e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2007
OR
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o |
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period
from
to
Commission File No.: 0-50231
Federal National Mortgage
Association
(Exact name of registrant as
specified in its charter)
Fannie Mae
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Federally chartered corporation
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52-0883107
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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3900 Wisconsin Avenue, NW
Washington, DC
(Address of principal
executive offices)
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20016
(Zip Code)
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Registrants telephone number, including area code:
(202) 752-7000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one ):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
As of October 22, 2007, there were 978,167,971 shares
of common stock outstanding.
PART IFINANCIAL
INFORMATION
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Item 2.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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You should read this Managements Discussion and
Analysis of Financial Condition and Results of Operations
(MD&A) in conjunction with our unaudited
condensed consolidated financial statements and related notes,
and the more detailed information contained in our Annual Report
on
Form 10-K
for the year ended December 31, 2006 (2006
Form 10-K).
The results of operations presented in our interim financial
statements and discussed in MD&A are not necessarily
indicative of the results that may be expected for the full
year. Please refer to Glossary of Terms Used in This
Report in our 2006
Form 10-K
for an explanation of key terms used throughout this
discussion.
EXPLANATORY
NOTE ABOUT THIS REPORT
We are filing this Quarterly Report on
Form 10-Q
for the third quarter of 2007 concurrently with the filing of
our Quarterly Reports on
Form 10-Q
for the first and second quarters of 2007.
We filed our 2006
Form 10-K
on August 16, 2007, after filing our Annual Report on
Form 10-K
for the year ended December 31, 2005 (2005
Form 10-K)
on May 2, 2007 and our Annual Report on
Form 10-K
for the year ended December 31, 2004 (2004
Form 10-K)
on December 6, 2006. Our 2004
Form 10-K
contained our consolidated financial statements and related
notes for the year ended December 31, 2004, as well as a
restatement of our previously issued consolidated financial
statements and related notes for the years ended
December 31, 2003 and 2002, and for the quarters ended
June 30, 2004 and March 31, 2004. The filing of the
2004
Form 10-K,
the 2005
Form 10-K
and the 2006
Form 10-K
were delayed significantly as a result of the substantial time
and effort devoted to ongoing controls remediation, and systems
reengineering and development in order to complete the
restatement of our financial results for 2003 and 2002, as
presented in our 2004
Form 10-K.
We have made significant progress in our efforts to remediate
material weaknesses that have prevented us from reporting our
financial results on a timely basis.
With the filing of our Quarterly Report on
Form 10-Q
for the third quarter of 2007 on a timely basis, we have
accomplished our goal of returning to current filing status. On
June 8, 2007, we announced that we plan to file our Annual
Report on
Form 10-K
for the year ended December 31, 2007 (2007
Form 10-K)
with the U.S. Securities and Exchange Commission
(SEC) on a timely basis. At this time, we are
confirming our expectation that we will file our 2007
Form 10-K
on a timely basis.
Fannie Mae is a mission-driven company, owned by private
shareholders (NYSE: FNM) and chartered by Congress to support
liquidity and stability in the secondary mortgage market. Our
business includes three integrated business
segmentsSingle-Family Credit Guaranty, Housing and
Community Development, and Capital Marketsthat work
together to provide services, products and solutions to our
lender customers and a broad range of housing partners.
Together, our business segments contribute to our chartered
mission objectives, helping to increase the total amount of
funds available to finance housing in the United States and to
make homeownership more available and affordable for low-,
moderate- and middle-income Americans. We also work with our
customers and partners to increase the availability and
affordability of rental housing.
Our Single-Family Credit Guaranty
(Single-Family) business works with our lender
customers to securitize single-family mortgage loans into Fannie
Mae mortgage-backed securities (Fannie Mae MBS) and
to facilitate the purchase of single-family mortgage loans for
our mortgage portfolio. Revenues in the segment are derived
primarily from the guaranty fees the segment receives as
compensation for assuming the credit risk on the mortgage loans
underlying single-family Fannie Mae MBS and on the single-family
mortgage loans held in our portfolio.
Our Housing and Community Development (HCD)
business works with our lender customers to securitize
multifamily mortgage loans into Fannie Mae MBS and to facilitate
the purchase of multifamily mortgage
1
loans for our mortgage portfolio. Our HCD business also helps to
expand the supply of affordable housing by investing in rental
and for-sale housing projects, including rental housing that is
eligible for federal low-income housing tax credits. Revenues in
the segment are derived from a variety of sources, including the
guaranty fees the segment receives as compensation for assuming
the credit risk on the mortgage loans underlying multifamily
Fannie Mae MBS and on the multifamily mortgage loans held in our
portfolio, transaction fees associated with the multifamily
business and bond credit enhancement fees. In addition,
HCDs investments in rental housing projects eligible for
the federal low-income housing tax credit generate both tax
credits and net operating losses that reduce our federal income
tax liability. Other investments in rental and for-sale housing
generate revenue from operations and the eventual sale of the
assets.
Our Capital Markets group manages our investment activity
in mortgage loans and mortgage-related securities, and has
responsibility for managing our assets and liabilities and our
liquidity and capital positions. Through the issuance of debt
securities in the capital markets, our Capital Markets group
attracts capital from investors globally that the company uses
to finance housing in the United States. Our Capital Markets
group generates income primarily from the difference, or spread,
between the yield on the mortgage assets we own and the cost of
the debt we issue in the global capital markets to fund these
assets.
Although we are a corporation chartered by the
U.S. Congress, the U.S. government does not guarantee,
directly or indirectly, our securities or other obligations. Our
business is self-sustaining and funded exclusively with private
capital.
2
The selected consolidated financial data presented below is
summarized from our condensed results of operations for the
three and nine months ended September 30, 2007 and 2006, as
well as from selected condensed consolidated balance sheet data
as of September 30, 2007 and December 31, 2006. This
data should be read in conjunction with this Managements
Discussion and Analysis of Financial Condition and Results of
Operations, as well as with the unaudited condensed consolidated
financial statements and related notes included in this report
and with our audited consolidated financial statements and
related notes included in our 2006
Form 10-K.
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For the
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For the
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2007
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2006
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2007
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2006
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(Dollars and shares in millions, except per share amounts)
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Income Statement Data:
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Net interest income
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$
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1,058
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$
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1,528
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$
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3,445
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$
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5,407
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Guaranty fee
income(1)
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1,232
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1,084
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3,450
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2,968
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Losses on certain guaranty contracts
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(294
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)
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(103
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)
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(1,038
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(181
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Derivatives fair value losses, net
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(2,244
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(3,381
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(891
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(854
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)
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Other income
(loss)(1)(2)
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242
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659
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449
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(612
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Credit-related
expenses(3)
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(1,200
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(197
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(2,039
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(457
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Net income (loss)
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(1,399
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)
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(629
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1,509
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3,455
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Preferred stock dividends and issuance costs at redemption
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(119
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(131
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(372
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(380
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Net income (loss) available to common stockholders
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(1,518
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(760
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1,137
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3,075
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Common Share Data:
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Earnings (loss) per share:
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Basic
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$
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(1.56
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)
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$
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(0.79
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$
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1.17
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$
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3.17
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Diluted
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(1.56
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(0.79
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1.17
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3.16
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Weighted-average common shares outstanding:
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Basic
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974
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972
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973
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971
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Diluted
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974
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972
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975
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972
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Cash dividends declared per common share
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$
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0.50
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$
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0.26
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$
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1.40
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$
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0.78
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New Business Acquisition Data:
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Fannie Mae MBS issues acquired by third
parties(4)
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$
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148,320
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$
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107,027
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$
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407,962
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$
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308,371
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Mortgage portfolio
purchases(5)
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49,574
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51,576
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134,407
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150,340
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New business acquisitions
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$
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197,894
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$
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158,603
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$
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542,369
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$
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458,711
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As of
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September 30,
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December 31,
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2007
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2006
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(Dollars in millions)
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Balance Sheet Data:
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Investments in securities:
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Trading
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$
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48,683
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$
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11,514
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Available-for-sale
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315,012
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378,598
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Mortgage loans:
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Loans held for sale
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5,053
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4,868
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Loans held for investment, net of allowance
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394,550
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378,687
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Total assets
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839,783
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843,936
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Short-term debt
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153,146
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165,810
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Long-term debt
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608,619
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601,236
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Total liabilities
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799,740
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802,294
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Preferred stock
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9,008
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9,108
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Total stockholders equity
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39,922
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41,506
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3
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As of
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September 30,
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December 31,
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2007
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2006
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(Dollars in millions)
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Regulatory Capital Data:
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Core
capital(6)
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$
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41,713
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$
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41,950
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Total
capital(7)
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43,798
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42,703
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Mortgage Credit Book of Business Data:
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Mortgage
portfolio(8)
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$
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728,578
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$
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728,932
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Fannie Mae MBS held by third
parties(9)
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2,003,382
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1,777,550
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Other credit
guaranties(10)
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35,508
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19,747
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Mortgage credit book of business
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$
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2,767,468
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$
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2,526,229
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For the
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For the
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2007
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2006
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2007
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2006
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Ratios:
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Return on assets
ratio(11)*
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(0.72
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)%
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(0.36
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)%
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0.18
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%
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0.49
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%
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Return on equity
ratio(12)*
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(19.4
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)
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(9.8
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)
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4.8
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13.1
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Equity to assets
ratio(13)*
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4.7
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4.7
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4.8
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4.8
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Dividend payout
ratio(14)*
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N/A
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N/A
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120.4
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24.7
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Average effective guaranty fee rate (in basis
points)(15)*
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22.8
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bp
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22.5
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bp
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22.0
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bp
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20.9
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bp
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Credit loss ratio (in basis
points)(16)*
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5.0
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bp
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2.3
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bp
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4.0
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bp
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1.8
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bp
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(1) |
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Certain prior period amounts that
previously were included as a component of Fee and other
income have been reclassified to Guaranty fee
income to conform to the current period presentation.
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(2) |
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Consists of trust management
income; investment gains (losses), net; debt extinguishment
gains, net; losses from partnership investments; and fee and
other income.
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(3) |
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Consists of provision for credit
losses and foreclosed property expense.
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(4) |
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Unpaid principal balance of Fannie
Mae MBS issued and guaranteed by us and acquired by third-party
investors during the reporting period. Excludes securitizations
of mortgage loans held in our portfolio.
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(5) |
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Unpaid principal balance of
mortgage loans and mortgage-related securities we purchased for
our investment portfolio during the reporting period. Includes
advances to lenders and mortgage-related securities acquired
through the extinguishment of debt.
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(6) |
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The sum of (a) the stated
value of outstanding common stock (common stock less treasury
stock); (b) the stated value of outstanding non-cumulative
perpetual preferred stock;
(c) paid-in-capital;
and (d) our retained earnings. Core capital excludes
accumulated other comprehensive loss.
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(7) |
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The sum of (a) core capital
and (b) the total allowance for loan losses and reserve for
guaranty losses, less (c) the specific loss allowance (that
is, the allowance required on individually impaired loans).
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(8) |
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Unpaid principal balance of
mortgage loans and mortgage-related securities held in our
portfolio.
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(9) |
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Unpaid principal balance of Fannie
Mae MBS held by third-party investors. The principal balance of
resecuritized Fannie Mae MBS is included only once in the
reported amount.
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(10) |
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Includes single-family and
multifamily credit enhancements that we have provided and that
are not otherwise reflected in the table.
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(11) |
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Annualized net income available to
common stockholders divided by average total assets during the
period.
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(12) |
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Annualized net income available to
common stockholders divided by average outstanding common equity
during the period.
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(13) |
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Average stockholders equity
divided by average total assets during the period.
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(14) |
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Common dividends declared during
the period divided by net income available to common
stockholders for the period. Because we experienced a loss for
the three months ended September 30, 2007 and 2006,
earnings for each of those periods were insufficient to cover
dividends declared during those periods.
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4
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(15) |
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Annualized guaranty fee income as a
percentage of average outstanding Fannie Mae MBS and other
guaranties during the period.
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(16) |
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Annualized charge-offs, net of
recoveries and annualized foreclosed property expense, as a
percentage of the average total mortgage credit book of business
during the period. Effective January 1, 2007, we have
excluded any initial losses recorded pursuant to Statement of
Position
No. 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer, on loans purchased from trusts from our credit
losses when the purchase price of delinquent loans that we
purchase from Fannie Mae MBS trusts exceeds the fair value of
the loans at the time of purchase. We have revised our
presentation of credit losses for the three and nine months
ended September 30, 2006 to conform to the current period
presentation. Refer to Risk ManagementCredit Risk
ManagementMortgage Credit Risk ManagementCredit
Losses for more information regarding this change in
presentation.
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Note:
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* |
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Average balances for purposes of
the ratio calculations are based on beginning and end of period
balances.
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Overview
We are in the midst of a significant correction in the housing
and mortgage markets. The market downturn that began in 2006 has
continued through the first three quarters of 2007, with
substantial declines in new and existing home sales, housing
starts, mortgage originations, and home prices, as well as
significant increases in inventories of unsold homes, mortgage
delinquencies, and foreclosures. In recent months, the capital
markets also have been characterized by high levels of
volatility, reduced levels of liquidity in the mortgage and
corporate credit markets, significantly wider credit spreads,
and rating agency downgrades on a growing number of
mortgage-related securities. Beginning with the third quarter of
2007, these factors have had a significant effect on our
business. We expect these factors will continue to affect our
financial condition and results of operations through the end of
2007 and into 2008.
Management believes that some factors in this correction may
benefit our business in the short or long term, and that other
factors in the correction may have a material adverse effect on
our business. In particular, the reduced liquidity accompanying
this correction has affected observable market pricing data,
causing disruptions of historical pricing relationships and
pricing gaps. This has had a negative impact on our estimates of
the fair value of our assets and obligations. Given this pricing
disruption and the complexity of our accounting policies and
estimates, the amounts that we actually realize could vary
significantly from our fair value estimates.
Like other participants in the U.S. residential mortgage
market, we have experienced and expect to continue to experience
adverse effects from this market correction, which are reflected
in our financial results. These include:
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Our credit losses and credit-related expenses have increased
significantly due to national home price declines and economic
weakness in some regional markets.
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|
Our Losses on certain guaranty contracts have
increased significantly. As conditions in the housing market
have deteriorated and market liquidity has declined, our
estimates of the compensation required by market participants to
assume our guaranty obligations, which is the basis we are
required to use to estimate these losses, have increased
significantly. Because of the manner in which we account for
these contracts, we recognize an immediate loss in earnings at
the time we issue MBS if our guaranty obligation exceeds the
fair value of our guaranty asset. We expect to recover that loss
over time as the associated MBS liquidates, while our credit
losses over time will reflect our actual loss experience on
these transactions.
|
|
|
|
Because of the significant disruption in the housing and
mortgage markets during the third quarter of 2007, the
indicative market prices we obtained from third parties in
connection with our purchases of delinquent loans from our MBS
trusts have decreased significantly. This has caused us to
reduce our estimates of the fair value of these loans, resulting
in a significant increase in our initial recorded losses from
these purchases.
|
5
|
|
|
|
|
Increasing credit spreads and estimates of declines in future
home prices have resulted in declines in the fair value of our
net assets.
|
These challenging market conditions have had a negative impact
on our earnings, which has reduced the amount of capital we hold
to satisfy our regulatory capital requirements. We continue to
maintain a strong capital position, and our access to sources of
liquidity has been adequate to meet our funding needs. If these
market and economic conditions continue, we may take actions to
ensure that we meet our regulatory capital requirements,
including forgoing some business opportunities, selling assets
or issuing additional preferred equity securities.
We believe that some benefits from the market correction may
enhance our strategic position in our market. These include:
|
|
|
|
|
The market for Alt-A, subprime and other nontraditional
mortgages has declined significantly. As that market has
declined, the demand for more traditional mortgage products,
such as
30-year
fixed-rate conforming loans, has increased significantly. These
products represent our core business and have historically
accounted for the majority of our new business volume and
profitability. Due to the higher mix of mortgage-related
securities backed by more traditional products and reduced
competition from private-label issuers of mortgage-related
securities, our estimated market share of new single-family
mortgage-related securities issuances increased to approximately
41.2% for the third quarter of 2007, from approximately 24.3%
for the third quarter of 2006.
|
|
|
|
We also have increased the guaranty fees we charge on new
business. This increased pricing compensates us for the added
risk that we assume as a result of current market conditions.
|
|
|
|
As a result of the growing need for credit and liquidity in the
multifamily market beginning in the third quarter of 2007, our
HCD business produced higher guaranty fee rates on new
multifamily business and faster growth in our multifamily
guaranty book of business.
|
|
|
|
Our total mortgage credit book of business has increased by 10%
during the first nine months of 2007, from $2.5 trillion
outstanding at December 31, 2006 to $2.8 trillion
outstanding at September 30, 2007.
|
In addition, following a thorough review of our costs, we
implemented a broad reengineering initiative that we expect will
reduce our total administrative expenses by more than
$200 million in 2007 as compared with 2006. With the filing
of our Forms 10-Q today, we have become current in our SEC
periodic financial reporting.
Our business is also significantly affected by general
conditions in the financial markets. During the first nine
months of 2007, conditions in the financial markets contributed
to the following financial results, compared with the first nine
months of 2006:
|
|
|
|
|
A decrease in our net interest income and net interest yield due
to the higher cost of debt.
|
|
|
|
An increase in losses on trading securities and unrealized
losses on available-for-sale securities.
|
|
|
|
An increased level of period-to-period volatility in the fair
value of our derivatives and securities.
|
During the first nine months of 2007, our ability to issue debt
and equity at rates we consider attractive has not been
impaired. In addition, we have experienced a lower level of
impairments on investment securities during the first nine
months of 2007 than we experienced during the same period in
2006.
Summary
of Our Financial Results
We recorded a net loss and a diluted loss per share of
$1.4 billion and $1.56, respectively, for the third quarter
of 2007, compared with a net loss and a diluted loss per share
of $629 million and $0.79, respectively, for the third
quarter of 2006.
Net income for the first nine months of 2007 was
$1.5 billion, a decrease of $1.9 billion, or 56%, from
the first nine months of 2006. Diluted earnings per share
decreased by 63% to $1.17 for the first nine months of 2007,
from $3.16 for the first nine months of 2006.
6
Refer to Consolidated Results of Operations below
for a more detailed discussion of our financial results for the
three and nine months ended September 30, 2007, compared
with the three and nine months ended September 30, 2006.
Market
and Economic Factors Affecting Our Business
Mortgage and housing market conditions, which significantly
affect our business and our financial performance, have worsened
since the end of 2006. The housing market downturn that began in
the second half of 2006 continued through the first three
quarters of 2007 and into the fourth quarter of 2007. The most
recent available data for the quarter ended September 30,
2007 show substantial declines in new and existing home sales,
housing starts and mortgage originations compared with prior
year levels. Moreover, home prices declined on a national basis
during the first three quarters of 2007. Additionally, overall
housing demand decreased over the past year because of a
slowdown in the overall economy, affordability constraints, and
declines in demand for investor properties and second homes,
which had been a key driver of overall housing activity. Housing
market conditions have deteriorated significantly in some
Midwestern states, particularly in Michigan, Ohio and Indiana,
which have experienced weak economic conditions and job losses.
Additionally, in recent quarters, housing market weakness has
expanded to other states, including Arizona, California, Florida
and Nevada, where home prices had risen most dramatically and
investor demand had been the highest in recent years.
Inventories of unsold homes have risen dramatically over the
past year, putting additional downward pressure on home prices.
These challenging market and economic conditions caused a
material increase in mortgage delinquencies and foreclosures
during 2007. The resetting of a substantial number of
adjustable-rate mortgages (ARMs) to higher interest
rates has also contributed to the increase in mortgage
delinquencies and foreclosures. A mortgage loan foreclosure may
occur when the borrower on an ARM is unable to make the higher
payments required after an interest-rate adjustment, and is
unable to either refinance the loan or sell the home for an
amount sufficient to pay off the mortgage. Based on data
provided by LoanPerformance, an independent provider of mortgage
market data, as of the end of 2006, we estimate that there were
approximately $150 billion in ARMs backing private-label
subprime mortgage-related securities that were scheduled to
reset for the first time at some point during 2007, subjecting
those borrowers to significant payment shock. In addition, as of
the end of July 2007, we estimate that there were approximately
$185 billion in ARMs backing private-label subprime
mortgage-related securities with payments that were scheduled to
reset initially sometime in 2008. These resets could result in a
further sharp increase in delinquency and foreclosure rates. The
rising number of mortgage defaults and foreclosures, combined
with declining home prices on a national basis and weak economic
conditions in some regions, has resulted in significant
increases in credit losses.
The credit performance of subprime and Alt-A loans, as well as
other higher risk loans, has deteriorated sharply during the
past year, and even the prime conventional portion of the
mortgage market has seen signs of credit distress. Concerns
about the potential for even higher delinquency rates and more
severe credit losses have resulted in increases in mortgage
rates in the non-conforming and subprime portions of the market.
Many lenders have tightened lending standards or elected to stop
originating subprime and other higher risk loans completely,
which has adversely affected many borrowers seeking alternative
financing to refinance out of ARMs resetting to higher rates.
The reduction in liquidity and funding sources in the mortgage
credit market has led to a substantial shift in mortgage
originations. The share of traditional fixed-rate conforming
mortgages has increased substantially, while the share of Alt-A
and subprime mortgages has dropped significantly. Moreover,
credit concerns and the resulting liquidity issues have affected
the general financial markets. In recent months, the financial
markets have been characterized by high levels of volatility,
reduced levels of liquidity in the mortgage and corporate credit
markets, significantly wider credit spreads and rating agency
downgrades on a growing number of mortgage-related securities.
In response to concerns over liquidity in the financial markets,
the Federal Reserve reduced its discount rate in August,
September and October 2007 by a total of 125 basis points
to 5.00% and lowered the federal funds rate in September and
October 2007 by a total of 75 basis points to 4.50%. After
rising in the first half of the year, long-term bond yields
declined during the third quarter of
7
2007. As short-term interest rates decreased in the third
quarter of 2007, the spread between long- and short-term
interest rates widened, resulting in a steepening of the yield
curve.
Outlook
We expect housing market weakness to continue in 2007 and 2008.
We believe the continued downturn in housing will lead to
further declines in mortgage originations in 2007 and 2008, and
contribute to slower growth in U.S. residential mortgage
debt outstanding (MDO) in 2007 and 2008. Based on
our current market outlook, we expect:
|
|
|
|
|
A relatively stable net interest yield for the remainder of 2007.
|
|
|
|
Growth in our single-family guaranty book of business at a
faster rate than the rate of overall MDO growth.
|
|
|
|
A continued increase in our guaranty fee income for 2007.
|
|
|
|
A significant increase in losses on certain guaranty contracts
for 2007 as compared with 2006, due to the continued weakening
in the housing and mortgage market.
|
|
|
|
A significant increase in credit-related expenses and credit
losses for both 2007 and 2008 as compared with the previous
years, due to continued home price declines.
|
|
|
|
Continued volatility in our net income, stockholders
equity and regulatory capital due to market conditions and the
effects of the manner in which we account for changes in the
fair value of our derivatives and trading securities.
|
We provide additional detail on trends that may affect our
result of operations, financial condition and regulatory capital
position in future periods in Consolidated Results of
Operations below.
CRITICAL
ACCOUNTING POLICIES
The preparation of financial statements in accordance with
U.S. generally accepted accounting principles
(GAAP) requires management to make a number of
judgments, estimates and assumptions that affect the reported
amount of assets, liabilities, income and expenses in the
consolidated financial statements. Understanding our accounting
policies and the extent to which we use management judgment and
estimates in applying these policies is integral to
understanding our financial statements. In our 2006
Form 10-K,
we identified the following as our critical accounting polices:
|
|
|
|
|
Fair Value of Financial Instruments
|
|
|
|
Amortization of Cost Basis Adjustments on Mortgage Loans and
Mortgage-Related Securities
|
|
|
|
Allowance for Loan Losses and Reserve for Guaranty Losses
|
|
|
|
Assessment of Variable Interest Entities
|
Our 2006
Form 10-K
contains a discussion of the judgments and assumptions made in
applying these policies and how changes in assumptions may
impact our consolidated financial statements. Refer to
Notes to Condensed Consolidated Financial
StatementsNote 1, Summary of Significant Accounting
Policies for updated information regarding our significant
accounting policies, including the expected impact on our
consolidated financial statements of recently issued accounting
pronouncements.
