . . . . . . . . . . . . . . . . . . . . . . . $111,004 $ 5,321 $ 319

Total assets of unconsolidated VIEs(1) . . . . . . . . . . . . . . . . . $740,387 $363,721 $13,102

(1) Contains securities exposed through consolidation which may also represent an interest in other unconsolidated VIEs.

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

Our maximum exposure to loss generally represents the greater of our recorded investment in the entity or the

unpaid principal balance of the assets covered by our guaranty. However, our securities issued by Fannie Mae

multi-class resecuritization trusts that are not consolidated do not give rise to any additional exposure to loss

as we already consolidate the underlying collateral.

Transfers of Financial Assets

We issue Fannie Mae MBS through portfolio securitization transactions by transferring pools of mortgage

loans or mortgage-related securities to one or more trusts or special purpose entities. We are considered to be

the transferor when we transfer assets from our own portfolio in a portfolio securitization transaction. For the

three months ended September 30, 2011 and 2010, the unpaid principal balance of portfolio securitizations

was $22.0 billion and $35.1 billion, respectively. For the nine months ended September 30, 2011 and 2010, the

unpaid principal balance of portfolio securitizations was $78.7 billion and $68.0 billion, respectively.

The following table displays some key characteristics of the securities retained in unconsolidated portfolio

securitization trusts.

Fannie Mae

Single-class

MBS & Fannie

Mae Megas

REMICS &

SMBS

(Dollars in millions)

As of September 30, 2011

Unpaid principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 618 $ 14,008

Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 683 15,320

Weighted-average coupon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.21% 5.96%

Weighted-average loan age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 years 4.5 years

Weighted-average maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.8 years 19.5 years

As of December 31, 2010

Unpaid principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63 $ 15,771

Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 16,745

Weighted-average coupon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.58% 6.28%

Weighted-average loan age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 years 4.4 years

Weighted-average maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.6 years 22.0 years

116

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
For the three months ended September 30, 2011 and 2010, the principal and interest received on retained

interests was $777 million and $855 million, respectively. For the nine months ended September 30, 2011 and

2010, the principal and interest received on retained interests was $2.2 billion and $2.6 billion, respectively.

Managed Loans

We define “managed loans” as on-balance sheet mortgage loans as well as mortgage loans that we have

securitized in unconsolidated portfolio securitization trusts. The following table displays the unpaid principal

balances of managed loans, including those managed loans that are delinquent as of September 30, 2011 and

December 31, 2010.

Unpaid Principal

Balance

Principal Amount of

Delinquent Loans(1) Unpaid PrincipalBalance

Principal Amount of

Delinquent Loans(1)

September 30, 2011 December 31, 2010

As of

(Dollars in millions)

Loans held for investment

Of Fannie Mae ............ $ 401,610 $124,595 $ 423,686 $141,342

Of consolidated trusts ....... 2,567,502 25,808 2,565,347 34,080

Loans held for sale . . . . . . . . . . . 335 60 964 127

Securitized loans............. 2,219 66 2,147 78

Total loans managed ........ $2,971,666 $150,529 $2,992,144 $175,627

(1) Represents the unpaid principal balance of loans held for investment, loans held for sale and securitized loans for

which we are no longer accruing interest and loans 90 days or more delinquent which are continuing to accrue

interest.

Qualifying Sales of Portfolio Securitizations

The majority of our portfolio securitization transactions do not qualify for sale treatment. We report the assets

and liabilities of consolidated trusts created via portfolio securitization transactions that do not qualify as sales

in our condensed consolidated balance sheets. Our continuing involvement in the form of guaranty assets and

guaranty liabilities with assets that were transferred into unconsolidated trusts is not material.

We recognize assets obtained and liabilities incurred in a portfolio securitization at fair value. Proceeds from

the initial sale of securities from portfolio securitizations were $143 million and $169 million for the three

months ended September 30, 2011 and 2010, respectively. Proceeds from the initial sale of securities from

portfolio securitizations were $764 million and $544 million for the nine months ended September 30, 2011

and 2010, respectively.

117

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
3. Mortgage Loans

The following table displays our mortgage loans as of September 30, 2011 and December 31, 2010.

Of

Fannie

Mae

Of

Consolidated

Trusts Total

Of

Fannie

Mae

Of

Consolidated

Trusts Total

September 30, 2011 December 31, 2010

As of

(Dollars in millions)

Single-family . . . . . . . . . . . . . . . . . $319,756 $2,474,912 $2,794,668 $328,824 $2,490,623 $2,819,447

Multifamily. . . . . . . . . . . . . . . . . . . 82,136 92,643 174,779 95,157 75,393 170,550

Total unpaid principal balance of

mortgage loans . . . . . . . . . . . . . 401,892 2,567,555 2,969,447 423,981 2,566,016 2,989,997

Cost basis and fair value adjustments,

net . . . . . . . . . . . . . . . . . . . . . . . (16,389) 16,197 (192) (16,498) 11,777 (4,721)

Allowance for loan losses for

loans held for investment . . . . . . . (55,398) (16,037) (71,435) (48,530) (13,026) (61,556)

Total mortgage loans . . . . . . . . . $330,105 $2,567,715 $2,897,820 $358,953 $2,564,767 $2,923,720

During the three months ended September 30, 2011, we did not redesignate any loans from held for

investment (“HFI”) to held for sale (“HFS”). During the nine months ended September 30, 2011, we

redesignated loans with a carrying value of $561 million from HFI to HFS.

The following tables display an aging analysis of the total recorded investment in our HFI mortgage loans,

excluding loans for which we have elected the fair value option, by portfolio segment and class as of

September 30, 2011 and December 31, 2010.

30 - 59 Days

Delinquent

60 - 89 Days

Delinquent

Seriously

Delinquent(2) TotalDelinquent Current Total

Recorded

Investment in

Loans Over

90 Days

Delinquent

and

Accruing

Interest

Recorded

Investment

in

Nonaccrual

Loans

As of September 30, 2011(1)

(Dollars in millions)

Single-family:

Primary(3) ........... $43,721 $15,523 $ 82,808 $142,052 $2,330,328 $2,472,380 $122 $ 98,154

Government(4) . . . . . . . . 105 46 312 463 51,458 51,921 312 —

Alt-A .............. 7,445 3,261 30,126 40,832 143,126 183,958 15 33,366

Other(5) ............. 3,586 1,556 11,940 17,082 75,753 92,835 101 13,305

Total single-family .... 54,857 20,386 125,186 200,429 2,600,665 2,801,094 550 144,825

Multifamily(6) . . . . . . . . . . 519 NA 753 1,272 175,761 177,033 — 698

Total . .......... $55,376 $20,386 $125,939 $201,701 $2,776,426 $2,978,127 $550 $145,523

118

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
30 - 59 Days

Delinquent

60 - 89 Days

Delinquent

Seriously

Delinquent(2)

Total

Delinquent Current Total

Recorded

Investment in

Loans Over

90 Days

Delinquent

and

Accruing

Interest

Recorded

Investment

in

Nonaccrual

Loans

As of December 31, 2010(1)

(Dollars in millions)

Single-family:

Primary(3) ........ $47,048 $18,055 $ 93,302 $158,405 $2,299,080 $2,457,485 $139 $110,758

Government(4) . . . . . 125 58 371 554 51,930 52,484 354 —

Alt-A ........... 8,547 4,097 37,557 50,201 156,951 207,152 21 41,566

Other(5) ......... 3,785 1,831 15,290 20,906 84,473 105,379 80 17,022

Total single-family. . 59,505 24,041 146,520 230,066 2,592,434 2,822,500 594 169,346

Multifamily (6) . . . . . . 382 NA 1,132 1,514 171,000 172,514 — 1,012

Total . . ...... $59,887 $24,041 $147,652 $231,580 $2,763,434 $2,995,014 $594 $170,358

(1) Recorded investment consists of (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost

basis adjustments; and (c) accrued interest receivable.

(2) Single-family seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process.

Multifamily seriously delinquent loans are loans that are 60 days or more past due.

(3) Consists of mortgage loans that are not included in other loan classes.

(4) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies

that are not Alt-A. Primarily consists of reverse mortgages which due to their nature are not aged and are included in

the current column.

(5) Includes loans with higher-risk loan characteristics, such as interest-only loans and negative-amortizing loans that are

neither government nor Alt-A.

(6) Multifamily loans 60-89 days delinquent are included in the seriously delinquent column.

The following table displays the total recorded investment in our single-family HFI loans, excluding loans for

which we have elected the fair value option, by class and credit quality indicator as of September 30, 2011

and December 31, 2010. The single-family credit quality indicator is updated quarterly.

Primary(3) Alt-A Other(4) Primary(3) Alt-A Other(4)

September 30, 2011(1)(2) December 31, 2010(1)(2)

As of

(Dollars in millions)

Estimated mark-to-market LTV ratio:(5)

Less than or equal to 80% . . . . . . . . . . . . . . . . $1,543,118 $ 68,340 $26,170 $1,561,202 $ 79,305 $ 29,854

80.01% to 90% . . . . . . . . . . . . . . . . . . . . . . . . 377,448 23,146 10,371 376,414 27,472 13,394

90.01% to 100% . . . . . . . . . . . . . . . . . . . . . . . 223,477 20,355 10,111 217,193 24,392 12,935

100.01% to 110% . . . . . . . . . . . . . . . . . . . . . . 117,339 16,051 9,275 112,376 18,022 11,400

110.01% to 120% . . . . . . . . . . . . . . . . . . . . . . 66,747 11,974 7,980 62,283 12,718 8,967

120.01% to 125% . . . . . . . . . . . . . . . . . . . . . . 23,692 4,878 3,368 21,729 5,083 3,733

Greater than 125% . . . . . . . . . . . . . . . . . . . . . 120,559 39,214 25,560 106,288 40,160 25,096

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,472,380 $183,958 $92,835 $2,457,485 $207,152 $105,379

(1) Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and

other cost basis adjustments; and (c) accrued interest receivable.

(2) Excludes $51.9 billion and $52.5 billion as of September 30, 2011 and December 31, 2010, respectively, of mortgage

loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies that are not Alt-A

119

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
loans. The segment class is primarily reverse mortgages for which we do not calculate an estimated mark-to-market

LTV.

(3) Consists of mortgage loans that are not included in other loan classes.

(4) Includes loans with higher-risk loan characteristics, such as interest-only loans and negative-amortizing loans that are

neither government nor Alt-A.

(5) The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end

of each reported period divided by the estimated current value of the property, which we calculate using an internal

valuation model that estimates periodic changes in home value.

The following table displays the total recorded investment in our multifamily HFI loans, excluding loans for

which we have elected the fair value option, by credit quality indicator as of September 30, 2011 and

December 31, 2010. We stratify multifamily loans into different internal risk rating categories based on the

credit risk inherent in each individual loan. We categorize loan credit risk based on relevant observable data

about a borrower’s ability to pay, including multifamily market economic fundamentals, review of available

current borrower financial information (e.g. current debt service coverage ratios), operating statements on the

underlying collateral, historical payment experience, estimates of the current collateral values and other related

credit documentation. As a result of this analysis, multifamily loans are categorized based on management’s

judgment into the following categories: (1) Green (loan with acceptable risk); (2) Yellow (loan with signs of

potential weakness); (3) Orange (loan with a well defined weakness that may jeopardize the timely full

repayment); and (4) Red (loan with a weakness that makes timely collection or liquidation in full highly

questionable based on existing conditions and values). We evaluate loans in the orange and red risk rating

categories to determine which ones are individually impaired. The multifamily credit quality indicator is

updated quarterly.

September 30, 2011(1) December 31, 2010(1)

As of

(Dollars in millions)

Credit risk profile by internally assigned grade:

Green . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $127,551 $117,388

Yellow(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,567 34,651

Orange. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,924 18,075

Red . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,991 2,400

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $177,033 $172,514

(1) Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts

and other cost basis adjustments; and (c) accrued interest receivable.

(2) Includes approximately $9.1 billion and $9.7 billion of unpaid principal balance as of September 30, 2011 and

December 31, 2010, respectively, classified solely due to past due financial information.

120

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Individually Impaired Loans

Individually impaired loans include TDRs, acquired credit-impaired loans, and other multifamily loans

regardless of whether we are currently accruing interest. The following tables display the total recorded

investment, unpaid principal balance, and related allowance as of September 30, 2011 and December 31, 2010

and interest income recognized and average recorded investment for the three and nine months ended

September 30, 2011 for individually impaired loans.

Unpaid

Principal

Balance

Total

Recorded

Investment(1)

Related Allowance for

Loan Losses

Related

Allowance for

Accrued

Interest

Receivable

Average

Recorded

Investment

Total Interest Income

Recognized(2)

Interest

Income Recognized on

a Cash Basis

Average

Recorded

Investment

Total Interest Income

Recognized (2)

Interest Income

Recognized on a

Cash Basis

As of September 30, 2011 For the Three Months Ended September 30, 2011 For the Nine Months Ended September 30, 2011

(Dollars in millions)

Individually impaired loans:

With related allowance recorded:

Single-family:

Primary(3) . . . . . . . . . . . . . . . . $115,961 $108,489 $28,709 $ 639 $102,555 $ 949 $183 $ 99,495 $2,764 $550

Government(4) . . . . . . . . . . . . . 247 247 58 7 280 3 — 270 9 —

Alt-A . . . . . . . . . . . . . . . . . . 34,034 31,159 10,865 277 29,755 247 45 29,459 728 143

Other(5) . . . . . . . . . . . . . . . . . 16,088 15,237 5,175 101 14,630 111 22 14,295 323 69

Total single-family . . . . . . . . . 166,330 155,132 44,807 1,024 147,220 1,310 250 143,519 3,824 762

Multifamily . . . . . . . . . . . . . . . . 2,877 2,896 704 27 2,485 26 2 2,324 74 5

Total individually impaired loans with

related allowance recorded. . . . . . . 169,207 158,028 45,511 1,051 149,705 1,336 252 145,843 3,898 767

With no related allowance recorded:(6)

Single-family:

Primary(3) . . . . . . . . . . . . . . . . 8,284 5,624 — — 7,118 175 58 6,019 427 146

Government(4) . . . . . . . . . . . . . 19 12 — — 21 2 — 14 6 —

Alt-A . . . . . . . . . . . . . . . . . . 2,962 1,467 — — 1,832 68 21 1,443 154 47

Other(5) . . . . . . . . . . . . . . . . . 638 342 — — 483 18 6 403 39 13

Total single-family . . . . . . . . . 11,903 7,445 — — 9,454 263 85 7,879 626 206

Multifamily . . . . . . . . . . . . . . . . 908 914 — — 836 12 2 799 37 7

Total individually impaired loans with

no related allowance recorded . . . . . 12,811 8,359 — — 10,290 275 87 8,678 663 213

Total individually impaired loans(7) . . . . . $182,018 $166,387 $45,511 $1,051 $159,995 $1,611 $339 $154,521 $4,561 $980

121

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Unpaid

Principal

Balance

Total Recorded

Investment(1)

Related

Allowance for

Loan Losses

Related

Allowance for

Accrued

Interest Receivable

Average

Recorded

Investment

As of December 31, 2010

For the Year

Ended

December 31, 2010

(Dollars in millions)

Individually impaired loans:

With related allowance recorded:

Single-family:

Primary(3) . . . . . . . . . . . . . . . . . $ 99,838 $ 93,024 $23,565 $ 772 $ 81,258

Government(4) . . . . . . . . . . . . . . 240 248 38 7 141

Alt-A . . . . . . . . . . . . . . . . . . . . 30,932 28,253 9,592 368 25,361

Other(5) . . . . . . . . . . . . . . . . . . . 14,429 13,689 4,479 137 12,094

Total single-family . . . . . . . . . 145,439 135,214 37,674 1,284 118,854

Multifamily . . . . . . . . . . . . . . . . . . 2,372 2,371 556 23 1,496

Total individually impaired loans

with related allowance recorded . . 147,811 137,585 38,230 1,307 120,350

With no related allowance recorded:(6)

Single-family:

Primary(3) . . . . . . . . . . . . . . . . . 10,586 7,237 — — 7,860

Government(4) . . . . . . . . . . . . . . 19 13 — — 11

Alt-A . . . . . . . . . . . . . . . . . . . . 3,600 1,884 — — 2,091

Other(5) . . . . . . . . . . . . . . . . . . . 879 512 — — 589

Total single-family . . . . . . . . . 15,084 9,646 — — 10,551

Multifamily . . . . . . . . . . . . . . . . . . 789 811 — — 642

Total individually impaired loans

with no related allowance

recorded . . . . . . . . . . . . . . . . . . 15,873 10,457 — — 11,193

Total individually impaired loans(7) . . . $163,684 $148,042 $38,230 $1,307 $131,543

(1) Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and

other cost basis adjustments; and (c) accrued interest receivable.

(2) Total single-family interest income recognized of $1.6 billion for the three months ended September 30, 2011 consists

of $1.1 billion of contractual interest and $427 million of effective yield adjustments. Total single-family interest

income recognized of $4.5 billion for the nine months ended September 30, 2011 consists of $3.3 billion of

contractual interest and $1.2 billion of effective yield adjustments.

(3) Consists of mortgage loans that are not included in other loan classes.

(4) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies

that are not Alt-A.

(5) Includes loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans that are

neither government nor Alt-A.

(6) The discounted cash flows or collateral value equals or exceeds the carrying value of the loan and, as such, no

valuation allowance is required.

122

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
(7) Includes single-family loans restructured in a TDR with a recorded investment of $159.0 billion and $140.1 billion as

of September 30, 2011 and December 31, 2010, respectively. Includes multifamily loans restructured in a TDR with a

recorded investment of $1.0 billion and $939 million as of September 30, 2011 and December 31, 2010, respectively.

Interest income recognized on impaired loans was $1.4 billion for the three months ended September 30, 2010

and $4.1 billion for the nine months ended September 30, 2010. Interest income recognized on a cash basis on

impaired loans was $511 million for the three months ended September 30, 2010 and $1.4 billion for the nine

months ended September 30, 2010.

Troubled Debt Restructurings

A modification to the contractual terms of a loan that results in granting a concession to a borrower

experiencing financial difficulties is considered a TDR. In addition to formal loan modifications, we also

engage in other loss mitigation activities with troubled borrowers, which include repayment plans and

forbearance arrangements, both of which represent informal agreements with the borrower that do not result in

the legal modification of the loan’s contractual terms. As described in our “Summary of Significant

Accounting Policies,” we account for these informal restructurings as a TDR if we defer more than three

missed payments. The substantial majority of the loan modifications we complete result in term extensions,

interest rate reductions or a combination of both. During the three and nine months ended September 30,

2011, the average term extension of a modified loan was 103 and 82 months, respectively, and the average

interest rate reduction of a modified loan was 2.63 and 3.14 percentage points, respectively.

Upon adoption of the new TDR standard, we reassessed all modifications, forbearance arrangements, and

repayment plans that occurred on or after January 1, 2011 through June 30, 2011 that were not previously

considered TDRs and for which the allowance for loan losses was measured on a collective basis (“the

transition population”). As of September 30, 2011, the recorded investment related to restructurings in the

transition population that were not previously considered TDRs was $2.3 billion and the individually impaired

allowance for loan losses on this population was $605 million.

The following table displays the number of loans and recorded investment in our loans restructured in a TDR

during the three and nine months ended September 30, 2011.

Number of

Loans

Recorded

Investment(1)

Number of

Loans

Recorded

Investment(1)

For the Three

Months Ended

September 30, 2011(5)

For the Nine

Months Ended

September 30, 2011

(Dollars in millions)

Single-family

Primary(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,725 $10,594 132,682 $23,783

Government(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 24 497 86

Alt-A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,932 2,691 27,722 5,958

Other(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,429 1,324 12,424 3,095

Total Single-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,287 14,633 173,325 32,922

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 39 42 214

Total troubled debt restructurings . . . . . . . . . . . . . . . . . . . . . . . 79,300 $14,672 173,367 $33,136

(1) Consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis

adjustments and fair value adjustments; and (c) accrued interest receivable on HFI loans. Based on the nature of our

modification programs, which do not include principal or interest forgiveness, there is not a material difference

123

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
between the recorded investment in our loans pre- and post- modification, therefore amounts represent recorded

investment post-modification.

(2) Consists of mortgage loans that are not included in other loan classes.

(3) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies

that are not Alt-A.

(4) Includes loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans that are

neither government nor Alt-A.

(5) Includes recorded investment related to transition population.

The following table displays the number of loans and recorded investment of TDRs that had a payment default

during the three and nine months ended September 30, 2011 and were modified in a TDR in the twelve

months prior to the payment default. For purposes of this disclosure, we define loans that had a payment

default as single-family and multifamily loans with completed TDRs that liquidated during the period, either

through foreclosure, deed-in-lieu of foreclosure or a preforeclosure sale, single-family loans with completed

modifications that are two or more months delinquent during the period or multifamily loans with completed

modifications that are one or more months delinquent during the period.

Number of

Loans

Recorded

Investment(1)

Number of

Loans

Recorded

Investment(1)

For the Three Months

Ended September 30, 2011

For the Nine Months Ended

September 30, 2011

(Dollars in millions)

Single-family

Primary(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,545 $2,531 52,532 $ 9,227

Government(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 17 252 68

Alt-A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,929 620 11,625 2,499

Other(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,519 378 5,384 1,315

Total single-family . . . . . . . . . . . . . . . . . . . . . . 19,063 3,546 69,793 13,109

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 8 49

Total TDRs that subsequently defaulted . . . . . . . . . . . 19,063 $3,546 69,801 $13,158

(1) Consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis

adjustments; and (c) fair value adjustments and accrued interest receivable on HFI loans. Represents our recorded

investment in the loan at time of payment default.

(2) Consists of mortgage loans that are not included in other loan classes.

(3) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies

that are not Alt-A.

(4) Includes loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans that are

neither government nor Alt-A.

Loans Acquired in a Transfer

We acquired delinquent loans from unconsolidated trusts and long-term standby commitments with an unpaid

principal balance plus accrued interest of $48 million and $67 million for the three months ended

September 30, 2011 and 2010, respectively, and $144 million and $227 million for the nine months ended

September 30, 2011 and 2010, respectively. The following table displays the outstanding unpaid principal

balance and accrued interest receivable, carrying amount by accrual status and accretable yield of acquired

124

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
credit-impaired loans as of September 30, 2011 and December 31, 2010, excluding loans that were modified

as TDRs subsequent to their acquisition from MBS trusts.

September 30,

2011

December 31,

2010

As of

(Dollars in millions)

Outstanding contractual balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,563 $8,519

Carrying amount:

Loans on accrual status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,758 $2,029

Loans on nonaccrual status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,392 2,449

Total carrying amount of loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,150 $4,478

Accretable yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,584 $2,412

The following table displays interest income recognized and the impact to the “Provision for loan losses”

related to loans that are still being accounted for as acquired credit-impaired loans, as well as loans that have

been subsequently modified as a TDR, for the three and nine months ended September 30, 2011 and 2010.

2011 2010 2011 2010

For the Three

Months Ended

September 30,

For the Nine

Months Ended

September 30,

(Dollars in millions)

Accretion of fair value discount(1) . . . . . . . . . . . . . . . . . . . $ 288 $ 231 $ 769 $ 785

Interest income on loans returned to accrual status or

subsequently modified as TDRs . . . . . . . . . . . . . . . . . . . 257 235 777 854

Total interest income recognized on acquired creditimpaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 545 $ 466 $1,546 $1,639

(Decrease) increase in “Provision for loan losses” subsequent

to the acquisition of credit-impaired loans . . . . . . . . . . . . $(275) $(125) $ 684 $ 319

(1) Represents accretion of the fair value discount that was recorded on acquired credit-impaired loans.

4. Allowance for Loan Losses

We maintain an allowance for loan losses for HFI loans in our mortgage portfolio and loans backing Fannie

Mae MBS issued from consolidated trusts. When calculating our allowance for loan losses, we consider only

our net recorded investment in the loan at the balance sheet date, which includes interest income only while

the loan was on accrual status. The allowance for loan losses is calculated based on our estimate of incurred

losses as of the balance sheet date. Determining the adequacy of our allowance for loan losses is complex and

requires judgment about the effect of matters that are inherently uncertain.

125

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Allowance for Loan Losses

The following table displays changes in both single-family and multifamily allowance for loan losses for the

three and nine months ended September 30, 2011 and total allowance for loan losses for the three and nine

months ended September 30, 2011 and 2010.

