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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, 2020
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from      to         
Commission file number: 0-50231
Federal National Mortgage Association
(Exact name of registrant as specified in its charter)
Fannie Mae
Federally chartered corporation
52-0883107
1100 15th Street, NW


800 232-6643
Washington, DC 20005
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
(Address of principal executive offices, including zip code) (Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: 
Title of each class Trading Symbol(s) Name of each exchange on which registered
None N/A N/A
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 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes      No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 
As of October 15, 2020, there were 1,158,087,567 shares of common stock of the registrant outstanding.



TABLE OF CONTENTS
Page
PART I—Financial Information
1
Item 1.
Item 2.
1
1
2
6
9
Item 3.
Item 4.
PART II—Other Information
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Fannie Mae Third Quarter 2020 Form 10-Q
1

MD&A | Introduction
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 provided for the exercise of certain authorities by our Board of Directors. Our directors do not have any fiduciary 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 do not know when or how the conservatorship will terminate, what further changes to our business will be made during or following conservatorship, 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 or whether we will continue to exist following conservatorship. The U.S. Department of the Treasury (“Treasury”) released a plan in September 2019 for housing finance reform (the “Treasury plan”) that includes recommendations related to ending our conservatorship. Congress and the Administration continue to consider options for reform of the housing finance system, including Fannie Mae. We are not permitted to retain more than $25 billion in capital reserves or to pay dividends or other distributions to stockholders other than Treasury. Our agreements with Treasury include covenants that significantly restrict our business activities. For additional information on the conservatorship, our uncertain future, our agreements with Treasury, and recent housing finance reform developments, see “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” in our Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”), “Risk Factors” in our 2019 Form 10-K and in this report, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations (‘MD&A’)—Legislation and Regulation” in our Form 10-Q for the quarter ended June 30, 2020 (“Second Quarter 2020 Form 10-Q”).
You should read this MD&A in conjunction with our unaudited condensed consolidated financial statements and related notes in this report and the more detailed information in our 2019 Form 10-K. You can find a “Glossary of Terms Used in This Report” in our 2019 Form 10-K. Forward-looking statements in this report are based on management’s current expectations and are subject to significant uncertainties and changes in circumstances, as we describe in “Forward-Looking Statements.” Future events and our future results may differ materially from those reflected in our forward-looking statements due to a variety of factors, including those discussed in “Risk Factors” and elsewhere in this report and in our 2019 Form 10-K.
Introduction
Fannie Mae is a leading source of financing for mortgages in the United States. Our revenues are primarily driven by guaranty fees we receive for managing the credit risk on loans underlying the mortgage-backed securities we issue. Our mission is to provide a stable source of liquidity to support housing in the U.S. for low- and moderate-income borrowers and renters. We operate in the secondary mortgage market, primarily working with lenders, who originate loans to borrowers. We do not originate loans or lend money directly to borrowers in the primary mortgage market. Instead, we securitize mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee (which we refer to as Fannie Mae MBS or our MBS); purchase mortgage loans and mortgage-related securities, primarily for securitization and sale at a later date; manage mortgage credit risk; and engage in other activities that support access to credit and the supply of affordable housing. In order to perform these activities through market cycles in accordance with our mission, we are working closely with FHFA, our conservator and regulator, to prioritize safety and soundness, strong risk management and strong corporate governance.
Through our single-family and multifamily business segments, we provided $982 billion in liquidity to the mortgage market in the first nine months of 2020, including $506 billion through our whole loan conduit that primarily supports small- to medium-sized lenders, enabling the financing of approximately 3.9 million home purchases, refinancings or rental units. Our liquidity provided in the first nine months of 2020 represents our highest level of acquisition volume since the first nine months of 2003.
Fannie Mae Provided $982 Billion in Liquidity in the First Nine Months of 2020
Unpaid Principal Balance Units
$286B
1.0M
Single-Family Home Purchases
$647B
2.3M
Single-Family Refinancings
$49B
542K
Multifamily Rental Units
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Executive Summary
Summary of Our Financial Performance
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The increase in our net income in the third quarter of 2020, compared with the third quarter of 2019, was primarily driven by an increase in net interest income due to higher loan prepayments as a result of the historically low interest rate environment, an increase in investment gains and a decrease in fair value losses. These were partially offset by a decrease in credit-related income due to expected credit losses as a result of the economic dislocation caused by the COVID-19 pandemic. Our net interest income for the third quarter of 2020 was also impacted by the application of our accounting policy for nonaccrual loans that allowed us to continue accruing interest income on delinquent loans that were current at March 1, 2020 and have been negatively impacted by the COVID-19 pandemic. As a result of this update, we recognized $763 million in interest income related to these loans in the third quarter which we would not have recognized prior to the application of our updated policy. See “Consolidated Results of Operations” for more information on our financial results and “Note 1, Summary of Significant Accounting Policies—New Accounting Guidance” for more information about our policy for nonaccrual loans.
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The decrease in our net income in the first nine months of 2020, compared with the first nine months of 2019, was primarily driven by a shift from credit-related income to credit-related expense driven by the economic dislocation caused by the COVID-19 pandemic, partially offset by an increase in net interest income due to higher loan prepayments as a result of the historically low interest rate environment. Our net interest income in the first nine months of 2020 was also impacted by our recognition of $2.2 billion in interest income as a result of the update in our application of our policy for nonaccrual loans as
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described above. We also recognized $569 million of provision for loan losses on the related accrued interest receivable in the first nine months of 2020.
Net worth. Our net worth was $20.7 billion as of September 30, 2020. This amount reflects:
our net worth of $14.6 billion as of December 31, 2019;
a reduction in our net worth in the first quarter of 2020 driven by a charge of $1.1 billion to retained earnings due to our implementation of Accounting Standards Update 2016-13, Financial Instruments—Credit Losses, Measurement of Credit Losses on Financial Instruments and related amendments (the “CECL standard”) on January 1, 2020; and
our comprehensive income of $7.2 billion for the first nine months of 2020.
See “Note 1, Summary of Significant Accounting Policies—New Accounting Guidance—The Current Expected Credit Loss Standard” for further details on our implementation of the CECL standard.
Changes in our net worth can be significantly impacted by market conditions that affect our net interest income; fluctuations in the estimated fair value of our derivatives and other financial instruments that we mark to market through our earnings; developments that affect our loss reserves, such as changes in interest rates, home prices or accounting standards, or events such as natural disasters or pandemics; and other factors, as we discuss in “Risk Factors” and “Consolidated Results of Operations” in our 2019 Form 10-K and in this report.
Financial performance. Our long-term financial performance will depend on many factors, including:
the size of and our share of the U.S. mortgage market, which in turn will depend upon macroeconomic factors such as population growth, household formation and housing supply;
borrower performance and changes in macroeconomic factors, including home prices and interest rates; and
actions by FHFA, the Administration and Congress relating to our business and housing finance reform, including the capital requirements that will be applicable to us, our ongoing financial obligations to Treasury, potential restrictions on our activities and our business footprint, our competitive environment, and actions we are required to take to support borrowers or the mortgage market.
Quarterly fluctuations in acquisition volumes, market share, guaranty fees, or acquisition credit characteristics in any one period typically have limited impact on the size and stability of our conventional guaranty book of business and the associated revenue, profitability, and credit quality. Only a portion of our guaranty book of business turns over each year. In eight of the past ten years, less than 20% of loans in our single-family conventional guaranty book of business held at year end had been originated during the year.
Historically low mortgage rates have contributed to our highest level of acquisition volume in the first nine months of 2020 since the same period in 2003. As a result, we acquired a higher-than-usual portion of our book of business during the first nine months of 2020, with 27% of the loans in our single-family conventional guaranty book of business as of September 30, 2020 originated in the first nine months of the year. Because we expect mortgage rates to remain low through 2021, we anticipate a large and growing portion of our book of business, originated in a historically-low-interest-rate environment, will have less incentive to refinance in the future, slowing the pace at which loans in our book of business turn over in future years. A slower turnover rate in our book of business would reduce our ability to increase our future revenues by increasing guaranty fees, as any such change would take longer to meaningfully increase the average charged guaranty fee on our total book of business. See “MD&A—Legislation and Regulation—Developments Relating to Exiting Conservatorship” in our Second Quarter 2020 Form 10-Q for a discussion of how this may impact our efforts to generate capital and “Consolidated Results of Operations—Net Interest Income” in this report for information on how this may affect amortization income we receive in future periods. Also see “COVID-19 Impact—Fannie Mae Response” and “Single-Family Business—Single-Family Business Metrics” in this report for a discussion of the new adverse market refinance fee we plan to implement on December 1, 2020.
As described further in “COVID-19 Impact” and “Risk Factors,” the COVID-19 pandemic has significantly affected our financial performance and we expect that it will continue to do so. Given the unprecedented nature of the COVID-19 pandemic and the fast pace at which new developments relating to the pandemic are occurring, it is difficult to assess or predict the long-term effects of the pandemic on our financial performance.
Net Worth, Treasury Funding and Senior Preferred Stock Dividends
Treasury has made a commitment under a senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. Pursuant to the senior preferred stock purchase agreement, we issued shares of senior preferred stock to Treasury in 2008.
Under the terms of the senior preferred stock, we will not owe senior preferred stock dividends to Treasury until we have accumulated over $25 billion in net worth as of the end of a quarter. Accordingly, no dividends were payable to Treasury for the third quarter of 2020, and none are payable for the fourth quarter of 2020.
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The charts below show information about our net worth, the remaining amount of Treasury’s funding commitment to us, senior preferred stock dividends we have paid Treasury and funds we have drawn from Treasury pursuant to its funding commitment.
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(1)Aggregate amount of dividends we have paid to Treasury on the senior preferred stock from 2008 through September 30, 2020. Under the terms of the senior preferred stock purchase agreement, dividend payments we make to Treasury do not offset our draws of funds from Treasury.
(2)Aggregate amount of funds we have drawn from Treasury pursuant to the senior preferred stock purchase agreement from 2008 through September 30, 2020.
The aggregate liquidation preference of the senior preferred stock increased from $135.4 billion as of June 30, 2020 to $138.0 billion as of September 30, 2020 due to the $2.5 billion increase in our net worth during the second quarter of 2020. The aggregate liquidation preference of the senior preferred stock will increase to $142.2 billion as of December 31, 2020 due to the $4.2 billion increase in our net worth during the third quarter of 2020.
If we were to draw additional funds from Treasury under the senior preferred stock purchase agreement with respect to a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw, and the aggregate liquidation preference of the senior preferred stock would increase by the amount of our draw. For a description of the terms of the senior preferred stock purchase agreement and the senior preferred stock, see “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” in our 2019 Form 10-K.
Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock. Treasury has also made a commitment under the senior preferred stock purchase agreement to provide us with funds to maintain a positive net worth under specified conditions. However, the U.S. government does not guarantee our securities or other obligations.
COVID-19 Impact
In March 2020, President Trump declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic in the United States resulted in stay-at-home orders, school closures and widespread business shutdowns across the country. Although business activity and community life have resumed to varying degrees, the future path of economic activity remains highly uncertain.
The pandemic continues to have a significant impact on our business and on our financial results. We provide a brief overview below of the economic impact of the pandemic, our response to it, and the pandemic’s impact on our business and financial results, with references to where these items are discussed in more detail in this report. We also highlight below the many uncertainties relating to the impact of the COVID-19 pandemic on Fannie Mae and the housing market.
Economic Impact
The COVID-19 pandemic caused substantial financial market volatility and has significantly adversely affected both the U.S. and global economies. While state and local governments throughout the country have re-opened their economies to varying degrees, the U.S. economy continues to be affected by the COVID-19 pandemic. Although the economy has improved significantly since the second quarter of 2020, business activity remains well below the level before the onset of the pandemic, with unemployment remaining substantially higher than pre-pandemic levels. Moreover, new daily cases of COVID-19 in the U.S. have been trending upward in October, exceeding their previous peak in July and increasing the risk of new shut-downs and reductions in business activity. The federal government has taken many actions to reduce the negative economic impact of the COVID-19 pandemic. For example, the Federal Reserve lowered the federal funds rate and increased its purchases of
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Treasury and mortgage-backed securities, purchased corporate debt securities, and established and expanded liquidity facilities to support the flow of credit to consumers and businesses. In addition, the federal government passed legislation increasing and expanding unemployment benefits, providing direct cash payments to eligible taxpayers, and allocating funds to assist businesses, states, and municipalities.
The disruption caused by the pandemic differs from previous economic downturns because of the high level of uncertainty related to the health and safety of consumers and workers. We expect the path and timing of economic recovery will be impacted by the rate of new COVID-19 cases and the associated mortality rates. We believe that sustaining the current economic recovery depends on continued growth in consumer spending, increased business activity, and an associated reduction in unemployment, all of which impact the ability of borrowers and renters to make their monthly payments. Government support, as described above, has played a role in helping to reduce the negative economic impact of the pandemic. Some of these programs have ended, including the $600 federal supplement to state unemployment benefits, which expired at the end of July. The ultimate impact of the expiration of these programs and the extent to which any future government actions will mitigate the negative impacts of COVID-19 on the U.S. economy and our business is highly unclear. The pandemic resulted in a contraction in U.S. gross domestic product (“GDP”) in the second quarter of 2020 that we expect will not be entirely offset by growth in the second half of the year. See “Key Market Economic Indicators” for information on macroeconomic conditions during the first nine months of 2020 and our current forecasts regarding future macroeconomic conditions.
Fannie Mae Response
We are taking a number of actions to help borrowers, renters, lenders and servicers manage the negative impact of the COVID-19 pandemic, including:
providing payment forbearance (that is, a temporary suspension or reduction of the borrower’s monthly mortgage payments) to single-family and multifamily borrowers with COVID-19-related financial hardships;
suspending most foreclosures and evictions;
conducting outreach efforts to provide borrowers and renters with information on the relief options available to them, including our #HeretoHelp media campaign and updating our KnowYourOptions.com website;
providing lenders and servicers temporary flexibilities for certain of our Selling Guide and Servicing Guide requirements; and
providing liquidity to lenders by purchasing a higher-than-usual volume of loans through our whole loan conduit.
We have also taken steps to mitigate the risk to Fannie Mae from the impacts of the pandemic, including the following:
Selling Guide Changes. We have temporarily changed some of our Single-Family Selling Guide requirements to help ensure that up-to-date information is being considered to support the borrower’s ability to repay the loan, such as requiring more recent documentation of borrower employment, income and assets.
Adverse Market Refinance Fee. We are implementing a new adverse market refinance fee in light of the increased costs and risk we expect to incur due to the COVID-19 pandemic. This new adverse market refinance fee is a one-time charge of 0.5% of the loan amount that the lender is required to pay at the time we acquire the loan and will be effective December 1, 2020. To help ensure that the fee does not negatively impact our affordable housing mission, the fee will only apply to eligible single-family loan refinances and will not apply to loans for home purchases, refinance loans with an original principal amount of less than or equal to $125,000, or certain HomeReady® refinance loans. The lender may choose whether to pass on all, some or none of the fee to the borrower. The new fee is intended to help us offset some of the higher projected expenses and risk due to COVID-19, including costs associated with the actions we are taking to help borrowers, lenders and servicers impacted by the pandemic, such as providing forbearances, suspending foreclosures and evictions, and offering repayment plans, payment deferrals and loan modifications.
See “Single-Family Business—Single-Family Mortgage Credit Risk Management” and “Multifamily Business—Multifamily Mortgage Credit Risk Management” for more information on the actions we are taking in response to the COVID-19 pandemic.
We have also taken steps to help protect the safety and resiliency of our workforce. From mid-March through early October 2020, we required nearly all of our workforce to work remotely. Beginning in early October, we are now allowing employees, on a voluntary basis, to request approval to return to work at some of our office locations and have established mandatory COVID-19 safety protocols for these locations. We expect a significant majority of our employees will continue to work remotely for the foreseeable future. To date, our business resiliency plans and technology systems have effectively supported this telework arrangement.
Impact on our Business and Financial Results
The economic dislocation caused by the COVID-19 pandemic was the primary driver of the decline in our net income in the first nine months of 2020, as compared with the first nine months of 2019. We significantly increased our allowance for loan losses in the first nine months of 2020 to reflect our expected loan losses as a result of the pandemic, which resulted in
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substantial credit-related expenses. We are also incurring other costs associated with the pandemic, such as paying higher fees to servicers to support providing loss mitigation to borrowers. We expect the impact of the pandemic to continue to negatively affect our financial results, contributing to lower net income in 2020 than in 2019. We could also have net losses in future periods. In addition, we expect the pandemic to negatively affect our returns on capital under FHFA’s conservatorship capital requirements. See “Consolidated Results of Operations,” “Single-Family Business” and “Multifamily Business” for more information on our financial results for the third quarter and first nine months of 2020.
We did not enter into new credit risk transfer transactions in the second quarter of 2020 due to adverse market conditions resulting from the COVID-19 pandemic. Although market conditions improved in the third quarter of 2020, we did not enter into any new credit risk transfer transactions in the third quarter and currently do not have plans to engage in additional new credit risk transfer transactions in the near future, as we evaluate FHFA’s recently proposed capital rule, FHFA’s conservatorship scorecard requirements and other factors. FHFA’s proposed capital rule would reduce the amount of capital relief we obtain from these transactions. We will continue to review our plans, which may be affected by our evaluation of the proposed capital rule and changes in the rule as it is finalized, our progress in meeting FHFA’s conservatorship scorecard, the strength of future market conditions, and our review of our overall business and capital plan to enable us to exit conservatorship. See “MD&A—Legislation and Regulation” in our Second Quarter 2020 Form 10-Q for more information on FHFA’s proposed capital rule. See “Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk” and “Multifamily Business—Multifamily Mortgage Credit Risk Management—Transfer of Multifamily Mortgage Credit Risk” for more information about our credit-risk transfer activity.
Also see “Retained Mortgage Portfolio,” “Liquidity and Capital Management” and “Risk Management” for discussions of the impact of the COVID-19 pandemic on our business.
Risks and Uncertainties
Our current forecasts and expectations relating to the impact of the COVID-19 pandemic are subject to many uncertainties and may change, perhaps substantially. It is difficult to assess or predict the impact of this unprecedented event on our business, financial results or financial condition. Factors that will impact the extent to which the COVID-19 pandemic affects our business, financial results and financial condition include: the duration, spread and severity of COVID-19 outbreaks; the actions taken to contain the virus or treat its impact, including government actions to mitigate the economic impact of the pandemic and the widespread availability and public acceptance of a COVID-19 vaccine; the extent to which consumers, workers and families feel safe resuming pre-pandemic activities; the nature, extent and success of the forbearance, payment deferrals, modifications and other loss mitigation options we provide to borrowers affected by the pandemic; accounting elections and estimates relating to the impact of the COVID-19 pandemic; borrower and renter behavior in response to the pandemic and its economic impact; how quickly and to what extent normal economic and operating conditions can resume, including whether any future outbreaks or increases in the daily number of new COVID-19 cases interrupt economic recovery; and how quickly and to what extent affected borrowers, renters and counterparties can recover from the negative economic impact of the pandemic. See “Risk Factors” for a discussion of the risks to our business, financial results and financial condition relating to the COVID-19 pandemic. See “Forward-Looking Statements” for a discussion of factors that could cause actual conditions, events or results to differ materially from those described in our forecasts, expectations and other forward-looking statements in this report.
Legislation and Regulation
The information in this section updates and supplements information regarding legislative and regulatory developments affecting our business set forth in “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” and “Business—Charter Act and Regulation” in our 2019 Form 10-K, as well as in “MD&A—Legislation and Regulation” in our Form 10-Q for the quarter ended March 31, 2020 (“First Quarter 2020 Form 10-Q”) and our Second Quarter 2020 Form 10-Q. Also see “Risk Factors” in this report and in our 2019 Form 10-K for discussions of risks relating to legislative and regulatory matters.
FHFA Instruction to Extend Timeframe for Single-Family MBS Delinquent Loan Buyout Policy
Under the terms of our MBS trust documents, we have the option or, in some instances, the obligation to purchase mortgage loans that meet specific criteria from an MBS trust. Our current policy is that, except for loans that are in forbearance or that have been granted certain other types of loss mitigation options (such as a repayment plan or payment deferral), we generally purchase loans from single-family MBS trusts when they become four consecutive monthly payments delinquent. In September 2020, FHFA instructed both us and Freddie Mac to extend the timeframe for our single-family delinquent loan buyout policy to twenty-four consecutively missed monthly payments (that is, loans that are 24 months past due), with the same exceptions noted above, effective January 1, 2021. Despite this change in policy, we currently anticipate that in most cases we will purchase delinquent loans from single-family MBS trusts prior to the 24-month deadline under one of the exceptions to the general policy, which includes loans that are permanently modified, loans subject to a short-sale or deed-in-lieu of foreclosure, loans that are paid in full and loans referred to foreclosure. FHFA’s instruction provides that this new buyout
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timeframe must be in effect for at least two years from the January 1, 2021 effective date and that market participants must be provided at least six months advance notice of any change. FHFA’s instruction also provides that we update our requirements to:
limit servicers’ obligations to advance guaranty fees to four months; and
allow servicers to receive reimbursement for advanced payments of principal and interest on a delinquent loan after four missed payments without being required to request reimbursement.
We are currently examining updates to our requirements on guaranty fee advances and reimbursement of principal and interest advances to comply with FHFA’s instruction, and expect to communicate additional details and effective dates in the future. See “Retained Mortgage Portfolio” for more information on our purchases of loans from MBS trusts.