As noted in our 2006
Form 10-K,
we evaluate our critical accounting estimates and judgments
required by our policies on an ongoing basis and update them as
necessary based on changing conditions. We consider the
estimation of fair value of our financial instruments to be our
most critical accounting estimate because a substantial portion
of our assets and liabilities are recorded at estimated fair
value, and, in certain circumstances, our valuation techniques
involve a high degree of management judgment. The downturn in
the housing market and reduced liquidity in the credit markets,
along with the uncertainty in the financial markets arising from
these conditions, resulted in significant market volatility and
a disruption of historical pricing
8
relationships between certain financial instruments during the
third quarter of 2007. This significant change in market
conditions has had widespread implications on how companies
measure the fair value of certain financial instruments.
Accordingly, we have provided an update to our critical
accounting policy on fair value to discuss how these recent
market conditions have affected the determination of fair value
for some of our financial instruments, most notably our guaranty
assets and guaranty obligations, and delinquent loans purchased
from securitization trusts.
Fair
Value of Financial Instruments
Fair value is defined as the amount at which a financial
instrument could be exchanged in a current transaction between
willing, unrelated parties, other than in a forced or
liquidation sale. We use one of the following three practices
for estimating fair value, the selection of which is based on
the availability and reliability of relevant market data:
(1) actual, observable market prices or market prices
obtained from multiple third parties when available;
(2) market data and model-based interpolations using
standard models widely accepted within the industry if market
prices are not available; or (3) internally developed
models that employ techniques such as a discounted cash flow
approach and that include market-based assumptions, such as
prepayment speeds and default and severity rates, derived from
internally developed models. Price transparency tends to be
limited in less liquid markets where quoted market prices or
observable market data may not be available. We regularly refine
and enhance our valuation methodologies to correlate more
closely to observable market data. When observable market prices
or data are not readily available or do not exist, the
estimation of fair value may require significant management
judgment and assumptions. See Part IIItem
1ARisk Factors for a discussion of the risks and
uncertainties related to our use of valuation models.
Guaranty
Assets and Guaranty Obligations
The recent changes in market conditions have had a significant
impact on the estimation of the net fair value of our guaranty
assets and guaranty obligations. As guarantor of our Fannie Mae
MBS issuances, at inception we recognize a non-contingent
liability for the fair value of our obligation to stand ready to
perform over the term of the guaranty as a component of
Guaranty obligations in our consolidated balance
sheets. The fair value of this obligation represents
managements estimate of the amount that we would expect to
pay a third party of similar credit standing to assume our
obligation.
Our guaranty business volume is generated through either our
flow or bulk transaction channels. The contract terms and level
of pricing flexibility for loans guaranteed through these
channels differ and may adversely impact the estimated fair
value of our guaranty obligations and losses on certain guaranty
contracts. In our flow business, we enter into agreements that
generally set base guaranty fee pricing for a lenders
future delivery of individual loans to us over a specified time
period. Because we have established the base guaranty fee
pricing for a specified time period, we may be limited in our
ability to renegotiate the pricing on our flow transactions with
individual lenders to reflect changes in market conditions and
the credit risk of mortgage loans that meet our eligibility
standards. As a result, the estimated amount that we would be
required to pay a third party of similar credit standing to
assume our obligation may be higher than our contractual price.
Our bulk business consists of transactions in which a defined
set of loans are to be delivered to us in bulk, and we have the
opportunity to review the loans for eligibility and pricing
prior to delivery in accordance with the terms of the specific
contract for such transactions. We generally have greater
ability to select risks in the bulk transaction channel and to
adjust our pricing more rapidly to reflect changes in market
conditions and the credit risk of the specific transactions.
Our guaranty obligations consist of future expected credit
losses, including any unrecoverable principal and interest over
the expected life of the underlying mortgages of our Fannie Mae
MBS and foreclosure costs, estimated administrative and other
costs related to our guaranty, and any deferred profit amounts.
We base the fair value of the guaranty obligations that we
record when we issue Fannie Mae MBS on market information
obtained from spot transaction prices, when available. In the
absence of spot transaction data, which is the case for the
substantial majority of our Fannie Mae MBS issuances, we
estimate the fair value using simulation models that estimate
our potential future credit losses and calculate the present
value of the
9
expected cash flows associated with our guaranty obligations
under various economic scenarios. The key inputs and assumptions
for our models include default and severity rates. We also
incorporate a market rate of return that we derive from
observable market data. The objective of our valuation models is
to estimate the amount that we would expect to pay a third party
of similar credit standing to assume our guaranty obligation
under current market conditions. Because of the recent
significant reduction in liquidity in the mortgage and credit
markets and increased volatility, estimating the fair value of
our guaranty obligations has become more difficult in some cases
and the degree of management judgment involved has increased.
Although we review the reasonableness of the results of our
simulation models by comparing those results with available
market information, it is possible that different assumptions
and inputs could produce a materially different estimate of the
fair value of our guaranty obligations, particularly in the
current market environment.
The fair value of our guaranty obligations is highly sensitive
to changes in the markets expectation for future levels of
home price appreciation. When there is a market expectation of a
decline in home prices, the level of credit risk for a mortgage
loan tends to increase because the market anticipates a
likelihood of higher credit losses. Incorporating this
expectation of higher credit losses into our simulation models
results in a significant increase in the estimated fair value of
our guaranty obligations and increases the losses recognized at
inception on certain guaranty contracts. Based on our
experience, however, we expect our actual future credit losses
to be significantly less than the estimated increase in the fair
value of our guaranty obligations, as the fair value of our
guaranty obligations includes not only future expected credit
losses but also the economic return that we believe a third
party would require to assume that credit risk. Our combined
allowance for loan losses and reserve for guaranty losses
reflects our estimate of the probable credit losses inherent in
our mortgage credit book of business. We disclose on a quarterly
basis the estimated impact on our expected credit losses from an
immediate 5% decline in single-family home prices for the entire
United States. See Risk ManagementCredit Risk
ManagementMortgage Credit Risk Management for our
credit loss sensitivity disclosures.
Loans
Purchased with Evidence of Credit Deterioration
For securitization trusts that include a Fannie Mae guaranty, we
have the option to purchase loans from those trusts, at par plus
accrued interest, after required payments have not been made in
full for four consecutive months. Under long-term standby
commitments, we also purchase loans from lenders when the loans
subject to these commitments meet certain delinquency criteria.
We record the acquisition of such defaulted loans at the lower
of the loans acquisition price or its fair value.
During the period of reduced liquidity and market volatility
that began in July 2007, we obtained indicative bids for
delinquent loans from brokers. We used these bids to value
delinquent loans that we purchased from trusts during the third
quarter of 2007. The recent change in market conditions has had
a significant impact on our estimate of the fair value of these
delinquent loans. Given that the primary market for delinquent
loans is currently illiquid, there is more limited price
transparency. Therefore, the estimated fair value of defaulted
loans is highly sensitive to changes in market conditions.
10
CONSOLIDATED
RESULTS OF OPERATIONS
The following discussion of our consolidated results of
operations is based on a comparison of our results between the
third quarters of 2007 and 2006 and between the first nine
months of 2007 and 2006. Table 1 presents a summary of our
unaudited condensed consolidated results of operations for these
periods.
Table
1: Summary of Condensed Consolidated Results of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
Quarterly
|
|
|
Year-to-Date
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
Variance
|
|
|
Variance
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in millions, except per share amounts)
|
|
|
Net interest income
|
|
$
|
1,058
|
|
|
$
|
1,528
|
|
|
$
|
3,445
|
|
|
$
|
5,407
|
|
|
$
|
(470
|
)
|
|
|
(31
|
)%
|
|
$
|
(1,962
|
)
|
|
|
(36
|
)%
|
Guaranty fee
income(1)
|
|
|
1,232
|
|
|
|
1,084
|
|
|
|
3,450
|
|
|
|
2,968
|
|
|
|
148
|
|
|
|
14
|
|
|
|
482
|
|
|
|
16
|
|
Trust management
income(2)
|
|
|
146
|
|
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
146
|
|
|
|
|
|
|
|
460
|
|
|
|
|
|
Fee and other
income(1)
|
|
|
76
|
|
|
|
234
|
|
|
|
546
|
|
|
|
567
|
|
|
|
(158
|
)
|
|
|
(68
|
)
|
|
|
(21
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
2,512
|
|
|
|
2,846
|
|
|
|
7,901
|
|
|
|
8,942
|
|
|
|
(334
|
)
|
|
|
(12
|
)
|
|
|
(1,041
|
)
|
|
|
(12
|
)
|
Losses on certain guaranty contracts
|
|
|
(294
|
)
|
|
|
(103
|
)
|
|
|
(1,038
|
)
|
|
|
(181
|
)
|
|
|
(191
|
)
|
|
|
(185
|
)
|
|
|
(857
|
)
|
|
|
(473
|
)
|
Investment gains (losses), net
|
|
|
136
|
|
|
|
550
|
|
|
|
(102
|
)
|
|
|
(758
|
)
|
|
|
(414
|
)
|
|
|
(75
|
)
|
|
|
656
|
|
|
|
87
|
|
Derivatives fair value losses, net
|
|
|
(2,244
|
)
|
|
|
(3,381
|
)
|
|
|
(891
|
)
|
|
|
(854
|
)
|
|
|
1,137
|
|
|
|
34
|
|
|
|
(37
|
)
|
|
|
(4
|
)
|
Losses from partnership investments
|
|
|
(147
|
)
|
|
|
(197
|
)
|
|
|
(527
|
)
|
|
|
(579
|
)
|
|
|
50
|
|
|
|
25
|
|
|
|
52
|
|
|
|
9
|
|
Administrative expenses
|
|
|
(660
|
)
|
|
|
(761
|
)
|
|
|
(2,018
|
)
|
|
|
(2,249
|
)
|
|
|
101
|
|
|
|
13
|
|
|
|
231
|
|
|
|
10
|
|
Credit-related
expenses(3)
|
|
|
(1,200
|
)
|
|
|
(197
|
)
|
|
|
(2,039
|
)
|
|
|
(457
|
)
|
|
|
(1,003
|
)
|
|
|
(509
|
)
|
|
|
(1,582
|
)
|
|
|
(346
|
)
|
Other non-interest
expenses(4)
|
|
|
(87
|
)
|
|
|
(29
|
)
|
|
|
(242
|
)
|
|
|
(40
|
)
|
|
|
(58
|
)
|
|
|
(200
|
)
|
|
|
(202
|
)
|
|
|
(505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes and extraordinary
gains (losses)
|
|
|
(1,984
|
)
|
|
|
(1,272
|
)
|
|
|
1,044
|
|
|
|
3,824
|
|
|
|
(712
|
)
|
|
|
(56
|
)
|
|
|
(2,780
|
)
|
|
|
(73
|
)
|
Benefit (provision) for federal income taxes
|
|
|
582
|
|
|
|
639
|
|
|
|
468
|
|
|
|
(380
|
)
|
|
|
(57
|
)
|
|
|
(9
|
)
|
|
|
848
|
|
|
|
223
|
|
Extraordinary gains (losses), net of tax effect
|
|
|
3
|
|
|
|
4
|
|
|
|
(3
|
)
|
|
|
11
|
|
|
|
(1
|
)
|
|
|
(25
|
)
|
|
|
(14
|
)
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,399
|
)
|
|
$
|
(629
|
)
|
|
$
|
1,509
|
|
|
$
|
3,455
|
|
|
$
|
(770
|
)
|
|
|
(122
|
)%
|
|
$
|
(1,946
|
)
|
|
|
(56
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
(1.56
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
1.17
|
|
|
$
|
3.16
|
|
|
$
|
(0.77
|
)
|
|
|
(97
|
)%
|
|
$
|
(1.99
|
)
|
|
|
(63
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain prior period amounts that
previously were included as a component of Fee and other
income have been reclassified to Guaranty fee
income to conform to the current period presentation.
|
|
(2) |
|
We began separately reporting the
revenues from trust management fees in our condensed
consolidated statements of income effective January 1,
2007. We previously included these revenues, which totaled
approximately $148 million and approximately
$447 million for the three and nine months ended
September 30, 2006, respectively, as a component of
interest income.
|
|
(3) |
|
Consists of provision for credit
losses and foreclosed property expense.
|
|
(4) |
|
Consists of debt extinguishment
gains (losses), net, minority interest in earnings of
consolidated subsidiaries and other expenses.
|
Our business generates revenues from four principal sources: net
interest income, guaranty fee income, trust management income,
and fee and other income. Other significant factors affecting
our net income include changes in the fair value of our
derivatives, the timing and size of investment gains and losses,
equity investments, losses on certain guaranty contracts,
credit-related expenses and administrative expenses. We provide
a comparative discussion of the effect of our principal revenue
sources and other listed items on our
11
condensed consolidated results of operations for the three and
nine months ended September 30, 2007 and 2006 below. We
also discuss other significant items presented in our unaudited
condensed consolidated statements of income.
Net
Interest Income
Table 2 presents analyses of our net interest income and net
interest yield for the three and nine months ended
September 30, 2007 and 2006.
Table
2: Analysis of Net Interest Income and
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Rates
|
|
|
Average
|
|
|
Income/
|
|
|
Rates
|
|
|
|
Balance(1)
|
|
|
Expense
|
|
|
Earned/Paid
|
|
|
Balance(1)
|
|
|
Expense
|
|
|
Earned/Paid
|
|
|
|
(Dollars in millions)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(2)
|
|
$
|
397,349
|
|
|
$
|
5,572
|
|
|
|
5.61
|
%
|
|
$
|
376,792
|
|
|
$
|
5,209
|
|
|
|
5.53
|
%
|
Mortgage securities
|
|
|
330,872
|
|
|
|
4,579
|
|
|
|
5.54
|
|
|
|
355,024
|
|
|
|
4,912
|
|
|
|
5.53
|
|
Non-mortgage
securities(3)
|
|
|
72,075
|
|
|
|
999
|
|
|
|
5.43
|
|
|
|
59,464
|
|
|
|
812
|
|
|
|
5.34
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
17,994
|
|
|
|
246
|
|
|
|
5.35
|
|
|
|
15,551
|
|
|
|
214
|
|
|
|
5.38
|
|
Advances to lenders
|
|
|
8,561
|
|
|
|
76
|
|
|
|
3.45
|
|
|
|
4,368
|
|
|
|
38
|
|
|
|
3.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
826,851
|
|
|
$
|
11,472
|
|
|
|
5.54
|
%
|
|
$
|
811,199
|
|
|
$
|
11,185
|
|
|
|
5.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
166,832
|
|
|
$
|
2,400
|
|
|
|
5.63
|
%
|
|
$
|
163,903
|
|
|
$
|
2,121
|
|
|
|
5.07
|
%
|
Long-term debt
|
|
|
613,801
|
|
|
|
8,013
|
|
|
|
5.22
|
|
|
|
613,374
|
|
|
|
7,533
|
|
|
|
4.91
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
161
|
|
|
|
1
|
|
|
|
4.46
|
|
|
|
181
|
|
|
|
3
|
|
|
|
4.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
780,794
|
|
|
$
|
10,414
|
|
|
|
5.31
|
%
|
|
$
|
777,458
|
|
|
$
|
9,657
|
|
|
|
4.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of net non-interest bearing funding
|
|
$
|
46,057
|
|
|
|
|
|
|
|
0.29
|
%
|
|
$
|
33,741
|
|
|
|
|
|
|
|
0.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest
yield(4)
|
|
|
|
|
|
$
|
1,058
|
|
|
|
0.52
|
%
|
|
|
|
|
|
$
|
1,528
|
|
|
|
0.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Rates
|
|
|
Average
|
|
|
Income/
|
|
|
Rates
|
|
|
|
Balance(1)
|
|
|
Expense
|
|
|
Earned/Paid
|
|
|
Balance(1)
|
|
|
Expense
|
|
|
Earned/Paid
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(2)
|
|
$
|
391,318
|
|
|
$
|
16,582
|
|
|
|
5.65
|
%
|
|
$
|
372,798
|
|
|
$
|
15,495
|
|
|
|
5.54
|
%
|
Mortgage securities
|
|
|
329,126
|
|
|
|
13,606
|
|
|
|
5.51
|
|
|
|
360,115
|
|
|
|
14,599
|
|
|
|
5.41
|
|
Non-mortgage
securities(3)
|
|
|
67,595
|
|
|
|
2,763
|
|
|
|
5.39
|
|
|
|
52,531
|
|
|
|
1,983
|
|
|
|
4.98
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
15,654
|
|
|
|
633
|
|
|
|
5.33
|
|
|
|
13,294
|
|
|
|
504
|
|
|
|
5.00
|
|
Advances to lenders
|
|
|
6,097
|
|
|
|
160
|
|
|
|
3.45
|
|
|
|
4,063
|
|
|
|
103
|
|
|
|
3.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
809,790
|
|
|
$
|
33,744
|
|
|
|
5.55
|
%
|
|
$
|
802,801
|
|
|
$
|
32,684
|
|
|
|
5.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
163,062
|
|
|
$
|
6,806
|
|
|
|
5.50
|
%
|
|
$
|
163,647
|
|
|
$
|
5,671
|
|
|
|
4.57
|
%
|
Long-term debt
|
|
|
609,018
|
|
|
|
23,488
|
|
|
|
5.14
|
|
|
|
607,106
|
|
|
|
21,596
|
|
|
|
4.74
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
136
|
|
|
|
5
|
|
|
|
4.91
|
|
|
|
265
|
|
|
|
10
|
|
|
|
4.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
772,216
|
|
|
$
|
30,299
|
|
|
|
5.22
|
%
|
|
$
|
771,018
|
|
|
$
|
27,277
|
|
|
|
4.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of net non-interest bearing funding
|
|
$
|
37,574
|
|
|
|
|
|
|
|
0.24
|
%
|
|
$
|
31,783
|
|
|
|
|
|
|
|
0.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest
yield(4)
|
|
|
|
|
|
$
|
3,445
|
|
|
|
0.57
|
%
|
|
|
|
|
|
$
|
5,407
|
|
|
|
0.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The average balances for mortgage
loans, advances to lenders and short- and long-term debt have
been calculated based on the average of the amortized cost
amount as of the beginning of each period and the amortized cost
amount as of the end of each month within the respective period.
This method was also used to calculate the average balance for
mortgage securities for the three and nine months ended
September 30, 2006. The average balances for all other
categories and periods have been calculated based on a daily
average.
|
|
(2) |
|
Includes nonaccrual loans with an
average balance totaling $6.2 billion and $6.1 billion
for the three months ended September 30, 2007 and 2006,
respectively, and $6.0 billion and $7.0 billion for
the nine months ended September 30, 2007 and 2006,
respectively.
|
|
(3) |
|
Includes cash equivalents.
|
|
(4) |
|
We calculate our net interest yield
by dividing our annualized net interest income for the period by
the average balance of our total interest-earning assets during
the period.
|
Table 3 presents the total variance, or change, in our net
interest income between the three months ended
September 30, 2007 and 2006, and the nine months ended
September 30, 2007 and 2006, and the extent to which that
variance is attributable to (1) changes in the volume of
our interest-earning assets and interest-bearing liabilities or
(2) changes in the interest rates of these assets and
liabilities.
13
Table 3: Rate/Volume
Analysis of Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2007 vs.
2006
|
|
|
For the Nine Months Ended September 30, 2007 vs. 2006
|
|
|
|
Total
|
|
|
Variance Due
to:(1)
|
|
|
Total
|
|
|
Variance Due
to:(1)
|
|
|
|
Variance
|
|
|
Volume
|
|
|
Rate
|
|
|
Variance
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(Dollars in millions)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
363
|
|
|
$
|
288
|
|
|
$
|
75
|
|
|
$
|
1,087
|
|
|
$
|
781
|
|
|
$
|
306
|
|
Mortgage securities
|
|
|
(333
|
)
|
|
|
(334
|
)
|
|
|
1
|
|
|
|
(993
|
)
|
|
|
(1,277
|
)
|
|
|
284
|
|
Non-mortgage
securities(2)
|
|
|
187
|
|
|
|
175
|
|
|
|
12
|
|
|
|
780
|
|
|
|
605
|
|
|
|
175
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
32
|
|
|
|
33
|
|
|
|
(1
|
)
|
|
|
129
|
|
|
|
94
|
|
|
|
35
|
|
Advances to lenders
|
|
|
38
|
|
|
|
37
|
|
|
|
1
|
|
|
|
57
|
|
|
|
54
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
287
|
|
|
|
199
|
|
|
|
88
|
|
|
|
1,060
|
|
|
|
257
|
|
|
|
803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
279
|
|
|
|
39
|
|
|
|
240
|
|
|
|
1,135
|
|
|
|
(20
|
)
|
|
|
1,155
|
|
Long-term debt
|
|
|
480
|
|
|
|
5
|
|
|
|
475
|
|
|
|
1,892
|
|
|
|
68
|
|
|
|
1,824
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
757
|
|
|
|
43
|
|
|
|
714
|
|
|
|
3,022
|
|
|
|
43
|
|
|
|
2,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(470
|
)
|
|
$
|
156
|
|
|
$
|
(626
|
)
|
|
$
|
(1,962
|
)
|
|
$
|
214
|
|
|
$
|
(2,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Combined rate/volume variances are
allocated to both rate and volume based on the relative size of
each variance.
|
|
(2) |
|
Includes cash equivalents.
|
Net interest income of $1.1 billion for the third quarter
of 2007 decreased by 31% from the third quarter of 2006, driven
by a 32% (25 basis points) decline in our net interest
yield to 0.52%. The overall increase of 37 basis points in
the average cost of our debt, to 5.31%, more than offset a
4 basis points increase in the average yield on our
interest-earning assets, to 5.54%.
Net interest income of $3.4 billion for the first nine
months of 2007 decreased by 36% from the first nine months of
2006, driven by a 37% (33 basis points) decline in our net
interest yield to 0.57%. The overall increase of 51 basis
points in the average cost of our debt, to 5.22%, more than
offset a 13 basis points increase in the average yield on
our interest-earning assets, to 5.55%.
We continued to experience compression in our net interest yield
during the first nine months of 2007, largely attributable to
the increase in our short-term and long-term debt costs as we
continued to replace, at higher interest rates, maturing debt
that we had issued at lower interest rates during the past few
years. In addition, as discussed below, effective
January 1, 2007, we reclassified the fees we receive from
the interest earned on cash flows between the date of remittance
by servicers and the date of distribution to MBS
certificateholders, which we refer to as float income, from
Interest income to Trust management
income. The reclassification of these fees contributed to
the decrease in our net interest yield, resulting in a reduction
of approximately 7 and 8 basis points for the three and
nine months ended September 30, 2007, respectively.
As discussed below in Derivatives Fair Value Losses,
Net, we consider the net contractual interest accruals on
our interest rate swaps to be part of the cost of funding our
mortgage investments. These amounts, however, are reflected in
our condensed consolidated statements of income as a component
of Derivatives fair value losses, net. Although we
experienced an increase in the average cost of our debt for the
three and nine months ended September 30, 2007, we recorded
net contractual interest income on our interest rate swaps
totaling $95 million and $193 million for the three
and nine months ended September 30, 2007, respectively. In
comparison, we recorded net contractual interest income of
$82 million and net contractual interest expense of
$157 million for the three and nine months ended
September 30, 2006, respectively. The economic effect of
the interest accruals on our interest rate swaps, which is not
reflected in the comparative net interest yields
14
presented above, resulted in a reduction in our funding costs of
approximately 5 and 3 basis points for the three and nine
months ended September 30, 2007, respectively. The effect
of interest accruals on our interest rate swaps also resulted in
a reduction in our funding costs of approximately 4 basis
points for the three months ended September 30, 2006 and an
increase in our funding costs of approximately 2 basis
points for the nine months ended September 30, 2006.
