Annual Report (10-k)

FEDERAL NATIONAL MORTGAGE ASSOCIATION FANNIE 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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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
Securities registered pursuant to Section 12(g) of the Act: 
Common Stock, without par value
8.25% Non-Cumulative Preferred Stock, Series T, stated value $25 per share
Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series S, stated value $25 per share
7.625% Non-Cumulative Preferred Stock, Series R, stated value $25 per share
6.75% Non-Cumulative Preferred Stock, Series Q, stated value $25 per share
Variable Rate Non-Cumulative Preferred Stock, Series P, stated value $25 per share
Variable Rate Non-Cumulative Preferred Stock, Series O, stated value $50 per share
5.375% Non-Cumulative Convertible Series 2004-1 Preferred Stock, stated value $100,000 per share
5.50% Non-Cumulative Preferred Stock, Series N, stated value $50 per share
4.75% Non-Cumulative Preferred Stock, Series M, stated value $50 per share
5.125% Non-Cumulative Preferred Stock, Series L, stated value $50 per share
5.375% Non-Cumulative Preferred Stock, Series I, stated value $50 per share
5.81% Non-Cumulative Preferred Stock, Series H, stated value $50 per share
Variable Rate Non-Cumulative Preferred Stock, Series G, stated value $50 per share
Variable Rate Non-Cumulative Preferred Stock, Series F, stated value $50 per share
5.10% Non-Cumulative Preferred Stock, Series E, stated value $50 per share
5.25% Non-Cumulative Preferred Stock, Series D, stated value $50 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨      No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨        No  þ
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 þ     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 þ     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.  o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No þ
The aggregate market value of the common stock held by non-affiliates of the registrant computed by reference to the last reported sale price of the common stock quoted on the OTCQB, operated by OTC Markets Group, Inc., on June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $2.5 billion.
As of February 1, 2021, there were 1,158,087,567 shares of common stock of the registrant outstanding.





Table of Contents
Page
PART I
Item 1. Business
1
Introduction
1
Executive Summary
2
Summary of Our Financial Performance
2
COVID-19 Impact
3
Our Mission and Charter
5
Mortgage Securitizations
6
Managing Mortgage Credit Risk
9
Conservatorship, Treasury Agreements and Housing Finance Reform
12
Legislation and Regulation
19
Human Capital
29
Where You Can Find Additional Information
30
Forward-Looking Statements
30
Item 1A. Risk Factors
34
Item 1B. Unresolved Staff Comments
57
Item 2. Properties
57
Item 3. Legal Proceedings
57
Item 4. Mine Safety Disclosures
59
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
60
Item 6. Selected Financial Data
61
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
63
Key Market Economic Indicators
63
Consolidated Results of Operations
67
Consolidated Balance Sheet Analysis
79
Retained Mortgage Portfolio
80
Guaranty Book of Business
83
Business Segments
84
Single-Family Business
85
Single-Family Mortgage Market
87
Single-Family Market Activity
88
Single-Family Business Metrics
90
Single-Family Business Financial Results
91
Single-Family Mortgage Credit Risk Management
94
Multifamily Business
122
Multifamily Mortgage Market
124
Multifamily Market Activity
125
Multifamily Business Metrics
125
Multifamily Business Financial Results
128
Multifamily Mortgage Credit Risk Management
129
Liquidity and Capital Management
136
Fannie Mae 2020 Form 10-K
i


Off-Balance Sheet Arrangements
145
Risk Management
147
Mortgage Credit Risk Management
149
Institutional Counterparty Credit Risk Management
151
Market Risk Management, including Interest-Rate Risk Management
159
Liquidity and Funding Risk Management
164
Operational Risk Management
164
Critical Accounting Policies and Estimates
165
Impact of Future Adoption of New Accounting Guidance
166
Glossary of Terms Used in This Report
166
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
169
Item 8. Financial Statements and Supplementary Data
169
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
169
Item 9A. Controls and Procedures
169
Item 9B. Other Information
174
PART III
Item 10. Directors, Executive Officers and Corporate Governance
174
Directors
174
Corporate Governance
178
ESG Matters
185
Report of the Audit Committee of the Board of Directors
188
Executive Officers
190
Item 11. Executive Compensation
192
Compensation Discussion and Analysis
192
Compensation Committee Report
210
Compensation Risk Assessment
210
Compensation Tables and Other Information
211
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
219
Item 13. Certain Relationships and Related Transactions, and Director Independence
220
Policies and Procedures Relating to Transactions with Related Persons
220
Transactions with Related Persons
222
Director Independence
223
Item 14. Principal Accounting Fees and Services
225
PART IV
Item 15. Exhibits, Financial Statement Schedules
226
Item 16. Form 10-K Summary
228
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1

Fannie Mae 2020 Form 10-K
ii

Business | Introduction


PART I
We have been under conservatorship, with the Federal Housing Finance Agency (“FHFA”) acting as conservator, since September 6, 2008. As conservator, FHFA succeeded to all rights, titles, powers and privileges of the company, and of any shareholder, officer or director of the company with respect to the company and its assets. The conservator has since 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. FHFA established 2020 performance objectives for us that included preparing for our eventual exit from conservatorship. Congress and the Administration continue to consider options for reform of the housing finance system, including Fannie Mae.
We are not permitted to pay dividends or other distributions to stockholders other than the U.S. Department of the Treasury (“Treasury”) and, if we attain and maintain sufficient capital to meet the capital requirements and buffers recently established by FHFA for two consecutive quarters, we will not be able to retain any additional capital reserves. Our agreements with Treasury include a commitment from Treasury 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. Our agreements with Treasury also include covenants that significantly restrict our business activities. For additional information on the conservatorship, the uncertainty of our future, our agreements with Treasury, and recent developments relating to housing finance reform, see “Conservatorship, Treasury Agreements and Housing Finance Reform,” “Legislation and Regulation” and “Risk Factors.”
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 “Business—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.
You can find a “Glossary of Terms Used in This Report” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (‘MD&A’).”
Item 1.  Business
Introduction
Fannie Mae is a leading source of financing for mortgages in the United States, with $4.0 trillion in assets as of December 31, 2020. Organized as a government-sponsored entity, Fannie Mae is a shareholder-owned corporation. Our charter is an act of Congress, and we have a mission under that charter to provide liquidity and stability to the residential mortgage market and to promote access to mortgage credit. We were initially established in 1938.
Our revenues are primarily driven by guaranty fees we receive for assuming the credit risk on loans underlying the mortgage-backed securities we issue. We do not originate loans or lend money directly to borrowers. Rather, we primarily work with lenders who originate loans to borrowers. We securitize those loans into Fannie Mae mortgage-backed securities that we guarantee (which we refer to as Fannie Mae MBS or our MBS).
Effectively managing credit risk is key to our business. In exchange for assuming credit risk on the loans we acquire, we receive guaranty fees. These fees take into account the credit risk characteristics of the loans we acquire and consist of two primary components:
Loan-level pricing adjustments, which are upfront fees received when we acquire single-family loans.
Base guaranty fees, which we receive monthly over the life of the loan.
Guaranty fees are set at the time we acquire loans and do not change over the life of the loan. How long a loan remains in our guaranty book is heavily dependent on interest rates. When interest rates decrease, a larger portion of our book of business turns over as more loans refinance. On the other hand, as interest rates increase, fewer loans refinance and our book turns over more slowly. Since guaranty fees are set at the time a loan is originated, the impact of any change in guaranty fees on future revenues is dependent on the rate at which loans in our book of business turn over and new loans are originated.

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Executive Summary
Please read this summary together with our MD&A, our consolidated financial statements as of December 31, 2020 and the accompanying notes.
Summary of Our Financial Performance

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2020 vs. 2019
Net revenues increased $3.4 billion compared to 2019, primarily driven by an increase in net amortization income as a result of record levels of refinancing activity in 2020. Interest rates declined to historically low levels in 2020 and remained low throughout the majority of the year. Due to this trend, refinance activity grew, resulting in approximately 38% of the loans in our single-family conventional guaranty book of business as of December 31, 2020 being originated during the year. We expect loans originated in the current environment will be less likely 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 would limit the impact that changes in our guaranty fees have on our future revenues as any changes would take longer to meaningfully impact the average charged guaranty fee on our total book of business.
Net income decreased $2.4 billion compared to 2019, primarily driven by a shift from credit-related income to credit-related expense, driven by the economic dislocation caused by the COVID-19 pandemic and lower redesignation activity, as well as a reduction in investment gains driven by a decrease in the volume of reperforming loan sales. This was partially offset by the increase in net revenues from higher net amortization income discussed above.
Net worth increased by $10.7 billion to $25.3 billion in 2020. The increase is attributed to $11.8 billion of comprehensive income for the twelve months ended December 31, 2020 offset 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. 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. Our future net worth will be impacted by recent changes in our obligation to pay dividends to Treasury, which are described in “Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements.”
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2019 vs. 2018
Net revenues remained flat from 2018 to 2019. There was an increase in guaranty fee income due to an increase in the size of our guaranty book of business, as well as an increase in our average guaranty fee charged, offset by a reduction in net interest income from our portfolio as we continued to reduce the size of our legacy assets.
Net income decreased $1.8 billion compared to 2018, primarily driven by a shift from fair value gains in 2018 to fair value losses in 2019 as a result of decreasing interest rates throughout most of 2019. Additionally, credit enhancement expenses grew as we increased the percentage of our guaranty book of business covered by credit risk transfer transactions. The decrease in net income was partially offset by an increase in investment gains due to an increase in gains on sales of single-family HFS loans and by an increase in credit-related income primarily driven by a decrease in actual and projected interest rates in 2019.
Net worth increased $8.4 billion in 2019. The increase is attributed to $14.0 billion of comprehensive income offset by $5.6 billion of dividends paid to the Treasury.
Long-term 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 population growth, household formation and housing supply;
borrower performance, the guaranty fees we charge, 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, 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.
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, it is difficult to assess or predict the long-term effects of the pandemic on our financial performance.
COVID-19 Impact
In March 2020, the COVID-19 outbreak in the United States was declared a national emergency. The COVID-19 pandemic 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.
Economic Impact
The COVID-19 pandemic caused substantial financial market volatility and has significantly adversely affected both the U.S. and global economies. Although the economy has improved significantly since the second quarter of 2020, business activity remains below the level before the onset of the pandemic, and unemployment remains substantially higher than pre-pandemic levels. Continued high levels of new daily cases of COVID-19 in the U.S., combined with concerns about the emergence of new, more infectious variants of the coronavirus, have led to new shut-downs in various locales and reductions in business activity, with increased risk of additional public-health measures. The federal government has taken and continues to take 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 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, allocating funds to assist businesses, states, and municipalities, and providing rental assistance, as well as mandating forbearance programs and eviction moratoriums.
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 success of vaccination efforts and fiscal stimulus. We believe that sustained 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. The
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pandemic resulted in a contraction in U.S. gross domestic product (“GDP”) in the first half of 2020 that was not entirely offset by growth in the second half of the year. See “MD&A—Key Market Economic Indicators” for information on macroeconomic conditions during 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 single-family 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 some of our Selling Guide and Servicing Guide requirements; and
providing liquidity to lenders by purchasing a higher-than-usual volume of single-family 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 implemented a new adverse market refinance fee for single-family loans in light of the increased costs and risk we expect to incur due to the COVID-19 pandemic. This fee, which became effective in December 2020, 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. For every $1 billion in eligible refinance loans we acquire, we will collect $5 million in adverse market refinance fees. To help ensure that the fee does not negatively impact our affordable housing mission, the fee only applies to eligible single-family loan refinances and does 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.
Additional Reserve Requirements. To address possible fluctuations in multifamily borrower income and expenses resulting from the COVID-19 pandemic, we instituted additional reserve requirements for certain new multifamily loan acquisitions.
See “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management” and “MD&A—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. In early October we began 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 2020, as compared with 2019. We increased our allowance for loan losses to reflect our expected loan losses as a result of the pandemic, which resulted in increased 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 and advancing principal and interest payments to MBS investors for loans in forbearance. As a result, we expect the COVID-19 pandemic to continue to negatively affect our financial results and our returns on capital.
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. Market conditions improved in the second half of 2020, but we have
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not entered into any new transactions as we evaluate their costs and benefits, including a reduction in the capital relief these transactions provide under FHFA’s enterprise regulatory capital framework. We may engage in credit risk transfer transactions in the future, which could help us manage capital and manage within our risk appetite, particularly given the growth and turnover in our book in 2020. The structure of and extent to which we engage in any additional credit risk transfer transactions will be affected by the enterprise regulatory capital framework, our risk appetite, the strength of future market conditions, including the cost of these transactions, and the review of our overall business and capital plan. For information on these transactions and their benefits and costs, see “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Credit Enhancement and Transfer of Mortgage Credit Risk” and “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management—Transfer of Multifamily Mortgage Credit Risk.” See “Legislation and Regulation—GSE Act and Other Legislative and Regulatory Matters—Capital” for information on the enterprise regulatory capital framework.
Also see “MD&A—Retained Mortgage Portfolio,” “MD&A—Liquidity and Capital Management” and “MD&A—Risk Management” for discussions of the impact of the COVID-19 pandemic on our business.
Our Mission and Charter
Our Mission
Our mission is to provide liquidity and stability to the residential mortgage market and to promote access to mortgage credit.
This mission is derived from our corporate charter, which is the Federal National Mortgage Association Charter Act, or the Charter Act. The Charter Act establishes the parameters under which we operate and our purposes, which are to:
provide stability in the secondary market for residential mortgages;
respond appropriately to the private capital market;
provide ongoing assistance to the secondary market for residential mortgages (including activities relating to mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and
promote access to mortgage credit throughout the nation (including central cities, rural areas and underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing.
Our Charter
The Charter Act specifies that our operations are to be financed by private capital to the maximum extent feasible. We are expected to earn reasonable economic returns on all our activities. However, we may accept lower returns on certain activities relating to mortgages on housing for low- and moderate-income families in order to support those segments of the market. We expect the lower returns to be offset by activities that yield higher returns.
Principal balance limitations. To meet our purposes, the Charter Act authorizes us to purchase and securitize mortgage loans secured by single-family and multifamily properties. Our acquisitions of single-family conventional mortgage loans are subject to maximum original principal balance limits, known as “conforming loan limits.” The conforming loan limits are adjusted each year based on FHFA’s housing price index. For 2020, the conforming loan limit for mortgages secured by one-family residences was set at $510,400, with higher limits for mortgages secured by two- to four-family residences and in four statutorily-designated states and territories (Alaska, Hawaii, Guam and the U.S. Virgin Islands). For 2021, FHFA increased the national conforming loan limit for one-family residences to $548,250. In addition, higher loan limits of up to 150% of the otherwise applicable loan limit apply in certain high-cost areas. The Charter Act does not impose maximum original principal balance limits on loans we purchase or securitize that are insured by the Federal Housing Administration (“FHA”) or guaranteed by the Department of Veterans Affairs (“VA”).
The Charter Act also includes the following provisions:
Credit enhancement requirements. The Charter Act generally requires credit enhancement on any single-family conventional mortgage loan that we purchase or securitize that has a loan-to-value (“LTV”) ratio over 80% at the time of purchase. The credit enhancement may take the form of one or more of the following: (1) insurance or a guaranty by a qualified insurer on the portion of the unpaid principal balance of a mortgage loan that exceeds 80% of the property value; (2) a seller’s agreement to repurchase or replace the loan in the event of default; or (3) retention by the seller of at least a 10% participation interest in the loan. Regardless of LTV ratio, the Charter
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Act does not require us to obtain credit enhancement to purchase or securitize loans insured by FHA or guaranteed by the VA.
Issuances of our securities. We are authorized, upon the approval of the Secretary of the Treasury, to issue debt obligations and mortgage-related securities. Neither the U.S. government nor any of its agencies guarantees, directly or indirectly, our debt or mortgage-related securities.
Authority of Treasury to purchase our debt obligations. At the discretion of the Secretary of the Treasury, Treasury may purchase our debt obligations up to a maximum of $2.25 billion outstanding at any one time.
Exemption for our securities offerings. Our securities offerings are exempt from registration requirements under the federal securities laws. As a result, we do not file registration statements or prospectuses with the SEC with respect to our securities offerings. However, our equity securities are not treated as exempt securities for purposes of Sections 12, 13, 14 or 16 of the Securities Exchange Act of 1934 (the “Exchange Act”). Consequently, we are required to file periodic and current reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Our non-equity securities are exempt securities under the Exchange Act.
Exemption from specified taxes. Fannie Mae is exempt from taxation by states, territories, counties, municipalities and local taxing authorities, except for taxation by those authorities on our real property. We are not exempt from the payment of federal corporate income taxes.
Limitations. We may not originate mortgage loans or advance funds to a mortgage seller on an interim basis, using mortgage loans as collateral, pending the sale of the mortgages in the secondary market. We may purchase or securitize mortgage loans only on properties located in the United States and its territories.
Liquidity Provided in 2020
We provided over $1.4 trillion in liquidity to the mortgage market in 2020, which enabled the financing of approximately 6 million home purchases, refinancings or rental units. This represents our highest volume of single-family and multifamily acquisitions on record.
Fannie Mae Provided over $1.4 trillion in Liquidity in 2020
Unpaid Principal Balance Units
$411B
1.5M
Single-Family Home Purchases
$948B
 3.4M
Single-Family Refinancings
$76B
792K
Multifamily Rental Units

Mortgage Securitizations
We support market liquidity by issuing Fannie Mae MBS that are readily traded in the capital markets. We create Fannie Mae MBS by placing mortgage loans in a trust and issuing securities that are backed by those mortgage loans. Monthly payments received on the loans are the primary source of payments passed through to Fannie Mae MBS holders. We guarantee to the MBS trust that we will supplement amounts received by the MBS trust as required to permit timely payment of principal and interest on the trust certificates. In return for this guaranty, we receive guaranty fees.
Below we discuss the three broad categories of our securitization transactions and UMBS.
Securitization Transactions
We currently securitize a substantial majority of the single-family and multifamily mortgage loans we acquire. Our securitization transactions primarily fall within three broad categories: lender swap transactions, portfolio securitizations, and structured securitizations.
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Lender Swap Transactions
Our most common type of securitization transaction is our “lender swap transaction.” In a single-family lender swap transaction, a mortgage lender that operates in the primary mortgage market generally delivers a pool of mortgage loans to us in exchange for Fannie Mae MBS backed by these mortgage loans. Lenders may hold the Fannie Mae MBS they receive from us or sell them to investors. A pool of mortgage loans is a group of mortgage loans with similar characteristics. After receiving the mortgage loans in a lender swap transaction, we place them in a trust for which we serve as trustee. This trust is established for the sole purpose of holding the mortgage loans separate and apart from our corporate assets. We guarantee to each MBS trust that we will supplement amounts received by the MBS trust as required to permit timely payment of principal and interest on the related Fannie Mae MBS. We are entitled to a portion of the interest payment as a fee for providing our guaranty. The mortgage servicer also retains a portion of the interest payment as a fee for servicing the loan. Then, on behalf of the trust, we make monthly distributions to the Fannie Mae MBS certificateholders from the principal and interest payments and other collections on the underlying mortgage loans.
Lender Swap Transaction
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Our Multifamily business generally creates multifamily Fannie Mae MBS in lender swap transactions in a manner similar to our Single-Family business. Our multifamily lender customers typically deliver only one mortgage loan to back each multifamily Fannie Mae MBS. The characteristics of each mortgage loan are used to establish guaranty fees on a risk-adjusted basis. Securitizing a multifamily mortgage loan into a Fannie Mae MBS facilitates its sale into the secondary market.
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Portfolio Securitization Transactions
We also purchase mortgage loans and mortgage-related securities for securitization and sale at a later date through our “portfolio securitization transactions.” Most of our portfolio securitization transactions are driven by our single-family whole loan conduit activities, pursuant to which we purchase single-family whole loans from a large group of typically smaller lenders principally for the purpose of securitizing the loans into Fannie Mae MBS, which may then be sold to dealers and investors.
Portfolio Securitization Transaction
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Structured Securitization Transactions
In a “structured securitization transaction,” we create structured Fannie Mae MBS, typically for our lender customers or securities dealer customers, in exchange for a transaction fee. In these transactions, the customer “swaps” a mortgage-related asset that it owns (typically a mortgage security) in exchange for a structured Fannie Mae MBS we issue. The process for issuing Fannie Mae MBS in a structured securitization is similar to the process involved in our lender swap securitizations described above.
We also issue structured transactions backed by multifamily Fannie Mae MBS through the Fannie Mae Guaranteed Multifamily Structures (“Fannie Mae GeMSTM”) program, which provides additional liquidity and stability to the multifamily market, while expanding the investor base for multifamily Fannie Mae MBS.
Uniform Mortgage-Backed Securities, or UMBS
Overview
In May 2019, we began using the common securitization platform operated by Common Securitization Solutions, LLC (“CSS”), a limited liability company we own jointly with Freddie Mac, to perform certain aspects of the securitization process for our single-family Fannie Mae MBS issuances. In June 2019, we and Freddie Mac began issuing UMBS®. The uniform mortgage-backed security is intended to maximize liquidity for both Fannie Mae and Freddie Mac mortgage-backed securities in the to-be-announced (“TBA”) market.
UMBS and Structured Securities
Each of Fannie Mae and Freddie Mac issues and guarantees UMBS and structured securities backed by UMBS and other securities, as described below.
UMBS. Each of Fannie Mae and Freddie Mac issues and guarantees UMBS that are directly backed by the mortgage loans it has acquired, referred to as “first-level securities.” UMBS issued by Fannie Mae are backed only by mortgage loans that Fannie Mae has acquired, and similarly UMBS issued by Freddie Mac are backed only by mortgage loans that Freddie Mac has acquired. There is no commingling of Fannie Mae- and Freddie Mac-acquired loans within UMBS.
Mortgage loans backing UMBS are limited to fixed-rate mortgage loans eligible for financing through the TBA market. We continue to issue some types of Fannie Mae MBS that are not TBA-eligible and therefore are not
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issued as UMBS, such as single-family Fannie Mae MBS backed by adjustable-rate mortgages and all multifamily Fannie Mae MBS.
Structured Securities. Each of Fannie Mae and Freddie Mac also issues and guarantees structured mortgage-backed securities, referred to as “second-level securities,” that are resecuritizations of UMBS or previously-issued structured securities. In contrast to UMBS, second-level securities can be commingled—that is, they can include both Fannie Mae securities and Freddie Mac securities as the underlying collateral for the security. These structured securities include Supers®, which are single-class resecuritizations, and REMICs, which are multi-class resecuritizations. While Supers are backed only by TBA-eligible securities, REMICs can be backed by TBA-eligible or non-TBA-eligible securities.
The key features of UMBS are the same as those of legacy single-family Fannie Mae MBS. Accordingly, all single-family Fannie Mae MBS that are directly backed by fixed-rate loans and generally eligible for trading in the TBA market are UMBS, whether issued before or after June 3, 2019, when we began issuing UMBS. 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 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, REMICs and other types of single-family or multifamily mortgage-backed securities. References to our single-family guaranty book of business in this report exclude Freddie Mac-acquired mortgage loans underlying Freddie Mac mortgage-related securities that we have resecuritized.
Common Securitization Platform
The common securitization platform operated by CSS has replaced certain elements of Fannie Mae’s and Freddie Mac’s proprietary systems for securitizing single-family mortgages and performing associated back-office and administrative functions. The design of the common securitization platform also allows for the potential integration of additional market participants in the future. We no longer use our individual proprietary securitization function for our single-family MBS issuances. In addition to using the common securitization platform for our newly issued UMBS issuances, we are also now using the common securitization platform for certain ongoing administrative functions for our previously issued and outstanding single-family Fannie Mae MBS. We do not use the common securitization platform operated by CSS for securitizing or performing associated administrative functions for our multifamily Fannie Mae MBS.
We discuss risks posed by our reliance on CSS in “Risk Factors—GSE and Conservatorship Risk.”
Managing Mortgage Credit Risk
Effectively pricing and managing credit risk is key to our business. Below we discuss key elements of how we are compensated for and manage the risk of credit losses through the life cycle of our loans and how we measure our credit risk.
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Loan Acquisition Policies
Loans we acquire must be underwritten in accordance with our guidelines and standards.
In Single-family, the vast majority of loans we acquire are assessed by Desktop Underwriter® (DU®), our proprietary single-family automated underwriting system. DU performs a comprehensive evaluation of the primary risk factors of a mortgage. We regularly review DU’s underlying models to determine whether its risk analysis and eligibility assessment appropriately reflect current market conditions and loan performance data to ensure the loans we acquire are consistent with our risk appetite and FHFA guidance. New business restrictions recently added to our senior preferred stock purchase agreement with Treasury impose additional risk criteria on the loans we acquire and will also be considered in future reviews of DU’s underlying models.
In Multifamily, we acquire the vast majority of our loans through our Delegated Underwriting and Servicing (DUS®) Program. DUS lenders, who must be pre-approved by us, are delegated the authority to underwrite and service loans for delivery to us in accordance with our standards and requirements. Based on a given loan’s unique characteristics and our established delegation criteria, lenders assess whether a loan must be reviewed by us. If review is required, our internal credit team will assess the loan’s risk profile to determine if it meets our risk tolerances. DUS lenders also share with us the risk of loss on our multifamily loans, thereby aligning our
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interests throughout the life of the loan. FHFA has instructed us to limit the volume and nature of multifamily loans we acquire, and the recent amendments to our senior preferred stock purchase agreement with Treasury include new covenants with respect to our multifamily loan acquisition volume. We will continue to closely monitor our multifamily loan acquisitions and market conditions and, as appropriate, make changes to our standards and requirements to ensure the multifamily loans we acquire are consistent with our risk appetite, the senior preferred stock purchase agreement, and FHFA guidance.
For more information about our mortgage acquisition policies and underwriting standards, see “MD&A—Single-family Business—Single-family Mortgage Credit Risk Management” and “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management.” For information on the restrictions on our single-family and multifamily loan acquisitions, see “Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements—Covenants under Treasury Agreements” and “MD&A—Multifamily Business—Multifamily Business Metrics.”
In exchange for managing credit risk on the loans we acquire, we receive guaranty fees that take into account, among other factors, the credit risk characteristics of the loans we acquire. We provide information about our guaranty fees in MD&A—Single-family Business—Single-family Business Metrics” and in “MD&A—Multifamily Business—Multifamily Business Metrics.”
Loan Performance Management
We closely monitor the performance of loans in our guaranty book of business and we work to reduce defaults and mitigate the severity of credit losses through our servicing policies and practices.
Single-family Loans
For single-family loans, the most important loan performance criteria we monitor are (1) serious delinquency rates, which are typically strong indicators of loans that are at a heightened risk of default, and (2) mark-to-market LTV ratios, which affect both the likelihood of losses and the potential severity of any losses we may ultimately realize. While mark-to-market LTV ratios are significantly impacted by changes in home prices, which are outside our control, we have an array of loss mitigation tools to try to reduce defaults on delinquent loans and to minimize the severity of the losses we do incur.