FHFA Waiver Regarding Publication of Stress Test Results
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires certain financial companies to conduct annual stress tests to determine whether the companies have the capital necessary to absorb losses as a result of adverse economic conditions. Under FHFA regulations implementing this requirement, each year we are required to conduct a stress test using two different scenarios of financial conditions provided by FHFA—baseline and severely adverse—and to publish a summary of our stress test results for the severely adverse scenario by August 15.
FHFA regulation requires that the scenarios provided by FHFA be generally consistent with and comparable to those established by the Federal Reserve Board. Following the onset of the COVID-19 pandemic, the Federal Reserve Board considered alternative scenarios that were not included among the scenarios initially issued by FHFA. Accordingly, on August 13, 2020, FHFA issued a waiver to delay publication of our stress test results for this year so that we may include the alternative scenarios considered by the Federal Reserve Board in the summary of our results, with such other supporting analysis that the Director of FHFA may deem necessary. In September 2020, in light of the continued uncertainty posed by the COVID-19 pandemic, the Federal Reserve Board published alternative hypothetical scenarios featuring severe recessions. We will publish our 2020 stress test results after FHFA provides us with instructions regarding these alternative scenarios and a revised publication timeframe.
CDC Eviction Moratorium
On September 4, 2020, to prevent the further spread of COVID-19, the Centers for Disease Control and Prevention (the “CDC”) published an order prohibiting the eviction of any tenant, lessee or resident of a residential property for nonpayment of rent through December 31, 2020, if such person provides a specified declaration attesting that they meet the requirements to obtain the protection of the order. The requirements to obtain the protection of the order include a specified income cap and an inability to pay their full rent. The CDC order does not apply in any jurisdiction with a moratorium on residential evictions that provides the same or greater level of public-health protection. While the CDC order does not impose any obligations on Fannie Mae or its servicers to ensure compliance by borrowers, a borrower’s income may be impacted by tenants who do not pay their rent while under the protection of the CDC order. As a result, as described in “Risk Factors,” this eviction moratorium could adversely affect the ability of some of our borrowers to make payments on their loans.
2019 Housing Goals Performance
We are subject to housing goals, which establish specified requirements for our mortgage acquisitions relating to affordability or location. In October 2020, FHFA notified us that it had determined that we met all of our single-family and multifamily housing goals for 2019. See “Business—Charter Act and Regulation—GSE Act and Other Legislation—Housing Goals” in our 2019 Form 10-K for more information regarding our housing goals.
Financial Stability Oversight Council Statement on Activities-Based Review of Secondary Mortgage Market Activities
In September 2020, the Financial Stability Oversight Council (the “FSOC”) announced that it had completed an activities-based review of the secondary mortgage market, focused in particular on the activities of Fannie Mae and Freddie Mac (the “GSEs”). In assessing potential risks to financial stability, the FSOC applied the framework for an activities-based approach described in its interpretative guidance on nonbank financial company determinations issued in December 2019. This framework provides that the FSOC will consult with relevant financial regulatory agencies, consider the risk profiles and business models of market participants engaging in the activities under evaluation, and take into account existing laws and regulations that may mitigate a potential risk to U.S. financial stability.
The FSOC noted that any distress at the GSEs that affected their secondary mortgage market activities could pose a risk to financial stability if the risks are not properly mitigated. In conducting its analysis on the extent to which FHFA’s regulatory framework would adequately mitigate potential stability risks, the FSOC reviewed FHFA’s recent proposed capital rule (which we describe in “MD&A—Legislation and Regulation” in our Second Quarter 2020 Form 10-Q) and additional enhancements FHFA is implementing to the GSEs’ regulatory framework. The FSOC’s announcement provided the following suggestions for FHFA to consider relating to the proposed capital rule:
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Risk-based capital requirements. The FSOC noted that FHFA’s proposed capital rule would require aggregate credit risk capital on mortgage exposures that would lead to a substantially lower risk-based capital requirement than the bank capital framework. The FSOC encouraged FHFA and other regulatory agencies to coordinate and take other appropriate action to avoid market distortions that could increase risks to financial stability by generally taking consistent approaches to the capital requirements and other regulation of similar risks across market participants, consistent with the business models and missions of their regulated entities.
Capital buffers. The FSOC encouraged FHFA to consider the relative merits of alternative approaches for more dynamically calibrating the capital buffers. The FSOC noted that the capital buffers should be tailored to mitigate the potential risks to financial stability and otherwise ensure that the GSEs have sufficient capital to absorb losses during periods of severe stress and remain viable going concerns, while balancing other policy objectives.
Total capital sufficiency. The FSOC noted that FHFA’s proposed capital rule requires a meaningful amount of capital for the GSEs, and is a significant step towards ensuring that the GSEs would be able to provide liquidity to the secondary mortgage market and satisfy their obligations during and after a period of severe stress. However, the FSOC also noted that its analysis using benchmark comparisons suggests that risk-based capital requirements and leverage ratio requirements that are materially less than those contemplated by FHFA’s proposed capital rule would likely not adequately mitigate the potential stability risk posed by the GSEs. Moreover, the FSOC noted that it is possible that additional capital could be required for the GSEs to remain viable concerns in the event of a severely adverse stress, particularly if the GSEs’ asset quality were ever to deteriorate to levels comparable to the experience leading up to the 2008 financial crisis. The FSOC encouraged FHFA to ensure high-quality capital by implementing regulatory capital definitions that are similar to those in the U.S. banking framework. The FSOC also encouraged FHFA to require the GSEs to be sufficiently capitalized to remain viable as going concerns during and after a severe economic downturn.
The FSOC also referenced FHFA’s implementation of other significant enhancements to the GSEs’ regulatory framework that would help mitigate the potential risk to financial stability, including efforts to strengthen GSE liquidity regulation, stress testing, supervision and resolution planning. The FSOC’s announcement stated that, “Should these reforms be implemented appropriately, they will lead to a more durable secondary mortgage market that helps provide sustainable access to mortgage credit across the economic cycle and is more resistant to shocks that could impair financial intermediation or financial market functioning to a degree that would be sufficient to inflict significant damage on the broader economy.” The FSOC concluded that it will continue to monitor the secondary mortgage market activities of the GSEs and FHFA’s implementation of the regulatory framework to ensure potential risks to financial stability are adequately addressed; if the FSOC determines that such risks to financial stability are not adequately addressed by FHFA’s capital and other regulatory requirements or other risk mitigants, the FSOC may consider more formal recommendations or other actions.
Proposed Rule on New Products and Activities
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended, including by the Federal Housing Finance Regulatory Reform Act of 2008 (together, the “GSE Act”), requires us to obtain prior approval from FHFA before initially offering new products and to provide advance notice to FHFA of new activities, subject to certain exceptions. In October 2020, FHFA issued a proposed rule implementing this provision. The proposed rule establishes a process for the review of new products and activities by FHFA, including providing for a public notice and comment period with respect to new products. The proposed rule also establishes revised criteria for determining what constitutes a new activity that requires notice to FHFA and describes the activities that are excluded from the requirements of the proposed rule. The proposed rule, if adopted as final, would replace an interim final rule that has been in effect since July 2009. Once adopted, the new rule would apply both during and after our transition from conservatorship. The new rule also would cover new activities and new products proposed by Common Securitization Solutions, LLC (“CSS”), which is an affiliate of Fannie Mae.
Extension of Qualified Mortgage Patch
The Consumer Financial Protection Bureau’s (the “CFPB’s”) “ability-to-repay” rule under the Truth in Lending Act includes a general “qualified mortgage” definition, and an exception to that definition referred to as the qualified mortgage “patch,” pursuant to which conventional mortgage loans are considered qualified mortgages if they (1) meet certain qualified mortgage requirements generally and (2) are eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac operating under the conservatorship or receivership of FHFA.
As described in our Second Quarter 2020 Form 10-Q, in June 2020, the CFPB proposed a revised qualified mortgage rule that would eliminate the qualified mortgage patch and revise the general qualified mortgage definition. This proposed rule has not been finalized.
In October 2020, the CFPB issued a final rule extending the expiration of the qualified mortgage patch until the mandatory compliance date for the revised qualified mortgage rule or when Fannie Mae and Freddie Mac exit conservatorship, whichever occurs first. The qualified mortgage patch was previously scheduled to expire on the earlier of January 10, 2021 or the exit of the GSEs from conservatorship.
Fannie Mae Third Quarter 2020 Form 10-Q
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MD&A | Key Market Economic Indicators
Key Market Economic Indicators
The COVID-19 pandemic has had a significant adverse effect on both the U.S. and global economies. Below we discuss how varying macroeconomic conditions can influence our financial results across different business and economic environments. See “Executive Summary—COVID-19 Impact” for additional information on the effects of the pandemic on the economy and the uncertainty associated with its ultimate impact on our business and financial results.
Our forecasts and expectations relating to the impact of the COVID-19 pandemic are subject to many uncertainties and may change, perhaps substantially, from our current forecasts and expectations.
Selected Benchmark Interest Rates
FNM-20200930_G5.JPG
(1)According to Bloomberg.
(2)Refers to the U.S. weekly average fixed-rate mortgage rate according to Freddie Mac's Primary Mortgage Market Survey®. These rates are reported using the latest available data for a given period.
How interest rates can affect our financial results
Net interest income. In a rising interest-rate environment, our mortgage loans tend to prepay more slowly, which typically results in lower net amortization income from cost basis adjustments on mortgage loans and related debt. Conversely, in a declining interest-rate environment, our mortgage loans tend to prepay faster, typically resulting in higher net amortization income from cost basis adjustments on mortgage loans and related debt.
Fair value gains (losses). We have exposure to fair value gains and losses resulting from changes in interest rates, primarily through our mortgage commitment derivatives and risk management derivatives, which we mark to market through earnings. Fair value gains and losses on our mortgage commitment derivatives fluctuate depending on how interest rates and prices move between the time the commitment is opened and settled. The net position and composition across the yield curve of our risk management derivatives changes over time. As a result, interest rate changes (increases or decreases) and yield curve changes (parallel, steepening or flattening shifts) will generate varying amounts of fair value gains or losses in a given period. We are preparing to implement hedge accounting in the first quarter of 2021 to reduce the impact of interest-rate volatility on our financial results. For additional information on the expected impact of hedge accounting, see “Consolidated Results of Operations—Fair Value Losses, Net.”
Credit-related income (expense). Increases in mortgage interest rates tend to lengthen the expected lives of our loans, which generally increases the expected impairment and provision for credit losses on such loans. Decreases in mortgage interest rates tend to shorten the expected lives of our loans, which reduces the impairment and provision for credit losses on such loans.
Fannie Mae Third Quarter 2020 Form 10-Q
9