Of

Fannie

Mae

Of

Consolidated

Trusts Total

Of

Fannie

Mae

Of

Consolidated

Trusts Total

2011 2010

For the Three Months Ended September 30,

(Dollars in millions)

Single-family allowance for loan losses:

Beginning balance . . . . . . . . . . . . . . $54,949 $13,078 $68,027

Provision for loan losses . . . . . . . . (235) 4,318 4,083

Charge-offs(1)(6) . . . . . . . . . . . . . . (3,802) (260) (4,062)

Recoveries . . . . . . . . . . . . . . . . . 848 35 883

Transfers(2) . . . . . . . . . . . . . . . . . 1,764 (1,764) —

Other(3). . . . . . . . . . . . . . . . . . . . 860 137 997

Ending balance . . . . . . . . . . . . . . . . $54,384 $15,544 $69,928

Multifamily allowance for loan losses:

Beginning balance . . . . . . . . . . . . . . $ 1,017 $ 462 $ 1,479

Provision for loan losses . . . . . . . . 39 37 76

Charge-offs(1) . . . . . . . . . . . . . . . (51) — (51)

Transfers(2) . . . . . . . . . . . . . . . . . 6 (6) —

Other(3).................... 3 — 3

Ending balance . . . . . . . . . . . . . . . . $ 1,014 $ 493 $ 1,507

Total allowance for loan losses:

Beginning balance . . . . . . . . . . . . . . $55,966 $13,540 $69,506 $42,844 $17,738 $60,582

Total provision for loan losses . . . . (196) 4,355 4,159 2,144 2,552 4,696

Charge-offs(1)(6) . . . . . . . . . . . . . . (3,853) (260) (4,113) (5,946) (1,243) (7,189)

Recoveries . . . . . . . . . . . . . . . . . 848 35 883 205 304 509

Transfers(2) . . . . . . . . . . . . . . . . . 1,770 (1,770) — 5,131 (5,131) —

Other(3). . . . . . . . . . . . . . . . . . . . 863 137 1,000 895 247 1,142

Ending balance(4)(5) . . . . . . . . . . . . . $55,398 $16,037 $71,435 $45,273 $14,467 $59,740

126

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Of

Fannie

Mae

Of

Consolidated

Trusts Total

Of

Fannie

Mae

Of

Consolidated

Trusts Total

2011 2010

For the Nine Months Ended September 30,

(Dollars in millions)

Single-family allowance for loan

losses:

Beginning balance . . . . . . . . . $ 47,377 $12,603 $ 59,980

Provision for loan losses . . . 9,962 10,410 20,372

Charge-offs(1)(6) . . . . . . . . . (14,766) (1,466) (16,232)

Recoveries . . . . . . . . . . . . . 3,197 1,537 4,734

Transfers(2) . . . . . . . . . . . . 7,676 (7,676) —

Other(3) . . . . . . . . . . . . . . . 938 136 1,074

Ending balance . . . . . . . . . . . $ 54,384 $15,544 $ 69,928

Multifamily allowance for loan

losses:

Beginning balance . . . . . . . . . $ 1,153 $ 423 $ 1,576

Provision for loan losses . . . 41 135 176

Charge-offs(1) . . . . . . . . . . . (252) — (252)

Transfers(2) . . . . . . . . . . . . 63 (63) —

Other(3) . . . . . . . . . . . . . . . 9 (2) 7

Ending balance . . . . . . . . . . . $ 1,014 $ 493 $ 1,507

Total allowance for loan losses:

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

Adoption of new accounting

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

Total provision for loan

losses. . . . . . . . . . . . . . . 10,003 10,545 20,548 11,008 9,922 20,930

Charge-offs(1)(6) . . . . . . . . . (15,018) (1,466) (16,484) (12,097) (6,645) (18,742)

Recoveries . . . . . . . . . . . . . 3,197 1,537 4,734 367 872 1,239

Transfers(2) . . . . . . . . . . . . 7,739 (7,739) — 41,606 (41,606) —

Other(3) . . . . . . . . . . . . . . . 947 134 1,081 (3,689) 6,501 2,812

Ending balance(4)(5) . . . . . . . . $ 55,398 $16,037 $ 71,435 $ 45,273 $ 14,467 $ 59,740

(1) Total charge-offs include accrued interest of $289 million and $811 million for the three months ended September 30,

2011 and 2010, respectively and $1.1 billion and $2.0 billion for the nine months ended September 30, 2011 and 2010,

respectively. Single-family charge-offs include accrued interest of $279 million and $1.1 billion for the three and nine

months ended September 30, 2011, respectively. Multifamily charge-offs include accrued interest of $10 million and

$34 million for the three and nine months ended September 30, 2011, respectively.

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

(3) Amounts represent the net activity recorded in our allowances for accrued interest receivable and preforeclosure

property taxes and insurance receivable from borrowers. The provision for credit losses, charge-offs, recoveries and

transfer activity included in this table reflects all changes for both the allowance for loan losses and the valuation

allowances for accrued interest and preforeclosure property taxes and insurance receivable that relate to the mortgage

loans.

127

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
(4) Includes $334 million and $397 million as of September 30, 2011 and 2010, respectively, for acquired credit-impaired

loans.

(5) Total single-family allowance for loan losses was $58.3 billion as of September 30, 2010. Total multifamily allowance

for loan losses was $1.4 billion as of September 30, 2010.

(6) While we purchase the substantial majority of loans that are four or more months delinquent from our MBS trusts, we

do not exercise this option to purchase loans during a forbearance period. Accordingly, charge-offs of consolidated

trusts generally represent loans that remained in our consolidated trusts at the time of default.

As of September 30, 2011, the allowance for accrued interest receivable for loans of Fannie Mae was

$1.9 billion and for loans of consolidated trusts was $304 million. As of December 31, 2010, the allowance

for accrued interest receivable for loans of Fannie Mae was $3.0 billion and for loans of consolidated trusts

was $439 million.

In the three month period ended June 30, 2010, we identified that for a portion of our delinquent loans we had

not estimated and recorded our obligation to reimburse servicers for advances they made on our behalf for

preforeclosure property taxes and insurance. We previously recognized these expenses when we reimbursed

servicers. We also did not record a receivable from borrowers for these payments or assess the collectibility of

the receivable. The nine month period ended September 30, 2010 includes an out-of-period adjustment of

$1.1 billion to our condensed consolidated statements of operations reflecting our assessment of the

collectibility of the receivable from borrowers.

The following table displays the allowance for loan losses and total recorded investment in our HFI loans,

excluding loans for which we have elected the fair value option, by impairment or reserve methodology and

portfolio segment as of September 30, 2011 and December 31, 2010.

SingleFamily Multifamily TotalSingleFamily Multifamily Total

September 30, 2011 December 31, 2010

As of

(Dollars in millions)

Allowance for loan losses by

segment:

Individually impaired loans . . $ 44,475 $ 702 $ 45,177 $ 37,296 $ 549 $ 37,845

Collectively reserved loans. . . 25,121 803 25,924 22,306 1,020 23,326

Acquired credit-impaired

loans . . . . . . . . . . . . . . . . 332 2 334 378 7 385

Total allowance for loan

losses . . . . . . . . . . . . . . $ 69,928 $ 1,507 $ 71,435 $ 59,980 $ 1,576 $ 61,556

Recorded investment in loans by

segment:(1) ..............

Individually impaired loans . . $ 159,031 $ 3,760 $ 162,791 $ 140,062 $ 3,074 $ 143,136

Collectively reserved loans. . . 2,638,517 173,223 2,811,740 2,677,640 169,332 2,846,972

Acquired credit-impaired

loans . . . . . . . . . . . . . . . . 3,546 50 3,596 4,798 108 4,906

Total recorded investment

in loans. . . . . . . . . . . . . $2,801,094 $177,033 $2,978,127 $2,822,500 $172,514 $2,995,014

(1) Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and

other cost basis adjustments; and (c) accrued interest receivable.

128

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
5. Investments in Securities

Trading Securities

Trading securities are recorded at fair value with subsequent changes in fair value recorded as “Fair value

(losses) gains, net” in our condensed consolidated statements of operations and comprehensive loss. The

following table displays our investments in trading securities and the cumulative amount of net losses

recognized from holding these securities as of September 30, 2011 and December 31, 2010.

September 30,

2011

December 31,

2010

As of

(Dollars in millions)

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,529 $ 7,398

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,866 1,326

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297 590

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,454 1,683

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,318 1,581

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,600 10,764

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 718 609

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 152

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,929 24,103

Non-mortgage-related securities:

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,755 27,432

Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,465 5,321

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,220 32,753

Total trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $68,149 $56,856

Losses in trading securities held in our portfolio, net . . . . . . . . . . . . . . . . . . . . $ 1,986 $ 2,149

The following table displays information about our net trading gains and losses for the three and nine months

ended September 30, 2011 and 2010.

2011 2010 2011 2010

For the Three

Months Ended

September 30,

For the Nine

Months Ended

September 30,

(Dollars in millions)

Net trading (losses) gains:

Mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(209) $879 $151 $2,497

Non-mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) 10 (5) 90

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(214) $889 $146 $2,587

Net trading (losses) gains recorded in the period related to

securities still held at period end:

Mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(206) $872 $145 $2,368

Non-mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . — 7 2 71

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(206) $879 $147 $2,439

129

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Available-for-Sale Securities

We measure AFS securities at fair value with unrealized gains and losses recorded as a component of “Other

comprehensive (loss) income,” net of tax, and we record realized gains and losses from the sale of AFS

securities in “Investment gains, net” in our condensed consolidated statements of operations and

comprehensive loss.

The following table displays the gross realized gains, losses and proceeds on sales of AFS securities for the

three and nine months ended September 30, 2011 and 2010.

2011 2010 2011 2010

For the Three

Months Ended

September 30,

For the Nine

Months Ended

September 30,

(Dollars in millions)

Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15 $170 $ 148 $ 515

Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 101 75 280

Total proceeds(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 597 978 1,826 6,552

(1) Excludes proceeds from the initial sale of securities from new portfolio securitizations included in “Note 2,

Consolidations and Transfers of Financial Assets.” For the nine months ended September 30, 2010, proceeds were

increased by $416 million, from what was previously disclosed, related to deconsolidated REMICs that were

previously presented as proceeds from issuance of long-term debt of consolidated trusts.

The following tables display the amortized cost, gross unrealized gains and losses and fair value by major

security type for AFS securities we held as of September 30, 2011 and December 31, 2010.

Total

Amortized

Cost(1)

Gross

Unrealized

Gains

Gross

Unrealized

Losses -

OTTI(2)

Gross

Unrealized

Losses -

Other(3)

Total

Fair

Value

As of September 30, 2011

(Dollars in millions)

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . $17,698 $1,559 $ (4) $ (15) $19,238

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . 12,781 968 — — 13,749

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . 807 132 — — 939

Alt-A private-label securities . . . . . . . . . . . . . . 14,299 215 (1,989) (238) 12,287

Subprime private-label securities . . . . . . . . . . . 10,367 3 (2,040) (443) 7,887

CMBS(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,598 62 — (270) 14,390

Mortgage revenue bonds . . . . . . . . . . . . . . . . . 10,635 180 (25) (183) 10,607

Other mortgage-related securities . . . . . . . . . . . 3,771 144 (21) (281) 3,613

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $84,956 $3,263 $(4,079) $(1,430) $82,710

130

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Total

Amortized

Cost(1)

Gross

Unrealized

Gains

Gross

Unrealized

Losses -

OTTI(2)

Gross

Unrealized

Losses -

Other(3)

Total

Fair

Value

As of December 31, 2010

(Dollars in millions)

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . $21,428 $1,453 $ (9) $ (44) $22,828

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . 15,986 1,010 — — 16,996

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . 909 130 — — 1,039

Alt-A private-label securities . . . . . . . . . . . . . . 15,789 177 (1,791) (285) 13,890

Subprime private-label securities . . . . . . . . . . . 11,323 54 (997) (448) 9,932

CMBS(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,273 25 — (454) 14,844

Mortgage revenue bonds . . . . . . . . . . . . . . . . . 11,792 47 (64) (734) 11,041

Other mortgage-related securities . . . . . . . . . . . 4,098 106 (44) (338) 3,822

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $96,598 $3,002 $(2,905) $(2,303) $94,392

(1) Amortized cost includes unamortized premiums, discounts and other cost basis adjustments as well as the credit

component of other-than-temporary impairments (OTTI) recognized in our condensed consolidated statements of

operations and comprehensive loss.

(2) Represents the noncredit component of other-than-temporary impairment losses recorded in “Accumulated other

comprehensive loss” as well as cumulative changes in fair value for securities for which we previously recognized the

credit component of an other-than-temporary impairment.

(3) Represents the gross unrealized losses on securities for which we have not recognized an other-than-temporary

impairment.

(4) Amortized cost includes $725 million and $848 million as of September 30, 2011 and December 31, 2010,

respectively, of increase to the carrying amount from previous fair value hedge accounting.

The following tables display additional information regarding gross unrealized losses and fair value by major

security type for AFS securities in an unrealized loss position that we held as of September 30, 2011 and

December 31, 2010.

Gross

Unrealized

Losses

Fair

Value

Gross

Unrealized

Losses

Fair

Value

Less Than 12

Consecutive Months

12 Consecutive

Months or Longer

As of September 30, 2011

(Dollars in millions)

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6) $ 758 $ (13) $ 186

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . (157) 1,544 (2,070) 7,072

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . (206) 992 (2,277) 6,843

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (110) 7,572 (160) 2,982

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) 311 (199) 2,718

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . (12) 264 (290) 1,508

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(500) $11,441 $(5,009) $21,309

131

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Gross

Unrealized

Losses

Fair

Value

Gross

Unrealized

Losses

Fair

Value

Less Than 12

Consecutive Months

12 Consecutive

Months or Longer

As of December 31, 2010

(Dollars in millions)

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (35) $ 1,461 $ (18) $ 211

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . (104) 1,915 (1,972) 9,388

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . (47) 627 (1,398) 8,493

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15) 1,774 (439) 10,396

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . (206) 5,009 (592) 3,129

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . (2) 262 (380) 2,014

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(409) $11,048 $(4,799) $33,631

Other-Than-Temporary Impairments

We recognize the credit component of other-than-temporary impairments of our debt securities in our

condensed consolidated statements of operations and comprehensive loss and the noncredit component in

“Other comprehensive (loss) income” for those securities that we do not intend to sell and for which it is not

more likely than not that we will be required to sell before recovery.

The fair value of our securities varies from period to period due to changes in interest rates, in the

performance of the underlying collateral and in the credit performance of the underlying issuer, among other

factors. $5.0 billion of the $5.5 billion of gross unrealized losses on AFS securities as of September 30, 2011

have existed for a period of 12 consecutive months or longer. Gross unrealized losses on AFS securities as of

September 30, 2011 include unrealized losses on securities with other-than-temporary impairment in which a

portion of the impairment remains in “Accumulated other comprehensive loss.” The securities with unrealized

losses for 12 consecutive months or longer, on average, had a fair value as of September 30, 2011 that was

81% of their amortized cost basis. Based on our review for impairments of AFS securities, which includes an

evaluation of the collectibility of cash flows and any intent or requirement to sell the securities, we have

concluded that we do not have an intent to sell and we believe it is not more likely than not that we will be

required to sell the securities. Additionally, our projections of cash flows indicate that we will recover a

portion or the majority of these unrealized losses over the lives of the securities.

The following table displays our net other-than-temporary impairments by major security type recognized in

our condensed consolidated statements of operations and comprehensive loss for the three and nine months

ended September 30, 2011 and 2010.

2011 2010(1) 2011 2010(1)

For the Three

Months Ended

September 30,

For the Nine

Months Ended

September 30,

(Dollars in millions)

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $238 $153 $329 $310

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 171 2 365

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2 31 24

Net other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . $262 $326 $362 $699

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

132

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
For the three and nine months ended September 30, 2011, we recorded net other-than-temporary impairment

of $262 million and $362 million, respectively. The net other-than-temporary impairment charges recorded in

the three month period ended September 30, 2011 were primarily driven by an increase in collateral losses on

certain Alt-A private-label securities, which resulted in a decrease in the present value of our cash flow

projections on these Alt-A private-label securities.

The following table displays activity related to the unrealized credit component on debt securities held by us

and recognized in earnings for the three and nine months ended September 30, 2011 and 2010. A related

unrealized non-credit component has been recognized in “Accumulated other comprehensive loss.”

2011 2010 2011 2010

For the Three

Months Ended

September 30,

For the Nine

Months Ended

September 30,

(Dollars in millions)

Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,876 $8,181 $8,215 $8,191

Additions for the credit component on debt securities for which OTTI

was not previously recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 6 8 21

Additions for credit losses on debt securities for which OTTI was

previously recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 320 354 678

Reductions for securities no longer in portfolio at period end . . . . . . . . . (5) (102) (5) (154)

Reductions for amortization resulting from increases in cash flows

expected to be collected over the remaining life of the securities . . . . . (253) (137) (692) (468)

Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,880 $8,268 $7,880 $8,268

As of September 30, 2011, those debt securities with other-than-temporary impairment for which we

recognized in our condensed consolidated statements of operations and comprehensive loss only the amount of

loss related to credit consisted predominantly of Alt-A and subprime securities. We evaluate Alt-A (including

option adjustable rate mortgage (“ARM”)) and subprime private-label securities for other-than-temporary

impairment by discounting the projected cash flows from econometric models to estimate the portion of loss

in value attributable to credit. Separate components of a third-party model project regional home prices,

unemployment and interest rates. The model combines these factors with available current information

regarding attributes of loans in pools backing the private-label mortgage-related securities to project

prepayment speeds, conditional default rates, loss severities and delinquency rates. It incorporates detailed

information on security-level subordination levels and cash flow priority of payments to project security level

cash flows. We model securities assuming the benefit of those external financial guarantees that we

determined are creditworthy. We have recorded other-than-temporary impairments for the three and nine

months ended September 30, 2011 based on this analysis, with amounts related to credit loss recognized in our

condensed consolidated statements of operations and comprehensive loss. For securities we determined were

not other-than-temporarily impaired, we concluded that either the bond had no projected credit loss or if we

projected a loss, that the present value of expected cash flows was greater than the security’s cost basis.

133

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
The following table displays the modeled attributes, including default rates and severities, which are used to

determine whether our senior interests in certain non-agency mortgage-related securities will experience a cash

shortfall. Assumption of voluntary prepayment rates is also an input to the present value of expected losses.

Subprime Option ARM Fixed Rate Variable Rate Hybrid Rate

Alt-A

As of September 30, 2011

(Dollars in millions)

Vintage Year

2004 & Prior:

Unpaid principal balance . . . . . . . . . . . . . . . . $ 1,699 $ 487 $3,497 $ 501 $2,311

Weighted average collateral default(1) . . . . . . . 36.6% 36.6% 10.5% 31.4% 16.0%

Weighted average collateral severities(2). . . . . . 59.8 51.9 47.0 41.1 38.6

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 11.6 12.7 9.2 12.5

Average credit enhancement(4) . . . . . . . . . . . . 51.1 16.3 12.1 22.3 10.5

2005

Unpaid principal balance . . . . . . . . . . . . . . . . $ 179 $1,324 $1,202 $ 540 $2,389

Weighted average collateral default(1) . . . . . . . 71.2% 56.3% 38.3% 53.5% 37.8%

Weighted average collateral severities(2). . . . . . 72.1 59.8 62.1 57.0 46.8

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 6.4 9.3 7.4 9.1

Average credit enhancement(4) . . . . . . . . . . . . 65.3 24.8 1.4 17.9 5.1

2006

Unpaid principal balance . . . . . . . . . . . . . . . . $11,792 $1,241 $ 533 $1,619 $1,716

Weighted average collateral default(1) . . . . . . . 76.3% 70.9% 38.6% 58.3% 31.0%

Weighted average collateral severities(2). . . . . . 72.2 62.6 64.6 57.8 49.8

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 3.4 8.4 6.5 9.8

Average credit enhancement(4) . . . . . . . . . . . . 17.5 17.0 2.3 0.2 0.6

2007 & After:

Unpaid principal balance . . . . . . . . . . . . . . . . $ 609 $ — $ — $ — $ 120

Weighted average collateral default(1) . . . . . . . 78.8% N/A N/A N/A 40.9%

Weighted average collateral severities(2). . . . . . 68.7 N/A N/A N/A 57.7

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 N/A N/A N/A 9.0

Average credit enhancement(4) . . . . . . . . . . . . 33.7 N/A N/A N/A 26.1

Total

Unpaid principal balance . . . . . . . . . . . . . . . . $14,279 $3,052 $5,232 $2,660 $6,536

Weighted average collateral default(1) . . . . . . . 71.6% 59.1% 19.7% 52.2% 28.4%

Weighted average collateral severities(2). . . . . . 70.6 59.7 52.3 54.5 44.9

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 6.0 11.5 7.2 10.5

Average credit enhancement(4) . . . . . . . . . . . . 22.8 20.3 8.6 7.9 6.2

(1) The expected remaining cumulative default rate of the collateral pool backing the securities, as a percentage of the

current collateral unpaid principal balance, weighted by security unpaid principal balance.

134

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
(2) The expected remaining loss given default of the collateral pool backing the securities, calculated as the ratio of

remaining cumulative loss divided by cumulative defaults, weighted by security unpaid principal balance.

(3) The average monthly voluntary prepayment rate, weighted by security unpaid principal balance.

(4) The average percent current credit enhancement provided by subordination of other securities. Excludes excess interest

projections and monoline bond insurance.

Maturity Information

The following table displays the amortized cost and fair value of our AFS securities by major security type

and remaining maturity, assuming no principal prepayments, as of September 30, 2011. Contractual maturity

of mortgage-backed securities is not a reliable indicator of their expected life because borrowers generally

have the right to prepay their obligations at any time.

Total

Amortized

Cost

Total

Fair

Value

Amortized

Cost

Fair

Value

Amortized

Cost

Fair

Value

Amortized

Cost

Fair

Value

Amortized

Cost

Fair

Value

One Year or Less

After One Year

Through Five Years

After Five Years

Through Ten Years After Ten Years

As of September 30, 2011

(Dollars in millions)

Fannie Mae................... $17,698 $19,238 $ — $ — $ 6 $ 6 $ 2,645 $ 2,832 $15,047 $16,400

Freddie Mac . . . ............... 12,781 13,749 1 1 46 48 1,331 1,439 11,403 12,261

Ginnie Mae. . . . . . . . . . . . . . . . . . . 807 939 — — — — 5 6 802 933

Alt-A private-label securities . . ..... 14,299 12,287 — — 1 1 249 252 14,049 12,034

Subprime private-label securities ..... 10,367 7,887 — — — — — — 10,367 7,887

CMBS . . .................... 14,598 14,390 62 63 5,255 5,244 8,678 8,500 603 583

Mortgage revenue bonds .......... 10,635 10,607 59 59 366 377 743 756 9,467 9,415

Other mortgage-related securities..... 3,771 3,613 — — — — — 14 3,771 3,599

Total . . . .................... $84,956 $82,710 $122 $123 $5,674 $5,676 $13,651 $13,799 $65,509 $63,112

Accumulated Other Comprehensive Loss

The following table displays our accumulated other comprehensive loss by major categories as of

September 30, 2011 and December 31, 2010.

September 30,

2011

December 31,

2010

As of

(Dollars in millions)

Net unrealized gains on available-for-sale securities for which we have not

recorded other-than-temporary impairment, net of tax . . . . . . . . . . . . . . . . . . $ 1,049 $ 304

Net unrealized losses on available-for-sale securities for which we have recorded

other-than-temporary impairment, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . (2,509) (1,736)

Other losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (236) (250)

Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,696) $(1,682)

135

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
The following table displays the activity in other comprehensive (loss) income, net of tax, by major categories

for the three and nine months ended September 30, 2011 and 2010.

2011 2010 2011 2010

For the Three

Months Ended

September 30,

For the Nine

Months Ended

September 30,

(Dollars in millions)

Comprehensive loss:

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(5,085) $(1,331) $(14,448) $(14,083)

Other comprehensive (loss) income, net of tax:

Changes in net unrealized losses on available-for-sale securities (net of

tax benefit of $210 and tax of $380, respectively, for the three months

ended and net of tax benefit of $142 and tax of $1,889, respectively,

for the nine months ended) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (391) 705 (264) 3,507

Reclassification adjustment for other-than-temporary impairments

recognized in net loss (net of tax of $92 and $113, respectively, for

the three months ended and net of tax of $120 and $239, respectively,

for the nine months ended) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 213 242 460

Reclassification adjustment for losses (gains) included in net loss (net of

tax benefit of $10 and tax of $10, respectively, for the three months

ended and net of tax of $1 and $16, respectively, for the nine months

ended) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (17) 2 (29)

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 6 6

Other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . (197) 902 (14) 3,944

Total comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(5,282) $ (429) $(14,462) $(10,139)

6. Financial Guarantees

For our guarantees to unconsolidated trusts and other guaranty arrangements, we recognize a guaranty

obligation for our obligation to stand ready to perform on these guarantees. For those guarantees recognized in

our condensed consolidated balance sheets, our maximum potential exposure under these guarantees is

primarily comprised of the unpaid principal balance of the underlying mortgage loans, which totaled

$56.5 billion and $52.4 billion as of September 30, 2011 and December 31, 2010, respectively. The maximum

amount we could recover through available credit enhancements and recourse with third parties on guarantees

recognized in our condensed consolidated balance sheets was $14.0 billion and $12.6 billion as of

September 30, 2011 and December 31, 2010, respectively. In addition, we had exposure of $9.5 billion and

$10.3 billion for other guarantees not recognized in our condensed consolidated balance sheets as of

September 30, 2011 and December 31, 2010, respectively. The maximum amount we could recover through

available credit enhancements and recourse with third parties on guarantees not recognized in our condensed

consolidated balance sheets was $4.1 billion and $3.9 billion as of September 30, 2011 and December 31,

2010, respectively. Recoverability of such credit enhancements and recourse is subject to, among other factors,

our mortgage insurers’ and financial guarantors’ ability to meet their obligations to us.