We consider single-family loans to be seriously delinquent when they are 90 days or more past due or in the foreclosure process. Once a single-family loan becomes 36 days past due, the servicer is required to make weekly attempts, for the next six months, to contact the borrower to try to engage in steps to prevent default. Our loss mitigation tools include payment forbearance, repayment plans, payment deferrals and loan modification options. We describe these tools and discuss them further in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management—Loan Workout Metrics.” Successful loan reperformance is heavily influenced by the effective use of these tools and the amount of equity the borrower has in their home.
Some loans that become seriously delinquent subsequently become current or repay in full without a modification or other loan workout. However, we modify a substantial portion of our seriously delinquent loans. For example, of the single-family loans that became seriously delinquent from 2017 to 2019, through December 31, 2020, 33% became current or fully repaid without a loan workout, while we performed loan workouts, including modifications, on 38% of them. Of these loans that received a workout, 70% became current or fully repaid as of December 31, 2020, including loans that became current and were subsequently sold in a reperforming loan sale, and 1% defaulted through foreclosure, a short sale or a deed-in-lieu of foreclosure. The reperformance of these previously worked-out loans has been negatively impacted in 2020 by the COVID-19 pandemic, with approximately 13% of the population in a forbearance plan as of December 31, 2020 and past due. When a loan does not cure on its own and we are not able to provide a workout for it, the likelihood of default increases. See “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management” for performance statistics on our single-family completed loan modifications during 2019 and 2018.
In 2020 our loss mitigation pivoted to payment forbearance, providing up to a year to borrowers affected by the COVID-19 pandemic. For loans already in a COVID-19-related forbearance as of February 28, 2021, forbearance can be extended to a total of up to 15 months, provided that the forbearance does not result in the loan becoming greater than 15 months delinquent. Forbearance is typically used in instances where the duration and impact of a borrower’s hardship are uncertain, such as disasters like hurricanes and flooding, to give the borrower time to understand whether, and to what extent, a loss mitigation solution will be needed to return to paying status. We estimate that, through December 31, 2020, our single-family cumulative forbearance take-up rate was approximately 8%. We discuss this rate in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management—Single-Family
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Business | Managing Mortgage Credit Risk
Loans in Forbearance.” As of December 31, 2020, 3.4% of our single-family conventional book of business, based on unpaid principal balance, and 3.0% based on loan count, remained in active forbearance, the vast majority of which were related to COVID-19, and 12% of these loans in forbearance, based on loan count, were still current. The majority of our single-family loans that exited forbearance during the year either repaid all missed payments or received a payment deferral solution. We expect the ultimate performance of these loans will be influenced by the success of these payment deferrals as well as our other loss mitigation options. Because payments are not required during forbearance, our serious delinquency rate has increased.
For delinquent loans that are unable to reperform, we use alternatives to foreclosure where possible, such as short sales, which reduce our credit losses while helping borrowers avoid foreclosure. We provide more information on short sales and our other foreclosure alternatives in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management—Loan Workout Metrics—Foreclosure Alternatives.” We work to obtain the highest price possible for the properties sold in short sales. When we acquire properties, including through foreclosure, our primary objectives are both to minimize the severity of loss to Fannie Mae by maximizing sales prices and to stabilize neighborhoods by preventing empty homes from depressing home values. The value of the underlying property relative to the loan’s unpaid principal balance has a significant impact on the severity of loss we incur as a result of loan default. As of December 31, 2020, the estimated weighted average mark-to-market LTV ratio of loans in our single-family conventional book of business was 58%, and less than 0.5% of these loans had an estimated mark-to-market LTV ratio above 100%.
In recent years, our credit loss mitigation strategy has also involved selling nonperforming and reperforming loans thereby removing them from our guaranty book of business. We suspended new sales of nonperforming and reperforming loans in the second quarter of 2020, as investor interest in purchasing these loans was severely impacted by the COVID-19 pandemic. However, market conditions for the sale of these loans, particularly reperforming loans, improved following the second quarter, and we resumed sales of reperforming loans in the third quarter. FHFA is currently examining issues relating to sales of nonperforming and reperforming loans during the COVID-19 national emergency and has instructed us to refrain from engaging in such sales until at least February 28, 2021, or later if directed by FHFA, while FHFA evaluates what additional loss mitigation requirements will apply to any future sales. For instance, although we already require purchasers to perform workout solutions like modifications to try to avoid foreclosure, we may attach additional terms to these sales that would require purchasers to offer borrowers protections included in existing legislation.
We present information on the credit characteristics and performance of our single-family loans in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring” and “Single-Family Problem Loan Management” and “Note 13, Concentrations of Credit Risk—Risk Characteristics of our Guaranty Book of Business.”
Multifamily Loans
For multifamily loans, key indicators of heightened risk of default are debt service coverage ratios (“DSCRs”), particularly loans with an estimated current DSCR below 1.0, and serious delinquency rates. We consider a multifamily loan seriously delinquent when it is 60 days or more past due.
For loans with indicators of heightened default risk, our DUS lenders, through their delegated authority, work with us to maintain the credit quality of the multifamily book of business and prevent foreclosures through loss mitigation strategies such as payment forbearance or loan modification.
For loans that ultimately default, we work to minimize the severity of loss in several ways, including pursuing contractual remedies through our DUS loss-sharing arrangements and with providers of additional credit enhancements where available.
Similar to single-family, we have relied heavily on payment forbearance, up to six months of which may be provided by lenders under delegated authority. For any forbearance request extending beyond six months, Fannie Mae does not delegate the decision and will determine whether to extend relief. As of December 31, 2020, 0.4% of our Multifamily guaranty book of business based on unpaid principal balance was in an active forbearance, the vast majority of which were related to COVID-19.
We present information on the credit characteristics and performance of our multifamily loans in “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management—Multifamily Portfolio Diversification and Monitoring” and “Note 13, Concentrations of Credit Risk—Risk Characteristics of our Guaranty Book of Business.”
Fannie Mae 2020 Form 10-K
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Sharing and Selling Credit Risk
In addition to managing credit risk through our selling and servicing practices, we also share and transfer credit risk to third parties through a variety of credit enhancement products and programs.
For single-family loans we acquire with an LTV ratio over 80% our charter requires credit enhancement, which we typically meet through third-party primary mortgage insurance.
Our Multifamily business uses a shared-risk business model that distributes credit risk to the private markets, primarily through our DUS program. Under DUS, our lenders typically share with us approximately one-third of the credit risk on these loans, aligning the interests of lenders and Fannie Mae. DUS lenders receive credit risk-related compensation in exchange for sharing risk. The lender risk-sharing we obtain through our DUS program accompanies our multifamily loans at the time we acquire them.
We use other types of credit enhancements, including pool mortgage insurance and credit risk transfer transactions. In our credit risk transfer transactions, we use risk-sharing capabilities we have developed to obtain credit enhancement by transferring portions of our single-family and multifamily mortgage credit risk on reference pools of mortgage loans to the private market. In most of our credit risk transfer transactions, investors receive payments, which effectively reduce the guaranty fee income we retain on the loans. In exchange for these payments, our credit risk transfer transactions are designed to transfer to the investors a portion of the losses we expect would be incurred in an economic downturn or a stressed credit environment. 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. Market conditions improved in the second half of 2020, but we have not entered into any new transactions as we evaluate their costs and benefits. We may engage in credit risk transfer transactions in the future.
For more information about our loans with credit enhancement, see “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk” and “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management—Transfer of Multifamily Mortgage Credit Risk.”
Measuring Credit Risk and the Impact of Changes on Our Quarterly Results
Our best estimate of future credit losses is reflected in our single-family and multifamily loss reserves, which for periods on or after January 1, 2020 is calculated using a lifetime credit loss methodology under the CECL standard. We update our estimate of credit losses quarterly based on the credit profile of our loans as well as certain actual and forecasted economic data. Changes in our estimate affect our benefit or provision for credit losses, which, combined with foreclosed property expense, comprises our credit-related income or expense each quarter.
We provide information on our loss reserves in “Selected Financial Data” and in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management—Other Single-Family Credit information” and “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management—Multifamily Problem Loan Management and Foreclosure Prevention—Other Multifamily Credit information.” We provide information on our credit related income or expense in “MD&A—Consolidated Results of Operations—Credit-Related Income (Expense).”
Conservatorship, Treasury Agreements and Housing Finance Reform
Conservatorship
On September 6, 2008, the Director of FHFA appointed FHFA as our conservator, pursuant to authority provided by 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”). The conservatorship is a statutory process designed to preserve and conserve our assets and property and put the company in a sound and solvent condition.
The conservatorship has no specified termination date. For more information on the risks to our business relating to the conservatorship and uncertainties regarding the future of our company and business, as well as the adverse effects of the conservatorship on the rights of holders of our common and preferred stock, see “Risk Factors—GSE and Conservatorship Risk.”
Our conservatorship could terminate through a receivership. For information on the circumstances under which FHFA is required or permitted to place us into receivership and the potential consequences of receivership, see “Legislation and
Fannie Mae 2020 Form 10-K
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Business | Conservatorship, Treasury Agreements and Housing Finance Reform
Regulation—GSE Act and Other Legislative and Regulatory Matters—Receivership and Resolution Planning” and “Risk Factors—GSE and Conservatorship Risk.”
Management of the Company during Conservatorship
Upon its appointment, the conservator immediately succeeded to (1) all rights, titles, powers and privileges of Fannie Mae, and of any shareholder, officer or director of Fannie Mae with respect to Fannie Mae and its assets, and (2) title to the books, records and assets of any other legal custodian of Fannie Mae. The conservator subsequently issued an order that provided for our Board of Directors to exercise specified authorities. The conservator also provided instructions regarding matters for which conservator decision or notification is required. The conservator retains the authority to amend or withdraw its order and instructions at any time. For more information on the authorities of our Board of Directors during conservatorship, see “Directors, Executive Officers and Corporate Governance—Corporate Governance—Conservatorship and Board Authorities.”
Our directors serve on behalf of the conservator and exercise their authority as directed by and with the approval, where required, of the conservator. Our directors have no fiduciary duties to any person or entity except to the conservator. Accordingly, our directors are not obligated to consider the interests of the company, the holders of our equity or debt securities, or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator.
Because we are in conservatorship, our common stockholders currently do not have the ability to elect directors or to vote on other matters. The conservator eliminated common and preferred stock dividends (other than dividends on the senior preferred stock issued to Treasury) during the conservatorship.
Powers of the Conservator under the GSE Act
FHFA has broad powers when acting as our conservator. As conservator, FHFA can direct us to enter into contracts or enter into contracts on our behalf. Further, FHFA may transfer or sell any of our assets or liabilities (subject to limitations and post-transfer notice provisions for transfers of certain types of financial contracts), without any approval, assignment of rights or consent of any party. However, mortgage loans and mortgage-related assets that have been transferred to a Fannie Mae MBS trust must be held by the conservator for the beneficial owners of the Fannie Mae MBS and cannot be used to satisfy the general creditors of the company. Neither the conservatorship nor the terms of our agreements with Treasury change our obligation to make required payments on our debt securities or perform under our mortgage guaranty obligations.
Treasury Agreements
On September 7, 2008, we, through FHFA in its capacity as conservator, and Treasury entered into a senior preferred stock purchase agreement, pursuant to which we issued to Treasury one million shares of Variable Liquidation Preference Senior Preferred Stock, Series 2008-2, which we refer to as the “senior preferred stock,” and a warrant to purchase shares of common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis at the time the warrant is exercised for a nominal price.
The senior preferred stock purchase agreement and the dividend and liquidation provisions of the senior preferred stock were amended in January 2021 pursuant to a letter agreement between us, through FHFA in its capacity as conservator, and Treasury. The terms of the agreement, including Treasury’s funding commitment, and the dividend and liquidation provisions of the senior preferred stock are described more fully below.
The January 2021 letter agreement made a number of significant changes to the covenants in the senior preferred stock purchase agreement, as well as to the terms of the senior preferred stock, including the following:
The dividend provisions of the senior preferred stock were amended to permit us to retain increases in our net worth until our net worth exceeds the amount of adjusted total capital necessary for us to meet the capital requirements and buffers under the enterprise regulatory capital framework discussed in “Legislation and Regulation—GSE Act and Other Legislative and Regulatory Matters—Capital.” We estimate that, had the enterprise regulatory capital framework been applicable to us as of December 31, 2020, we would have been required to hold approximately $185 billion in adjusted total capital, of which approximately $135 billion must be in the form of common equity tier 1 capital. After the “capital reserve end date,” which is defined as the last day of the second consecutive fiscal quarter during which we have maintained capital equal to, or in excess of, all of the capital requirements and buffers under the enterprise regulatory capital framework, the amount of quarterly dividends to Treasury will be equal to the lesser of any quarterly increase in our net worth and a 10% annual rate on the then-current liquidation preference of the senior preferred stock. As a result of these changes, our ability to retain earnings in excess of the capital requirements and buffers set forth in the enterprise regulatory capital framework will be limited.
Fannie Mae 2020 Form 10-K
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At the end of each fiscal quarter, through and including the capital reserve end date, the liquidation preference of the senior preferred stock will be increased by an amount equal to the increase in our net worth, if any, during the immediately prior fiscal quarter.
We may issue and retain up to $70 billion in proceeds from the sale of common stock without Treasury’s prior consent, provided that (1) Treasury has already exercised its warrant in full, and (2) all currently pending significant litigation relating to the conservatorship and to an amendment to the senior preferred stock purchase agreement made in August 2012 has been resolved, which may require Treasury’s assent.
FHFA may release us from conservatorship without Treasury’s consent after (1) all currently pending significant litigation relating to our conservatorship and the August 2012 amendment to the senior preferred stock purchase agreement has been resolved, and (2) our common equity tier 1 capital, together with any other common stock that we may issue in a public offering, equals or exceeds 3% of our “adjusted total assets” under our enterprise regulatory capital framework. We estimate that, had the new framework been applicable to us as of December 31, 2020, 3% of our adjusted total assets would have been approximately $124 billion.
New restrictive covenants were added that will impact both our single-family and multifamily business activities.
See “Risk Factors” for a description of the risks to our business relating to the senior preferred stock purchase agreement, as well as the adverse effects of the senior preferred stock and the warrant on the rights of holders of our common stock and other series of preferred stock.
Senior Preferred Stock Purchase Agreement
The senior preferred stock purchase agreement provides that, on a quarterly basis, we may draw funds up to the amount, if any, by which our total liabilities exceed our total assets, as reflected in our consolidated balance sheet, prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), for the applicable fiscal quarter (referred to as the “deficiency amount”), up to the maximum amount of remaining funding under the agreement. As of the date of this filing, the maximum amount of remaining funding under the agreement is $113.9 billion. If we were to draw additional funds from Treasury under the agreement with respect to a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw. The senior preferred stock purchase agreement provides that the deficiency amount will be calculated differently if we become subject to receivership or other liquidation process.
The senior preferred stock purchase agreement provides for the payment of an unspecified quarterly commitment fee to Treasury to compensate Treasury for its ongoing support under the senior preferred stock purchase agreement. As amended by the January 2021 letter agreement, the agreement provides that (1) through and continuing until the capital reserve end date, the periodic commitment fee will not be set, accrue, or be payable, and (2) not later than the capital reserve end date, we and Treasury, in consultation with the Chair of the Federal Reserve, will agree to set the periodic commitment fee. Treasury’s funding commitment under the senior preferred stock purchase agreement has no expiration date. The agreement provides that Treasury’s funding commitment will terminate under any of the following circumstances: (1) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding commitment at that time; (2) the payment in full of, or reasonable provision for, all of our liabilities (whether or not contingent, including mortgage guaranty obligations); or (3) the funding by Treasury of the maximum amount that may be funded under the agreement. In addition, Treasury may terminate its funding commitment and declare the agreement null and void if a court vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of the conservator or otherwise curtails the conservator’s powers.
In the event of our default on payments with respect to our debt securities or guaranteed Fannie Mae MBS, if Treasury fails to perform its obligations under its funding commitment and if we and/or the conservator are not diligently pursuing remedies with respect to that failure, the agreement provides that any holder of such defaulted debt securities or Fannie Mae MBS may file a claim in the United States Court of Federal Claims for relief requiring Treasury to fund us up to (1) the amount necessary to cure the payment defaults on our debt and Fannie Mae MBS, (2) the deficiency amount, or (3) the amount of remaining funding under the senior preferred stock purchase agreement, whichever is the least. Any payment that Treasury makes under those circumstances will be treated for all purposes as a draw under the agreement that will increase the liquidation preference of the senior preferred stock.
Most provisions of the senior preferred stock purchase agreement may be waived or amended by mutual agreement of the parties; however, no waiver or amendment of the agreement is permitted that would decrease Treasury’s aggregate funding commitment or add conditions to Treasury’s funding commitment if the waiver or amendment would adversely affect in any material respect the holders of our debt securities or guaranteed Fannie Mae MBS.
Fannie Mae 2020 Form 10-K
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Senior Preferred Stock
Shares of the senior preferred stock have no par value and have a stated value and initial liquidation preference equal to $1,000 per share, for an aggregate initial liquidation preference of $1 billion. As a result of the January 2021 letter agreement, the dividend rate and liquidation preference of the senior preferred stock depend on whether we have reached the capital reserve end date.
Treasury, as the holder of the senior preferred stock, is entitled to receive, when, as and if declared, out of legally available funds, cumulative quarterly cash dividends. The dividends we have paid to Treasury on the senior preferred stock during conservatorship have been declared by, and paid at the direction of, our conservator, acting as successor to the rights, titles, powers and privileges of the Board of Directors. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the senior preferred stock purchase agreement.
Dividend amount prior to capital reserve end date. The terms of the senior preferred stock provide for dividends each quarter in the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. The January 2021 letter agreement increased the applicable capital reserve amount, starting with the quarterly dividend period ending on December 31, 2020, from $25 billion to the amount of adjusted total capital necessary for us to meet the capital requirements and buffers set forth in enterprise regulatory capital framework. If our net worth does not exceed this amount as of the end of the immediately preceding fiscal quarter, then dividends will neither accumulate nor be payable for such period. Our net worth is defined as the amount, if any, by which our total assets (excluding Treasury’s funding commitment and any unfunded amounts related to the commitment) exceed our total liabilities (excluding any obligation with respect to capital stock), in each case as reflected on our balance sheet prepared in accordance with GAAP.
Dividend amount following capital reserve end date. Beginning on the first dividend period following the capital reserve end date, the applicable quarterly dividend amount on the senior preferred stock will be the lesser of:
(1)     a 10% annual rate on the then-current liquidation preference of the senior preferred stock; and
(2)     an amount equal to the incremental increase in our net worth during the immediately prior fiscal quarter.
However, the applicable quarterly dividend amount will immediately increase to a 12% annual rate on the then-current liquidation preference of the senior preferred stock if we fail to timely pay dividends in cash to Treasury. This increased dividend amount will continue until the dividend period following the date we have paid, in cash, full cumulative dividends to Treasury (including any unpaid dividends), at which point the applicable quarterly dividend amount will revert to the prior calculation method.
Liquidation preference. Under the terms governing the senior preferred stock, the aggregate liquidation preference is increased by the following:
any amounts Treasury pays to us pursuant to its funding commitment under the senior preferred stock purchase agreement (a total of $119.8 billion as of the date of this filing),
any quarterly commitment fees that are payable but not paid in cash (no such fees have become payable, nor will they under the current terms of the senior preferred stock purchase agreement and the senior preferred stock); and
any dividends that are payable but not paid in cash to Treasury, regardless of whether or not they are declared.
In addition:
amendments to the terms of the senior preferred stock made in December 2017 increased the aggregate liquidation preference of the senior preferred stock by $3 billion as of December 31, 2017;
amendments to the terms of the senior preferred stock made in September 2019 letter agreement provides that, beginning on September 30, 2019, and at the end of each fiscal quarter thereafter, the liquidation preference shall be increased by an amount equal to the increase in our net worth, if any, during the immediately prior fiscal quarter, until such time as the liquidation preference has increased by $22 billion pursuant to this provision; and
the January 2021 letter agreement revised these terms to provide that, at the end of each fiscal quarter through and including the capital reserve end date, the liquidation preference shall be increased by an amount equal to the increase in our net worth, if any, during the immediately prior fiscal quarter.
The senior preferred stock ranks ahead of our common stock and all other outstanding series of our preferred stock, as well as any capital stock we issue in the future, as to both dividends and rights upon liquidation. As a result, if we are liquidated, the holder of the senior preferred stock is entitled to its then current liquidation preference before any distribution is made to the holders of our common stock or other preferred stock. The aggregate liquidation preference
Fannie Mae 2020 Form 10-K
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Business | Conservatorship, Treasury Agreements and Housing Finance Reform
of the senior preferred stock was $142.2 billion as of December 31, 2020. It will increase to $146.8 billion as of March 31, 2021 due to the increase in our net worth during the fourth quarter of 2020.
The senior preferred stock provides that we may not, at any time, declare or pay dividends on, make distributions with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any common stock or other securities ranking junior to the senior preferred stock unless (1) full cumulative dividends on the outstanding senior preferred stock (including any unpaid dividends added to the liquidation preference) have been declared and paid in cash, and (2) all amounts required to be paid with the net proceeds of any issuance of capital stock for cash (as described in the following paragraph) have been paid in cash. Shares of the senior preferred stock are not convertible. Shares of the senior preferred stock have no general or special voting rights, other than those set forth in the certificate of designation for the senior preferred stock or otherwise required by law. The consent of holders of at least two-thirds of all outstanding shares of senior preferred stock is generally required to amend the terms of the senior preferred stock or to create any class or series of stock that ranks prior to or on parity with the senior preferred stock.
We are not permitted to redeem the senior preferred stock prior to the termination of Treasury’s funding commitment under the senior preferred stock purchase agreement. Moreover, we are not permitted to pay down the liquidation preference of the outstanding shares of senior preferred stock except to the extent of (1) accumulated and unpaid dividends previously added to the liquidation preference and not previously paid down; and (2) quarterly commitment fees previously added to the liquidation preference and not previously paid down. In addition to these exceptions, if we issue any shares of capital stock for cash while the senior preferred stock is outstanding, the net proceeds of the issuance, with the exception of up to $70 billion in aggregate gross cash proceeds from the issuance of common stock, must be used to pay down the liquidation preference of the senior preferred stock. The liquidation preference of each share of senior preferred stock may not be paid down below $1,000 per share prior to the termination of Treasury’s funding commitment. Following the termination of Treasury’s funding commitment, we may pay down the liquidation preference of all outstanding shares of senior preferred stock at any time, in whole or in part.
Net Worth, Treasury Funding and Senior Preferred Stock Dividends
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.
FNM-20201231_G5.JPG FNM-20201231_G6.JPG
(1)Aggregate amount of dividends we have paid to Treasury on the senior preferred stock from 2008 through December 31, 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 December 31, 2020.
Common Stock Warrant
Pursuant to the senior preferred stock purchase agreement, on September 7, 2008, we, through FHFA in its capacity as conservator, issued to Treasury a warrant to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis on the date the warrant is exercised, for an exercise
Fannie Mae 2020 Form 10-K
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Business | Conservatorship, Treasury Agreements and Housing Finance Reform
price of $0.00001 per share. The warrant may be exercised in whole or in part at any time on or before September 7, 2028.
Covenants under Treasury Agreements
The senior preferred stock purchase agreement contains covenants that prohibit us from taking a number of actions without the prior written consent of Treasury, including:
paying dividends or other distributions on or repurchasing our equity securities (other than the senior preferred stock or warrant);
issuing equity securities, except for stock issuances made (1) to Treasury, (2) pursuant to obligations that existed at the time we entered conservatorship, and (3) as amended by the January 2021 letter agreement, for common stock ranking pari passu or junior to the common stock issued to Treasury in connection with the exercise of its warrant, provided that (i) Treasury has already exercised its warrant in full, and (ii) all currently pending significant litigation relating to the conservatorship and the August 2012 amendment to the senior preferred stock purchase agreement has been resolved, which may require Treasury’s assent. Net proceeds of the issuance of any shares of capital stock for cash while the senior preferred stock is outstanding, except for up to $70 billion in aggregate gross cash proceeds from the issuance of common stock, must be used to pay down the liquidation preference of the senior preferred stock;
terminating or seeking to terminate our conservatorship, other than through a receivership, except that, as revised by the January 2021 letter agreement, FHFA can terminate our conservatorship without the prior consent of Treasury if several conditions are met, including (1) all currently pending significant litigation relating to the conservatorship and the August 2012 amendment to the senior preferred stock purchase agreement has been resolved, and (2) for two or more consecutive quarters, our common equity tier 1 capital (as defined in the enterprise regulatory capital framework), together with any stockholder equity that would result from a firm commitment public underwritten offering of common stock which is fully consummated concurrent with the termination of conservatorship, equals or exceeds at least 3% of our adjusted total assets (as defined in the enterprise regulatory capital framework);
selling, transferring, leasing or otherwise disposing of any assets, except for dispositions for fair market value in limited circumstances including if (a) the transaction is in the ordinary course of business and consistent with past practice or (b) the assets have a fair market value individually or in the aggregate of less than $250 million; and
issuing subordinated debt.
Covenants in the senior preferred stock purchase agreement also subject us to limits on the amount of mortgage assets that we may own and the total amount of our indebtedness.
Mortgage Asset Limit. The amount of mortgage assets we are permitted to own is $250 billion and, as a result of the January 2021 letter agreement, will decrease to $225 billion on December 31, 2022. We are currently managing our business to a $225 billion cap pursuant to instructions from FHFA. Our mortgage assets as of December 31, 2020 were $165.0 billion. Our mortgage asset calculation also includes 10% of the notional value of interest-only securities we hold. We disclose the amount of our mortgage assets each month in the “Endnotes” to our Monthly Summaries, which are available on our website and announced in a press release.
Debt Limit. Our debt limit under the senior preferred stock purchase agreement is set at 120% of the amount of mortgage assets we were allowed to own under the agreement on December 31 of the immediately preceding calendar year. This debt limit is currently $300 billion, and it will decrease to $270 billion as of December 31, 2022. As calculated for this purpose, our indebtedness as of December 31, 2020 was $290.0 billion. We disclose the amount of our indebtedness on a monthly basis under the caption “Total Debt Outstanding” in our Monthly Summaries, which are available on our website and announced in a press release.
Another covenant prohibits us from entering into any new compensation arrangements or increasing amounts or benefits payable under existing compensation arrangements with any of our executive officers (as defined by Securities and Exchange Commission (“SEC”) rules) without the consent of the Director of FHFA, in consultation with the Secretary of the Treasury.
In addition to the changes described above to covenants already in the senior preferred stock purchase agreement, the January 2021 letter agreement added additional covenants:
We are required to comply with the terms of the enterprise regulatory capital framework as published by FHFA in the Federal Register on December 17, 2020, disregarding any subsequent amendments or modifications.