MD&A | Key Market Economic Indicators
Single-Family Quarterly Home Price Growth Rate(1)
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(1)Calculated internally using property data on loans purchased by Fannie Mae, Freddie Mac, and other third-party home sales data. Fannie Mae’s home price index is a weighted repeat transactions index, measuring average price changes in repeat sales on the same properties. Fannie Mae’s home price index excludes prices on properties sold in foreclosure. Fannie Mae’s home price estimates are based on preliminary data and are subject to change as additional data become available.
How home prices can affect our financial results
Actual and forecasted home prices impact our provision or benefit for credit losses.
Changes in home prices affect the amount of equity that borrowers have in their homes. Borrowers with less equity typically have higher delinquency and default rates.
As home prices increase, the severity of losses we incur on defaulted loans that we hold or guarantee decreases because the amount we can recover from the properties securing the loans increases. Decreases in home prices increase the losses we incur on defaulted loans.
Home price growth in the third quarter of 2020 was unseasonably strong despite the COVID-19 pandemic, benefiting from continued low interest rates, low levels of supply and high levels of demand, particularly from first-time homebuyers. Higher-than-expected increases in supply or decreases in demand could lead to decreases in home prices.
We currently expect home prices on a national basis to increase 7.0% in 2020, compared with 4.8% home price growth in 2019. We revised our 2020 home price forecast upward since the second quarter due to better-than-expected housing demand and continued low levels of supply through the first nine months of the year. However, we have adjusted downward our longer-term projection of home price growth as we believe there may be an eventual weakening in housing demand due to the ongoing economic and labor market weaknesses caused by the pandemic. As such, our current estimate of home price growth on a national basis for 2021 is 1.7%. We also expect significant regional variation in the timing and rate of home price growth.
Our forecasts and expectations relating to the impact of the COVID-19 pandemic are subject to many uncertainties and may change, perhaps substantially, from our current forecasts and expectations. For example, home price growth could slow and potentially decline if GDP growth is weaker than we currently expect, if unemployment, particularly among existing homeowners and potential new home buyers, is higher than we expect, or if the housing market is more sensitive to economic and labor-market weaknesses than we expect. For further discussion on housing activity, see “Single-Family Business—Single-Family Mortgage Market” and “Multifamily Business—Multifamily Mortgage Market.”
Fannie Mae Third Quarter 2020 Form 10-Q
10

MD&A | Key Market Economic Indicators
New Housing Starts(1)
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(1)According to U.S. Census Bureau and subject to revision.
How housing activity can affect our financial results
Two key aspects of economic activity that can impact supply and demand for housing and thus mortgage lending are the rate of household formation and housing construction.
Household formation is a key driver of demand for both single-family and multifamily housing. A newly formed household will either rent or purchase a home. Thus, changes in the pace of household formation can affect prices and credit performance as well as the degree of loss on defaulted loans.
Growth of household formation stimulates homebuilding. Homebuilding has typically been a cyclical leader of broader economic activity contributing to the growth of GDP and to employment. Residential construction activity has historically been a leading indicator, weakening prior to a slowdown in U.S. economic activity and accelerating prior to a recovery. However, the housing sector’s performance may vary from its historical precedent due to the many uncertainties related to the impact of the COVID-19 pandemic on the economy and the housing market, as well as uncertainty surrounding future economic or housing policy.
With regard to housing construction, a decline in housing starts results in fewer new homes being available for purchase and potentially a lower volume of mortgage originations. Construction activity can also affect credit losses through its impact on home prices. If the growth of demand exceeds the growth of supply, prices will appreciate and impact the risk profile of newly originated home purchase mortgages, depending on where in the housing cycle the market is. A reduced pace of construction is often associated with a broader economic slowdown and may signal expected increases in delinquency and losses on defaulted loans.
In light of the effects of the COVID-19 pandemic and its impact on the economy, home sales fell sharply in the second quarter but then rebounded in the third quarter. Purchase demand has remained resilient, supported by the low mortgage-rate environment. Given both the current strength in demand and low inventories, we expect single-family housing starts to further increase in the fourth quarter and full-year 2020 housing starts to exceed 2019 levels.

Fannie Mae Third Quarter 2020 Form 10-Q
11

MD&A | Key Market Economic Indicators
GDP, Unemployment Rate and Personal Consumption
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(1)GDP growth (decline) and personal consumption growth (decline) for periods prior to the third quarter of 2020 are based on the quarterly series calculated by the Bureau of Economic Analysis and are subject to revision. GDP growth and personal consumption growth for the third quarter of 2020 are based on Fannie Mae’s forecast.
(2)According to the U.S. Bureau of Labor Statistics and subject to revision.
How GDP, the unemployment rate and personal consumption can affect our financial results
Changes in GDP, the unemployment rate and personal consumption can affect several mortgage market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies. Reduced housing demand and higher loan delinquencies can contribute to credit losses.
Economic growth is a key factor for the performance of mortgage-related assets. In a growing economy, employment and income are rising, thus allowing existing borrowers to meet payment requirements, existing homeowners to consider purchasing and moving to another home, and renters to consider becoming homeowners. Homebuilding typically increases to meet the rise in demand. Mortgage delinquencies typically fall in an expanding economy, thereby decreasing credit losses.
In a slowing economy, employment and income growth slow and housing activity slows as an early indicator of reduced economic activity. Typically, as an economic slowdown intensifies, households reduce their spending. This reduction in consumption then accelerates the slowdown. An economic slowdown can lead to employment losses, impairing the ability of borrowers and renters to meet mortgage and rental payments, thus causing loan delinquencies to rise. Home sales and mortgage originations also typically fall in a slowing economy.
Due to the impact of COVID-19, the unemployment rate rose significantly and GDP declined significantly in the first half of 2020. After a partial recovery in the third quarter, we expect GDP and unemployment to improve further in the fourth quarter of 2020. Overall for full-year 2020, we expect a decline in GDP compared with 2019, as well as elevated unemployment levels from pre-pandemic levels.
See “Risk Factors—Market and Industry Risk” in our 2019 Form 10-K and “Risk Factors” in this report for further discussion of risks to our business and financial results associated with interest rates, home prices, housing activity and economic conditions.
Fannie Mae Third Quarter 2020 Form 10-Q
12

MD&A | Consolidated Results of Operations
Consolidated Results of Operations
This section discusses our condensed consolidated results of operations and should be read together with our condensed consolidated financial statements and the accompanying notes.

Summary of Condensed Consolidated Results of Operations
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2020 2019 Variance 2020 2019 Variance
(Dollars in millions)
Net interest income(1)
$ 6,656  $ 5,348  $ 1,308  $ 17,780  $ 15,371  $ 2,409 
Fee and other income 93  188  (95) 303  435  (132)
Net revenues 6,749  5,536  1,213  18,083  15,806  2,277 
Investment gains, net 653  253  400  644  847  (203)
Fair value losses, net (327) (713) 386  (1,621) (2,298) 677 
Administrative expenses (762) (749) (13) (2,265) (2,237) (28)
Credit-related income (expenses):
Benefit (provision) for credit losses 501  1,857  (1,356) (2,094) 3,732  (5,826)
Foreclosed property expense (71) (96) 25  (161) (364) 203 
Total credit-related income (expenses) 430  1,761  (1,331) (2,255) 3,368  (5,623)
Temporary Payroll Tax Cut Continuation Act of
    2011 (“TCCA”) fees
(679) (613) (66) (1,976) (1,806) (170)
Credit enhancement expense(2)
(325) (290) (35) (1,061) (782) (279)
Change in expected credit enhancement
   recoveries(3)
(48) —  (48) 413  —  413 
Other expenses, net(4)
(313) (186) (127) (792) (551) (241)
Income before federal income taxes 5,378  4,999  379  9,170  12,347  (3,177)
Provision for federal income taxes (1,149) (1,036) (113) (1,935) (2,552) 617 
Net income $ 4,229  $ 3,963  $ 266  $ 7,235  $ 9,795  $ (2,560)
Total comprehensive income $ 4,216  $ 3,977  $ 239  $ 7,224  $ 9,703  $ (2,479)
(1)Prior-period amounts have been adjusted to reflect the current-year change in presentation related to our yield maintenance fees. See “Note 1, Summary of Significant Accounting Policies” for more information about our change in presentation.
(2)Previously included in Other expenses, net. Consists of costs associated with our freestanding credit enhancements, which primarily include our Connecticut Avenue Securities® (“CAS”) and Credit Insurance Risk TransferTM (“CIRTTM”) programs, enterprise-paid mortgage insurance (“EPMI”), and certain lender risk-sharing programs. See “Note 1, Summary of Significant Accounting Policies” for more information about our change in presentation.
(3)Consists of change in benefits recognized from our freestanding credit enhancements, including any realized amounts. See “Note 1, Summary of Significant Accounting Policies” for more information about our change in presentation.
(4)Consists of debt extinguishment gains and losses, housing trust fund expenses, loan subservicing costs, servicer fees paid in connection with certain loss mitigation activities, and gains and losses from partnership investments.
Net Interest Income
Our primary source of net interest income is guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties.
Guaranty fees consist of two primary components:
base guaranty fees that we receive over the life of the loan; and
upfront fees that we receive at the time of loan acquisition primarily related to single-family loan-level pricing adjustments and other fees we receive from lenders, which are amortized into net interest income as cost basis adjustments over the contractual life of the loan. We refer to this as amortization income.
We recognize almost all of our guaranty fee revenue in net interest income because we consolidate the substantial majority of loans underlying our Fannie Mae MBS in consolidated trusts in our condensed consolidated balance sheets. Those guaranty fees are the primary component of the difference between the interest income on loans in consolidated trusts and the interest expense on the debt of consolidated trusts.
Fannie Mae Third Quarter 2020 Form 10-Q
13