Based on the current composition of our portfolio, our expected
investment activity for the remainder of the year and the
current interest rate environment, we expect our net interest
yield to remain relatively stable for the remainder of 2007.
Guaranty
Fee Income
Table 4 shows the components of our guaranty fee income, our
average effective guaranty fee rate, and Fannie Mae MBS activity
for the three and nine months ended September 30, 2007 and
2006.
Table 4: Guaranty
Fee Income and Average Effective Guaranty Fee
Rate(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Amount
|
|
|
Rate(2)
|
|
|
Amount
|
|
|
Rate(2)
|
|
|
Variance
|
|
|
|
(Dollars in millions)
|
|
|
Guaranty fee income/average effective guaranty fee rate,
excluding
buy-up
impairment
|
|
$
|
1,235
|
|
|
|
22.8
|
bp
|
|
$
|
1,092
|
|
|
|
22.6
|
bp
|
|
|
13
|
%
|
Buy-up
impairment
|
|
|
(3
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
(0.1
|
)
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income/average effective guaranty fee
rate(4)(5)
|
|
$
|
1,232
|
|
|
|
22.8
|
bp
|
|
$
|
1,084
|
|
|
|
22.5
|
bp
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding Fannie Mae MBS and other
guaranties(6)
|
|
$
|
2,163,173
|
|
|
|
|
|
|
$
|
1,929,303
|
|
|
|
|
|
|
|
12
|
%
|
Fannie Mae MBS
issues(7)
|
|
|
171,204
|
|
|
|
|
|
|
|
124,019
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Amount
|
|
|
Rate(2)
|
|
|
Amount
|
|
|
Rate(2)
|
|
|
Variance
|
|
|
|
(Dollars in millions)
|
|
|
Guaranty fee income/average effective guaranty fee rate,
excluding certain fair value adjustments and
buy-up
impairment
|
|
$
|
3,439
|
|
|
|
21.9
|
bp
|
|
$
|
2,978
|
|
|
|
21.0
|
bp
|
|
|
15
|
%
|
Net change in fair value of
buy-ups and
guaranty
assets(3)
|
|
|
19
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy-up
impairment
|
|
|
(8
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
(0.1
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income/average effective guaranty fee
rate(4)(5)
|
|
$
|
3,450
|
|
|
|
22.0
|
bp
|
|
$
|
2,968
|
|
|
|
20.9
|
bp
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding Fannie Mae MBS and other
guaranties(6)
|
|
$
|
2,090,322
|
|
|
|
|
|
|
$
|
1,893,843
|
|
|
|
|
|
|
|
10
|
%
|
Fannie Mae MBS
issues(7)
|
|
|
453,506
|
|
|
|
|
|
|
|
357,480
|
|
|
|
|
|
|
|
27
|
|
|
|
|
(1) |
|
Guaranty fee income consists of
contractual guaranty fees related to Fannie Mae MBS held in our
portfolio and held by third-party investors, adjusted for
(1) the amortization of upfront fees and impairment of
guaranty assets, net of a proportionate reduction in the related
guaranty obligation and deferred profit, and (2) impairment
of buy-ups.
The average effective guaranty fee rate reflects our average
contractual guaranty fee rate adjusted for the impact of
amortization of deferred amounts and
buy-up
impairment. Losses recognized at inception on certain guaranty
contracts are excluded from guaranty fee income and the average
effective guaranty fee rate, but as described in footnote 5
below, the subsequent recovery of these losses over the life of
the loans underlying the MBS issuances is reflected in our
guaranty fee income and average effective guaranty fee rate.
|
|
(2) |
|
Presented in annualized basis
points and calculated based on guaranty fee income components
divided by average outstanding Fannie Mae MBS and other
guaranties for each respective period.
|
|
(3) |
|
Consists of the effect of the net
change in fair value of
buy-ups and
guaranty assets from portfolio securitization transactions
subsequent to January 1, 2007. We include the net change in
fair value of
buy-ups and
guaranty assets
|
15
|
|
|
|
|
from portfolio securitization
transactions in guaranty fee income in our condensed
consolidated statements of income pursuant to our adoption of
Statement of Financial Accounting Standards (SFAS)
No. 155, Accounting for Certain Hybrid Financial
Instruments, an amendment of SFAS 133 and
SFAS 140 (SFAS 155). We prospectively
adopted SFAS 155 effective January 1, 2007.
Accordingly, we did not record a fair value adjustment in
earnings during 2006.
|
|
(4) |
|
Certain prior period amounts that
previously were included as a component of Fee and other
income have been reclassified to Guaranty fee
income to conform to the current period presentation.
|
|
(5) |
|
Losses recognized at inception on
certain guaranty contracts are recorded as a component of our
guaranty obligation. We amortize a portion of our guaranty
obligation, which includes these losses, into income each period
in proportion to the reduction in the guaranty asset for
payments received. This amortization increases our guaranty fee
income and reduces the related guaranty obligation. The
amortization of the guaranty obligation associated with losses
recognized at inception on certain guaranty contracts totaled
$144 million and $60 million for the three months
ended September 30, 2007 and 2006, respectively, and
$327 million and $157 million for the nine months
ended September 30, 2007 and 2006, respectively.
|
|
(6) |
|
Other guaranties includes
$35.5 billion and $19.7 billion as of
September 30, 2007 and December 31, 2006,
respectively, and $21.7 billion and $19.2 billion as
of September 30, 2006 and December 31, 2005,
respectively, related to long-term standby commitments we have
issued and credit enhancements we have provided.
|
|
(7) |
|
Reflects unpaid principal balance
of Fannie Mae MBS issued and guaranteed by us, including
mortgage loans held in our portfolio that we securitized during
the period and Fannie Mae MBS issued during the period that we
acquired for our portfolio.
|
The 14% increase in guaranty fee income for the third quarter of
2007 from the third quarter of 2006 resulted from a 12% increase
in average outstanding Fannie Mae MBS and other guaranties, and
a 1% increase in the average effective guaranty fee rate to
22.8 basis points from 22.5 basis points.
The 16% increase in guaranty fee income for the first nine
months of 2007 from the first nine months of 2006 resulted from
a 10% increase in average outstanding Fannie Mae MBS and other
guaranties, and a 5% increase in the average effective guaranty
fee rate to 22.0 basis points from 20.9 basis points.
Growth in average outstanding Fannie Mae MBS and other
guaranties for the three and nine months ended
September 30, 2007 was attributable to an increase in
Fannie Mae MBS issuances and a slower liquidation rate on our
mortgage credit book of business. Although mortgage origination
volumes fell during the first nine months of 2007, our market
share of MBS issuances increased due to the shift in the product
mix of mortgage originations back to more traditional conforming
products, such as
30-year
fixed-rate loans, which represent our core product and
historically have accounted for the majority of our new business
volume, and reduced competition from private-label issuers of
mortgage-related securities.
The increase in our average effective guaranty fee rate, which
excludes the effect of losses recorded at inception on certain
guaranty contracts, was attributable to targeted pricing
increases on new business to reflect the higher risk premium
resulting from the overall market increase in mortgage credit
risk pricing, an increase in our acquisition of
Alt-A
mortgage loans, which generally have higher guaranty fee rates,
and an increase in the accretion of our guaranty obligation and
deferred profit into income.
Because of our increased market share, we expect our
single-family guaranty book of business to grow at a faster rate
than the rate of overall MDO growth in 2007, and our guaranty
fee income to continue to increase for the remainder of 2007.
Trust Management
Income
Trust management income totaled $146 million and
$460 million for the three and nine months ended
September 30, 2007, respectively. Trust management income
consists of the fees we earn as master servicer, issuer and
trustee for Fannie Mae MBS. We derive these fees from the
interest earned on cash flows between the date of remittance by
servicers and the date of distribution to MBS
certificateholders, which we refer to as float income. Prior to
November 2006, funds received from servicers were commingled
with our corporate assets. Because our compensation for these
roles could not be segregated, we included these amounts, which
totaled approximately $148 million and approximately
$447 million for the three and nine months ended
September 30, 2006, as a component of Interest
income in our condensed consolidated statements of income.
In November 2006, we made operational changes to segregate these
funds from our corporate assets.
16
Accordingly, we began separately reporting this compensation as
Trust management income in our condensed
consolidated statements of income effective January 1, 2007.
Fee and
Other Income
Fee and other income decreased to $76 million for the third
quarter of 2007, from $234 million for the third quarter of
2006. The $158 million decrease in fee and other income in
the third quarter of 2007 resulted from changes in foreign
currency exchange rates. We recorded a foreign currency exchange
loss of $133 million on our foreign-denominated debt in the
third quarter of 2007, due to the weakening of the
U.S. dollar against the Japanese yen during the third
quarter of 2007. In contrast, we recorded a foreign currency
exchange gain of $37 million in the third quarter of 2006.
Our foreign currency exchange gains (losses) are offset in part
by corresponding net losses (gains) on foreign currency swaps,
which are recognized in our condensed consolidated statements of
income as a component of Derivatives fair value losses,
net. We seek to eliminate our exposure to fluctuations in
foreign exchange rates by entering into foreign currency swaps
that effectively convert debt denominated in a foreign currency
to debt denominated in U.S. dollars.
Fee and other income decreased to $546 million for the
first nine months of 2007, from $567 million for the first
nine months of 2006. The $21 million decrease in fee and
other income for the first nine months of 2007 was due in part
to the recognition of a foreign currency exchange loss of
$188 million on our foreign-denominated debt for the first
nine months of 2007, compared with a foreign currency exchange
loss of $123 million for the first nine months of 2006. The
increase in foreign currency exchange losses was due to the
weakening of the U.S. dollar against the Japanese yen
during the first nine months of 2007. The decrease in fee and
other income was also due to a decrease in certain multifamily
fees related to consolidated loans, partially offset by
increased multifamily loan prepayment and yield maintenance fees.
Losses on
Certain Guaranty Contracts
Losses on certain guaranty contracts increased by
$191 million to $294 million for the third quarter of
2007, from $103 million for the third quarter of 2006.
Losses on certain guaranty contracts increased by
$857 million to $1.0 billion for the first nine months
of 2007, from $181 million for the first nine months of
2006.
We recognize an immediate loss in earnings on new guaranteed
Fannie Mae MBS issuances when our expectation of returns is
below what we believe a market participant would require for
that credit risk inclusive of a reasonable profit margin. We
expect, however, to recover the losses that we recognize at
inception on certain guaranty contracts in our consolidated
income statements over time in proportion to our receipt of
contractual guaranty fees on those guaranties and the decline in
the unpaid principal balance on the mortgage loans underlying
the MBS.
Following is an example to illustrate how losses recorded at
inception on certain guaranty contracts affect our earnings over
time. Assume that within one of our guaranty contracts, we have
an individual Fannie Mae MBS issuance for which the present
value of the guaranty fees we expect to receive over time based
on both a five-year contractual and expected life of the
fixed-rate loans underlying the MBS totals $100. Based on market
expectations, we estimate that a market participant would
require $120 to assume the risk associated with our guaranty of
the principal and interest due to investors in the MBS trust. To
simplify the accounting in our example, we assume that the
expected life of the underlying loans remains the same over the
five-year contractual period and the annual scheduled principal
and interest loan payments are equal over the five-year period.
Accounting
Upon Initial Issuance of
MBS:
|
|
|
|
|
We record a guaranty asset of $100, which represents the present
value of the guaranty fees we expect to receive over time.
|
|
|
|
We record a guaranty obligation of $120, which represents the
estimated amount that a market participant would require to
assume this obligation.
|
17
|
|
|
|
|
We record the difference of $20, or the amount by which the
guaranty obligation exceeds the guaranty asset, in our income
statement as losses on certain guaranty contracts.
|
Accounting
in Each of Years 1 to
5:
|
|
|
|
|
We collect $20 in guaranty fees per year, which represents
one-fifth of the outstanding receivable amount, and record this
amount as a reduction in the guaranty asset.
|
|
|
|
We reduce the guaranty obligation by a proportionate amount, or
one-fifth, and record this amount, which totals $24, in our
income statement as guaranty fee income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
Cumulative
|
|
|
|
0
|
|
|
1
|
|
|
2
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
Effect
|
|
|
Losses on certain guaranty contracts
|
|
$
|
(20
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(20
|
)
|
Guaranty fee income
|
|
|
|
|
|
|
24
|
|
|
|
24
|
|
|
|
24
|
|
|
|
24
|
|
|
|
24
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
$
|
(20
|
)
|
|
$
|
24
|
|
|
$
|
24
|
|
|
$
|
24
|
|
|
$
|
24
|
|
|
$
|
24
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As illustrated in the example, the $20 loss recognized at
inception of the guaranty contract will be accreted into
earnings over time as a component of guaranty fee income. For
additional information on our accounting for guaranty
transactions, which is more complex than the example presented,
refer to our 2006
Form 10-K
in Notes to Consolidated Financial
StatementsNote 1, Summary of Significant Accounting
Policies.
As credit conditions deteriorated during the first nine months
of 2007, the markets expectation of future credit risk
increased. This change in market conditions increased the
estimated risk premium or compensation that a market participant
would require to assume our guaranty obligations. As a result,
the estimated fair value of our guaranty obligations related to
MBS issuances increased, contributing to a higher level of
losses at inception on certain of our MBS issuances. Our losses
on certain guaranty contracts also were affected by the
following during the first nine months of 2007:
|
|
|
|
|
Lender Flow Transaction Contracts: We enter
into flow transaction contracts that establish our base guaranty
fee pricing with a lender for a specified period of time.
Because pricing is fixed for a period of time, these contracts
may limit our ability to immediately adjust our base guaranty
fee pricing to reflect changes in market conditions. As the
market risk premium increased during the first nine months of
2007, we experienced an increase in the losses related to some
of these contracts because we had established our base guaranty
fee pricing for a specified time period and could not increase
our prices to reflect the increased market risk. To address this
in part, we have expanded our use of standard risk-based price
adjustments that apply to all deliveries of loans with certain
risk characteristics.
|
|
|
|
Affordability Mission Housing
Goals: Our efforts to increase the amount of
mortgage financing that we make available to target populations
and geographic areas to support our housing goals contributed to
an increase in losses on certain guaranty contracts for the
first nine months of 2007, due to the higher credit risk premium
associated with these MBS issuances. In addition, certain
contracts that support our affordability mission are priced at a
discounted rate.
|
|
|
|
Contract-Level Pricing: We negotiate guaranty
contracts with our customers based upon the overall economics of
the transaction; however, the accounting for our
guaranty-related assets and liabilities is not determined at the
contract level for the substantial majority of our guaranty
transactions. Instead, it is determined separately for each
individual MBS issuance within a contract. Although we determine
losses at an individual MBS issuance level, we largely price our
guaranty business on an overall contract basis and establish a
single price for all loans included in the contract.
Accordingly, a single guaranty transaction may result in some
loan pools for which we recognize a loss immediately in earnings
and other loan pools for which we record deferred profits that
are recognized as a component of guaranty fee income over the
life of the loans underlying the MBS issuance.
|
We expect that the vast majority of our MBS guaranty
transactions will generate positive economic returns over the
lives of the related MBS because we expect our guaranty fees to
exceed our incurred credit losses based on our experience.
Losses on certain guaranty contracts do not reflect our estimate
of incurred credit
18
losses in our mortgage credit book of business. Instead, these
losses are recognized as charges against our allowance for loan
losses or reserve for guaranty losses, and are reflected in our
credit losses. Our combined allowance for loan losses and
reserve for guaranty losses reflects our estimate of the
probable credit losses inherent in our mortgage credit book of
business. See Credit-Related Expenses for a
discussion of our current year provision for credit losses.
We have increased guaranty pricing for some of our loan products
during 2007. Additionally, we have made targeted eligibility
changes during 2007 to enhance the risk profile characteristics
of mortgage loans that we guarantee. We previously disclosed
that we expected losses on certain guaranty contracts to more
than double in 2007 from the $439 million recorded in 2006.
Based on the losses reported for the first nine months of 2007,
we expect our losses on certain guaranty contracts for the full
year 2007 to be significantly higher than previously estimated.
Investment
Gains (Losses), Net
Table 5 summarizes the components of investment gains (losses),
net for the three and nine months ended September 30, 2007
and 2006.
Table
5: Investment Gains (Losses), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Other-than-temporary impairment on investment
securities(1)
|
|
$
|
(81
|
)
|
|
$
|
(6
|
)
|
|
$
|
(84
|
)
|
|
$
|
(852
|
)
|
Lower-of-cost-or-market adjustments on held-for-sale loans
|
|
|
3
|
|
|
|
47
|
|
|
|
(115
|
)
|
|
|
(45
|
)
|
Gains (losses) on Fannie Mae portfolio securitizations, net
|
|
|
(65
|
)
|
|
|
45
|
|
|
|
(27
|
)
|
|
|
74
|
|
Gains on sale of investment securities, net
|
|
|
99
|
|
|
|
115
|
|
|
|
414
|
|
|
|
125
|
|
Unrealized gains (losses) on trading securities, net
|
|
|
249
|
|
|
|
364
|
|
|
|
(180
|
)
|
|
|
(25
|
)
|
Other investment losses, net
|
|
|
(69
|
)
|
|
|
(15
|
)
|
|
|
(110
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains (losses), net
|
|
$
|
136
|
|
|
$
|
550
|
|
|
$
|
(102
|
)
|
|
$
|
(758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes other-than-temporary
impairment on guaranty assets and
buy-ups as
these amounts are recognized as a component of guaranty fee
income.
|
The $414 million decrease in investment gains for the third
quarter of 2007 from the third quarter of 2006 was primarily
attributable to the combined effect of the following:
|
|
|
|
|
A decrease of $115 million in unrealized gains on trading
securities. We recorded $249 million in unrealized gains on
trading securities during the third quarter of 2007, primarily
due to a decline in interest rates during the quarter, which
increased the fair value of our trading securities. This
increase was partially offset by a decline in the fair value of
private-label mortgage-related securities backed by subprime and
Alt-A loans due to a widening of credit spreads on these
securities during the quarter. In contrast, we recorded $364
million in unrealized gains on trading securities during the
third quarter of 2006, due to a decline in interest rates during
the quarter.
|
|
|
|
A net loss of $65 million for the third quarter of 2007 on
Fannie Mae portfolio securitizations, compared with a net gain
of $45 million for the third quarter of 2006. We
securitized some subprime mortgage assets that were in a loss
position during the third quarter of 2007. Cash proceeds related
to portfolio securitizations accounted for as sales totaled
$9.2 billion and $5.7 billion for the third quarter of
2007 and 2006, respectively.
|
|
|
|
An increase of $75 million in other-than-temporary
impairment on investment securities. We recognized
other-than-temporary impairment of $81 million for the
third quarter of 2007, due to credit ratings downgrades and
other credit-related events relating to certain non-mortgage
investments that we had designated as available for sale, which
caused the fair value of these securities to decline below their
|
19
|
|
|
|
|
carrying value, and a deterioration in the credit quality of
some of our mortgage revenue bond investments. In contrast, we
recognized other-than-temporary impairment of $6 million
for the third quarter of 2006.
|
The $656 million decrease in investment losses for the
first nine months of 2007 from the first nine months of 2006 was
primarily attributable to the combined effect of the following:
|
|
|
|
|
A decrease of $768 million in other-than-temporary
impairment on investment securities. We recognized
other-than-temporary impairment of $84 million for the
first nine months of 2007, largely due to the impairments
recorded during the third quarter of 2007. In contrast, we
recognized other-than-temporary impairment of $852 million
for the first nine months of 2006 due to a general increase in
interest rates during the period, which caused the fair value of
certain securities that we designated for sale to decline below
the carrying value of those securities. We expect
other-than-temporary impairment on investment securities for the
full year 2007 to be significantly lower than the amount
recorded in 2006.
|
|
|
|
An increase of $289 million in gains on sale of investment
securities, net. We recorded net gains of $414 million and
$125 million for the first nine months of 2007 and 2006,
respectively, related to the sale of securities totaling
$45.3 billion and $46.3 billion, respectively. The
investment gains recorded during the first nine months of 2007
were attributable to the recovery in value of securities we sold
that we had previously written down due to other-than-temporary
impairment.
|
|
|
|
An increase of $155 million in unrealized losses on trading
securities. As described in Consolidated Balance Sheet
AnalysisTrading Securities, we increased our
portfolio of trading securities during the first nine months of
2007 to approximately $48.7 billion as of
September 30, 2007, from $11.5 billion as of
December 31, 2006. We recorded unrealized losses of $180
million on our trading securities for the first nine months of
2007, reflecting the combined effect of an increase in our
portfolio of mortgage-related securities classified as trading
and a decrease in the fair value of these securities due to the
significant widening of credit spreads during the period.
|
While changes in the fair value of our trading securities
generally move inversely to changes in the fair value of our
derivatives, we recorded losses on both our trading securities
and derivatives for the first nine months of the year, due to
the effect on our trading securities of the significant widening
of credit spreads. Because the fair value of our trading
securities is affected by market fluctuations that cannot be
predicted, we cannot estimate the impact of changes in the fair
value of our trading securities for the full year. We provide
information on the sensitivity of changes in the fair value of
trading securities to changes in interest rates in Risk
ManagementInterest Rate Risk Management and Other Market
RisksMeasuring Interest Rate Risk.
20
Derivatives
Fair Value Losses, Net
Table 6 presents, by type of derivative instrument, the fair
value gains and losses on our derivatives for the three and nine
months ended September 30, 2007 and 2006. Table 6 also
includes an analysis of the components of derivatives fair value
gains and losses attributable to net contractual interest income
(expense) on our interest rate swaps, the net change in the fair
value of terminated derivative contracts through the date of
termination and the net change in the fair value of outstanding
derivative contracts. The five-year interest rate swap rate,
which is shown below in Table 6, is a key reference interest
rate affecting the estimated fair value of our derivatives.