Fannie Mae 2020 Form 10-K
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New Business Restrictions. New restrictive covenants impact both our single-family and multifamily business activities:
Limit on Multifamily Volume. We may not acquire more than $80 billion in multifamily mortgage assets in any 52-week period. FHFA will adjust the dollar amount of this limitation on multifamily mortgage purchase activity up or down at the end of each calendar year based on changes to the consumer price index. Additionally, at least 50% of our multifamily acquisitions in any calendar year must, at the time of acquisition, be classified as mission-driven, consistent with FHFA guidelines. In the fourth quarter of 2020, FHFA established a 2021 multifamily volume cap of $70 billion in new business volume over the four-quarter period from January 1, 2021 through December 31, 2021. FHFA also announced the requirement that at least 50% of our 2021 multifamily business volume must be mission-driven, focused on certain affordable and underserved market segments. For more information about our multifamily new business volume, see “MD&A—Multifamily Business—Multifamily Business Metrics.” We understand that the $70 billion multifamily volume cap and related requirements established by FHFA in the fourth quarter of 2020 remain in effect for calendar year 2021, and that the $80 billion limit on multifamily mortgage purchase activity established under the January 2021 letter agreement operates as an independent limit on our prospective multifamily loan acquisitions.
Requirement to Provide Equitable Access for Single-Family Acquisitions. We:
may not vary our pricing or acquisition terms for single-family loans based on the business characteristics of the seller, including the seller’s size, charter type, or volume of business with us; and
must offer to purchase at all times, for equivalent cash consideration and on substantially the same terms, any single-family mortgage loan that (1) is of a class of loans that we then offer to acquire for inclusion in our mortgage-backed securities or for other non-cash consideration, (2) is offered by a seller that has been approved to do business with us, and (3) has been originated and sold in compliance with our underwriting standards.
Single Counterparty Volume Cap on Single-Family Acquisitions for Cash. Beginning on January 1, 2022, and thereafter, we may not acquire more than $1.5 billion in single-family loans for cash consideration from any single seller (including its affiliates) during any period comprising four calendar quarters.
Limit on Specified Higher-Risk Single-Family Acquisitions. We may not acquire a single-family mortgage loan if, following the acquisition, more than 3% of our single-family loans that result from a refinancing, or 6% of our single family loans that do not result from a refinancing, in each case, that we have acquired during the preceding 52-week period, would have two or more of the following higher-risk characteristics at origination:
a combined loan-to-value ratio greater than 90%;
a debt-to-income ratio greater than 45%; and
a FICO credit score (or equivalent credit score) less than 680.
Limit on Acquisitions of Single-Family Mortgage Loans Backed by Second Homes and Investment Properties. We must limit our acquisitions of single-family mortgage loans secured by either second homes or investment properties to not more than 7% of the single-family mortgage loans we have acquired during the preceding 52-week period.
Single-Family Loan Eligibility Requirements Program. Beginning on or prior to July 1, 2021, we must implement a program reasonably designed to ensure that the single-family loans we acquire are limited to:
qualified mortgages, except government-backed loans;
loans exempt from the Consumer Financial Protection Bureau’s (the “CFPB’s”) ability-to-repay and qualified mortgage rule, except timeshares and home equity lines of credit;
loans secured by an investment property;
refinancing loans with streamlined underwriting originated in accordance with our eligibility criteria for high loan-to-value refinancings;
loans originated with temporary underwriting flexibilities during times of exigent circumstances, as determined in consultation with FHFA;
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loans secured by manufactured housing; and
such other loans that FHFA may designate that were eligible for purchase by us as of the date of the January 2021 letter agreement.
We are assessing the operational and business impacts of these new covenants and our compliance with them, including how these new limitations will impact, and may require changes to, our underwriting standards and requirements for acquisitions of single-family and multifamily loans. These changes may impact the overall volume and types of loans we acquire in 2021. As of the date of this filing, based on interpretive guidance we have received from FHFA to date and an initial assessment of our acquisition activities, we are not currently in compliance with the new covenants that restrict our acquisitions of purchase money single-family loans with higher-risk characteristics and our acquisitions of single-family loans backed by investment properties and second homes, measured during the preceding 52-week period. We are working with FHFA on resolving any remaining interpretive issues and discussing a timetable to be fully compliant with these covenants.
Annual Risk Management Plan Covenant. Each year we remain in conservatorship we are required to provide Treasury a risk management plan that sets out our strategy for reducing our risk profile, describes the actions we will take to reduce the financial and operational risk associated with each of our business segments, and includes an assessment of our performance against the planned actions described in the prior year’s plan. We submitted our most recent annual risk management plan to Treasury in December 2020.
Although the senior preferred stock purchase agreement does not specify penalties for failure to comply with the covenants in the agreement, FHFA, as our conservator and regulator, has the authority to direct compliance and to impose consequences for noncompliance.
Housing Finance Reform
Policymakers and others have focused significant attention in recent years on how to reform the nation’s housing finance system, including what role, if any, Fannie Mae and Freddie Mac should play in that system. Congress may consider proposed housing finance reform legislation that could result in significant changes in our structure and role in the future, including proposals that would result in Fannie Mae’s liquidation or dissolution. The January 2021 letter agreement includes a commitment for us and Treasury to work toward developing a proposal to restructure Treasury’s interests in us in a manner that meets three goals: (1) facilitating an orderly exit from conservatorship, (2) ensuring that Treasury is appropriately compensated, and (3) permitting us to raise third-party capital and make distributions as appropriate. The January 2021 letter agreement states that Treasury, in consultation with FHFA, should endeavor to transmit this proposal to both Houses of Congress by September 30, 2021. At the same time the January 2021 letter agreement was announced, Treasury issued a Blueprint on Next Steps for GSE Reform. Indicating that “Congress is best positioned to adopt comprehensive housing finance reform,” Treasury addressed five key considerations in the blueprint that should inform Treasury’s continued work with FHFA to meet the goals described above: build GSE equity capital, determine GSE capital structure, set commitment fee for ongoing government support, establish appropriate pricing oversight, and assess appropriate market concentration. In the blueprint, Treasury indicated that, among other things, consideration should be given to whether consolidating our and Freddie Mac’s operations into a single entity would more efficiently fulfill our mission and promote the interests of stakeholders, including taxpayers. It is unclear how or whether Treasury in the current Administration will prioritize or act on the commitments set forth in the letter agreement or the considerations set forth in the Blueprint. There continues to be significant uncertainty regarding the timing, content and impact of future legislative and regulatory actions affecting us, including the enactment of housing finance reform legislation. See “Risk Factors—GSE and Conservatorship Risk” for a description of risks associated with our future and potential housing finance reform.
Legislation and Regulation
U.S. Government Response to COVID-19
Congress has passed several pieces of legislation to address the economic dislocation and other burdens resulting from the COVID-19 pandemic:
The Coronavirus Aid, Relief, and Economic Security Act, referred to as the CARES Act, was enacted in March 2020.
The Consolidated Appropriations Act of 2021 was enacted in December 2020.
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Relief for Individuals and Businesses; Federal Eviction Moratoriums
The CARES Act included a number of provisions aimed at providing relief for individuals and businesses that applied to the loans we guarantee, including provisions requiring that our servicers:
provide forbearance (that is, a temporary suspension of the borrower’s monthly mortgage payments) for up to 360 days upon the request of any single-family borrower experiencing a financial hardship caused by 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 the COVID-19 pandemic;
through December 31, 2020, provide forbearance for up to 90 days upon the request of any multifamily borrower experiencing a documented financial hardship due to the COVID-19 pandemic that was current on its payments as of February 1, 2020; during the forbearance period, multifamily borrowers may not evict tenants for nonpayment, issue notices to vacate, or charge fees for late payment of rent; and
suspend foreclosures and foreclosure-related evictions for single-family properties through May 17, 2020, other than for vacant or abandoned properties.
The CARES Act instituted a temporary moratorium, through July 25, 2020, on tenant evictions for nonpayment of rent that applied to any single-family or multifamily property that secures a mortgage loan we own or guarantee. To prevent the further spread of COVID-19 the Centers for Disease Control and Prevention (the “CDC”) issued an order in September 2020 prohibiting the eviction of any tenant, lessee or resident of a residential property for nonpayment of rent, if such person provides a specified declaration attesting that they meet the requirements to obtain the protection of the order. The CDC’s moratorium’s initially expired on December 31, 2020, but it was subsequently extended by the Consolidated Appropriations Act of 2021 through January 31, 2021. In January 2021, the CDC extended the eviction moratorium through March 31, 2021. The requirements to obtain the protection of the order include a specified income cap and an inability to pay 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 and as described in “Risk Factors,” these eviction moratoriums could adversely affect the ability of some of our borrowers to make payments on their loans.
See “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management” and “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management” for more information on the actions we have taken and are taking to provide forbearance and suspend foreclosures and evictions, including beyond the requirements under the CARES Act.
Accounting for Troubled Debt Restructurings
The CARES Act also allows financial institutions to elect temporary relief relating to the accounting for troubled debt restructurings (“TDRs”). The CARES Act provides that a financial institution may elect to suspend the TDR requirements under U.S. generally accepted accounting principles (“GAAP”) for certain loss mitigation activities, including forbearance and loan modifications, related to the COVID-19 pandemic that occur between March 1, 2020 through the earlier of December 31, 2020 or 60 days after the date on which the COVID-19 outbreak national emergency terminates, as long as the loan was not more than 30 days delinquent as of December 31, 2019. The Consolidated Appropriations Act of 2021 extended the period of the TDR relief until the earlier of January 1, 2022 or 60 days after the date on which the COVID-19 outbreak national emergency terminates. As described in “Note 1, Summary of Significant Accounting Policies,” we have elected this option for temporary TDR relief for COVID-19-related loss mitigation activities.
Economic Stimulus
The Consolidated Appropriations Act of 2021 and the CARES Act also contain many provisions designed to mitigate the negative economic impact of the COVID-19 pandemic, including direct cash payments to eligible taxpayers below specified income limits, expanded unemployment insurance benefits and eligibility, and relief designed to prevent layoffs and business closures at small businesses. While these provisions mostly expired by December 2020, the Consolidated Appropriations Act of 2021, which was signed into law in December 2020, replaced many of these with similar provisions. The Consolidated Appropriations Act of 2021 also included $25 billion in rental assistance funds for eligible households living in single-family or multifamily properties. We believe these payments, expanded benefits, and other relief have increased the ability of impacted borrowers to pay their mortgage loans and renters to pay their rent.
State and Local Government Responses to COVID-19
In 2020, many states and localities issued executive orders or enacted legislation requiring mortgage forbearance, foreclosure and eviction moratoriums, and rent flexibilities. As the pandemic continues into 2021, some states have
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taken action or are considering actions to extend foreclosure and eviction protections further into 2021. The terms of these new and proposed requirements vary significantly in duration and scope. Actions taken by federal, state or local lawmakers to provide additional relief to borrowers and renters during the COVID-19 pandemic, depending on their scope and whether and to what extent they apply to our business, could have a material adverse effect on our business and financial results.
GSE Act and Other Legislative and Regulatory Matters
As a federally chartered corporation, we are subject to government regulation and oversight. FHFA, our primary regulator, regulates our safety and soundness and our mission. FHFA is an independent agency of the federal government with general supervisory and regulatory authority over Fannie Mae, Freddie Mac and the Federal Home Loan Banks (“FHLBs”). The U.S. Department of Housing and Urban Development (“HUD”) is our regulator with respect to fair lending matters. Our regulators also include the SEC and Treasury.
We describe below regulations applicable to us pursuant to the GSE Act, other legislation and related regulatory matters. We also describe some regulations applicable to the mortgage industry and the securities markets that may indirectly affect us.
Capital
The GSE Act sets forth minimum and critical capital requirements for Fannie Mae and Freddie Mac and provides that the Director of FHFA shall establish risk-based capital requirements and may establish higher minimum capital requirements. FHFA has suspended the statute’s capital classifications during conservatorship. Although existing statutory and regulatory capital requirements are not binding during conservatorship, we continue to submit capital reports to FHFA and FHFA monitors our capital levels. See “Note 12, Regulatory Capital Requirements” for information on the amount of regulatory capital we held as of December 31, 2020.
Conservatorship Capital Framework
In 2017, FHFA directed Fannie Mae and Freddie Mac to implement an aligned risk measurement framework for evaluating business decisions and performance during conservatorship. The conservatorship capital framework includes specific requirements relating to risk on our book of business and modeled returns on our new acquisitions. We are required to submit quarterly reports to FHFA relating to the framework’s requirements. We discuss below our transition from the conservatorship capital framework to our new enterprise regulatory capital framework.
Enterprise Regulatory Capital Framework
In November 2020, FHFA adopted a final rule establishing a new regulatory capital framework for the GSEs, which was published in the Federal Register on December 17, 2020. The new regulatory capital framework implements the statutory capital requirements and establishes supplemental risk-based and leverage-based capital requirements beyond what is expressly required in the GSE Act. The framework provides a granular assessment of credit risk specific to different mortgage loan categories, as well as components for market risk and operational risk. The regulatory capital framework set forth in the final rule includes the following:
Supplemental capital requirements relating to the amount and form of the capital we hold, based largely on definitions of capital used in U.S. banking regulators’ regulatory capital framework. The final rule specifies complementary leverage-based and risk-based requirements, which together determine the requirements for each tier of capital;
A requirement that we hold prescribed capital buffers that can be drawn down in periods of financial stress and then rebuilt over time as economic conditions improve. If we fall below the prescribed buffer amounts, we must restrict capital distributions such as stock repurchases and dividends, as well as discretionary bonus payments to executives, until the buffer amounts are restored;
A requirement to file quarterly public capital reports starting in 2022, regardless of our status in conservatorship;
Specific minimum percentages, or “floors,” on the risk-weights applicable to single-family and multifamily exposures, which has the effect of increasing the capital required to be held for loans otherwise subject to lower risk weights;
Specific floors on the risk-weights applicable to retained portions of credit risk transfer transactions, which has the effect of decreasing the capital relief obtained from these transactions; and
Additional elements based on U.S. banking regulators’ regulatory capital framework, including the planned eventual introduction of an advanced approach to complement the standardized approach for measuring risk-weighted assets.
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FHFA’s adoption of the enterprise regulatory capital framework followed an announcement by the Financial Stability Oversight Council (the “FSOC”) in September 2020 that it had completed an activities-based review of the secondary mortgage market. The FSOC’s review focused in particular on the activities of Fannie Mae and Freddie Mac (the “GSEs”), including an analysis of the extent to which FHFA’s regulatory framework would adequately mitigate potential stability risks. The FSOC indicated that much of its analysis centered on FHFA’s then recently proposed capital rule. 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, “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 indicated that it will continue to monitor the secondary mortgage market activities of the GSEs and FHFA’s implementation of the GSEs’ 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.
The enterprise regulatory capital framework goes into effect in February 2021, but the dates on which we must comply with the requirements of the capital framework are staggered and largely dependent on whether we remain in conservatorship. Under the final rule, our compliance with the capital buffers will be required upon exit from conservatorship, and our compliance with the base regulatory requirements will be required by the later of our exit from conservatorship or such later date as may be specified by FHFA. Further, the compliance date for advanced approaches of the final rule will be January 1, 2025, or such later date as may be specified by FHFA. Reporting requirements under the enterprise regulatory capital framework take effect on January 1, 2022, including public reporting of our calculations of regulatory capital levels, buffers, adjusted total assets, and total risk-weighted assets. See “Note 12, Regulatory Capital Requirements” for information on existing reporting requirements relating to our regulatory capital as of December 31, 2020.
As amended by the January 2021 letter agreement, our senior preferred stock purchase agreement includes a covenant requiring us to comply with the terms of the enterprise regulatory capital framework as published by FHFA in the Federal Register on December 17, 2020, disregarding any subsequent amendments or modifications. In addition, the dividend provisions as amended by the January 2021 letter agreement provide that, after the capital reserve end date, the amount of quarterly dividends on the senior preferred stock will be equal to the lesser of any quarterly increase in our net worth and a 10% annual rate on the then-current liquidation preference of the senior preferred stock. As a result of this change, our ability to retain earnings in excess of the capital requirements and buffers set forth in the enterprise regulatory capital framework, including to build management buffers, will be limited.
When it is fully applicable to Fannie Mae, this framework will require us to hold significantly more capital than the statutory requirement and prior FHFA proposed capital rules. See “MD&A—Liquidity and Capital Management—Regulatory Capital” for information on the amount of regulatory capital we held as of December 31, 2020.
Currently, we review our business decisions continuously as they relate to the new capital requirements and the conservatorship capital framework, because we measure our risk and returns on our current business against the conservatorship capital framework, but the loans we acquire now and any credit-risk sharing transactions we enter into will also impact our future capital requirements. We expect to cease using the conservatorship capital framework to make business and risk decisions sometime in 2021 and to use instead the new enterprise capital regulatory framework and certain risk measures. Managing our business to take into account our new capital requirements and measures of risk requires balancing potentially competing business objectives, including furthering our mission objectives, prudently managing risk, and earning a competitive return. We expect that the enterprise regulatory capital framework will have a significant impact on our business, but we cannot measure the impact at this time because we do not know when many of the provisions of the new framework will become applicable. We are developing our ongoing business strategy to align our business activities with our new capital requirements and measures of risk.
Portfolio Standards
The GSE Act requires FHFA to establish standards governing our portfolio holdings, to ensure that they are backed by sufficient capital and consistent with our mission and safe and sound operations. FHFA is also required to monitor our portfolio and, in some circumstances, may require us to dispose of or acquire assets. In 2010, FHFA adopted, as the standard for our portfolio holdings, the portfolio limits specified in the senior preferred stock purchase agreement described under “Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements—Covenants under Treasury Agreements,” as it may be amended from time to time. The rule is effective for as long as we remain subject to the terms and obligations of the senior preferred stock purchase agreement.
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New Products and Activities
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. FHFA adopted an interim final rule implementing these provisions in July 2009, but subsequently concluded that permitting us to engage in new products was inconsistent with the goals of the conservatorship and instructed us not to submit new product requests under the rule. In October 2020, FHFA issued a proposed rule that, if adopted as final, would replace the interim final rule. 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 a final rule, would apply to Fannie Mae, and any affiliates of Fannie Mae, both during and after a transition from conservatorship. In January 2021, we submitted a comment letter recommending various modifications to the proposed rule to streamline FHFA’s review of new products and activities.
Receivership and Resolution Planning
Under the GSE Act, FHFA must place us into receivership if the Director of FHFA makes a written determination that our assets are less than our obligations (that is, we have a net worth deficit) or if we have not been paying our debts as they become due, in either case, for a period of 60 days. FHFA has notified us that the measurement period for any mandatory receivership determination with respect to our assets and liabilities would commence no earlier than the SEC public filing deadline for our quarterly or annual financial statements and would continue for 60 calendar days thereafter. FHFA has advised us that if, during that 60-day period, we receive funds from Treasury in an amount at least equal to the deficiency amount under the senior preferred stock purchase agreement, the Director of FHFA will not make a mandatory receivership determination.
In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other reasons set forth in the GSE Act. The statutory grounds for discretionary appointment of a receiver include: a substantial dissipation of assets or earnings due to unsafe or unsound practices; the existence of an unsafe or unsound condition to transact business; an inability to meet our obligations in the ordinary course of business; a weakening of our condition due to unsafe or unsound practices or conditions; critical undercapitalization; undercapitalization and no reasonable prospect of becoming adequately capitalized; the likelihood of losses that will deplete substantially all of our capital; or by consent.
In December 2020, FHFA issued a directive and a proposed rule requiring us to develop a plan to facilitate a rapid and orderly resolution in the event FHFA is appointed as our receiver. The stated goals of our resolution planning are to minimize disruption in the national housing finance markets, preserve the value of our franchise and assets, facilitate the division of assets and liabilities between the limited-life regulated entity and the receivership estate, ensure that creditors bear losses in the order of their priority under the GSE Act, and foster market discipline by making clear that no extraordinary government support will be available to indemnify investors against losses or fund the resolution.
The appointment of FHFA as receiver would immediately terminate the conservatorship. In the event of receivership, the GSE Act requires FHFA, as the receiver, to organize a limited-life regulated entity with respect to Fannie Mae. Among other requirements, the GSE Act provides that this limited-life regulated entity:
would succeed to Fannie Mae’s charter and thereafter operate in accordance with and subject to such charter;
would assume, acquire or succeed to our assets and liabilities to the extent that such assets and liabilities are transferred by FHFA to the entity; and
would not be permitted to assume, acquire or succeed to any of our obligations to shareholders.
Placement into receivership would likely have a material adverse effect on holders of our common stock and preferred stock, and could have a material adverse effect on holders of our debt securities and Fannie Mae MBS. Should we be placed into receivership, different assumptions would be required to determine the carrying value of our assets, which could lead to substantially different financial results. For more information on the risks to our business relating to receivership and uncertainties regarding the future of our business, see “Risk Factors—GSE and Conservatorship Risk.”
Affordable Housing Allocations
The GSE Act requires us to set aside in each fiscal year an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of our new business purchases and to pay this amount to specified HUD and Treasury funds in support of affordable housing. New business purchases consist of single-family and multifamily whole mortgage loans purchased during the period and single-family and multifamily mortgage loans underlying Fannie Mae MBS issued
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during the period pursuant to lender swaps, which we describe in “Mortgage Securitizations.” We are prohibited from passing through the cost of these allocations to the originators of the mortgage loans that we purchase or securitize. For each year’s new business purchases since 2015, we have set aside amounts for these contributions and transferred the funds when directed by FHFA to do so. See “Certain Relationships and Related Transactions, and Director Independence—Transactions with Related Persons—Treasury Interest in Affordable Housing Allocations” for information on our contribution for 2020 new business purchases.
Executive Compensation
The amount of compensation we may pay our executives is subject to a number of legal and regulatory restrictions, particularly while we are in conservatorship. For a description of our executive compensation program and legal and regulatory requirements that affect our executive compensation, see “Executive Compensation.”
Fair Lending
The GSE Act requires the Secretary of HUD to assure that Fannie Mae and Freddie Mac meet their fair lending obligations. Among other things, HUD periodically reviews and comments on our underwriting and appraisal guidelines to ensure consistency with the Fair Housing Act. 
Stress Testing
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 2020 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 a revised publication timeframe.
FHFA Proposed Liquidity Requirements
In June 2020, FHFA instructed us to meet prescriptive liquidity requirements. In December 2020, those requirements became effective and FHFA issued a proposed rule in line with the updated requirements. The proposed rule, if adopted as a final rule, will be effective as of September 2021. Under the requirements, we must hold more liquid assets than under our previous framework, which negatively impacts our net interest income.
The proposed rule and our current liquidity requirements have four components we must meet:
a short-term cash flow metric that requires us to meet our expected cash outflows and continue to provide liquidity to the market over a 30-day period of stress, plus an additional $10 billion buffer;
an intermediate cash flow metric that requires us to meet our expected cash outflows and continue to provide liquidity to the market over a 365-day period of stress;
a specified minimum long-term debt to less-liquid asset ratio. Less-liquid assets are those that are not eligible to be pledged as collateral to the Fixed Income Clearing Corporation; and
a requirement that we fund our assets with liabilities that have a specified minimum term relative to the term of the assets.
As of December 31, 2020, we were in compliance with these requirements.
Guaranty Fees and Pricing
Our guaranty fees and pricing are subject to regulatory, legislative and conservatorship requirements:
FHFA, in its capacity as conservator, has provided guidance relating to our guaranty fee pricing for new single-family acquisitions. FHFA’s guidance requires that we meet a specified minimum return on equity target based on the conservatorship capital framework. 
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In 2016, FHFA in its regulatory capacity, established minimum base guaranty fees that generally apply to our acquisitions of 30-year and 15-year single-family fixed-rate loans in lender swap transactions.
In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) under which, at the direction of FHFA, we increased the guaranty fee on all single-family residential mortgages delivered to us by 10 basis points effective April 1, 2012. The revenue generated by this fee increase is paid to Treasury and helps offset the cost of a two-month extension of the payroll tax cut in early 2012. In 2012, FHFA and Treasury advised us to remit this fee increase to Treasury with respect to all loans acquired by us on or after April 1, 2012 and before January 1, 2022, and to continue to remit these amounts to Treasury on and after January 1, 2022 with respect to loans we acquired before this date until those loans are paid off or otherwise liquidated.
FHFA Rule on Uniform Mortgage-Backed Securities
We and Freddie Mac are required to align our programs, policies and practices that affect the prepayment rates of TBA-eligible MBS pursuant to an FHFA rule. The rule is intended to ensure that Fannie Mae and Freddie Mac programs, policies and practices that individually have a material effect on cash flows (including policies that affect prepayment speeds) are and will remain aligned regardless of whether we and Freddie Mac are in conservatorship. The rule provides a non-exhaustive list of covered programs, policies and practices, including management decisions or actions about: single-family guaranty fees; the spread between the note rate on the mortgage and the pass-through coupon on the MBS; eligibility standards for sellers, servicers, and private mortgage insurers; distressed loan servicing requirements; removal of mortgage loans from securities; servicer compensation; and proposals that could materially change the credit risk profile of the single-family mortgages securitized by a GSE.
Prior to this FHFA rule, we, Freddie Mac and FHFA undertook alignment efforts with the goal of ensuring consistency of prepayment speeds between Fannie Mae-issued and Freddie Mac-issued securities. In response to this rule, we also created a process aimed at ensuring any changes to our programs, policies and practices do not have a material effect on cash flows. Accordingly, we believe that our policies and practices are generally aligned with the requirements specified by FHFA pursuant to the rule. FHFA may mandate further alignment efforts in the future, and the impact of any such efforts on our business or our MBS is uncertain.
Housing Goals
Our housing goals, which are established by FHFA in accordance with the GSE Act, require that a specified amount of mortgage loans we acquire meet standards relating to affordability or location. For single-family goals, our acquisitions are measured against the lower of benchmarks set by FHFA or the level of goals-qualifying originations in the primary mortgage market. Multifamily goals are established as a number of units to be financed.
In October 2020, FHFA determined that we met all of our 2019 single-family and multifamily housing goals. We will report our 2020 housing goals performance to FHFA in March 2021, and FHFA will make a final determination regarding our 2020 performance later in the year, after data regarding the share of goals-qualifying originations in the primary mortgage market, reported under the Home Mortgage Disclosure Act, becomes available. The tables below display information about our housing goals and performance against our goals.
Single-Family Housing Goals(1)
2019 2020
FHFA Benchmark Single-Family
Market Level
Result FHFA Benchmark
Low-income (≤80% of area median income) families home purchases
24 % 26.6  % 27.8  % 24  %
Very low-income (≤50% of area median income) families home purchases
6.6  6.5 
Low-income areas home purchases(2)
19  22.9  24.5  19 
Low-income and high-minority areas home purchases(3)
14  18.1  19.5  14 
Low-income families refinances
21  24.0  23.8  21 
(1)    The FHFA benchmarks and our results are expressed as a percentage of the total number of eligible single-family mortgages acquired during the period. The Single-Family Market level is the percentage of eligible single-family mortgages originated in the primary mortgage market.
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(2)    These mortgage loans must be secured by a property that is (a) in a low-income census tract, (b) in a high-minority census tract and affordable to moderate-income families (those with incomes less than or equal to 100% of area median income), or (c) in a designated disaster area and affordable to moderate-income families.