MD&A | Consolidated Results of Operations
The timing of when we recognize amortization income can vary based on a number of factors, the most significant of which is a change in mortgage interest rates. In a rising interest-rate environment, our mortgage loans tend to prepay more slowly, which typically results in lower net amortization income. Conversely, in a declining interest-rate environment, our mortgage loans tend to prepay faster, typically resulting in higher net amortization income.
We also recognize net interest income on the difference between interest income earned on the assets in our retained mortgage portfolio and our other investments portfolio (collectively, our “portfolios”) and the interest expense associated with the debt that funds those assets. See “Retained Mortgage Portfolio” and “Liquidity and Capital Management—Liquidity Management—Other Investments Portfolio” for more information about our portfolios.
The table below displays the components of our net interest income from our guaranty book of business, which we discuss in “Guaranty Book of Business,” and from our portfolios. Prior period amounts have been adjusted to reflect the current year change in presentation related to our yield maintenance fees.
Components of Net Interest Income
For the Three Months Ended September 30, For the Nine Months Ended September 30,
  2020 2019 Variance 2020 2019 Variance
(Dollars in millions)
Net interest income from guaranty book of business:
Base guaranty fee income, net of TCCA $ 2,842  $ 2,478  $ 364  $ 8,119  $ 7,178  $ 941 
Base guaranty fee income related to TCCA(1)
679  613  66  1,976  1,806  170 
Net amortization income 2,713  1,487  1,226  6,174  3,851  2,323 
Total net interest income from guaranty book of business
6,234  4,578  1,656  16,269  12,835  3,434 
Net interest income from portfolios 422  770  (348) 1,511  2,536  (1,025)
Total net interest income $ 6,656  $ 5,348  $ 1,308  $ 17,780  $ 15,371  $ 2,409 
(1)Represents revenues generated by the 10 basis point guaranty fee increase we implemented pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us.
Net interest income increased in the third quarter and first nine months of 2020 compared with the third quarter and first nine months of 2019, driven by higher net amortization income and higher base guaranty fee income, partially offset by lower income from portfolios.
Higher net amortization income. A declining interest-rate environment in the third quarter and first nine months of 2020 led to significantly increased prepayment volumes as loans refinanced, which accelerated the amortization of cost basis adjustments on mortgage loans of consolidated trusts and the related debt.
When refinance activity slows, we expect the amortization rate of our loans to also slow, which will likely result in less amortization income in a given period.
Higher base guaranty fee income. An increase in the size of our guaranty book of business combined with loans with higher average base guaranty fees comprising a greater portion of our book contributed to the increase in base guaranty fee income in the third quarter and first nine months of 2020.
Lower income from portfolios. Lower yields in the third quarter and first nine months of 2020 on mortgage loans and assets in our other investments portfolio were partially offset by a decrease in interest expense on our funding debt as key benchmark rates declined as a result of the COVID-19 pandemic. For a discussion of the impact of COVID-19 on our funding needs and funding activity, see “Liquidity and Capital Management—Liquidity Management—Debt Funding.”
We expect mortgage rates to remain low through 2021, contributing to a significant amount of mortgage refinance activity and high levels of amortization income. Because a large portion of our book of business has been and is expected to be originated in a historically low interest rate environment, we anticipate that refinancing activity will decrease at some point in the future as fewer borrowers can benefit from a refinancing or as interest rates rise. Lower levels of refinancing in the future will likely slow the rate at which we amortize cost basis adjustments and therefore will likely result in lower amortization income in a given period as the average life of our outstanding book of business may extend.
Fannie Mae Third Quarter 2020 Form 10-Q
14

MD&A | Consolidated Results of Operations
Analysis of Deferred Amortization Income
We initially recognize mortgage loans and debt of consolidated trusts in our condensed consolidated balance sheets at fair value. The difference between the initial fair value and the carrying value of these instruments is recorded as a cost basis adjustment, either as a premium or a discount, in our condensed consolidated balance sheets. We amortize these cost basis adjustments over the contractual lives of the loans or debt. On a net basis, for mortgage loans and debt of consolidated trusts, we are in a premium position with respect to debt of consolidated trusts, which represents deferred income we will recognize in our condensed consolidated statements of operations and comprehensive income as amortization income in future periods.
Deferred Income Represented by Net Premium Position
on Debt of Consolidated Trusts
(Dollars in billions)
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Analysis of Net Interest Income
We have updated the application of our accounting policy for nonaccrual loans as it relates to loans negatively impacted by COVID-19. As a result, for loans that were current as of March 1, 2020 and subsequently become delinquent, we continue to accrue interest income for up to six months pursuant to an April 2020 Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (the “Interagency Statement”). If those loans are in a forbearance plan beyond six months of delinquency, we continue to accrue interest income provided collection of principal and interest continues to be reasonably assured. As a result of this update, we recognized $763 million in the third quarter of 2020 and $2.2 billion in the first nine months of 2020 in interest income related to these loans which we would not have recognized prior to the application of our updated policy. We also recognized $569 million of provision for loan losses on the related accrued interest receivable in the first nine months of 2020. This update also resulted in a significant portion of delinquent loans staying on accrual status. See “Note 1, Summary of Significant Accounting Policies” for more information about our accounting policy update and “Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management” and “Multifamily Business—Multifamily Mortgage Credit Risk Management” for details about loans in forbearance, as well as on-balance sheet loans past due 90 days or more and continuing to accrue interest.
Fannie Mae Third Quarter 2020 Form 10-Q
15

MD&A | Consolidated Results of Operations
The table below displays an analysis of our net interest income, average balances, and related yields earned on assets and incurred on liabilities. For most components of the average balances, we use a daily weighted average of unpaid principal balance net of unamortized cost basis adjustments. When daily average balance information is not available, such as for mortgage loans, we use monthly averages. Prior-period amounts have been adjusted to reflect the current-year change in presentation related to our yield maintenance fees.
Analysis of Net Interest Income and Yield(1)
For the Three Months Ended September 30,
2020 2019
Average
Balance
Interest
Income/
(Expense)
Average
Rates
Earned/Paid
Average
Balance
Interest
Income/
(Expense)
Average
Rates
Earned/Paid
(Dollars in millions)
Interest-earning assets:
Mortgage loans of Fannie Mae $ 118,270  $ 959  3.24  % $ 119,887  $ 1,248  4.16  %
Mortgage loans of consolidated trusts 3,401,660  24,851  2.92  3,185,389  27,824  3.49 
Total mortgage loans(2)
3,519,930  25,810  2.93  3,305,276  29,072  3.52 
Mortgage-related securities 9,582  63  2.63  10,859  111  4.09 
Non-mortgage-related securities(3)
152,229  133  0.34  62,294  347  2.18 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
47,200  14  0.12  29,792  178  2.34 
Advances to lenders 8,845  33  1.46  6,287  47  2.93 
Total interest-earning assets $ 3,737,786  $ 26,053  2.79  % $ 3,414,508  $ 29,755  3.48  %
Interest-bearing liabilities:
Short-term funding debt $ 33,349  $ (19) 0.22  % $ 23,064  $ (125) 2.12  %
Long-term funding debt 237,020  (806) 1.36  163,996  (1,056) 2.58 
Connecticut Avenue Securities® (“CAS”)
16,932  (188) 4.44  23,364  (356) 6.09 
Total debt of Fannie Mae 287,301  (1,013) 1.41  210,424  (1,537) 2.92 
Debt securities of consolidated trusts held by third parties
3,439,484  (18,384) 2.14  3,196,503  (22,870) 2.86 
Total interest-bearing liabilities $ 3,726,785  $ (19,397) 2.08  % $ 3,406,927  $ (24,407) 2.87  %
Net interest income/net interest yield $ 6,656  0.71  % $ 5,348  0.61  %
Fannie Mae Third Quarter 2020 Form 10-Q
16

MD&A | Consolidated Results of Operations
For the Nine Months Ended September 30,
2020 2019
Average
Balance
Interest
Income/
(Expense)
Average
Rates
Earned/Paid
Average
Balance
Interest
Income/
(Expense)
Average
Rates
Earned/Paid
(Dollars in millions)
Interest-earning assets:
Mortgage loans of Fannie Mae $ 111,752  $ 3,003  3.58  % $ 119,180  $ 3,848  4.30  %
Mortgage loans of consolidated trusts 3,326,312  78,752  3.16  3,167,172  84,597  3.56 
Total mortgage loans(2)
3,438,064  81,755  3.17  3,286,352  88,445  3.59 
Mortgage-related securities 10,474  278  3.54  9,904  320  4.31 
Non-mortgage-related securities(3)
107,155  510  0.63  61,109  1,095  2.36 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
41,030  135  0.43  37,349  698  2.46 
Advances to lenders 7,726  92  1.56  4,975  120  3.18 
Total interest-earning assets $ 3,604,449  $ 82,770  3.06  % $ 3,399,689  $ 90,678  3.56  %
Interest-bearing liabilities:
Short-term funding debt $ 38,637  $ (175) 0.60  % $ 21,138  $ (369) 2.30  %
Long-term funding debt 187,628  (2,370) 1.68  172,284  (3,272) 2.53 
Connecticut Avenue Securities® (“CAS”)
18,813  (696) 4.93  24,170  (1,114) 6.15 
Total debt of Fannie Mae 245,078  (3,241) 1.76  217,592  (4,755) 2.91 
Debt securities of consolidated trusts held by third parties
3,357,411  (61,749) 2.45  3,173,700  (70,552) 2.96 
Total interest-bearing liabilities $ 3,602,489  $ (64,990) 2.41  % $ 3,391,292  $ (75,307) 2.96  %
Net interest income/net interest yield $ 17,780  0.66  % $ 15,371  0.60  %
(1)Includes the effects of discounts, premiums and other cost basis adjustments.
(2)Average balance includes mortgage loans on nonaccrual status. For nonaccrual mortgage loans not subject to the COVID-19-related nonaccrual guidance, interest income is recognized when cash is received. Interest income from the amortization of loan fees, primarily consisting of upfront cash fees and yield maintenance fees, was $2.6 billion and $6.6 billion, respectively, for the third quarter and first nine months of 2020, compared with $1.8 billion and $4.2 billion, respectively, for the third quarter and first nine months of 2019.
(3)Consists of cash, cash equivalents and U.S Treasury securities.
Investment Gains, Net
Investment gains, net primarily includes gains and losses recognized from the sale of loans and available-for-sale (“AFS”) securities, gains and losses recognized on the consolidation and deconsolidation of securities, and the lower of cost or fair value adjustments on single-family loans held-for-sale (“HFS”).
Investment gains, net increased in the third quarter of 2020, compared with the third quarter of 2019, as a result of an increase in both volume and gains on sales of single-family reperforming loans. Investment gains decreased in the first nine months of 2020, compared with the first nine months of 2019, as a result of a lower volume of sales of single-family reperforming loans.
Fair Value Losses, Net
The estimated fair value of our derivatives, trading securities and other financial instruments carried at fair value may fluctuate substantially from period to period because of changes in interest rates, the yield curve, mortgage and credit spreads and implied volatility, as well as activity related to these financial instruments. While the estimated fair value of our derivatives that mitigate certain risk exposures may fluctuate, some of the financial instruments that generate these exposures are not recorded at fair value in our condensed consolidated financial statements.
We are preparing to implement fair value hedge accounting in the first quarter of 2021 to reduce the impact of interest-rate volatility on our financial results. Once implemented, for derivatives in designated hedges, fair value gains and losses attributable to changes in certain benchmark interest rates, such as LIBOR or SOFR, may be reduced by offsetting gains and losses in the fair value of designated hedged mortgage loans or debt. Therefore, we expect the volatility of our financial results associated with changes in interest rates will be reduced substantially. We expect fair value gains and losses driven by other factors, such as credit spreads, will remain.
Fannie Mae Third Quarter 2020 Form 10-Q
17

MD&A | Consolidated Results of Operations
The table below displays the components of our fair value gains and losses.
Fair Value Losses, Net
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2020 2019 2020 2019
(Dollars in millions)
Risk management derivatives fair value losses attributable to:
Net contractual interest expense on interest-rate swaps $ (46) $ (190) $ (216) $ (698)
Net change in fair value during the period 44  (294) (85) (541)
Total risk management derivatives fair value losses, net (2) (484) (301) (1,239)
Mortgage commitment derivatives fair value losses, net
(672) (177) (2,327) (946)
Credit enhancement derivatives fair value gains (losses), net
380  (7) 400  (31)
Total derivatives fair value losses, net
(294) (668) (2,228) (2,216)
Trading securities gains (losses), net
(91) 95  691  370 
CAS debt fair value gains (losses), net
(9) 59  465  156 
Other, net(1)
67  (199) (549) (608)
Fair value losses, net $ (327) $ (713) $ (1,621) $ (2,298)
(1)Consists of fair value gains and losses on non-CAS debt and mortgage loans held at fair value.
Fair value losses in the third quarter of 2020 were primarily driven by:
decreases in the fair value of mortgage commitment derivatives due to losses on commitments to sell mortgage-related securities as prices increased during the commitment period due to tightening spreads between current coupon yields and treasury yields, which were partially offset by gains on commitments to buy mortgage-related securities; and
losses on trading securities due to increases in U.S. Treasury yields during the period, which resulted in losses on fixed-rate securities held in our other investments portfolio.
These losses were partially offset by fair value gains in the third quarter of 2020 on credit enhancement derivatives, primarily driven by higher projected default rates on our lender risk-sharing securities as delinquencies increased on the underlying loans thus increasing the value of the securities to us.
Fair value losses in the first nine months of 2020 were primarily driven by:
decreases in the fair value of mortgage commitment derivatives due to losses on commitments to sell mortgage-related securities as prices increased during the commitment period due to tightening spreads between current coupon yields and treasury yields, which were partially offset by gains on commitments to buy mortgage-related securities;
increases in the fair value of long-term debt of consolidated trusts held at fair value, which are included in “Other, net,” due to declines in interest rates; and
net interest expense on risk management derivatives combined with decreases in the fair value of pay-fixed risk management derivatives due to declines in swap rates, which were partially offset by increases in the fair value of receive-fixed risk management derivatives.
These losses were partially offset by fair value gains in the first nine months of 2020 on trading securities and CAS debt, primarily driven by declines in interest rates and widened spreads between CAS debt yields and LIBOR, which resulted in gains on fixed-rate securities held in our other investments portfolio and our CAS debt held at fair value.
Fair value losses in the third quarter and first nine months of 2019 were primarily driven by:
net interest expense accruals on risk management derivatives combined with decreases in the fair value of pay-fixed risk management derivatives due to declines in longer-term swap rates, which were partially offset by increases in the fair value of our receive-fixed risk management derivatives;
decreases in the fair value of our mortgage commitment derivatives due to losses on commitments to sell mortgage-related securities as prices increased and interest rates declined during the commitment period, partially offset by gains on commitments to buy mortgage-related securities; and
increases in the fair value of our long-term debt of consolidated trusts held at fair value, which are included in “Other, net,” due to declines in interest rates.
Fannie Mae Third Quarter 2020 Form 10-Q
18