The fair value of our guaranty obligations associated with the Fannie Mae MBS included in “Investments in

securities” was $2.2 billion and $2.0 billion as of September 30, 2011 and December 31, 2010, respectively.

136

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Risk Characteristics of our Book of Business

We gauge our performance risk under our guaranty based on the delinquency status of the mortgage loans we

hold in portfolio, or in the case of mortgage-backed securities, the mortgage loans underlying the related

securities. Management also monitors the serious delinquency rate, which is the percentage of single-family

loans three or more months past due or in the foreclosure process, and the percentage of multifamily loans

60 days or more past due, of loans that also have higher risk characteristics, such as high mark-to-market

loan-to-value ratios on single-family loans and low original debt service coverage ratios on multifamily loans.

We use this information, in conjunction with housing market and economic conditions, to structure our pricing

and our eligibility and underwriting criteria to reflect the current risk of loans with these higher-risk

characteristics, and in some cases we decide to significantly reduce our participation in riskier loan product

categories. Management also uses this data together with other credit risk measures to identify key trends that

guide the development of our loss mitigation strategies.

The following tables display the current delinquency status and certain higher risk characteristics of our

single-family conventional and total multifamily guaranty book of business as of September 30, 2011 and

December 31, 2010.

30 Days

Delinquent

60 Days

Delinquent

Seriously

Delinquent(2) 30 DaysDelinquent

60 Days

Delinquent

Seriously

Delinquent(2)

As of September 30, 2011(1) As of December 31, 2010(1)

Percentage of single-family

conventional guaranty book of

business(3) . . . . . . . . . . . . . . . . . 2.00% 0.75% 4.64% 2.19% 0.89% 5.37%

Percentage of single-family

conventional loans(4) . . . . . . . . . . 2.16 0.75 4.00 2.32 0.87 4.48

137

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Percentage of

Single-Family

Conventional

Guaranty Book

of Business(3)

Percentage

Seriously

Delinquent(2)(4)

Percentage of

Single-Family

Conventional

Guaranty Book

of Business(3)

Percentage

Seriously

Delinquent(2)(4)

As of September 30, 2011(1) As of December 31, 2010(1)

Estimated mark-to-market loan-to-value

ratio:

Less than 100% . . . . . . . . . . . . . . . . . 84% 2.35% 84% 2.62%

100.01% to 110% . . . . . . . . . . . . . . . . 5 9.50 5 11.60

110.01% to 120% . . . . . . . . . . . . . . . . 3 12.16 3 14.74

120.01% to 125% . . . . . . . . . . . . . . . . 1 13.64 1 16.86

Greater than 125% . . . . . . . . . . . . . . . 7 19.83 7 24.71

Geographical distribution:

Arizona . . . . . . . . . . . . . . . . . . . . . . . 2 3.78 2 6.23

California . . . . . . . . . . . . . . . . . . . . . . 19 2.70 18 3.89

Florida . . . . . . . . . . . . . . . . . . . . . . . . 6 11.90 7 12.31

Nevada . . . . . . . . . . . . . . . . . . . . . . . 1 7.53 1 10.66

Select Midwest states(5) . . . . . . . . . . . . 10 4.55 11 4.80

All other states . . . . . . . . . . . . . . . . . . 62 3.20 61 3.46

Product distribution (not mutually

exclusive): (6)

Alt-A . . . . . . . . . . . . . . . . . . . . . . . . . 7 12.71 8 13.87

Subprime . . . . . . . . . . . . . . . . . . . . . . * 23.91 * 28.20

Negatively amortizing adjustable rate. . . * 7.79 * 9.02

Interest only . . . . . . . . . . . . . . . . . . . . 5 15.70 6 17.85

Investor property . . . . . . . . . . . . . . . . . 6 4.34 6 4.79

Condo/Coop . . . . . . . . . . . . . . . . . . . . 9 4.74 9 5.37

Original loan-to-value ratio H90%(7) . . . 10 8.42 10 10.04

FICO credit score G620(7) . . . . . . . . . . 3 13.56 4 14.63

Original loan-to-value ratio H90% and

FICO credit score G620(7) . . . . . . . . 1 18.99 1 21.41

Vintages:

2005 . . . . . . . . . . . . . . . . . . . . . . . . . 7 7.13 9 7.20

2006 . . . . . . . . . . . . . . . . . . . . . . . . . 7 11.81 8 12.19

2007 . . . . . . . . . . . . . . . . . . . . . . . . . 10 12.63 12 13.24

2008 . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.34 9 4.88

All other vintages . . . . . . . . . . . . . . . . 68 1.60 62 1.73

* Represents less than 0.5% of the single-family conventional guaranty book of business.

(1) Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan

level information, which constituted approximately 99% of our total single-family conventional guaranty book of

business as of both September 30, 2011 and December 31, 2010.

(2) Consists of single-family conventional loans that were three months or more past due or in the foreclosure process, as

of the periods indicated.

138

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
(3) Calculated based on the aggregate unpaid principal balance of single-family conventional loans for each category

divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of

business.

(4) Calculated based on the number of single-family conventional loans that were delinquent divided by the total number

of loans in our single-family conventional guaranty book of business.

(5) Consists of Illinois, Indiana, Michigan, and Ohio.

(6) Categories are not mutually exclusive. Loans with multiple product features are included in all applicable categories.

(7) Includes housing goals-oriented products such as MyCommunityMortgage» and Expanded Approval».

30 Days

Delinquent

Seriously

Delinquent(3) 30 DaysDelinquent

Seriously

Delinquent(3)

As of September 30, 2011(1)(2) As of December 31, 2010(1)(2)

Percentage of multifamily guaranty book of

business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.20% 0.57% 0.21% 0.71%

Percentage of

Multifamily

Guaranty

Book of Business

Percentage

Seriously

Delinquent(3)

Percentage of

Multifamily

Guaranty

Book of Business

Percentage

Seriously

Delinquent(3)

As of September 30, 2011(1)(2) As of December 31, 2010(1)(2)

Original loan-to-value ratio:

Greater than 80% . . . . . . . . . . . . . . . . . 5% 1.52% 5% 0.59%

Less than or equal to 80% . . . . . . . . . . . 95 0.53 95 0.71

Original debt service coverage ratio:

Less than or equal to 1.10 . . . . . . . . . . . 8 0.17 9 0.27

Greater than 1.10 . . . . . . . . . . . . . . . . . 92 0.61 91 0.75

Acquisition loan size distribution:

Less than or equal to $750,000 . . . . . . . . 2 1.37 2 1.61

Greater than $750,000 and less than or

equal to $3 million . . . . . . . . . . . . . . 11 1.11 12 1.17

Greater than $3 million and less than or

equal to $5 million . . . . . . . . . . . . . . 9 0.80 9 0.88

Greater than $5 million and less than or

equal to $25 million . . . . . . . . . . . . . 42 0.63 42 0.88

Greater than $25 million . . . . . . . . . . . . 36 0.23 35 0.24

Maturing dates:

Maturing in 2011 . . . . . . . . . . . . . . . . . 1 3.68 3 0.68

Maturing in 2012 . . . . . . . . . . . . . . . . . 6 0.41 7 0.42

Maturing in 2013 . . . . . . . . . . . . . . . . . 10 0.45 11 0.54

Maturing in 2014 . . . . . . . . . . . . . . . . . 8 0.56 8 0.67

Maturing in 2015 . . . . . . . . . . . . . . . . . 9 0.45 9 0.57

(1) Consists of the portion of our multifamily guaranty book of business for which we have detailed loan level

information, which constituted 99% of our total multifamily guaranty book of business as of both September 30, 2011

and December 31, 2010 excluding loans that have been defeased. Defeasance is a pre-payment of a loan through

substitution of collateral.

(2) Calculated based on the aggregate unpaid principal balance of multifamily loans for each category divided by the

aggregate unpaid principal balance of loans in our multifamily guaranty book of business.

(3) Consists of multifamily loans that were 60 days or more past due as of the periods indicated.

139

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
7. Acquired Property, Net

Acquired property, net consists of held for sale foreclosed property received in full satisfaction of a loan net of

a valuation allowance for declines in the fair value of foreclosed properties after initial acquisition. We classify

as held for sale those properties that we intend to sell and are actively marketed for sale. The following table

displays the activity in acquired property and the related valuation allowance for the three and nine months

ended September 30, 2011 and 2010.

Acquired

Property

Valuation

Allowance(1)

Acquired

Property, Net

Acquired

Property

Valuation

Allowance(1)

Acquired

Property, Net

September 30, 2011 September 30, 2011

For the Three Months Ended For the Nine Months Ended

(Dollars in millions)

Balance as of beginning of period . . . . . . . $14,915 $(1,323) $13,592 $ 18,054 $(1,881) $ 16,173

Additions . . . . . . . . . . . . . . . . . . . . . . . . 4,066 (144) 3,922 13,953 (422) 13,531

Disposals . . . . . . . . . . . . . . . . . . . . . . . . (5,606) 601 (5,005) (18,632) 2,119 (16,513)

Write-downs, net of recoveries . . . . . . . . . — (314) (314) — (996) (996)

Balance as of end of period . . . . . . . . . . . $13,375 $(1,180) $12,195 $ 13,375 $(1,180) $ 12,195

Acquired

Property

Valuation

Allowance(1)

Acquired

Property, Net

Acquired

Property

Valuation

Allowance(1)

Acquired

Property, Net

September 30, 2010 September 30, 2010

For the Three Months Ended For the Nine Months Ended

(Dollars in millions)

Balance as of beginning of period . . . . . . . $15,141 $(1,120) $14,021 $ 9,716 $ (574) $ 9,142

Additions . . . . . . . . . . . . . . . . . . . . . . . . 8,586 (339) 8,247 22,176 (629) 21,547

Disposals . . . . . . . . . . . . . . . . . . . . . . . . (4,618) 390 (4,228) (12,783) 915 (11,868)

Write-downs, net of recoveries . . . . . . . . . — (450) (450) — (1,231) (1,231)

Balance as of end of period . . . . . . . . . . . $19,109 $(1,519) $17,590 $ 19,109 $(1,519) $ 17,590

(1) Reflects activities in the valuation allowance for acquired properties held primarily by our Single-Family segment.

140

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
8. Short-Term Borrowings and Long-Term Debt

Short-Term Borrowings

The following table displays our outstanding short-term borrowings (borrowing with an original contractual

maturity of one year or less) and weighted-average interest rates of these borrowings as of September 30, 2011

and December 31, 2010.

Outstanding

WeightedAverage

Interest

Rate(1) Outstanding

WeightedAverage

Interest

Rate(1)

September 30, 2011 December 31, 2010

As of

(Dollars in millions)

Federal funds purchased and securities sold under

agreements to repurchase. . . . . . . . . . . . . . . . . . . . . . $ — —% $ 52 2.20%

Fixed-rate short-term debt:

Discount notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $193,385 0.13% $151,500 0.32%

Foreign exchange discount notes . . . . . . . . . . . . . . . . 333 2.01 384 2.43

Total short-term debt of Fannie Mae . . . . . . . . . . . . 193,718 0.14 151,884 0.32

Debt of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . 5,004 0.19 5,359 0.23

Total short-term debt . . . . . . . . . . . . . . . . . . . . . . . . $198,722 0.14% $157,243 0.32%

(1) Includes the effects of discounts, premiums, and other cost basis adjustments.

141

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Long-Term Debt

Long-term debt represents borrowings with an original contractual maturity of greater than one year. The

following table displays our outstanding long-term debt as of September 30, 2011 and December 31, 2010.

Maturities Outstanding

WeightedAverage

Interest

Rate(1) Maturities Outstanding

WeightedAverage

Interest

Rate(1)

September 30, 2011 December 31, 2010

As of

(Dollars in millions)

Senior fixed:

Benchmark notes and bonds . . . . . . 2011-2030 $ 281,876 2.90% 2011-2030 $ 300,344 3.20%

Medium-term notes . . . . . . . . . . . . 2011-2021 153,166 1.81 2011-2020 199,266 2.13

Foreign exchange notes and bonds . . 2021-2028 667 5.22 2017-2028 1,177 6.21

Other(2) . . . . . . . . . . . . . . . . . . . . . 2011-2040 44,241 5.59 2011-2040 44,893 5.64

Total senior fixed . . . . . . . . . . . . 479,950 2.80 545,680 3.02

Senior floating:

Medium-term notes . . . . . . . . . . . . 2011-2016 62,970 0.30 2011-2015 72,039 0.31

Other(2) . . . . . . . . . . . . . . . . . . . . . 2020-2037 421 6.61 2020-2037 386 4.92

Total senior floating . . . . . . . . . . 63,391 0.33 72,425 0.34

Subordinated fixed:

Qualifying subordinated(3) . . . . . . . . 2012-2014 4,893 5.08 2011-2014 7,392 5.47

Subordinated debentures . . . . . . . . . 2019 2,851 9.91 2019 2,663 9.91

Total subordinated fixed . . . . . . . 7,744 6.86 10,055 6.65

Total long-term debt of Fannie

Mae(4) . . . . . . . . . . . . . . . . . . . . 551,085 2.58 628,160 2.77

Debt of consolidated trusts(2) . . . . . . . 2011-2051 2,441,969 4.40 2011-2051 2,411,597 4.59

Total long-term debt . . . . . . . . . . $2,993,054 4.06% $3,039,757 4.22%

(1) Includes the effects of discounts, premiums and other cost basis adjustments.

(2) Includes a portion of structured debt instruments that is reported at fair value.

(3) Consists of subordinated debt issued with an interest deferral feature.

(4) Reported amounts include a net discount and other cost basis adjustments of $9.5 billion and $12.4 billion as of

September 30, 2011 and December 31, 2010, respectively.

Intraday Lines of Credit

We periodically use secured and unsecured intraday funding lines of credit provided by several large financial

institutions. We post collateral which, in some circumstances, the secured party has the right to repledge to

third parties. As these lines of credit are uncommitted intraday loan facilities, we may be unable to draw on

them if and when needed. We had secured uncommitted lines of credit of $25.0 billion and unsecured

uncommitted lines of credit of $500 million as of September 30, 2011 and December 31, 2010. We had no

borrowings outstanding from these lines of credit as of September 30, 2011 and December 31, 2010.

142

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
9. Derivative Instruments

Derivative instruments are an integral part of our strategy in managing interest rate risk. Derivative instruments

may be privately negotiated contracts, which are often referred to as over-the-counter derivatives, or they may

be listed and traded on an exchange. We typically do not settle the notional amount of our risk management

derivatives; rather, notional amounts provide the basis for calculating actual payments or settlement amounts.

The derivatives we use for interest rate risk management purposes consist primarily of interest rate swaps,

interest rate options, foreign currency swaps and futures.

We enter into forward purchase and sale commitments that lock in the future delivery of mortgage loans and

mortgage-related securities at a fixed price or yield. Certain commitments to purchase mortgage loans and

purchase or sell mortgage-related securities meet the criteria of a derivative. We typically settle the notional

amount of our mortgage commitments that are accounted for as derivatives.

We recognize all derivatives as either assets or liabilities in our condensed consolidated balance sheets at their

fair value on a trade date basis. Fair value amounts, which are netted to the extent a legal right of offset exists

and is enforceable by law at the counterparty level and are inclusive of the right or obligation associated with

the cash collateral posted or received, are recorded in “Other assets” or “Other liabilities” in our condensed

consolidated balance sheets. We record all derivative gains and losses, including accrued interest, in “Fair

value (losses) gains, net” in our condensed consolidated statements of operations and comprehensive loss.

Notional and Fair Value Position of our Derivatives

The following table displays the notional amount and estimated fair value of our asset and liability derivative

instruments as of September 30, 2011 and December 31, 2010.

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives

As of September 30, 2011 As of December 31, 2010

(Dollars in millions)

Risk management derivatives:

Swaps:

Pay-fixed . . . ........... $ 36,990 $ 46 $156,892 $(17,154) $ 49,085 $ 1,812 $228,142 $(14,115)

Receive-fixed ........... 144,603 7,740 35,205 (63) 172,174 6,493 52,003 (578)

Basis. . . . . . . . . . . . . . . . . 332 122 6,665 (18) 435 29 50 —

Foreign currency . . . . . . . . . 457 135 542 (82) 1,274 164 286 (51)

Swaptions:

Pay-fixed . . . ........... 64,150 191 48,500 (275) 66,200 482 30,950 (1,773)

Receive-fixed ........... 38,845 6,707 48,500 (3,036) 48,340 4,992 30,275 (673)

Interest rate caps . ........... 7,000 2 — — 7,000 24 — —

Other(1) . . . . . . . . . . . . . . . . . . 639 52 150 (4) 909 75 25 (1)

Total gross risk management

derivatives . . ........... 293,016 14,995 296,454 (20,632) 345,417 14,071 341,731 (17,191)

Accrued interest receivable

(payable) . . . . . . . . . . . . . . — 770 — (1,319) — 1,288 — (1,805)

Netting adjustment(2) ........ — (15,539) — 18,372 — (15,175) — 18,023

Total net risk management

derivatives. ........... $293,016 $ 226 $296,454 $ (3,579) $345,417 $ 184 $341,731 $ (973)

143

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives

As of September 30, 2011 As of December 31, 2010

(Dollars in millions)

Mortgage commitment derivatives:

Mortgage commitments to

purchase whole loans ...... $ 9,434 $ 84 $ 2,991 $ (12) $ 2,880 $ 19 $ 4,435 $ (105)

Forward contracts to purchase

mortgage-related securities . . 30,447 365 18,370 (86) 19,535 123 27,697 (468)

Forward contracts to sell

mortgage-related securities . . 15,077 48 50,896 (596) 40,761 811 24,562 (169)

Total mortgage commitment

derivatives. ........... $ 54,958 $ 497 $ 72,257 $ (694) $ 63,176 $ 953 $ 56,694 $ (742)

Derivatives at fair value . . . . $347,974 $ 723 $368,711 $ (4,273) $408,593 $ 1,137 $398,425 $ (1,715)

(1) Includes futures, swap credit enhancements and mortgage insurance contracts that we account for as derivatives. The

mortgage insurance contracts have payment provisions that are not based on a notional amount.

(2) The netting adjustment represents the effect of the legal right to offset under legally enforceable master netting

agreements to settle with the same counterparty on a net basis, as well as cash collateral receivable and payable. Cash

collateral receivable was $3.5 billion as of September 30, 2011 and December 31, 2010. Cash collateral payable was

$653 million and $604 million as of September 30, 2011 and December 31, 2010, respectively.

A majority of our derivative instruments contain provisions that require our senior unsecured debt to maintain

a minimum credit rating from S&P, Moody’s or Fitch. If our senior unsecured debt were to fall below

established thresholds in our governing agreements, which range from A- to BBB+, we would be in violation

of these provisions, and the counterparties to the derivative instruments could request immediate payment or

demand immediate collateralization on derivative instruments in net liability positions. The aggregate fair

value of all derivatives with credit-risk-related contingent features that were in a net liability position as of

September 30, 2011 was $7.0 billion, for which we posted collateral of $6.9 billion in the normal course of

business. Had all of the credit-risk-related contingency features underlying these agreements been triggered, an

additional $182 million of collateral would have been required to be posted as collateral or to immediately

settle our positions based on the individual agreements and our fair value position at September 30, 2011.

The aggregate fair value of all derivatives with credit risk-related contingent features that were in a net

liability position as of December 31, 2010 was $4.4 billion, for which we posted collateral of $3.5 billion in

the normal course of business. Had all of the credit risk-related contingency features underlying these

agreements been triggered, an additional $891 million would have been required to be posted as collateral or

to immediately settle our positions based on the individual agreements and our fair value position at

December 31, 2010.

144

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
The following table displays, by type of derivative instrument, the fair value gains and losses, net on our

derivatives for the three and nine months ended September 30, 2011 and 2010.

2011 2010 2011 2010

For the

Three Months

Ended September 30,

For the

Nine Months

Ended September 30,

(Dollars in millions)

Risk management derivatives:

Swaps:

Pay-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(11,334) $(8,034) $(16,206) $(24,811)

Receive-fixed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,577 6,126 7,105 18,642

Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 43 104 73

Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 149 114 138

Swaptions:

Pay-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533 17 805 (1,342)

Receive-fixed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,091 1,778 2,591 5,460

Interest rate caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) (16) (22) (115)

Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36) (4) (58) 33

Total risk management derivatives fair value (losses) gains,

net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,067) 59 (5,567) (1,922)

Mortgage commitment derivatives fair value losses, net . . . . . . . . (188) (183) (226) (1,361)

Total derivatives fair value losses, net . . . . . . . . . . . . . . . . . . . $ (4,255) $ (124) $ (5,793) $ (3,283)

(1) Includes futures, swap credit enhancements and mortgage insurance contracts.

Derivative Counterparty Credit Exposure

Our derivative counterparty credit exposure relates principally to interest rate and foreign currency derivative

contracts. We are exposed to the risk that a counterparty in a derivative transaction will default on payments

due to us. If there is a default, we may need to acquire a replacement derivative from a different counterparty

at a higher cost or may be unable to find a suitable replacement. We estimate our exposure to credit loss on

derivative instruments by calculating the replacement cost, on a present value basis, to settle at current market

prices all outstanding derivative contracts in a net gain position by counterparty where the right of legal offset

exists, such as master netting agreements, and by transaction where the right of legal offset does not exist.

Typically, we seek to manage credit exposure by contracting with experienced counterparties that are rated A-

(or its equivalent) or better by S&P, Moody’s or Fitch. We also manage our exposure by requiring

counterparties to post collateral. The collateral includes cash, U.S. Treasury securities, agency debt and agency

mortgage-related securities.

145

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
The table below displays our credit exposure on outstanding risk management derivative instruments in a gain

position by counterparty credit ratings, as well as the notional amount outstanding and the number of

counterparties for all risk management derivatives as of September 30, 2011 and December 31, 2010.

AA+/AA/AA- A+/A Subtotal(2) Other(3) Total

Credit Rating(1)

As of September 30, 2011

(Dollars in millions)

Credit loss exposure(4) . . . . . . . . . . . . . . . . . . $ 587 $ 232 $ 819 $ 49 $ 868

Less: Collateral held(5) . . . . . . . . . . . . . . . . . . 515 189 704 — 704

Exposure net of collateral . . . . . . . . . . . . . . . . $ 72 $ 43 $ 115 $ 49 $ 164

Additional information:

Notional amount . . . . . . . . . . . . . . . . . . . . . $152,829 $434,712 $587,541 $1,929 $589,470

Number of counterparties . . . . . . . . . . . . . . . 7 8 15

AA+/AA/AA- A+/A Subtotal(2) Other(3) Total

Credit Rating(1)

As of December 31, 2010

(Dollars in millions)

Credit loss exposure(4) . . . . . . . . . . . . . . . . . . $ 350 $ 325 $ 675 $ 75 $ 750

Less: Collateral held(5) . . . . . . . . . . . . . . . . . . 273 325 598 — 598

Exposure net of collateral . . . . . . . . . . . . . . . . $ 77 $ — $ 77 $ 75 $ 152

Additional information:

Notional amount . . . . . . . . . . . . . . . . . . . . . $208,898 $476,766 $685,664 $1,484 $687,148

Number of counterparties . . . . . . . . . . . . . . . 7 8 15

(1) We manage collateral requirements based on the lower credit rating of the legal entity, as issued by S&P and Moody’s.

The credit rating reflects the equivalent S&P’s rating for any ratings based on Moody’s scale.

(2) We had exposure to 4 and 3 interest rate and foreign currency derivative counterparties in a net gain position as of

September 30, 2011 and December 31, 2010, respectively. Those interest rate and foreign currency derivatives had

notional balances of $135.1 billion and $106.5 billion as of September 30, 2011 and December 31, 2010, respectively.

(3) Includes defined benefit mortgage insurance contracts and swap credit enhancements accounted for as derivatives

where the right of legal offset does not exist. Also includes exchange-traded derivatives, such as futures and interest

rate swaps, which are settled daily through a clearinghouse.

(4) Represents the exposure to credit loss on derivative instruments, which we estimate using the fair value of all

outstanding derivative contracts in a gain position. We net derivative gains and losses with the same counterparty

where a legal right of offset exists under an enforceable master netting agreement. This table excludes mortgage

commitments accounted for as derivatives.

(5) Represents both cash and non-cash collateral posted by our counterparties to us. Does not include collateral held in

excess of exposure. We reduce the value of non-cash collateral in accordance with the counterparty agreements to help

ensure recovery of any loss through the disposition of the collateral.

10. Segment Reporting

Our three reportable segments are: Single-Family, Multifamily, and Capital Markets. We use these three

segments to generate revenue and manage business risk, and each segment is based on the type of business

activities it performs. We are working on reorganizing our company by function rather than by business in

order to improve our operational efficiencies and effectiveness. In future periods, we may change some of our

management reporting and how we report our business segment results.