(3)    These mortgage loans must be secured by a property that is (a) in a low-income census tract or (b) in a high-minority census tract and affordable to moderate-income families.
Multifamily Housing Goals
2019 2020
Goal Result Goal
(in units)
Low-income families
315,000  385,763  315,000 
Very low-income families
60,000  79,649  60,000 
Small affordable multifamily properties(1)
10,000  17,832  10,000 
(1) Small affordable multifamily properties are those with 5 to 50 units that are affordable to low-income families.
In December 2020, FHFA established single-family and multifamily housing goals for Fannie Mae and Freddie Mac for 2021. In the past, FHFA has established housing goals for a three-year period, but due to the COVID-19 pandemic and associated economic uncertainty, FHFA established benchmark levels for only the 2021 calendar year. The benchmark levels for our single-family and multifamily housing goals remain the same as those applicable for 2020. As described in “Risk Factors—GSE and Conservatorship Risk,” actions we may take to meet our housing goals and duty to serve requirements described below may increase our credit losses and credit-related expense.
Duty to Serve Underserved Markets
The GSE Act requires that we serve very low-, low-, and moderate-income families in three specified underserved markets: manufactured housing, affordable housing preservation and rural housing. In December 2016, FHFA published a final rule implementing our duty to serve these underserved markets. Under the rule, we are required to adopt an underserved markets plan for each underserved market covering a three-year period that sets forth the activities and objectives we will undertake to meet our duty to serve that market. Our underserved markets plans, which are effective for 2018 to 2020, received non-objections from FHFA, were initially finalized and published in December 2017 and have been updated since that time.
The types of activities that are eligible for duty to serve credit in each underserved market are summarized below:
Manufactured housing market. For the manufactured housing market, duty to serve credit is available for eligible activities relating to manufactured homes (whether titled as real property or personal property (known as chattel)) and loans for specified categories of manufactured housing communities.
Affordable housing preservation market. For the affordable housing preservation market, duty to serve credit is available for eligible activities relating to preserving the affordability of housing for renters and buyers under specified programs enumerated in the GSE Act and other comparable affordable housing programs administered by state and local governments, subject to FHFA approval. Duty to serve credit also is available for activities related to small multifamily rental properties, energy efficiency improvements on existing multifamily rental and single-family first lien properties, certain shared equity homeownership programs, the purchase or rehabilitation of certain distressed properties, and activities under HUD’s Choice Neighborhoods Initiative and Rental Assistance Demonstration programs.
Rural housing market. For the rural housing market, duty to serve credit is available for eligible activities related to housing in rural areas, including activities related to housing in high-needs rural regions and for high-needs rural populations.
FHFA’s evaluation guidance communicates FHFA’s expectations regarding the development of the underserved markets plans and describes the annual process by which FHFA will evaluate our achievements under the plans, with performance results to be reported to Congress annually. If FHFA determines that we failed to meet the requirements of an underserved markets plan, it may result in the imposition of a housing plan that could require us to take additional steps. In October 2020, FHFA reported its determination that we complied with our 2019 duty to serve requirements and its finding that we performed a satisfactory job of increasing the liquidity and distribution of available capital in each of the three underserved markets. FHFA will determine in 2021 our performance with respect to our 2020 duty to serve obligations.
In December 2020, FHFA advised us that it has no objection to our 2021 duty-to-serve plan.
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Swap Transactions; Minimum Capital and Margin Requirements
As a result of the Dodd-Frank Act, we are required to submit new swap transactions for clearing to a derivatives clearing organization. Additionally, in October 2015, an inter-agency body of regulators issued a final rule under the act governing margin and capital requirements applicable to entities that are subject to their oversight. The rule is effective in two phases and each phase requires that we implement operational changes and changes relating to the collateral we collect and provide for swap transactions. The first phase of the rule became effective in 2017. Effectiveness of the second phase of the rule was scheduled for September 2020, but was delayed to September 2021 in light of exigent circumstances caused by the COVID-19 pandemic. This phase will require additional operational changes and changes to collateral requirements, which may increase the costs associated with hedging our retained mortgage portfolio.
Risk Retention
In 2014, an inter-agency body of regulators issued a final rule implementing the Dodd-Frank Act’s credit risk retention requirement. The final rule generally requires sponsors of securitization transactions to retain a 5% economic interest in the credit risk of the securitized assets. The rule offers several compliance options, one of which is to have either Fannie Mae or Freddie Mac (so long as they remain in conservatorship or receivership with capital support from the United States) securitize and fully guarantee the assets, in which case no further retention of credit risk is required. A potential exit from conservatorship, or changes we make in our business upon any potential exit from conservatorship to comply with the rule, could reduce our market share or adversely impact our business. Securities backed solely by mortgage loans meeting the definition of a “qualified residential mortgage” are exempt from the risk retention requirements of the rule. The rule currently defines “qualified residential mortgage” to have the same meaning as the term “qualified mortgage” as defined by the CFPB in connection with its ability-to-repay rule discussed below.
Ability-to-Repay Rule and the Qualified Mortgage Patch
The Dodd-Frank Act amended the Truth in Lending Act (“TILA”) to require creditors to determine that borrowers have a “reasonable ability to repay” most mortgage loans prior to making such loans. If a creditor fails to comply, a borrower may be able to offset a portion of the amount owed in a foreclosure proceeding or recoup monetary damages. The rule offers several options for complying with the ability-to-repay requirement, including making loans that meet certain terms and characteristics (referred to as “qualified mortgages”), which may provide creditors and their assignees with special protection from liability. A loan will be a standard qualified mortgage under the rule if, among other things, (1) the points and fees paid in connection with the loan do not exceed 3% of the total loan amount, (2) the loan term does not exceed 30 years, (3) the loan is fully amortizing with no negative amortization, interest-only or balloon features and (4) the debt-to-income (“DTI”) ratio on the loan does not exceed 43% at origination and is underwritten according to Appendix Q in the rule. The CFPB also created the qualified mortgage “patch,” pursuant to which a special class of conventional mortgage loans are considered qualified mortgages if they (1) meet the points and fees, term and amortization requirements of qualified mortgages generally and (2) are eligible for sale to Fannie Mae or Freddie Mac. In 2013, FHFA directed Fannie Mae and Freddie Mac to limit our acquisition of single-family loans to those loans that meet the points and fees, term and amortization requirements for qualified mortgages, or to loans that are exempt from the ability-to-repay rule, such as loans made to investors.
In December 2020, the CFPB published a final rule that eliminates the qualified mortgage patch and replaces the current 43% DTI ratio limit and Appendix Q requirements for a standard qualified mortgage with a pricing and underwriting framework. The pricing framework hinges on the difference between a loan’s annual percentage rate (“APR”) and the average prime offer rate (“APOR”) for comparable transactions. A loan will receive a conclusive presumption—a safe harbor for lenders—that the consumer had the ability to repay if the APR does not exceed the APOR by 1.50 percentage points. A loan will receive a rebuttable presumption that the consumer had the ability to repay if the APR exceeds the APOR by 1.50 percentage points but by less than 2.25 percentage points. Higher pricing thresholds exist for smaller loan amounts and manufactured housing loans. The underwriting framework requires lenders to consider and verify the borrower’s current or reasonably expected income, assets, debt obligations, alimony, child support, and monthly DTI ratio or residual income before originating a loan.
The final rule is scheduled to go into effect in March 2021, with lenders required to comply beginning in July 2021. Between March and July 1, 2021 lenders can choose to comply with either the qualified mortgage patch or the new qualified mortgage rule. On February 4, 2021, the Acting Director of the CFPB indicated that he may seek to delay implementation of the new rule to preserve flexibility for President Biden’s nominee for CFPB Director, once confirmed. If the rule’s implementation is delayed, the qualified mortgage patch will continue in place until the mandatory compliance date of the final rule or a replacement rule. We do not expect the final rule, as published, to impact our business significantly, but it may increase competition. We cannot predict the impact of any replacement rule that may be adopted in its stead. See “Risk Factors—GSE and Conservatorship Risk” and “—Legal, Regulatory and Other Risks” for more information on risks presented by regulatory changes in the financial services industry.
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TILA-RESPA Integrated Disclosure (“TRID”)
The Dodd-Frank Act required the CFPB to streamline and simplify the disclosures required under TILA and the Real Estate Settlement Procedures Act. In October 2015, the CFPB’s final rule implementing these changes went into effect. Although this rule applies to mortgage originators and is not directly applicable to us, we could face potential liability for certain errors in the required disclosures in connection with the loans we acquire from lenders. It remains unclear what sorts of errors will give rise to liability. Also in October 2015, FHFA directed us and Freddie Mac not to conduct post-purchase loan file reviews for technical compliance with TRID. Consistent with FHFA’s directive, we currently do not intend to exercise our contractual remedies, including requiring the lender to repurchase the loan, for noncompliance with the provisions of TRID, except in two limited circumstances: if the required form is not used; or if a particular practice would impair enforcement of the note or mortgage or would result in assignee liability, and a court of law, regulator or other authoritative body has determined that such practice violates TRID. 
FHFA Rule on Credit Score Models
Under an FHFA rule that became effective in October 2019, we are required to validate and approve third-party credit score models and obtain FHFA’s approval of our determination. We must evaluate the models for factors such as accuracy, reliability and integrity, as well as impacts on fair lending and the mortgage industry. In November 2020, we announced our determination that the “classic FICO® Score” from Fair Isaac Corporation should be approved for our continued use as a credit score model and FHFA’s approval of this determination. This validation was an incremental step while we continue to assess additional credit score model applications in accordance with the rule. Fannie Mae uses credit scores to establish a minimum credit threshold for mortgage lending, provide a foundation for risk-based pricing, and support disclosures to investors
Single-Counterparty Credit Limit
The Federal Reserve Board has adopted rules to restrict the counterparty credit exposures of U.S.-based global systemically important banks (“U.S. GSIBs”) and certain large bank holding companies, large savings and loan holding companies, and U.S. intermediate holding companies that are subsidiaries of foreign banking organizations. These rules, which have various implementation dates depending on the type of covered organization, generally limit the exposure of a covered organization to any counterparty and its affiliates to no more than 25% of the covered organization’s tier 1 capital. U.S. GSIBs must adhere to a stricter limit of 15% of their tier 1 capital for exposures to any other U.S. GSIB or non-bank entity supervised by the Federal Reserve. 
While Fannie Mae is in conservatorship, a covered organization’s exposures involving claims on or directly and fully guaranteed by Fannie Mae are exempt from these restrictions and Fannie Mae MBS and debt can be used as collateral to reduce a banking organization’s counterparty exposure. At this time, we do not know what impact, if any, these rules will have on our customers’ business practices, or whether and to what extent this rule may adversely affect demand for or the liquidity of securities we issue. 
In the discussion of a recent amendment to these rules, the Federal Reserve Board noted that a change in the conservatorship status of the GSEs could affect aspects of the Federal Reserve Board’s regulatory framework, and that it “will continue to monitor and take into consideration any future changes to the conservatorship status of the GSEs, including the extent and type of support received by the GSEs.”
The Future of LIBOR and Alternative Reference Rates
In 2017, the United Kingdom’s Financial Conduct Authority, which regulates the London Inter-bank Offered Rate (“LIBOR”), announced its intention to stop persuading or compelling the group of major banks that sustains LIBOR to submit rate quotations after 2021. In November 2020, ICE Benchmark Administration, the administrator of LIBOR, stated its intention to cease publication of one-week and two-month U.S. dollar LIBOR after 2021, and to cease publication of overnight, one-month, three-month, six-month and one-year U.S. dollar LIBOR tenors after June 2023. We have exposure to one-month, three-month, six-month and one-year LIBOR, including in financial instruments that mature after June 2023. Our exposure arises from our acquisitions of loans and securities, our sales of securities, and our entry into derivative transactions that reference LIBOR. The markets for alternative reference rates are developing and, as they develop, we expect to transition to these alternative reference rates. The transition from LIBOR will require action by many market participants and leadership from organizations such as Alternative Reference Rates Committee (the “ARRC”) member firms, FHFA, our advisors and regulators, and may involve action by one or more legislatures in the U.S and abroad. We are actively seeking to facilitate an orderly transition from LIBOR.
We have established an internal office focused on LIBOR transition issues that is overseen by our LIBOR Enterprise Steering Council, which includes members of senior management. We also coordinate with FHFA on our LIBOR transition efforts. As part of these efforts, we have sought to identify the risks inherent in this transition and engaged
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external business and legal consultants focused on LIBOR and alternative indices. We continue to analyze potential risks associated with the LIBOR transition, including financial, operational, legal, reputational and compliance risks.
In addition to the work we are doing on an enterprise level to facilitate an orderly transition from LIBOR, we also are a voting member of the ARRC and participate in its working groups. The ARRC is a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York to identify a set of alternative U.S. dollar reference interest rates and an adoption plan for those alternative rates. Banking and financial regulators, including FHFA, also participate in the ARRC as ex-officio members. In 2017, the ARRC recommended an alternative reference rate, referred to as the Secured Overnight Financing Rate (“SOFR”). The Federal Reserve Bank of New York began publishing SOFR in 2018. In support of the ARRC’s efforts to develop SOFR as a key market index, we issued the market’s first SOFR securities in 2018, and through December 31, 2020 we have issued a total of $136.1 billion in SOFR-indexed floating-rate corporate debt. We created SOFR-indexed adjustable rate mortgage products for new originations for our single-family business and our multifamily business during 2020. We ceased purchasing any LIBOR adjustable-rate mortgage loans at the end of 2020. We also started issuing SOFR-indexed REMIC securities and ceased issuing new LIBOR REMIC securities in 2020. In addition, we have entered into SOFR-indexed interest rate swaps and futures transactions to further support the development of this emerging index.
Currently, our LIBOR-indexed derivative contracts represent a substantial portion of our LIBOR exposure. In fall 2020, we announced that we agreed to industry-adopted amendments aimed at an orderly transition to SOFR upon any LIBOR cessation for our derivatives contracts. Another principal source of our exposure to LIBOR arises from (1) single-family and multifamily LIBOR-based adjustable-rate mortgage loans that we have securitized or own and (2) LIBOR-indexed REMIC structured securities that we have issued. Each of those products allow us to select a replacement index if LIBOR ceases to be published. In addition, we implemented fallback language based on the recommendations of the ARRC for new issuances of these products during 2020.
See “Risk Factors—Market and Industry Risk” for a discussion of the risks to our results of operations, financial condition, liquidity and net worth posed by the potential discontinuance of LIBOR.
Human Capital
Our employees are key to ensuring our long-term success. They are essential to our goals of being a return-oriented company able to attract private capital while managing risk, increasing our operational agility and undertaking a digital transformation. As of December 31, 2020, we had approximately 7,700 employees. Because we design, build and maintain complex systems to support our specialized role in the secondary mortgage market, approximately 38% of our employees work in technology-related jobs. Competition is high for employees with technology skills in the Washington, DC and Dallas metropolitan areas, where most of our employees work. Despite conservatorship, an uncertain future, and limitations on the compensation we are able to offer, we believe many employees and potential recruits are attracted by our mission and the compelling nature of our work. As of December 31, 2020, approximately 4% of positions across the company were vacant, and approximately 6% of our technology-related positions were vacant.
Employee Engagement
We are committed to maintaining an engaged workforce as we believe engagement is critical to the ongoing achievement of the company’s and the conservator’s goals. We monitor employee engagement through regular surveys. In 2020 the vast majority of our employees agreed with statements such as whether they would recommend Fannie Mae as a great place to work, which we consider to be strong indicators of their engagement. We believe our ability to recruit and retain employees and keep them engaged is influenced by the opportunity to do interesting work that supports our mission. We also offer employee benefits to encourage involvement in socially positive efforts, including those that echo our mission. Specifically, we offer employees up to $5,000 per year in matching charitable gifts (subject to overall available funding) and 10 hours of paid leave each month to engage in volunteer activities. We have also established a relief fund to which our employees can make charitable donations to assist employees who have suffered losses as a result of a natural disaster or other catastrophic event.
Employee Development
We invest in our employees’ development, because we believe doing so supports the success of the company as well as our employees. We seek to provide training and opportunities that enable employees to develop digital, leadership and other critical skills we need to achieve our strategy and fulfill our mission. In recent years, we have worked on instilling lean management techniques, practices and behaviors throughout our workforce and Agile development principles for employees engaged in product development. We also emphasize to our employees their responsibility for and role in managing risk through our risk-assessment and monitoring activities, training and corporate messaging. In
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2020, these efforts enabled us to respond to demands created by the COVID-19 pandemic and record-high volumes resulting from historically low interest rates with commercial speed and agility.
Safety and Resiliency
We took a number of steps in 2020 to protect the safety and resiliency of our workforce. From the onset of the COVID-19 pandemic in mid-March through early October 2020, we required nearly all of our workforce to work remotely. Recognizing that our employees were balancing a number of competing obligations, we focused on employee wellness and, with the help of a campaign to spotlight flexible work options, we created an environment that supports our business needs while helping employees better meet their personal obligations. We also increased the amount of family sick leave available to employees and made other adjustments to support employees. In early October 2020, we began allowing employees, on a voluntary basis, to request approval to return to work at some of our office locations and established mandatory COVID-19 safety protocols at those 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 remote work arrangement.
Diversity and Inclusion
We seek to foster an environment in which all employees are treated with dignity and respect, have the opportunity to contribute to meaningful work, and perform that work in an inclusive environment free from discrimination, harassment, and retaliation. We believe this commitment helps us attract and retain a skilled, diverse workforce. As of December 31, 2020, racial or ethnic minorities constituted 55% of our overall workforce and 24% of our officer-level employees, and women constituted 44% of our overall workforce and 37% of our officer-level employees. Supporting our role in the secondary mortgage market requires employees with specialized technology skills. As a result, we consider our workforce diversity in the context of fintech companies, whose operations are based on a blend of financial services products and technology platforms, rather than financial services firms or other companies that have significant retail operations or a large number of administrative roles. We sponsor programs and activities to cultivate a diverse and inclusive work environment by focusing on inclusive leadership principles, talent development, enterprise accessibility, team and group dynamics, and a consistent communications strategy that reinforces the practice of driving inclusion to achieve innovative solutions. We also support voluntary, grassroots employee resource groups that are open to all employees, support diversity and inclusion, and provide a forum for members to come together for professional growth and development, cultural awareness, education, community service, and networking across the organization. In 2020, our senior management also sponsored a series of “Courageous Conversations” to facilitate safe-space discussions for employees to gain an understanding of and share differing viewpoints on issues related to social justice.
See “Corporate Governance—Human Capital Management Oversight” for information on oversight of human capital management by our Board of Directors’ Compensation and Human Capital Committee. See “Risk Factors—GSE and Conservatorship Risk” for a discussion of how restrictions on our compensation and uncertainty with respect to our future negatively affects our ability to retain and recruit executives and other employees.
Where You Can Find Additional Information
We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10‑Q, current reports on Form 8-K and all other SEC reports and amendments to those reports as soon as reasonably practicable after we electronically file the material with, or furnish it to, the SEC. Our website address is www.fanniemae.com. Materials that we file with the SEC are also available from the SEC’s website, www.sec.gov. You may also request copies of any filing from us, at no cost, by calling the Fannie Mae Investor Relations & Marketing Helpline at 1-800-2FANNIE (1-800-232-6643), or by writing to Fannie Mae, Attention: Investor Relations & Marketing, 1100 15th Street, NW, Washington, DC 20005.
References in this report to our website or to the SEC’s website do not incorporate information appearing on those websites unless we explicitly state that we are incorporating the information.
Forward-Looking Statements
This report includes statements that constitute forward-looking statements within the meaning of Section 21E of the Exchange Act. In addition, we and our senior management may from time to time make forward-looking statements in our other filings with the SEC, our other publicly available written statements and orally to analysts, investors, the news media and others. Forward-looking statements often include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “forecast,” “project,” “would,” “should,” “could,” “likely,” “may,” “will” or similar words. Examples of forward-looking statements in this report include, among others, statements relating to our expectations regarding the following matters:
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our future financial performance, financial condition and net worth, and the factors that will affect them;
the impact of the COVID-19 pandemic, and the actions that we and federal, state, and local governments are taking in response to it, on our business, financial results, financial condition, returns on capital, debt funding needs, business plans, and on mortgage market and economic conditions, and the factors that will affect the pandemic’s impact;
our expectations for, and the impact of fluctuations in, our acquisition volumes, market share, guaranty fees, acquisition credit characteristics, or the pace at which loans in our book of business turn over;
our plans relating to and the effects of our credit risk transfer transactions, as well as the factors that will affect our engagement in future transactions;
our loss mitigation activity and its impact;
our business plans and strategies, their development, and their impact;
our work and plans to build capital to meet the requirements of the enterprise regulatory capital framework as well as to build management buffers;
the impact of the enterprise regulatory capital framework and the January 2021 letter agreement with Treasury on our business and our financial performance and condition;
future increases in our net worth and in the liquidation preference of the senior preferred stock, and attainment of the capital reserve end date;
the impact of the CFPB’s final rule eliminating the qualified mortgage patch on our business;
volatility in our future financial results and efforts we may make to address volatility, including our expectations relating to our hedge accounting program and its impact;
the size and composition of our retained mortgage portfolio;
the amount and timing of our purchases of loans from MBS trusts;
the impact on our business or financial results and the timing of legislation and regulation;
our payments to HUD and Treasury funds under the GSE Act;
mortgage market and economic conditions (including U.S. GDP, unemployment rates, mortgage rates, home price growth, housing demand, housing activity, housing starts, home sales, rent growth, multifamily vacancy rates, and the future volume of and characteristics of mortgage originations) and the impact of mortgage market and economic conditions on our business and financial results;
our future off-balance sheet exposure to Freddie Mac-issued securities;
the risks to our business;
future delinquency rates, default rates, forbearances and other loss mitigation activity, foreclosures, and credit losses relating to the loans in our guaranty book of business and the factors that will affect them, including the impact of the COVID-19 pandemic;
our expectations relating to our TDRs;
the performance of loans in our book of business and the factors that will affect such performance;
our loan acquisitions, the credit risk profile of such acquisitions, and the factors that will affect them;
our expectations regarding our employees’ remote work arrangements;
our future liquidity, liquidity requirements, the amount of our outstanding debt, and expectations for how we will meet our debt obligations; and
our response to legal and regulatory proceedings and their impact on our business or financial condition.
Forward-looking statements reflect our management’s current expectations, forecasts or predictions of future conditions, events or results based on various assumptions and management’s estimates of trends and economic factors in the markets in which we are active and that otherwise impact our business plans. Forward-looking statements are not guarantees of future performance. By their nature, forward-looking statements are subject to significant risks and uncertainties and changes in circumstances. Our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.
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There are a number of factors that could cause actual conditions, events or results to differ materially from those described in our forward-looking statements, including, among others, the following:
uncertainty regarding our future, our exit from conservatorship and our ability to raise or earn the capital needed to meet our capital requirements;
uncertainty surrounding the duration, spread and severity of COVID-19 pandemic; 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;
the market and regulatory changes we anticipate and our readiness for them, including changes relating to an eventual exit from conservatorship, the competitive landscape, and the need to attract private investment;
the impact of the senior preferred stock purchase agreement and the enterprise regulatory capital framework, as well as future legislative and regulatory requirements or changes affecting us, such as the enactment of housing finance reform legislation, including changes that limit our business activities or our footprint;
actions by FHFA, Treasury, HUD, the CFPB or other regulators, Congress, or state or local governments that affect our business, including our new capital requirements and recent changes or potential further changes in the ability-to-repay rule that eliminates the qualified mortgage patch for GSE-eligible loans;
changes in the structure and regulation of the financial services industry;
the timing and level of, as well as regional variation in, home price changes;
future interest rates and credit spreads;
developments that may be difficult to predict, including: market conditions that result in changes in our net amortization income from our guaranty book of business, fluctuations in the estimated fair value of our derivatives and other financial instruments that we mark to market through our earnings; and developments that affect our loss reserves, such as changes in interest rates, home prices or accounting standards, or events such as natural disasters or the emergence of widespread health emergencies or pandemics;
uncertainties relating to the discontinuance of LIBOR, or other market changes that could impact the loans we own or guarantee or our MBS;
credit availability;
disruptions or instability in the housing and credit markets;
the size and our share of the U.S. mortgage market and the factors that affect them, including population growth and household formation;
growth, deterioration and the overall health and stability of the U.S. economy, including U.S. GDP, unemployment rates, personal income and other indicators thereof;
changes in the fiscal and monetary policies of the Federal Reserve;
our and our competitors’ future guaranty fee pricing and the impact of that pricing on our competitive environment and guaranty fee revenues;
the volume of mortgage originations;
the size, composition, quality and performance of our guaranty book of business and retained mortgage portfolio;
the competitive environment in which we operate, including the impact of legislative, regulatory or other developments on levels of competition in our industry and other factors affecting our market share;
how long loans in our guaranty book of business remain outstanding;
challenges we face in retaining and hiring qualified executives and other employees;
the effectiveness of our business resiliency plans and systems;
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changes in the demand for Fannie Mae MBS, in general or from one or more major groups of investors;
our conservatorship, including any changes to or termination (by receivership or otherwise) of the conservatorship and its effect on our business;
the investment by Treasury, including the impact of recent changes or potential future changes to the terms of the senior preferred stock purchase agreement, and its effect on our business, including restrictions imposed on us by the terms of the senior preferred stock purchase agreement, the senior preferred stock, and Treasury’s warrant, as well as the extent that these or other restrictions on our business and activities are applied to us through other mechanisms even if we cease to be subject to these agreements and instruments;
adverse effects from activities we undertake to support the mortgage market and help borrowers, renters, lenders and servicers;
actions we may be required to take by FHFA, in its role as our conservator or as our regulator, such as actions in response to the COVID-19 pandemic, changes in the type of business we do, or actions relating to UMBS or our resecuritization of Freddie Mac-issued securities;
limitations on our business imposed by FHFA, in its role as our conservator or as our regulator;
our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers;
the possibility that changes in leadership at FHFA or the Administration may result in changes in FHFA’s or Treasury’s willingness to pursue our exit from conservatorship;
our reliance on CSS and the common securitization platform for a majority of our single-family securitization activities, our reduced influence over CSS as a result of recent changes to the CSS limited liability company agreement, and any additional changes FHFA may require in our relationship with or in our support of CSS;
a decrease in our credit ratings;
limitations on our ability to access the debt capital markets;
constraints on our entry into new credit risk transfer transactions;
significant changes in forbearance, modification and foreclosure activity;
our resumption of and the volume and pace of future nonperforming and reperforming loan sales and their impact on our results and serious delinquency rates;
changes in borrower behavior;
actions we may take to mitigate losses, and the effectiveness of our loss mitigation strategies, management of our REO inventory and pursuit of contractual remedies;
defaults by one or more institutional counterparties;
resolution or settlement agreements we may enter into with our counterparties;
our need to rely on third parties to fully achieve some of our corporate objectives;
our reliance on mortgage servicers;
changes in GAAP, guidance by the Financial Accounting Standards Board and changes to our accounting policies;
changes in the fair value of our assets and liabilities;
the stability and adequacy of the systems and infrastructure that impact our operations, including ours and those of CSS, our other counterparties and other third parties;
the impact of increasing interdependence between the single-family mortgage securitization programs of Fannie Mae and Freddie Mac in connection with UMBS;
operational control weaknesses;
our reliance on models and future updates we make to our models, including the assumptions used by these models;
domestic and global political risks and uncertainties;
natural disasters, environmental disasters, terrorist attacks, widespread health emergencies or pandemics, or other major disruptive events;
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severe weather events, fires, floods or other events for which we may be uninsured or under-insured or that may affect our counterparties, and other risks resulting from climate change and efforts to address climate change;
cyber attacks or other information security breaches or threats; and
the other factors described in “Risk Factors.”