MD&A | Consolidated Results of Operations

Credit-Related Income (Expense)
Our credit-related income or expense can vary substantially from period to period based on a number of factors, such as changes in actual and forecasted home prices or property valuations, fluctuations in actual and forecasted interest rates, borrower payment behavior, events such as natural disasters or pandemics, the types and volume of our loss mitigation activities, including forbearances and loan modifications, the volume of foreclosures completed, and the redesignation of loans from held for investment (“HFI”) to HFS. In recent periods, the redesignation of certain reperforming and nonperforming single-family loans has been a significant driver of credit-related income. We suspended new sales of reperforming and nonperforming loans in the second quarter of 2020, as investor interest in purchasing these loans was severely impacted by the COVID-19 pandemic and its effects. Market conditions for the sale of these loans, particularly reperforming loans, has improved following the second quarter. As a result, we resumed sales of reperforming loans in the third quarter.
Our credit-related income or expense and our loss reserves can also be impacted by updates to the models, assumptions and data used in determining our allowance for loan losses. The January 1, 2020 CECL standard implementation introduced additional volatility in our financial results as credit-related income or expense now includes expected lifetime losses on our loans and thus are sensitive to fluctuations in the factors detailed above. Although CECL impacts the timing and amount of estimated credit-related income or expense recognized in any given period, it does not impact the amount of credit losses we ultimately realize at the time a loan is written-off.
As described below, during 2020, our credit-related income or expense and our loss reserves have been significantly affected by our estimates of the impact of the COVID-19 pandemic, which require significant management judgment. Changes in our estimates of borrowers that will ultimately receive forbearance (referred to as our “cumulative forbearance take-up rate”) and even more significantly, the loss mitigation outcomes of affected borrowers after the forbearance period ends, remain uncertain and can affect the amount of credit-related income or expense we recognize. Although we believe the estimates underlying our allowance determination are reasonable, we may observe future volatility in these estimates as we continue to observe actual loan performance data and update our models and assumptions relating to this unprecedented event.
Fannie Mae Third Quarter 2020 Form 10-Q
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MD&A | Consolidated Results of Operations
Benefit (Provision) for Credit Losses
The table below provides a quantitative analysis of the drivers for the third quarter and first nine months of 2020 of our single-family and multifamily benefit or provision for credit losses and the decrease or increase in expected benefit from freestanding credit enhancements. The benefit or provision for credit losses includes our benefit or provision for loan losses, accrued interest receivable losses, and our guaranty loss reserves. It excludes the transition impact of adopting the CECL standard, which was recorded as an adjustment to retained earnings as of January 1, 2020. Many of the drivers that contribute to our benefit or provision for credit losses overlap or are interdependent. The attribution shown below is based on internal allocation estimates.
Components of Benefit (Provision) for Credit Losses and Change in Expected Credit Enhancement Recoveries
For the Three Months Ended September 30, 2020 For the Nine Months Ended September 30, 2020
(Dollars in millions)
Single-family benefit (provision) for credit losses:
Changes in loan activity(1)
$ (18) $ (85)
Redesignation of loans from HFI to HFS 510  685 
Actual and forecasted home prices 939  355 
Actual and projected interest rates 25  1,366 
Change in actual and expected loan delinquencies and change in assumptions regarding COVID-19 forbearance(2)
(537) (3,127)
Provision from allowance on accrued interest receivable (391) (560)
Other(3)
14  (43)
Single-family benefit (provision) for credit losses 542  (1,409)
Multifamily provision for credit losses:
Changes in loan activity(1)
(32) (106)
Actual and projected interest rates (48) 226 
Actual and projected economic data and estimated impact of the COVID-19
pandemic
49  (825)
Other(3)
(11) 22 
Multifamily provision for credit losses (42) (683)
Total benefit (provision) for credit losses(4)
$ 500  $ (2,092)
Change in expected credit enhancement recoveries:(5)
Single-family $ (48) $ 218 
Multifamily (4) 188 
Total change in expected credit enhancement recoveries $ (52) $ 406 
(1)Primarily consists of loan liquidations, new troubled debt restructurings (“TDRs”), amortization of concessions granted to borrowers and the impact of FHFA’s Advisory Bulletin 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” (the “Advisory Bulletin”). For multifamily, changes in loan activity also includes changes in the allowance due to loan delinquencies and the impact of changes in debt service coverage ratios (“DSCRs”) based on updated property financial information, which is used to assess loan credit quality.
(2)Includes changes in the allowance due to assumptions regarding loss mitigation when loans exit forbearance.
(3)For single-family, includes changes in the reserve for guaranty losses that are not separately included in the other components. For multifamily, includes provision for allowance on accrued interest receivable.
(4)Excludes credit losses on our AFS securities, which are included in “Benefit (provision) for credit losses” in Summary of Condensed Consolidated Results of Operations.
(5)Includes only changes in expected credit enhancement recoveries for active loans. Recoveries received after foreclosure, which are included in “Changes in expected credit enhancement recoveries” in Summary of Condensed Consolidated Results of Operations, are not included.
Fannie Mae Third Quarter 2020 Form 10-Q
20

MD&A | Consolidated Results of Operations
Single-Family Benefit (Provision) for Credit Losses
The primary factors that contributed to our single-family provision for credit losses in the first nine months of 2020 were:
Provision from change in actual and expected loan delinquencies and change in assumptions regarding COVID-19 forbearance, which includes adjustments to modeled results. Our single-family provision for credit losses for the first nine months of 2020 was driven by the economic dislocation caused by the COVID-19 pandemic, with the majority of the provision recognized in the first quarter of 2020. Estimating expected credit losses as a result of the COVID-19 pandemic continues to require significant management judgment regarding a number of matters, including our expectations surrounding borrower participation in a COVID-19-related forbearance, the type and extent of loss mitigation that may be needed when the loan exits forbearance, the high degree of uncertainty regarding the future course of the pandemic and its effect on the economy, and expectations regarding the impact of fiscal stimulus to support borrowers. As a result, the model used to estimate single-family credit losses does not capture the entirety of losses we expect to incur relating to COVID-19. The model has consumed data from the initial months of the pandemic, including loan delinquencies, and updated credit profile data for loans in forbearance. As more of this data was consumed by our credit loss model, we reduced the non-modeled adjustment initially recorded in the first quarter.
In the third quarter of 2020, management continued to apply its judgment and supplement model results as of September 30, 2020, taking into account the continued high degree of uncertainty regarding the future impact of the pandemic and its effect on the economy, future economic and housing policy, and extended foreclosure moratoriums. These factors, combined with higher loan delinquencies, led to an increase in provision attributable to these COVID-19-related factors, which was partially offset by a decrease in our estimated single-family cumulative forbearance take-up. This take-up rate, calculated by loan count, was revised from 12.5% as of June 30, 2020 to 8.8% as of September 30, 2020, based on recent economic data and actual forbearance activity observed through the third quarter of 2020. See “Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management—Single-Family Loans in Forbearance” for information on our single-family loans in forbearance.
Provision from allowance on accrued interest receivable. As a result of our update to the application of our nonaccrual policy in the second quarter of 2020, we continue to accrue interest for those loans that were negatively impacted by the COVID-19 pandemic. This update resulted in a significant portion of delinquent loans, that were current as of March 1, 2020 and subsequently became delinquent, remaining on accrual status. Accordingly, we established a valuation allowance for expected credit losses on the accrued interest receivable balance based on our evaluation of collectability. As shown in the table above, this contributed to a provision for credit losses attributable to this factor for the third quarter and first nine months of 2020. See “Note 1, Summary of Significant Accounting Policies” for more information about our nonaccrual policy.
The factors discussed above were offset by the factors below, which contributed to a single-family benefit for credit losses for the third quarter of 2020 and reduced the amount of single-family provision for credit losses recognized in the first nine months of 2020:
Benefit from lower actual and projected interest rates. For much of 2020, we continued to be in a historically low interest rate environment. As mortgage interest rates decline, we expect an increase in future prepayments on single-family loans, including modified loans. Higher expected prepayments shorten the expected lives of modified loans, which decreases the expected impairment relating to term and interest-rate concessions provided on these loans and results in a benefit for credit losses. Most of this benefit from lower actual and projected mortgage interest rates was recognized in the first half of 2020.
Benefit from the redesignation of certain reperforming single-family loans from HFI to HFS. In the third quarter of 2020, we resumed sales of reperforming loans after our suspension of new loan sales in the second quarter of 2020. As a result, we redesignated certain reperforming single-family loans from HFI to HFS in the third quarter of 2020, as we no longer intend to hold them for the foreseeable future or to maturity. Upon redesignation of these loans, we recorded the loans at the lower of cost or fair value with a write-off against the allowance for loan losses. Amounts recorded in the allowance related to these loans exceeded the amounts written off, which contributed to a net benefit for credit losses for the third quarter and first nine months of 2020 as shown in the table above.
Benefit from actual and expected home price growth. In the first quarter of 2020, we significantly reduced our expectations for home price growth to near-zero for 2020. However, the negative impact from the first quarter of 2020 was more than offset by an increase in actual home price growth in the second and third quarters. See “Key Market Economic Indicators” for additional information about how home prices affect our credit loss estimates, including a discussion of our home price forecast.
Multifamily Provision for Credit Losses
Our multifamily provision for credit losses in the third quarter and first nine months of 2020 was primarily driven by:
Provision from actual and projected economic data and estimated impact of the COVID-19 pandemic, which includes adjustments to modeled results. Our multifamily provision for credit losses for the first nine months of 2020 was driven
Fannie Mae Third Quarter 2020 Form 10-Q
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MD&A | Consolidated Results of Operations
by higher expected losses as a result of the economic dislocation caused by the COVID-19 pandemic and heightened economic uncertainty, driven by elevated unemployment, which we expect will result in a decrease of multifamily property income and property values. In addition, the multifamily provision for credit losses includes increased expected credit losses on seniors housing loans, as these properties have been disproportionately impacted by the pandemic. The vast majority of these expenses were recognized in the first half of 2020. Consistent with the single-family discussion above, the model we use to estimate multifamily credit losses does not capture the entirety of losses we expect to incur relating to COVID-19. The model has consumed data from the initial months of the pandemic, but we continue to apply management judgment and supplement model results as of September 30, 2020, taking into account the continued high degree of uncertainty that remains relating to the impact of the pandemic.
In the third quarter of 2020, our multifamily provision for expected losses as a result of the COVID-19 pandemic was relatively flat. In September 2020, we decreased our estimate for credit losses due to a downward revision of our estimated multifamily cumulative forbearance take-up rate from 10.0% as of June 30, 2020 to 5.0% as of September 30, 2020 based on the unpaid principal balance of the multifamily book of business, as well as an improved forecasted unemployment rate. These benefits were offset by continued economic uncertainty, forbearance arrangements that were extended beyond the initial term, and overall increased delinquencies. These factors, inclusive of the other components of the multifamily provision for credit losses, resulted in a modest expense for the third quarter of 2020. See “Multifamily Business—Multifamily Mortgage Credit Risk Management—-Multifamily Problem Loan Management and Foreclosure Prevention” for information on our multifamily loans in forbearance.
The table below provides quantitative analysis of the drivers for the third quarter and first nine months of 2019 of our single-family benefit for credit losses. The presentation of our components represents amounts recognized prior to our transition to the lifetime loss model prescribed by the CECL standard. Many of the drivers that contribute to our benefit for credit losses overlap or are interdependent. The attribution shown below is based on internal allocation estimates. The table does not include our multifamily benefit (provision) for credit losses as the amounts for 2019 were less than $50 million.
Components of Benefit for Credit Losses
For the Three Months Ended September 30, 2019 For the Nine Months Ended September 30, 2019
(Dollars in millions)
Single-family benefit for credit losses:
Changes in loan activity(1)
$ 161  $ 383 
Redesignation of loans from HFI to HFS
553  1,203 
Actual and forecasted home prices 121  661 
Actual and projected interest rates 126  486 
Other(2)
879  1,020 
Total single-family benefit for credit losses $ 1,840  $ 3,753 
(1)Primarily consists of changes in the allowance due to loan delinquency, loan liquidations, new TDRs, amortization of concessions granted to borrowers and the impact of FHFA’s Advisory Bulletin.
(2)Primarily consists of the impact of model and assumption changes and changes in the reserve for guaranty losses that are not separately included in the other components.
The primary factors that contributed to our benefit for credit losses in the third quarter and first nine months of 2019 were:
Redesignation of certain reperforming single-family loans from HFI to HFS during the periods.
An enhancement in the third quarter of 2019 to the model used to estimate cash flows for individually impaired single-family loans within our allowance for loan losses. This enhancement was performed as a part of management’s routine model performance review process. In addition to incorporating recent loan performance data, this model enhancement better captures recent prepayment activity, default rates, and loss severity in the event of default. The enhancement resulted in a decrease to our allowance for loan losses and an incremental benefit for credit losses of approximately $850 million and is included in “Other” in the table above.
An increase in actual and forecasted home prices.
Lower actual and projected mortgage interest rates.
Changes in loan activity. Higher loan liquidation activity generally occurs during a lower interest rate environment as loans prepay, and during the peak home buying season of the second and third quarters of each year. When mortgage loans prepay, we reverse any remaining allowance related to these loans, which contributed to the benefit for credit losses.
Fannie Mae Third Quarter 2020 Form 10-Q
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MD&A | Consolidated Results of Operations
TCCA Fees
Pursuant to the TCCA, in 2012, FHFA directed us to increase our single-family guaranty fees by 10 basis points and remit this increase to Treasury. This TCCA-related revenue is included in “Net interest income” and the expense is recognized as “TCCA fees” in our condensed consolidated financial statements. TCCA fees increased in the third quarter and first nine months of 2020 compared with the third quarter and first nine months of 2019 as our book of business subject to the TCCA continued to grow.
FHFA has provided guidance that we are not required to accrue or remit TCCA fees to Treasury with respect to loans backing MBS trusts that have been delinquent for four months or longer. Once payments on such loans resume, we will resume accrual and remittance to Treasury of the associated TCCA fees on the loans. See “Business—Charter Act and Regulation—GSE Act and Other Legislation—Guaranty Fees and Pricing” in our 2019 Form 10-K for further discussion of the TCCA.
Credit Enhancement Expense    
Credit enhancement expense consists of costs associated with our freestanding credit enhancements, which primarily include our CAS and CIRT programs, EPMI, and amortization expense for certain lender risk-sharing programs. For our CAS and CIRT programs, this expense is generally based on the outstanding balance of the covered reference pool. Therefore, the periodic expense at the transaction or security level generally increases or decreases as the outstanding covered balance increases or decreases, respectively. We exclude from this expense costs related to our CAS transactions accounted for as debt instruments and credit risk transfer programs accounted for as derivative instruments. Credit enhancement expense has been presented as a separate line item for all periods presented. In prior periods, credit enhancement expenses were recorded in “Other expenses, net.” We discuss the transfer of mortgage credit risk in “Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk” and “Multifamily Business—Multifamily Mortgage Credit Risk Management—Transfer of Multifamily Mortgage Credit Risk.”
Change in Expected Credit Enhancement Recoveries
Change in expected credit enhancement recoveries consists of the change in benefits recognized from our freestanding credit enhancements, including any realized amounts. Benefits, if any, from our CAS, CIRT and EPMI programs previously recorded in “Fee and other income” have been reclassified to “Change in expected credit enhancement recoveries” for all periods presented. Benefits from other lender risk-sharing programs, including our multifamily Delegated Underwriting and Servicing (“DUS®) program, were recorded as a reduction of credit-related expense in periods prior to 2020. However, with our adoption of the CECL standard on January 1, 2020, benefits from freestanding credit enhancements are no longer recorded as a reduction of credit-related expenses. These benefits from lender risk-sharing have been reclassified into “Change in expected credit enhancement recoveries” on a prospective basis beginning January 1, 2020.
Other Expenses, Net
Other expenses primarily consists of debt extinguishment gains and losses, housing trust fund expenses, loan subservicing costs, servicer fees paid in connection with certain loss mitigation activities, and gains and losses from partnership investments. We expect our fees paid to servicers for loss mitigation work to increase into 2021 as single-family borrowers who received a COVID-19-related forbearance enter into various loss mitigation solutions once the forbearance period ends, such as repayment plans, payment deferrals or loan modifications. For additional information about our loans in forbearance, see “Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Loans in Forbearance.”
Fannie Mae Third Quarter 2020 Form 10-Q
23