Table
6: Derivatives Fair Value Losses, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Risk management derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
$
|
(7,500
|
)
|
|
$
|
(7,198
|
)
|
|
$
|
(1,780
|
)
|
|
$
|
1,852
|
|
Receive-fixed
|
|
|
3,834
|
|
|
|
3,329
|
|
|
|
956
|
|
|
|
(11
|
)
|
Basis
|
|
|
90
|
|
|
|
38
|
|
|
|
(35
|
)
|
|
|
25
|
|
Foreign
currency(1)
|
|
|
140
|
|
|
|
(65
|
)
|
|
|
97
|
|
|
|
32
|
|
Swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
|
(237
|
)
|
|
|
(822
|
)
|
|
|
32
|
|
|
|
(925
|
)
|
Receive-fixed
|
|
|
1,460
|
|
|
|
1,405
|
|
|
|
(199
|
)
|
|
|
(1,951
|
)
|
Interest rate caps
|
|
|
(3
|
)
|
|
|
(33
|
)
|
|
|
5
|
|
|
|
92
|
|
Other(2)
|
|
|
3
|
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk management derivatives fair value losses, net
|
|
|
(2,213
|
)
|
|
|
(3,344
|
)
|
|
|
(920
|
)
|
|
|
(882
|
)
|
Mortgage commitment derivatives fair value gains (losses), net
|
|
|
(31
|
)
|
|
|
(37
|
)
|
|
|
29
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives fair value losses, net
|
|
$
|
(2,244
|
)
|
|
$
|
(3,381
|
)
|
|
$
|
(891
|
)
|
|
$
|
(854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk management derivatives fair value gains (losses)
attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net contractual interest income (expense) on interest rate swaps
|
|
$
|
95
|
|
|
$
|
82
|
|
|
$
|
193
|
|
|
$
|
(157
|
)
|
Net change in fair value of terminated derivative contracts from
end of prior period to date of termination
|
|
|
(50
|
)
|
|
|
(110
|
)
|
|
|
(187
|
)
|
|
|
(154
|
)
|
Net change in fair value of outstanding derivative contracts,
including derivative contracts entered into during the period
|
|
|
(2,258
|
)
|
|
|
(3,316
|
)
|
|
|
(926
|
)
|
|
|
(571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk management derivatives fair value losses,
net(3)
|
|
$
|
(2,213
|
)
|
|
$
|
(3,344
|
)
|
|
$
|
(920
|
)
|
|
$
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
5-year swap
rate:
|
|
|
|
|
|
|
|
|
As of January 1
|
|
|
5.10
|
%
|
|
|
4.88
|
%
|
As of March 31
|
|
|
4.99
|
|
|
|
5.31
|
|
As of June 30
|
|
|
5.50
|
|
|
|
5.65
|
|
As of September 30
|
|
|
4.87
|
|
|
|
5.08
|
|
|
|
|
(1) |
|
Includes the effect of net
contractual interest expense of approximately $16 million
and $20 million for the three months ended
September 30, 2007 and 2006, respectively, and
$50 million and $55 million for the nine months ended
September 30, 2007 and 2006, respectively. The change in
fair value of foreign currency swaps excluding this item
resulted in a net gain of $156 million and a net loss of
$45 million for the three months ended September 30,
2007 and 2006, respectively, and net gains of $147 million
and $87 million for the nine months ended
September 30, 2007 and 2006, respectively.
|
|
(2) |
|
Includes MBS options, forward
starting debt, swap credit enhancements and mortgage insurance
contracts.
|
|
(3) |
|
Reflects net derivatives fair value
gains (losses) recognized in the condensed consolidated
statements of income, excluding mortgage commitments.
|
21
As shown in Table 6 above, we recorded net contractual interest
income on interest rate swaps for the three and nine months
ended September 30, 2007. In comparison, we recorded net
contractual interest income for the three months ended
September 30, 2006 and net contractual interest expense for
the nine months ended September 30, 2006. Although these
amounts are included in the net derivatives fair value losses
recognized in our condensed consolidated statements of income,
we consider the interest accruals on our interest rate swaps to
be part of the cost of funding our mortgage investments.
We recorded derivatives fair value losses totaling
$2.2 billion and $3.4 billion for the third quarter of
2007 and 2006, respectively, due to fair value losses on our
interest rate swaps that were partially offset by fair value
gains on our option-based derivatives. The fair value losses on
our interest rate swaps were attributable to a decrease in swap
rates during each period, which resulted in fair value losses on
our pay-fixed swaps that exceeded the fair value gains on our
receive-fixed swaps. We experienced fair value gains on our
option-based derivatives in each period due to an increase in
fair value resulting from an increase in implied volatility that
more than offset a decrease in fair value resulting from the
combined effect of the decrease in swap rates and the time decay
of these options. Time decay refers to the diminishing value of
an option over time as less time remains to exercise the option.
The less time left on an option, the greater the effects of time
decay.
We recorded derivatives fair value losses totaling
$891 million and $854 million for the first nine
months of 2007 and 2006, respectively. The derivatives fair
value losses recorded in the third quarter of 2007 and 2006 more
than offset the cumulative derivatives fair value gains recorded
for the first six months of each year.
Because the fair value of our derivatives is affected by market
fluctuations that cannot be predicted, we cannot estimate the
impact of changes in the fair value of our derivatives for the
remainder of 2007. We provide information on the sensitivity of
changes in the fair value of our derivatives to changes in
interest rates in Risk ManagementInterest Rate Risk
Management and Other Market RisksMeasuring Interest Rate
Risk.
Losses
from Partnership Investments
Losses from partnership investments decreased to
$147 million for the third quarter of 2007, from
$197 million for the third quarter of 2006. The decrease in
losses for the third quarter of 2007 was attributable to the
recognition of a gain on the sale of investments in federal
low-income housing tax credit (LIHTC) partnerships
in July 2007, as well as a lower LIHTC portfolio balance
compared to the third quarter of 2006, which resulted in fewer
net operating losses. LIHTC partnerships generate tax credits
and incur operational losses for which we obtain tax benefits
through tax deductions. See Benefit (Provision) for
Federal Income Taxes for further discussion of LIHTC tax
benefits.
Losses from partnership investments decreased to
$527 million for the first nine months of 2007, from
$579 million for the first nine months of 2006. The
decrease in losses for the first nine months of 2007 was due to
the recognition of gains on sales of investments in LIHTC
partnerships in March 2007 and July 2007, which was partially
offset by an increase in losses from our continuing investments
in LIHTC partnerships.
Administrative
Expenses
Table 7 details the components of our administrative expenses,
which include ongoing operating costs, as well as costs
associated with our efforts to return to timely financial
reporting.
22
Table
7: Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Variance
|
|
|
2007
|
|
|
2006
|
|
|
Variance
|
|
|
|
(Dollars in millions)
|
|
|
Ongoing operating
costs(1)
|
|
$
|
528
|
|
|
$
|
509
|
|
|
|
4
|
%
|
|
$
|
1,563
|
|
|
$
|
1,424
|
|
|
|
10
|
%
|
Restatement and related regulatory
expenses(2)
|
|
|
132
|
|
|
|
252
|
|
|
|
(48
|
)
|
|
|
455
|
|
|
|
825
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
$
|
660
|
|
|
$
|
761
|
|
|
|
(13
|
)%
|
|
$
|
2,018
|
|
|
$
|
2,249
|
|
|
|
(10
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes costs associated with our
efforts to return to timely financial reporting and also
excludes various costs that we do not expect to incur on a
regular basis.
|
|
(2) |
|
Includes costs of restatement and
related regulatory examinations, investigations and litigation,
and costs associated with our efforts to return to timely
financial reporting.
|
The decreases in administrative expenses for the third quarter
of 2007 from the third quarter of 2006, and for the first nine
months of 2007 from the first nine months of 2006, were due to a
significant reduction in restatement and related regulatory
expenses. This reduction was partially offset by an increase in
our ongoing operating costs, resulting from costs associated
with an early retirement program and various involuntary
severance initiatives implemented in 2007, as well as costs
associated with the significant investment we have made to
remediate material weaknesses in our internal control over
financial reporting by enhancing our organizational structure
and systems. Due to these costs, we expect our ongoing operating
costs for 2007 to exceed those for 2006.
As we have previously disclosed, we undertook a thorough review
of our costs beginning in January 2007 as part of a broad
reengineering initiative to increase productivity and lower
administrative costs. As a result of this effort, we expect to
reduce our total administrative expenses by more than
$200 million in 2007 as compared with 2006, primarily
through a reduction in employee and contract resources. We
estimate that our 2007 productivity and cost reduction
reengineering initiative will reduce our ongoing operating costs
to approximately $2 billion in 2008.
Credit-Related
Expenses
Our credit-related expenses consist of our provision for credit
losses and our foreclosed property expense. Our credit-related
expenses increased to $1.2 billion for the third quarter of
2007, from $197 million for the third quarter of 2006.
Credit-related expenses increased to $2.0 billion for the
first nine months of 2007, from $457 million for the first
nine months of 2006. Following is a discussion of changes in the
components of our credit-related expenses for each comparable
period.
The provision for credit losses increased by $942 million,
or 650%, to $1.1 billion for the third quarter of 2007,
from $145 million for the third quarter of 2006. The
provision for credit losses increased by $1.4 billion, or
381%, to $1.8 billion for the first nine months of 2007,
from $368 million for the first nine months of 2006.
Approximately $670 million and $805 million of the
provision for credit losses for the three and nine months ended
September 30, 2007, respectively, relates to charge-offs
recorded when we purchase delinquent loans from MBS trusts and
the purchase price, which is equal to the par amount, exceeds
the fair value at the purchase date. These charges totaled
$37 million and $153 million for the three and nine
months ended September 30, 2006, respectively. Accordingly,
$633 million and $652 million of the increase in the
provision for credit losses for the three and nine months ended
September 30, 2007, respectively, was attributable
primarily to a substantial decrease in the market value of
delinquent loans we purchased from MBS trusts. The decrease
began in July 2007 as housing and credit market conditions
deteriorated, causing increased credit spread requirements and
decreased liquidity for this type of asset.
Pursuant to our MBS trust agreement, we have the option to
purchase loans from the MBS trust, at par plus accrued interest,
after required payments have not been made in full for four
consecutive months. We record
23
these loans at their estimated fair value at the date of
purchase from the trust and recognize the difference between the
amount paid and the fair value as a component of charge-offs.
Based on our past experience, the majority of the loans we
purchase from MBS trusts cure or pay off; however, our cure rate
has declined in recent periods and may decline further. If a
loan pays off in full, we recover the loss previously recognized
as a component of net interest income. If a loan cures, meaning
that the borrower is no longer past due, we recover the loss
previously recorded as a component of net interest income over
the contractual life of the loan. If we foreclose upon a
mortgage loan purchased from an MBS trust, the charge-off
recognized at the date of foreclosure and the foreclosed
property expense would be reduced because of the loss we
previously recorded when we purchased the loan from the MBS
trust. In some cases, losses that we record when we purchase
loans from MBS trusts may result in our recording gains when we
dispose of the foreclosed properties.
We are required by our MBS trust agreement to purchase loans
from an MBS trust when specified predetermined triggers are met.
Accordingly, we would expect to continue to incur these charges
as part of our provision for credit losses in our consolidated
financial statements. We do not expect the market prices for
these delinquent loans to improve in the reasonably foreseeable
future.
The remaining increase in our provision for credit losses of
$309 million and $750 million for the three and nine
months ended September 30, 2007, respectively, is
attributable to an increase in net charge-offs and incremental
additions to the allowance for loan losses and reserve for
guaranty losses during each period. The increase in net
charge-offs in each period reflects higher default rates and an
increase in the average amount of loss per loan, or charge-off
severity, resulting from continued economic weakness in the
Midwest region and the national decline in home prices during
the first nine months of 2007. The higher default rates are, in
part, due to earlier than anticipated defaults on loans
originated in 2006 and 2007. The increase in charge-off severity
is attributable to the combined effect of the national decline
in home prices and the higher unpaid principal balances of loans
going to foreclosure.
Foreclosed property expense increased by $61 million, or
117%, to $113 million for the third quarter of 2007, from
$52 million for the third quarter of 2006. Foreclosed
property expense increased by $180 million, or 202%, to
$269 million for the first nine months of 2007, from
$89 million for the first nine months of 2006. These
increases were driven by an increase in the inventory of
foreclosed properties and rapidly declining sales prices on
foreclosed properties, particularly in the Midwest, which
accounted for the majority of the increase in our foreclosed
property expense in each period. The national decline in home
prices has contributed to further increases in foreclosure
activity.
Any amounts due from mortgage insurance companies on primary
mortgage insurance in excess of the amount of a loan charge-off
and all pool mortgage insurance are recognized as a reduction to
our credit losses when such amounts are collected from insurance
companies. As such, a significant amount of our current year
credit losses will result in a reduction in our credit losses in
subsequent periods as cash collections are received from
mortgage insurance companies, either as a recovery to our
allowance for loan losses or reserve for guaranty losses or as a
reduction of foreclosed property expense.
Home prices have declined in the first nine months of 2007, and
we expect they will continue to decline for the remainder of
2007 and in 2008. As a result, we expect significant increases
in our serious delinquency rates, foreclosure activity, credit
losses and credit-related expenses for 2007 compared with 2006,
and for 2008 compared with 2007. We provide additional detail on
our credit losses and factors affecting our allowance for loan
losses and reserve for guaranty losses in Risk
ManagementCredit Risk ManagementMortgage Credit Risk
Management.
Other
Non-Interest Expenses
We recorded other non-interest expenses of $87 million for
the third quarter of 2007, compared with $29 million for
the third quarter of 2006. We recorded other non-interest
expenses of $242 million and $40 million for the first
nine months of 2007 and 2006, respectively. The increase in
expenses for each period was predominately due to higher credit
enhancement expenses and a reduction in the amount of net gains
recognized on the extinguishment of debt.
24
Federal
Income Taxes
We recorded net tax benefit amounts for the third quarter of
2007 and 2006, which produced an effective tax rate of 29% and
50%, respectively. We recorded a net tax benefit for the first
nine months of 2007 that produced an effective tax rate of
(45)%, compared with a net tax provision and an effective tax
rate of 10% for the first nine months of 2006. The difference
between our federal statutory rate of 35% and our effective tax
rate is primarily due to the tax benefits we receive from our
investments in LIHTC partnerships and other equity investments
that help to support our affordable housing mission. In
calculating our interim provision for income taxes, we use an
estimate of our annual effective tax rate, which we update each
quarter based on actual historical information and
forward-looking estimates. The estimated annual effective tax
rate may fluctuate each period based upon changes in facts and
circumstances, if any, as compared to those forecasted at the
beginning of the year and each interim period thereafter. The
variance in our effective tax rate between periods is primarily
due to the combined effect of fluctuations in our actual pre-tax
income and our estimated annual taxable income, which affects
the relative tax benefit we expect to receive from tax-exempt
income and tax credits, and changes in the actual dollar amount
of these tax benefits.
Results of our three business segments are intended to reflect
each segment as if it were a stand-alone business. We describe
the management reporting and allocation process used to generate
our segment results in our 2006
Form 10-K
in Notes to Consolidated Financial
StatementsNote 15, Segment Reporting. We
summarize our segment results for the three and nine months
ended September 30, 2007 and 2006 in the tables below and
provide a discussion of these results. We include more detail on
our segment results in Notes to Condensed Consolidated
Financial StatementsNote 13, Segment Reporting.
Single-Family
Business
Our Single-Family business recorded a net loss of
$186 million for the third quarter of 2007, compared with
net income of $529 million for the third quarter of 2006.
Our Single-Family business recorded net income of
$305 million for the first nine months of 2007, a decrease
of $1.3 billion, or 81%, from net income of
$1.6 billion for the first nine months of 2006. Table 8
summarizes the financial results for our Single-Family business
for the periods indicated. The primary source of revenue for our
Single-Family business is guaranty fee income. Other sources of
revenue include trust management income and technology and other
fees. Expenses primarily include credit-related expenses, losses
on certain guaranty contracts and administrative expenses.
Table
8: Single-Family Business Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Quarterly
|
|
|
Year-to-Date
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Variance
|
|
|
Variance
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in millions)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income
|
|
$
|
1,424
|
|
|
$
|
1,242
|
|
|
$
|
4,015
|
|
|
$
|
3,406
|
|
|
$
|
182
|
|
|
|
15
|
%
|
|
$
|
609
|
|
|
|
18
|
%
|
Trust management
income(1)
|
|
|
138
|
|
|
|
|
|
|
|
433
|
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
433
|
|
|
|
|
|
Other
income(2)
|
|
|
125
|
|
|
|
345
|
|
|
|
476
|
|
|
|
1,030
|
|
|
|
(220
|
)
|
|
|
(64
|
)
|
|
|
(554
|
)
|
|
|
(54
|
)
|
Losses on certain guaranty contracts
|
|
|
(292
|
)
|
|
|
(101
|
)
|
|
|
(1,023
|
)
|
|
|
(175
|
)
|
|
|
(191
|
)
|
|
|
(189
|
)
|
|
|
(848
|
)
|
|
|
(485
|
)
|
Credit-related
expenses(3)
|
|
|
(1,195
|
)
|
|
|
(192
|
)
|
|
|
(2,040
|
)
|
|
|
(450
|
)
|
|
|
(1,003
|
)
|
|
|
(522
|
)
|
|
|
(1,590
|
)
|
|
|
(353
|
)
|
Other
expenses(4)
|
|
|
(484
|
)
|
|
|
(482
|
)
|
|
|
(1,397
|
)
|
|
|
(1,304
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
(93
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes
|
|
|
(284
|
)
|
|
|
812
|
|
|
|
464
|
|
|
|
2,507
|
|
|
|
(1,096
|
)
|
|
|
(135
|
)
|
|
|
(2,043
|
)
|
|
|
(81
|
)
|
Benefit (provision) for federal income taxes
|
|
|
98
|
|
|
|
(283
|
)
|
|
|
(159
|
)
|
|
|
(871
|
)
|
|
|
381
|
|
|
|
135
|
|
|
|
712
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(186
|
)
|
|
$
|
529
|
|
|
$
|
305
|
|
|
$
|
1,636
|
|
|
$
|
(715
|
)
|
|
|
(135
|
)%
|
|
$
|
(1,331
|
)
|
|
|
(81
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Quarterly
|
|
|
Year-to-Date
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Variance
|
|
|
Variance
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in millions)
|
|
|
Other Key Performance Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average single-family guaranty book of
business(5)
|
|
$
|
2,432,904
|
|
|
$
|
2,198,281
|
|
|
$
|
2,359,126
|
|
|
$
|
2,158,428
|
|
|
$
|
234,623
|
|
|
|
11
|
%
|
|
$
|
200,698
|
|
|
|
9
|
%
|
|
|
|
(1) |
|
Effective January 1, 2007, we
began separately reporting our float income as Trust
management income. Float income for 2006 is included in
Other income.
|
|
(2) |
|
Consists of net interest income,
investment gains and losses, and fee and other income.
|
|
(3) |
|
Consists of the provision for
credit losses and foreclosed property expense.
|
|
(4) |
|
Consists of administrative expenses
and other expenses.
|
|
(5) |
|
The single-family guaranty book of
business consists of single-family mortgage loans held in our
portfolio, single-family Fannie Mae MBS held in our portfolio,
single-family Fannie Mae MBS held by third parties, and other
single-family credit enhancements that we provide.
|
Key factors affecting the results of our Single-Family business
for the three and nine months ended September 30, 2007,
compared with the three and nine months ended September 30,
2006 included the following.
|
|
|
|
|
Increased guaranty fee income for both the three and nine months
ended September 30, 2007, attributable to an increase in
the average single-family guaranty book of business, coupled
with an increase in the average effective single-family guaranty
fee rate.
|
|
|
|
|
|
The growth in our average single-family guaranty book of
business was due to strong growth in single-family Fannie Mae
MBS issuances and a decrease in the liquidation rate of the
single-family guaranty book of business. Total single-family
Fannie Mae MBS outstanding increased to $2.1 trillion as of
September 30, 2007, from $1.9 trillion as of
December 31, 2006. Our estimated overall market share of
new single-family mortgage-related securities issuances
increased to approximately 41.2% for the third quarter of 2007,
from approximately 24.3% for the third quarter of 2006. Our
market share has increased in the first nine months of 2007, due
to the shift in the product mix of mortgage originations to more
traditional conforming fixed-rate loans and reduced competition
from private-label issuers of mortgage-related securities. These
market share estimates are based on publicly available data and
exclude previously securitized mortgages.
|
|
|
|
The growth in our average effective single-family guaranty fee
rate resulted from targeted pricing increases on new business
due to the increase in the market pricing of mortgage credit
risk, an increase in our acquisition of Alt-A mortgage loans,
which generally have higher guaranty fee rates, and an increase
in the accretion of our guaranty obligation and deferred profit
into income in the first nine months of 2007 as compared with
the same period in 2006.
|
|
|
|
|
|
Significantly higher losses on certain guaranty contracts for
both the three and nine months ended September 30, 2007,
due to the deterioration in home prices and overall housing
market conditions during the first nine months of 2007, which
led to an increase in mortgage credit risk pricing that resulted
in an increase in the estimated fair value of our guaranty
obligations. As a result, we recorded increased losses on
certain guaranty contracts, in conjunction with our MBS
issuances during the third quarter and first nine months of 2007.
|
|
|
|
A substantial increase in credit-related expenses for both the
three and nine months ended September 30, 2007, reflecting
an increase in both the provision for credit losses and
foreclosed property expense due to the continued impact of weak
economic conditions in the Midwest and the effect of the
national decline in home prices.
|
|
|
|
A net tax benefit for the third quarter of 2007, which produced
an effective tax rate of 35%, and a net tax provision and an
effective tax rate of 34% for the nine months ended
September 30, 2007. In comparison,
|
26
|
|
|
|
|
we recorded a net tax provision for the three and nine months
ended September 30, 2006 and an effective tax rate of 35%
for each period.
|
HCD
Business
Net income for our HCD business increased by $8 million, or
9%, to $97 million for the third quarter of 2007, from
$89 million for the third quarter of 2006. Net income for
our HCD business increased by $46 million, or 14%, to
$370 million for the first nine months of 2007, from
$324 million for the first nine months of 2006. Table 9
summarizes the financial results for our HCD business for the
periods indicated. The primary sources of revenue for our HCD
business are guaranty fee income and other income. Expenses
primarily include administrative expenses, credit-related
expenses and net operating losses associated with LIHTC
investments. The losses on our LIHTC investments are offset by
the tax benefits generated from these investments.
Table
9: HCD Business Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Quarterly
|
|
|
Year-to-Date
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Variance
|
|
|
Variance
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in millions)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee
income(1)
|
|
$
|
115
|
|
|
$
|
120
|
|
|
$
|
326
|
|
|
$
|
381
|
|
|
$
|
(5
|
)
|
|
|
(4
|
)%
|
|
$
|
(55
|
)
|
|
|
(14
|
)%
|
Other
income(1)(2)
|
|
|
78
|
|
|
|
50
|
|
|
|
278
|
|
|
|
156
|
|
|
|
28
|
|
|
|
56
|
|
|
|
122
|
|
|
|
78
|
|
Losses on partnership investments
|
|
|
(147
|
)
|
|
|
(197
|
)
|
|
|
(527
|
)
|
|
|
(579
|
)
|
|
|
50
|
|
|
|
25
|
|
|
|
52
|
|
|
|
9
|
|
Credit-related
expenses(3)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
1
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
114
|
|
Other
expenses(4)
|
|
|
(245
|
)
|
|
|
(239
|
)
|
|
|
(755
|
)
|
|
|
(672
|
)
|
|
|
(6
|
)
|
|
|
(3
|
)
|
|
|
(83
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes
|
|
|
(204
|
)
|
|
|
(271
|
)
|
|
|
(677
|
)
|
|
|
(721
|
)
|
|
|
67
|
|
|
|
25
|
|
|
|
44
|
|
|
|
6
|
|
Benefit for federal income taxes
|
|
|
301
|
|
|
|
360
|
|
|
|
1,047
|
|
|
|
1,045
|
|
|
|
(59
|
)
|
|
|
(16
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
97
|
|
|
$
|
89
|
|
|
$
|
370
|
|
|
$
|
324
|
|
|
$
|
8
|
|
|
|
9
|
%
|
|
$
|
46
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Key Performance Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average multifamily guaranty book of
business(5)
|
|
$
|
131,643
|
|
|
$
|
117,629
|
|
|
$
|
127,061
|
|
|
$
|
117,845
|
|
|
$
|
14,014
|
|
|
|
12
|
%
|
|
$
|
9,216
|
|
|
|
8
|
%
|
|
|
|
(1) |
|
Certain prior period amounts that
previously were included as a component of Fee and other
income have been reclassified to Guaranty fee
income to conform to the current period presentation.
|
|
(2) |
|
Consists of trust management income
and fee and other income.
|
|
(3) |
|
Consists of the (provision) benefit
for credit losses and foreclosed property income.
|
|
(4) |
|
Consists of net interest expense,
losses on certain guaranty contracts, administrative expenses,
minority interest in earnings of consolidated subsidiaries and
other expenses.
|
|
(5) |
|
The multifamily guaranty book of
business consists of multifamily mortgage loans held in our
portfolio, multifamily Fannie Mae MBS held in our portfolio,
multifamily Fannie Mae MBS held by third parties and other
multifamily credit enhancements that we provide.
|
Key factors affecting the results of our HCD business for the
three and nine months ended September 30, 2007, compared
with the three and nine months ended September 30, 2006
included the following.
|
|
|
|
|
Decreased guaranty fee income for both the three and nine months
ended September 30, 2007, resulting from a decline in the
average effective multifamily guaranty fee rate, which was
partially offset by an increase in the average multifamily
guaranty book of business. The decline in our average effective
multifamily guaranty fee rate for both the three and nine months
ended September 30, 2007 was due in part to the
amortization and recognition of deferred profits in 2006 related
to a large multifamily transaction that was terminated in
December 2006. In addition, our HCD business continued to
experience competitive fee pressure from private-label issuers
of commercial mortgage-backed securities during the first six
months of 2007. In the third quarter of 2007, this trend began
to reverse as a result of the growing need for credit and
liquidity in the multifamily mortgage market. These market
factors
|
27
|
|
|
|
|
contributed to a higher fee rate on new multifamily business and
to faster growth in our multifamily guaranty book of business
during the third quarter of 2007.
|
|
|
|
|
|
A decrease in losses on partnership investments for the third
quarter of 2007, due to the recognition of a gain on the sale of
investments in LIHTC partnerships in July 2007, as well as a
lower LIHTC portfolio balance compared to the third quarter of
2006, which resulted in fewer net operating losses. Losses on
partnership investments declined slightly for the first nine
months of 2007 as a result of the recognition of gains on sales
of investments in LIHTC partnerships in March 2007 and July
2007, which was partially offset by increased operating losses
on retained LIHTC partnerships.
|
|
|
|
An increase in other income for the first nine months of 2007,
due to an increase in loan prepayment and yield maintenance fees
resulting from higher liquidations in the first nine months of
2007 relative to the first nine months of 2006.
|
|
|
|
An increase in other expenses for the first nine months of 2007,
primarily resulting from higher net interest expense associated
with an increase in segment assets.
|
Capital
Markets Group
Our Capital Markets group recorded a net loss of
$1.3 billion for the third quarter of 2007, compared with a
net loss of $1.2 billion for the third quarter of 2006. Our
Capital Markets group recorded net income of $834 million
for the first nine months of 2007, a decrease of
$661 million, or 44%, from net income of $1.5 billion
for the first nine months of 2006. Table 10 summarizes the
financial results for our Capital Markets group for the periods
indicated. The primary sources of revenue for our Capital
Markets group are net interest income and fee and other income.