Readers are cautioned not to unduly rely on the forward-looking statements we make and to place these forward-looking statements into proper context by carefully considering the factors discussed in “Risk Factors” in this report. These forward-looking statements are representative only as of the date they are made, and we undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under the federal securities laws.
Item 1A.  Risk Factors
Risk Factors Summary:
The summary of risks below provides an overview of the principal risks we are exposed to in the normal course of our business activities. This summary does not contain all of the information that may be important to you, and you should read the more detailed discussion of risks that follows this summary.
GSE and Conservatorship Risk
The future of our company is uncertain.
Our business activities are significantly affected by the conservatorship and the senior preferred stock purchase agreement and could be significantly impacted by the enterprise regulatory capital framework.
Our regulator is authorized or required to place us into receivership under specified conditions, which would result in our liquidation, and FHFA, acting as receiver, proceeding to realize on our assets. Amounts recovered by our receiver from these actions may not be sufficient to repay the liquidation preference of any series of our preferred stock or to provide any proceeds to common shareholders.
Our business and results of operations may be materially adversely affected if we are unable to retain and recruit well-qualified executives and other employees. The conservatorship, the uncertainty of our future and limitations on our executive and employee compensation put us at a disadvantage compared to many other companies with which we compete for talent.
Pursuing our housing goals and duty to serve obligations may adversely affect our business, results of operations and financial condition.
The conservatorship and agreements with Treasury adversely affect our common and preferred shareholders.
The liquidity and market value of our MBS could be adversely affected by developments in the UMBS market, including those connected with our or Freddie Mac’s exit from conservatorship.
Our issuance of UMBS and structured securities backed by Freddie Mac-issued securities has increased our operational and counterparty credit risk.
Our reliance on CSS and the common securitization platform has increased our counterparty and third-party risk.
We are limited in our ability to diversify our business and may be prohibited from undertaking activities that management believes would benefit our business.
An active trading market in our equity securities may cease to exist, which would adversely affect the market price and liquidity of our common and preferred stock.
COVID-19 Pandemic Risk
We expect the COVID-19 pandemic to continue to adversely affect our business and financial results.
Credit Risk
We may incur significant credit losses and credit-related expenses on the loans in our book of business.
One or more of our institutional counterparties may fail to fulfill their contractual obligations to us, resulting in financial losses, business disruption and decreased ability to manage risk.
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Risk Factors
Our financial condition or results of operations may be adversely affected if mortgage servicers fail to perform their obligations to us.
We may incur losses as a result of claims under our mortgage insurance policies not being paid in full or at all.
Mortgage fraud could result in significant financial losses and harm to our reputation.
We may suffer losses if borrowers are unable to obtain property or flood insurance, if their claims under insurance policies are not paid, or if they suffer property damage as a result of a hazard for which we do not require insurance, such as flooding outside of certain areas.
The occurrence of major natural or other disasters in the United States or its territories and the impact of climate change could negatively impact our credit losses and credit-related expenses.
Operational Risk
A failure in our operational systems or infrastructure, or those of third parties, could materially adversely affect our business, impair our liquidity, cause financial losses and harm our reputation.
A breach of the security of our systems or facilities, or those of third parties with which we do business, including as a result of cyber attacks, could damage or disrupt our business or result in the disclosure or misuse of confidential information, which could damage our reputation, result in regulatory sanctions and/or increase our costs and cause losses.
Our concurrent implementation of multiple new initiatives may increase our operational risk and result in one or more material weaknesses in our internal control over financial reporting.
Material weaknesses in our internal control over financial reporting could result in errors in our reported results or disclosures that are not complete or accurate.
Failure of our models to produce reliable results may adversely affect our ability to manage risk and make effective business decisions.
Liquidity and Funding Risk
Limitations on our ability to access the debt capital markets could have a material adverse effect on our ability to fund our operations, and our liquidity contingency plans may be difficult or impossible to execute during a sustained liquidity crisis.
A decrease in the credit ratings on our senior unsecured debt could have an adverse effect on our ability to issue debt on reasonable terms, particularly if such a decrease were not based on a similar action on the credit ratings of the U.S. government. A decrease in our credit ratings also could require that we post additional collateral for our derivatives contracts.
Market and Industry Risk
Changes in interest rates or our loss of the ability to manage interest-rate risk successfully could adversely affect our financial results and condition, and increase interest-rate risk.
Changes in spreads could materially impact our results of operations, net worth and the fair value of our net assets.
Uncertainty relating to the potential discontinuance of LIBOR may adversely affect our results of operations, financial condition, liquidity and net worth.
A deterioration in general economic conditions, particularly home prices and employment trends or the financial markets may materially adversely affect our business and financial condition.
A decline in activity in the U.S. housing market or increasing interest rates could lower our business volumes or otherwise adversely affect our results of operations, net worth and financial condition.
Legal and Regulatory Risk
Regulatory changes in the financial services industry may negatively impact our business.
Legislative, regulatory or judicial actions could negatively impact our business, results of operations, financial condition or net worth.
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General Risk
Our business and financial results could be materially adversely affected by legal or regulatory proceedings.
Changes in accounting standards and policies can be difficult to predict and can materially impact how we record and report our financial results.
In many cases, our accounting policies and methods, which are fundamental to how we report our financial condition and results of operations, require management to make judgments and estimates about matters that are inherently uncertain. Management also relies on models in making these estimates.
Risk Factors
Refer to “MD&A—Key Market Economic Indicators,” “MD&A—Risk Management,” “MD&A—Single-Family Business” and “MD&A—Multifamily Business” for more detailed descriptions of the primary risks to our business and how we seek to manage those risks.
The risks we face could materially adversely affect our business, results of operations, financial condition, liquidity and net worth, and could cause our actual results to differ materially from our past results or the results contemplated by any forward-looking statements we make. We believe the risks described below and in the other sections of this report referenced above are the most significant we face; however, these are not the only risks we face. We face additional risks and uncertainties not currently known to us or that we currently believe are immaterial.
GSE and Conservatorship Risk
The future of our company is uncertain.
The company faces an uncertain future, including how long we will continue to exist in our current form, the extent of our role in the market, the level of government support of our business, how long we will be in conservatorship, what form we will have, what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated, and whether we will continue to exist following conservatorship. The conservatorship is indefinite in duration and the timing, conditions and likelihood of our emerging from conservatorship are uncertain. Our conservatorship could terminate through a receivership. Termination of the conservatorship, other than in connection with a receivership, requires Treasury’s consent under the senior preferred stock purchase agreement; unless (i) the pending significant lawsuits relating to the amendment of the senior preferred stock purchase agreement and/or the conservatorship have been resolved, and (ii) for two or more consecutive quarters, our common equity tier 1 capital, together with any other common stock that we may issue in a public offering, equals or exceeds 3% of our “adjusted total assets” under our enterprise regulatory capital framework. We estimate that, had the new framework been applicable to us as of December 31, 2020, we would have been required to hold approximately $185 billion in adjusted total capital, of which approximately $135 billion must be in the form of common equity tier 1 capital.
The current Administration has not articulated a formal position on housing finance reform or the future of Fannie Mae and Freddie Mac, although FHFA’s strategic plan for conservatorship, issued in 2019, includes as an objective preparing Fannie Mae and Freddie Mac for their eventual exits from conservatorship. Actions taken to reform the housing finance system could have a significant impact on our structure, our role in the secondary mortgage market, our capitalization, our business and our competitive environment.
Congress may consider legislation, or federal agencies such as FHFA may consider regulations or administrative actions, to increase the competition we face, reduce our market share, expand our obligations to provide funds to Treasury, constrain our business operations, or subject us to other obligations that may adversely affect our business. We cannot predict the timing or final content of housing finance reform legislation or other legislation, regulations or administrative actions that will impact our activities, nor can we predict the extent of such impact.
Our business activities are significantly affected by the conservatorship and the senior preferred stock purchase agreement and could be significantly impacted by the enterprise regulatory capital framework.
In conservatorship our business is not managed with a strategy to maximize shareholder returns while fulfilling our mission. As conservator, FHFA can direct us to enter into contracts or enter into contracts on our behalf, and generally has the power to transfer or sell any of our assets or liabilities. In addition, our directors have no fiduciary duties to any person or entity except to the conservator. Accordingly, our directors are not obligated to consider the interests of the company, the holders of our equity or debt securities, or the holders of Fannie Mae MBS in making or approving a decision unless specifically directed to do so by the conservator.
As conservator, FHFA can prevent us from engaging in business activities or transactions that we believe would benefit our business and financial results. For example, because FHFA must approve changes to the national loan-level price
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Risk Factors
adjustments we charge and can direct us to make other changes to our guaranty fee pricing, our ability to address changing market conditions, pursue certain strategic objectives, or manage the mix of loans we acquire is constrained.
Additionally, FHFA may require us to undertake activities that are costly or difficult to implement.
In November 2020, FHFA adopted a final rule establishing a new regulatory capital framework for the GSEs. The new regulatory capital framework implements statutory capital requirements and establishes supplemental risk-based and leverage-based capital requirements. Our capital requirements under the enterprise regulatory capital framework may require us to change or limit certain business activities. We may be required to take actions to maintain appropriate risk-adjusted returns, which could adversely affect our competitive position. Additionally, these requirements depend upon the timing of exiting conservatorship.
Even if we are released from conservatorship, we remain subject to the terms of the senior preferred stock purchase agreement with Treasury, under which we issued the senior preferred stock and warrant. The senior preferred stock purchase agreement can only be canceled or modified with the consent of Treasury. The agreement includes a number of covenants that significantly restrict our business activities, and new restrictive covenants were added in the January 2021 letter agreement with Treasury that impact both our single-family and multifamily business activities. For example, one covenant provides that we may not acquire a single-family loan if, following its acquisition, in the prior 52-week period, we have acquired single-family loans with specified higher-risk characteristics in excess of the covenant’s thresholds. In addition, we are currently subject to a $300 billion debt limit under our senior preferred stock purchase agreement, which will decrease to $270 billion as of December 31, 2022. The unpaid principal balance of our aggregate indebtedness was $290.0 billion as of December 31, 2020. Because of our debt limit, our business activities may be constrained. For more information about the covenants in the senior preferred stock purchase agreement and their potential impact on our business, see “Business—Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements—Covenants under Treasury Agreements.”
Our regulator is authorized or required to place us into receivership under specified conditions, which would result in our liquidation, and FHFA, acting as receiver, proceeding to realize on our assets. Amounts recovered by our receiver from these actions may not be sufficient to repay the liquidation preference of any series of our preferred stock or to provide any proceeds to common shareholders.
FHFA is required to place us into receivership if the Director of FHFA makes a written determination that our assets are less than our obligations or if we have not been paying our debts as they become due, in either case, for a period of 60 days after the SEC filing deadline for any of our Form 10-Ks or Form 10-Qs. Although Treasury committed to providing us funds in accordance with the terms of the senior preferred stock purchase agreement, if we need funding from Treasury to avoid triggering FHFA’s obligation, Treasury may not be able to provide sufficient funds to us within the required 60 days if it has exhausted its borrowing authority, if there is a government shutdown, or if the funding we need exceeds the amount available to us under the agreement. In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for the reasons set forth in the GSE Act, including if our Board or shareholders consent to the appointment of a receiver or, if under the definitions in the GSE Act, we are undercapitalized with no reasonable prospect of becoming adequately capitalized or critically undercapitalized. Under the GSE Act, FHFA succeeded to all of the rights, titles, powers and privileges of our board of directors and shareholders. In addition, we have not held sufficient core or total capital to meet the critical capital requirements in the GSE Act since 2008.
A receivership would terminate the conservatorship. In addition to the powers FHFA has as our conservator, the appointment of FHFA as our receiver would terminate all rights and claims that our shareholders and creditors may have against our assets or under our charter arising from their status as shareholders or creditors, except for their right to payment, resolution or other satisfaction of their claims as permitted under the GSE Act. If we are placed into receivership and do not or cannot fulfill our MBS guaranty obligations, there may be significant delays of any payments to our MBS holders, and the MBS holders could become unsecured creditors of ours with respect to claims made under our guaranty to the extent the mortgage collateral underlying the Fannie Mae MBS is insufficient to satisfy the claims of the MBS holders.
In the event of a liquidation of our assets, only after payment of the administrative expenses of the receiver and the immediately preceding conservator, the secured and unsecured claims against the company (including repaying all outstanding debt obligations), and the liquidation preference of the senior preferred stock, would any liquidation proceeds be available to repay the liquidation preference on any other series of preferred stock. Finally, only after the liquidation preference on all series of preferred stock is repaid would any liquidation proceeds be available for distribution to the holders of our common stock. In the event of such a liquidation, we can make no assurances that there would be sufficient proceeds to make any distribution to holders of our preferred stock or common stock, other than to Treasury as the holder of our senior preferred stock.
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Risk Factors
Our business and results of operations may be materially adversely affected if we are unable to retain and recruit well-qualified executives and other employees. The conservatorship, the uncertainty of our future and limitations on our executive and employee compensation put us at a disadvantage compared to many other companies with which we compete for talent.
Our business is highly dependent on the talents and efforts of our executives and other employees. The conservatorship, the uncertainty of our future and limitations on executive and employee compensation have had, and are likely to continue to have, an adverse effect on our ability to retain and recruit talent. Attrition in key management positions and challenges in hiring new management could harm our ability to manage our business effectively, to successfully implement strategic initiatives, and ultimately could adversely affect our financial performance.
Actions taken by Congress, FHFA and Treasury to date, or that may be taken by them or other government agencies in the future, have had, and may continue to have, an adverse effect on our retention and recruitment of executives and other employees. We are subject to significant restrictions on the amount and type of compensation we may pay while under conservatorship. For example:
The Equity in Government Compensation Act of 2015 limits the compensation and benefits for our Chief Executive Officer to the same level in effect as of January 1, 2015 while we are in conservatorship or receivership. Accordingly, annual direct compensation for our Chief Executive Officer is limited to base salary at an annual rate of $600,000.
The Stop Trading on Congressional Knowledge Act of 2012, known as the STOCK Act, and related FHFA regulations prohibit our senior executives from receiving bonuses during conservatorship.
As our conservator, FHFA has the authority to approve the terms and amount of our executive compensation and may require changes to our executive compensation program. For example:
In 2019, FHFA directed us, for so long as we are in conservatorship, to:
increase the mandatory deferral period for at-risk deferred salary received by senior vice presidents and above from one year to two years, effective January 1, 2022 for executives hired before January 1, 2020 and effective January 1, 2020 for executives hired or promoted to senior vice president on or after January 1, 2020; and
limit base salaries for all employees to no more than $600,000.
In 2019, FHFA directed us to submit for conservator decision any compensation arrangement for a newly hired employee where the proposed total target direct compensation is $600,000 or above, or any increase in total target direct compensation for an existing employee where the proposed total target direct compensation is $600,000 or above. This directive continues for so long as we are in conservatorship.
For new executive hires and compensation increase requests for executives, FHFA has requested that we target annual direct compensation to the 25th percentile of the market to the extent practicable and subject to appropriate exceptions.
The terms of our senior preferred stock purchase agreement with Treasury contain specified restrictions relating to compensation, including a prohibition on selling or issuing equity securities without Treasury’s prior written consent except under limited circumstances, which effectively eliminates our ability to offer equity-based compensation to our employees.
As a result of the restrictions on our compensation, we have not been able to incent and reward excellent performance with compensation structures that provide upside potential to our executives, which places us at a disadvantage compared to many other companies in attracting and retaining executives. In addition, the restrictions on our compensation and the uncertainty of potential action by Congress or the Administration with respect to our future— including whether we will exit conservatorship, how long it may take before we exit conservatorship, or whether housing finance reform will result in a significant restructuring of the company or the company no longer continuing to exist—also negatively affects our ability to retain and recruit executives and other employees.
The cap on our Chief Executive Officer compensation continues to make retention and succession planning for this position difficult, and it may make it difficult to attract qualified candidates for this critical role in the future.
We face competition from the financial services and technology industries, and from businesses outside of these industries, for qualified executives and other employees. If we are unable to retain, promote and attract executives and other employees with the necessary skills and talent, we would face increased risks for operational failures. If there were several high-level departures at approximately the same time, our ability to conduct our business could be
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materially adversely affected, which could have a material adverse effect on our results of operations and financial condition.
Pursuing our housing goals and duty to serve obligations may adversely affect our business, results of operations and financial condition
We are required by the GSE Act to support the housing market in ways that could adversely affect our financial results and condition. For example, we are subject to housing goals that require a portion of the mortgage loans we acquire to be for low- and very low-income families, families in low-income census tracts and moderate-income families in minority census tracts or designated disaster areas. We also have a duty to serve very low-, low- and moderate-income families in three underserved markets: manufactured housing, affordable housing preservation and rural areas. We may take actions to meet our housing goals and duty to serve obligations that could adversely affect our profitability. For example, we may acquire loans that offer lower expected returns or increase our credit losses and credit-related expenses. If we do not meet our housing goals or duty to serve requirements, and FHFA finds that the goals or requirements were feasible, we may become subject to a housing plan with additional requirements that could have an adverse effect on our results of operations and financial condition. The potential penalties for failure to comply with housing plan requirements include a cease-and-desist order and civil money penalties. See “Business—Legislation and Regulation—GSE Act and Other Legislative and Regulatory Matters” for more information on our housing goals and duty to serve underserved markets.
The conservatorship and agreements with Treasury adversely affect our common and preferred shareholders.
The material adverse effects of the conservatorship on our shareholders under our agreements with Treasury include the following:
No voting rights during conservatorship. During conservatorship, our common shareholders do not have the ability to elect directors or to vote on other matters unless the conservator delegates this authority to them.
No dividends to common or preferred shareholders, other than to Treasury. Our conservator announced in September 2008 that we would not pay any dividends on the common stock or on any series of preferred stock, other than the senior preferred stock, while we are in conservatorship. In addition, under the terms of the senior preferred stock purchase agreement, dividends may not be paid to common or preferred shareholders (other than on the senior preferred stock) without the prior written consent of Treasury, regardless of whether we are in conservatorship.
Our profits directly increase the liquidation preference of Treasury’s senior preferred stock and, once they exceed our capital reserve amount, will be payable to Treasury as dividends. The senior preferred stock ranks senior to our common stock and all other series of our preferred stock, as well as any capital stock we issue in the future, as to both dividends and distributions upon liquidation. Accordingly, if we are liquidated, the senior preferred stock is entitled to its then-current liquidation preference, before any distribution is made to the holders of our common stock or other preferred stock. See “Business—Conservatorship, Treasury Agreements and Housing Finance Reform—Senior Preferred Stock” for more information on the aggregate liquidation preference of the senior preferred stock.
Exercise of the Treasury warrant would substantially dilute the investment of current shareholders. If Treasury exercises its warrant to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis, the ownership interest in the company of our then-existing common shareholders will be substantially diluted, and we would thereafter have a controlling shareholder.
We are not managed for the benefit of shareholders. Because we are in conservatorship, we are not managed with a strategy to maximize shareholder returns.
The senior preferred stock purchase agreement, senior preferred stock and warrant can only be canceled or modified with the consent of Treasury. For additional description of the conservatorship and our agreements with Treasury, see “Business—Conservatorship, Treasury Agreements and Housing Finance Reform.”
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Risk Factors
The liquidity and market value of our MBS could be adversely affected by developments in the UMBS market, including those connected with our or Freddie Mac’s exit from conservatorship.
In 2019, we began issuing UMBS. The issuance of UMBS represented a significant change for the mortgage market and for our securitization operations and business. The success of UMBS is largely predicated on the fungibility of UMBS issued by Fannie Mae and Freddie Mac. If investors stop viewing Fannie Mae-issued UMBS and Freddie Mac-issued UMBS as fungible, or if investors prefer Freddie Mac-issued UMBS over Fannie Mae-issued UMBS, it could adversely affect the liquidity and market value of Fannie Mae MBS, the volume of our UMBS issuances and our guaranty fee revenues. FHFA adopted a rule to align Fannie Mae and Freddie Mac programs, policies and practices that affect the prepayment rates of TBA-eligible mortgage-backed securities to support the fungibility of Fannie Mae-issued UMBS and Freddie Mac-issued UMBS. However, these alignment efforts may not be successful over the long term and the prepayment rates on Fannie Mae-issued UMBS and Freddie Mac-issued UMBS could diverge in a manner that is disadvantageous for us.
The continued support of FHFA, Treasury, the Securities Industry and Financial Markets Association, and certain other regulatory bodies is critical to the success of UMBS. If any of these entities were to cease its support, the liquidity and market value of Fannie Mae-issued UMBS could be adversely affected. Furthermore, if either we or Freddie Mac exits conservatorship, it is unclear whether our and Freddie Mac’s programs, policies and practices in support of UMBS and resecuritizations of each other’s securities would be sustained.
Our issuance of UMBS and structured securities backed by Freddie Mac-issued securities has increased our operational and counterparty credit risk.
Issuing UMBS has increased our operational and counterparty credit risk exposure to Freddie Mac. When we resecuritize Freddie Mac-issued UMBS or other Freddie Mac securities, our guaranty of principal and interest extends to the underlying Freddie Mac security. We expect this risk exposure to increase as we issue more structured securities backed directly or indirectly by Freddie Mac-issued securities going forward. Although we have an indemnification agreement with Freddie Mac, in the event Freddie Mac were to fail (for credit or operational reasons) to make a payment due on its securities underlying a Fannie Mae-issued structured security, we would be obligated under our guaranty to fund any shortfall and make the entire payment on the related Fannie Mae-issued structured security on that payment date. Our pricing does not currently reflect any incremental credit, liquidity or operational risk associated with our guaranty of resecuritized Freddie Mac securities. As a result, a failure by Freddie Mac to meet its obligations under the terms of its securities that back structured securities we issue could have a material adverse effect on our earnings and financial condition, and we could be dependent on Freddie Mac and on the senior preferred stock purchase agreements that we and Freddie Mac each have with Treasury to avoid a liquidity event or a default under our guaranty.
UMBS have created significant interdependence between the single-family mortgage securitization programs of Fannie Mae and Freddie Mac. Accordingly, the market value of single-family Fannie Mae MBS could be affected by financial and operational incidents relating to Freddie Mac, even if those incidents do not directly relate to Fannie Mae or Fannie Mae MBS. Similarly, any disruption in Freddie Mac’s securitization activities or any adverse events affecting Freddie Mac’s significant mortgage sellers and servicers also could adversely affect the market value of single-family Fannie Mae MBS.
Our reliance on CSS and the common securitization platform has increased our counterparty and third-party risk.
We are reliant on CSS and its common securitization platform for the operation of a majority of our single-family securitization activities. In January 2020, at FHFA’s direction we entered into an amended limited liability company agreement for CSS. The amendment reduced our and Freddie Mac’s ability to control CSS Board decisions, even after conservatorship, including decisions about strategy, business operations and funding. The amendment expanded the CSS Board of Managers from two members designated by each GSE to include the Board Chair, CSS CEO and up to three additional FHFA-designated Board members. In January 2021, FHFA designated two additional Board members, as a result the four members designated by Fannie Mae and Freddie Mac constitute a minority of the Board and could be outvoted by non-GSE designated Board members on any matter during conservatorship and on a number of significant matters following either our or Freddie Mac’s exit from conservatorship. Although the amended agreement would require our approval for certain “material decisions” if either we or Freddie Mac have exited conservatorship, the Board may approve a number of actions even after conservatorship over the objection of the members we and Freddie Mac designate, including: approval of the annual budget and strategic plan for CSS (so long as it does not involve a material business change); withdrawal of capital by a member; and requiring capital contributions necessary to support CSS’s ordinary business operations. It is possible that FHFA may require us to make additional changes to the CSS limited liability company agreement, or may otherwise impose restrictions or provisions relating to CSS or UMBS, that may adversely affect us.
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Risk Factors
We do not currently pay service fees to CSS under our customer services agreement; its operations are funded entirely through capital contributions from Fannie Mae and Freddie Mac pursuant to the limited liability company agreement. We expect this arrangement may change, but we do not know how the eventual arrangement will be structured, or what control we will have in establishing those fees. During conservatorship, FHFA can direct us to enter into an amendment of the customer services agreement or enter such an amendment on our behalf, that could provide for a fee structure that would survive an exit from conservatorship absent a further amendment to the customer services agreement, which a majority of the Board would have to approve. Although implementation of any fee changes could require a further amendment to the customer services agreement, we might not have significant leverage to negotiate that amendment and the associated fee changes given our dependence on CSS.
Our securitization activities are complex and present significant operational and technological challenges and risks. Any measures we take to mitigate these challenges and risks might not be sufficient to prevent a disruption to our securitization activities. Our business activities could be adversely affected and the market for single-family Fannie Mae MBS could be disrupted if the common securitization platform were to fail or otherwise become unavailable to us or if CSS were unable to perform its obligations to us. Any such failure or unavailability could have a significant adverse impact on our business and could adversely affect the liquidity or market value of our single-family MBS. In addition, a failure by CSS to maintain effective controls and procedures could result in material errors in our reported results or disclosures that are not complete or accurate.
We are limited in our ability to diversify our business and may be prohibited from undertaking activities that management believes would benefit our business.
As a federally chartered corporation, we are subject to the limitations imposed by the Charter Act, extensive regulation, supervision and examination by FHFA and regulation by other federal agencies, including Treasury, HUD and the SEC. The Charter Act defines our permissible business activities. For example, we may not originate mortgage loans or purchase single-family loans in excess of the conforming loan limits, and our business is limited to the U.S. housing finance sector. FHFA, as our regulator, may impose additional limitations on our business. For example, the GSE Act requires us to obtain prior approval from FHFA for new products and to provide prior notice to FHFA of new activities that we consider not to be products. FHFA recently proposed a rule to implement these requirements that, if adopted, would permit FHFA to establish terms, conditions, or limitations with respect to any new product or new activity. In addition, as described in a previous risk factor, our business activities are subject to significant restrictions as a result of the conservatorship and the senior preferred stock purchase agreement. These limitations and requirements may cause us to delay or prevent us from undertaking new business activities management believes would benefit our business. Further, as a result of these limitations and requirements on our ability to diversify our operations, our financial condition and results of operations depend almost entirely on conditions in a single sector of the U.S. economy, specifically, the U.S. housing market. Weak or unstable conditions in the U.S. housing market can therefore have a significant adverse effect on our business that we cannot mitigate through diversification.