MD&A | Consolidated Balance Sheet Analysis

Consolidated Balance Sheet Analysis
This section discusses our condensed consolidated balance sheets and should be read together with our condensed consolidated financial statements and the accompanying notes.
Summary of Condensed Consolidated Balance Sheets
As of
September 30, 2020 December 31, 2019 Variance
(Dollars in millions)
Assets
Cash and cash equivalents and federal funds sold and securities purchased
   under agreements to resell or similar arrangements
$ 50,172  $ 34,762  $ 15,410 
Restricted cash 73,516  40,223  33,293 
Investments in securities 144,367  50,527  93,840 
Mortgage loans:
Of Fannie Mae 119,337  101,668  17,669 
Of consolidated trusts 3,439,709  3,241,510  198,199 
Allowance for loan losses (11,703) (9,016) (2,687)
Mortgage loans, net of allowance for loan losses 3,547,343  3,334,162  213,181 
Deferred tax assets, net 12,808  11,910  898 
Other assets 36,397  31,735  4,662 
Total assets $ 3,864,603  $ 3,503,319  $ 361,284 
Liabilities and equity
Debt:
Of Fannie Mae $ 289,423  $ 182,247  $ 107,176 
Of consolidated trusts 3,530,381  3,285,139  245,242 
Other liabilities 24,106  21,325  2,781 
Total liabilities 3,843,910  3,488,711  355,199 
Fannie Mae stockholders’ equity:
Senior preferred stock 120,836  120,836  — 
Other net deficit (100,143) (106,228) 6,085 
Total equity 20,693  14,608  6,085 
Total liabilities and equity $ 3,864,603  $ 3,503,319  $ 361,284 
Cash and Cash Equivalents and Federal Funds Sold and Securities Purchased under Agreements to Resell or Similar Arrangements and Investments in Securities
The increase in both (1) cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar arrangements and (2) investments in securities from December 31, 2019 to September 30, 2020 was primarily driven by the investment of proceeds from new debt issuances, which we discuss in “Liquidity and Capital Management—Debt Funding—Debt Funding Activity,” as well as proceeds from loan payoffs. These funds were mostly invested in U.S. Treasury securities at period end.
Mortgage Loans, Net of Allowance
The mortgage loans reported in our condensed consolidated balance sheets are classified as either HFS or HFI and include loans owned by Fannie Mae and loans held in consolidated trusts.
Mortgage loans, net of allowance increased as of September 30, 2020 compared with December 31, 2019, primarily driven by:
an increase in mortgage loans due to acquisitions, primarily from higher mortgage refinance activity, outpacing liquidations and sales;
partially offset by an increase in our allowance for loan losses due to losses we expect to incur as a result of the COVID-19 pandemic and the impact of our adoption of the CECL standard on January 1, 2020.
For additional information on our mortgage loans, see “Note 3, Mortgage Loans,” and for additional information on changes in our allowance for loan losses, see “Note 4, Allowance for Loan Losses.”
Fannie Mae Third Quarter 2020 Form 10-Q
24

MD&A | Consolidated Balance Sheet Analysis

Debt
The increase in debt of Fannie Mae from December 31, 2019 to September 30, 2020 was primarily driven by new long-term debt issuances to support elevated refinancing and purchase activity, in preparation for the implementation in December 2020 of the new liquidity risk management requirements issued by FHFA, and in anticipation of future potential liquidity needs as a result of the COVID-19 pandemic. The increase in debt of consolidated trusts from December 31, 2019 to September 30, 2020 was primarily driven by sales of Fannie Mae MBS, which are accounted for as issuances of debt of consolidated trusts in our condensed consolidated balance sheets, since the MBS certificate ownership is transferred from us to a third party. See “Liquidity and Capital Management—Debt Funding” for a summary of activity in debt of Fannie Mae and a comparison of the mix between our outstanding short-term and long-term debt. Also see “Note 7, Short-Term and Long-Term Debt” for additional information on our total outstanding debt.
Stockholders’ Equity
Our net equity increased as of September 30, 2020 compared with December 31, 2019 by the amount of our comprehensive
income recognized during the first nine months of 2020, partially offset by a charge of $1.1 billion to retained earnings due to our implementation of the CECL standard on January 1, 2020. See “Note 1, Summary of Significant Accounting Policies—New Accounting Guidance—The Current Expected Credit Loss Standard” for further details.
The aggregate liquidation preference of the senior preferred stock increased from $135.4 billion as of June 30, 2020 to $138.0 billion as of September 30, 2020 due to the $2.5 billion increase in our net worth during the second quarter of 2020. The aggregate liquidation preference of the senior preferred stock will increase to $142.2 billion as of December 31, 2020 due to the $4.2 billion increase in our net worth during the third quarter of 2020.
Retained Mortgage Portfolio
We use our retained mortgage portfolio primarily to provide liquidity to the mortgage market through our whole loan conduit and to support our loss mitigation activities, particularly in times of economic stress when other sources of liquidity to the mortgage market may decrease or withdraw. Previously, we also used our retained mortgage portfolio for investment purposes.
Our retained mortgage portfolio consists of mortgage loans and mortgage-related securities that we own, including Fannie Mae MBS and non-Fannie Mae mortgage-related securities. Assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties are not included in our retained mortgage portfolio.
The chart below separates the instruments within our retained mortgage portfolio, measured by unpaid principal balance, into three categories based on each instrument’s use:
Lender liquidity, which includes balances related to our whole loan conduit activity, supports our efforts to provide liquidity to the single-family and multifamily mortgage markets.
Loss mitigation supports our loss mitigation efforts through the purchase of delinquent loans from our MBS trusts.
Other represents assets that were previously purchased for investment purposes. More than half of the balance of “Other” as of September 30, 2020 consisted of Fannie Mae reverse mortgage securities and reverse mortgage loans. We expect the amount of assets in “Other” will continue to decline over time as they liquidate, mature or are sold.
Retained Mortgage Portfolio
(Dollars in billions)
FNM-20200930_G10.JPG
The increase in our retained mortgage portfolio as of September 30, 2020 compared with December 31, 2019 was primarily due to an increase in our acquisitions of loans through our whole loan conduit, which primarily supports liquidity for small- to medium-sized lenders, in the first nine months of 2020 driven by higher mortgage refinance activity. This increase was partially
Fannie Mae Third Quarter 2020 Form 10-Q
25

MD&A | Retained Mortgage Portfolio
offset by a decrease in our legacy investment portfolio due to continued liquidations of loans and a decrease in our loss mitigation portfolio due to the sale of reperforming loans.
The table below displays the components of our retained mortgage portfolio, measured by unpaid principal balance. Based on the nature of the asset, these balances are included in either “Investments in securities” or “Mortgage loans of Fannie Mae” in our Summary of Condensed Consolidated Balance Sheets shown above.
Retained Mortgage Portfolio
As of
September 30, 2020 December 31, 2019
(Dollars in millions)
Lender liquidity:
Agency securities(1)
$ 42,196  $ 38,375 
Mortgage loans 44,061  21,152 
Total lender liquidity 86,257  59,527 
Loss mitigation mortgage loans(2)
57,460  60,731 
Other:
Reverse mortgage loans 14,533  17,129 
Mortgage loans 5,287  6,546 
Reverse mortgage securities(3)
7,324  7,575 
Private-label and other securities 495  1,250 
Fannie Mae-wrapped private-label securities 534  581 
Mortgage revenue bonds 218  272 
Total other 28,391  33,353 
Total retained mortgage portfolio $ 172,108  $ 153,611 
Retained mortgage portfolio by segment:
Single-family mortgage loans and mortgage-related securities $ 166,038  $ 145,179 
Multifamily mortgage loans and mortgage-related securities $ 6,070  $ 8,432 
(1)Consists of Fannie Mae, Freddie Mac, and Ginnie Mae mortgage-related securities, including Freddie Mac securities guaranteed by Fannie Mae. Excludes Fannie Mae and Ginnie Mae reverse mortgage securities and Fannie Mae-wrapped private-label securities.
(2)Includes single-family loans classified as TDRs that were on accrual status of $33.1 billion and $38.2 billion as of September 30, 2020 and December 31, 2019, and single-family loans on nonaccrual status of $18.9 billion and $19.6 billion as of September 30, 2020 and December 31, 2019. Includes multifamily loans classified as TDRs that were on accrual status of $26 million and $51 million as of September 30, 2020 and December 31, 2019, respectively, and multifamily loans on nonaccrual status of $355 million and $132 million as of September 30, 2020 and December 31, 2019, respectively.
(3)Consists of Fannie Mae and Ginnie Mae reverse mortgage securities.
The amount of mortgage assets that we may own is capped at $250 billion by our senior preferred stock purchase agreement with Treasury, and FHFA has directed that we further cap our mortgage assets at $225 billion. The Treasury plan includes a recommendation that Treasury and FHFA amend our senior preferred stock purchase agreement to further reduce the cap on our investments in mortgage-related assets, and also to restrict our retained mortgage portfolio to solely supporting the business of securitizing MBS. See “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” in our 2019 Form 10-K for additional information on our portfolio cap and the Treasury plan.
Effective January 31, 2020, FHFA directed us to include 10% of the notional value of interest-only securities in calculating the size of the retained portfolio for the purpose of determining compliance with the senior preferred stock purchase agreement retained portfolio limits and associated FHFA guidance. As of September 30, 2020, 10% of the notional value of our interest-only securities was $2.4 billion, which is not included in the table above.
Under the terms of our MBS trust documents, we have the option or, in some instances, the obligation, to purchase mortgage loans that meet specific criteria from an MBS trust. The purchase price for these loans is the unpaid principal balance of the loan plus accrued interest. If a delinquent loan remains in a single-family MBS trust, the servicer is responsible for advancing the borrower’s missed scheduled principal and interest payments to the MBS holders for up to four months, after which time we must make these missed payments. In addition, we must eventually reimburse servicers for advanced principal and interest payments. In deciding whether and when to exercise our option to purchase a loan from a single-family MBS trust, we consider a variety of factors, including, but not limited to, our cost of funds, general market conditions, and relevant market yields. The cost of purchasing most delinquent loans from a single-family Fannie Mae MBS trust and holding them in our retained mortgage portfolio is currently less than the cost of advancing delinquent payments to security holders.
Fannie Mae Third Quarter 2020 Form 10-Q
26

MD&A | Retained Mortgage Portfolio
Our current policy is that, except for loans that are in forbearance or that have been granted certain other types of loss mitigation options (such as a repayment plan or payment deferral), we generally purchase loans from single-family MBS trusts when they become four consecutive monthly payments delinquent. As described in “Legislation and Regulation—FHFA Instruction to Extend Timeframe for Single-Family MBS Delinquent Loan Buyout Policy,” in September 2020, FHFA instructed both us and Freddie Mac to extend the timeframe for our single-family delinquent loan buyout policy to twenty-four consecutively missed monthly payments (that is, loans that are 24 months past due), with the same exceptions noted above, effective January 1, 2021. Despite this change in policy, we currently anticipate that in most cases we will purchase delinquent loans from single-family MBS trusts prior to the 24-month deadline under one of the exceptions to the general policy, which includes loans that are permanently modified, loans subject to a short-sale or deed-in-lieu of foreclosure, loans that are paid in full and loans referred to foreclosure.
In support of our loss mitigation strategies, we purchased $9.2 billion of loans from our single-family MBS trusts in the first nine months of 2020, the substantial majority of which were delinquent, compared with $7.8 billion of loans purchased from single-family MBS trusts in the first nine months of 2019. We expect the amount of loans we buy out of trusts to increase significantly in 2021 as a result of COVID-19-related loan delinquencies and loss mitigation strategies, which will increase the size of our retained mortgage portfolio, perhaps substantially. The volume of loans we ultimately buy, the timing of those purchases, and the length of time those loans remain in our retained mortgage portfolio remain highly uncertain and depend on a number of factors, including the success of our loss mitigation activities. If the amount of mortgage loans we purchase from MBS trusts is significantly higher than we currently expect, or if liquidations and sales from our retained mortgage portfolio are significantly lower than we expect, we may seek to obtain FHFA’s and Treasury’s prior written consent to increase our current mortgage asset limit. Depending on the amount, if any, by which Treasury and FHFA agree to any request we make for an increase in our mortgage asset limit, our business activities may be constrained. See “Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management—Single-Family Loans in Forbearance” and “Multifamily Business—Multifamily Mortgage Credit Risk Management—Multifamily Problem Loan Management and Foreclosure Prevention” for information on our loans in forbearance.
Guaranty Book of Business
Our “guaranty book of business” consists of:
Fannie Mae MBS outstanding, excluding the portions of any structured securities we issue that are backed by Freddie Mac securities;
mortgage loans of Fannie Mae held in our retained mortgage portfolio; and
other credit enhancements that we provide on mortgage assets.
“Total Fannie Mae guarantees” consists of:
our guaranty book of business; and
the portions of any structured securities we issue that are backed by Freddie Mac securities.
We and Freddie Mac began issuing single-family uniform mortgage-backed securities, or “UMBS®,” in June 2019. In this report, we use the term “Fannie Mae-issued UMBS” to refer to single-family Fannie Mae MBS that are directly backed by fixed-rate mortgage loans and generally eligible for trading in the to-be-announced (“TBA”) market. We use the term “Fannie Mae MBS” or “our MBS” to refer to any type of mortgage-backed security that we issue, including UMBS, Supers®, Real Estate Mortgage Investment Conduit securities (“REMICs”) and other types of single-family or multifamily mortgage-backed securities.
Some Fannie Mae MBS that we issue are backed in whole or in part by Freddie Mac securities. When we resecuritize Freddie Mac securities into Fannie Mae-issued structured securities, such as Supers and REMICs, our guaranty of principal and interest extends to the underlying Freddie Mac securities. However, Freddie Mac continues to guarantee the payment of principal and interest on the underlying Freddie Mac securities that we have resecuritized. We do not charge an incremental guaranty fee to include Freddie Mac securities in the structured securities that we issue. References to our single-family guaranty book of business in this report exclude Freddie Mac-acquired mortgage loans underlying Freddie Mac securities that we have resecuritized.
Fannie Mae Third Quarter 2020 Form 10-Q
27