146

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Under our segment reporting, the sum of the results for our three business segments does not equal our

condensed consolidated statements of operations and comprehensive loss, as we separate the activity related to

our consolidated trusts from the results generated by our three segments. Our segment financial results include

directly attributable revenues and expenses. Additionally, we allocate to each of our segments: (1) capital

using FHFA minimum capital requirements adjusted for over- or under-capitalization; (2) indirect

administrative costs; and (3) a provision or benefit for federal income taxes. In addition, we allocate

intracompany guaranty fee income as a charge from the Single-Family and Multifamily segments to Capital

Markets for managing the credit risk on mortgage loans held by the Capital Markets group. We also include

an eliminations/adjustments category to reconcile our business segment results and the activity related to our

consolidated trusts to net loss in our condensed consolidated statements of operations and comprehensive loss.

The following tables display our segment results for the three and nine months ended September 30, 2011 and

2010.

SingleFamily MultifamilyCapital

Markets

Consolidated

Trusts(1)

Eliminations/

Adjustments(2)

Total

Results

Business Segments

Other Activity/

Reconciling Items

For the Three Months Ended September 30, 2011

(Dollars in millions)

Net interest (loss) income . . . . . . . . . . . . $ (374) $ (7) $ 3,904 $ 1,210 $ 453(3) $ 5,186

Provision for loan losses . . . . . . . . . . . . . (4,083) (76) — — — (4,159)

Net interest (loss) income after provision

for loan losses . . . . . . . . . . . . . . . . . . (4,457) (83) 3,904 1,210 453 1,027

Guaranty fee income (expense) . . . . . . . . 1,867 226 (369) (1,124)(4) (551)(4) 49(4)

Investment gains (losses), net . . . . . . . . . . 3 5 801 (89) (647)(5) 73

Net other-than-temporary impairments . . . — — (262) — — (262)

Fair value losses, net. . . . . . . . . . . . . . . . (2) — (4,670) (17) 164(6) (4,525)

Debt extinguishment losses, net . . . . . . . . — — (107) (12) — (119)

Losses from partnership investments . . . . . — (30) — — — (30)(7)

Fee and other income (expenses) . . . . . . . 136 51 125 (67) (3) 242

Administrative expenses . . . . . . . . . . . . . (409) (62) (120) — — (591)

Benefit (provision) for guaranty losses . . . 11 (3) — — — 8

Foreclosed property expense . . . . . . . . . . (710) (23) — — — (733)

Other expenses. . . . . . . . . . . . . . . . . . . . (184) (9) (14) — (17) (224)

(Loss) income before federal income

taxes . . . . . . . . . . . . . . . . . . . . . . . . . (3,745) 72 (712) (99) (601) (5,085)

(Provision) benefit for federal income

taxes . . . . . . . . . . . . . . . . . . . . . . . . . (1) — 1 — — —

Net (loss) income attributable to Fannie

Mae . . . . . . . . . . . . . . . . . . . . . . . . $(3,746) $ 72 $ (711) $ (99) $(601) $(5,085)

147

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
SingleFamily Multifamily

Capital

Markets

Consolidated

Trusts(1)

Eliminations/

Adjustments(2)

Total

Results

Business Segments

Other Activity/

Reconciling Items

For the Nine Months Ended September 30, 2011

(Dollars in millions)

Net interest (loss) income . . . ....... $ (1,952) $ (27) $11,481 $ 4,098 $ 1,518(3) $ 15,118

Provision for loan losses........... (20,372) (176) — — — (20,548)

Net interest (loss) income after

provision for loan losses . . ....... (22,324) (203) 11,481 4,098 1,518 (5,430)

Guaranty fee income (expense) ...... 5,618 651 (1,159) (3,350)(4) (1,611)(4) 149(4)

Investment (losses) gains, net . . . . . . . (2) 10 2,589 (258) (2,020)(5) 319

Net other-than-temporary impairments . . — — (361) (1) — (362)

Fair value losses, net . . . . . . . . . . . . . (5) — (5,959) (122) 216(6) (5,870)

Debt extinguishment (losses) gains,

net . . . . . . . . . . . . . . . . . . . . . . . — — (186) 37 — (149)

Losses from partnership investments . . . — (8) — — 1 (7)(7)

Fee and other income (expense) . . . . . . 397 166 309 (222) (6) 644

Administrative expenses ........... (1,225) (194) (346) — — (1,765)

(Provision) benefit for guaranty losses . . (732) 38 — — — (694)

Foreclosed property expense . ....... (717) (26) — — — (743)

Other (expenses) income . . . ....... (579) 33 (32) — (53) (631)

(Loss) income before federal income

taxes ...................... (19,569) 467 6,336 182 (1,955) (14,539)

Benefit (provision) for federal income

taxes . . . . . . . . . . . . . . . . . . . . . . 106 (61) 46 — — 91

Net (loss) income . ............ (19,463) 406 6,382 182 (1,955) (14,448)

Less: Net income attributable to

noncontrolling interest . . . . . . . . . — — — — (1)(8) (1)

Net (loss) income attributable to

Fannie Mae ................ $(19,463) $ 406 $ 6,382 $ 182 $(1,956) $(14,449)

148

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
SingleFamily Multifamily

Capital

Markets

Consolidated

Trusts(1)

Eliminations/

Adjustments(2)

Total

Results

Business Segments

Other Activity/

Reconciling Items

For the Three Months Ended September 30, 2010

(Dollars in millions)

Net interest (loss) income . . . ........ $(1,108) $ — $4,065 $ 1,246 $ 573(3) $ 4,776

(Provision) benefit for loan losses . . . . . . (4,702) 6 — — — (4,696)

Net interest (loss) income after provision

for loan losses ................. (5,810) 6 4,065 1,246 573 80

Guaranty fee income (expense) ........ 1,804 205 (402) (1,095)(4) (461)(4) 51(4)

Investment gains (losses), net . ........ 3 4 1,270 (165) (1,030)(5) 82

Net other-than-temporary impairments . . . — — (323) (3) — (326)

Fair value gains (losses), net. . . . . . . . . . — — 436 (89) 178(6) 525

Debt extinguishment losses, net........ — — (185) (29) — (214)

Gains from partnership investments . . . . . — 39 — — 8 47(7)

Fee and other income (expense) . . . . . . . 93 35 130 (4) (1) 253

Administrative expenses ............ (471) (94) (165) — — (730)

(Provision) benefit for guaranty losses . . . (79) 1 — — — (78)

Foreclosed property expense . . ........ (778) (9) — — — (787)

Other expense . .................. (217) (7) (3) — (16) (243)

(Loss) income before federal income

taxes ....................... (5,455) 180 4,823 (139) (749) (1,340)

Benefit for federal income taxes ....... 1 1 7 — — 9

Net (loss) income . . ............. (5,454) 181 4,830 (139) (749) (1,331)

Less: Net income attributable to

noncontrolling interests . . . . . . . . . . — — — — (8)(8) (8)

Net (loss) income attributable to Fannie

Mae . . . . . . . . . . . . . . . . . . . . . . $(5,454) $181 $4,830 $ (139) $ (757) $(1,339)

149

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
SingleFamily Multifamily

Capital

Markets

Consolidated

Trusts(1)

Eliminations/

Adjustments(2)

Total

Results

Business Segments

Other Activity/

Reconciling Items

For the Nine Months Ended September 30, 2010

(Dollars in millions)

Net interest (loss) income . . . ....... $ (4,438) $ 9 $10,671 $ 3,767 $ 1,763(3) $ 11,772

(Provision) benefit for loan losses. . . . . (20,966) 36 — — — (20,930)

Net interest (loss) income after

provision for loan losses . . ....... (25,404) 45 10,671 3,767 1,763 (9,158)

Guaranty fee income (expense) ...... 5,367 594 (1,041) (3,422)(4) (1,341)(4) 157(4)

Investment gains (losses), net ....... 7 3 2,841 (348) (2,232)(5) 271

Net other-than-temporary impairments . . — — (696) (3) — (699)

Fair value losses, net . ............ — — (119) (113) (645)(6) (877)

Debt extinguishment losses, net ...... — — (368) (129) — (497)

Losses from partnership investments . . . — (41) — — 4 (37)(7)

Fee and other income (expense) . . . . . . 225 98 370 (18) (1) 674

Administrative expenses ........... (1,297) (286) (422) — — (2,005)

(Provision) benefit for guaranty losses . . (163) 52 — — — (111)

Foreclosed property expense . ....... (1,227) (28) — — — (1,255)

Other (expenses) income . . . ....... (648) (24) 115 — (56) (613)

(Loss) income before federal income

taxes ...................... (23,140) 413 11,351 (266) (2,508) (14,150)

Benefit (provision) for federal income

taxes . . . . . . . . . . . . . . . . . . . . . . 53 (14) 28 — — 67

Net (loss) income . ............ (23,087) 399 11,379 (266) (2,508) (14,083)

Less: Net income attributable to

noncontrolling interests . . . . . . . . — — — — (4)(8) (4)

Net (loss) income attributable to

Fannie Mae ................ $(23,087) $ 399 $11,379 $ (266) $(2,512) $(14,087)

(1) Represents activity related to the assets and liabilities of consolidated trusts in our condensed consolidated balance

sheets.

(2) Represents the elimination of intercompany transactions occurring between the three business segments and our

consolidated trusts, as well as other adjustments to reconcile to our condensed consolidated results.

(3) Represents the amortization expense of cost basis adjustments on securities that we own in our portfolio that on a

GAAP basis are eliminated.

(4) Represents the guaranty fees paid from consolidated trusts to the Single-Family and Multifamily segments. The

adjustment to guaranty fee income in the Eliminations/Adjustments column represents the elimination of the

amortization of deferred cash fees related to consolidated trusts that were re-established for segment reporting. Total

guaranty fee income is included in fee and other income in our condensed consolidated statements of operations and

comprehensive loss.

(5) Primarily represents the removal of realized gains and losses on sales of Fannie Mae MBS classified as

available-for-sale securities that are issued by consolidated trusts and retained in the Capital Markets portfolio. The

adjustment also includes the removal of securitization gains (losses) recognized in the Capital Markets segment

relating to portfolio securitization transactions that do not qualify for sale accounting under GAAP.

(6) Represents the removal of fair value adjustments on consolidated Fannie Mae MBS classified as trading that are

retained in the Capital Markets portfolio.

(7) Gains (losses) from partnership investments are included in other expenses in our condensed consolidated statements

of operations and comprehensive loss.

150

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
(8) Represents the adjustment from equity method accounting to consolidation accounting for partnership investments that

are consolidated in our condensed consolidated balance sheets.

11. Regulatory Capital Requirements

FHFA has announced that our existing statutory and FHFA-directed regulatory capital requirements will not be

binding during the conservatorship, and that FHFA will not issue quarterly capital classifications during the

conservatorship. We submit capital reports to FHFA during the conservatorship and FHFA monitors our capital

levels.

The following table displays our regulatory capital classification measures as of September 30, 2011 and

December 31, 2010.

September 30,

2011(1) December 31,2010(1)

As of

(Dollars in millions)

Core capital(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(110,943) $ (89,516)

Statutory minimum capital requirement(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,697 33,676

Deficit of core capital over statutory minimum capital requirement . . . . . . . . . . . . . . $(143,640) $(123,192)

(1) Amounts as of September 30, 2011 and December 31, 2010 represent estimates that we have submitted to FHFA.

(2) The sum of (a) the stated value of our outstanding common stock (common stock less treasury stock); (b) the stated

value of our outstanding non-cumulative perpetual preferred stock; (c) our paid-in capital; and (d) our retained

earnings (accumulated deficit). Core capital does not include: (a) accumulated other comprehensive income (loss) or

(b) senior preferred stock.

(3) Generally, the sum of (a) 2.50% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third

parties; (b) 0.45% of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and (c) up to

0.45% of other off-balance sheet obligations, which may be adjusted by the Director of FHFA under certain

circumstances (See 12 CFR 1750.4 for existing adjustments made by the Director).

12. Concentration of Credit Risk

Mortgage Seller/Servicers. Mortgage servicers collect mortgage and escrow payments from borrowers, pay

taxes and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required

activities on our behalf. Our business with mortgage servicers is concentrated. Our ten largest single-family

mortgage servicers, including their affiliates, serviced 75% of our single-family guaranty book of business as

of September 30, 2011, compared with 77% as of December 31, 2010. Our ten largest multifamily mortgage

servicers, including their affiliates, serviced 68% of our multifamily guaranty book of business as of

September 30, 2011, compared with 70% as of December 31, 2010.

If one of our principal mortgage seller/servicers fails to meet its obligations to us, it could increase our creditrelated expenses and credit losses, result in financial losses to us and have a material adverse effect on our

earnings, liquidity, financial condition and net worth.

Mortgage Insurers. Mortgage insurance “risk in force” represents our maximum potential loss recovery

under the applicable mortgage insurance policies. We had total mortgage insurance coverage risk in force of

$92.2 billion on the single-family mortgage loans in our guaranty book of business as of September 30, 2011,

which represented approximately 3% of our single-family guaranty book of business. Our primary and pool

mortgage insurance coverage risk in force on single-family mortgage loans in our guaranty book of business

represented $87.7 billion and $4.5 billion, respectively, as of September 30, 2011, compared with $91.2 billion

151

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
and $4.7 billion, respectively, as of December 31, 2010. Eight mortgage insurance companies provided over

99% of our mortgage insurance as of both September 30, 2011 and December 31, 2010.

Increases in mortgage insurance claims due to higher defaults and credit losses in recent periods have

adversely affected the financial results and financial condition of many mortgage insurers. During the three

month period ending September 30, 2011, we notified PMI Mortgage Insurance Co. (“PMI”) and Republic

Mortgage Insurance Company (“RMIC”), two of our mortgage insurer counterparties, that they were

suspended nationwide as approved mortgage insurers.

As reported by PMI, on October 20, 2011, PMI received from its regulator an order under which the regulator

now has full possession, management and control. The regulator is also seeking to place PMI into

receivership. Pursuant to the order, effective October 24, 2011, the regulator instituted a partial claim payment

plan whereby all valid claims under PMI mortgage guaranty insurance policies will be paid 50% in cash and

50% deferred as a policyholder claim. It is uncertain when, and if, PMI’s regulator will allow PMI to begin

paying its deferred policyholder claims and/or increase the amount of cash PMI pays on claims. On

October 12, 2011, RMIC voluntarily entered into an agreement with its regulator to discontinue writing or

assuming any new mortgage guaranty insurance business in all states.

As of November 7, 2011, four of our mortgage insurers (Triad, RMIC, PMI and Genworth Mortgage

Insurance Corporation) have publicly disclosed that they are either in run-off or, absent a waiver, estimate they

would not meet state regulatory capital requirements for their main writing entity as of September 30, 2011.

An additional two of our mortgage insurers (Mortgage Guaranty Insurance Corporation and Radian Guaranty,

Inc.) have disclosed that, in the absence of additional capital contributions to their writing entity, their capital

might fall below state regulatory capital requirements in the future. These six mortgage insurers provided a

combined $75.7 billion, or 82%, of our risk in force mortgage insurance coverage of our single-family

guaranty book of business as of September 30, 2011.

The current weakened financial condition of our mortgage insurer counterparties creates an increased risk that

these counterparties will fail to fulfill their obligations to reimburse us for claims under insurance policies. If

we determine that it is probable that we will not collect all of our claims from one or more of these mortgage

insurer counterparties, it could result in an increase in our loss reserves, which could adversely affect our

earnings, liquidity, financial condition and net worth.

As of September 30, 2011, our allowance for loan losses of $71.4 billion, allowance for accrued interest

receivable of $2.2 billion and reserve for guaranty losses of $916 million incorporated an estimated recovery

amount of approximately $12.7 billion from mortgage insurance related both to loans that are individually

measured for impairment and those that are collectively reserved. This amount is comprised of the contractual

recovery of approximately $15.1 billion as of September 30, 2011 and an adjustment of approximately

$2.4 billion which reduces the contractual recovery for our assessment of our mortgage insurer counterparties’

inability to fully pay those claims. As of December 31, 2010, our allowance for loan losses of $61.6 billion,

allowance for accrued interest receivable of $3.4 billion and reserve for guaranty losses of $323 million

incorporated an estimated recovery amount of approximately $16.4 billion from mortgage insurance related

both to loans that are individually measured for impairment and those that are collectively reserved. This

amount is comprised of the contractual recovery of approximately $17.5 billion as of December 31, 2010 and

an adjustment of approximately $1.2 billion, which reduces the contractual recovery for our assessment of our

mortgage insurer counterparties’ inability to fully pay those claims.

152

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
We had outstanding receivables of $3.7 billion recorded in “Other assets” in our condensed consolidated balance

sheets as of September 30, 2011 and $4.4 billion as of December 31, 2010 related to amounts claimed on insured,

defaulted loans that we have not yet received, of which $494 million as of September 30, 2011 and $648 million

as of December 31, 2010 was due from our mortgage seller/servicers. We assessed the total outstanding receivables

for collectibility, and they are recorded net of a valuation allowance of $589 million as of September 30, 2011 and

$317 million as of December 31, 2010. These mortgage insurance receivables are short-term in nature, having an

average duration of approximately six months, and the valuation allowance reduces our claim receivable to the

amount which is considered probable of collection as of September 30, 2011 and December 31, 2010.

We received proceeds under our primary and pool mortgage insurance policies for single-family loans of

$1.4 billion and $4.6 billion for the three and nine months ended September 30, 2011, respectively, and

$6.4 billion for the year ended December 31, 2010. We negotiated the cancellation and restructurings of some

of our mortgage insurance coverage in exchange for a fee. The cash fees received of $796 million for the year

ended December 31, 2010 are included in our total insurance proceeds amount; there were no such cash fees

received in the nine months ended September 30, 2011. These fees represented an acceleration of, and

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

insurers and were recorded as a reduction to our “Foreclosed property expense” in our condensed consolidated

statements of operations and comprehensive loss.

Financial Guarantors. We are the beneficiary of financial guarantees on non-agency securities held in our

investment portfolio and on non-agency securities that have been resecuritized to include a Fannie Mae

guaranty and sold to third parties. The following table displays the total unpaid principal balance of

guaranteed non-agency securities in our portfolio as of September 30, 2011, and December 31, 2010.

September 30, 2011 December 31, 2010

As of

(Dollars in millions)

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,356 $1,544

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,425 1,487

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,003 5,264

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324 347

Non mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 172

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,166 $8,814

With the exception of Ambac Assurance Corporation (“Ambac”), none of our financial guarantor

counterparties has failed to repay us for claims under guaranty contracts. Ambac provided coverage on

$3.4 billion, or 41%, of our total guarantees, as of September 30, 2011. We are also the beneficiary of

financial guarantees included in securities issued by Freddie Mac, the federal government and its agencies that

totaled $32.6 billion as of September 30, 2011 and $25.7 billion as of December 31, 2010. If a financial

guarantor fails to meet its obligations to us with respect to the securities for which we have obtained financial

guarantees, it could reduce the fair value of our mortgage-related securities and result in financial losses to us,

which could have a material adverse effect on our earnings, liquidity, financial condition and net worth.

We model our securities without assuming the benefit of financial guarantees. We then adjust results for those

external financial guarantees from guarantors that we determine are creditworthy, although we continue to

seek collection of any amounts due to us from all counterparties. As of September 30, 2011, when modeling

our securities for impairments we did not assume the benefit of external financial guarantees from any

counterparty.

153

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Lenders with Risk Sharing. We enter into risk sharing agreements with lenders pursuant to which the lenders

agree to bear all or some portion of the credit losses on the covered loans. Our maximum potential loss

recovery from lenders under these risk sharing agreements on single-family loans was $13.3 billion as of

September 30, 2011 and $15.6 billion as of December 31, 2010. As of September 30, 2011, 58% of our

maximum potential loss recovery on single-family loans was from three lenders. As of December 31, 2010,

56% of our maximum potential loss recovery on single-family loans was from three lenders. Our maximum

potential loss recovery from lenders under these risk sharing agreements on both DUS and non-DUS

multifamily loans was $31.6 billion as of September 30, 2011 and $30.3 billion as of December 31, 2010. As

of September 30, 2011 and December 31, 2010, 40% and 41%, respectively, of our maximum potential loss

recovery on multifamily loans was from three DUS lenders.

Custodial Depository Institutions. A total of $52.1 billion in deposits for single-family payments were

received and held by 286 institutions in the month of September 2011 and a total of $75.4 billion in deposits

for single-family payments were received and held by 289 institutions in the month of December 2010. Of

these total deposits, 93% as of September 30, 2011 and 92% as of December 31, 2010 were held by

institutions rated as investment grade by S&P, Moody’s and Fitch. Our ten largest custodial depository

institutions held 93% of these deposits as of both September 30, 2011 and December 31, 2010. In the month

of September 2011, approximately $3.6 billion or 7% of our total deposits for single-family payments received

and held by these institutions was in excess of the deposit insurance protection limit compared with

approximately $6.2 billion or 8% in the month of December 2010. These amounts can vary as they are

calculated based on individual payments of mortgage borrowers and we must estimate which borrowers are

paying their regular principal and interest payments and other types of payments, such as prepayments from

refinancing or sales.

13. Fair Value

We use fair value measurements for the initial recording of certain assets and liabilities and periodic

remeasurement of certain assets and liabilities on a recurring or nonrecurring basis.

Fair Value Measurement

Fair value measurement guidance defines fair value, establishes a framework for measuring fair value and

expands disclosures around fair value measurements. This guidance applies whenever other accounting

standards require or permit assets or liabilities to be measured at fair value. The guidance establishes a threelevel fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value.

The fair value hierarchy gives the highest priority, Level 1, to measurements based on unadjusted quoted

prices in active markets for identical assets or liabilities. The next highest priority, Level 2, is given to

measurements of assets and liabilities based on limited observable inputs or observable inputs for similar

assets and liabilities. The lowest priority, Level 3, is given to measurements based on unobservable inputs.

154

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Recurring Changes in Fair Value

The following tables display our assets and liabilities measured in our condensed consolidated balance sheets

at fair value on a recurring basis subsequent to initial recognition, including instruments for which we have

elected the fair value option as of September 30, 2011 and December 31, 2010. Specifically, total assets

measured at fair value on a recurring basis and classified as Level 3 were $36.2 billion, or 1% of “Total

assets,” and $39.0 billion, or 1% of “Total assets,” in our condensed consolidated balance sheets as of

September 30, 2011 and December 31, 2010, respectively.