An active trading market in our equity securities may cease to exist, which would adversely affect the market price and liquidity of our common and preferred stock.
Our common stock and preferred stock are now traded exclusively in the over-the-counter market, and are not currently listed on any securities exchanges. We cannot predict the actions of market makers, investors or other market participants, and can offer no assurances that the market for our securities will be stable. If there is no active trading market in our equity securities, the market price and liquidity of the securities will be adversely affected. In addition, the market price of our common stock and preferred stock is subject to significant volatility, which may be due to other factors described in these “Risk Factors,” as well as speculation regarding our future, economic and political conditions generally, liquidity in the over-the-counter market in which our stock trades, and other factors, many of which are beyond our control. Such factors could cause the market price of our common stock and preferred stock to decline significantly, which may result in significant losses to holders of our common stock and preferred stock.
COVID-19 Pandemic Risk
We expect the COVID-19 pandemic to continue to adversely affect our business and financial results.
The COVID-19 pandemic caused substantial financial market volatility and has significantly adversely affected both the U.S. and global economies. As described in “Business—Executive Summary—COVID-19 Impact—Economic Impact,” although the economy has improved significantly since the second quarter of 2020, business activity remains below the level before the onset of the pandemic, and unemployment remains substantially higher than pre-pandemic levels. Continued high levels of new daily cases of COVID-19 in the U.S., combined with concerns about the emergence of new, more infectious variants of the coronavirus, have led to new shut-downs in various locales and reductions in business activity, with increased risk of additional public-health measures.
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Risk Factors
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 success of vaccination efforts and fiscal stimulus. We believe that sustained 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. We expect the impact of the COVID-19 pandemic to continue to negatively affect our financial results and our returns on capital.
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 the COVID-19 pandemic; 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 the COVID-19 vaccines; 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. While we are unable to predict the future course of these events or their longer-term effects on our business, key areas we have identified where the COVID-19 pandemic is negatively affecting or may negatively affect our business, financial results and financial condition are described below:
Increased borrower credit risk. Among other factors, income growth and unemployment levels affect borrowers’ ability to repay their mortgage loans. We expect the economic dislocation caused by the COVID-19 pandemic and elevated unemployment rates to result in continued higher serious delinquency rates and possibly in significantly higher defaults on the mortgage loans in our guaranty book of business. Because of this expectation, we had substantial credit-related expenses in 2020. As there is significant uncertainty associated with the impact of the COVID-19 pandemic, we may ultimately experience greater losses than we currently expect and also may have high credit-related expenses in future periods. Moreover, we are taking a number of actions to help borrowers affected by the COVID-19 pandemic that we expect will continue to adversely affect our financial results and financial condition, including:
providing forbearance to single-family borrowers impacted by COVID-19-related financial hardships who request forbearance;
providing forbearance to eligible multifamily borrowers impacted by COVID-19-related financial hardships on the condition that such borrowers suspend evictions and other penalties relating to late rent payments during the forbearance period; and
temporarily suspending foreclosures and certain foreclosure-related activities for single-family properties (other than for vacant or abandoned properties).
A number of federal, state and local authorities have implemented limitations on evictions, including the CDC eviction moratorium described in “Business—Legislation and Regulation—U.S. Government Response to COVID-19—Relief for Individuals and Businesses; Federal Eviction Moratoriums.” We believe that applicable eviction restrictions could have adversely affected, and could continue to adversely affect, the ability of some of our borrowers to make payments on their loans. We discuss the actions we have taken and their impact in more detail in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management” and in “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management.”
Certain states and localities have implemented COVID-19-related borrower and renter protections that are more extensive than federal or our requirements. States and localities may continue to consider such proposals in the future or extend the time period of existing protections. These additional protections, depending on their scope and whether and to what extent they apply to our business, could contribute to a higher number of single-family and multifamily borrowers becoming delinquent on their loans or could limit our ability to take enforcement actions with respect to our loans.
In addition, while home price appreciation was positive in 2020, the economic dislocation resulting from the COVID-19 pandemic could result in declines in home prices in the future. Similarly, economic dislocation resulting from the COVID-19 pandemic could result in declines in multifamily property valuations. Declines in multifamily property valuations would increase the amount of our loss in the event a borrower defaults on their
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loan. The magnitude of the impact would likely vary significantly across geographic regions and based on the credit characteristics of the loans.
The COVID-19 pandemic may also affect the credit quality of our new loan acquisitions. For example, CARES Act provisions prohibiting lenders from reporting previously-current borrowers receiving COVID-19-related payment accommodations as delinquent to the credit bureaus may result in our not having accurate data on a borrower’s credit history when we are determining the eligibility of the single-family loans we acquire.
Increased human capital and business resiliency risk. COVID-19 continues to spread in the U.S. and the rate of new daily cases may increase from current levels. If a significant number of our executives or other employees, or their family members for whom they provide care, contract COVID-19 during the same time period, it could materially adversely affect our ability to manage our business, which could have a material adverse effect on our results of operations and financial condition. The risk of executives, other employees or their family members contracting COVID-19 may increase with the resumption of business activity and the reopening of workplaces and schools. We are now allowing employees, on a voluntary basis, to request approval to return to work at some of our office locations. Although we have established COVID-19 safety protocols, the return of some employees to the office may increase the risk of our employees contracting COVID-19.
We expect a significant majority of our employees will continue to work remotely for the foreseeable future, driven by safety concerns, childcare obligations and other factors. The strain on our workforce caused by this shift to a remote work environment and the uncertainty and stressors associated with the COVID-19 pandemic may result in business interruptions, reduced productivity and other adverse impacts on our operations. While our technological systems to date have continued to function with our workforce working remotely, this telework arrangement increases the risk of technological or cybersecurity incidents that negatively affect our business operations. This telework arrangement, as well as the risk that employees or their family members could contract COVID-19 and our reliance on third parties for some functions, also could adversely affect our ability to maintain effective controls and procedures, which could result in material errors in our reported results or disclosures that are not complete or accurate.
Increased counterparty credit and operational risk. The economic dislocation caused by the COVID-19 pandemic could lead to default by one or more of our institutional counterparties on their obligations to us, which could result in significant financial losses.
In addition, if multiple single-family or multifamily servicers were to fail to meet their obligations to us, it could cause substantial disruption to our business, borrowers and the mortgage industry. We may not be able to transfer the servicing of loans to new servicers without significant operational disruptions and financial losses, and there may not be sufficient industry capacity to take on large servicing transfers.
As noted above, the economic dislocation caused by the COVID-19 pandemic could lead to significantly higher defaults on mortgage loans. A substantially higher level of mortgage defaults could affect our mortgage insurer counterparties' ability to fully meet their payment obligations to us.
Increased liquidity risk. As described in “MD&A—Liquidity and Capital Management,” while market conditions have improved since the first quarter of 2020, adverse market conditions in March limited our ability to issue debt with a maturity greater than two years. If the COVID-19 pandemic results in a sustained market liquidity crisis, our liquidity contingency plans may be difficult or impossible to execute. In this event, our alternative source of liquidity, our other investments portfolio, may not be sufficient to meet our liquidity needs.
In addition, as described in “MD&A—Liquidity and Capital Management,” our debt funding needs increased in 2020 driven in part by the impact of the COVID-19 pandemic.
Increased market risk. Market dislocations relating to the COVID-19 pandemic have made it more challenging to manage our interest-rate risk. Furthermore, with the decline in borrower performance due to impact of the COVID-19 pandemic and increased uncertainty regarding the value of mortgage-related assets in the current environment, we may have higher investment losses in future periods relating to decreases in the fair value of our loans that are held for sale.
Increased model and accounting estimate risk. Given the unprecedented nature and timing of the COVID-19 pandemic and its uncertain impact, we believe our model results relating to our allowance for loan losses currently cannot accurately capture the entirety of loan losses we will ultimately incur relating to COVID-19. The unprecedented nature of the COVID-19 pandemic may also negatively affect our ability to rely on models to effectively manage the risks to our business. Moreover, the CARES Act provisions prohibiting lenders from reporting some borrowers receiving COVID-19-related payment accommodations as delinquent may also impact the stability of the interpretation and predictiveness of borrower credit data and therefore the reliability of our models in the future.
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Risk Factors
Increased risk of additional government action affecting our business. Federal, state and local governments have taken many actions that have or that we expect will adversely affect our financial results, such as stay-at-home orders and business shut-downs, and the loan forbearance requirements of the CARES Act. The U.S. Congress, Treasury, the Federal Reserve, FHFA or other national, state or local government agencies or legislatures may take additional steps in response to the COVID-19 pandemic that could adversely affect our business, financial results and financial condition, such as expanding or extending our obligations to help borrowers, renters or counterparties affected by the pandemic or imposing new or expanded business shut-downs.
Increased risk of mortgage fraud. In response to the COVID-19 pandemic, we are offering certain temporary flexibilities relating to our Single-Family Selling Guide requirements. This could increase the risk of mortgage fraud relating to the loans we acquire during the COVID-19 pandemic. In addition, the CARES Act provides that a single-family borrower may obtain mortgage payment forbearance with no additional documentation required other than the borrower's attestation to a financial hardship caused by COVID-19, which creates the risk that borrowers who are not experiencing financial hardship may request a forbearance.
The impacts of COVID-19 to our business have generally amplified, or reduced our ability to mitigate, these and the other risks discussed herein.
Credit Risk
We may incur significant credit losses and credit-related expenses on the loans in our book of business.
We are exposed to a significant amount of mortgage credit risk on our $3.7 trillion guaranty book of business. Borrowers may fail to make required payments on mortgage loans we own or guaranty. This exposes us to the risk of credit losses and credit-related expenses.
As we describe earlier in this section under “COVID-19 Pandemic Risk,” the COVID-19 pandemic has exposed us to substantial credit-related expenses and risk of credit losses. Our serious delinquency rate increased in 2020 compared with 2019 with increased borrower participation in forbearance plans. Our loans currently in forbearance generally have a somewhat weaker credit profile than our overall guaranty book of business. If a large number of borrowers cannot repay the amounts owed at the end of their forbearance plans or over time, or fail to qualify for repayment plans, payment deferrals or modifications, this could result in significantly higher defaults on the mortgage loans in our guaranty book of business. We expect the COVID-19 pandemic to result in a continued higher serious delinquency rate over the next several quarters compared to pre-pandemic levels in recent periods exposing us to greater credit risk.
The credit performance of loans in our book of business could deteriorate further, particularly if we experience home price declines, continued economic dislocation and elevated unemployment, resulting in significantly higher credit losses and credit-related expenses. Although we strengthened our underwriting and eligibility standards over the last decade, we continue to have loans in our book of business that were originated prior to the financial market crisis of 2008, and these loans continue to generate a disproportionate percentage of our credit losses. We present detailed information about the risk characteristics of our single-family conventional guaranty book of business in “MD&A—Single-Family Business” and our multifamily guaranty book of business in “MD&A—Multifamily Business.”
While we use certain credit enhancements to mitigate some of our potential future credit losses, we may not be able to obtain as much protection from our credit enhancements as we would like, for a number of reasons:
Some of the credit enhancements we use, such as mortgage insurance, credit insurance risk transfer transactions and DUS lender loss-sharing arrangements, are subject to the risk that the counterparties may not meet their obligations to us.
Our credit risk transfer transactions have limited terms, after which they provide limited or no further credit protection on the covered loans.
Generally, our credit risk transfer transactions do not cover losses from principal forgiveness.
Our credit risk transfer transactions are not designed to shield us from all losses because we retain a portion of the risk of future losses on loans covered by these transactions, including all or a portion of the first loss risk in most transactions.
In the event of a sufficiently severe economic downturn, we may not be able to enter into new back-end credit risk transfer transactions for our recent acquisitions on economically advantageous terms.
Mortgage insurance does not protect us from all losses on covered loans. For example, mortgage insurance does not cover property damage that is not already covered by the hazard or flood insurance we require, and such damage may result in a reduction to, or a denial of mortgage insurance benefits. A property damaged by a flood that was outside a Federal Emergency Management Agency (“FEMA”)-designated Special Flood Hazard
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Area, where we require coverage, or a property damaged by an earthquake are the most likely scenarios where property damage may result in a default not covered by hazard insurance.
For the last several years we have used credit risk transfer transactions as an important tool to manage the credit risk of our loan acquisitions. 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. Market conditions improved in the second half of 2020, but we have not entered into any new transactions. As a result, the portion of our single-family book covered by credit enhancement decreased from 53% in 2019 to 42% as of December 31, 2020. We continue to evaluate the costs and benefits of credit risk transfer transactions, including a reduction in capital relief these transactions provide under FHFA’s enterprise regulatory capital framework. We may engage in credit risk transfer transactions in the future, which could help us manage capital and manage within our risk appetite, particularly given the growth and turnover in our book in 2020. The structure of and extent to which we engage in any additional credit risk transfer transactions will be affected by the enterprise regulatory capital framework, our risk appetite, the strength of future market conditions, including the cost of these transactions, and the review of our overall business and capital plan.
One or more of our institutional counterparties may fail to fulfill their contractual obligations to us, resulting in financial losses, business disruption and decreased ability to manage risk.
We rely on our institutional counterparties to provide services and credit enhancements that are critical to our business. We face the risk that one or more of our institutional counterparties may fail to fulfill their contractual obligations to us. If an institutional counterparty defaults on its obligations to us, it could also negatively impact our ability to operate our business, as we outsource some of our critical functions to third parties, such as mortgage servicing, single-family Fannie Mae MBS issuance and administration, and certain technology functions.
Our primary exposures to institutional counterparty risk are with credit guarantors that provide credit enhancements on the mortgage assets that we hold in our retained mortgage portfolio or that back our Fannie Mae MBS, including;
mortgage insurers and reinsurers, including those that participate in our Credit Insurance Risk TransferTM (“CIRTTM”) transactions, and multifamily lenders with risk sharing arrangements;
mortgage servicers that service the loans we hold in our retained mortgage portfolio or that back our Fannie Mae MBS;
mortgage sellers and servicers that are obligated to repurchase loans from us or reimburse us for losses in certain circumstances;
the financial institutions that issue the investments, including overnight bank deposits, held in our other investments portfolio; and
derivatives counterparties.
We also have counterparty exposure to custodial depository institutions; mortgage originators, investors and dealers; debt security dealers; central counterparty clearing institutions; and document custodians.
The concentration of our counterparties in similar or related businesses heightens our counterparty risk exposure. We routinely enter into a high volume of transactions with counterparties in the financial services industry, including brokers and dealers, mortgage lenders and commercial banks, and mortgage insurers, resulting in a significant credit concentration with respect to this industry. We may also have multiple exposures to particular counterparties, as many of our counterparties perform several types of services for us. For example, our lender customers or their affiliates may also act as derivatives counterparties, mortgage servicers, custodial depository institutions or document custodians. Accordingly, if one of these counterparties were to become insolvent or otherwise default on its obligations to us, it could harm our business and financial results in a variety of ways.
An institutional counterparty may default on its obligations to us for a number of reasons, such as changes in financial condition that affect its credit rating, changes in its servicer rating, a reduction in liquidity, operational failures or insolvency. The economic dislocation from the COVID-19 pandemic increases the risk that these conditions may arise. In the event of a bankruptcy or receivership of one of our counterparties, we may be required to establish our ownership rights to the assets these counterparties hold on our behalf to the satisfaction of the bankruptcy court or receiver, which could result in a delay in accessing these assets causing a decline in their value. Counterparty defaults or limitations on their ability to do business with us could result in significant financial losses or hamper our ability to do business or manage the risks to our business. In addition, if we are unable to replace a defaulting counterparty that performs services critical to our business, it could adversely affect our ability to conduct our operations and manage risk.
We have significant exposure to institutions in the financial services industry relating to derivatives, funding, short-term lending, securities, and other transactions. We depend on our ability to enter into derivatives transactions with our derivatives counterparties in order to manage the duration and prepayment risk of our retained mortgage portfolio. If we lose access to our derivatives counterparties, it could adversely affect our ability to manage these risks.
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Risk Factors
We use clearinghouses to facilitate many of our derivative trades. If the clearinghouse or the clearing member we use to access the clearinghouse defaults, we could lose margin that we have posted with the clearing member or clearinghouse. We are also a clearing member of two divisions of the Fixed Income Clearing Corporation (“FICC”), a central counterparty (“CCP”). One FICC division clears our trades involving securities purchased under agreements to resell, securities sold under agreements to repurchase, and other non-mortgage related securities. The other division clears our forward purchase and sale commitments of mortgage-related securities, including dollar roll transactions. As a clearing member of FICC, we could be exposed to the losses if the CCP or one or more of the CCP’s clearing members fails to perform its obligations, because each FICC clearing member is required to absorb a portion of the losses incurred by other clearing members if they fail to meet their obligations to the clearinghouse. For more information, see “MD&A—Risk Management—Institutional Counterparty Credit Risk Management—Other Counterparties—Central Counterparty Clearing Institutions.”
Our financial condition or results of operations may be adversely affected if mortgage servicers fail to perform their obligations to us.
We delegate the servicing of the mortgage loans in our guaranty book of business to mortgage servicers; we do not have our own servicing function. Functions performed by mortgage servicers on our behalf include collecting and delivering principal and interest payments, administering escrow accounts, monitoring and reporting delinquencies, performing default prevention activities and other functions. The inability of a mortgage servicer to perform these functions could negatively impact our ability to, among other things:
manage our book of business;
collect amounts due to us;
actively manage troubled loans; and
implement our homeownership assistance, foreclosure prevention and other loss mitigation efforts.
A large portion of our single-family guaranty book is serviced by non-depository servicers. The potentially lower financial strength, liquidity and operational capacity of non-depository mortgage sellers and servicers compared with depository mortgage sellers and servicers may negatively affect their ability to fully satisfy their financial obligations or to properly service the loans on our behalf.
If we replace a mortgage servicer, we likely would incur costs and potential increases in servicing fees and could also face operational risks. If a mortgage servicer fails, it could result in a temporary disruption in servicing and loss mitigation activities relating to the loans serviced by that mortgage servicer, particularly if there is a loss of experienced servicing personnel. We may also face challenges in transferring a large servicing portfolio.
Multifamily mortgage servicing is typically performed by the lenders who sell the mortgages to us. We are exposed to the risk that multifamily servicers could come under financial pressure, which could potentially result in a decline in the quality of the servicing they provide us.
For the majority of the loans in our single-family guaranty book of business and nearly all of the loans in our multifamily guaranty book of business, we require servicers to advance missed borrower principal and interest payments for up to four months. Single-family servicers are also required to advance property tax and insurance payments to taxing authorities, hazard insurers and mortgage insurers. If a large number of single-family or multifamily borrowers do not pay their mortgages as a result of the economic dislocation caused by the COVID-19 pandemic, our servicers may not have sufficient liquidity to advance these missed payments. In such case, we would be required to make the payments, which could require us to obtain substantial additional funding. The actions we have taken to mitigate our credit risk exposure to mortgage servicers may not be sufficient to prevent us from experiencing significant financial losses or business interruptions in the event they cannot fulfill their obligations to us.
We may incur losses as a result of claims under our mortgage insurance policies not being paid in full or at all.
We rely heavily on mortgage insurers to provide insurance against borrower defaults on single-family conventional mortgage loans with LTV ratios over 80% at the time of acquisition. Although the financial condition of our primary mortgage insurer counterparties currently approved to write new business has improved in recent years and they must meet risk-based asset requirements, there is still a risk that these counterparties may fail to fulfill their obligations to pay our claims under insurance policies.
With respect to primary mortgage insurers that we have approved to write coverage on loans sold to us, we currently do not differentiate pricing based on counterparty strength or operational performance. Additionally, we would not revoke a primary mortgage insurer’s status as an eligible insurer unless there was a material violation of our private mortgage insurer eligibility requirements. Further, we do not generally select the provider of primary mortgage insurance on a specific loan, because the selection is usually made by the lender at the time the loan is originated. Accordingly, we have limited ability to manage our concentration risk with respect to primary mortgage insurers.
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Risk Factors
Three of our mortgage insurer counterparties that are currently not approved to write new business—PMI Mortgage Insurance Co. (“PMI”), Triad Guaranty Insurance Corporation (“Triad”) and Republic Mortgage Insurance Company (“RMIC”)—are currently in run-off. Mortgage insurers that are in run-off continue to collect renewal premiums and process claims on their existing insurance business, but are no longer approved to write new insurance with us, which increases the risk that the mortgage insurer will fail to pay claims fully. Entering run-off may limit sources of profits and liquidity for the mortgage insurer and could also cause the quality and speed of its claims processing to deteriorate. PMI and Triad have been paying only a portion of policyholder claims and deferring the remaining portion and it is uncertain whether they will be permitted in the future to pay their deferred policyholder claims or increase or decrease the amount of cash they pay on claims. RMIC is no longer deferring payments on policyholder claims, but remains in run-off. For more information on mortgage insurers in run-off and our risk in force mortgage insurance coverage see “Notes to Consolidated Financial Statements—Concentrations of Credit Risk—Other Concentrations.”
On at least a quarterly basis, we assess our mortgage insurer counterparties’ respective abilities to fulfill their obligations to us, and our loss reserves take into account this assessment. If our assessment indicates their ability to pay claims has deteriorated significantly or if our projected claim amounts have increased, we could experience an increase credit-related expenses and credit losses.
Mortgage fraud could result in significant financial losses and harm to our reputation.
We use a process of delegated underwriting in which lenders make specific representations and warranties about the characteristics of the mortgage loans we purchase and securitize. As a result, we do not independently verify most borrower information that is provided to us. This exposes us to the risk that one or more of the parties involved in a transaction (the borrower, seller, broker, appraiser, title agent, lender or servicer) will engage in fraud by misrepresenting facts about a mortgage loan. Similarly, we rely on delegated servicing of loans and use of a variety of external resources to manage our REO inventory. We have experienced financial losses resulting from mortgage fraud, including institutional fraud perpetrated by counterparties. In the future, we may experience additional financial losses or reputational damage as a result of mortgage fraud.
We may suffer losses if borrowers are unable to obtain property or flood insurance, if their claims under insurance policies are not paid, or if they suffer property damage as a result of a hazard for which we do not require insurance, such as flooding outside of certain areas.
In general, we require borrowers to obtain property insurance to cover the risk of damage to their homes resulting from hazards such as fire, wind and, for properties in a Special Flood Hazard Area as designated by FEMA, flooding. As of December 31, 2020, 3.4% of loans in our single-family guaranty book of business and 6.9% of loans in our multifamily guaranty book of business are located in a Special Flood Hazard Area. For flood insurance, single-family borrowers generally rely on the National Flood Insurance Program (“NFIP”), which was recently extended through September 2021. If Congress fails to extend or re-authorize the program upon future expirations, FEMA may not have sufficient funds to pay claims for flood damage, and borrowers may not be able to renew their flood insurance coverage or obtain new policies through the NFIP. In addition, NFIP insurance does not cover temporary living expenses, and the maximum limit of coverage available under NFIP for a single-family residential property is $250,000, which may not be sufficient to cover all losses.
The risk of significant flooding in places outside of a Special Flood Hazard Area (that is, in places where we do not require flood insurance) is expected to increase in the coming years as a result of climate change. Increases in the intensity or frequency of floods or other weather-related disasters as a result of climate change will intensify the foregoing risks. To the extent that borrowers are unable to obtain property or flood insurance and suffer property damage, their claims under insurance policies are not paid, or they suffer property damage as a result of a hazard for which we do not generally require insurance, such as earthquake damage or flood damage on a property located outside a Special Flood Hazard Area, they may not pay their mortgage loans, which negatively impacts our credit losses and credit-related expenses.
In addition, insurers may become less willing to continue writing coverage in certain areas for certain perils, which may depress home prices in those areas and may limit the loans that Fannie Mae is able to acquire in those areas. Ultimately, the desirability of areas that frequently experience hurricanes, wildfires or other natural disasters may diminish over time, which can depress home prices or adversely affect the region’s economy, which may negatively impact our financial results.
The occurrence of major natural or other disasters in the United States or its territories and the impact of climate change could negatively impact our credit losses and credit-related expenses.
We conduct our business in the single-family and multifamily residential mortgage markets and own or guarantee the performance of mortgage loans throughout the United States and its territories. The occurrence of a major natural or environmental disaster, terrorist attack, cyber attack, pandemic, or similar event (a “major disruptive event”) in the
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United States or its territories could negatively impact our credit losses and credit-related expenses in the affected geographic area or, depending on the magnitude, scope and nature of the event, nationally, in a number of ways. As we describe earlier in this section under “COVID-19 Pandemic Risk,” the COVID-19 pandemic has exposed us to substantial credit-related expenses and risk of credit losses. A major disruptive event that either damages or destroys residential or multifamily real estate securing mortgage loans in our book of business or negatively impacts the ability of borrowers to make principal and interest payments on mortgage loans in our book of business could increase our delinquency rates, default rates and average loan loss severity of our book of business in the affected region or regions. Further, a major disruptive event or a long-lasting increase in the vulnerability of an area to disasters that affects borrowers’ ability make payments on their mortgages, discourages housing activity, including homebuilding or home buying, or causes a deterioration in housing conditions in the affected region could lower the volume of originations in the mortgage market, influence home prices and property values in the affected region or in adjacent regions and increase delinquency rates and default rates. Any of these outcomes could generate significant credit losses and credit-related expenses.
Recent years have seen frequent and severe natural disasters in the U.S., including hurricanes, wildfires and floods. The frequency and intensity of major weather-related events is indicative of the impact of climate change and this change is expected to persist for the foreseeable future. Population growth and an increase in people living in high-risk areas, such as coastal areas vulnerable to severe storms and flooding, have also increased the impact of these events. Although our financial exposure from these events is mitigated to the extent our book of business is geographically diverse, we remain exposed to risk, particularly in connection with the risk of geographically widespread weather events and changes in weather patterns. In addition, the increasing unpredictability of major natural disasters negatively affects our ability to forecast losses from such events, which may negatively impact our ability to accurately address the likelihood of such losses in the guaranty fees that we charge. As a result, any continuation or increase in recent weather trends or their unpredictability, or any single natural disaster of significant scope or intensity, could have a material impact on our results of operations and financial condition.
Further, legal or regulatory responses to concerns about global climate change may impact the housing markets and, as a result, our business. Steps to address the risk of more frequent or severe weather events resulting from climate change could result in a potentially disruptive transition away from carbon-intense industries. Such a transition could negatively impact certain industries and regional economies, affecting the ability of borrowers in those industries or regions to pay their mortgage loans. President Biden has indicated that addressing climate change will be a priority for his administration.
Operational Risk
A failure in our operational systems or infrastructure, or those of third parties, could materially adversely affect our business, impair our liquidity, cause financial losses and harm our reputation.