MD&A | Guaranty Book of Business

The table below displays the composition of our guaranty book of business based on unpaid principal balance. Our single-family guaranty book of business accounted for 90% of our guaranty book of business as of September 30, 2020 and December 31, 2019.
Composition of Fannie Mae Guaranty Book of Business(1)
As of
September 30, 2020 December 31, 2019
Single-Family
Multifamily
Total
Single-Family
Multifamily
Total
(Dollars in millions)
Conventional guaranty book of business(2)
$ 3,221,939  $ 367,209  $ 3,589,148  $ 2,997,475  $ 341,522  $ 3,338,997 
Government guaranty book of business(3)
23,402  2,303  25,705  27,422  1,079  28,501 
Guaranty book of business 3,245,341  369,512  3,614,853  3,024,897  342,601  3,367,498 
Freddie Mac securities guaranteed by Fannie Mae(4)
117,748    117,748  50,100  —  50,100 
Total Fannie Mae guarantees $ 3,363,089  $ 369,512  $ 3,732,601  $ 3,074,997  $ 342,601  $ 3,417,598 
(1)Includes other single-family Fannie Mae guaranty arrangements of $1.1 billion and $1.3 billion as of September 30, 2020 and December 31, 2019, and other multifamily Fannie Mae guaranty arrangements of $10.8 billion and $11.3 billion as of September 30, 2020 and December 31, 2019, respectively. The unpaid principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.
(2)Refers to mortgage loans and mortgage-related securities that are not guaranteed or insured, in whole or in part, by the U.S. government.
(3)Refers to mortgage loans and mortgage-related securities guaranteed or insured, in whole or in part, by the U.S. government.
(4)Consists of approximately (i) $93.3 billion and $37.8 billion in unpaid principal balance of Freddie Mac-issued UMBS backing Fannie Mae-issued Supers as of September 30, 2020 and December 31, 2019, respectively; and (ii) $24.4 billion and $12.3 billion in unpaid principal balance of Freddie Mac securities backing Fannie Mae-issued REMICs as of September 30, 2020 and December 31, 2019, respectively. Our total exposure to Freddie Mac securities backing Fannie Mae-issued REMICs disclosed as of December 31, 2019 may have been lower because a portion of the Freddie Mac securities backing these Fannie Mae-issued REMICs may have been backed by Fannie Mae MBS.
The GSE Act requires us to set aside each year an amount equal to 4.2 basis points of the unpaid principal balance of our new business purchases and to pay this amount to specified U.S. Department of Housing and Urban Development (“HUD”) and Treasury funds in support of affordable housing. In February 2020, we paid $280 million to the funds based on our new business purchases in 2019. For the first nine months of 2020, we recognized an expense of $413 million related to this obligation based on $982.6 billion in new business purchases during the period. We expect to pay this amount to the funds in 2021, plus additional amounts to be accrued based on our new business purchases in the fourth quarter of 2020. See “Business—Charter Act and Regulation—GSE Act and Other Legislation—Affordable Housing Allocations” in our 2019 Form 10-K for more information regarding this obligation.
Fannie Mae Third Quarter 2020 Form 10-Q
28

MD&A | Business Segments
Business Segments
We have two reportable business segments: Single-Family and Multifamily. The Single-Family business operates in the secondary mortgage market relating to single-family mortgage loans, which are secured by properties containing four or fewer residential dwelling units. The Multifamily business operates in the secondary mortgage market relating primarily to multifamily mortgage loans, which are secured by properties containing five or more residential units.
The chart below displays the net revenues and net income for each of our business segments for the first nine months of 2019 compared with the first nine months of 2020. Net revenues consist of net interest income and fee and other income.
Business Segment Net Revenues and Net Income
(Dollars in billions)
FNM-20200930_G11.JPG FNM-20200930_G12.JPG
In the following sections, we describe each segment’s business metrics, financial results and credit performance.
Single-Family Business
Our Single-Family business provides liquidity to the mortgage market primarily by acquiring single-family loans from lenders and securitizing those loans into Fannie Mae MBS, which are either delivered to the lenders or sold to investors or dealers.
This section supplements and updates information regarding our Single-Family business segment in our 2019 Form 10-K. See “MD&A—Single-Family Business” in our 2019 Form 10-K for additional information regarding the primary business activities, customers and competition of our Single-Family business.
Single-Family Market Activity
Single-Family Mortgage Acquisition Share
Our share of the single-family mortgage acquisition market fluctuates from period to period. We currently estimate our single-family acquisition share in the last three years was within the range of 23% to 30%, supporting approximately one in four single-family mortgage loans. As shown in the table below, our share of total mortgage acquisitions over a longer period of time has varied within a wider range and is often impacted by economic cycles. For example, during periods of recession, our acquisition share has historically increased as some other market competitors reduced their acquisitions.
Our competitors for the acquisition of single-family mortgage assets are financial institutions and government agencies that manage residential mortgage credit risk or invest in residential mortgage loans, including Freddie Mac, the Federal Housing Administration (“FHA”), the United States Department of Veterans Affairs (“VA”), Ginnie Mae (which primarily guarantees securities backed by FHA-insured loans and VA-guaranteed loans), the Federal Home Loan Banks (“FHLBs”), U.S. banks and thrifts, securities dealers, insurance companies, pension funds, investment funds and other mortgage investors.
Fannie Mae Third Quarter 2020 Form 10-Q
29


MD&A | Single-Family Business
The table below shows our estimated share of mortgage acquisitions from 2000 through the first nine months of 2020.
Fannie Mae Single-Family Acquisition Share of Total Market Originations(1)
FNM-20200930_G13.JPG
(1) Acquisition share is calculated as the ratio of Fannie Mae single-family acquisitions over our estimate of total market originations. We exclude our purchase of delinquent loans from our MBS trusts in the calculation of our acquisition share.
(2) Recession periods include any year in which any month in that year is determined to be recessionary by the National Bureau of Economic Research.
Single-Family Mortgage-Related Securities Issuances Share
Our single-family Fannie Mae MBS issuances were $383.8 billion for the third quarter of 2020, compared with $188.5 billion for the third quarter of 2019. This increase was driven by a high volume of refinance activity in the second and third quarters of 2020 due to historically low mortgage rates. Based on the latest data available, the chart below displays our estimated share of single-family mortgage-related securities issuances in the third quarter of 2020 as compared with that of our primary competitors for the issuance of single-family mortgage-related securities.
Single-Family Mortgage-Related Securities Issuances Share
Third Quarter 2020
FNM-20200930_G14.JPG
Fannie Mae Third Quarter 2020 Form 10-Q
30


MD&A | Single-Family Business
We estimate our share of single-family mortgage-related securities issuances was 45% in the second quarter of 2020 and 39% in the third quarter of 2019.
Single-Family Mortgage Market
Housing activity improved substantially in the third quarter of 2020, remaining resilient in the face of the COVID-19 pandemic. While we expect a slight slowdown in housing activity in the fourth quarter of 2020, we expect solid gains in total home sales and housing starts for full-year 2020 over 2019 levels. Additionally, we expect mortgage rates to remain low through 2021, supporting refinance originations, which we expect to reach the highest level since 2003 this year.
Housing activity increased in the third quarter of 2020 compared with the second quarter of 2020. Total existing home sales averaged 6.1 million units annualized in the third quarter of 2020, compared with 4.3 million units in the second quarter of 2020, according to data from the National Association of REALTORS®. According to the U.S. Census Bureau, new single-family home sales increased during the third quarter of 2020, averaging an annualized rate of 973,000 units, compared with 703,000 units in the second quarter of 2020.
The 30-year fixed mortgage rate averaged 2.95% in the third quarter of 2020, compared with 3.23% in the second quarter of 2020, according to Freddie Mac’s Primary Mortgage Market Survey®.
We forecast that total originations in the U.S. single-family mortgage market in 2020 will increase from 2019 levels by approximately 66%, from an estimated $2.46 trillion in 2019 to $4.08 trillion in 2020 (an all-time high for annual originations), and that the amount of originations in the U.S. single-family mortgage market that are refinances will increase from an estimated $1.14 trillion in 2019 to $2.59 trillion in 2020.
Presentation of Our Single-Family Guaranty Book of Business
For purposes of the information reported in this “Single-Family Business” section, we measure the single-family guaranty book of business using the unpaid principal balance of our mortgage loans underlying Fannie Mae MBS outstanding. By contrast, the single-family guaranty book of business presented in the “Composition of Fannie Mae Guaranty Book of Business” table in the “Guaranty Book of Business” section is based on the unpaid principal balance of the Fannie Mae MBS outstanding, rather than the unpaid principal balance of the underlying mortgage loans. These amounts differ primarily as a result of payments we receive on underlying loans that have not yet been remitted to the MBS holders. As measured for purposes of the information reported below, our single-family conventional guaranty book of business was $3,120.3 billion as of September 30, 2020 and $2,951.9 billion as of December 31, 2019.
Single-Family Business Metrics
Net interest income for our Single-Family business is driven by the guaranty fees we charge and the size of our single-family conventional guaranty book of business. Our business volume and growth in our guaranty book of business is affected by the rate of growth in total U.S. residential mortgage debt outstanding, the size of the U.S. residential mortgage market and our share of mortgage acquisitions. The guaranty fees we charge are based on the characteristics of the loans we acquire. We may adjust our guaranty fees in light of market conditions and to achieve return targets, which are based on FHFA’s conservatorship capital framework that currently applies to Fannie Mae. As a result, the average charged guaranty fee on new acquisitions may fluctuate based on the credit quality and product mix of loans acquired, as well as market conditions and other factors.
We are implementing a new adverse market refinance fee effective December 1, 2020. The new fee is intended to help us offset some of the higher projected expenses and risk due to COVID-19. For every $1 billion in eligible refinance loans we acquire, we will collect $5 million in adverse market refinance fees, which will be amortized into net interest income over the contractual life of the loans as a cost basis adjustment. See “Executive Summary—COVID-19 Impact” for additional information on the new adverse market refinance fee we plan to implement.
Fannie Mae Third Quarter 2020 Form 10-Q
31


MD&A | Single-Family Business
The charts below display our average charged guaranty fees, net of TCCA fees, on our single-family conventional guaranty book of business and on new single-family conventional loan acquisitions, along with our average single-family conventional guaranty book of business and our single-family conventional loan acquisitions for the periods presented.
Select Single-Family Business Metrics
(Dollars in billions)
FNM-20200930_G15.JPG FNM-20200930_G16.JPG
Average charged guaranty fee on single-family conventional guaranty book of business, net of TCCA fees(1)
Average single-family conventional guaranty book of business(2)
Average charged guaranty fee on new single-family conventional acquisitions, net of TCCA fees(1)
Single-family conventional acquisitions
(1) Excludes the impact of a 10 basis point guaranty fee increase implemented pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us.
(2) Our single-family conventional guaranty book of business primarily consists of single-family conventional mortgage loans underlying Fannie Mae MBS outstanding. It also includes single-family conventional mortgage loans of Fannie Mae held in our retained mortgage portfolio, and other credit enhancements that we provide on single-family conventional mortgage assets. Our single-family conventional guaranty book of business does not include: (a) non-Fannie Mae single-family mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty; (b) mortgage loans guaranteed or insured, in whole or in part, by the U.S. government; or (c) Freddie Mac-acquired mortgage loans underlying Freddie Mac-issued UMBS that we have resecuritized. Our average single-family conventional guaranty book of business is based on quarter-end balances.
Average charged guaranty fee represents, on an annualized basis, the sum of the average base guaranty fees for our single-family conventional guaranty arrangements, which we receive over the life of the loan, during the period, plus the recognition of any upfront cash payments relating to these guaranty arrangements based on an estimated average life at the time of acquisition. Management uses average charged guaranty fee on new acquisitions as a metric to assess the reasonableness of our compensation for the credit risk we manage on newly acquired single-family loans.
Our average charged guaranty fee on new single-family conventional acquisitions decreased in the third quarter of 2020 compared with the third quarter of 2019 due to the improved credit risk profile of our third quarter 2020 acquisitions. See “Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring” for further information on the credit risk profile of our acquisitions in the third quarter of 2020 as compared with the third quarter of 2019.
If refinances continue to be a large proportion of our acquisitions in 2021, we expect our average charged guaranty fee on new single-family conventional acquisitions to increase in 2021 as a result of the new adverse market refinance fee we plan to implement on December 1, 2020.
We use loan-level price adjustments, including various upfront risk-based fees and the new adverse market refinance fee, to price for the credit risk we assume in providing our guaranty. FHFA must approve changes to the national loan-level price adjustments we charge and can direct us to make other changes to our single-family guaranty fee pricing.
Fannie Mae Third Quarter 2020 Form 10-Q
32