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Netting

Adjustment(1)

Estimated

Fair Value

Fair Value Measurements as of September 30, 2011

(Dollars in millions)

Assets:

Cash equivalents(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,150 $ 5,000 $ — $ — $ 6,150

Trading securities:

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 5,668 1,861 — 7,529

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,866 — — 2,866

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 261 36 — 297

Alt-A private-label securities . . . . . . . . . . . . . . . . . . — 1,242 212 — 1,454

Subprime private-label securities . . . . . . . . . . . . . . . — — 1,318 — 1,318

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 10,600 — — 10,600

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . — — 718 — 718

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 147 — — 147

Non-mortgage-related securities:

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . 40,755 — — — 40,755

Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . — 2,465 — — 2,465

Total trading securities . . . . . . . . . . . . . . . . . . . . . . . . . 40,755 23,249 4,145 — 68,149

Available-for-sale securities:

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 18,441 797 — 19,238

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 13,737 12 — 13,749

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 939 — — 939

Alt-A private-label securities . . . . . . . . . . . . . . . . . . — 5,662 6,625 — 12,287

Subprime private-label securities . . . . . . . . . . . . . . . — — 7,887 — 7,887

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 14,390 — — 14,390

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . — 8 10,599 — 10,607

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 14 3,599 — 3,613

Total available-for-sale securities . . . . . . . . . . . . . . . . . . — 53,191 29,519 — 82,710

Mortgage loans of consolidated trusts . . . . . . . . . . . . . . . — 1,077 2,284 — 3,361

Other assets:

Risk management derivatives:

Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 8,657 156 — 8,813

Swaptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 6,898 — — 6,898

Interest rate caps . . . . . . . . . . . . . . . . . . . . . . . . . . — 2 — — 2

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 — 50 — 52

Netting adjustment . . . . . . . . . . . . . . . . . . . . . . . . . — — — (15,539) (15,539)

Mortgage commitment derivatives . . . . . . . . . . . . . . . . — 476 21 — 497

Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 16,033 227 (15,539) 723

Total assets at fair value . . . . . . . . . . . . . . . . . . . . . $41,907 $98,550 $36,175 $(15,539) $161,093

155

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Netting

Adjustment(1)

Estimated

Fair Value

Fair Value Measurements as of September 30, 2011

(Dollars in millions)

Liabilities:

Long-term debt:

Of Fannie Mae:

Senior fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ 439 $ — $ — $ 439

Senior floating. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 406 — 406

Total of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 439 406 — 845

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 3,112 728 — 3,840

Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 3,551 1,134 — 4,685

Other liabilities:

Risk management derivatives:

Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 18,476 160 — 18,636

Swaptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 3,311 — — 3,311

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 — — — 4

Netting adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (18,372) (18,372)

Mortgage commitment derivatives . . . . . . . . . . . . . . . . . . . . . — 681 13 — 694

Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 22,468 173 (18,372) 4,273

Total liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . $ 4 $26,019 $1,307 $(18,372) $ 8,958

156

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Netting

Adjustment(1)

Estimated

Fair Value

Fair Value Measurements as of December 31, 2010

(Dollars in millions)

Assets:

Cash equivalents(2) . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,049 $ 2,300 $ — $ — $ 6,349

Trading securities:

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . — 5,196 2,202 — 7,398

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,326 — — 1,326

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . — 590 — — 590

Alt-A private-label securities . . . . . . . . . . . . . . — 1,663 20 — 1,683

Subprime private-label securities . . . . . . . . . . . . — — 1,581 — 1,581

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 10,764 — — 10,764

Mortgage revenue bonds . . . . . . . . . . . . . . . . . — — 609 — 609

Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 152 — 152

Non-mortgage-related securities:

U.S. Treasury securities . . . . . . . . . . . . . . . . . . 27,432 — — — 27,432

Asset-backed securities . . . . . . . . . . . . . . . . . . — 5,309 12 — 5,321

Total trading securities . . . . . . . . . . . . . . . . . . . . . . 27,432 24,848 4,576 — 56,856

Available-for-sale securities:

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . — 22,714 114 — 22,828

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . — 16,993 3 — 16,996

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,039 — — 1,039

Alt-A private-label securities . . . . . . . . . . . . . . — 6,841 7,049 — 13,890

Subprime private-label securities . . . . . . . . . . . . — — 9,932 — 9,932

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 14,844 — — 14,844

Mortgage revenue bonds . . . . . . . . . . . . . . . . . — 11 11,030 — 11,041

Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 16 3,806 — 3,822

Total available-for-sale securities . . . . . . . . . . . . . . . — 62,458 31,934 — 94,392

Mortgage loans of consolidated trusts. . . . . . . . . . . . — 755 2,207 — 2,962

Other assets:

Risk management derivatives:

Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 9,623 163 — 9,786

Swaptions . . . . . . . . . . . . . . . . . . . . . . . . . . . — 5,474 — — 5,474

Interest rate caps . . . . . . . . . . . . . . . . . . . . . . . — 24 — — 24

Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 — 72 — 75

Netting adjustment . . . . . . . . . . . . . . . . . . . . . — — — (15,175) (15,175)

Mortgage commitment derivatives . . . . . . . . . . . . — 941 12 — 953

Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 3 16,062 247 (15,175) 1,137

Total assets at fair value . . . . . . . . . . . . . . . . . $31,484 $106,423 $38,964 $(15,175) $161,696

157

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Netting

Adjustment(1)

Estimated

Fair Value

Fair Value Measurements as of December 31, 2010

(Dollars in millions)

Liabilities:

Long-term debt:

Of Fannie Mae:

Senior fixed . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ 472 $ — $ — $ 472

Senior floating . . . . . . . . . . . . . . . . . . . . . . . . — — 421 — 421

Total of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . — 472 421 — 893

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . — 1,644 627 — 2,271

Total long-term debt. . . . . . . . . . . . . . . . . . . . . . . . — 2,116 1,048 — 3,164

Other liabilities:

Risk management derivatives:

Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 16,436 113 — 16,549

Swaptions . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,446 — — 2,446

Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 — — — 1

Netting adjustment . . . . . . . . . . . . . . . . . . . . . — — — (18,023) (18,023)

Mortgage commitment derivatives . . . . . . . . . . . . — 712 30 — 742

Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . 1 19,594 143 (18,023) 1,715

Total liabilities at fair value . . . . . . . . . . . . . . . $ 1 $21,710 $1,191 $(18,023) $ 4,879

(1) Derivative contracts are reported on a gross basis by level. The netting adjustment represents the effect of the legal

right to offset under legally enforceable master netting agreements to settle with the same counterparty on a net basis,

as well as cash collateral.

(2) Cash equivalents is comprised of U.S. Treasuries that are classified as Level 1 as well as money market funds and

certificate of deposits that are classified as Level 2.

158

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
The following tables display a reconciliation of all assets and liabilities measured at fair value on a recurring

basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2011

and 2010. The tables also display gains and losses due to changes in fair value, including both realized and

unrealized gains and losses, recognized in our condensed consolidated statements of operations and

comprehensive loss for Level 3 assets and liabilities for the three and nine months ended September 30, 2011

and 2010. When assets and liabilities are transferred between levels, we recognize the transfer as of the end of

the period.

Balance,

July 1,

2011

Included

in Net

Loss

Included in

Other

Comprehensive

(Loss) Income Purchases(1) Sales(1) Issuances(2) Settlements(2)

Transfers

out of

Level 3(3)

Transfers

into

Level 3(3)

Balance,

September 30,

2011

Net Unrealized

Gains (Losses)

Included

in Net Loss

Related to

Assets and

Liabilities Still

Held as of

September 30,

2011(4)

Total Gains or (Losses)

(Realized/Unrealized)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

For the Three Months Ended September 30, 2011

(Dollars in millions)

Trading securities:

Mortgage-related:

Fannie Mae . . . . . . . . . . . . $ 1,679 $ 19 $ — $322 $ (3) $— $(115) $ (41) $ — $ 1,861 $ 41

Ginnie Mae . . . . . . . . . . . . — — — — — — — — 36 36 —

Alt-A private-label securities . . . 126 7 — — — — (13) (73) 165 212 10

Subprime private-label

securities . . . . . . . . . . . . 1,459 (96) — — — — (45) — — 1,318 (95)

Mortgage revenue bonds . . . . . 616 105 — — — — (3) — — 718 106

Other . . . . . . . . . . . . . . . . 154 (4) — — — — (3) (147) — — —

Total trading securities . . . . . . . . . $ 4,034 $ 31 $ — $322 $ (3) $— $(179) $(261) $ 201 $ 4,145 $ 62

Available-for-sale securities:

Mortgage-related:

Fannie Mae . . . . . . . . . . . . $ 635 $ (1) $ 16 $853 $(344) $— $ (9) $(374) $ 21 $ 797 $ —

Freddie Mac . . . . . . . . . . . . 12 — — — — — (1) — 1 12 —

Alt-A private-label securities . . . 6,652 (20) (15) — — — (250) (431) 689 6,625 —

Subprime private-label

securities . . . . . . . . . . . . 8,909 148 (484) — (363) — (323) — — 7,887 —

Mortgage revenue bonds . . . . . 10,464 (5) 429 — (1) — (288) — — 10,599 —

Other . . . . . . . . . . . . . . . . 3,707 (10) 9 — — — (107) — — 3,599 —

Total available-for-sale securities . . . . $30,379 $112 $ (45) $853 $(708) $— $(978) $(805) $ 711 $29,519 $ —

Mortgage loans of consolidated

trusts . . . . . . . . . . . . . . . . . $ 2,365 $ 8 $ — $ 45 $ — $— $(101) $ (56) $ 23 $ 2,284 $ 6

Net derivatives . . . . . . . . . . . . . 79 118 — — — (1) (72) (70) — 54 33

Long-term debt:

Of Fannie Mae:

Senior floating . . . . . . . . . . . $ (402) $ (74) $ — $ — $ — $— $ 70 $ — $ — $ (406) $ (74)

Of consolidated trusts . . . . . . . . (646) 1 — — 4 (4) 18 35 (136) (728) 6

Total long-term debt . . . . . . . . . . $ (1,048) $ (73) $ — $ — $ 4 $ (4) $ 88 $ 35 $(136) $ (1,134) $ (68)

159

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Balance,

December 31,

2010

Included

in Net

Loss

Included in

Other

Comprehensive

(Loss) Income Purchases(1) Sales(1) Issuances(2) Settlements(2)

Transfers

out of

Level 3(3)

Transfers

into

Level 3(3)

Balance,

September 30,

2011

Net Unrealized

Gains (Losses)

Included in Net

Loss Related to

Assets and

Liabilities Still

Held as of

September 30,

2011(4)

Total Gains or (Losses)

(Realized/Unrealized)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

For the Nine Months Ended September 30, 2011

(Dollars in millions)

Trading securities:

Mortgage-related:

Fannie Mae ..... $ 2,202 $ 7 $ — $ 446 $ (18) $ — $ (344) $ (432) $ — $ 1,861 $ 32

Ginnie Mae . . . . . — — — — — — — — 36 36 —

Alt-A private-label

securities . . . . . 20 8 — — — — (14) (73) 271 212 12

Subprime privatelabel securities. . 1,581 (126) — — — — (137) — — 1,318 (126)

Mortgage revenue

bonds . . . . . . . 609 126 — — — — (17) — — 718 129

Other . . . . . . . . . 152 1 — — — — (6) (147) — — —

Non-mortgagerelated:

Asset-backed

securities . . . . . 12 — — — — — (5) (9) 2 — —

Total trading

securities ........ $ 4,576 $ 16 $ — $ 446 $ (18) $ — $ (523) $ (661) $ 309 $ 4,145 $ 47

Available-for-sale

securities:

Mortgage-related:

Fannie Mae . . . . . $ 114 $ (1) $ 28 $1,742 $(383) $ — $ (11) $ (843) $ 151 $ 797 $ —

Freddie Mac . . . . 3 — — — — — (1) — 10 12 —

Alt-A private-label

securities ..... 7,049 (19) 63 — — — (725) (1,495) 1,752 6,625 —

Subprime privatelabel securities. . 9,932 408 (1,089) — (363) — (1,001) — — 7,887 —

Mortgage revenue

bonds ....... 11,030 (8) 723 — (107) — (1,039) — — 10,599 —

Other ......... 3,806 (7) 120 — — — (320) — — 3,599 —

Total available-for-sale

securities ........ $31,934 $ 373 $ (155) $1,742 $(853) $ — $(3,097) $(2,338) $1,913 $29,519 $ —

Mortgage loans of

consolidated trusts . . $ 2,207 $ 38 $ — $ 102 $ — $ — $ (251) $ (93) $ 281 $ 2,284 $ 28

Net derivatives . . . . . . 104 123 — — — (2) (101) (70) — 54 49

Long-term debt:

Of Fannie Mae:

Senior floating . . . $ (421) $ (88) $ — $ — $ — $ — $ 103 $ — $ — $ (406) $ (89)

Of consolidated

trusts ......... (627) (28) — — 4 (44) 66 112 (211) (728) (11)

Total long-term debt . . . $ (1,048) $(116) $ — $ — $ 4 $(44) $ 169 $ 112 $ (211) $ (1,134) $(100)

160

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Balance,

July 1,

2010

Included

in Net

Loss

Included

in Other

Comprehensive

(Loss) Income

Purchases,

Sales,

Issuances, and

Settlements, Net

Transfers

out of

Level 3(3)

Transfers

into

Level 3(3)

Balance,

September 30,

2010

Net Unrealized

Gains (Losses)

Included

in Net Loss

Related to

Assets and

Liabilities Still

Held as of

September 30,

2010(4)

Total Gains or (Losses)

(Realized/Unrealized)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

For the Three Months Ended September 30, 2010

(Dollars in millions)

Trading securities:

Mortgage-related:

Fannie Mae . . . . . . . . . . . . . . . . . . . $ 58 $ (7) $ — $ 80 $ (12) $1,925 $ 2,044 $ (1)

Freddie Mac .................. 4 — — — — — 4 —

Ginnie Mae ................... — — — 1 — — 1 —

Alt-A private-label securities . . . . . . . . 119 174 — (11) (24) 216 474 176

Subprime private-label securities ..... 1,645 (1) — (53) — — 1,591 (1)

Mortgage revenue bonds. . . . . . . . . . . 650 28 — — — — 678 30

Other. . . . . . . . . . . . . . . . . . . . . . . 160 (2) — (3) — — 155 (2)

Non-mortgage-related:

Asset-backed securities . . . . . . . . . . . 24 1 — (10) — — 15 —

Total trading securities ............... $ 2,660 $ 193 $ — $ 4 $ (36) $2,141 $ 4,962 $202

Available-for-sale securities:

Mortgage-related:

Fannie Mae . . . . . . . . . . . . . . . . . . . $ 53 $ — $ — $ 65 $ (51) $ 11 $ 78 $ —

Freddie Mac . . . . . . . . . . . . . . . . . . 21 — — (14) — — 7 —

Ginnie Mae . . . . . . . . . . . . . . . . . . . 125 — (1) — — — 124 —

Alt-A private-label securities ........ 7,777 (59) 264 (259) (490) 1,878 9,111 —

Subprime private-label securities ..... 10,255 (96) 183 (402) — — 9,940 —

Mortgage revenue bonds........... 12,428 3 172 (369) (2) — 12,232 —

Other....................... 3,890 2 103 (119) — — 3,876 —

Total available-for-sale securities ........ $34,549 $(150) $721 $(1,098) $(543) $1,889 $35,368 $ —

Mortgage loans of consolidated trusts . . . . . $ — $ (9) $ — $ 62 $ — $ — $ 53 $ (9)

Net derivatives . . . . . . . . . . . . . . . . . . . . 226 65 — (69) — — 222 21

Guaranty assets and buy-ups . . . . . . . . . . . 15 (1) — 3 — — 17 (2)

Long-term debt:

Of Fannie Mae:

Senior floating ................. $ (585) $ (37) $ — $ 155 $ — $ — $ (467) $ (38)

Of consolidated trusts .............. (105) 8 — 2 48 (22) (69) 4

Total long-term debt ................ $ (690) $ (29) $ — $ 157 $ 48 $ (22) $ (536) $ (34)

161

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Balance,

December 31,

2009

Impact of

New

Accounting

Standards

Included

in Net

Loss

Included

in Other

Comprehensive

(Loss) Income

Purchases,

Sales,

Issuances,

and

Settlements,

Net

Transfers

out of

Level 3(3)

Transfers

into

Level 3(3)

Balance,

September 30,

2010

Net Unrealized

Gains (Losses)

Included in Net

Loss Related to

Assets and

Liabilities Still

Held as of

September 30,

2010(4)

Total Gains or (Losses)

(Realized/Unrealized)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

For the Nine Months Ended September 30, 2010

(Dollars in millions)

Trading securities:

Mortgage-related:

Fannie Mae ........... $ 5,656 $ (2) $ (3) $ — $ (162) $(5,375) $1,930 $ 2,044 $ (3)

Freddie Mac .......... — — — — — — 4 4 —

Ginnie Mae ........... — — — — 1 — — 1 —

Alt-A private-label

securities . . . . . . . . . . . 564 62 206 — (59) (613) 314 474 186

Subprime private-label

securities ........... 1,780 — (1) — (188) — — 1,591 (1)

Mortgage revenue bonds . . . 600 — 127 — (49) — — 678 126

Other. . . . . . . . . . . . . . . 154 — 6 — (5) — — 155 6

Non-mortgage-related:

Asset-backed securities . . . 107 — 1 — (59) (47) 13 15 2

Total trading securities ....... $ 8,861 $ 60 $ 336 $ — $ (521) $(6,035) $2,261 $ 4,962 $316

Available-for-sale securities:

Mortgage-related:

Fannie Mae . . . . . . . . . . . $ 596 $ (203) $ (1) $ 4 $ 147 $ (514) $ 49 $ 78 $ —

Freddie Mac . . . . . . . . . . 27 — — (1) (25) — 6 7 —

Ginnie Mae . . . . . . . . . . . 123 — — 2 (1) — — 124 —

Alt-A private-label

securities ........... 8,312 471 (40) 998 (934) (2,746) 3,050 9,111 —

Subprime private-label

securities ........... 10,746 (118) (106) 768 (1,350) — — 9,940 —

Mortgage revenue bonds . . . 12,820 21 2 675 (1,284) (2) — 12,232 —

Other............... 3,530 366 (4) 357 (373) — — 3,876 —

Total available-for-sale securities . . $36,154 $ 537 $(149) $2,803 $(3,820) $(3,262) $3,105 $35,368 $ —

Mortgage loans of consolidated

trusts . . . . . . . . . . . . . . . . $ — $ — $ (9) $ — $ 62 $ — $ — $ 53 $ (9)

Net derivatives . . . . . . . . . . . . 123 — 232 — (128) — (5) 222 85

Guaranty assets and buy-ups . . . 2,577 (2,568) 2 1 5 — — 17 2

Long-term debt:

Of Fannie Mae:

Senior floating ......... $ (601) $ — $ (26) $ — $ 160 $ — $ — $ (467) $ (21)

Of consolidated trusts ...... — (77) 15 — (36) 59 (30) (69) 11

Total long-term debt ........ $ (601) $ (77) $ (11) $ — $ 124 $ 59 $ (30) $ (536) $ (10)

(1) Purchases and sales include activity related to the consolidation and deconsolidation of assets of securitization trusts.

(2) Issuances and settlements include activity related to the consolidation and deconsolidation of liabilities of

securitization trusts.

(3) Transfers out of Level 3 consisted primarily of Fannie Mae guaranteed mortgage-related securities and private-label

mortgage-related securities backed by Alt-A loans. Prices for these securities were obtained from multiple third-party

vendors supported by market observable inputs. Transfers into Level 3 consisted primarily of Fannie Mae guaranteed

162

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
mortgage-related securities and private-label mortgage-related securities backed by Alt-A loans. Prices for these

securities are based on inputs from a single source or inputs that were not readily observable.

(4) Amount represents temporary changes in fair value. Amortization, accretion and other-than-temporary impairments are

not considered unrealized and are not included in this amount.

The following tables display realized and unrealized gains and losses included in our condensed consolidated

statements of operations and comprehensive loss for the three and nine months ended September 30, 2011 and

2010, for our Level 3 assets and liabilities measured in our condensed consolidated balance sheets at fair value

on a recurring basis.

Interest

Income

Fair Value

(Losses)

Gains, net

Net

Other-thanTemporary

Impairments Other Total

For the Three Months Ended September 30, 2011

(Dollars in millions)

Total realized and unrealized gains (losses) included in

net loss .................................... $158 $98 $(62) $ 2 $196

Net unrealized (losses) gains related to Level 3 assets and

liabilities still held as of September 30, 2011 . . . . . . . . $ (1) $34 $ — $— $ 33

Interest

Income

Fair Value

(Losses)

Gains, net

Net

Other-thanTemporary

Impairments Other Total

For the Nine Months Ended September 30, 2011

(Dollars in millions)

Total realized and unrealized gains (losses) included in

net loss .................................... $428 $82 $(85) $ 9 $434

Net unrealized (losses) gains related to Level 3 assets and

liabilities still held as of September 30, 2011 . . . . . . . . $ (2) $26 $ — $— $ 24

Interest

Income

Fair Value

(Losses)

Gains, net

Net

Other-thanTemporaryImpairments Other Total

For the Three Months Ended September 30, 2010

(Dollars in millions)

Total realized and unrealized gains (losses) included in

net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70 $222 $(235) $12 $ 69

Net unrealized gains (losses) related to Level 3 assets and

liabilities still held as of September 30, 2010 . . . . . . . . $— $180 $ — $ (2) $178

Interest

Income

Fair Value

(Losses)

Gains, net

Net

Other-thanTemporaryImpairments Other Total

For the Nine Months Ended September 30, 2010

(Dollars in millions)

Total realized and unrealized gains (losses) included in

net loss .................................... $282 $547 $(454) $26 $401

Net unrealized gains related to Level 3 assets and

liabilities still held as of September 30, 2010 ........ $ — $382 $ — $ 2 $384

163

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable

inputs. The following is a description of the valuation techniques we use for assets and liabilities measured at

fair value on a recurring basis, as well as our basis for classifying these assets and liabilities as Level 1,

Level 2 or Level 3. These valuation techniques are also used to estimate the fair value of financial instruments

not carried at fair value but disclosed as part of the fair value of financial instruments.

Cash Equivalents, Trading Securities and Available-for-Sale Securities—These securities are recorded in our

condensed consolidated balance sheets at fair value on a recurring basis. Fair value is measured using quoted

market prices in active markets for identical assets, when available. Securities, such as U.S. Treasuries, whose

value is based on quoted market prices in active markets for identical assets are classified as Level 1. If

quoted market prices in active markets for identical assets are not available, we use prices provided by up to

four third-party pricing services that are calibrated to the quoted market prices in active markets for similar

securities, and assets valued in this manner are classified as Level 2. In the absence of prices provided by

third-party pricing services supported by observable market data, fair values are estimated using quoted prices

of securities with similar characteristics or discounted cash flow models that use inputs such as spread,

prepayment speed, yield, and loss severity based on market assumptions where available. Such instruments are

generally classified as Level 2. Where there is limited activity or less transparency around inputs to the

valuation, securities are classified as Level 3.

Mortgage Loans Held for Investment—The majority of HFI performing loans and nonperforming loans that

are not individually impaired are reported in our condensed consolidated balance sheets at the principal

amount outstanding, net of cost basis adjustments and an allowance for loan losses. We elected the fair value

option for certain loans containing embedded derivatives that would otherwise require bifurcation and

consolidated loans of senior-subordinate trust structures, which are recorded in our condensed consolidated

balance sheets at fair value on a recurring basis.

Fair value of performing loans represents an estimate of the prices we would receive if we were to securitize

those loans and is determined based on comparisons to Fannie Mae MBS with similar characteristics, either on

a pool or loan level. We use the observable market values of our Fannie Mae MBS determined from thirdparty pricing services and other observable market data as a base value, from which we add or subtract the

fair value of the associated guaranty asset, guaranty obligation and master servicing arrangement. We classify

these valuations primarily within Level 2 of the valuation hierarchy given that the market values of our Fannie

Mae MBS are calibrated to the quoted market prices in active markets for similar securities. To the extent that

significant inputs are not observable or determined by extrapolation of observable points, the loans are

classified within Level 3. Certain loans that do not qualify for Fannie Mae MBS securitization are valued

using market-based data including, for example, credit spreads, severities and prepayment speeds for similar

loans, through third-party pricing services or through a model approach incorporating both interest rate and

credit risk simulating a loan sale via a synthetic structure.

Fair value of single-family nonperforming loans represents an estimate of the prices we would receive if we

were to sell these loans in the nonperforming whole-loan market. We calculate the fair value of nonperforming

loans based on assumptions about key factors, including loan performance, collateral value, foreclosure related

expenses, disposition timeline, and mortgage insurance repayment. Using these assumptions, along with

indicative bids for a representative sample of nonperforming loans, we compute a market calibrated fair value.

The bids on sample loans are obtained from multiple active market participants. Fair value for loans that are

four or more months delinquent, in an open modification period, or in a closed modification and that have

performed for nine or fewer months, is estimated directly from a model calibrated to these indicative bids. Fair

value for loans that are one to three months delinquent is estimated by an interpolation method using three

164

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
inputs: (1) the fair value estimate as a performing loan; (2) the fair value estimate as a nonperforming loan;

and (3) the delinquency transition rate corresponding to the loan’s current delinquency status.

Fair value of a portion of our single-family nonperforming loans is measured using the value of the underlying

collateral. These valuations leverage our proprietary distressed home price model. The model assigns a value

using comparable transaction data. In determining what comparables to use in the calculations, the model

measures three key characteristics relative to the target property: (1) distance from target property, (2) time of

the transaction and (3) comparability of the nondistressed value. A portion of the nonperforming loans that are

impaired is measured at fair value in our condensed consolidated balance sheets on a nonrecurring basis.

These loans are classified within Level 3 of the valuation hierarchy because significant inputs are

unobservable.

Fair value of multifamily nonperforming loans is determined by external third-party valuations when available.

If third-party valuations are unavailable, we determine the value of the collateral based on a derived property

value estimation method using current net operating income of the property and capitalization rates.

Derivatives Assets and Liabilities (collectively “derivatives”)—Derivatives are recorded in our condensed

consolidated balance sheets at fair value on a recurring basis. The valuation process for the majority of our

risk management derivatives uses observable market data provided by third-party sources, resulting in Level 2

classification. Interest rate swaps are valued by referencing yield curves derived from observable interest rates

and spreads to project and discount swap cash flows to present value. Option-based derivatives use a model

that projects the probability of various levels of interest rates by referencing swaption and caplet volatilities

provided by market makers/dealers. The projected cash flows of the underlying swaps of these option-based

derivatives are discounted to present value using yield curves derived from observable interest rates and

spreads. Exchange-traded futures are valued using market quoted prices, resulting in Level 1 classification.

Certain highly complex structured derivatives use only a single external source of price information due to

lack of transparency in the market and may be modeled using observable interest rates and volatility levels as

well as significant assumptions, resulting in Level 3 classification. Mortgage commitment derivatives use

observable market data, quotes and actual transaction price levels adjusted for market movement, and are

typically classified as Level 2. Adjustments for market movement based on internal model results that cannot

be corroborated by observable market data are classified as Level 3.

Guaranty Assets and Buy-ups—Guaranty assets related to our portfolio securitizations are recorded in our

condensed consolidated balance sheets at fair value on a recurring basis and are classified within Level 3 of

the valuation hierarchy. Guaranty assets in lender swap transactions are recorded in our condensed

consolidated balance sheets at the lower of cost or fair value. These assets, which are measured at fair value

on a nonrecurring basis, are classified within Level 3 of the fair value hierarchy.