Expenses primarily consist of administrative expenses.
Derivatives fair value gains and losses, investment gains and
losses, and debt extinguishment gains and losses also have a
significant impact on the financial performance of our Capital
Markets group.
Table
10: Capital Markets Business Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Quarterly
|
|
|
Year-to-Date
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Variance
|
|
|
Variance
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
|
|
$
|
1,064
|
|
|
$
|
1,352
|
|
|
$
|
3,455
|
|
|
$
|
4,879
|
|
|
$
|
(288
|
)
|
|
|
(21
|
)%
|
|
$
|
(1,424
|
)
|
|
|
(29
|
)%
|
Investment gains (losses), net
|
|
|
183
|
|
|
|
529
|
|
|
|
(56
|
)
|
|
|
(831
|
)
|
|
|
(346
|
)
|
|
|
(65
|
)
|
|
|
775
|
|
|
|
93
|
|
Derivatives fair value losses, net
|
|
|
(2,244
|
)
|
|
|
(3,381
|
)
|
|
|
(891
|
)
|
|
|
(854
|
)
|
|
|
1,137
|
|
|
|
34
|
|
|
|
(37
|
)
|
|
|
(4
|
)
|
Fee and other income (expense)
|
|
|
(66
|
)
|
|
|
117
|
|
|
|
66
|
|
|
|
219
|
|
|
|
(183
|
)
|
|
|
(156
|
)
|
|
|
(153
|
)
|
|
|
(70
|
)
|
Other
expenses(1)
|
|
|
(433
|
)
|
|
|
(430
|
)
|
|
|
(1,317
|
)
|
|
|
(1,375
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
58
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes and extraordinary
gains (losses), net of tax effect
|
|
|
(1,496
|
)
|
|
|
(1,813
|
)
|
|
|
1,257
|
|
|
|
2,038
|
|
|
|
317
|
|
|
|
17
|
|
|
|
(781
|
)
|
|
|
(38
|
)
|
Benefit (provision) for federal income taxes
|
|
|
183
|
|
|
|
562
|
|
|
|
(420
|
)
|
|
|
(554
|
)
|
|
|
(379
|
)
|
|
|
(67
|
)
|
|
|
134
|
|
|
|
24
|
|
Extraordinary gains (losses), net of tax effect
|
|
|
3
|
|
|
|
4
|
|
|
|
(3
|
)
|
|
|
11
|
|
|
|
(1
|
)
|
|
|
(25
|
)
|
|
|
(14
|
)
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,310
|
)
|
|
$
|
(1,247
|
)
|
|
$
|
834
|
|
|
$
|
1,495
|
|
|
$
|
(63
|
)
|
|
|
(5
|
)%
|
|
$
|
(661
|
)
|
|
|
(44
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes debt extinguishment gains
(losses), guaranty fee expense, administrative expenses and
other expenses.
|
Key factors affecting the results of our Capital Markets group
for the three and nine months ended September 30, 2007,
compared with the three and nine months ended September 30,
2006 included the following.
|
|
|
|
|
A significant reduction in net interest income for both the
three and nine months ended September 30, 2007 due to
continued compression in our net interest yield, largely
attributable to the increase in our
|
28
|
|
|
|
|
short-term and long-term debt costs as we continued to replace,
at higher interest rates, maturing debt that we had issued at
lower interest rates during the past few years.
|
|
|
|
|
|
A reduction in investment gains for the three months ended
September 30, 2007, due to a decrease in unrealized gains
on trading securities, a net loss on Fannie Mae portfolio
securitizations and an increase in other-than-temporary
impairment on investment securities. In addition, a reduction in
investment losses for the nine months ended September 30,
2007, due to a lower level of other-than-temporary impairment on
investment securities and an increase in gains on the sale of
investment securities, which were partially offset by an
increase in unrealized losses on trading securities.
|
|
|
|
|
|
We recognized $81 million and $84 million in
other-than-temporary impairment on investment securities for the
three and nine months ended September 30, 2007. The
impairment recognized in the third quarter of 2007 was the
result of credit ratings downgrades and other credit-related
events relating to certain non-mortgage investments that we had
designated as available for sale, which caused the fair value of
these securities to decline below their carrying value, and a
deterioration in the credit quality of some of our mortgage
revenue bond investments. In contrast, we recognized
other-than-temporary impairment on investment securities
totaling $6 million and $852 million for the three and
nine months ended September 30, 2006, due to a decline in
fair value below carrying value of certain securities that we
designated for sale.
|
|
|
|
We experienced a decrease in gains on the sale of investment
securities for the three months ended September 30, 2007.
We experienced an increase in gains on the sale of investment
securities for the nine months ended September 30, 2007,
due to the recovery in value of securities we sold that we had
previously written down due to other-than-temporary impairment.
|
|
|
|
We recorded a decreased level of unrealized gains on trading
securities for the three months ended September 30, 2007,
and an increased level of unrealized losses on trading
securities for the nine months ended September 30, 2007,
reflecting the decrease in the fair value of these securities
due to wider mortgage-to-debt spreads.
|
|
|
|
|
|
Derivatives fair value losses of $2.2 billion and
$3.4 billion for the third quarter of 2007 and 2006,
respectively, which were largely attributable to fair value
losses on our interest rate swaps due to a decline in interest
rates during each period. The derivatives fair value losses
recorded in the third quarter of 2007 and 2006 more than offset
the cumulative derivatives fair value gains for the first six
months of each year.
|
|
|
|
A shift to fee and other expense for the three months ended
September 30, 2007, compared with fee and other income for
the three months ended September 30, 2006. We experienced a
decrease in fee and other income for the nine months ended
September 30, 2007, as compared with the nine months ended
September 30, 2006. The variance between each period was
attributable to an increase in foreign currency exchange losses
on our foreign-denominated debt and a decrease in the
recognition of certain multifamily fees.
|
|
|
|
A net tax benefit for the third quarter of 2007, which produced
an effective tax rate of 12%, and a net tax provision and
effective tax rate of 33% for the nine months ended
September 30, 2007. In comparison, we recorded a net tax
benefit for the third quarter of 2006, which produced an
effective tax rate of 31%, and a net tax provision and effective
tax rate of 27% for the nine months ended September 30,
2006. The variance in the effective tax rate and statutory rate
was primarily due to fluctuations in our pre-tax income and the
relative benefit of tax-exempt income generated from our
investments in mortgage revenue bonds.
|
CONSOLIDATED
BALANCE SHEET ANALYSIS
Our total assets of $839.8 billion as of September 30,
2007 decreased by $4.2 billion, or less than 1%, from
December 31, 2006. Our total liabilities of
$799.7 billion as of September 30, 2007 decreased by
$2.6 billion, or less than 1%, from December 31, 2006.
Stockholders equity of $39.9 billion as of
September 30, 2007 reflected a decrease of
$1.6 billion, or 4%, from December 31, 2006. Following
is a discussion of material changes since December 31, 2006
in the major components of our assets and liabilities.
29
Mortgage
Investments
Table 11 shows the composition of our mortgage portfolio by
product type and the carrying value, which reflects the net
impact of our purchases, sales and liquidations, of these
products as of September 30, 2007 and December 31,
2006.
Table
11: Mortgage Portfolio
Composition(1)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage
loans:(2)
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
Government insured or guaranteed
|
|
$
|
23,101
|
|
|
$
|
20,106
|
|
Conventional:
|
|
|
|
|
|
|
|
|
Long-term, fixed-rate
|
|
|
199,200
|
|
|
|
202,339
|
|
Intermediate-term,
fixed-rate(3)
|
|
|
48,358
|
|
|
|
53,438
|
|
Adjustable-rate
|
|
|
51,296
|
|
|
|
46,820
|
|
|
|
|
|
|
|
|
|
|
Total conventional single-family
|
|
|
298,854
|
|
|
|
302,597
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
321,955
|
|
|
|
322,703
|
|
|
|
|
|
|
|
|
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Government insured or guaranteed
|
|
|
859
|
|
|
|
968
|
|
Conventional:
|
|
|
|
|
|
|
|
|
Long-term, fixed-rate
|
|
|
5,272
|
|
|
|
5,098
|
|
Intermediate-term,
fixed-rate(3)
|
|
|
64,144
|
|
|
|
50,847
|
|
Adjustable-rate
|
|
|
7,190
|
|
|
|
3,429
|
|
|
|
|
|
|
|
|
|
|
Total conventional multifamily
|
|
|
76,606
|
|
|
|
59,374
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
77,465
|
|
|
|
60,342
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
399,420
|
|
|
|
383,045
|
|
|
|
|
|
|
|
|
|
|
Unamortized premiums and other cost basis adjustments, net
|
|
|
679
|
|
|
|
943
|
|
Lower of cost or market adjustments on loans held for sale
|
|
|
(101
|
)
|
|
|
(93
|
)
|
Allowance for loan losses for loans held for investment
|
|
|
(395
|
)
|
|
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage loans, net
|
|
|
399,603
|
|
|
|
383,555
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
|
102,506
|
|
|
|
124,383
|
|
Non-Fannie Mae single-class mortgage securities
|
|
|
28,015
|
|
|
|
27,980
|
|
Fannie Mae structured MBS
|
|
|
72,784
|
|
|
|
75,261
|
|
Non-Fannie Mae structured mortgage
securities(4)
|
|
|
106,217
|
|
|
|
97,399
|
|
Mortgage revenue bonds
|
|
|
16,156
|
|
|
|
16,924
|
|
Other mortgage-related securities
|
|
|
3,480
|
|
|
|
3,940
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
329,158
|
|
|
|
345,887
|
|
|
|
|
|
|
|
|
|
|
Market value
adjustments(5)
|
|
|
(3,385
|
)
|
|
|
(1,261
|
)
|
Other-than-temporary impairments
|
|
|
(619
|
)
|
|
|
(1,004
|
)
|
Unamortized premiums (discounts) and other cost basis
adjustments,
net(6)
|
|
|
(990
|
)
|
|
|
(1,083
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities, net
|
|
|
324,164
|
|
|
|
342,539
|
|
|
|
|
|
|
|
|
|
|
Mortgage portfolio,
net(7)
|
|
$
|
723,767
|
|
|
$
|
726,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Mortgage loans and mortgage-related
securities are reported at unpaid principal balance.
|
30
|
|
|
(2) |
|
Mortgage loans include unpaid
principal balance totaling $100.0 billion and
$105.5 billion as of September 30, 2007 and
December 31, 2006, respectively, related to
mortgage-related securities that were consolidated under
Financial Accounting Standards Board Interpretation
(FIN) No. 46R (revised December 2003),
Consolidation of Variable Interest Entities (an
interpretation of ARB No. 51)
(FIN 46R), and mortgage-related
securities created from securitization transactions that did not
meet the sales criteria under SFAS No. 140,
Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities (a replacement of FASB Statement
No. 125) (SFAS 140), which effectively
resulted in mortgage-related securities being accounted for as
loans.
|
|
(3) |
|
Intermediate-term, fixed-rate
consists of mortgage loans with contractual maturities at
purchase equal to or less than 15 years.
|
|
(4) |
|
As of September 30, 2007,
$76.2 billion of this amount consists of private-label
mortgage-related securities backed by subprime or Alt-A mortgage
loans. Refer to Risk ManagementCredit Risk
ManagementMortgage Credit Risk ManagementMortgage
Credit Book of Business for a description of our
investments in subprime and Alt-A securities.
|
|
(5) |
|
Includes unrealized gains and
losses on mortgage-related securities and securities commitments
classified as trading and available-for-sale.
|
|
(6) |
|
Includes the impact of
other-than-temporary impairments of cost basis adjustments.
|
|
(7) |
|
Includes consolidated
mortgage-related assets acquired through the assumption of debt.
Also includes $2.3 billion and $448 million as of
September 30, 2007 and December 31, 2006,
respectively, of mortgage loans and mortgage-related securities
that we have pledged as collateral and for which counterparties
have the right to sell or repledge.
|
Pursuant to a May 2006 consent order with the Office of Federal
Housing Enterprise Oversight (OFHEO), we are
currently subject to a limit on the size of our mortgage
portfolio. For the first two quarters of 2007, we were
restricted from increasing our net mortgage portfolio assets
above $727.75 billion. On September 19, 2007, OFHEO
issued an interpretation of the consent order revising the
existing portfolio cap. The mortgage portfolio cap is no longer
based on the amount of our net mortgage portfolio
assets, which reflects GAAP adjustments, but is now based
on our average monthly mortgage portfolio balance.
Our average monthly mortgage portfolio balance is based on the
unpaid principal balance of our mortgage portfolio as defined
and reported in our Monthly Summary, which is a statistical
measure rather than an amount computed in accordance with GAAP,
and excludes both consolidated mortgage-related assets acquired
through the assumption of debt and the impact on the unpaid
principal balances recorded on our purchases of delinquent loans
from MBS trusts pursuant to Statement of Position
No. 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
(SOP 03-3).
The mortgage portfolio cap was set at $735 billion for the
third quarter of 2007. For the fourth quarter of 2007, the
portfolio cap increased by 1% to $742.35 billion. For each
subsequent quarter, the portfolio cap increases by 0.5%, not to
exceed 2% per year. Except as described below, compliance with
the portfolio cap will be determined by comparing the applicable
portfolio cap to the cumulative average month-end portfolio
balances, measured by unpaid principal balance, since July 2007
(until the cumulative average becomes and remains a
12-month
moving average). For purposes of this calculation, OFHEOs
interpretation sets the July 2007 month-end balance at
$725 billion. In addition, any net increase in delinquent
loan balances in our portfolio after September 30, 2007
will be excluded from the month-end portfolio balance. Our
average monthly mortgage portfolio balance was
$725.9 billion as of September 30, 2007, which was
$9.1 billion below our applicable portfolio limit of
$735 billion. We will be subject to the OFHEO-directed
minimum capital requirement and portfolio cap until the Director
of OFHEO determines that these requirements should be modified
or allowed to expire, taking into account certain specified
factors.
31
Table 12 compares our mortgage portfolio activity for the three
and nine months ended September 30, 2007 and 2006.
Table
12: Mortgage Portfolio
Activity(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Variance
|
|
|
September 30,
|
|
|
Variance
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in millions)
|
|
|
Purchases
|
|
$
|
49,574
|
|
|
$
|
51,576
|
|
|
$
|
(2,002
|
)
|
|
|
(4
|
)%
|
|
$
|
134,407
|
|
|
$
|
150,340
|
|
|
$
|
(15,933
|
)
|
|
|
(11
|
)%
|
Sales
|
|
|
20,222
|
|
|
|
21,415
|
|
|
|
(1,193
|
)
|
|
|
(6
|
)
|
|
|
45,301
|
|
|
|
46,251
|
|
|
|
(950
|
)
|
|
|
(2
|
)
|
Liquidations
|
|
|
28,013
|
|
|
|
35,528
|
|
|
|
(7,515
|
)
|
|
|
(21
|
)
|
|
|
90,007
|
|
|
|
106,110
|
|
|
|
(16,103
|
)
|
|
|
(15
|
)
|
|
|
|
(1) |
|
The amounts provided represent the
unpaid principal balances. These unpaid principal balance
amounts, which represent statistical measures of business
activity, do not reflect certain GAAP adjustments, including
market valuation adjustments, allowance for loan losses,
impairments, unamortized premiums and discounts, and the impact
of consolidation of variable interest entities.
|
We selectively identify and purchase mortgage assets that meet
our targeted risk-adjusted return thresholds. We typically are a
more active purchaser when mortgage-to-debt spreads are wider
and the prices of mortgage assets are lower. We generally reduce
our purchases when mortgage-to-debt spreads are narrower and
prices are higher. Our level of portfolio purchases decreased
during the nine months ended September 30, 2007 as compared
with the same period in 2006, due to lower market volumes
resulting from the reduction in mortgage origination activity
and a more limited availability of mortgage assets that met our
risk-adjusted return thresholds for most of the period. Our
level of portfolio purchases for the third quarter of 2007 was
comparable with that of the third quarter of 2006. Beginning in
the third quarter of 2007, there was a significant widening of
mortgage-to-debt spreads due to the reduction in liquidity and
market estimates of slower prepayments. These market conditions
presented more opportunities for us to purchase mortgage assets
at attractive prices and spreads during the quarter. However,
our ability to capitalize on these opportunities was limited by
the OFHEO-directed minimum capital requirement and portfolio cap
imposed by our May 2006 consent order with OFHEO.
While our levels of portfolio sales for the first nine months of
2007 were comparable to the first nine months of 2006, we
experienced a decrease in sales activity during the third
quarter of 2007 due to the widening of mortgage-to-debt spreads.
The decrease in mortgage liquidations for the three and nine
months ended September 30, 2007 was largely attributable to
the decline in home prices, which reduced the level of
refinancing activity relative to the same periods in the prior
year.
We continue to manage the size of our mortgage portfolio to meet
the OFHEO-directed portfolio cap. In addition to the portfolio
cap, our investment activities may be constrained by our
regulatory capital requirements, certain operational
limitations, tax classifications and our intent to hold certain
temporarily impaired securities until recovery, as well as risk
parameters applied to the mortgage portfolio.
Liquid
Investments
Our liquid assets consist of non-mortgage investments, cash and
cash equivalents, and funding agreements with our lenders,
including advances to lenders and repurchase agreements. Our
non-mortgage investments, which account for the majority of our
liquid assets, primarily consist of high-quality securities that
are readily marketable or have short-term maturities, such as
commercial paper. Our liquid assets, net of cash equivalents
pledged as collateral, totaled approximately $62.6 billion
and $69.4 billion as of September 30, 2007 and
December 31, 2006, respectively. Our non-mortgage
investments, which are carried at fair value in our condensed
consolidated balance sheets, totaled $39.5 billion and
$47.6 billion as of September 30, 2007 and
December 31, 2006, respectively. We provide additional
detail on our non-mortgage investments in Notes to
Condensed Consolidated Financial StatementsNote 5,
Investments in Securities.
32
Trading
Securities
During 2007, we began designating an increasingly large portion
of the securities we purchase as trading securities. This change
in practice was principally driven by our adoption of Statement
of Financial Accounting Standards (SFAS)
No. 155, Accounting for Certain Hybrid Financial
Instruments, an amendment of SFAS 133 and
SFAS 140 (SFAS 155), which requires us
to evaluate securities for embedded derivatives unless they are
designated as trading securities. We increased our portfolio of
trading securities during the first nine months of 2007 to
approximately $48.7 billion as of September 30, 2007,
from $11.5 billion as of December 31, 2006.
Available-for-Sale
Securities
Although we report both our trading and available-for-sale
(AFS) securities at fair value in our condensed
consolidated balance sheets, changes in the fair value of our
trading securities are reported in our earnings while changes in
the fair value of our AFS securities are reported as a separate
component of stockholders equity in accumulated other
comprehensive income (AOCI). The estimated fair
value and amortized cost of our AFS securities totaled
$315.0 billion and $318.2 billion, respectively, as of
September 30, 2007, and gross unrealized gains and gross
unrealized losses recorded in AOCI related to these securities
totaled $1.8 billion and $5.0 billion, respectively.
In comparison, the estimated fair value and amortized cost of
our AFS securities totaled $378.6 billion and
$379.5 billion, respectively, as of December 31, 2006,
and gross unrealized gains and gross unrealized losses recorded
in AOCI totaled $2.8 billion and $3.7 billion,
respectively.
The fair value of our investment securities, which are primarily
mortgage-backed securities, are affected by changes in interest
rates, credit spreads and other market factors. We generally
view changes in the fair value of our investment securities
caused by movements in interest rates to be temporary, which is
consistent with our experience. While we experienced a
significant decrease in the fair value of our AFS securities at
the end of the third quarter of 2007, we believe that
substantially all of the decline in fair value was due to the
significant widening of credit spreads during the first nine
months of 2007. We have the intent and ability to hold these
securities until the earlier of recovery of the unrealized loss
amounts or maturity. Accordingly, we believe that it is probable
that we will collect the full principal and interest due in
accordance with the contractual terms of the securities,
although we may experience future declines in value as a result
of movements in interest rates.
Debt
Instruments
We issue debt instruments as the primary means to fund our
mortgage investments and manage our interest rate risk exposure.
Table 13 shows the amount of our outstanding short-term
borrowings and long-term debt as of September 30, 2007 and
December 31, 2006.
33
Table
13: Outstanding
Debt(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Outstanding
|
|
|
Rate
|
|
|
|
(Dollars in millions)
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
$
|
1,645
|
|
|
|
5.60
|
%
|
|
$
|
700
|
|
|
|
5.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
152,469
|
|
|
|
5.06
|
|
|
|
164,686
|
|
|
|
5.16
|
|
From consolidations
|
|
|
677
|
|
|
|
5.35
|
|
|
|
1,124
|
|
|
|
5.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
$
|
153,146
|
|
|
|
5.06
|
%
|
|
$
|
165,810
|
|
|
|
5.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior fixed-rate
|
|
$
|
575,346
|
|
|
|
5.20
|
%
|
|
$
|
576,099
|
|
|
|
4.98
|
%
|
Senior floating-rate
|
|
|
15,651
|
|
|
|
5.87
|
|
|
|
5,522
|
|
|
|
5.06
|
|
Subordinated fixed-rate
|
|
|
10,980
|
|
|
|
6.13
|
|
|
|
12,852
|
|
|
|
5.91
|
|
From consolidations
|
|
|
6,642
|
|
|
|
5.84
|
|
|
|
6,763
|
|
|
|
5.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term
debt(2)
|
|
$
|
608,619
|
|
|
|
5.25
|
%
|
|
$
|
601,236
|
|
|
|
5.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding debt amounts and
weighted average interest rate reported in this table include
the effect of unamortized discounts, premiums and other cost
basis adjustments. The unpaid principal balance of outstanding
debt, which excludes unamortized discounts, premiums and other
cost basis adjustments, totaled $770.2 billion as of
September 30, 2007, compared with $773.4 billion as of
December 31, 2006.
|
|
(2) |
|
Reported amounts include a net
premium and cost basis adjustments of $12.4 billion and
$11.9 billion as of September 30, 2007 and
December 31, 2006, respectively.
|
Despite our portfolio limit, we have been an active issuer of
both short- and long-term debt for refunding and rebalancing
purposes. We present our debt activity in Table 18 in
Liquidity and Capital ManagementLiquidityDebt
Funding.