MD&A | Single-Family Business
Single-Family Business Financial Results(1)
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2020 2019 Variance 2020 2019 Variance
(Dollars in millions)
Net interest income(2)
$ 5,870  $ 4,484  $ 1,386  $ 15,350  $ 12,942  $ 2,408 
Fee and other income 73  156  (83) 238  350  (112)
Net revenues 5,943  4,640  1,303  15,588  13,292  2,296 
Investment gains, net 583  198  385  527  709  (182)
Fair value losses, net (244) (719) 475  (1,734) (2,364) 630 
Administrative expenses (634) (634) —  (1,888) (1,899) 11 
Credit-related income (expense)(3)
478  1,747  (1,269) (1,556) 3,391  (4,947)
TCCA fees(2)
(679) (613) (66) (1,976) (1,806) (170)
Credit enhancement expense (274) (240) (34) (897) (639) (258)
Change in expected credit enhancement
  recoveries(4)
(48) —  (48) 218  —  218 
Other expenses, net(5)
(307) (184) (123) (722) (540) (182)
Income before federal income taxes 4,818  4,195  623  7,560  10,144  (2,584)
Provision for federal income taxes (1,049) (872) (177) (1,623) (2,125) 502 
Net income $ 3,769  $ 3,323  $ 446  $ 5,937  $ 8,019  $ (2,082)
(1)See “Note 9, Segment Reporting” for information about our segment allocation methodology.
(2)Reflects the impact of a 10 basis point guaranty fee increase implemented pursuant to the TCCA, the incremental revenue from which is remitted to Treasury. The resulting revenue is included in net interest income and the expense is recognized as “TCCA fees.”
(3)Consists of the benefit or provision for credit losses and foreclosed property income or expense. The presentation of our credit-related income for the three and nine months ended September 30, 2019 represents amounts recognized prior to our transition to the lifetime loss model prescribed by the CECL standard.
(4)Consists of change in benefits recognized from our single-family freestanding credit enhancements, which primarily relate to our CAS and CIRT programs. See “Note 1, Summary of Significant Accounting Policies” for more information about our change in presentation.
(5)Consists primarily of debt extinguishment gains and losses, housing trust fund expenses, servicer fees paid in connection with certain loss mitigation activities, and loan subservicing costs.
Net Interest Income
Single-family net interest income increased in the third quarter and first nine months of 2020 compared with the third quarter and first nine months of 2019, driven by higher net amortization income and higher base guaranty fee income, partially offset by lower income from portfolios.
The drivers of net interest income for the Single-Family segment are consistent with the drivers of net interest income in our condensed consolidated statements of operations and comprehensive income, which we discuss in “Consolidated Results of Operations—Net Interest Income.”
Investment Gains, Net
Single-family investment gains, net increased in the third quarter of 2020, compared with the third quarter of 2019, as a result of an increase in both volume and gains on sales of single-family reperforming loans.
Single-family investment gains, net decreased in the first nine months of 2020, compared with the first nine months of 2019, as a result of a lower volume of sales of single-family reperforming loans.
The drivers of investment gains, net for the Single-Family segment are consistent with the drivers of investment gains, net in our condensed consolidated statements of operations and comprehensive income, which we discuss in “Consolidated Results of Operations—Investment Gains, Net.”
Fair Value Losses, Net
Fair value losses, net in the third quarter of 2020 were primarily driven by decreases in the fair value of our mortgage commitment derivatives and losses on trading securities, partially offset by fair value gains on credit enhancement derivatives.
Fannie Mae Third Quarter 2020 Form 10-Q
33


MD&A | Single-Family Business
Fair value losses, net in the first nine months of 2020 were primarily driven by decreases in the fair value of our mortgage commitment derivatives and increases in the fair value of long-term debt of consolidated trusts held at fair value, partially offset by fair value gains on trading securities and CAS debt.
Fair value losses, net in the third quarter and first nine months of 2019 were primarily driven by net interest expense accruals on our risk management derivatives combined with decreases in the fair value of our pay-fixed risk management derivatives, partially offset by increases in the fair value of our receive-fixed risk management derivatives, and decreases in the fair value of our mortgage commitment derivatives. In addition, increases in the fair value of our debt also resulted in fair value losses for the third quarter and first nine months of 2019.
The drivers of fair value losses, net for the Single-Family segment are consistent with the drivers of fair value losses, net in our condensed consolidated statements of operations and comprehensive income, which we discuss in “Consolidated Results of Operations—Fair Value Losses, Net.”
As we discuss in “Consolidated Results of Operations—Fair Value Losses, Net,” we expect that implementing a hedge accounting program will reduce the volatility of our financial results associated with changes in interest rates, while fair value gains and losses driven by other factors such as credit spreads will remain.
Credit-Related Income (Expense)
Credit-related income for the third quarter of 2020 was primarily driven by a decrease in our allowance for loan losses due to an increase in actual and forecasted home prices and the redesignation of certain reperforming single-family loans from HFI to HFS. This was partially offset by an increase to our allowance for loan losses we expect to incur as a result of the COVID-19 pandemic as well as an increase in the allowance on accrued interest receivable due to the updated application of our nonaccrual policy.
Credit-related expense for the first nine months of 2020 was primarily driven by an increase in our allowance for loan losses due to losses we expect to incur as a result of the COVID-19 pandemic as well as an increase in the allowance on accrued interest receivable due to the updated application of our nonaccrual policy. This was partially offset by lower actual and projected mortgage interest rates and the redesignation of certain reperforming single-family loans from HFI to HFS.
Credit-related income for the third quarter and first nine months of 2019 was primarily driven by the redesignation of certain single-family loans from HFI to HFS; a model enhancement, including the incorporation of updated loan performance data; an increase in actual and forecasted home prices; lower actual and projected mortgage interest rates; and changes in loan activity related to loan liquidations.
See “Consolidated Results of Operations—Credit-Related Income (Expense)” in this report for more information on the primary factors that contributed to our single-family credit-related income (expense).
Single-Family Mortgage Credit Risk Management
This section updates our discussion of single-family mortgage credit risk management in our 2019 Form 10-K. For additional information on our acquisition and servicing policies, underwriting and servicing standards, quality control process, repurchase requests, and representation and warranty framework, see “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management” in our 2019 Form 10-K.
Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards
COVID-19 Selling Policies
We are working closely with Freddie Mac, under the guidance and at the direction of FHFA, to offer temporary measures during the COVID-19 national emergency that provide lenders with the clarity and flexibility to continue lending in a prudent and responsible manner.
Temporary policy flexibilities and updates to our Selling Guide requirements are designed to mitigate the operational impact of COVID-19 on loan underwriting and originations. These flexibilities include:
purchasing certain loans that are subject to a COVID-19-related payment forbearance at the time of sale, subject to payment of a loan-level price adjustment;
offering additional methods of obtaining verbal verifications of borrower employment;
allowing alternative property valuation methods; and
expanding guidelines for the use of a power of attorney.
Temporary policy updates to provide clarity and mitigate risk include:
assessment of more recent documentation of borrower employment (including self-employment), income, and assets;
Fannie Mae Third Quarter 2020 Form 10-Q
34


MD&A | Single-Family Business
requiring evidence of receipt of funds from stocks, stock options and mutual funds when used for down payment or closing costs, and reducing the value to 70% when considered for reserves;
requiring additional due diligence regarding the payment status of a borrower’s existing mortgage loans;
providing clarity for assessing self-employment income for qualifying purposes; and
requiring that loans be no more than six months old to be eligible for sale to us.
COVID-19 Servicing Policies
We also continue to work with Freddie Mac as instructed by FHFA and/or as required by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), to implement temporary policies to enable our single-family loan servicers to better assist borrowers impacted by COVID-19. We issued initial requirements to servicers on temporary policies to assist borrowers impacted by COVID-19 in March 2020, and have subsequently amended the requirements. We will continue monitoring the market to determine whether further adjustments to or extensions of our temporary policies are appropriate.
These temporary policies include requiring that our single-family loan servicers:
provide forbearance upon the request of any single-family borrower experiencing a financial hardship due to the COVID-19 pandemic, regardless of the borrower’s delinquency status and with no additional documentation required other than the borrower’s attestation to a financial hardship caused by COVID-19. The borrower must be provided an initial forbearance plan for a period up to 180 days, and that forbearance period may be extended for up to an additional 180 days at the request of the borrower. If the borrower’s COVID-19-related hardship has not been resolved during an incremental forbearance period, the servicer must extend the borrower’s forbearance period at the borrower’s request, not to exceed 12 months total;
beginning July 1, 2020, offer a payment deferral workout option to eligible borrowers who have resolved a COVID-19-related financial hardship but cannot afford to bring the loan current by reinstating the loan (that is, repaying all the missed payments at one time) or through a repayment plan (that is, repaying the missed payments over time). The payment deferral workout option allows the borrower to defer up to 12 months of past-due payments, without interest, to the end of the loan term (or when the loan is refinanced, the property is sold or the loan is otherwise paid off before the end of the loan term). All other terms of the loan remain unchanged;
suspend foreclosures and foreclosure-related activities for single-family properties through at least December 31, 2020, other than for vacant or abandoned properties; and
report as current to the credit bureaus the obligation of a borrower who receives a forbearance plan or other form of relief as a result of the COVID-19 pandemic during the covered period if the borrower was current before the accommodation and makes payments as agreed under the accommodation in accordance with the Fair Credit Reporting Act, as amended by the CARES Act.
Certain states and localities have implemented COVID-19-related borrower and renter protections that are more extensive than the CARES Act requirements or our Servicing Guide requirements. States and localities may continue to consider such proposals in the future or extend the time period of existing protections. Our servicers must comply with all applicable laws.
Desktop Underwriter Update
As part of our comprehensive risk management approach, we periodically update our proprietary automated underwriting system, Desktop Underwriter® (“DU®”), to reflect changes to our underwriting and eligibility guidelines. As part of normal business operations, we regularly review DU to determine whether its risk analysis and eligibility assessment are appropriate based on the current market environment and loan performance information. As a result of our most recent review, in April 2020 we enhanced the DU eligibility assessment to help Fannie Mae and our customers better manage credit risk in the current market while providing sustainable options to borrowers. We expect this change will result in a modest reduction of loans with high-risk factors being eligible for acquisition through DU.
We will continue to closely monitor loan acquisitions and market conditions and, as appropriate, make changes to DU, including its eligibility criteria, to ensure that the loans we acquire are consistent with our risk appetite and FHFA guidance.
For further information regarding Desktop Underwriter, please see “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards” in our 2019 Form 10-K.
Fannie Mae Third Quarter 2020 Form 10-Q
35


MD&A | Single-Family Business
Single-Family Portfolio Diversification and Monitoring
The table below displays our single-family conventional business volumes and our single-family conventional guaranty book of business, based on certain key risk characteristics that we use to evaluate the risk profile and credit quality of our single-family loans. We provide additional information on the credit characteristics of our single-family loans in quarterly financial supplements, which we furnish to the U.S. Securities and Exchange Commission (“SEC”) with current reports on Form 8-K. Information in our quarterly financial supplements is not incorporated by reference into this report.
Key Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1)
Percent of Single-Family Conventional
Business Volume at Acquisition(2)
Percent of Single-Family Conventional
Guaranty Book of Business(3)
As of
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2020 2019 2020 2019 September 30, 2020 December 31, 2019
Original loan-to-value (“LTV”) ratio:(4)
<= 60% 28  % 16  % 25  % 16  % 21  % 19  %
60.01% to 70% 15  12  16  12  14  13 
70.01% to 80% 33  38  34  37  36  37 
80.01% to 90% 11  13  12  13  12  12 
90.01% to 95% 10  14  10  14  11  12 
95.01% to 100% 3  3  4 
Greater than 100% * —  * * 2 
Total 100  % 100  % 100  % 100  % 100  % 100  %
Weighted average
71  % 77  % 72  % 77  % 74  % 76  %
Average loan amount $ 281,202  $ 269,204  $ 279,641  $ 255,909  $ 181,361  $ 173,804 
Estimated mark-to-market LTV ratio:(5)
<= 60% 52  % 54  %
60.01% to 70% 17  17 
70.01% to 80% 18  16 
80.01% to 90% 9 
90.01% to 100% 4 
Greater than 100% * *
Total 100  % 100  %
Weighted average
57  % 57  %
Product type:
Fixed-rate:(6)
Long-term 84  % 90  % 85  % 90  % 85  % 85  %
Intermediate-term 16  10  15  14  13 
Total fixed-rate
100  100  100  99  99  98 
Adjustable-rate * * * 1 
Total 100  % 100  % 100  % 100  % 100  % 100  %
Number of property units:
1 unit 99  % 98  % 98  % 98  % 97  % 97  %
2 to 4 units 1  2  3 
Total 100  % 100  % 100  % 100  % 100  % 100  %
Property type:
Single-family homes 92  % 91  % 92  % 91  % 91  % 91  %
Condo/Co-op 8  8  9 
Total 100  % 100  % 100  % 100  % 100  % 100  %
Fannie Mae Third Quarter 2020 Form 10-Q
36


MD&A | Single-Family Business
Percent of Single-Family Conventional
Business Volume at Acquisition(2)
Percent of Single-Family Conventional
Guaranty Book of Business(3)
As of
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2020 2019 2020 2019 September 30, 2020 December 31, 2019
Occupancy type:
Primary residence 92  % 93  % 93  % 91  % 89  % 89  %
Second/vacation home 4  3  4 
Investor 4  4  7 
Total 100  % 100  % 100  % 100  % 100  % 100  %
FICO credit score at origination:
< 620   % * % * % * % 1  % %
620 to < 660 2  2  5 
660 to < 680 2  2  4 
680 to < 700 5  5  7 
700 to < 740 17  22  19  23  20  21 
>= 740 74  65  72  61  63  61 
Total 100  % 100  % 100  % 100  % 100  % 100  %
Weighted average 762  751  759  747  749  746 
Debt-to-income (“DTI”) ratio at origination:(7)
<= 43% 81  % 74  % 79  % 71  % 77  % 76  %
43.01% to 45% 7  8  9 
Greater than 45% 12  17  13  20  14  15 
Total 100  % 100  % 100  % 100  % 100  % 100  %
Weighted average 33  % 36  % 34  % 36  % 35  % 35  %
Loan purpose:
Purchase 32  % 54  % 31  % 59  % 40  % 45  %
Cash-out refinance 17  18  19  19  20  19 
Other refinance 51  28