We estimate the fair value of guaranty assets based on the present value of expected future cash flows of the

underlying mortgage assets using management’s best estimate of certain key assumptions, which include

prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. These cash

flows are projected using proprietary prepayment, interest rate and credit risk models. Because guaranty assets

are like an interest-only income stream, the projected cash flows from our guaranty assets are discounted using

one-month LIBOR plus the option-adjusted spread (“OAS”) for interest-only trust securities. The interest-only

OAS is calibrated using prices of a representative sample of interest-only trust securities. We believe the

remitted fee income is less liquid than interest-only trust securities and more like an excess servicing strip. We

take a further haircut of the present value for liquidity considerations. This discount is based on market quotes

from dealers.

165

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
The fair value of the guaranty assets includes the fair value of any associated buy-ups, which is estimated in

the same manner as guaranty assets but is recorded separately as a component of “Other assets” in our

condensed consolidated balance sheets. While the fair value of the guaranty assets reflects all guaranty

arrangements, the carrying value primarily reflects only those arrangements entered into subsequent to our

adoption of the accounting standard on guarantor’s accounting and disclosure requirements for guarantees.

Debt—The majority of debt of Fannie Mae is recorded in our condensed consolidated balance sheets at the

principal amount outstanding, net of cost basis adjustments. We elected the fair value option for certain

structured debt instruments, which are recorded in our condensed consolidated balance sheets at fair value on

a recurring basis.

We use third-party pricing services that reference observable market data such as interest rates and spreads to

measure the fair value of debt, and thus classify that debt as Level 2. When third-party pricing is not

available, we use a discounted cash flow approach based on a yield curve derived from market prices observed

for Fannie Mae Benchmark Notes and adjusted to reflect fair values at the offer side of the market.

For structured debt instruments that are not valued by third-party pricing services, cash flows are evaluated

taking into consideration any structured derivatives through which we have swapped out of the structured

features of the notes. The resulting cash flows are discounted to present value using a yield curve derived from

market prices observed for Fannie Mae Benchmark Notes and adjusted to reflect fair values at the offer side of

the market. Market swaption volatilities are also referenced for the valuation of callable structured debt

instruments. Given that the derivatives considered in the valuations of these structured debt instruments are

classified as Level 3, the valuations of the structured debt instruments result in a Level 3 classification.

Consolidated MBS debt is traded in the market as MBS assets. Accordingly, we estimate the fair value of our

consolidated MBS debt using quoted market prices in active markets for similar liabilities when traded as

assets. The valuation methodology and inputs used in estimating the fair value of MBS assets are described

under “Cash Equivalents, Trading Securities and Available-for-Sale Securities.” Certain consolidated MBS debt

with embedded derivatives is recorded in our condensed consolidated balance sheets at fair value on a

recurring basis.

166

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Nonrecurring Changes in Fair Value

The following tables display assets and liabilities measured in our condensed consolidated balance sheets at

fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis

but are subject to fair value adjustments in certain circumstances (for example, when we evaluate for

impairment), and the gains or losses recognized for these assets and liabilities for the three and nine months

ended September 30, 2011 and 2010 as a result of fair value measurements.

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Estimated

Fair

Value

Total

Losses

Total

Losses

For the

Three Months

Ended

September 30, 2011

For the

Nine Months

Ended

September 30, 2011

Fair Value Measurements

For the Nine Months Ended September 30, 2011

(Dollars in millions)

Assets:

Mortgage loans held for sale, at lower

of cost or fair value . . . . . . . . . . . $— $ 2 $ 204 $ 206(1) $ (3) $ (16)

Single-family mortgage loans held for

investment, at amortized cost:

Of Fannie Mae ............ — — 40,280 40,280(2) (1,045) (2,125)

Of consolidated trusts . . . . . . . . — — 885 885(2) (33) (131)

Multifamily mortgage loans held for

investment, at amortized cost:

Of Fannie Mae ............ — — 1,708 1,708(2) (183) (291)

Acquired property, net:

Single-family . . . ............ — — 17,642 17,642(3) (635) (2,147)

Multifamily . . . . . . . . . . . . . . . . — — 315 315(3) (32) (81)

Other assets ................. — — 1,138 1,138(4) (29) (94)

Total assets at fair value . . . . . . . . $— $ 2 $62,172 $62,174 $(1,960) $(4,885)

167

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Estimated

Fair

Value

Total (Losses)

Gains

Total

Losses

For the

Three Months

Ended

September 30, 2010

For the

Nine Months

Ended

September 30, 2010

Fair Value Measurements

For the Nine Months Ended September 30, 2010

(Dollars in millions)

Assets:

Mortgage loans held for sale, at lower

of cost or fair value . . . . . . . . . . . $— $6,884 $ 550 $ 7,434(1)(5) $ (1) $ (91)(5)

Single-family mortgage loans held for

investment, at amortized cost:

Of Fannie Mae ............ — — 27,329 27,329(2) (408) (1,216)

Of consolidated trusts . ....... — — 1,039 1,039(2) (79) (182)

Multifamily mortgage loans held for

investment, at amortized cost:

Of Fannie Mae ............ — — 1,132 1,132(2) 95 (142)

Acquired property, net:

Single-family . . . ............ — — 15,546 15,546(3) (768) (1,772)

Multifamily . . . . . . . . . . . . . . . . — — 196 196(3) (5) (37)

Other Assets:

Guaranty assets. . . . . . . . . . . . . . — — 28 28 (2) (6)

Partnership investments . . . . . . . . — — 109 109 (15) (104)

Other assets . . . . . . . . . . . . . . . . — — 51 51(4) (8) (8)

Total assets at fair value . . . . . . . . $— $6,884 $45,980 $52,864 $(1,191) $(3,558)

(1) Includes $72 million and $7.1 billion of mortgage loans held for sale that were sold, deconsolidated, retained as a

mortgage-related security or redesignated to mortgage loans held for investment as of September 30, 2011 and 2010,

respectively.

(2) Includes $5.7 billion and $1.6 billion of mortgage loans held for investment that were liquidated or transferred to

foreclosed properties as of September 30, 2011 and 2010, respectively.

(3) Includes $11.8 billion and $7.2 billion of acquired properties that were sold or transferred as of September 30, 2011

and 2010, respectively.

(4) Includes $285 million and $4 million of other assets that were sold or transferred as of September 30, 2011 and 2010,

respectively.

(5) Includes $7.1 billion of estimated fair value and $68 million in losses due to the adoption of the new accounting

standards.

The following is a description of the fair valuation techniques we use for assets and liabilities measured at fair

value on a nonrecurring basis under the accounting standard for fair value measurements as well as our basis

for classifying these assets and liabilities as Level 1, Level 2 or Level 3. We also use these valuation

techniques to estimate the fair value of financial instruments not carried at fair value but disclosed as part of

the fair value of financial instruments.

Mortgage Loans Held for Sale—Loans are reported at the lower of cost or fair value in our condensed

consolidated balance sheets. The valuation methodology and inputs used in estimating the fair value of HFS

loans are described under “Mortgage Loans Held for Investment” and these loans are classified as Level 2 to

168

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
the extent that significant inputs are observable. To the extent that significant inputs are unobservable or

determined by extrapolation of observable points, the loans are classified within Level 3.

Acquired Property, Net and Other Assets—Acquired property, net mainly represents foreclosed property

received in full satisfaction of a loan net of a valuation allowance. Acquired property is initially recorded in

our condensed consolidated balance sheets at its fair value less its estimated cost to sell. The initial fair value

of foreclosed properties is determined using a hierarchy based on the reliability of available information. The

fair value estimate is based on the best information available at the time of valuation. The hierarchy includes

offers accepted, third-party interior appraisals, independent broker opinions, proprietary home price model

values and exterior broker price opinions. Estimated cost to sell is based upon historical sales cost at a

geographic level.

Subsequent to initial measurement, the foreclosed properties that we intend to sell are reported at the lower of

the carrying amount or fair value less estimated costs to sell. Foreclosed properties classified as held for use,

included in other assets, are depreciated and are impaired when circumstances indicate that the carrying

amount of the property is no longer recoverable. The fair value of our single-family foreclosed properties on

an ongoing basis is determined using the same information hierarchy used at the point of initial fair value. The

fair value of our multifamily properties is derived using third-party valuations. When third-party valuations are

not available, we estimate the fair value using current net operating income of the property and capitalization

rates.

Acquired property is classified as Level 3 of the valuation hierarchy because significant inputs are

unobservable.

Fair Value of Financial Instruments

The following table displays the carrying value and estimated fair value of our financial instruments as of

September 30, 2011 and December 31, 2010. The fair value of financial instruments we disclose, includes

commitments to purchase multifamily and single-family mortgage loans, which are off-balance sheet financial

instruments that we do not record in our condensed consolidated balance sheets. The fair values of these

commitments are included as “Mortgage loans held for investment, net of allowance for loan losses.” The

disclosure excludes certain financial instruments, such as plan obligations for pension and postretirement

health care benefits, employee stock option and stock purchase plans, and also excludes all non-financial

169

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
instruments. As a result, the fair value of our financial assets and liabilities does not represent the underlying

fair value of our total consolidated assets and liabilities.

Carrying

Value

Estimated

Fair Value

Carrying

Value

Estimated

Fair Value

September 30, 2011 December 31, 2010

As of

(Dollars in millions)

Financial assets:

Cash and cash equivalents(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,268 $ 80,268 $ 80,975 $ 80,975

Federal funds sold and securities purchased under agreements to

resell or similar arrangements . . . . . . . . . . . . . . . . . . . . . . . . 35,950 35,950 11,751 11,751

Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,149 68,149 56,856 56,856

Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,710 82,710 94,392 94,392

Mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . 309 309 915 915

Mortgage loans held for investment, net of allowance for loan

losses:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329,848 303,953 358,698 319,367

Of consolidated trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,567,663 2,663,443 2,564,107 2,610,145

Mortgage loans held for investment . . . . . . . . . . . . . . . . . . . . . . 2,897,511 2,967,396 2,922,805 2,929,512

Advances to lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,145 5,029 7,215 6,990

Derivative assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . 723 723 1,137 1,137

Guaranty assets and buy-ups. . . . . . . . . . . . . . . . . . . . . . . . . . . 480 858 458 814

Total financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,171,245 $3,241,392 $3,176,504 $3,183,342

Financial liabilities:

Federal funds purchased and securities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ 52 $ 51

Short-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,718 193,759 151,884 151,974

Of consolidated trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,004 5,004 5,359 5,359

Long-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551,085 580,238 628,160 649,684

Of consolidated trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,441,969 2,588,550 2,411,597 2,514,929

Derivative liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . 4,273 4,273 1,715 1,715

Guaranty obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765 3,920 769 3,854

Total financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,196,814 $3,375,744 $3,199,536 $3,327,566

(1) Includes restricted cash of $56.0 billion and $63.7 billion as of September 30, 2011 and December 31, 2010,

respectively.

The following are valuation techniques for items not subject to the fair value hierarchy either because they are

not measured at fair value other than for the purpose of the above table or because they are only measured at

fair value at inception.

Financial Instruments for which fair value approximates carrying value—We hold certain financial instruments

that are not carried at fair value but for which the carrying value approximates fair value due to the short-term

nature and negligible credit risk inherent in them. These financial instruments include cash and cash

equivalents, federal funds and securities sold/purchased under agreements to repurchase/resell (exclusive of

dollar roll repurchase transactions) and the majority of advances to lenders.

Advances to Lenders—The carrying value for the majority of our advances to lenders approximates the fair

value due to the short-term nature of the specific instruments. Other instruments include loans for which the

170

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
carrying value does not approximate fair value. These loans are valued using collateral values of similar loans

as a proxy.

Guaranty Obligations—The fair value of all guaranty obligations (“GO”), measured subsequent to their initial

recognition, is our estimate of a hypothetical transaction price we would receive if we were to issue our

guaranty to an unrelated party in a standalone arm’s-length transaction at the measurement date. We estimate

the fair value of the GO using our internal GO valuation models, which calculate the present value of

expected cash flows based on management’s best estimate of certain key assumptions such as current

mark-to-market LTV ratios, future house prices, default rates, severity rates and required rate of return. We

further adjust the model values based on our current market pricing when such transactions reflect credit

characteristics that are similar to our outstanding GO. While the fair value of the GO reflects all guaranty

arrangements, the carrying value primarily reflects only those arrangements entered into subsequent to our

adoption of the accounting standard on guarantor’s accounting and disclosure requirements for guarantees.

Fair Value Option

We elected the fair value option for certain consolidated loans and debt instruments recorded in our condensed

consolidated balance sheets as a result of consolidating VIEs. These instruments contain embedded derivatives

that would otherwise require bifurcation. Under the fair value option, we elected to carry these instruments at

fair value instead of bifurcating the embedded derivative from the respective loan or debt instrument.

We elected the fair value option for all long-term structured debt instruments that are issued in response to

specific investor demand and have interest rates that are based on a calculated index or formula and are

economically hedged with derivatives at the time of issuance. By electing the fair value option for these

instruments, we are able to eliminate the volatility in our results of operations that would otherwise result

from the accounting asymmetry created by recording these structured debt instruments at cost while recording

the related derivatives at fair value.

We elected the fair value option for the financial assets and liabilities of the consolidated senior-subordinate

trust structures. By electing the fair value option for these instruments, we are able to eliminate the volatility

in our results of operations that would otherwise result from different accounting treatment between loans at

cost and debt at cost.

Interest income for the mortgage loans is recorded in “Mortgage loans interest income” and interest expense

for the debt instruments is recorded in “Long-term debt interest expense” in our condensed consolidated

statements of operations and comprehensive loss.

The following table displays the fair value and unpaid principal balance of the financial instruments for which

we have made fair value elections as September 30, 2011 and December 31, 2010.

Loans of

Consolidated

Trusts(1)

Long-Term

Debt of

Fannie Mae

Long-Term

Debt of

Consolidated

Trusts(2)

Loans of

Consolidated

Trusts(1)

Long-Term

Debt of

Fannie Mae

Long-Term

Debt of

Consolidated

Trusts(2)

September 30, 2011 December 31, 2010

As of

(Dollars in millions)

Fair value . . . ...................... $3,361 $845 $3,840 $2,962 $893 $2,271

Unpaid principal balance . . . ............ 3,853 712 3,952 3,456 829 2,572

(1) Includes nonaccrual loans with a fair value of $211 million and $219 million as of September 30, 2011 and

December 31, 2010, respectively. The difference between unpaid principal balance and the fair value of these

nonaccrual loans as of September 30, 2011 is $227 million. Includes loans that are 90 days past due with a fair value

171

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
of $367 million and $369 million as of September 30, 2011 and December 31, 2010, respectively. The difference

between unpaid principal balance and the fair value of these 90 or more days past due loans as of September 30, 2011

is $256 million.

(2) Includes interest-only debt instruments with no unpaid principal balance and a fair value of $123 million and

$151 million as of September 30, 2011 and December 31, 2010, respectively.

Changes in Fair Value under the Fair Value Option Election

The following table displays fair value gains and losses, net, including changes attributable to instrumentspecific credit risk, for loans and debt for which the fair value election was made. Amounts are recorded as a

component of “Fair value (losses) gains, net” in our condensed consolidated statements of operations and

comprehensive loss for the periods ended September 30, 2011 and 2010.

Loans

Long-Term

Debt

Total Gains

(Losses)

Long-Term

Debt

2011 2010

For the Three Months Ended September 30,

(Dollars in millions)

Changes in instrument-specific credit risk . . . . . . . . . . . . . . . . . . . . . . . . . $ 27 $ 8 $ 35 $ (3)

Other changes in fair value . ................................. (30) (79) (109) (44)

Fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3) $(71) $ (74) $(47)

Loans

Long-Term

Debt

Total Gains

(Losses)

Long-Term

Debt

2011 2010

For the Nine Months Ended September 30,

(Dollars in millions)

Changes in instrument-specific credit risk . . ....................... $(184) $ 12 $(172) $ 5

Other changes in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 (72) 39 (70)

Fair value losses, net ..................................... $ (73) $(60) $(133) $(65)

In determining the changes in the instrument-specific credit risk for loans, the changes in the associated creditrelated components of these loans, primarily the guaranty obligation, were taken into consideration with the

overall change in the fair value of the loans for which we elected the fair value option for financial

instruments. In determining the changes in the instrument-specific credit risk for debt, the changes in Fannie

Mae debt spreads to LIBOR that occurred during the period were taken into consideration with the overall

change in the fair value of the debt for which we elected the fair value option for financial instruments.

Specifically, cash flows are evaluated taking into consideration any derivatives through which Fannie Mae has

swapped out of the structured features of the notes and thus created a floating-rate LIBOR-based debt

instrument. The change in value of these LIBOR-based cash flows based on the Fannie Mae yield curve at the

beginning and end of the period represents the instrument-specific risk.

14. Commitments and Contingencies

We are party to various types of legal actions and proceedings, including actions brought on behalf of various

classes of claimants. We also are subject to regulatory examinations, inquiries and investigations and other

information gathering requests. In some of the matters, indeterminate amounts are sought. Modern pleading

practice in the U.S. permits considerable variation in the assertion of monetary damages or other relief.

Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to

state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. This variability in

pleadings, together with our and our counsel’s actual experience in litigating or settling claims, leads us to

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(In conservatorship)

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(UNAUDITED)
conclude that the monetary relief that may be sought by plaintiffs bears little relevance to its merits or

disposition value.

On a quarterly and annual basis, we review relevant information about all pending legal actions and

proceedings for the purpose of evaluating and revising our contingencies, reserves and disclosures.

Legal actions and proceedings of all types are subject to many uncertain factors that generally cannot be

predicted with assurance. Accordingly, the outcome of any given matter and the amount or range of potential

loss at particular points in time is frequently difficult to ascertain. Uncertainties can include how fact finders

will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial

and appellate courts will apply the law. Disposition valuations are also subject to the uncertainty of how

opposing parties and their counsel view the evidence and applicable law. Further, FHFA adopted a regulation

on June 20, 2011, which provides, in part, that while we are in conservatorship, FHFA will not pay claims by

our current or former shareholders, unless the Director of FHFA determines it is in the interest of the

conservatorship. The presence of this regulation and the Director of FHFA’s assertion that it will not pay

claims asserted in certain cases discussed below while we are in conservatorship creates additional uncertainty

in those cases.

We have established a reserve for those matters where a loss is probable and where we can reasonably

estimate the amount of such loss. Reserves have been established for certain of the matters noted below. These

reserves did not have a material adverse effect on our financial statements. We note, however, that in light of

the uncertainties involved in such actions and proceedings, there is no assurance that the ultimate resolution of

these matters will not significantly exceed the reserves we have currently accrued.

For the remaining legal actions or proceedings, including those where there is only a reasonable possibility

that a loss may be incurred, we are not currently able to estimate the reasonably possible losses or ranges of

losses and we have not established a reserve with respect to those actions or proceedings. We are often unable

to estimate the possible loss or range of loss, particularly for proceedings that are in their early stages of

development, where plaintiffs seek substantial or indeterminate damages, or where there may be novel or

unsettled legal questions relevant to the proceedings or settlement negotiations have not occurred or

progressed. Further, as noted above, FHFA’s regulation and the Director of FHFA’s assertion creates additional

uncertainty with respect to certain cases.

Given the uncertainties involved in any action or proceeding, regardless of whether we have established a

reserve, the ultimate resolution of certain of these matters may be material to our operating results for a

particular period, depending on, among other factors, the size of the loss or liability imposed and the level of

our net income or loss for that period. Based on our current knowledge with respect to the matters described

below, we believe we have valid defenses to the claims in these proceedings and intend to defend these

matters vigorously regardless of whether or not we have recorded a loss reserve.

In addition to the matters specifically described below, we are involved in a number of legal and regulatory

proceedings that arise in the ordinary course of business that we do not expect will have a material impact on

our business or financial condition. We have advanced fees and expenses of certain current and former officers

and directors in connection with various legal proceedings pursuant to indemnification agreements.

In re Fannie Mae Securities Litigation

Fannie Mae is a defendant in a consolidated class action lawsuit initially filed in 2004 and currently pending

in the U.S. District Court for the District of Columbia. In the consolidated complaint filed on March 4, 2005,

lead plaintiffs Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio

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FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
allege that we and certain former officers, as well as our former outside auditor, made materially false and

misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and

SEC Rule 10b-5 promulgated thereunder. Plaintiffs contend that Fannie Mae’s accounting statements were

inconsistent with GAAP requirements relating to hedge accounting and the amortization of premiums and

discounts, and seek unspecified compensatory damages, attorneys’ fees, and other fees and costs. On

January 7, 2008, the court defined the class as all purchasers of Fannie Mae common stock and call options

and all sellers of publicly traded Fannie Mae put options during the period from April 17, 2001 through

December 22, 2004. On October 17, 2008, FHFA, as conservator for Fannie Mae, intervened in this case. On

August 18, 2011, the parties filed various motions for summary judgment.

On October 7, 2011, FHFA, as conservator, filed a motion to stay this case for the duration of our

conservatorship based on a regulation FHFA adopted on June 20, 2011, which provides in part that while we

are in conservatorship, FHFA will not pay claims by our current or former shareholders, unless the Director of

FHFA determines it is in the interest of the conservatorship. The Acting Director of FHFA has determined it

will not pay the claims asserted in this case while we are in conservatorship. FHFA maintains, therefore, that

continuing litigation of this matter would be a waste of resources. Alternatively, FHFA has stated it will seek a

stay of this case, while a separate lawsuit challenging the regulation is decided.

In September and December, 2010, plaintiffs served expert reports claiming damages to plaintiffs under

various scenarios ranging cumulatively from $2.2 billion to $8.6 billion. Given the substantial and novel legal

questions that remain, including those raised by FHFA’s regulation and the Director of FHFA’s determination,

we are currently unable to estimate the reasonably possible loss or range of loss arising from this litigation.

2008 Class Action Lawsuits

Fannie Mae is a defendant in two consolidated class actions filed in 2008 and currently pending in the

U.S. District Court for the Southern District of New York—In re Fannie Mae 2008 Securities Litigation and In

re 2008 Fannie Mae ERISA Litigation. On February 11, 2009, the Judicial Panel on Multidistrict Litigation

ordered that the cases be coordinated for pretrial proceedings. Given the early status of these matters, the

absence of a specified demand or claim by the plaintiffs and the substantial and novel legal questions that

remain, we are currently unable to estimate the reasonably possible loss or range of loss arising from these

lawsuits.

In re Fannie Mae 2008 Securities Litigation

In a consolidated complaint filed on June 22, 2009, lead plaintiffs Massachusetts Pension Reserves Investment

Management Board and Boston Retirement Board (for common shareholders) and Tennessee Consolidated

Retirement System (for preferred shareholders) allege that we, certain of our former officers, and certain of

our underwriters violated Sections 12(a)(2) and 15 of the Securities Act of 1933. Lead plaintiffs also allege

that we, certain of our former officers, and our outside auditor, violated Sections 10(b) (and Rule 10b-5

promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934. Lead plaintiffs seek various forms

of relief, including rescission, damages, interest, costs, attorneys’ and experts’ fees, and other equitable and

injunctive relief. On October 13, 2009, the Court entered an order allowing FHFA to intervene.

On November 24, 2009, the Court granted the defendants’ motion to dismiss the Securities Act claims as to

all defendants. On September 30, 2010, the Court granted in part and denied in part the defendants’ motions

to dismiss the Securities Exchange Act claims. As a result of the partial denial, some of the Securities

Exchange Act claims remain pending against us and certain of our former officers. On October 14, 2010, we

and certain other defendants filed motions for reconsideration of those portions of the Court’s September 30,

2010 order denying in part the defendants’ motions to dismiss. Fannie Mae filed its answer to the consolidated

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(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
complaint on December 31, 2010. Defendants’ motions for reconsideration were denied on April 11, 2011. On

July 28, 2011 lead plaintiffs filed motions to certify a class of persons who, between November 8, 2006 and

September 5, 2008, inclusive, purchased or acquired (a) Fannie Mae common stock and options or (b) Fannie

Mae preferred stock.

On October 12, 2011, FHFA, as conservator, filed a letter with the court requesting a pre-motion conference to

discuss FHFA’s intention to file a motion to stay this case for the duration of our conservatorship based on a

regulation FHFA adopted on June 20, 2011, which provides in part that while we are in conservatorship,

FHFA will not pay claims by our current or former shareholders, unless the Director of FHFA determines it is

in the interest of the conservatorship. The Acting Director of FHFA has determined it will not pay the claims

asserted in this case while we are in conservatorship. FHFA maintains, therefore, that continuing litigation of

this matter is a waste of resources. Alternatively, FHFA will seek a stay of this case while a separate lawsuit

challenging the regulation is decided.