Derivative
Instruments
We supplement our issuance of debt with interest rate-related
derivatives to manage the prepayment and duration risk inherent
in our mortgage investments. We present, by derivative
instrument type, the estimated fair value of derivatives
recorded in our condensed consolidated balance sheets and the
related outstanding notional amount as of September 30,
2007 and December 31, 2006 in Notes to Condensed
Consolidated Financial StatementsNote 9, Derivative
Instruments.
Table 14 provides an analysis of the change in the estimated
fair value of the net derivative asset (liability) amounts,
excluding mortgage commitments, recorded in our condensed
consolidated balance sheets between December 31, 2006 and
September 30, 2007. As indicated in Table 14, we recorded a
net derivative asset of $1.8 billion as of
September 30, 2007 related to our risk management
derivatives, compared with a net derivative asset of
$3.7 billion as of December 31, 2006. The related
outstanding notional amounts totaled $814.4 billion and
$745.4 billion as of September 30, 2007 and
December 31, 2006, respectively.
34
|
|
Table
14:
|
Changes
in Risk Management Derivative Assets (Liabilities) at Fair
Value,
Net(1)
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Net derivative asset as of December 31,
2006(2)
|
|
$
|
3,725
|
|
Effect of cash payments:
|
|
|
|
|
Fair value at inception of contracts entered into during the
period(3)
|
|
|
155
|
|
Fair value at date of termination of contracts settled during
the
period(4)
|
|
|
42
|
|
Periodic net cash contractual interest receipts
|
|
|
(1,191
|
)
|
|
|
|
|
|
Total cash receipts, net
|
|
|
(994
|
)
|
|
|
|
|
|
Income statement impact of recognized amounts:
|
|
|
|
|
Periodic net contractual interest income on interest rate swaps
|
|
|
193
|
|
Net change in fair value during the period
|
|
|
(1,113
|
)
|
|
|
|
|
|
Derivatives fair value losses,
net(5)
|
|
|
(920
|
)
|
|
|
|
|
|
Net derivative asset as of September 30,
2007(2)
|
|
$
|
1,811
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes mortgage commitments.
|
|
(2) |
|
Represents the net of
Derivative assets at fair value and Derivative
liabilities at fair value recorded in our condensed
consolidated balance sheets, excluding mortgage commitments.
|
|
(3) |
|
Primarily includes upfront premiums
paid on option contracts.
|
|
(4) |
|
Primarily represents cash paid upon
termination of derivative contracts.
|
|
(5) |
|
Reflects net derivatives fair value
losses recognized in our condensed consolidated statements of
income, excluding mortgage commitments.
|
The $1.9 billion decrease in the fair value of the net
derivative asset was largely attributable to the decrease in the
aggregate net fair value of our interest rate swaps due to the
decrease in swap rates between December 31, 2006 and
September 30, 2007. We present, by derivative instrument
type, our risk management derivative activity for the nine
months ended September 30, 2007, along with the stated
maturities of our derivatives outstanding as of
September 30, 2007, in Table 28 in Risk
ManagementInterest Rate Risk Management and Other Market
Risks.
SUPPLEMENTAL NON-GAAP INFORMATIONFAIR VALUE BALANCE
SHEETS
Our assets and liabilities consist predominately of financial
instruments. The balance sheets presented in our condensed
consolidated financial statements reflect some financial assets
measured and reported at fair value while other financial
assets, along with most of our financial liabilities, are
measured and reported at historical cost. Each of the non-GAAP
supplemental consolidated fair value balance sheets presented
below in Table 15 reflects all of our assets and liabilities at
estimated fair value. Estimated fair value is the amount at
which an asset or liability could be exchanged between willing
parties, other than in a forced or liquidation sale. The
non-GAAP estimated fair value of our net assets (net of tax
effect) is derived from our non-GAAP fair value balance sheet.
The non-GAAP supplemental consolidated fair value balance sheets
and estimated fair value of our net assets are not defined terms
within GAAP and may not be comparable to similarly titled
measures reported by other companies. In addition, they are not
intended as a substitute for amounts reported in our condensed
consolidated financial statements prepared in accordance with
GAAP. However, we routinely use fair value measures to make
investment decisions and to measure, monitor and manage our risk
because our assets and liabilities consist predominately of
financial instruments. Management, particularly our Capital
Markets group, uses this information to analyze changes in our
assets and liabilities from period to period and understand how
the overall value of the company is changing from period to
period and to measure the performance of our capital markets
investment activities. Accordingly, we believe that the non-GAAP
supplemental consolidated fair value balance sheets and the fair
value of our net assets are useful to investors because they
provide consistency in the measurement and reporting of all of
our assets and liabilities. We believe that the non-GAAP
supplemental consolidated fair value balance sheets and the fair
value of our net assets, when used in
35
conjunction with our condensed consolidated financial statements
prepared in accordance with GAAP, can serve as valuable
incremental tools for investors to assess changes in our overall
value over time relative to changes in market conditions.
Cautionary
Language Relating to Supplemental Non-GAAP Financial
Measures
In reviewing our supplemental non-GAAP consolidated fair value
balance sheets, there are a number of important factors and
limitations to consider. The presentation of some of the line
items in our non-GAAP consolidated fair value balance sheets may
differ from the presentation in our consolidated GAAP balance
sheets, as we have disaggregated certain line items and
aggregated certain other line items. We describe these
differences in the notes to the non-GAAP consolidated fair value
balance sheets. We believe this revised presentation, for
purposes of analyzing our non-GAAP consolidated fair value
balance sheets, provides greater transparency into the
components of our balance sheet associated with our guaranty
business activities and the components associated with our
capital markets business activities, which is consistent with
the way we manage risks and allocate revenues and expenses for
segment reporting purposes.
Moreover, as discussed in Critical Accounting
PoliciesFair Value of Financial Instruments, when
quoted market prices or observable market data are not
available, we rely on internally developed models that may
require management judgment and assumptions to estimate fair
value. Differences in assumptions used in our models could
result in significant changes in our estimates of fair value. In
addition, the estimated fair value of our net assets is
calculated as of a particular point in time based on our
existing assets and liabilities and does not incorporate other
factors that may have a significant impact on that value, most
notably any value from future business activities in which we
expect to engage. As a result, the estimated fair value of our
net assets presented in our non-GAAP supplemental consolidated
fair value balance sheets does not represent an estimate of our
net realizable value, liquidation value or our market value as a
whole. Amounts we ultimately realize from the disposition of
assets or settlement of liabilities may vary significantly from
the estimated fair values presented in our non-GAAP supplemental
consolidated fair value balance sheets. Because temporary
changes in market conditions can substantially affect the fair
value of our net assets, we do not believe that short-term
fluctuations in the fair value of our net assets attributable to
mortgage-to-debt option-adjusted spreads (OAS) or
changes in the fair value of our net guaranty assets are
necessarily representative of the effectiveness of our
investment strategy or the long-term underlying value of our
business. We believe the long-term value of our business depends
primarily on our ability to acquire new assets and funding at
attractive prices, to effectively manage the risks of these
assets and liabilities over time and to earn attractive returns
on our guaranty business. However, we believe that assessing the
factors that affect near-term changes in the estimated fair
value of our net assets helps us evaluate our long-term value
and assess whether temporary market factors have caused our net
assets to become overvalued or undervalued relative to the level
of risk and expected long-term fundamentals of our business.
36
Table
15: Non-GAAP Supplemental Consolidated Fair
Value Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
As of December 31, 2006
|
|
|
|
GAAP
|
|
|
|
|
|
|
|
|
GAAP
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Fair Value
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Fair Value
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Adjustment(1)
|
|
|
Fair Value
|
|
|
Value
|
|
|
Adjustment(1)
|
|
|
Fair Value
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,976
|
|
|
$
|
|
|
|
$
|
4,976
|
(2)
|
|
$
|
3,972
|
|
|
$
|
|
|
|
$
|
3,972
|
(2)
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
8,349
|
|
|
|
2
|
|
|
|
8,351
|
(2)
|
|
|
12,681
|
|
|
|
|
|
|
|
12,681
|
(2)
|
Trading securities
|
|
|
48,683
|
|
|
|
|
|
|
|
48,683
|
(2)
|
|
|
11,514
|
|
|
|
|
|
|
|
11,514
|
(2)
|
Available-for-sale securities
|
|
|
315,012
|
|
|
|
|
|
|
|
315,012
|
(2)
|
|
|
378,598
|
|
|
|
|
|
|
|
378,598
|
(2)
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
|
|
5,053
|
|
|
|
21
|
|
|
|
5,074
|
(3)
|
|
|
4,868
|
|
|
|
(88
|
)
|
|
|
4,780
|
(3)
|
Mortgage loans held for investment, net of allowance for loan
losses
|
|
|
394,550
|
|
|
|
(3,601
|
)
|
|
|
390,949
|
(3)
|
|
|
378,687
|
|
|
|
(2,821
|
)
|
|
|
375,866
|
(3)
|
Guaranty assets of mortgage loans held in portfolio
|
|
|
|
|
|
|
4,105
|
|
|
|
4,105
|
(3)(4)
|
|
|
|
|
|
|
3,669
|
|
|
|
3,669
|
(3)(4)
|
Guaranty obligations of mortgage loans held in portfolio
|
|
|
|
|
|
|
(5,299
|
)
|
|
|
(5,299
|
)(3)(4)
|
|
|
|
|
|
|
(2,831
|
)
|
|
|
(2,831
|
)(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
399,603
|
|
|
|
(4,774
|
)
|
|
|
394,829
|
(2)(3)
|
|
|
383,555
|
|
|
|
(2,071
|
)
|
|
|
381,484
|
(2)(3)
|
Advances to lenders
|
|
|
11,738
|
|
|
|
(122
|
)
|
|
|
11,616
|
(2)
|
|
|
6,163
|
|
|
|
(152
|
)
|
|
|
6,011
|
(2)
|
Derivative assets at fair value
|
|
|
3,172
|
|
|
|
|
|
|
|
3,172
|
(2)
|
|
|
4,931
|
|
|
|
|
|
|
|
4,931
|
(2)
|
Guaranty assets and
buy-ups
|
|
|
10,332
|
|
|
|
4,212
|
|
|
|
14,544
|
(2)(4)
|
|
|
8,523
|
|
|
|
3,737
|
|
|
|
12,260
|
(2)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
|
801,865
|
|
|
|
(682
|
)
|
|
|
801,183
|
(2)
|
|
|
809,937
|
|
|
|
1,514
|
|
|
|
811,451
|
(2)
|
Master servicing assets and credit enhancements
|
|
|
1,668
|
|
|
|
1,752
|
|
|
|
3,420
|
(4)(5)
|
|
|
1,624
|
|
|
|
1,063
|
|
|
|
2,687
|
(4)(5)
|
Other assets
|
|
|
36,250
|
|
|
|
2,901
|
|
|
|
39,151
|
(5)(6)
|
|
|
32,375
|
|
|
|
(948
|
)
|
|
|
31,427
|
(5)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
839,783
|
|
|
$
|
3,971
|
|
|
$
|
843,754
|
|
|
$
|
843,936
|
|
|
$
|
1,629
|
|
|
$
|
845,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
$
|
1,645
|
|
|
$
|
2
|
|
|
$
|
1,647
|
(2)
|
|
$
|
700
|
|
|
$
|
|
|
|
$
|
700
|
(2)
|
Short-term debt
|
|
|
153,146
|
|
|
|
199
|
|
|
|
153,345
|
(2)
|
|
|
165,810
|
|
|
|
(63
|
)
|
|
|
165,747
|
(2)
|
Long-term debt
|
|
|
608,619
|
|
|
|
10,316
|
|
|
|
618,935
|
(2)
|
|
|
601,236
|
|
|
|
5,358
|
|
|
|
606,594
|
(2)
|
Derivative liabilities at fair value
|
|
|
1,336
|
|
|
|
|
|
|
|
1,336
|
(2)
|
|
|
1,184
|
|
|
|
|
|
|
|
1,184
|
(2)
|
Guaranty obligations
|
|
|
14,322
|
|
|
|
1,771
|
|
|
|
16,093
|
(2)
|
|
|
11,145
|
|
|
|
(2,960
|
)
|
|
|
8,185
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
|
779,068
|
|
|
|
12,288
|
|
|
|
791,356
|
(2)
|
|
|
780,075
|
|
|
|
2,335
|
|
|
|
782,410
|
(2)
|
Other liabilities
|
|
|
20,672
|
|
|
|
(2,572
|
)
|
|
|
18,100
|
(7)
|
|
|
22,219
|
|
|
|
(2,101
|
)
|
|
|
20,118
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
799,740
|
|
|
|
9,716
|
|
|
|
809,456
|
|
|
|
802,294
|
|
|
|
234
|
|
|
|
802,528
|
|
Minority interests in consolidated subsidiaries
|
|
|
121
|
|
|
|
|
|
|
|
121
|
|
|
|
136
|
|
|
|
|
|
|
|
136
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
9,008
|
|
|
|
(287
|
)
|
|
|
8,721
|
(8)
|
|
|
9,108
|
|
|
|
(90
|
)
|
|
|
9,018
|
(8)
|
Common
|
|
|
30,914
|
|
|
|
(5,458
|
)
|
|
|
25,456
|
(9)
|
|
|
32,398
|
|
|
|
1,485
|
|
|
|
33,883
|
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity/non-GAAP fair value of net
assets
|
|
$
|
39,922
|
|
|
$
|
(5,745
|
)
|
|
$
|
34,177
|
|
|
$
|
41,506
|
|
|
$
|
1,395
|
|
|
$
|
42,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
839,783
|
|
|
$
|
3,971
|
|
|
$
|
843,754
|
|
|
$
|
843,936
|
|
|
$
|
1,629
|
|
|
$
|
845,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Explanation and Reconciliation
of Non-GAAP Measures to GAAP Measures
|
|
|
(1) |
|
Each of the amounts listed as a
fair value adjustment represents the difference
between the carrying value included in our GAAP condensed
consolidated balance sheets and our best judgment of the
estimated fair value of the listed asset or liability.
|
|
(2) |
|
We determined the estimated fair
value of these financial instruments in accordance with the fair
value guidelines outlined in SFAS No. 107,
Disclosures about Fair Value of Financial Instruments
(SFAS 107), as described in Notes to
Condensed Consolidated Financial StatementsNote 15,
Fair Value of Financial Instruments. In Note 15, we
also disclose the carrying value and estimated fair value of our
total financial assets and total financial liabilities as well
as discuss the methodologies and assumptions we use in
estimating the fair value of our financial instruments.
|
|
(3) |
|
We have separately presented the
estimated fair value of Mortgage loans held for
sale, Mortgage loans held for investment, net of
allowance for loan losses, Guaranty assets of
mortgage loans held in portfolio and Guaranty
obligations of mortgage loans held in portfolio. These
combined line items together represent total mortgage loans
reported in our GAAP condensed consolidated balance sheets. This
presentation provides transparency into the components of the
fair value of our mortgage loans associated with our guaranty
business activities and the components of our capital markets
business activities, which is consistent with the way we manage
risks and allocate revenues and expenses for segment reporting
purposes. While the carrying values and estimated fair values of
the individual line items may differ from the amounts presented
in Note 15, the combined amounts together equal the
carrying value and estimated fair value amounts of total
mortgage loans in Note 15.
|
|
(4) |
|
In our GAAP condensed consolidated
balance sheets, we report the guaranty assets associated with
our outstanding Fannie Mae MBS and other guaranties as a
separate line item and include
buy-ups,
master servicing assets and credit enhancements associated with
our guaranty assets in Other assets. The GAAP
carrying value of our guaranty assets reflects only those
guaranty arrangements entered into subsequent to our adoption of
FIN No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of
FIN No. 34) (FIN 45), on
January 1, 2003. On a GAAP basis, our guaranty assets
totaled $9.4 billion and $7.7 billion as of
September 30, 2007 and December 31, 2006,
respectively. The associated
buy-ups
totaled $894 million and $831 million as of
September 30, 2007 and December 31, 2006,
respectively. In our non-GAAP supplemental consolidated fair
value balance sheets, we also disclose the estimated guaranty
assets and obligations related to mortgage loans held in our
portfolio. The aggregate estimated fair value of the guaranty
asset-related components totaled $16.8 billion as of
September 30, 2007, compared with $15.8 billion as of
December 31, 2006. These components represent the sum of
the following line items in this table: (i) Guaranty assets
of mortgage loans held in portfolio; (ii) Guaranty
obligations of mortgage loans held in portfolio,
(iii) Guaranty assets and
buy-ups; and
(iv) Master servicing assets and credit enhancements.
|
|
(5) |
|
The line items Master
servicing assets and credit enhancements and Other
assets together consist of the assets presented on the
following five line items in our GAAP condensed consolidated
balance sheets: (i) Accrued interest receivable;
(ii) Acquired property, net; (iii) Deferred tax
assets; (iv) Partnership investments; and (v) Other
assets. The carrying value of these items in our GAAP condensed
consolidated balance sheets together totaled $38.8 billion
and $34.8 billion as of September 30, 2007 and
December 31, 2006, respectively. We deduct the carrying
value of the
buy-ups
associated with our guaranty obligation, which totaled
$894 million and $831 million as of September 30,
2007 and December 31, 2006, respectively, from Other
assets reported in our GAAP condensed consolidated balance
sheets because
buy-ups are
a financial instrument that we combine with guaranty assets in
our SFAS 107 disclosure in Note 15. We have estimated
the fair value of master servicing assets and credit
enhancements based on our fair value methodologies discussed in
Note 15.
|
|
(6) |
|
With the exception of partnership
investments and deferred tax assets, the GAAP carrying values of
other assets generally approximate fair value. While we have
included partnership investments at their carrying value in each
of the non-GAAP supplemental consolidated fair value balance
sheets, the fair values of these items are generally different
from their GAAP carrying values, potentially materially. For
example, our LIHTC partnership investments had a carrying value
of $8.0 billion and an estimated fair value of
$9.1 billion as of September 30, 2007. We assume that
other deferred assets, consisting primarily of prepaid expenses,
have no fair value. We adjust the GAAP-basis deferred income
taxes for purposes of each of our non-GAAP supplemental
consolidated fair value balance sheets to include estimated
income taxes on the difference between our non-GAAP supplemental
consolidated fair value balance sheets net assets, including
deferred taxes from the GAAP condensed consolidated balance
sheets, and our GAAP condensed consolidated balance sheets
stockholders equity. Because our adjusted deferred income
taxes are a net asset in each year, the amounts are included in
our non-GAAP fair value balance sheets as a component of other
assets.
|
|
(7) |
|
The line item Other
liabilities consists of the liabilities presented on the
following four line items in our GAAP condensed consolidated
balance sheets: (i) Accrued interest payable;
(ii) Reserve for guaranty losses; (iii) Partnership
liabilities; and (iv) Other liabilities. The carrying value
of these items in our GAAP condensed consolidated balance sheets
together totaled $20.7 billion and $22.2 billion as of
September 30, 2007 and December 31, 2006,
respectively. The GAAP carrying values of these other
liabilities generally approximate fair value. We assume that
deferred liabilities, such as deferred debt issuance costs, have
no fair value.
|
38
|
|
|
(8) |
|
Preferred stockholders
equity is reflected in our non-GAAP supplemental
consolidated fair value balance sheets at the estimated fair
value amount.
|
|
(9) |
|
Common stockholders
equity consists of the stockholders equity
components presented on the following five line items in our
GAAP condensed consolidated balance sheets: (i) Common
stock; (ii) Additional paid-in capital; (iii) Retained
earnings; (iv) Accumulated other comprehensive loss; and
(v) Treasury stock, at cost. Common
stockholders equity is the residual of the excess of
the estimated fair value of total assets over the estimated fair
value of total liabilities, after taking into consideration
preferred stockholders equity and minority interest in
consolidated subsidiaries.
|
Changes
in Non-GAAP Estimated Fair Value of Net Assets
Table 16 summarizes the change in the estimated fair value of
our net assets for the first nine months of 2007.
Table
16: Non-GAAP Estimated Fair Value of Net Assets
(Net of Tax Effect)
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Balance as of December 31, 2006
|
|
$
|
42,901
|
|
Capital
transactions:(1)
|
|
|
|
|
Common dividends, common share repurchases and issuances, net
|
|
|
(1,279
|
)
|
Preferred dividends, redemptions and issuances
|
|
|
(472
|
)
|
|
|
|
|
|
Capital transactions, net
|
|
|
(1,751
|
)
|
Change in estimated fair value of net assets, excluding capital
transactions
|
|
|
(6,973
|
)
|
|
|
|
|
|
Decrease in estimated fair value of net assets, net
|
|
|
(8,724
|
)
|
|
|
|
|
|
Balance as of September 30,
2007(2)
|
|
$
|
34,177
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents net capital
transactions, which are reflected in the condensed consolidated
statements of changes in stockholders equity.
|
|
(2) |
|
Represents estimated fair value of
net assets (net of tax effect) presented in Table 15:
Non-GAAP Supplemental Consolidated Fair Value Balance
Sheets.
|
Summary
of Fair Value Results
The estimated fair value of our net assets decreased by
$8.7 billion to $34.2 billion as of September 30,
2007, from $42.9 billion as of December 31, 2006. The
$8.7 billion decrease included the effect of a reduction of
$1.8 billion attributable to capital transactions,
consisting primarily of payments of $1.1 billion for the
redemption of preferred stock and $1.7 billion for
dividends to holders of our common and preferred stock, which
were partially offset by proceeds of $1.0 billion from the
issuance of preferred stock.
Excluding the effect of capital transactions, we experienced a
$7.0 billion decrease in the estimated fair value of our
net assets for the first nine months of 2007. The primary
factors affecting the fair value of our net assets for the first
nine months of 2007 included the benefit from the economic
income generated by our businesses, which was more than offset
by a decrease in value resulting from the decline in home prices
and wider mortgage-to-debt OAS. We expect periodic fluctuations
in the estimated fair value of our net assets due to our
business activities, as well as due to changes in market
conditions, including changes in interest rates, changes in
relative spreads between our mortgage assets and debt, and
changes in implied volatility. Below we provide selected market
information in Table 17 and discuss how changes in market
conditions have contributed to the significant decrease in the
estimated fair value of our net assets.
39
Table
17: Selected Market
Information(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
10-year U.S.
Treasury note yield
|
|
|
4.59
|
%
|
|
|
4.70
|
%
|
|
|
(0.11
|
)%
|
Implied
volatility(2)
|
|
|
17.20
|
%
|
|
|
15.70
|
%
|
|
|
1.50
|
%
|
30-year
Fannie Mae MBS par coupon rate
|
|
|
5.97
|
%
|
|
|
5.79
|
%
|
|
|
0.18
|
%
|
Lehman U.S. MBS Index OAS (in basis points) over LIBOR yield
curve
|
|
|
21.4
|
bp
|
|
|
(2.7
|
) bp
|
|
|
24.1
|
bp
|
Lehman U.S. Agency Debt Index OAS (in basis points) over LIBOR
yield curve
|
|
|
(18.8
|
) bp
|
|
|
(13.8
|
)bp
|
|
|
(5.0
|
) bp
|
|
|
|
(1) |
|
Information obtained from Lehman
Live, Lehman POINT and Bloomberg.
|
|
(2) |
|
Implied volatility for an interest
rate swaption with a
3-year
option on a
10-year
final maturity.
|
Estimated
Impact of Changes in Market Conditions on Fair Value
Results
For the first nine months of 2007, we experienced a decrease in
the fair value of our net guaranty assets, including related
deferred tax assets, of $4.5 billion. This fair value
change does not include the impact of the economic earnings of
the guaranty business during the period. The decline is
primarily due to a substantial increase in the estimated fair
value of our guaranty obligations attributable to the decline in
the home prices and the markets expectation of future home
price declines. This increase more than offset an increase in
the fair value of our guaranty assets that resulted from growth
in our guaranty book of business.