Shortcomings or failures in our internal processes, people, data management or systems could disrupt our business or have a material adverse effect on our risk management, liquidity, financial statement reliability, financial condition and results of operations. Such a failure could result in legislative or regulatory intervention or sanctions, liability to customers, financial losses, business disruptions and damage to our reputation. For example, our business is highly dependent on our ability to manage and process, on a daily basis, an extremely large number of transactions, many of which are highly complex, across numerous and diverse markets that continuously and rapidly change and evolve. These transactions are subject to various legal, accounting and regulatory standards. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control, adversely affecting our ability to process these transactions or manage associated data with reliability and integrity. In addition, we rely on information provided by third parties in processing many of our transactions; that information may be incorrect or we may fail to properly manage or analyze it or properly monitor its data quality.
We rely upon business processes that are highly dependent on people, technology and equipment, data and the use of numerous complex systems and models to manage our business and produce books and records upon which our financial statements and risk reporting are prepared. This reliance increases the risk that we may be exposed to financial, reputational or other losses as a result of inadequately designed internal processes or data management architecture, inflexible technology or the failure of our systems. While we continue to enhance our technology, infrastructure, operational controls and organizational structure in order to reduce our operational risk, these actions may not be effective to manage these risks and may create additional operational risk as we execute these enhancements. In addition, our use of third-party service providers for some of our business and technology functions increases the risk that an operational failure by a third party will adversely affect us.
Our ability to manage and aggregate data may be limited by the effectiveness of our policies, programs, processes, systems and practices that govern how data is acquired, validated, stored, protected, processed and shared. Failure to
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manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs.
We also face the risk of operational failure, termination or capacity constraints of any of the clearing agents, paying agents, exchanges, clearinghouses or other financial intermediaries, including CSS and Freddie Mac, we use to facilitate our securities and derivatives transactions. In recent years, there has been significant consolidation among clearing agents, exchanges and clearing houses. This consolidation and interconnectivity increases the risk of operational failure, on both an individual basis and an industry-wide basis, as disparate complex systems need to be integrated, often on an accelerated basis. Any such failure, termination or constraint could adversely affect our ability to effect transactions or manage our exposure to risk.
Substantially all of our employees and business operations functions are consolidated in two metropolitan areas: Washington, DC and Dallas, Texas. As a result of this concentration of our employees and facilities, a major disruptive event at either location could impact our ability to operate notwithstanding the business continuity plans and facilities that we have in place, including our out-of-region data center for disaster recovery. Moreover, because of the concentration of our employees in the Washington, DC and Dallas metropolitan areas, a regional disruption in one of these areas could prevent our employees from occupying our facilities, working remotely, or communicating with or traveling to other locations. Further, if the frequency, severity or unpredictability of weather-related events in the Washington, DC or Dallas regions increases as a result of changing weather patterns, then these disruptions could occur regularly or last for longer periods of time. Accordingly, the occurrence of one or more major disruptive events could materially adversely affect our ability to conduct our business and lead to financial losses.
A breach of the security of our systems or facilities, or those of third parties with which we do business, including as a result of cyber attacks, could damage or disrupt our business or result in the disclosure or misuse of confidential information, which could damage our reputation, result in regulatory sanctions and/or increase our costs and cause losses.
Our operations rely on the secure receipt, processing, storage and transmission of confidential and other information in our computer systems and networks and with our business partners, including proprietary, confidential or personal information that is subject to privacy laws, regulations or contractual obligations. Information security risks for large institutions like us have significantly increased in recent years in part because of the proliferation of new technologies and the use of the Internet and telecommunications technologies to conduct or automate financial transactions. A number of financial services companies, consumer-based companies and other organizations have reported the unauthorized disclosure of client, customer or other confidential information, as well as cyber attacks involving the dissemination, theft and destruction of corporate information, intellectual property, cash or other valuable assets. There have also been several highly publicized cases where hackers have requested “ransom” payments in exchange for not disclosing stolen customer information or for not disabling the target company’s computer or other systems.
We have been, and likely will continue to be, the target of cyber attacks, computer viruses, malicious code, phishing attacks, denial of service attacks and other information security threats. To date, cyber attacks have not had a material impact on our financial condition, results or business; however, we could suffer material financial or other losses in the future and we are not able to predict the severity of these attacks. Our risk and exposure to these matters remains heightened because of, among other things:
the evolving nature of these threats;
the current global economic and political environment;
our prominent size and scale and our role in the financial services industry;
the outsourcing of some of our business operations;
the ongoing shortage of qualified cybersecurity professionals;
our migration to cloud-based systems;
our increased use of employee-owned devices for business communication;
the large number of our employees working remotely; and
the interconnectivity and interdependence of third parties to our systems.
Despite our efforts to ensure the integrity of our software, computers, systems and information, we may not be able to anticipate, detect or recognize threats to our systems and assets, or to implement effective preventive measures against all cyber threats, especially because the techniques used are increasingly sophisticated, change frequently, are complex, and are often not recognized until launched. We routinely identify cyber threats as well as vulnerabilities in our systems and work to address them, but these efforts may be insufficient. Further, these efforts involve costs that can be significant as cyber attack methods continue to rapidly evolve. Cyber attacks can originate from a variety of sources,
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including external parties who are affiliated with foreign governments or are involved with organized crime or terrorist organizations. Third parties may also attempt to induce employees, customers or other users of our systems to disclose sensitive information or provide access to our systems or network, or to our data or that of our counterparties or borrowers, and these types of risks may be difficult to detect or prevent.
The occurrence of a cyber attack, breach, unauthorized access, misuse, computer virus or other malicious code or other cybersecurity event could jeopardize or result in the unauthorized disclosure, gathering, monitoring, misuse, corruption, loss or destruction of confidential and other information that belongs to us, our customers, our counterparties, third-party service providers or borrowers that is processed and stored in, and transmitted through, our computer systems and networks. The occurrence of such an event could also result in damage to our software, computers or systems, or otherwise cause interruptions or malfunctions in our, our customers’, our counterparties’ or third parties’ operations. This could result in significant financial losses, loss of customers and business opportunities, reputational damage, litigation, regulatory fines, penalties or intervention, reimbursement or other compensatory costs, or otherwise adversely affect our business, financial condition or results of operations.
Cyber attacks can occur and persist for an extended period of time without detection. Investigations of cyber attacks are inherently unpredictable, and it takes time to complete an investigation and have full and reliable information. While we are investigating a cyber attack, we do not necessarily know the extent of the harm or how best to remediate it, and we can repeat or compound certain errors or actions before we discover and remediate them. In addition, announcing that a cyber attack has occurred increases the risk of additional cyber attacks, and preparing for this elevated risk can delay the announcement of a cyber attack. All or any of these challenges could further increase the costs and consequences of a cyber attack.
In addition, we may be required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. Although we maintain insurance coverage relating to cybersecurity risks, our insurance may not be sufficient to provide adequate loss coverage in all circumstances.
Because we are interconnected with and dependent on third-party vendors, exchanges, clearing houses, fiscal and paying agents, and other financial intermediaries, including CSS, we could be materially adversely impacted if any of them is subject to a successful cyber attack or other information security event. Third parties with which we do business may also be sources of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the external storage and processing of our information, as well as customer, counterparty and borrower information, including on cloud-based systems. We also share this type of information with regulatory agencies and their vendors. While we engage in actions to mitigate our exposure resulting from our information-sharing activities, ongoing threats may result in unauthorized access, loss or destruction of data or other cybersecurity incidents with increased costs and consequences to us such as those described above.
We routinely transmit and receive personal, confidential and proprietary information by electronic means. In addition, our customers maintain personal, confidential and proprietary information on systems we provide. We have discussed and worked with customers, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and protect against cyber attacks, but we do not have, and may be unable to put in place, secure capabilities with all of our clients, vendors, service providers, counterparties and other third parties and we may not be able to ensure that these third parties have appropriate controls in place to protect the confidentiality of the information. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer, vendor, service provider, counterparty or other third party could result in legal liability, regulatory action and reputational harm.
Our concurrent implementation of multiple new initiatives may increase our operational risk and result in one or more material weaknesses in our internal control over financial reporting.
We are currently implementing a number of initiatives in furtherance of both our and our conservator’s strategic objectives. The magnitude of the many new initiatives we are undertaking may increase our operational risk. Many of these initiatives involve significant changes to our business processes, systems and infrastructure, and present significant operational challenges for us. Some business initiatives that we are currently developing or executing against include a new hedge accounting program, our environmental, social and governance initiatives, enhancements and efficiencies to our operational processes, and enhancements to our existing and development of new information technology and other systems. For example, for the past several years we have been transitioning our core information technology systems to third-party cloud-based platforms. If completing this initiative is delayed or we fail to complete it in a well-managed, secure and effective manner, we may experience unplanned service disruption or unforeseen costs, which could result in material harm to our business and results of operations. While implementation of each individual initiative creates operational challenges, implementing multiple initiatives during the same time period significantly increases these challenges. Due to the operational complexity associated with these changes and the limited time
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periods for implementing them, we believe there is a risk that implementing these changes could result in one or more material weaknesses in our internal control over financial reporting in a future period. If this were to occur, we could experience material errors in our reported financial results. In addition, FHFA, Treasury, other agencies of the U.S. government or Congress may require us to implement additional initiatives in the future that could further increase our operational risk.
Material weaknesses in our internal control over financial reporting could result in errors in our reported results or disclosures that are not complete or accurate.
Management has determined that, as of the date of this filing, we have ineffective disclosure controls and procedures that result in a material weakness in our internal control over financial reporting. In addition, our independent registered public accounting firm, Deloitte & Touche LLP, has expressed an adverse opinion on our internal control over financial reporting because of the material weakness. Our ineffective disclosure controls and procedures and material weakness could result in errors in our reported results or disclosures that are not complete or accurate, which could have a material adverse effect on our business and operations.
Our material weakness relates specifically to the impact of the conservatorship on our disclosure controls and procedures. Because we are under the control of FHFA, some of the information that we may need to meet our disclosure obligations may be solely within the knowledge of FHFA. As our conservator, FHFA has the power to take actions without our knowledge that could be material to our shareholders and other stakeholders, and could significantly affect our financial performance or our continued existence as an ongoing business. Because FHFA currently functions as both our regulator and our conservator, there are inherent structural limitations on our ability to design, implement, test or operate effective disclosure controls and procedures relating to information known to FHFA. As a result, we have not been able to update our disclosure controls and procedures in a manner that adequately ensures the accumulation and communication to management of information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws, including disclosures affecting our financial statements. Given the structural nature of this material weakness, we do not expect to remediate this weakness while we are under conservatorship. See “Controls and Procedures” for further discussion of management’s conclusions on our disclosure controls and procedures and internal control over financial reporting.
Failure of our models to produce reliable results may adversely affect our ability to manage risk and make effective business decisions.
We make significant use of quantitative models to measure and monitor our risk exposures and to manage our business. For example, we use models to measure and monitor our exposures to interest rate, credit and market risks, and to forecast credit losses. We use this information in making business decisions relating to strategies, initiatives, transactions, pricing and products.
Models are inherently imperfect predictors of actual results because they are based on historical data and assumptions regarding factors such as future loan demand, borrower behavior, creditworthiness and home price trends. Other potential sources of inaccurate or inappropriate model results include errors in computer code, bad data, misuse of data, or use of a model for a purpose outside the scope of the model’s design. Modeling often assumes that historical data or experience can be relied upon as a basis for forecasting future events, an assumption that may be especially tenuous in the face of unprecedented events, such as the COVID-19 pandemic.  
Given the challenges of predicting future behavior, management judgment is used at every stage of the modeling process, from model design decisions regarding core underlying assumptions, to interpreting and applying final model output. To control for these inherent imperfections, our models are validated by an independent model risk management team within our Enterprise Risk Management Division and are subject to control requirements set by our model risk policies.
When market conditions change quickly and in unforeseen ways, there is an increased risk that the model assumptions and data inputs for our models are not representative of the most recent market conditions, which requires management judgment to make adjustments or overrides to our models. In a rapidly changing environment, it may not be possible to update existing models quickly enough to properly account for the most recently available data and events. For example, the unprecedented nature of the COVID-19 pandemic has negatively affected our ability to rely on models and may continue to do so.
If our models fail to produce reliable results on an ongoing basis we may not make appropriate risk management decisions, including decisions affecting loan purchases, management of credit losses, guaranty fee pricing, and asset and liability management. Moreover, strategies we employ to manage and govern the risks associated with our use of models may not be effective or fully reliable.
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Risk Factors
Liquidity and Funding Risk
Limitations on our ability to access the debt capital markets could have a material adverse effect on our ability to fund our operations, and our liquidity contingency plans may be difficult or impossible to execute during a sustained liquidity crisis.
Our ability to fund our business depends on our ongoing access to the debt capital markets. Market concerns about matters such as the extent of government support for our business and debt securities, the future of our business (including future profitability, future structure, regulatory actions and our status as a government-sponsored enterprise) and the creditworthiness of the U.S. government could cause a severe negative effect on our access to the unsecured debt markets, particularly for long-term debt. We believe that our ability in recent years to issue debt of varying maturities at attractive pricing resulted from federal government support of our business. As a result, we believe that our status as a government-sponsored enterprise and continued federal government support is essential to maintaining our access to debt funding. Changes or perceived changes in federal government support of our business, our debt securities or our status as a government-sponsored enterprise, including changes arising in connection with efforts to end our conservatorship, could materially and adversely affect our ability to fund our business. There can be no assurance that the government will continue to support our business or our debt securities, or that our current level of access to debt funding will continue. If our senior preferred stock purchase agreement with Treasury is amended in the future to reduce its support for our debt securities issued after such amendment, it could materially increase our borrowing costs or materially adversely affect our access to the debt capital markets.
Future changes or disruptions in the financial markets could significantly change the amount, mix and cost of funds we obtain, as well as our liquidity position. If we are unable to issue both short- and long-term debt securities at attractive rates and in amounts sufficient to operate our business and meet our obligations, it likely would interfere with the operation of our business and have a material adverse effect on our liquidity, results of operations, financial condition and net worth.
Our liquidity contingency plans may be difficult or impossible to execute during a sustained market liquidity crisis. If the financial markets experience substantial volatility in the future similar to or more intensely than in 2020, it could significantly adversely affect the amount, mix and cost of funds we obtain, as well as our liquidity position. If we cannot access the unsecured debt markets, our ability to repay maturing indebtedness and fund our operations could be eliminated or significantly impaired. In this event, our alternative source of liquidity, our other investments portfolio, may not be sufficient to meet our liquidity needs.
A decrease in the credit ratings on our senior unsecured debt could have an adverse effect on our ability to issue debt on reasonable terms, particularly if such a decrease were not based on a similar action on the credit ratings of the U.S. government. A decrease in our credit ratings also could require that we post additional collateral for our derivatives contracts.
A reduction in our credit ratings could materially adversely affect our liquidity, our ability to conduct our normal business operations, our financial condition and our results of operations. Credit ratings on our senior unsecured debt, as well as the credit ratings of the U.S. government, are primary factors that could affect our borrowing costs and our access to the debt capital markets. Credit ratings on our debt are subject to revision or withdrawal at any time by the rating agencies. Actions by governmental entities impacting the support our business or our debt securities receive from Treasury could adversely affect the credit ratings on our senior unsecured debt. If our senior preferred stock purchase agreement with Treasury is amended to reduce its support for our debt securities issued after such amendment, it could result in a downgrade in the credit ratings on our senior unsecured debt.
Because we rely on the U.S. government for capital support, in recent years, when a rating agency has taken an action relating to the U.S. government’s credit rating, they have taken a similar action relating to our ratings at approximately the same time. S&P, Moody’s and Fitch have all indicated that they would likely lower their ratings on the debt of Fannie Mae and certain other government-related entities if they were to lower their ratings on the U.S. government. As a result, if a future government shutdown or other event results in downgrades of the government’s credit rating, our credit ratings may be similarly downgraded. We currently cannot predict the potential impact of a credit ratings downgrade on demand for our securities or on our business.
A reduction in our credit ratings also could cause derivatives clearing organizations or their members to demand that we post additional collateral for our derivative contracts. Our credit ratings and ratings outlook are included in “MD&A—Liquidity and Capital Management—Liquidity Management—Credit Ratings.”
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Risk Factors
Market and Industry Risk
Changes in interest rates or our loss of the ability to manage interest-rate risk successfully could adversely affect our financial results and condition, and increase interest-rate risk.
We are subject to interest-rate risk, which is the risk that movements in interest rates will adversely affect the value of our assets or liabilities or our future earnings. The primary source of our interest-rate risk is our retained mortgage portfolio, other investments portfolio and the Fannie Mae debt and risk management derivatives we use to fund and manage these portfolios. We describe these risks in more detail in “MD&A—Risk Management—Market Risk Management, Including Interest-Rate Risk Management.” Changes in interest rates affect both the value of our mortgage assets and prepayment rates on our mortgage loans, which could have a material adverse effect on our financial results and condition, as well as our liquidity.
Our ability to manage interest-rate risk depends on our ability to issue debt instruments with a range of maturities and other features, including call provisions, at attractive rates and to engage in derivatives transactions. We must exercise judgment in selecting the amount, type and mix of debt and derivative instruments that will most effectively manage our interest-rate risk. The amount, type and mix of financial instruments that are available to us may not offset possible future changes in the spread between our borrowing costs and the interest we earn on our mortgage assets.
We mark to market changes in the estimated fair value of our derivatives through our earnings on a quarterly basis, but we do not similarly mark to market changes in some of the financial instruments that generate our interest-rate risk exposures. As a result, changes in interest rates, particularly significant changes, can have a significant adverse effect on our earnings and net worth for the quarter in which the changes occur, depending on the nature of the changes and the derivatives and short-term investments we hold at that time. For example, we invest the cash held in MBS trusts in short-term investments, such as reverse repo arrangements and U.S. Treasury bills, or hold it in our Federal Reserve account. In a positive interest-rate environment we are entitled to the interest income earned on these short-term investments. If interest rates on short-term investments become negative we would plan to keep all trust cash in our Federal Reserve account. The Federal Reserve has previously indicated that it is not considering adopting a negative interest rate policy and negative interest rates on short-term products have been limited; however, if negative interest rates become more prevalent in the market and the Federal Reserve adopts a negative interest rate policy, then the cash we hold in MBS trusts may not be sufficient to make required payments of principal and interest. If this were to occur, we would be required to replace any shortfall with our own funds to make payments that are due to Fannie Mae MBS certificateholders.
The overall decline in interest rates in 2020 resulted in declines in the fair value of some of the financial instruments that we mark to market through our earnings, which contributed to our fair value losses in 2020. While we have not generally experienced negative interest rates in the United States, some central banks in Europe and Asia have in the past cut interest rates below zero. If U.S. interest rates decline further or fall below zero, it could also further negatively affect our ability to manage our interest-rate risk and result in additional fair value losses, and negative interest rates could increase our operational risk. Additionally a low or negative interest rate environment could reduce the amounts that we earn on our other investment portfolio to the extent interest rates on our investments are lower than the interest expense associated with the debt that funds those assets and we are unable to reinvest contemporaneously in higher-yielding instruments. The lower interest rates in 2020 also contributed to an increase in the size of our retained mortgage portfolio due to an increase in our acquisitions of loans through our whole loan conduit. We expect the size of our retained mortgage portfolio will continue to increase, driven by increases in the amount of loans we purchase from MBS trusts as a result of loan delinquencies and loss mitigation strategies. Because we expect our retained mortgage portfolio to grow, we have increased our outstanding debt and derivative issuance activity. This has increased the risk that movements in interest rates will affect our financial results.
While we implemented hedge accounting in 2021 to reduce the impact of interest-rate volatility on our financial results, we have experienced significant fair value losses in some periods due to changes in interest rates, and we expect to continue to experience volatility from period to period in our financial results as a result of fair value losses or gains on our derivatives.
Changes in interest rates also can affect our credit losses. When interest rates increase, our credit losses from loans with adjustable payment terms may increase as borrower payments increase at their reset dates, which increases the borrower’s risk of default. Rising interest rates may also reduce the opportunity for these borrowers to refinance into a fixed-rate loan. Similarly, many borrowers may have additional debt obligations, such as home equity lines of credit and second liens, that also have adjustable payment terms. If a borrower’s payment on his or her other debt obligations increases due to rising interest rates or a change in amortization, it increases the risk that the borrower may default on a loan we own or guarantee. In addition to increasing the risk of future borrower defaults, rising interest rates reduce expected future loan prepayments, which lengthens the expected life of our loans and therefore increases our impairment related to any concessions we may have provided on those loans.
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Risk Factors
Changes in spreads could materially impact our results of operations, net worth and the fair value of our net assets.
Spread risk can result from changes in the spread between our mortgage assets and the debt and derivatives we use to hedge our position, as well as the current market spreads of our Connecticut Avenue Securities® (“CAS”) deals issued prior to 2016 that are subject to fair value accounting. Changes in market conditions, including changes in interest rates, liquidity, prepayment and default expectations, and the level of uncertainty in the market for a particular asset class may cause fluctuations in spreads. Changes in mortgage spreads have contributed to significant volatility in our financial results in certain periods, due to fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings, and this could occur again in a future period. Changes in mortgage spreads could cause significant fair value losses, and could adversely affect our near-term financial results and net worth. We do not actively manage or hedge our spread risk after we purchase mortgage assets, other than through asset monitoring and disposition.
Uncertainty relating to the potential discontinuance of LIBOR may adversely affect our results of operations, financial condition, liquidity and net worth.
We routinely engage in transactions involving financial instruments that reference LIBOR, including loans, securities, and derivative transactions. In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced its intention to stop persuading or compelling the group of major banks that sustain LIBOR to submit rate quotations after 2021. In November 2020, ICE Benchmark Administration, the administrator of LIBOR, stated its intention to cease publication of one-week and two-month U.S. dollar LIBOR after 2021, and to cease publication of overnight, one-month, three-month, six-month and one-year U.S. dollar LIBOR tenors after June 2023. We have exposure to one-month, three-month, six-month and one-year LIBOR, including in financial instruments that mature after June 2023.
Efforts are underway to identify and transition to a set of alternative reference rates. As described in “Business—Legislation and Regulation—GSE Act and Other Legislative and Regulatory Matters—The Future of LIBOR and Alternative Reference Rates,” the ARRC has recommended an alternative reference rate referred to as SOFR. However, SOFR is calculated based on different criteria than LIBOR. Accordingly, SOFR and LIBOR may diverge, particularly in times of macroeconomic stress. Since the initial publication of SOFR in 2018, daily changes in SOFR have at times been more volatile than daily changes in comparable benchmark or market rates, and SOFR may be subject to direct influence by activities of the Federal Reserve and the Federal Reserve Bank of New York in ways that other rates may not be. For example, at the direction of the Federal Reserve, the Federal Reserve Bank of New York conducted overnight and term repurchase agreement (“repo”) operations to help maintain the federal funds rate within a target range starting in September 2019. Those activities lasted for an extended period of months and directly impacted prevailing SOFR rates.
While many of our LIBOR-indexed financial instruments allow us to take discretionary action to select an alternative reference rate if LIBOR is discontinued, our use of an alternative reference rate may be subject to legal challenges. There is considerable uncertainty as to how the financial services industry will address the discontinuance of LIBOR in financial instruments. This uncertainty could result in disputes and litigation with counterparties and borrowers surrounding the implementation of alternative reference rates in our financial instruments that reference LIBOR. If LIBOR ceases or changes in a manner that causes regulators or market participants to question its viability, financial instruments indexed to LIBOR could experience disparate outcomes based on their contractual terms, ability to amend those terms, market or product type, legal or regulatory jurisdiction, and other factors. There can be no assurance that legislative or regulatory actions will dictate what happens if LIBOR ceases or is no longer representative or viable, or what those actions might be. In addition, while the ARRC was created to ensure a successful transition from LIBOR, there can be no assurance that the ARRC will endorse practices that create a smooth transition and minimize value transfers between market participants, or that its endorsed practices will be broadly adopted by market participants. Divergent industry or market participant actions could result after LIBOR is no longer available, representative, or viable. It is uncertain what effect any divergent industry practices will have on the performance of financial instruments, including those that we own or have issued. Alternative reference rates that replace LIBOR may not yield the same or similar economic results over the lives of the financial instruments, which could adversely affect the value of and return on these instruments. The LIBOR transition could result in our paying higher interest rates on our current LIBOR-indexed obligations, adversely affect the yield on and fair value of the loans and securities we hold or guarantee that reference LIBOR, and increase the costs of or affect our ability to effectively use derivative instruments to manage interest-rate risk.
These developments could have a material impact on us, adjustable-rate mortgage borrowers, investors, and our customers and counterparties. This could result in losses, reputational damage, litigation or costs, or otherwise adversely affect our business.
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Risk Factors
A deterioration in general economic conditions, particularly home prices and employment trends, or the financial markets may materially adversely affect our business and financial condition.
Our business is significantly affected by the status of the U.S. economy, particularly home prices and employment trends. A prolonged period of slow growth in the U.S. economy or any deterioration in general economic conditions or the financial markets could materially adversely affect our results of operations, net worth and financial condition. In general, if home prices decrease, or the unemployment rate increases, it could result in significantly higher levels of credit losses and credit-related expense. For example, as we describe earlier in this section under “COVID-19 Pandemic Risk,” the economic dislocation cause by the COVID-19 pandemic has exposed us to substantial credit-related expenses and risk of credit losses.
Global economic conditions can also adversely affect our business and financial results. Changes or volatility in market conditions resulting from deterioration in or uncertainty regarding global economic conditions can adversely affect the value of our assets, which could materially adversely affect our results of operations, net worth and financial condition. A slowdown in economic growth around the world remains a concern for policy makers and financial markets. To the extent global economic conditions negatively affect the U.S. economy, they also could negatively affect the credit performance of the loans in our book of business.
Volatility or uncertainty in global or domestic political conditions also can significantly affect economic conditions and the financial markets. Global or domestic political unrest also could affect growth and financial markets. We describe above the risks to our business posed by changes in interest rates and changes in spreads. In addition, future changes or disruptions in the financial markets could significantly change the amount, mix and cost of funds we obtain, as well as our liquidity position.
A decline in activity in the U.S. housing market or increasing interest rates could lower our business volumes or otherwise adversely affect our results of operations, net worth and financial condition.
Our business volume is affected by the rate of growth in total U.S. residential mortgage debt outstanding and the size of the U.S. residential mortgage market. A decline in mortgage debt outstanding reduces the unpaid principal balance of mortgage loans available for us to acquire, which in turn could reduce our net interest income and adversely affect our financial results. Various factors may impact our business volume, including:
Rising interest rates, which generally result in fewer mortgage originations, particularly for refinances.
Lower home prices and multifamily property valuations, which could preclude some borrowers from being able to refinance their loans.
Legal and Regulatory Risk
Regulatory changes in the financial services industry may negatively impact our business.
Changes in the regulation of the financial services industry are affecting and are expected to continue to affect many aspects of our business. Changes to financial regulations could affect our business directly or indirectly if they affect our customers and counterparties. Examples of regulatory changes that have affected us or may affect us in the future include: rules requiring the clearing of certain derivatives transactions and margin and capital rules for uncleared derivative trades, which impose additional costs on us; and the Dodd-Frank Act risk retention and single-counterparty credit limit requirements.