In re 2008 Fannie Mae ERISA Litigation

In a consolidated complaint filed on September 11, 2009, plaintiffs allege that certain of our current and

former officers and directors, including former members of Fannie Mae’s Benefit Plans Committee and the

Compensation Committee of Fannie Mae’s Board of Directors, as fiduciaries of Fannie Mae’s Employee Stock

Ownership Plan (“ESOP”), breached their duties to ESOP participants and beneficiaries by investing ESOP

funds in Fannie Mae common stock when it was no longer prudent to continue to do so. Plaintiffs purport to

represent a class of participants and beneficiaries of the ESOP whose accounts invested in Fannie Mae

common stock beginning April 17, 2007. The plaintiffs seek unspecified damages, attorneys’ fees and other

fees and costs and injunctive and other equitable relief. On November 2, 2009, defendants filed motions to

dismiss these claims, which are now fully briefed and remain pending. On November 2, 2011, we filed a letter

notifying the court of two recent decisions by the U.S. Court of Appeals for the Second Circuit that are

relevant to the defendants’ motions to dismiss.

Comprehensive Investment Services v. Mudd, et al.

This individual securities action was originally filed on May 13, 2009, by plaintiff Comprehensive Investment

Services, Inc. against certain of our former officers and directors, and certain of our underwriters in the

Southern District of Texas. On July 7, 2009, this case was transferred to the Southern District of New York for

coordination with In re Fannie Mae 2008 Securities Litigation and In re 2008 Fannie Mae ERISA Litigation.

Plaintiff filed an amended complaint on May 11, 2011 against us, certain of our former officers, and certain of

our underwriters. The amended complaint alleges violations of §10(b) of the Securities Exchange Act of 1934

and Rule 10b-5 promulgated thereunder; violations of §20(a) of the Securities Exchange Act of 1934; and

violations of the Texas Business and Commerce Code, common law fraud, and negligent misrepresentation in

connection with Fannie Mae’s May 2008 $2.0 billion offering of 8.25% non-cumulative preferred Series T

stock. Plaintiff seeks relief in the form of rescission, actual damages, punitive damages, interest, costs,

attorneys’ and experts’ fees, and other equitable and injunctive relief. On July 11, 2011, defendants filed

motions to dismiss the amended complaint, which are now fully briefed and remain pending. Given the

preliminary stage of this lawsuit, the absence of a specified demand or claim by the plaintiff and the

substantial and novel legal questions that remain, we are currently unable to estimate the reasonably possible

loss or range of loss arising from this litigation.

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FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Smith v. Fannie Mae, et al.

This individual securities action was originally filed on February 25, 2010, by plaintiff Edward Smith against

Fannie Mae and certain of its former officers as well as several underwriters in the Central District of

California. On April 12, 2010, this case was transferred to the Southern District of New York for coordination

with In re Fannie Mae 2008 Securities Litigation and In re 2008 Fannie Mae ERISA Litigation. Plaintiff filed

an amended complaint on April 19, 2011, which alleges violations of §10(b) of the Securities Exchange Act of

1934 and Rule 10b-5 promulgated thereunder; violations of §20(a) of the Securities Exchange Act of 1934;

common law fraud and negligence claims; and California state law claims for misrepresentation in connection

with Fannie Mae’s December 2007 $7.0 billion offering of 7.75% fixed-to-floating rate non-cumulative

preferred Series S stock. Plaintiff seeks relief in the form of rescission, actual damages (including interest),

and exemplary and punitive damages. On July 11, 2011, defendants filed motions to dismiss the amended

complaint, which are now fully briefed and remain pending. Given the preliminary stage of this lawsuit, the

absence of a specified demand or claim by the plaintiff and the substantial and novel legal questions that

remain, we are currently unable to estimate the reasonably possible loss or range of loss arising from this

litigation.

Alenick v. Merrill Lynch, et al.

On May 12, 2011, Zeke Alenick filed an individual securities action against one of our former officers, certain

of our underwriters, and an employee of one of our underwriters in New York State Court. Plaintiff alleges

common law fraud, recklessness, negligence, and violations of §349 of the New York General Business Law

in connection with Fannie Mae’s May 2008 $2.0 billion offering of 8.25% non-cumulative preferred Series T

stock. The complaint seeks various forms of relief, including damages, punitive damages, and rescission. On

June 13, 2011, the case was removed to the United States District Court for the Southern District of New York

and accepted as related to In re Fannie Mae 2008 Securities Litigation and In re 2008 Fannie Mae ERISA

Litigation. On July 18 and 25, 2011, Alenick filed motions to dismiss voluntarily all defendants. The court

granted those motions on July 25 and 28, 2011, and closed the case.

Investigation by the Securities and Exchange Commission

On September 26, 2008, we received notice of an ongoing investigation into Fannie Mae by the SEC

regarding certain accounting and disclosure matters. On January 8, 2009, the SEC issued a formal order of

investigation. We are cooperating with this investigation.

Investigation by the Department of Justice

On September 26, 2008, we received notice of an ongoing federal investigation by the U.S. Attorney for the

Southern District of New York into certain accounting, disclosure and corporate governance matters. In

connection with that investigation, Fannie Mae received a Grand Jury subpoena for documents. That subpoena

was subsequently withdrawn. However, we were informed that the Department of Justice was continuing an

investigation and on March 15, 2010, we received another Grand Jury subpoena for documents. We are

cooperating with this investigation.

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FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information about market risk is set forth in “MD&A—Risk Management—Market Risk Management,

Including Interest Rate Risk Management.”

Item 4. Controls and Procedures

Overview

We are required under applicable laws and regulations to maintain controls and procedures, which include

disclosure controls and procedures as well as internal control over financial reporting, as further described

below.

Evaluation of Disclosure Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures refer to controls and other procedures designed to provide reasonable

assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is

recorded, processed, summarized and reported within the time periods specified in the rules and forms of the

Securities and Exchange Commission (“SEC”). Disclosure controls and procedures include, without limitation,

controls and procedures designed to provide reasonable assurance that information required to be disclosed by

us in the reports that we file or submit under the Exchange Act is accumulated and communicated to

management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow

timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and

procedures, management recognizes that any controls and procedures, no matter how well designed and

operated, can provide only reasonable assurance of achieving the desired control objectives, and management

was required to apply its judgment in evaluating and implementing possible controls and procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our

Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and

procedures as in effect as of September 30, 2011, the end of the period covered by this report. As a result of

management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our

disclosure controls and procedures were not effective at a reasonable assurance level as of September 30, 2011

or as of the date of filing this report.

Our disclosure controls and procedures were not effective as of September 30, 2011 or as of the date of filing

this report because they did not adequately ensure the accumulation and communication to management of

information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws.

As a result, we were not able to rely upon the disclosure controls and procedures that were in place as of

September 30, 2011 or as of the date of this filing, and we continue to have a material weakness in our

internal control over financial reporting. This material weakness is described in more detail below under

“Description of Material Weakness.” Based on discussions with FHFA and the structural nature of the

weakness in our disclosure controls and procedures, it is likely that we will not remediate this material

weakness while we are under conservatorship.

Description of Material Weakness

The Public Company Accounting Oversight Board’s Auditing Standard No. 5 defines a material weakness as a

deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a

reasonable possibility that a material misstatement of the company’s annual or interim financial statements

will not be prevented or detected on a timely basis.

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Management has determined that we continued to have the following material weakness as of September 30,

2011 and as of the date of filing this report:

• Disclosure Controls and Procedures. We have been under the conservatorship of FHFA since

September 6, 2008. Under the 2008 Reform Act, FHFA is an independent agency that currently functions

as both our conservator and our regulator with respect to our safety, soundness and mission. Because of

the nature of the conservatorship under the 2008 Reform Act, which places us under the “control” of

FHFA (as that term is defined by securities laws), some of the information that we may need to meet our

disclosure obligations may be solely within the knowledge of FHFA. As our conservator, FHFA has the

power to take actions without our knowledge that could be material to our shareholders and other

stakeholders, and could significantly affect our financial performance or our continued existence as an

ongoing business. Although we and FHFA attempted to design and implement disclosure policies and

procedures that would account for the conservatorship and accomplish the same objectives as a disclosure

controls and procedures policy of a typical reporting company, there are inherent structural limitations on

our ability to design, implement, test or operate effective disclosure controls and procedures. As both our

regulator and our conservator under the 2008 Reform Act, FHFA is limited in its ability to design and

implement a complete set of disclosure controls and procedures relating to Fannie Mae, particularly with

respect to current reporting pursuant to Form 8-K. Similarly, as a regulated entity, we are limited in our

ability to design, implement, operate and test the controls and procedures for which FHFA is responsible.

Due to these circumstances, we have not been able to update our disclosure controls and procedures in a

manner that adequately ensures the accumulation and communication to management of information

known to FHFA that is needed to meet our disclosure obligations under the federal securities laws,

including disclosures affecting our condensed consolidated financial statements. As a result, we did not

maintain effective controls and procedures designed to ensure complete and accurate disclosure as

required by GAAP as of September 30, 2011 or as of the date of filing this report. Based on discussions

with FHFA and the structural nature of this weakness, it is likely that we will not remediate this material

weakness while we are under conservatorship.

Mitigating Actions Relating to Material Weakness

As described above under “Description of Material Weakness,” we continue to have a material weakness in

our internal control over financial reporting relating to our disclosure controls and procedures. However, we

and FHFA have engaged in the following practices intended to permit accumulation and communication to

management of information needed to meet our disclosure obligations under the federal securities laws:

• FHFA has established the Office of Conservatorship Operations, which is intended to facilitate operation

of the company with the oversight of the conservator.

• We have provided drafts of our SEC filings to FHFA personnel for their review and comment prior to

filing. We also have provided drafts of external press releases, statements and speeches to FHFA

personnel for their review and comment prior to release.

• FHFA personnel, including senior officials, have reviewed our SEC filings prior to filing, including this

quarterly report on Form 10-Q for the quarter ended September 30, 2011 (“Third Quarter 2011

Form 10-Q”), and engaged in discussions regarding issues associated with the information contained in

those filings. Prior to filing our Third Quarter 2011 Form 10-Q, FHFA provided Fannie Mae management

with a written acknowledgement that it had reviewed the Third Quarter 2011 Form 10-Q, and it was not

aware of any material misstatements or omissions in the Third Quarter 2011 Form 10-Q and had no

objection to our filing the Third Quarter 2011 Form 10-Q.

• The Acting Director of FHFA and our Chief Executive Officer have been in frequent communication,

typically meeting on at least a bi-weekly basis.

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• FHFA representatives attend meetings frequently with various groups within the company to enhance the

flow of information and to provide oversight on a variety of matters, including accounting, credit and

market risk management, liquidity, external communications and legal matters.

• Senior officials within FHFA’s Office of the Chief Accountant have met frequently with our senior finance

executives regarding our accounting policies, practices and procedures.

Changes in Internal Control over Financial Reporting

Overview

Management is required to evaluate, with the participation of our Chief Executive Officer and Chief Financial

Officer, whether any changes in our internal control over financial reporting that occurred during our last

fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over

financial reporting. Below we describe changes in our internal control over financial reporting since June 30,

2011 that management believes have materially affected, or are reasonably likely to materially affect, our

internal control over financial reporting.

Changes in Management

During the third quarter of 2011, Susan R. McFarland became our new Chief Financial Officer, succeeding

David C. Hisey as our principal financial officer. Mr. Hisey continued to serve as our principal accounting

officer until the fourth quarter of 2011, when Gregory A. Fink, Senior Vice President and Controller of Fannie

Mae, was appointed as our principal accounting officer. Mr. Hisey continues to serve as our Executive Vice

President and Deputy Chief Financial Officer.

In addition, John Nichols, who had previously been our interim Chief Risk Officer, was appointed our Chief

Risk Officer in the third quarter of 2011.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

The information in this item supplements information regarding certain legal proceedings set forth in “Legal

Proceedings” in our 2010 Form 10-K and First Quarter 2011 Form 10-Q and Second Quarter Form 10-Q. We

also provide information regarding material legal proceedings in “Note 14, Commitments and Contingencies,”

which is incorporated herein by reference. In addition to the matters specifically described or incorporated by

reference in this item, we are involved in a number of legal and regulatory proceedings that arise in the

ordinary course of business that do not have a material impact on our business. Litigation claims and

proceedings of all types are subject to many factors that generally cannot be predicted accurately.

We record reserves for legal claims when losses associated with the claims become probable and the amounts

can reasonably be estimated. The actual costs of resolving legal claims may be substantially higher or lower

than the amounts reserved for those claims. For matters where the likelihood or extent of a loss is not

probable or cannot be reasonably estimated, we have not recognized in our condensed consolidated financial

statements the potential liability that may result from these matters. We presently cannot determine the

ultimate resolution of the matters described or incorporated by reference in this item or in our 2010

Form 10-K, First Quarter 2011 Form 10-Q or Second Quarter 2011 Form 10-Q. We have recorded a reserve

for legal claims related to those matters for which we were able to determine a loss was both probable and

reasonably estimable. If certain of these matters are determined against us, it could have a material adverse

effect on our results of operations, liquidity and financial condition, including our net worth.

FHFA Private-Label Mortgage-Related Securities Litigation

In the third quarter of 2011, FHFA, as conservator for us and for Freddie Mac, filed 16 lawsuits on behalf of

us and Freddie Mac against various financial institutions, their officers and unaffiliated underwriters who were

responsible for marketing and selling private-label mortgage-related securities to us. The lawsuits seek to

recover losses we and Freddie Mac incurred on the securities. FHFA filed 13 of these lawsuits in the

U.S. District Court for the Southern District of New York—against Bank of America Corp.; Barclays Bank

PLC; Citigroup, Inc.; Credit Suisse Holdings (USA), Inc.; Deutsche Bank AG; First Horizon National

Corporation; Goldman, Sachs & Co.; HSBC North America Holdings Inc.; JPMorgan Chase & Co.; Merrill

Lynch & Co.; Nomura Holding America Inc.; SG Americas, Inc.; and UBS Americas Inc. and against certain

related entities and individuals. Two lawsuits—against Countrywide Financial Corporation and Morgan

Stanley—were filed in the Supreme Court of the State of New York for the County of New York, and one—

against The Royal Bank of Scotland Group PLC—was filed in the U.S. District Court for the District of

Connecticut. The lawsuit against UBS was filed on July 27, 2011, and all the others were filed on

September 2, 2011. The lawsuits allege that the defendants violated federal securities laws and state common

law by making material misstatements and omissions in the offering documents for the securities that were

sold to Fannie Mae and Freddie Mac regarding the characteristics of the loans underlying the securities. Some

of the complaints also allege state securities law violations and common law fraud. The complaints seek,

among other things, rescission and recovery of consideration paid for the securities at issue in the lawsuits,

monetary damages and, in certain cases, punitive damages for common law fraud.

Investigation by Office of the Inspector General of FHFA and U.S. Attorney for the Eastern District of

Virginia

On October 27, 2011, we received notice of an ongoing investigation by the Office of the Inspector General of

FHFA (“FHFA OIG”) and the U.S. Attorney for the Eastern District of Virginia with regard to a multifamily

agreement with The Related Companies, L.P. The financial impact of the agreement was not material to our

financial statements. In connection with the investigation, we received a subpoena for documents from the

FHA OIG. We are cooperating with this investigation.

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Item 1A. Risk Factors

In addition to the information in this report, you should carefully consider the risks relating to our business

that we identify in “Risk Factors” in our 2010 Form 10-K. This section supplements and updates that

discussion and, for a complete understanding of the subject, you should read both together. Please also refer to

“MD&A—Risk Management” in this report and in our 2010 Form 10-K for more detailed descriptions of the

primary risks to our business and how we seek to manage those risks.

The risks we face could materially adversely affect our business, results of operations, financial condition,

liquidity and net worth, and could cause our actual results to differ materially from our past results or the

results contemplated by forward-looking statements contained in this report. However, these are not the only

risks we face. In addition to the risks we discuss below, we face risks and uncertainties not currently known to

us or that we currently believe are immaterial.

The future of our company is uncertain.

There is significant uncertainty regarding the future of our company, including how long we will continue to

be in existence, the extent of our role in the market, what form we will have, and what ownership interest, if

any, our current common and preferred stockholders will hold in us after the conservatorship is terminated.

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

GSEs and reforming America’s housing finance market. The report provides that the Administration will work

with FHFA to determine the best way to responsibly reduce Fannie Mae’s and Freddie Mac’s role in the

market and ultimately wind down both institutions. The report also addresses three options for a reformed

housing finance system. The report does not state whether or how the existing infrastructure or human capital

of Fannie Mae may be used in the establishment of such a reformed system. The report emphasizes the

importance of proceeding with a careful transition plan and providing the necessary financial support to

Fannie Mae and Freddie Mac during the transition period.

The Subcommittee on Capital Markets and Government Sponsored Enterprises of the Financial Services

Committee has approved numerous bills that could constrain the current operations of the GSEs or alter the

existing authority that FHFA or Treasury have over the enterprises. In addition, several bills have been

introduced in the Senate and House of Representatives that would place the GSEs into receivership after a

period of time and either grant federal charters to new entities to engage in activities similar to those currently

engaged in by the GSEs or leave secondary mortgage market activities to entities in the private sector. We

expect that Congress will continue to hold hearings and consider legislation in the remainder of 2011 and in

2012 on the future status of Fannie Mae and Freddie Mac, including proposals that would result in a

substantial change to our business structure, our operations, or that involve Fannie Mae’s liquidation or

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

regarding the future status of the GSEs. See “MD&A—Legislative and Regulatory Developments—GSE

Reform” for more information about the Treasury report and Congressional proposals regarding reform of the

GSEs.

Our regulator is authorized or required to place us into receivership under specified conditions, which

would result in the liquidation of our assets. Amounts recovered from the liquidation will likely be

insufficient to repay the liquidation preference of any series of our preferred stock or to provide any

proceeds to common shareholders.

FHFA has an obligation to place us into receivership if the Director of FHFA makes a written determination

that our assets are less than our obligations for a period of 60 days after the filing deadline for our Form 10-K

or Form 10-Q with the SEC. Because of the credit-related expenses we expect to incur on our legacy book of

business and our dividend obligation to Treasury, we will continue to need funding from Treasury to avoid

triggering FHFA’s obligation. Although Treasury committed to providing us funds in accordance with the

181
terms of the senior preferred stock purchase agreement, Treasury may not provide these funds to us within the

required 60 days if it has exhausted its borrowing authority or if there is a government shutdown. In addition,

we could be put into receivership at the discretion of the Director of FHFA at any time for other reasons,

including conditions that FHFA has already asserted existed at the time the former Director of FHFA placed

us into conservatorship.

A receivership would terminate the conservatorship. In addition to the powers FHFA has as our conservator,

the appointment of FHFA as our receiver would terminate all rights and claims that our shareholders and

creditors may have against our assets or under our charter arising from their status as shareholders or creditors,

except for their right to payment, resolution or other satisfaction of their claims as permitted under the GSE

Act. Unlike a conservatorship, the purpose of which is to conserve our assets and return us to a sound and

solvent condition, the purpose of a receivership is to liquidate our assets and resolve claims against us.

To the extent we are placed into receivership and do not or cannot fulfill our guaranty to the holders of our

Fannie Mae MBS, the MBS holders could become unsecured creditors of ours with respect to claims made

under our guaranty.

In the event of a liquidation of our assets, only after payment of the administrative expenses of the receiver

and the immediately preceding conservator, the secured and unsecured claims against the company (including

repaying all outstanding debt obligations), and the liquidation preference of the senior preferred stock, would

any liquidation proceeds be available to repay the liquidation preference on any other series of preferred stock.

Finally, only after the liquidation preference on all series of preferred stock is repaid would any liquidation

proceeds be available for distribution to the holders of our common stock. It is unlikely that there would be

sufficient proceeds to repay the liquidation preference of any series of our preferred stock or to make any

distribution to the holders of our common stock.

Efforts that we undertake, including those we are required or asked to undertake by FHFA, other

government agencies or Congress, in pursuit of providing liquidity, stability and affordability to the

mortgage market and providing assistance to struggling homeowners, or in pursuit of other goals, may

adversely affect our business, results of operations, financial condition, liquidity and net worth.

Prior to the conservatorship, our business was managed with a strategy to maximize shareholder returns, while

fulfilling our mission. Our conservator has directed us to focus primarily on minimizing our credit losses from

delinquent mortgages and providing assistance to struggling homeowners to help them remain in their homes.

As a result, we may continue to take a variety of actions designed to address this focus that could adversely

affect our economic returns, possibly significantly, such as: reducing our guaranty fees and modifying loans to

extend the maturity, lower the interest rate or defer or forgive principal owed by the borrower. These activities

may have short- and long-term adverse effects on our business, results of operations, financial condition,

liquidity and net worth. For example, while we do not at this time know the ultimate impact on us of the

changes to HARP described in “MD&A—Legislative and Regulatory Developments,” we expect we may incur

additional credit-related expenses as a result of acquiring refinancings made under HARP’s revised terms. The

amount of any additional credit-related expenses we incur depends on a number of factors, including the

terms, credit profile and volume of our acquisitions under the revised program. At this time, we do not know

how many of these refinancings we will acquire. We have also incurred substantial costs in connection with

HAMP, as we discuss in “MD&A—Consolidated Results of Operations—Financial Impact of the Making

Home Affordable Program on Fannie Mae” in our 2010 Form 10-K. Other agencies of the U.S. government or

Congress also may ask us to undertake significant efforts to support the housing and mortgage markets, as

well as struggling homeowners.

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Limitations on our ability to access the debt capital markets could have a material adverse effect on our

ability to fund our operations and generate net interest income.

Our ability to fund our business depends primarily on our ongoing access to the debt capital markets. Our

level of net interest income depends on how much lower our cost of funds is compared to what we earn on

our mortgage assets. Market concerns about matters such as the extent of government support for our business,

the future of our business (including future profitability, future structure, regulatory actions and GSE status)

and the creditworthiness of the U.S. government could cause a severe negative effect on our access to the

unsecured debt markets, particularly for long-term debt. We believe that our ability in 2010 and the first nine

months of 2011 to issue debt of varying maturities at attractive pricing resulted from federal government

support of us and the financial markets, including the Federal Reserve’s purchases of our debt and MBS. As a

result, we believe that our status as a GSE and continued federal government support is essential to

maintaining our access to debt funding. Changes or perceived changes in the government’s support of us or

the markets could have a material adverse effect on our ability to fund our operations. As recently as

September 2011, the Federal Reserve announced that, to help support conditions in mortgage markets, it will

now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in

agency mortgage-backed securities. However, there can be no assurance that the government will continue to

support us or the markets, or that our current level of access to debt funding will continue. In addition, due to

our reliance on the U.S. government’s support, our access to debt funding also could be materially adversely

affected by a change or perceived change in the creditworthiness of the U.S. government.

Future changes or disruptions in the financial markets could significantly change the amount, mix and cost of

funds we obtain, as well as our liquidity position. If we are unable to issue both short- and long-term debt

securities at attractive rates and in amounts sufficient to operate our business and meet our obligations, it

likely would interfere with the operation of our business and have a material adverse effect on our liquidity,

results of operations, financial condition and net worth.

Our liquidity contingency plans may be difficult or impossible to execute during a liquidity crisis.

We believe that our liquidity contingency plans may be difficult or impossible to execute during a liquidity

crisis. If we cannot access the unsecured debt markets, our ability to repay maturing indebtedness and fund

our operations could be significantly impaired. In this event, our alternative sources of liquidity—consisting of

our cash and other investments portfolio and the unencumbered mortgage assets in our mortgage portfolio—

may not be sufficient to meet our liquidity needs.

We believe that the amount of mortgage-related assets that we could successfully borrow against or sell in the

event of a liquidity crisis or significant market disruption is substantially lower than the amount of mortgagerelated assets we hold. Due to the large size of our portfolio of mortgage assets, current market conditions and

the significant amount of distressed assets in our mortgage portfolio, there likely would be insufficient market

demand for large amounts of these assets over a prolonged period of time, which would limit our ability to

borrow against or sell these assets.

To the extent that we are able to obtain funding by pledging or selling mortgage-related securities as

collateral, we anticipate that a discount would be applied that would reduce the value assigned to those

securities. Depending on market conditions at the time, this discount could result in proceeds significantly

lower than the current market value of these securities and could thereby reduce the amount of financing we

obtain. In addition, our primary source of collateral is Fannie Mae MBS that we own. In the event of a

liquidity crisis in which the future of our company is uncertain, counterparties may be unwilling to accept

Fannie Mae MBS as collateral. As a result, we may not be able to sell or borrow against these securities in

sufficient amounts to meet our liquidity needs.

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A decrease in the credit ratings on our senior unsecured debt could have an adverse effect on our ability to

issue debt on reasonable terms and trigger additional collateral requirements, and would likely do so if such

a decrease were not based on a similar action on the credit ratings of the U.S. government.

Credit ratings on our senior unsecured debt, as well as the credit ratings of the U.S. government, are primary

factors that could affect our borrowing costs and our access to the debt capital markets. Credit ratings on our

debt are subject to revision or withdrawal at any time by the rating agencies. Actions by governmental entities

impacting the support we receive from Treasury could adversely affect the credit ratings on our senior

unsecured debt.