We estimate that the significant widening of mortgage-to-debt
spreads during the first nine months of 2007 caused a decline of
approximately $4.5 billion to $5.0 billion in the fair
value of our net portfolio. As displayed in Table 17 above, the
Lehman U.S. MBS index, which primarily includes
30-year and
15-year
mortgages, reflected a significant widening of OAS during the
first nine months of 2007. The OAS on securities held by us that
are not in the index, such as AAA-rated
10-year
commercial mortgage-backed securities and AAA-rated
private-label mortgage-related securities, widened even more
dramatically, resulting in an overall decrease in the fair value
of our mortgage assets. Debt OAS based on the Lehman
U.S. Agency Debt Index to the London Interbank Offered Rate
(LIBOR) tightened by 5 basis points to minus
18.8 basis points as of September 30, 2007, resulting
in an increase in the fair value of our debt. Our economic
earnings from our portfolio investments resulted in an increase
in fair value of our net assets that partially offset the
decrease that resulted from the change in market conditions.
40
LIQUIDITY AND CAPITAL MANAGEMENT
Liquidity
Debt
Funding
Our primary source of cash is proceeds from the issuance of our
debt securities. As a result, we are dependent on our continuing
ability to issue debt securities in the capital markets to meet
our cash requirements. Table 18 summarizes our debt activity for
the three and nine months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Issued during the
period:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
341,033
|
|
|
$
|
432,575
|
|
|
$
|
1,124,200
|
|
|
$
|
1,715,094
|
|
Weighted average interest rate
|
|
|
4.91
|
%
|
|
|
5.16
|
%
|
|
|
5.07
|
%
|
|
|
4.78
|
%
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
37,462
|
|
|
$
|
40,833
|
|
|
$
|
150,753
|
|
|
$
|
140,046
|
|
Weighted average interest rate
|
|
|
5.58
|
%
|
|
|
5.73
|
%
|
|
|
5.57
|
%
|
|
|
5.52
|
%
|
Total issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
378,495
|
|
|
$
|
473,408
|
|
|
$
|
1,274,953
|
|
|
$
|
1,855,140
|
|
Weighted average interest rate
|
|
|
4.98
|
%
|
|
|
5.21
|
%
|
|
|
5.13
|
%
|
|
|
4.84
|
%
|
Redeemed during the
period:(1)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
351,130
|
|
|
$
|
455,380
|
|
|
$
|
1,135,352
|
|
|
$
|
1,735,420
|
|
Weighted average interest rate
|
|
|
4.97
|
%
|
|
|
5.08
|
%
|
|
|
5.07
|
%
|
|
|
4.68
|
%
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
45,725
|
|
|
$
|
43,339
|
|
|
$
|
142,973
|
|
|
$
|
119,899
|
|
Weighted average interest rate
|
|
|
4.68
|
%
|
|
|
4.15
|
%
|
|
|
4.58
|
%
|
|
|
3.73
|
%
|
Total redeemed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
396,855
|
|
|
$
|
498,719
|
|
|
$
|
1,278,325
|
|
|
$
|
1,855,319
|
|
Weighted average interest rate
|
|
|
4.93
|
%
|
|
|
5.00
|
%
|
|
|
5.02
|
%
|
|
|
4.62
|
%
|
|
|
|
(1) |
|
Excludes debt activity resulting
from consolidations and intraday loans.
|
|
(2) |
|
Includes Federal funds purchased
and securities sold under agreements to repurchase.
|
|
(3) |
|
Represents the face amount at
issuance or redemption.
|
|
(4) |
|
Represents all payments on debt,
including regularly scheduled principal payments, payments at
maturity, payments as the result of a call and payments for any
other repurchases.
|
The amount of our total outstanding debt remained relatively
consistent between December 31, 2006 and September 30,
2007, as we managed the size of our mortgage portfolio to meet
the OFHEO-directed portfolio cap. In addition, the mix between
our outstanding short-term and long-term debt remained
relatively consistent. Despite a lack of portfolio growth for
the first nine months of 2007, we remained an active participant
in the international capital markets to meet our consistent need
for funding and rebalancing our portfolio. Changes in the amount
of our debt issuances and redemptions between periods are
influenced by investor demand for our debt, changes in interest
rates, and the maturity of existing debt. For information on our
outstanding short-term and long-term debt as of
September 30, 2007, refer to Consolidated Balance
Sheet AnalysisDebt Instruments.
41
Our sources of liquidity remained adequate to meet both our
short-term and long-term funding needs during the first nine
months of 2007, and we anticipate that they will remain
adequate. Despite the overall reduction in liquidity and funding
sources in the mortgage credit market in recent months, our
ability to issue debt at rates we consider attractive has not
been impaired. In addition, we issued $1.375 billion in
preferred stock in September and October 2007.
Liquidity
Contingency Plan
We maintain a liquidity contingency plan in the event that
factors, whether internal or external to our business,
temporarily compromise our ability to access capital through
normal channels. Our contingency plan provides for alternative
sources of liquidity that would allow us to meet all of our cash
obligations for 90 days without relying upon the issuance
of unsecured debt. In the event of a liquidity crisis in which
our access to the unsecured debt funding market becomes
impaired, our primary source of liquidity is the sale or pledge
of mortgage assets in our unencumbered mortgage portfolio.
Another source of liquidity in the event of a liquidity crisis
is the sale of assets in our liquid investment portfolio.
Pursuant to our September 1, 2005 agreement with OFHEO, we
periodically test our liquidity contingency plan. We believe we
were in compliance with our agreement with OFHEO to maintain and
test our liquidity contingency plan as of March 31, 2007,
June 30, 2007 and September 30, 2007.
Credit
Ratings and Risk Ratings
Our ability to borrow at attractive rates is highly dependent
upon our credit ratings. Our senior unsecured debt (both
long-term and short-term), benchmark subordinated debt and
preferred stock are rated and continuously monitored by
Standard & Poors, a division of The McGraw Hill
Companies (Standard & Poors),
Moodys Investors Service (Moodys), and
Fitch Ratings (Fitch), each of which is a nationally
recognized statistical rating organization. Table 19 below sets
forth the credit ratings issued by each of these rating agencies
of our long-term and short-term senior unsecured debt,
qualifying benchmark subordinated debt and preferred stock as of
November 8, 2007. To date, we have not experienced any
limitations in our ability to access the capital markets due to
a credit ratings downgrade. Table 19 also sets forth our
risk to the government rating and our Bank
Financial Strength Rating as of November 8, 2007.
Table
19: Fannie Mae Debt Credit Ratings and Risk
Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
|
|
|
Senior
|
|
|
Qualifying
|
|
|
|
|
|
|
|
|
Bank
|
|
|
|
Long-Term
|
|
|
Short-Term
|
|
|
Benchmark
|
|
|
Preferred
|
|
|
Risk to the
|
|
|
Financial
|
|
|
|
Unsecured Debt
|
|
|
Unsecured Debt
|
|
|
Subordinated Debt
|
|
|
Stock
|
|
|
Government(1)
|
|
|
Strength(1)
|
|
|
Standard & Poors
|
|
|
AAA
|
|
|
|
A-1+
|
|
|
|
AA-
|
(2)
|
|
|
AA-
|
(2)
|
|
|
AA-
|
(2)
|
|
|
|
|
Moodys
|
|
|
Aaa
|
|
|
|
P-1
|
|
|
|
Aa2
|
|
|
|
Aa3
|
|
|
|
|
|
|
|
B+
|
|
Fitch
|
|
|
AAA
|
|
|
|
F1+
|
|
|
|
AA-
|
|
|
|
AA-
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Pursuant to our September 1,
2005 agreement with OFHEO, we agreed to seek to obtain a rating,
which will be continuously monitored by at least one nationally
recognized statistical rating organization, that assesses, among
other things, the independent financial strength or risk
to the government of Fannie Mae operating under its
authorizing legislation but without assuming a cash infusion or
extraordinary support of the government in the event of a
financial crisis.
|
|
(2) |
|
Negative outlook.
|
Cash
Flows
Our primary sources of funding include proceeds from our
issuance of our debt securities, principal and interest payments
on mortgage assets, and guaranty fees. Our primary uses of funds
include the purchase of mortgage assets, repayment of debt and
interest payments, payment of dividends, administrative expenses
and taxes.
Nine Months Ended September 30, 2007. Our
cash and cash equivalents of $4.5 billion as of
September 30, 2007 increased by $1.2 billion from
December 31, 2006. We generated cash flows from operating
activities of
42
$16.9 billion, largely attributable to net cash provided
from trading securities. We also generated cash flows from
investing activities of $746 million, attributable to funds
provided from a reduction in federal funds sold and securities
purchased under agreements to resell. These cash flows were
partially offset by net cash used in financing activities of
$16.5 billion, as amounts paid to extinguish debt exceeded
the proceeds from the issuance of debt.
Nine Months Ended September 30, 2006. Our
cash and cash equivalents of $3.1 billion as of
September 30, 2006 increased by $259 million from
December 31, 2005. We generated cash flows from operating
activities of $25.6 billion, largely attributable to net
cash provided from trading securities. These cash flows were
partially offset by net cash used in financing activities of
$20.5 billion, as amounts paid to extinguish debt exceeded
the proceeds from the issuance of debt, and net cash used in
investing activities of $4.9 billion, attributable to an
increase in federal funds sold and securities purchased under
agreements to resell.
Because our cash flows are complex and interrelated and bear
little relationship to our net earnings and net assets, we do
not rely on this traditional cash flow analysis to evaluate our
liquidity position. Instead, we rely on our liquidity
contingency plan described above to ensure that we preserve
stable, reliable and cost effective sources of cash to meet all
obligations from normal operations and maintain sufficient
excess liquidity to withstand both a severe and moderate
liquidity stress environment.
Capital
Management
Regulatory
Capital
Table 20 displays our regulatory capital classification measures
as of September 30, 2007 and December 31, 2006, with
the exception of our statutory risk-based capital measure and
related total capital measure, which have been provided as of
June 30, 2007 (the most recent date for which our statutory
risk-based capital measure is available) and December 31,
2006. The regulatory capital classification measures as of
September 30, 2007 provided in the table below represent
amounts that will be resubmitted to OFHEO for its certification
and are subject to its review and approval. They do not
represent OFHEOs announced capital classification measures.
43
Table
20: Regulatory Capital Measures
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007(1)
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Core
capital(2)
|
|
$
|
41,713
|
|
|
$
|
41,950
|
|
Statutory minimum
capital(3)
|
|
|
30,303
|
|
|
|
29,359
|
|
|
|
|
|
|
|
|
|
|
Surplus of core capital over required minimum capital
|
|
$
|
11,410
|
|
|
$
|
12,591
|
|
|
|
|
|
|
|
|
|
|
Surplus of core capital percentage over required minimum
capital(4)
|
|
|
37.7
|
%
|
|
|
42.9
|
%
|
|
|
|
|
|
|
|
|
|
Core
capital(2)
|
|
$
|
41,713
|
|
|
$
|
41,950
|
|
OFHEO-directed minimum
capital(5)
|
|
|
39,393
|
|
|
|
38,166
|
|
|
|
|
|
|
|
|
|
|
Surplus of core capital over OFHEO-directed minimum capital
|
|
$
|
2,319
|
|
|
$
|
3,784
|
|
|
|
|
|
|
|
|
|
|
Surplus of core capital percentage over OFHEO-directed minimum
capital(6)
|
|
|
5.9
|
%
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
|
Total
capital(7)
|
|
$
|
43,798
|
|
|
$
|
42,703
|
|
Statutory risk-based
capital(8)
|
|
|
10,225
|
|
|
|
26,870
|
|
|
|
|
|
|
|
|
|
|
Surplus of total capital over required risk-based capital
|
|
$
|
33,573
|
|
|
$
|
15,833
|
|
|
|
|
|
|
|
|
|
|
Surplus of total capital percentage over required risk-based
capital(9)
|
|
|
328.3
|
%
|
|
|
58.9
|
%
|
|
|
|
|
|
|
|
|
|
Core
capital(2)
|
|
$
|
41,713
|
|
|
$
|
41,950
|
|
Statutory critical
capital(10)
|
|
|
15,682
|
|
|
|
15,149
|
|
|
|
|
|
|
|
|
|
|
Surplus of core capital over required critical capital
|
|
$
|
26,031
|
|
|
$
|
26,801
|
|
|
|
|
|
|
|
|
|
|
Surplus of core capital percentage over required critical
capital(11)
|
|
|
166.0
|
%
|
|
|
176.9
|
%
|
|
|
|
(1)
|
|
Statutory risk-based capital and
total capital measures have been provided as of June 30,
2007 (the most recent date for which the statutory risk-based
capital measure is available) and December 31, 2006. The
regulatory capital classification measures as of
September 30, 2007 provided in this table represent
estimates that will be resubmitted to OFHEO for its
certification.
|
|
(2)
|
|
The sum of (a) the stated
value of our outstanding common stock (common stock less
treasury stock); (b) the stated value of our outstanding
non-cumulative perpetual preferred stock; (c) our paid-in
capital; and (d) our retained earnings. Core capital
excludes accumulated other comprehensive income (loss).
|
|
(3)
|
|
Generally, the sum of
(a) 2.50% of on-balance sheet assets; (b) 0.45% of the
unpaid principal balance of outstanding Fannie Mae MBS held by
third parties; and (c) up to 0.45% of other off-balance
sheet obligations, which may be adjusted by the Director of
OFHEO under certain circumstances (See 12 CFR 1750.4 for
existing adjustments made by the Director of OFHEO).
|
|
(4)
|
|
Defined as the surplus of core
capital over statutory minimum capital expressed as a percentage
of statutory minimum capital.
|
|
(5)
|
|
Defined as a 30% surplus over the
statutory minimum capital requirement. We are currently required
to maintain this surplus under the OFHEO consent order until
such time as the Director of OFHEO determines that the
requirement should be modified or allowed to expire, taking into
account certain specified factors.
|
|
(6)
|
|
Defined as the surplus of core
capital over OFHEO-directed minimum capital expressed as a
percentage of OFHEO-directed minimum capital.
|
|
(7)
|
|
The sum of (a) core capital
and (b) the total allowance for loan losses and reserve for
guaranty losses, less (c) the specific loss allowance (that
is, the allowance required on individually impaired loans). The
specific loss allowance totaled $51 million as of
June 30, 2007 and $106 million as of December 31,
2006.
|
|
(8)
|
|
Defined as the amount of total
capital required to be held to absorb projected losses flowing
from future adverse interest rate and credit risk conditions
specified by statute (see 12 CFR 1750.13 for conditions),
plus 30% mandated by statute to cover management and operations
risk.
|
|
(9)
|
|
Defined as the surplus of total
capital over statutory risk-based capital expressed as a
percentage of statutory risk-based capital.
|
44
|
|
|
(10) |
|
Generally, the sum of
(a) 1.25% of on-balance sheet assets; (b) 0.25% of the
unpaid principal balance of outstanding Fannie Mae MBS held by
third parties and (c) up to 0.25% of other off-balance
sheet obligations, which may be adjusted by the Director of
OFHEO under certain circumstances.
|
|
(11) |
|
Defined as the surplus of core
capital over statutory critical capital expressed as a
percentage of statutory critical capital.
|
Based on financial estimates that we provided to OFHEO, on
September 27, 2007, OFHEO announced that we were classified
as adequately capitalized as of June 30, 2007 (the most
recent date for which results have been published by OFHEO).
In September 2007 we issued $1.0 billion in preferred
stock, which was intended to partially replace the
$1.1 billion in preferred stock we redeemed in February and
April 2007. We issued an additional $375 million in
preferred stock in October 2007. Our core capital and our
capital surplus have decreased since September 30, 2007,
due to market trends that have adversely affected our earnings.
If these market trends continue to negatively affect our net
income, they will continue to cause a reduction in our retained
earnings and, as a result, in the amount of our core capital. We
may be required to take actions, or refrain from taking actions,
in order to maintain or increase our statutory and
OFHEO-directed minimum capital surplus. Like the portfolio cap,
our need to maintain capital at specific levels limits our
ability to increase our portfolio investments. In order to
maintain our regulatory capital at required levels, we may forgo
purchase opportunities or sell assets. We also may issue
additional preferred securities. Refer to
Item 1ARisk Factors for a more detailed
discussion of how continued declines in our earnings could
negatively impact our regulatory capital position.
The significant reduction in our statutory risk-based capital
requirement from December 31, 2006 to June 30, 2007
resulted from risk management actions that served to lower our
investment portfolios exposure to extreme interest rate
movements. On October 11, 2007, OFHEO announced a proposed
rule that would change the mortgage loan loss severity formulas
used in the regulatory risk-based capital stress test. If
adopted, the proposed changes would increase our risk-based
capital requirement. Using data from the third and fourth
quarters of 2006, OFHEOs recalculation of the risk-based
capital requirement for those periods using the proposed
formulas showed that our total capital base would continue to
exceed all risk-based capital requirements.
Capital
Activity
Common
Stock
Shares of common stock outstanding, net of shares held in
treasury, totaled approximately 974 million,
973 million, 973 million and 972 million as of
September 30, 2007, June 30, 2007, March 31, 2007
and December 31, 2006, respectively. We issued
0.3 million, 0.3 million and 1.0 million shares
of common stock from treasury for our employee benefit plans
during the quarters ended September 30, 2007, June 30,
2007 and March 31, 2007, respectively. We did not issue any
common stock during the first three quarters of 2007 other than
in accordance with these plans.
From April 2005 to November 2007, we prohibited all of our
employees from engaging in purchases or sales of our securities
except in limited circumstances relating to financial hardship.
In May 2006, we implemented a stock repurchase program that
authorized the repurchase of up to $100 million of our
shares from our non-officer employees, who are employees below
the level of vice president. From May 31, 2006 to
September 30, 2007, we purchased an aggregate of
approximately 122,000 shares of common stock from our employees
under the program. In November 2007, the prohibition on employee
sales and purchases of our securities was lifted and the
employee stock repurchase program was terminated.
Non-Cumulative
Preferred Stock
On February 28, 2007, we redeemed all of the shares of our
Variable Rate Non-Cumulative Preferred Stock, Series J,
with an aggregate stated value of $700 million.
45
On April 2, 2007, we redeemed all of the shares of our
Variable Rate Non-Cumulative Preferred Stock, Series K,
with an aggregate stated value of $400 million.
On September 28, 2007, we issued 40 million shares of
Variable Rate Non-Cumulative Preferred Stock, Series P,
with an aggregate stated value of $1.0 billion. The
Series P Preferred Stock has a variable dividend rate that
will reset quarterly on each March 31, June 30,
September 30 and December 31, beginning December 31,
2007, at a per annum rate equal to the greater of
(i) 3-Month
LIBOR plus 0.75% and (ii) 4.50%. The Series P
Preferred Stock may be redeemed, at our option, on or after
September 30, 2012. The net proceeds from the issuance of
Series P Preferred Stock were added to our working capital
and will be used for general corporate purposes.
On October 4, 2007, we issued 15 million shares of
6.75% Non-Cumulative Preferred Stock, Series Q, with an
aggregate stated value of $375 million. The Series Q
Preferred Stock has a dividend rate of 6.75% per annum. The
Series Q Preferred Stock may be redeemed, at our option, on
or after September 30, 2010. The net proceeds from the
issuance of Series Q Preferred Stock were added to our
working capital and will be used for general corporate purposes.
Subordinated
Debt
Pursuant to our September 1, 2005 agreement with OFHEO, we
agreed to issue qualifying subordinated debt, rated by at least
two nationally recognized statistical rating organizations, in a
quantity such that the sum of our total capital plus the
outstanding balance of our qualifying subordinated debt equals
or exceeds the sum of (1) outstanding Fannie Mae MBS held
by third parties times 0.45% and (2) total on-balance sheet
assets times 4%, which we refer to as our subordinated
debt requirement.
As of March 31, 2007, June 30, 2007 and
September 30, 2007, we were in compliance with our
subordinated debt requirement. As of March 31, 2007, our
total capital plus the outstanding balance of our qualifying
subordinated debt was approximately $49.8 billion and
exceeded our subordinated debt requirement by $7.9 billion.
As of June 30, 2007, our total capital plus the outstanding
balance of our qualifying subordinated debt was approximately
$51.0 billion and exceeded our subordinated debt
requirement by $8.1 billion. Our total capital plus the
outstanding balance of our qualifying subordinated debt was
approximately $49.5 billion and exceeded our subordinated
debt requirement by $6.9 billion as of September 30,
2007.
We have not issued any subordinated debt securities since 2003.
We had qualifying subordinated debt totaling $2.0 billion,
based on redemption value, that matured in January 2007. As of
the date of this filing, we have $9.0 billion in
outstanding qualifying subordinated debt.
Dividends
We paid common stock dividends of $0.40 per share for the first
quarter of 2007 and $0.50 per share for the second and third
quarters of 2007. On October 16, 2007, our Board of
Directors declared common stock dividends of $0.50 per share for
the fourth quarter of 2007, payable on November 26, 2007.
We paid preferred stock dividends of $138 million,
$121 million and $115 million in the first, second and
third quarter of 2007, respectively. On October 16, 2007,
our Board of Directors declared total preferred stock dividends
of $137 million for the fourth quarter of 2007, payable on
December 31, 2007.
OFF-BALANCE
SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES
We enter into certain business arrangements that are not
recorded in our condensed consolidated balance sheets or may be
recorded in amounts that are different from the full contract or
notional amount of the transaction. These arrangements are
commonly referred to as off-balance sheet
arrangements, and expose us to potential losses in excess
of the amounts recorded in the condensed consolidated balance
sheets. The most significant off-balance sheet arrangements that
we engage in result from the mortgage loan securitization and
resecuritization transactions that we routinely enter into as
part of the normal course of our business operations. We also
hold limited partnership interests in LIHTC partnerships that
are established to finance the
46
construction or development of low-income affordable multifamily
housing and other limited partnerships. LIHTC and other limited
partnerships may involve off-balance sheet entities, some of
which are consolidated on our balance sheets and some of which
are accounted for under the equity method.
Fannie
Mae MBS Transactions and Other Financial Guaranties
Table 21 presents a summary of our on- and off-balance sheet
Fannie Mae MBS and other guaranties as of September 30,
2007 and December 31, 2006.
Table
21: On- and Off-Balance Sheet MBS and Other Guaranty
Arrangements
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae MBS and other guaranties
outstanding(1)
|
|
$
|
2,214,180
|
|
|
$
|
1,996,941
|
|
Less: Fannie Mae MBS held in
portfolio(2)
|
|
|
175,290
|
|
|
|
199,644
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae MBS held by third parties and other guaranties
|
|
$
|
2,038,890
|
|
|
$
|
1,797,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $35.5 billion and
$19.7 billion in unpaid principal balance of other
guaranties as of September 30, 2007 and December 31,
2006, respectively. Excludes $99.1 billion and
$105.6 billion in unpaid principal balance of consolidated
Fannie Mae MBS as of September 30, 2007 and
December 31, 2006, respectively.
|
|
(2) |
|
Amounts represent unpaid principal
balance and are recorded in Investments in
securities in our condensed consolidated balance sheets.
|
LIHTC
Partnership Interests
As of September 30, 2007, we had a recorded investment in
LIHTC partnerships of $8.0 billion, compared with
$8.8 billion as of December 31, 2006. In March 2007,
we sold a portfolio of investments in LIHTC partnerships
reflecting approximately $676 million in future LIHTC tax
credits and the release of future capital obligations relating
to the investments. In July 2007, we sold a portfolio of
investments in LIHTC partnerships reflecting approximately
$254 million in future LIHTC tax credits and the release of
future capital obligations relating to the investments. For
additional information regarding our holdings in off-balance
sheet limited partnerships, refer to Notes to Condensed
Consolidated Financial StatementsNote 2,
Consolidations.