Our business and results also may be adversely affected by changes in the CFPB’s “ability-to-repay” rule to replace the “qualified mortgage patch,” including changes to the rule discussed in “Business—Legislation and Regulation—GSE Act and Other Legislative and Regulatory Matters.” Although the ability-to-repay rule does not apply directly to us, the rule applies to the lenders from which we acquire single-family mortgage loans. And because FHFA has instructed and the senior preferred stock purchase agreement requires that, with respect to loans that are subject to TILA ability-to-repay standards, Fannie Mae and Freddie Mac shall only acquire loans that are qualified mortgages under the ability-to-repay rule with minor exceptions, provisions in the new rule may reduce the volume of loans that are eligible for delivery to us, and may increase the competition we face for the acquisition and guaranty of such loans.
Changes in regulations applicable to U.S. banks could affect the volume and characteristics of mortgage loans available in the market.
Changes in regulations could also affect demand for our debt and MBS, as U.S. banks purchase a large amount of our debt securities and MBS. New or revised liquidity or capital requirements applicable to U.S. banks could materially affect banks’ willingness to deliver loans to us and demand by those banks for our debt securities and MBS. Developments in connection with the single-counterparty credit limit regulations, including those taken in anticipation of our eventual exit from conservatorship, could also cause our customers to change their business practices.
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Risk Factors
The actions of Treasury, the Commodity Futures Trading Commission, the SEC, the Federal Deposit Insurance Corporation, the Federal Reserve and international central banking authorities directly or indirectly impact financial institutions’ cost of funds for lending, capital-raising and investment activities, which could increase our borrowing costs or make borrowing more difficult for us. Changes in monetary policy are beyond our control and difficult to anticipate.
Overall, these legislative and regulatory changes could affect us in substantial and unforeseeable ways and could have a material adverse effect on our business, results of operations, financial condition, liquidity and net worth.
Legislative, regulatory or judicial actions could negatively impact our business, results of operations, financial condition or net worth.
Legislative, regulatory or judicial actions at the federal, state or local level could negatively impact our business, results of operations, financial condition, liquidity or net worth. Legislative, regulatory or judicial actions could affect us in a number of ways, including by imposing significant additional costs on us and diverting management attention or other resources. For example, we were affected by loan forbearance requirements of the CARES act and, among other things, we could also be affected by:
Designation as a systemically important financial institution. In September 2020, the FSOC announced that it had completed an activities based review of the secondary mortgage market. It 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 and 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.
Legislative or regulatory changes that expand our, or our servicers’, responsibility and liability for securing, maintaining or otherwise overseeing properties prior to foreclosure, which could increase our costs.
Court decisions concluding that we or our affiliates are governmental actors, which could impose additional burdens and requirements on us.
State laws and court decisions granting new or expanded priority rights over our mortgages to homeowners associations or through initiatives that provide a lien priority to loans used to finance energy efficiency or similar improvements, which could adversely affect our ability to recover our losses on affected loans.
Other agencies of the U.S. government or Congress asking us to take actions to support the housing and mortgage markets or in support of other goals. For example, in December 2011 Congress enacted the TCCA under which we increased our guaranty fee on all single-family mortgages delivered to us by 10 basis points. The revenue generated by this fee increase is paid to Treasury.
General Risk
Our business and financial results could be materially adversely affected by legal or regulatory proceedings.
We are a party to various claims and other legal proceedings. We are periodically involved in government investigations. We may be required to establish accruals and to make substantial payments in the event of adverse judgments or settlements of any such claims, investigations or proceedings, which could have a material adverse effect on our business, results of operations, financial condition, liquidity and net worth. Any legal proceeding or governmental investigation, even if resolved in our favor, could result in negative publicity or cause us to incur significant legal and other expenses. In addition, responding to these matters could divert significant internal resources away from managing our business.
In addition, a number of lawsuits have been filed against the U.S. government relating to the senior preferred stock purchase agreement and the conservatorship. See “Note 16, Commitments and Contingencies” and “Legal Proceedings” for a description of these lawsuits. These lawsuits, and actions Treasury or FHFA may take in response to these lawsuits, could have a material impact on our business.
Changes in accounting standards and policies can be difficult to predict and can materially impact how we record and report our financial results.
Our accounting policies and methods are fundamental to how we record and report our financial condition, results of operations and cash flows. From time to time, the FASB or the SEC changes the financial accounting and reporting standards or the policies that govern the preparation of our financial statements. In addition, FHFA provides guidance that affects our adoption or implementation of financial accounting or reporting standards. These changes can be difficult to predict and expensive to implement, and can materially impact how we record and report our financial condition, results of operations and cash flows. We could be required to apply new or revised guidance retrospectively,
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Risk Factors
which may result in the revision of prior-period financial statements by material amounts. The implementation of new or revised accounting guidance, could have a material adverse effect on our financial results or net worth.
In many cases, our accounting policies and methods, which are fundamental to how we report our financial condition and results of operations, require management to make judgments and estimates about matters that are inherently uncertain. Management also relies on models in making these estimates.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in applying many of these accounting policies and methods so that they comply with GAAP and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the appropriate accounting policy or method from two or more acceptable alternatives, any of which might be reasonable under the circumstances but might affect the amounts of assets, liabilities, revenues and expenses that we report. See “Note 1, Summary of Significant Accounting Policies” for a description of our significant accounting policies.
We have identified our allowance for loan losses accounting policy as critical to the presentation of our financial condition and results of operations. This policy is described in “MD&A—Critical Accounting Policies and Estimates.” We believe this policy is critical because it requires management to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions.
Because our financial statements involve estimates for amounts that are very large, even a small change in the estimate can have a significant impact for the reporting period. For example, because our allowance for loan losses is so large, even a change that has a small impact relative to the size of this allowance can have a meaningful impact on our results for the quarter in which we make the change. Because loans are evaluated for impairment under the CECL standard, our credit-related income or expense now reflects expected lifetime losses, rather than just incurred losses, as were recognized under the pre-CECL model. As a result, the CECL standard has introduced additional volatility to our results.
Many of our accounting methods involve substantial use of models, which are inherently imperfect predictors of actual results because they are based on assumptions, including about future events. For example, we will determine expected lifetime losses on loans and other financial instruments subject to the CECL standard using models. Our actual results could differ significantly from those generated by our models. As a result, the estimates that we use to prepare our financial statements, as well as our estimates of our future results of operations, may be inaccurate, perhaps significantly.
Item 1B.  Unresolved Staff Comments
None.
Item 2.  Properties
There are no physical properties that are material to us.
Item 3.  Legal Proceedings
This item describes our material legal proceedings. We describe additional material legal proceedings in “Note 16, Commitments and Contingencies,” which is incorporated herein by reference. In addition to the matters specifically described or incorporated by reference in this item, we are involved in a number of legal and regulatory proceedings that arise in the ordinary course of business that we do not expect will have a material impact on our business or financial condition. However, litigation claims and proceedings of all types are subject to many factors and their outcome and effect on our business and financial condition generally cannot be predicted accurately.
We establish an accrual for legal claims only when a loss is probable and we can reasonably estimate the amount of such loss. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims. If certain of these matters are determined against us, FHFA or Treasury, it could have a material adverse effect on our results of operations, liquidity and financial condition, including our net worth.
Senior Preferred Stock Purchase Agreements Litigation
Between June 2013 and August 2018, preferred and common stockholders of Fannie Mae and Freddie Mac filed lawsuits in multiple federal courts against one or more of the United States, Treasury and FHFA, challenging actions taken by the defendants relating to the Fannie Mae and Freddie Mac senior preferred stock purchase agreements and the conservatorships of Fannie Mae and Freddie Mac. Some of these lawsuits also contain claims against Fannie Mae and Freddie Mac. The legal claims being advanced by one or more of these lawsuits include challenges to the net worth
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sweep dividend provisions of the senior preferred stock that were implemented pursuant to August 2012 amendments to the agreements, the payment of dividends to Treasury under the net worth sweep dividend provisions, and FHFA’s decision to require Fannie Mae and Freddie Mac to draw funds from Treasury in order to pay dividends to Treasury prior to the August 2012 amendments. Some of the lawsuits also challenge the constitutionality of FHFA’s structure. The plaintiffs seek various forms of equitable and injunctive relief, including rescission of the August 2012 amendments, as well as damages.
Amendments to our senior preferred stock purchase agreement made pursuant to the January 2021 letter agreement provide that we may take certain actions without Treasury’s prior written consent only when all currently pending significant litigation relating to the conservatorship and to the August 2012 amendments to the agreement has been resolved. For more information, see “Business—Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements.” The cases that remain pending or were terminated after September 30, 2020 are as follows:
District of Columbia. Fannie Mae is a defendant in three cases pending in the U.S. District Court for the District of Columbia—a consolidated putative class action and two additional cases. In all three cases, Fannie Mae and Freddie Mac stockholders filed amended complaints on November 1, 2017 against us, FHFA as our conservator and Freddie Mac. On September 28, 2018, the court dismissed all of the plaintiffs’ claims in these cases, except for their claims for breach of an implied covenant of good faith and fair dealing. All three cases are described in “Note 16, Commitments and Contingencies.”
Southern District of Texas (Collins v. Mnuchin). On October 20, 2016, preferred and common stockholders filed a complaint against FHFA and Treasury in the U.S. District Court for the Southern District of Texas. On May 22, 2017, the court dismissed the case. On September 6, 2019, the U.S. Court of Appeals for the Fifth Circuit, sitting en banc, affirmed the district court’s dismissal of claims against Treasury, but reversed the dismissal of claims against FHFA. The court held that plaintiffs could pursue their claim that FHFA exceeded its statutory powers as conservator when it implemented the net worth sweep dividend provisions of the senior preferred stock purchase agreements in August 2012. The court also held that the provision of the Housing and Economic Recovery Act that insulates the FHFA Director from removal without cause violates constitutional separation of powers principles and, thus, that the FHFA Director may be removed by the president for any reason. The court held that the appropriate remedy for this violation is to declare the provision severed from the statute. Both the plaintiffs and the government filed petitions with the Supreme Court seeking review of the Fifth Circuit’s decision. The Supreme Court granted those petitions on July 9, 2020 and heard oral argument on December 9, 2020.
Western District of Michigan. On June 1, 2017, preferred and common stockholders of Fannie Mae and Freddie Mac filed a complaint for declaratory and injunctive relief against FHFA and Treasury in the U.S. District Court for the Western District of Michigan. FHFA and Treasury moved to dismiss the case on September 8, 2017, and plaintiffs filed a motion for summary judgment on October 6, 2017. On September 8, 2020, the court denied plaintiffs’ motion for summary judgment and granted defendants’ motion to dismiss. The plaintiffs filed a notice of appeal with the U.S. Court for the Sixth Circuit on October 27, 2020.
District of Minnesota. On June 22, 2017, preferred and common stockholders of Fannie Mae and Freddie Mac filed a complaint for declaratory and injunctive relief against FHFA and Treasury in the U.S. District Court for the District of Minnesota. The court dismissed the case on July 6, 2018, and plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the Eighth Circuit on July 10, 2018.
Eastern District of Pennsylvania. On August 16, 2018, common stockholders of Fannie Mae and Freddie Mac filed a complaint for declaratory and injunctive relief against FHFA and Treasury in the U.S. District Court for the Eastern District of Pennsylvania. FHFA and Treasury moved to dismiss the case on November 16, 2018, and plaintiffs filed a motion for summary judgment on December 21, 2018.
U.S. Court of Federal Claims. Numerous cases are pending against the United States in the U.S. Court of Federal Claims. Fannie Mae is a nominal defendant in four of these cases: Fisher v. United States of America, filed on December 2, 2013; Rafter v. United States of America, filed on August 14, 2014; Perry Capital LLC v. United States of America, filed on August 15, 2018; and Fairholme Funds Inc. v. United States, which was originally filed on July 9, 2013, and amended publicly to include Fannie Mae as a nominal defendant on October 2, 2018. Plaintiffs in these cases allege that the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendment constitute a taking of Fannie Mae’s property without just compensation in violation of the U.S. Constitution. The Fisher plaintiffs are pursuing this claim derivatively on behalf of Fannie Mae, while the Rafter, Perry Capital and Fairholme Funds plaintiffs are pursuing the claim both derivatively and directly against the United States. Plaintiffs in Rafter also allege direct and derivative breach of contract claims against the government. The Perry Capital and Fairholme Funds plaintiffs allege similar breach of contract claims, as well as direct and derivative breach of fiduciary duty claims against the government. Plaintiffs in Fisher request just compensation to Fannie Mae in an unspecified amount. Plaintiffs in Rafter, Perry Capital and Fairholme Funds seek just compensation for themselves on
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Legal Proceedings
their direct claims and payment of damages to Fannie Mae on their derivative claims. The United States filed a motion to dismiss the Fisher, Rafter and Fairholme Funds cases on August 1, 2018. On December 6, 2019, the court entered an order in the Fairholme Funds case that granted the government’s motion to dismiss all the direct claims but denied the motion as to all of the derivative claims brought on behalf of Fannie Mae. On June 18, 2020, the U.S. Court of Appeals for the Federal Circuit agreed to hear the appeal of the court’s December 6, 2019 order. In the Fisher case, the court denied the government’s motion to dismiss on May 8, 2020 and, on August 21, 2020, the Federal Circuit denied the Fisher plaintiffs’ request for interlocutory appeal.
Item 4.  Mine Safety Disclosures
None.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
Our common stock is traded in the over-the-counter market and quoted on the OTCQB, operated by OTC Markets Group Inc., under the ticker symbol “FNMA.” Over-the-counter market quotations for our common stock reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The transfer agent and registrar for our common stock is Computershare Trust Company, N.A., and its address is P.O. Box 505005, Louisville, KY 40233-5005 or, for overnight correspondence, 462 South 4th Street, Suite 1600, Louisville, KY 40202.
Holders
As of February 1, 2021, we had approximately 8,000 registered holders of record of our common stock. In addition, as of February 1, 2021, Treasury held a warrant giving it the right to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis on the date of exercise.
Equity Compensation Plan Information
As of December 31, 2020, we had no outstanding options, warrants or rights under any equity compensation plan. Although we have a legacy equity compensation plan that was previously approved by shareholders, our 1985 Employee Stock Purchase Plan, we do not anticipate issuing additional shares under that plan. Moreover, we are prohibited from issuing any stock or other equity securities as compensation without the approval of FHFA and the prior written consent of Treasury under the senior preferred stock purchase agreement, except under limited circumstances.
Recent Sales of Unregistered Equity Securities
Under the terms of our senior preferred stock purchase agreement with Treasury, we are prohibited from selling or issuing our equity interests, without the prior written consent of Treasury except under limited circumstances described in “Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements—Covenants under Treasury Agreements.”
During the quarter ended December 31, 2020, we did not sell any equity securities.
Information about Certain Securities Issuances by Fannie Mae
Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a material direct financial obligation or become directly or contingently liable for a material obligation under an off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03 or, if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for that offering that are filed with the SEC.
Because the securities we issue are exempted securities under the Securities Act of 1933, we do not file registration statements or prospectuses with the SEC with respect to our securities offerings. To comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial obligations, we report our incurrence of these types of obligations either in offering circulars or prospectuses (or supplements thereto) that we post on our website or in a current report on Form 8-K that we file with the SEC, in accordance with a “no-action” letter we received from the SEC staff in 2004. In cases where the information is disclosed in a prospectus or offering circular posted on our website, the document will be posted on our website within the same time period that a prospectus for a non-exempt securities offering would be required to be filed with the SEC.
The website address for disclosure about our debt securities is www.fanniemae.com/debtsearch. From this address, investors can access the offering circular and related supplements for debt securities offerings under Fannie Mae’s universal debt facility, including pricing supplements for individual issuances of debt securities.
Disclosure about our obligations pursuant to the MBS we issue, some of which may be off-balance sheet obligations, can be found at www.fanniemae.com/mbsdisclosure. From this address, investors can access information and documents about our MBS, including prospectuses and related prospectus supplements.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
We are providing our website address solely for your information. Information appearing on our website is not incorporated into this report.
Our Purchases of Equity Securities
We did not repurchase any of our equity securities during the fourth quarter of 2020.
Item 6.  Selected Financial Data
The selected consolidated financial data displayed below are summarized from our results of operations for the five-year period ended December 31, 2020, as well as selected consolidated balance sheet data as of the end of each year within this five-year period. Our results of operations for any one period are not necessarily indicative of the results to be expected in any other period. This section should be read together with our consolidated financial statements and the accompanying notes.
For the Year Ended December 31,
2020 2019 2018 2017 2016
(Dollars in millions)
Statement of operations data:
Net revenues(1)
$ 25,328  $ 21,859  $ 21,828  $ 22,562  $ 21,764 
Net income attributable to Fannie Mae 11,805  14,160  15,959  2,463  12,313 
New business purchase data:
New business purchases(2)
$ 1,435,305  $ 666,878  $ 512,023  $ 569,616  $ 637,425 
Performance ratios:
Net interest yield(3)
0.68  % 0.62  % 0.64  % 0.65  % 0.68  %
Efficiency ratio(4)
31.17  33.22  31.22  26.85  25.03 
Credit (income) loss ratio (in basis
    points):(5)
Single-family (0.6) bps 1.5 bps 6.8 bps 7.6 bps 12.8  bps
Multifamily 4.3  (0.1) 0.6  (0.7) (0.2)
Return on assets(6)
0.32  % 0.41  % 0.47  % 0.07  % 0.38  %
Net worth ratio(7)
0.63  0.42  * * *
As of December 31,
2020 2019 2018 2017 2016
Credit quality data: (Dollars in millions)
Total troubled debt restructurings on accrual status $ 69,532  $ 81,700  $ 98,375  $ 110,130  $ 127,494 
Total nonaccrual loans(8)
29,716  29,147  32,150  47,369  44,450 
Loss reserves(9)
(10,798) (9,047) (14,252) (19,400) (23,835)
Loss reserves as a percentage of guaranty book of business:
Single-family(10)
0.30  % 0.30  % 0.49  % 0.65  % 0.83  %
Multifamily(11)
0.32  0.08  0.08  0.09  0.08 

Balance sheet data:
Investments in securities $ 138,239  $ 50,527  $ 45,296  $ 39,522  $ 48,925 
Mortgage loans, net of allowance 3,653,892  3,334,162  3,249,395  3,178,525  3,079,753 
Total assets 3,985,749  3,503,319  3,418,318  3,345,529  3,287,968 
Short-term debt 12,173  26,662  24,896  33,756  35,579 
Long-term debt 3,923,563  3,440,724  3,367,024  3,296,298  3,226,737 
Total liabilities 3,960,490  3,488,711  3,412,078  3,349,215  3,281,897 
Senior preferred stock 120,836  120,836  120,836  117,149  117,149 
Preferred stock 19,130  19,130  19,130  19,130  19,130 
Total Fannie Mae stockholders’ equity (deficit) 25,259  14,608  6,240  (3,686) 6,071 
Net worth surplus (deficit) 25,259  14,608  6,240  (3,686) 6,071 
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Selected Financial Data

As of December 31,
2020 2019 2018 2017 2016
(Dollars in millions)
Book of business data:
Guaranty book of business(12)
$ 3,714,454  $ 3,367,498  $ 3,269,152  $ 3,211,858  $ 3,134,005 
(1)    Consists of net interest income and fee and other income.
(2)    New business purchases consist of single-family and multifamily whole mortgage loans purchased during the period and single-family and multifamily mortgage loans underlying Fannie Mae MBS issued during the period pursuant to lender swaps.
(3)    Calculated based on net interest income for the period divided by the average balance of total interest-earning assets during the period, expressed as a percentage.
(4) Calculated based on non-interest expense for the period divided by the sum of net interest income and non-interest income, excluding fair value gains (losses), net, for the period, expressed as a percentage.
(5)    Consists of write-offs, recoveries, foreclosed property income (expense), write-offs on the redesignation of mortgage loans and gains on sales and other valuation adjustments for the reporting period divided by the average guaranty book of business during the period, expressed in basis points.
(6) Calculated based on net income for the reporting period divided by average total assets during the period, expressed as a percentage. Average balances for purposes of ratio calculations are based on balances at the beginning of the year and at the end of each quarter for each year shown.
(7) Calculated based upon net worth divided by total assets outstanding at the end of the period. For periods prior to the second quarter of 2019, we were unable to retain our earnings to build net worth beyond $3 billion in agreement with the terms of our Senior Preferred Stock Agreement. As such, this ratio is not presented prior to 2019.
(8)    Total amounts based on amortized cost of nonaccrual loans. See “Note 1, Summary of Significant Accounting Policies” for information about our policies for placing single-family and multifamily loans on nonaccrual status.
(9)    Consists of our allowance for loan losses and reserve for guaranty losses. The measurement of our loss reserves was impacted upon the adoption of the CECL standard on January 1, 2020. See “Note 1, Summary of Significant Accounting Policies” for more information about our adoption of the CECL standard.
(10)    Calculated based on single-family conventional guaranty book of business.
(11) Prior to our adoption of the CECL standard on January 1, 2020, benefits for freestanding credit enhancements were netted against our multifamily loss reserves. As of January 1, 2020, these credit enhancements are recorded in “Other assets” in our consolidated balance sheets.
(12)    Refers to the sum of the unpaid principal balance of: (a) Fannie Mae MBS outstanding (excluding the portions of any structured securities Fannie Mae issues that are backed by Freddie Mac securities); (b) mortgage loans of Fannie Mae held in our retained mortgage portfolio; and (c) other credit enhancements that we provide on mortgage assets. It also excludes non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.


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MD&A | Key Market Economic Indicators
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read this MD&A together with our consolidated financial statements as of December 31, 2020 and the accompanying notes. This MD&A does not discuss 2018 performance or a comparison of 2018 versus 2019 performance for select areas where we have determined the omitted information is not necessary to understand our current-period financial condition, changes in our financial condition, or our results. The omitted information may be found in our 2019 Form 10-K, filed with the SEC on February 13, 2020, in MD&A sections titled “Consolidated Results of Operations,” “Single-Family Business,” “Multifamily Business,” and “Liquidity and Capital Management.”
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-20201231_G7.JPG
(1)According to Bloomberg.
(2)SOFR began April 2018.
(3)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,
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MD&A | Key Market Economic Indicators
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. In January 2021, we implemented fair value hedge accounting 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.
Single-Family Annual Home Price Growth Rate(1)
FNM-20201231_G8.JPG
(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 becomes 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. Declines in home prices increase the losses we incur on defaulted loans.
Home price growth in 2020 was very robust at 10.5% 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.
We currently expect home price growth on a national basis to slow to 4.5% in 2021, which is an improvement from our prior forecast but lower than the exceptionally strong home price growth we saw in 2020. However, higher-than-expected increases in supply or decreases in demand could lead to decreases or slower growth in home prices. 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
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MD&A | Key Market Economic Indicators
expect. For further discussion on housing activity, see “Single-Family Business—Single-Family Mortgage Market” and “Multifamily Business—Multifamily Mortgage Market.”
New Housing Starts(1)
FNM-20201231_G9.JPG
(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 rates 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 leading indicator, weakening prior to a slowdown in U.S. economic activity and accelerating prior to a recovery, which contributes to the growth of GDP and employment. 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.
After falling sharply in the second quarter, home sales rebounded significantly in the second half of 2020 as purchase demand strengthened due to the low mortgage-rate environment and pent-up demand from the earlier pandemic-related declines, among other factors.
Given both the current strength in demand and low supply of existing and new homes available for sale at the end of the year, we expect single-family housing starts in 2021 to exceed 2020 levels by 18.6%, with overall housing activity also remaining strong throughout 2021.
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MD&A | Key Market Economic Indicators
We expect multifamily starts to remain mostly flat in 2021 compared with the levels seen at the end of 2020; however, due primarily to the high level of multifamily starts at the beginning of 2020, multifamily starts are projected to fall by 13.0% on an annual basis in 2021.
GDP, Unemployment Rate and Personal Consumption
FNM-20201231_G10.JPG
(1)GDP growth (decline) and personal consumption growth (decline) for periods prior to the fourth quarter of 2020 are based on the quarterly series calculated by the Bureau of Economic Analysis and are subject to revision.
(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, which in turn can lead 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.
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MD&A | Key Market Economic Indicators
The impact of COVID-19 resulted in a significant decline in GDP and a significant rise in the unemployment rate in the first half of 2020, with partial recovery in the second half of 2020 resulting in estimated negative GDP of 3.5% for the full year compared to the 2019 annual level. We expect economic recovery to continue into 2021, as we expect the positive impacts of further stimulus, increased vaccinations and reduction of lockdown measures should help spur economic growth, particularly beginning in the spring. We expect positive GDP growth of 6.1% for 2021.
See “Risk Factors—Market and Industry Risk” for further discussion of risks to our business and financial results associated with interest rates, home prices, housing activity and economic conditions.
Consolidated Results of Operations
This section discusses our consolidated results of operations and should be read together with our consolidated financial statements and the accompanying notes.

Summary of Consolidated Results of Operations
For the Year Ended December 31, Variance
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(Dollars in millions)
Net interest income(1)
$ 24,866  $ 21,293  $ 21,273  $ 3,573  $ 20 
Fee and other income
462  566  555  (104) 11 
Net revenues
25,328  21,859  21,828  3,469  31 
Investment gains, net
907  1,770  952  (863) 818 
Fair value gains (losses), net
(2,501) (2,214) 1,121  (287) (3,335)
Administrative expenses
(3,068) (3,023) (3,059) (45) 36 
Credit-related income:
Benefit (provision) for credit losses (678) 4,011  3,309  (4,689) 702 
Foreclosed property expense (177) (515) (617) 338  102 
Total credit-related income (expense) (855) 3,496  2,692  (4,351) 804 
TCCA fees
(2,673) (2,432) (2,284) (241) (148)
 Credit enhancement expense(2)
(1,361) (1,134) (679) (227) (455)
 Change in expected credit enhancement recoveries(3)
233  —  —  233  — 
Other expenses, net(4)
(1,131) (745) (472) (386) (273)
Income before federal income taxes
14,879  17,577  20,099  (2,698) (2,522)
Provision for federal income taxes
(3,074) (3,417) (4,140) 343  723 
Net income
$ 11,805  $ 14,160  $ 15,959  $ (2,355) $ (1,799)
Total comprehensive income
$ 11,790  $ 13,969  $ 15,611  $ (2,179) $ (1,642)
(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 CIRT 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)Includes estimated changes in benefits from our freestanding credit enhancements as well as 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.
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MD&A | Consolidated Results of Operations
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 consolidated balance sheets. Guaranty fees from these loans account for the difference between the interest income on loans in consolidated trusts and the interest expense on the debt of consolidated trusts.
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. See “Note 1, Summary of Significant Accounting Policies” for more information about our change in presentation.
Components of Net Interest Income
For the Year Ended December 31,
Variance
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(Dollars in millions)
Net interest income from guaranty book of business:
Base guaranty fee income(1)
$ 11,157  $ 9,711  $ 8,908  $ 1,446  $ 803 
Base guaranty fee income related to TCCA(2)
2,673  2,432  2,284  241