On August 5, 2011, S&P lowered the long-term sovereign credit rating on the U.S. to “AA+.” As a result of

this action, and because we directly rely on the U.S. government for capital support, on August 8, 2011, S&P

lowered our long-term senior debt rating to “AA+” with a negative outlook. Previously, our long-term senior

debt had been rated by S&P as “AAA” and had been on CreditWatch Negative. S&P affirmed our short-term

senior debt rating of “A-1+” and removed it from CreditWatch Negative. In assigning a negative outlook on

the U.S. government’s long-term debt rating, S&P noted that it may lower the U.S. government’s long-term

debt rating to “AA” within the next two years if it sees less reduction in spending than agreed to or higher

interest rates, or if new fiscal pressures during the period result in a higher general government debt trajectory

than S&P currently assumes. If S&P further lowers the U.S. government’s long-term debt rating, we expect

that S&P would lower our long-term debt rating correspondingly.

After the U.S. government’s statutory debt limit was raised on August 2, 2011, Fitch affirmed its rating and

stable outlook of our long-term debt, and Moody’s confirmed the U.S. government’s rating and our long-term

debt ratings. Moody’s also removed the designation that these ratings were under review for possible

downgrade. Moody’s revised the outlook for both the U.S. government’s rating and our long-term debt ratings

to negative. In assigning the negative outlook to the U.S. government’s rating, Moody’s indicated there would

be a risk of a downgrade if (1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal

consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or

(4) there is an appreciable rise in the U.S. government’s funding costs over and above what is currently

expected. As of November 3, 2011, our long-term debt continued to be rated “Aaa” by Moody’s and “AAA”

by Fitch.

S&P, Moody’s and Fitch have all indicated that they would likely lower their ratings on the debt of Fannie

Mae and certain other government-related entities if they were to lower their ratings on the U.S. government.

We currently cannot predict whether one or more of these rating agencies will downgrade our debt ratings in

the future, nor can we predict the potential impact. Although S&P’s downgrade of our credit rating has not

increased our borrowing costs or limited our access to the debt capital markets to date, an additional reduction

in our credit ratings could have a material adverse impact on our access to debt funding or on the cost of our

debt funding, and would likely do so if it were not based on a similar action on the credit ratings of the

U.S. government. An additional reduction in our credit ratings may also trigger additional collateral

requirements under our derivatives contracts and other borrowing arrangements, reduce our earnings and

materially adversely affect our liquidity, our ability to conduct our normal business operations, our financial

condition and results of operations. Our credit ratings and ratings outlook are included in “MD&A—Liquidity

and Capital Management—Liquidity Management—Credit Ratings.”

Further deterioration in the credit quality of, or defaults by, one or more of our mortgage insurer

counterparties could result in nonpayment of claims under mortgage insurance policies, business

disruptions and increased concentration risk.

We rely heavily on mortgage insurers to provide insurance against borrower defaults on single-family

conventional mortgage loans with LTV ratios over 80% at the time of acquisition. The already weak financial

condition of many of our mortgage insurer counterparties deteriorated at an accelerated pace during the third

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quarter of 2011, which increases the significant risk that these counterparties will fail to fulfill their

obligations to reimburse us for claims under insurance policies. Since January 1, 2009, the insurer financial

strength ratings of all of our major mortgage insurer counterparties have been downgraded multiple times to

reflect their weakened financial condition. In 2008, one of our top eight mortgage insurer counterparties, Triad

Guaranty Insurance Corporation (“Triad”), ceased issuing commitments for new mortgage insurance, and,

under an order received from its regulator, is now paying all valid claims 60% in cash and 40% by the

creation of a deferred payment obligation, which may be paid in the future. Since June 30, 2011, two more of

our top eight insurer counterparties, PMI Mortgage Insurance Co. (“PMI”) and Republic Mortgage Insurance

Company (“RMIC”) were ordered to or agreed with their regulators to cease issuing commitments for new

mortgage insurance. RMIC’s parent company has announced that RMIC is in run-off operating mode. RMIC’s

parent company has also indicated that it is more likely than not that the capital contributed to RMIC by its

parent company will “continue on a path toward full depletion in relatively short order.” PMI has received an

order from its regulator under which the regulator now has full possession, management and control of PMI.

The regulator is also seeking to place PMI into receivership. The regulator instituted a partial claim payment

plan whereby all valid claims under PMI’s mortgage guaranty insurance policies will be paid 50% in cash and

50% deferred as a policyholder claim. RMIC’s state regulators could take additional corrective action, which

may include the issuance of an order to defer payment of claims and/or placement of the mortgage insurance

writing entity into receivership. It is uncertain when, and if, Triad’s or PMI’s regulator will allow deferred

policyholder claims to be paid and/or increase the amount of cash paid on claims.

As of November 7, 2011, four of our mortgage insurers (Triad, RMIC, PMI and Genworth Mortgage

Insurance Corporation) have publicly disclosed that they are either in run-off or, absent a waiver, estimate they

would not meet state regulatory capital requirements for their main writing entity as of September 30, 2011.

An additional two of our mortgage insurers (Mortgage Guaranty Insurance Corporation and Radian Guaranty,

Inc.) have disclosed that, in the absence of additional capital contributions to their writing entity, their capital

might fall below state regulatory capital requirements in the future. These six mortgage insurers provided a

combined $75.7 billion, or 82%, of our risk in force mortgage insurance coverage of our single-family

guaranty book of business as of September 30, 2011. If mortgage insurers are not able to raise capital and

they exceed their risk-to-capital limits, they will likely be forced into run-off or receivership unless they can

secure and maintain a waiver from their state regulator. This would increase the risk that they will fail to pay

our claims under insurance policies, and could also cause the quality and speed of their claims processing to

deteriorate. We are unable to determine how long certain of our mortgage insurer counterparties will remain

below their state-imposed risk-to-capital limits.

Some mortgage insurers have been exploring corporate restructurings, intended to provide relief from

risk-to-capital limits in certain states. A restructuring plan that would involve contributing capital to a

subsidiary would result in less liquidity available to its parent company to pay claims on its existing book of

business and an increased risk that its parent company will not pay its claims in full in the future.

If our assessment of one or more of our mortgage insurer counterparty’s ability to fulfill its obligations to us

worsens and our internal credit rating for the insurer is further downgraded, it could result in a significant

increase in our loss reserves and increase our credit losses.

Many mortgage insurers stopped insuring new mortgages with higher loan-to-value ratios or with lower

borrower credit scores or on select property types, which has contributed to the reduction in our business

volumes for high loan-to-value ratio loans. As our charter generally requires us to obtain credit enhancement

on single-family conventional mortgage loans with loan-to-value ratios over 80% at the time of purchase, an

inability to find suitable credit enhancement may inhibit our ability to pursue new business opportunities, meet

our housing goals and otherwise support the housing and mortgage markets. For example, where mortgage

insurance or other credit enhancement is not available, we may be hindered in our ability to refinance loans

into more affordable loans. In addition, access to fewer mortgage insurer counterparties will increase our

concentration risk with the remaining mortgage insurers in the industry.

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Changes in the foreclosure environment and our reliance on servicers and their counsel and other service

providers to complete foreclosures could continue to have a material adverse effect on our business, results

of operations, financial condition and net worth.

Circumstances in the foreclosure environment over the last few years have resulted in foreclosures proceeding

at a slow pace. As a result of the housing market downturn that began in 2006 and significantly worsened in

2008, the volume of foreclosures to be processed by servicers and states significantly increased in 2009 and

the first nine months of 2010. In October 2010, a number of single-family mortgage servicers temporarily

halted some or all of the foreclosures they were processing after discovering deficiencies in their and their

service providers’ foreclosure processes. Although servicers have generally ended their outright foreclosure

halts, the processing of foreclosures continues to be slow in many states due to continuing issues in the

servicer foreclosure process, including efforts by servicers to comply with regulatory consent orders, recent

changes in state foreclosure laws, court rules and proceedings, and the pipeline of foreclosures resulting from

these delays and the elevated level of foreclosures caused by the housing market downturn. In addition, court

budget cuts in Florida and other states could further delay the processing of foreclosures.

These changes in the foreclosure environment have negatively affected our foreclosure timelines, credit-related

expenses and single-family serious delinquency rates, and we expect they will continue to do so. We believe

these changes also will delay the recovery of the housing market. These changes could also negatively affect

the value of the private-label securities we hold and result in additional impairments on these securities. In

addition, the failure of our servicers or their service providers to apply prudent and effective process controls

and to comply with legal and other requirements in the foreclosure process poses operational, reputational and

legal risks for us. The servicer foreclosure process deficiencies have generated significant concern and are

currently being reviewed by various government agencies and the various state attorneys general, which could

lead to additional new laws, regulation, rules or agreements that negatively affect our ability to foreclose

expeditiously or increase our costs.

In addition, FHFA directed us in October 2011 to phase out the practice of requiring mortgage servicers to use

our network of retained attorneys to perform default- and foreclosure-related legal services for our loans.

Phasing out the requirement that servicers use our retained attorney network may negatively impact the

performance of default- and foreclosure-related legal services for our loans, which may adversely impact our

efforts to reduce our credit losses.

Challenges to the MERS» company, system and processes could pose operational, reputational and legal

risks for us.

MERSCORP, Inc. (“MERSCORP”) is a privately held company that maintains an electronic registry (the

“MERS System”) that tracks servicing rights and ownership of loans in the United States. Mortgage Electronic

Registration Systems, Inc. (“MERS”), a wholly owned subsidiary of MERSCORP, Inc., can serve as a

nominee for the owner of a mortgage loan and, in that role, become the mortgagee of record for the loan in

local land records. Fannie Mae seller/servicers may choose to use MERS as a nominee; however, we have

prohibited servicers from initiating foreclosures on Fannie Mae loans in MERS’s name. Approximately half of

the loans we own or guarantee are registered in MERS’s name and the related servicing rights are tracked in

the MERS System. The MERS System is widely used by participants in the mortgage finance industry. Along

with a number of other organizations in the mortgage finance industry, we are a shareholder of MERSCORP.

Several legal challenges have been made disputing MERS ’s ability to initiate foreclosures, act as nominee in

local land records, and/or assign mortgages or take other action on behalf of the loan owner. These challenges

seek judicial relief ranging from money damages to injunctive/declaratory relief seeking the prevention of

mortgage assignments by MERS and/or the voiding of completed foreclosures in which MERS appeared in the

chain of title. These challenges have focused public attention on MERS and on how loans are recorded in

local land records. As a result, these challenges could negatively affect MERS’s ability to serve as the

mortgagee of record in some jurisdictions, which could cause additional costs and time in the recordation

186
process. These challenges also could result in court decisions that substantially delay new or pending

foreclosures, or void completed foreclosures in certain jurisdictions, which would require that we re-foreclose

on the affected properties, thereby increasing our costs and lengthening the time it takes for us to foreclose on

and dispose of the properties.

In addition, where MERS is the mortgagee of record, it must execute assignments of mortgages, affidavits and

other legal documents in connection with foreclosure proceedings. As a result, investigations by governmental

authorities and others into the servicer foreclosure process deficiencies discussed above may impact MERS.

On April 13, 2011, federal banking regulators and FHFA announced that they were taking enforcement action

against MERS and MERSCORP to address significant weaknesses in, among other things, oversight,

management supervision and corporate governance at MERS and MERSCORP that were uncovered as part of

the regulators’ review of mortgage servicers’ foreclosure processing. Failures by MERS or MERSCORP to

apply prudent and effective process controls and to comply with legal and other requirements could pose

counterparty, operational, reputational and legal risks for us. If investigations or new regulation or legislation

restricts servicers’ use of MERS, our counterparties may be required to record all mortgage transfers in land

records, incurring additional costs and time in the recordation process. At this time, we cannot predict the

ultimate outcome of these legal challenges to, or the enforcement action against, MERS and MERSCORP or

the impact on our business, results of operations and financial condition.

A failure in our operational systems or infrastructure, or those of third parties, could materially adversely

affect our business, impair our liquidity, cause financial losses and harm our reputation.

Shortcomings or failures in our internal processes, people or systems could have a material adverse effect on

our risk management, liquidity, financial statement reliability, financial condition and results of operations;

disrupt our business; and result in legislative or regulatory intervention, liability to customers, financial losses

and damage to our reputation. For example, our business is highly dependent on our ability to manage and

process, on a daily basis, an extremely large number of transactions, many of which are highly complex,

across numerous and diverse markets and in an environment in which we must make frequent changes to our

core processes in response to changing external conditions. These transactions are subject to various legal,

accounting and regulatory standards. Our financial, accounting, data processing or other operating systems and

facilities may fail to operate properly or become disabled, adversely affecting our ability to process these

transactions. In addition, we rely on information provided by third parties in processing many of our

transactions, and that information may be incorrect or we may fail to properly manage or analyze it.

We rely upon business processes that are highly dependent on people, legacy technology and the use of

numerous complex systems and models to manage our business and produce books and records upon which

our financial statements are prepared. This reliance increases the risk that we may be exposed to financial,

reputational or other losses as a result of inadequately designed internal processes or systems, or failed

execution of our systems. While we continue to enhance our technology, operational controls and

organizational structure in order to reduce our operational risk, these actions may not be effective to manage

these risks and may create additional operational risk as we execute these enhancements. In addition, as our

use of third-party service providers for some of our business functions increases, we increasingly face the risk

of an operational failure with respect to these third parties.

We also face the risk of operational failure, termination or capacity constraints of any of the clearing agents,

exchanges, clearinghouses or other financial intermediaries we use to facilitate our securities and derivatives

transactions. Any such failure, termination or constraint could adversely affect our ability to effect transactions

or manage our exposure to risk, and could have a significant adverse impact on our business, liquidity,

financial condition, net worth and results of operations.

Our operations rely on the secure processing, storage and transmission of confidential and other information in

our computer systems and networks. Our computer systems, software and networks may be vulnerable to

breaches, unauthorized access, misuse, computer viruses or other malicious code and other events that could

187
have a security impact. If one or more of such events occur, this potentially could jeopardize our or our

customers’ or counterparties’ confidential and other information processed and stored in, and transmitted

through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our

customers’, our counterparties’ or third parties’ operations, which could result in significant losses,

reputational damage, litigation, regulatory fines or penalties, or adversely affect our business, financial

condition or results of operations. In addition, we may be required to expend significant additional resources

to modify our protective measures or to investigate and remediate vulnerabilities or other exposures arising

from operational and security risks.

In addition, we have experienced, and expect we may continue to experience, substantial changes in

management, employees and our business structure and practices since the conservatorship began. These

changes could increase our operational risk and result in business interruptions and financial losses. In

addition, due to events that are wholly or partially beyond our control, our systems could fail to operate

properly, which could lead to financial losses, business disruptions, legal and regulatory sanctions and

reputational damage.

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

Recent Sales of Unregistered Securities

Under the terms of our senior preferred stock purchase agreement with Treasury, we are prohibited from

selling or issuing our equity interests, other than as required by (and pursuant to) the terms of a binding

agreement in effect on September 7, 2008, without the prior written consent of Treasury.

We previously provided stock compensation to employees and members of the Board of Directors under the

Fannie Mae Stock Compensation Plan of 1993 and the Fannie Mae Stock Compensation Plan of 2003 (the

“Plans”). During the quarter ended September 30, 2011, 583 restricted stock units vested, as a result of which

403 shares of common stock were issued, and 180 shares of common stock that otherwise would have been

issued were withheld by us in lieu of requiring the recipients to pay us the withholding taxes due upon

vesting. All of these restricted stock units were granted prior to our entering into conservatorship. Restricted

stock units granted under the Plans typically vest in equal annual installments over three or four years

beginning on the first anniversary of the date of grant. Each restricted stock unit represents the right to receive

a share of common stock at the time of vesting. As a result, restricted stock units are generally similar to

restricted stock, except that restricted stock units do not confer voting rights on their holders. All restricted

stock units were granted to persons who were employees or members of the Board of Directors of Fannie

Mae.

The securities we issue are “exempted securities” under laws administered by the SEC to the same extent as

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

that, under the GSE Act, our equity securities are not treated as exempted securities for purposes of

Section 12, 13, 14 or 16 of the Exchange Act. As a result, our securities offerings are exempt from SEC

registration requirements and we do not file registration statements or prospectuses with the SEC under the

Securities Act of 1933 with respect to our securities offerings.

Information about Certain Securities Issuances by Fannie Mae

Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a

material direct financial obligation or become directly or contingently liable for a material obligation under an

off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03

or, if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for that

offering that are filed with the SEC.

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To comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial

obligations, we report our incurrence of these types of obligations either in offering circulars or prospectuses

(or supplements thereto) that we post on our Web site or in a current report on Form 8-K, in accordance with

a “no-action” letter we received from the SEC staff in 2004. In cases where the information is disclosed in a

prospectus or offering circular posted on our Web site, the document will be posted on our Web site within the

same time period that a prospectus for a non-exempt securities offering would be required to be filed with the

SEC.

The Web site address for disclosure about our debt securities is www.fanniemae.com/debtsearch. From this

address, investors can access the offering circular and related supplements for debt securities offerings under

Fannie Mae’s universal debt facility, including pricing supplements for individual issuances of debt securities.

Disclosure about our obligations pursuant to some of the MBS we issue, some of which may be off-balance

sheet obligations, can be found at www.fanniemae.com/mbsdisclosure. From this address, investors can access

information and documents about our MBS, including prospectuses and related prospectus supplements.

We are providing our Web site address solely for your information. Information appearing on our Web site is

not incorporated into this report.

Our Purchases of Equity Securities

The following table shows shares of our common stock we repurchased during the third quarter of 2011.

Period

Total

Number of

Shares

Purchased(1)

Average

Price Paid

per Share

Total Number of

Shares Purchased as

Part of Publicly

Announced

Program(2)

Maximum Number of

Shares that

May Yet be

Purchased Under

the Program (2)

(Shares in thousands)

2011

July 1-31 ......................... 2 $0.34 — —

August 1-31 ....................... — 0.27 — —

September 1-30 .................... — 0.27 — —

Total .......................... 2

(1) Consists of shares of common stock reacquired from employees to pay an aggregate of $576 in withholding taxes due

upon the vesting of previously issued restricted stock.

(2) We do not have any publicly announced share repurchase programs under which we could purchase our common

stock.

Dividend Restrictions

Our payment of dividends is subject to the following restrictions:

Restrictions Relating to Conservatorship. Our conservator announced on September 7, 2008 that we would

not pay any dividends on the common stock or on any series of preferred stock, other than the senior preferred

stock. In addition, FHFA’s regulations relating to conservatorship and receivership operations, which became

effective July 20, 2011, prohibit us from paying any dividends while in conservatorship unless authorized by

the Director of FHFA. The Acting Director of FHFA directs us to make dividend payments on the senior

preferred stock on a quarterly basis.

Restrictions under Senior Preferred Stock Purchase Agreement. The senior preferred stock purchase

agreement prohibits us from declaring or paying any dividends on Fannie Mae equity securities (other than the

senior preferred stock) without the prior written consent of Treasury.

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Statutory Restrictions. Under the GSE Act, FHFA has authority to prohibit capital distributions, including

payment of dividends, if we fail to meet our capital requirements. If FHFA classifies us as significantly

undercapitalized, approval of the Director of FHFA is required for any dividend payment. Under the GSE Act,

we are not permitted to make a capital distribution if, after making the distribution, we would be

undercapitalized, except the Director of FHFA may permit us to repurchase shares if the repurchase is made in

connection with the issuance of additional shares or obligations in at least an equivalent amount and will

reduce our financial obligations or otherwise improve our financial condition.

Restrictions Relating to Qualifying Subordinated Debt. During any period in which we defer payment of

interest on qualifying subordinated debt, we may not declare or pay dividends on, or redeem, purchase or

acquire, our common stock or preferred stock.

Restrictions Relating to Preferred Stock. Payment of dividends on our common stock is also subject to the

prior payment of dividends on our preferred stock and our senior preferred stock. Payment of dividends on all

outstanding preferred stock, other than the senior preferred stock, is also subject to the prior payment of

dividends on the senior preferred stock.

Item 3. Defaults Upon Senior Securities

None.

Item 4. [Removed and reserved]

Item 5. Other Information

On November 4, 2011, Gregory A. Fink, Senior Vice President and Controller of Fannie Mae, was appointed

as the company’s principal accounting officer, effective on that date. As of that date, David C. Hisey no longer

serves as the company’s principal accounting officer. Mr. Hisey continues to serve as the company’s Executive

Vice President and Deputy Chief Financial Officer.

Gregory A. Fink, 44, has been Senior Vice President—Finance of Fannie Mae since April 2009, as well as the

company’s Controller since September 2010. Mr. Fink previously served as Vice President—Financial

Reporting from October 2006 to April 2009. Mr. Fink joined Fannie Mae in March 2006 as Vice President—

Accounting Policy.

Item 6. Exhibits

An index to exhibits has been filed as part of this report beginning on page E-1 and is incorporated herein by

reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report

to be signed on its behalf by the undersigned thereunto duly authorized.

Federal National Mortgage Association

By: /s/ Michael J. Williams

Michael J. Williams

President and Chief Executive Officer

Date: November 8, 2011

By: /s/ Susan R. McFarland

Susan R. McFarland

Executive Vice President and

Chief Financial Officer

Date: November 8, 2011

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INDEX TO EXHIBITS

Item Description

3.1 Fannie Mae Charter Act (12 U.S.C. § 1716 et seq.) as amended through July 30, 2008

(Incorporated by reference to Exhibit 3.1 to Fannie Mae’s Annual Report on Form 10-K, filed

February 24, 2011.)

3.2 Fannie Mae Bylaws, as amended through January 30, 2009 (Incorporated by reference to

Exhibit 3.2 to Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2008,

filed February 26, 2009.)

31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)

31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

101. INS XBRL Instance Document*

101. SCH XBRL Taxonomy Extension Schema*

101. CAL XBRL Taxonomy Extension Calculation*

101. LAB XBRL Taxonomy Extension Labels*

101. PRE XBRL Taxonomy Extension Presentation*

101. DEF XBRL Taxonomy Extension Definition*

* The financial information contained in these XBRL documents is unaudited. The information in these

exhibits shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or

otherwise subject to the liabilities of Section 18, nor shall they be deemed incorporated by reference into

any disclosure document relating to Fannie Mae, except to the extent, if any, expressly set forth by specific

reference in such filing.

E-1
Exhibit 31.1

CERTIFICATION

PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)

I, Michael J. Williams, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 of Fannie

Mae (formally, the Federal National Mortgage Association);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to

state a material fact necessary to make the statements made, in light of the circumstances under which such

statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the

registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure

controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control

over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and

have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be designed under our supervision, to ensure that material information relating to the

registrant, including its consolidated subsidiaries, is made known to us by others within those entities,

particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over

financial reporting to be designed under our supervision, to provide reasonable assurance regarding the

reliability of financial reporting and the preparation of financial statements for external purposes in

accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in

this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end

of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that

occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case

of an annual report) that has materially affected, or is reasonably likely to materially affect, the

registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of

internal control over financial reporting, to the registrant’s auditors and the audit committee of the

registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control

over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,

process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

/s/ Michael J. Williams

Michael J. Williams

President and Chief Executive Officer

Date: November 8, 2011
Exhibit 31.2

CERTIFICATION

PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)

I, Susan R. McFarland, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 of Fannie

Mae (formally, the Federal National Mortgage Association);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to

state a material fact necessary to make the statements made, in light of the circumstances under which such

statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the

registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure

controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control

over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and

have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be designed under our supervision, to ensure that material information relating to the

registrant, including its consolidated subsidiaries, is made known to us by others within those entities,

particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over

financial reporting to be designed under our supervision, to provide reasonable assurance regarding the

reliability of financial reporting and the preparation of financial statements for external purposes in

accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in

this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end

of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that

occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case

of an annual report) that has materially affected, or is reasonably likely to materially affect, the

registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of

internal control over financial reporting, to the registrant’s auditors and the audit committee of the

registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control

over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,

process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

/s/ Susan R. McFarland

Susan R. McFarland

Executive Vice President and

Chief Financial Officer

Date: November 8, 2011
Exhibit 32.1

CERTIFICATION

In connection with the Quarterly Report on Form 10-Q of Fannie Mae (formally, the Federal National

Mortgage Association) for the quarter ended September 30, 2011, as filed with the Securities and Exchange

Commission on the date hereof (the “Report”), I, Michael J. Williams, President and Chief Executive Officer

of Fannie Mae, certify, pursuant to 18 U.S.C. Section 1350 that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities

Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and

results of operations of Fannie Mae.

/s/ Michael J. Williams

Michael J. Williams

President and Chief Executive Officer

Date: November 8, 2011

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed

as part of the Report or as a separate disclosure document.
Exhibit 32.2

CERTIFICATION

In connection with the Quarterly Report on Form 10-Q of Fannie Mae (formally, the Federal National

Mortgage Association) for the quarter ended September 30, 2011, as filed with the Securities and Exchange

Commission on the date hereof (the “Report”), I, Susan R. McFarland, Executive Vice President and Chief

Financial Officer of Fannie Mae, certify, pursuant to 18 U.S.C. Section 1350, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities

Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and

results of operations of Fannie Mae.

/s/ Susan R. McFarland

Susan R. McFarland

Executive Vice President and

Chief Financial Officer

Date: November 8, 2011

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed

as part of the Report or as a separate disclosure document.
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