Credit
Risk Management
Mortgage
Credit Risk Management
Mortgage credit risk is the risk that a borrower will fail to
make required mortgage payments. We are exposed to credit risk
on our mortgage credit book of business because we either hold
the mortgage assets or have issued a guaranty in connection with
the creation of Fannie Mae MBS backed by mortgage assets.
Mortgage
Credit Book of Business
Table 22 displays the composition of our entire mortgage credit
book of business, which consists of both on- and off-balance
sheet arrangements, as of September 30, 2007 and
December 31, 2006. Our single-family mortgage credit book
of business accounted for approximately 94% of our entire
mortgage credit book of business as of both September 30,
2007 and December 31, 2006.
47
Table
22: Composition of Mortgage Credit Book of
Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
|
|
|
|
Single-Family(1)
|
|
|
Multifamily(2)
|
|
|
Total
|
|
|
|
|
|
|
Conventional(3)
|
|
|
Government(4)
|
|
|
Conventional(3)
|
|
|
Government(4)
|
|
|
Conventional(3)
|
|
|
Government(4)
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Mortgage
portfolio:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(6)
|
|
$
|
298,854
|
|
|
$
|
23,101
|
|
|
$
|
76,606
|
|
|
$
|
859
|
|
|
$
|
375,460
|
|
|
$
|
23,960
|
|
|
|
|
|
Fannie Mae MBS
|
|
|
172,518
|
|
|
|
2,246
|
|
|
|
312
|
|
|
|
214
|
|
|
|
172,830
|
|
|
|
2,460
|
|
|
|
|
|
Agency mortgage-related
securities(7)
|
|
|
30,898
|
|
|
|
1,723
|
|
|
|
|
|
|
|
50
|
|
|
|
30,898
|
|
|
|
1,773
|
|
|
|
|
|
Mortgage revenue bonds
|
|
|
3,186
|
|
|
|
2,896
|
|
|
|
7,616
|
|
|
|
2,458
|
|
|
|
10,802
|
|
|
|
5,354
|
|
|
|
|
|
Other mortgage-related
securities(8)
|
|
|
80,692
|
|
|
|
968
|
|
|
|
23,350
|
|
|
|
31
|
|
|
|
104,042
|
|
|
|
999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
|
586,148
|
|
|
|
30,934
|
|
|
|
107,884
|
|
|
|
3,612
|
|
|
|
694,032
|
|
|
|
34,546
|
|
|
|
|
|
Fannie Mae MBS held by third
parties(9)
|
|
|
1,948,986
|
|
|
|
15,467
|
|
|
|
37,780
|
|
|
|
1,149
|
|
|
|
1,986,766
|
|
|
|
16,616
|
|
|
|
|
|
Other credit
guaranties(10)
|
|
|
18,638
|
|
|
|
|
|
|
|
16,810
|
|
|
|
60
|
|
|
|
35,448
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage credit book of business
|
|
$
|
2,553,772
|
|
|
$
|
46,401
|
|
|
$
|
162,474
|
|
|
$
|
4,821
|
|
|
$
|
2,716,246
|
|
|
$
|
51,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty book of
business(11)
|
|
$
|
2,438,996
|
|
|
$
|
40,814
|
|
|
$
|
131,508
|
|
|
$
|
2,282
|
|
|
$
|
2,570,504
|
|
|
$
|
43,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
Single-Family(1)
|
|
|
Multifamily(2)
|
|
|
Total
|
|
|
|
|
|
|
Conventional(3)
|
|
|
Government(4)
|
|
|
Conventional(3)
|
|
|
Government(4)
|
|
|
Conventional(3)
|
|
|
Government(4)
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Mortgage
portfolio:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(6)
|
|
$
|
302,597
|
|
|
$
|
20,106
|
|
|
$
|
59,374
|
|
|
$
|
968
|
|
|
$
|
361,971
|
|
|
$
|
21,074
|
|
|
|
|
|
Fannie Mae MBS
|
|
|
198,335
|
|
|
|
709
|
|
|
|
277
|
|
|
|
323
|
|
|
|
198,612
|
|
|
|
1,032
|
|
|
|
|
|
Agency mortgage-related
securities(7)
|
|
|
29,987
|
|
|
|
1,995
|
|
|
|
|
|
|
|
56
|
|
|
|
29,987
|
|
|
|
2,051
|
|
|
|
|
|
Mortgage revenue bonds
|
|
|
3,394
|
|
|
|
3,284
|
|
|
|
7,897
|
|
|
|
2,349
|
|
|
|
11,291
|
|
|
|
5,633
|
|
|
|
|
|
Other mortgage-related
securities(8)
|
|
|
85,339
|
|
|
|
2,084
|
|
|
|
9,681
|
|
|
|
177
|
|
|
|
95,020
|
|
|
|
2,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
|
619,652
|
|
|
|
28,178
|
|
|
|
77,229
|
|
|
|
3,873
|
|
|
|
696,881
|
|
|
|
32,051
|
|
|
|
|
|
Fannie Mae MBS held by third
parties(9)
|
|
|
1,714,815
|
|
|
|
19,069
|
|
|
|
42,184
|
|
|
|
1,482
|
|
|
|
1,756,999
|
|
|
|
20,551
|
|
|
|
|
|
Other credit
guaranties(10)
|
|
|
3,049
|
|
|
|
|
|
|
|
16,602
|
|
|
|
96
|
|
|
|
19,651
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage credit book of business
|
|
$
|
2,337,516
|
|
|
$
|
47,247
|
|
|
$
|
136,015
|
|
|
$
|
5,451
|
|
|
$
|
2,473,531
|
|
|
$
|
52,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty book of
business(11)
|
|
$
|
2,218,796
|
|
|
$
|
39,884
|
|
|
$
|
118,437
|
|
|
$
|
2,869
|
|
|
$
|
2,337,233
|
|
|
$
|
42,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts reported reflect our
total single-family mortgage credit book of business. Of these
amounts, the portion of our conventional single-family mortgage
credit book of business for which we have access to detailed
loan-level information represented approximately 95% of our
total conventional single-family mortgage credit book of
business as of both September 30, 2007 and
December 31, 2006. Unless otherwise noted, the credit
statistics we provide in the Mortgage Credit Risk
Management discussion that follows relate only to this
specific portion of our conventional single-family mortgage
credit book of business. The remaining portion of our
single-family mortgage credit book of business consists of
non-Fannie Mae mortgage-related securities backed by
single-family mortgage loans, credit enhancements that we
provide on single-family mortgage assets and all other
single-family government related loans and securities.
Non-Fannie Mae mortgage-related securities held in our portfolio
include Freddie Mac securities, Ginnie Mae securities,
private-label mortgage-related securities, Fannie Mae MBS backed
by private-label mortgage-
|
48
|
|
|
|
|
related securities, and
housing-related municipal revenue bonds. Our Capital Markets
group prices and manages credit risk related to this specific
portion of our single-family mortgage credit book of business.
We may not have access to detailed loan-level data on these
particular mortgage-related assets and therefore may not manage
the credit performance of individual loans. However, a
substantial majority of these securities benefit from
significant forms of credit enhancement, including guaranties
from Ginnie Mae or Freddie Mac, insurance policies, structured
subordination and similar sources of credit protection. All
non-Fannie Mae agency securities held in our portfolio as of
September 30, 2007 and December 31, 2006 were rated
AAA/Aaa by Standard & Poors and Moodys.
Over 90% of non-agency mortgage-related securities held in our
portfolio as of both September 30, 2007 and
December 31, 2006 were rated AAA/Aaa by
Standard & Poors and Moodys.
|
|
(2) |
|
The amounts reported reflect our
total multifamily mortgage credit book of business. Of these
amounts, the portion of our multifamily mortgage credit book of
business for which we have access to detailed loan-level
information represented approximately 78% and 84% of our total
multifamily mortgage credit book as of September 30, 2007
and December 31, 2006, respectively. Unless otherwise
noted, the credit statistics we provide in the Mortgage
Credit Risk Management discussion that follows relate only
to this specific portion of our multifamily mortgage credit book
of business.
|
|
(3) |
|
Refers to mortgage loans and
mortgage-related securities that are not guaranteed or insured
by the U.S. government or any of its agencies.
|
|
(4) |
|
Refers to mortgage loans and
mortgage-related securities guaranteed or insured by the U.S.
government or one of its agencies.
|
|
(5) |
|
Mortgage portfolio data is reported
based on unpaid principal balance.
|
|
(6) |
|
Includes unpaid principal totaling
$100.0 billion and $105.5 billion as of
September 30, 2007 and December 31, 2006,
respectively, related to mortgage-related securities that were
consolidated under FIN 46R and mortgage-related securities
created from securitization transactions that did not meet the
sales criteria under SFAS 140, which effectively resulted
in mortgage-related securities being accounted for as loans.
|
|
(7) |
|
Consists of mortgage-related
securities issued by Freddie Mac and Ginnie Mae.
|
|
(8) |
|
Consists of mortgage-related
securities issued by entities other than Fannie Mae, Freddie Mac
or Ginnie Mae.
|
|
(9) |
|
Consists of Fannie Mae MBS held by
third-party investors. The principal balance of resecuritized
Fannie Mae MBS is included only once in the reported amount.
|
|
(10) |
|
Includes single-family and
multifamily credit enhancements that we have provided and that
are not otherwise reflected in the table.
|
|
(11) |
|
Consists of mortgage loans held in
our portfolio, Fannie Mae MBS held in our portfolio, Fannie Mae
MBS held by third parties and other credit guaranties. Excludes
agency mortgage-related securities, mortgage revenue bonds and
other mortgage-related securities held in our portfolio for
which we do not provide a guaranty.
|
49
Single-Family
Table 23 provides information on the product distribution of our
conventional single-family business volumes for the three months
ended September 30, 2007 and 2006, and our conventional
single-family mortgage credit book of business as of
September 30, 2007 and December 31, 2006.
|
|
Table
23:
|
Product
Distribution of Conventional Single-Family Business Volume and
Mortgage Credit Book of
Business(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
Percent of
|
|
|
|
Business
Volume(2)
|
|
|
Book of
Business(3)
|
|
|
|
For the
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
74
|
%
|
|
|
69
|
%
|
|
|
70
|
%
|
|
|
68
|
%
|
Intermediate-term
|
|
|
5
|
|
|
|
7
|
|
|
|
15
|
|
|
|
18
|
|
Interest-only
|
|
|
9
|
|
|
|
6
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-rate
|
|
|
88
|
|
|
|
82
|
|
|
|
88
|
|
|
|
87
|
|
Adjustable-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only
|
|
|
7
|
|
|
|
9
|
|
|
|
5
|
|
|
|
4
|
|
Negative-amortizing
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
|
|
2
|
|
Other ARMs
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable-rate
|
|
|
12
|
|
|
|
18
|
|
|
|
12
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As noted in Table 22 above, we
generally have access to detailed loan-level statistics only on
conventional single-family mortgage loans held in our portfolio
and backing Fannie Mae MBS (whether held in our portfolio or
held by third parties).
|
|
(2) |
|
Percentages calculated based on
unpaid principal balance of loans at time of acquisition.
Single-family business volume refers to both single-family
mortgage loans we purchase for our mortgage portfolio and
single-family mortgage loans we securitize into Fannie Mae MBS.
|
|
(3) |
|
Percentages calculated based on
unpaid principal balance of loans as of the end of each period.
|
Fixed-Rate and ARM Loans: As presented in
Table 23 above, our conventional single-family mortgage credit
book of business continues to consist mostly of long-term
fixed-rate mortgage loans. In addition, a greater proportion of
our conventional single-family business volumes consisted of
fixed-rate loans for the third quarter of 2007, as compared with
the third quarter of 2006.
Alt-A Loans: An Alt-A mortgage loan generally
refers to a loan that can be underwritten with lower or
alternative documentation than a full documentation mortgage
loan but that may also include other alternative product
features. Alt-A mortgage loans generally have a higher risk of
default than non-Alt-A mortgage loans. In reporting our Alt-A
exposure, we have classified mortgage loans as Alt-A if the
lenders that deliver the mortgage loans to us have classified
the loans as Alt-A based on documentation or other product
features. As of September 30, 2007, we estimate that
approximately 12% of our total single-family mortgage credit
book of business consisted of Alt-A mortgage loans or Fannie Mae
MBS backed by Alt-A mortgage loans. During 2007, we restricted
our eligibility standards for Alt-A mortgage loans eligible for
delivery to us. Our acquisitions of Alt-A mortgage loans have a
combination of credit enhancement and pricing that we believe
adequately reflects the higher credit risk posed by these
mortgages. We will determine the timing and level of our
acquisition of Alt-A mortgage loans in the future based on our
assessment of the availability and cost of credit enhancement
with adequate levels of pricing to compensate for the risks.
50
Subprime Loans: A subprime mortgage loan
generally refers to a mortgage loan made to a borrower with a
weaker credit profile than that of a prime borrower. As a result
of the weaker credit profile, subprime borrowers have a higher
likelihood of default than prime borrowers. Subprime mortgage
loans are typically originated by lenders specializing in this
type of business or by subprime divisions of large lenders,
using processes unique to subprime loans. In reporting our
subprime exposure, we have classified mortgage loans as subprime
if the mortgage loans are originated by one of these specialty
lenders or a subprime division of a large lender. Approximately
0.3% of our total single-family mortgage credit book of business
as of September 30, 2007 consisted of subprime mortgage
loans or Fannie Mae MBS backed by subprime mortgage loans. Less
than 1% of our single-family business volume for the nine months
ended September 30, 2007 consisted of subprime mortgage
loans or Fannie Mae MBS backed by subprime mortgage loans. Our
acquisitions of subprime mortgage loans have a combination of
credit enhancement and pricing that we believe adequately
reflects the higher credit risk posed by these mortgages. In
order to respond to the current subprime mortgage crisis and
provide liquidity to the market, we intend to increase our
purchase of subprime mortgages. We will determine the timing and
level of our acquisition of subprime mortgage loans in the
future based on our assessment of the availability and cost of
credit enhancement with adequate levels of pricing to compensate
for the risks.
Alt-A and Subprime Securities: We held
approximately $106.2 billion in non-Fannie Mae structured
mortgage-related securities in our investment portfolio as of
September 30, 2007. Of this amount, $76.2 billion
consisted of private-label mortgage-related securities backed by
subprime or Alt-A mortgage loans. As of September 30, 2007,
we held in our investment portfolio approximately
$33.8 billion in private-label mortgage-related securities
backed by Alt-A mortgage loans and approximately
$42.4 billion in private-label mortgage-related securities
backed by subprime mortgage loans. We also guaranteed
approximately $6.2 billion in resecuritized subprime
mortgage-related securities as of September 30, 2007.
Approximately $18.6 billion of these Alt-A- and
subprime-backed private-label mortgage-related securities were
classified as trading securities in our condensed consolidated
balance sheets as of September 30, 2007. In reporting our
Alt-A and subprime exposure, we have classified private-label
mortgage-related securities as Alt-A or subprime if the
securities were labeled as such when issued.
To date, we generally have focused our purchases of
private-label mortgage-related securities backed by subprime or
Alt-A loans on the highest-rated tranches of these securities
available at the time of acquisition. For our private-label
mortgage-related securities backed by subprime loans that were
rated AAA at acquisition, the weighted average credit
enhancement, which is predominantly in the form of
subordination, is 32%. In 2007, we began to acquire a limited
amount of subprime-backed private-label mortgage-related
securities of investment grades below AAA. As of
September 30, 2007, approximately $441 million in
unpaid principal balance, or 1%, of the subprime-backed
private-label mortgage-related securities in our portfolio had a
credit rating of less than AAA. All of these subprime-backed
mortgage-related securities with a credit rating of less than
AAA were classified as trading securities in our condensed
consolidated balance sheets as of September 30, 2007.
In October 2007, the credit ratings of nine subprime
private-label mortgage-related securities held in our portfolio,
with an aggregate unpaid principal balance of $263 million
as of September 30, 2007, were downgraded by
Standard & Poors. One of these downgraded
securities, with an unpaid principal balance of
$178 million as of September 30, 2007, classified as
available-for-sale, was downgraded from AAA to AA. The other
eight downgraded securities, with an aggregate unpaid principal
balance of $85 million as of September 30, 2007, are
classified as trading. Prior to these downgrades, these eight
securities had credit ratings that were less than AAA. During
October 2007 and through November 8, 2007, seven of our
AAA-rated subprime private-label mortgage-related securities,
with an aggregate unpaid principal balance of approximately
$1.3 billion, have been put under review for possible
credit rating downgrade or on negative watch. As of
November 8, 2007, all of these securities continue to be
rated AAA. Of these securities, one security with an unpaid
principal balance of $255 million is classified as trading,
while the remaining six securities, with an aggregate unpaid
principal balance of $1.0 billion, are classified as
available-for-sale.
We have not recorded any impairment of the securities classified
as available-for-sale, as they continue to be rated investment
grade and we have the intent and ability to hold these
securities until the earlier of recovery
51
of the unrealized amounts or maturity. As of November 8,
2007, all of our private-label mortgage-related securities
backed by Alt-A mortgage loans were rated AAA and none had been
downgraded or placed under review for possible downgrade.
For the nine months ended September 30, 2007, we estimate
that the fair value of the subprime private-label
mortgage-related securities held in our portfolio decreased by
$896 million. Of this decrease, $285 million related
to securities classified as trading and is therefore reflected
in our earnings as losses on trading securities, which are
recorded as a component of Investment gains (losses),
net, for the nine months ended September 30, 2007.
The remaining $611 million of this decrease related to
securities classified as available-for-sale and is therefore
reflected after-tax in AOCI. In addition, we estimate that the
fair value of the Alt-A private-label mortgage-related
securities held in our portfolio decreased by $344 million
for the nine months ended September 30, 2007. Of this
decrease, $91 million was reflected in our earnings as
losses on trading securities.
Credit Characteristics: The weighted average
credit score, the weighted average original loan-to-value ratio
and the weighted average estimated mark-to-market loan-to-value
ratio for our conventional single-family mortgage credit book of
business were 721, 71% and 59%, respectively, as of
September 30, 2007, as compared with 721, 70% and 55% ,
respectively, as of December 31, 2006. Approximately 16% of
our conventional single-family mortgage credit book of business
had an estimated mark-to-market loan-to-value ratio greater than
80% as of September 30, 2007, up from 10% as of
December 31, 2006.
Multifamily
As of September 30, 2007, the weighted average original
loan-to-value ratio for our multifamily mortgage credit book of
business remained at 68%, and the percentage of our multifamily
mortgage credit book of business with an original loan-to-value
ratio greater than 80% remained at 6%.
Serious
Delinquency
The serious delinquency rate is an indicator of potential future
foreclosures, although most loans that become seriously
delinquent do not result in foreclosure. Table 24 below compares
the serious delinquency rates for all conventional single-family
loans and multifamily loans with credit enhancements and without
credit enhancements.
52
Table
24: Serious Delinquency Rates
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September 30, 2007
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December 31, 2006
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|
September 30, 2006
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Serious
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|
Serious
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|
Serious
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|
Book
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|
Delinquency
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|
Book
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|
Delinquency
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|
Book
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|
Delinquency
|
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|
|
|
|
|
Outstanding(1)
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|
Rate(2)
|
|
|
Outstanding(1)
|
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|
Rate(2)
|
|
|
Outstanding(1)
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|
Rate(2)
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|
|
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|
Conventional single-family delinquency rates by geographic
region:(3)
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|
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|
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|
Midwest
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|
17
|
%
|
|
|
1.14
|
%
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|
|
17
|
%
|
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|
1.01
|
%
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17
|
%
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0.94
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%
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|
Northeast
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19
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|
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|
0.79
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|
|
19
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|
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|
0.67
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|
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19
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|
|
|
0.62
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|
|
|
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|
Southeast
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25
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|
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|
0.88
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|
|
24
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|
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|
0.68
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|
24
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|
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|
0.64
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|
|
|
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|
Southwest
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16
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|
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|
0.69
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|
16
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|
0.69
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16
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|
|
|
0.69
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|
|
|
|
|
West
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23
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|
|
|
0.33
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|
|
|
24
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|
|
|
0.20
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|
|
|
24
|
|
|
|
0.17
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conventional single-family loans
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|
|
100
|
%
|
|
|
0.78
|
%
|
|
|
100
|
%
|
|
|
0.65
|
%
|
|
|
100
|
%
|
|
|
0.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional single-family loans:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit enhanced
|
|
|
20
|
%
|
|
|
2.18
|
%
|
|
|
19
|
%
|
|
|
1.81
|
%
|
|
|
19
|
%
|
|
|
1.74
|
%
|
|
|
|
|
Non-credit enhanced
|
|
|
80
|
|
|
|
0.43
|
|
|
|
81
|
|
|
|
0.37
|
|
|
|
81
|
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conventional single-family loans
|
|
|
100
|
%
|
|
|
0.78
|
%
|
|
|
100
|
%
|
|
|
0.65
|
%
|
|
|
100
|
%
|
|
|
0.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit enhanced
|
|
|
89
|
%
|
|
|
0.08
|
%
|
|
|
96
|
%
|
|
|
0.07
|
%
|
|
|
96
|
%
|
|
|
0.13
|
%
|
|
|
|
|
Non-credit enhanced
|
|
|
11
|
|
|
|
0.11
|
|
|
|
4
|
|
|
|
0.35
|
|
|
|
4
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total multifamily loans
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|
100
|
%
|
|
|
0.08
|
%
|
|
|
100
|
%
|
|
|
0.08
|
%
|
|
|
100
|
%
|
|
|
0.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
(1) |
|
Reported based on unpaid principal
balance of loans, where we have detailed loan-level information.
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|
(2) |
|
Calculated based on number of loans
for single-family and unpaid principal balance for multifamily.
We include all of the conventional single-family loans that we
own and that back Fannie Mae MBS in the calculation of the
single-family delinquency rate. We include the unpaid principal
balance of all multifamily loans that we own or that back Fannie
Mae MBS and any housing bonds for which we provide credit
enhancement in the calculation of the multifamily serious
delinquency rate.
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|
(3) |
|
Midwest consists of IL, IN, IA, MI,
MN, NE, ND, OH, SD and WI. Northeast includes CT, DE, ME, MA,
NH, NJ, NY, PA, PR, RI, VT and VI. Southeast consists of AL, DC,
FL, GA, KY, MD, MS, NC, SC, TN, VA and WV. Southwest consists of
AZ, AR, CO, KS, LA, MO, NM, OK, TX and UT. West consists of AK,
CA, GU, HI, ID, MT, NV, OR, WA and WY.
|
The increase in our single-family serious delinquency rate as of
September 30, 2007 from our rate as of September 30,
2006 was due to continued economic weakness in the Midwest,
particularly in Ohio, Michigan and Indiana, and to the continued
housing market downturn and decline in home prices throughout
much of the country. We have experienced increases in serious
delinquency rates across our conventional single-family mortgage
credit book, including in higher risk loan categories, such as
subprime loans, Alt-A loans, adjustable-rate loans,
interest-only loans, loans made for the purchase of investment
properties, negative-amortizing loans, loans to borrowers with
lower credit scores and loans with high loan-to-value ratios. We
have seen particularly rapid increases in serious delinquency
rates in some higher risk loan categories, such as Alt-A loans,
interest-only loans, loans with subordinate financing and loans
made for the purchase of condominiums. Many of these higher risk
loans were originated in 2006 and the first half of 2007. We
have also experienced a significant increase in delinquency
rates in loans originated in California, Florida, Nevada and
Arizona. These states had previously experienced very rapid home
price appreciation and are now experiencing home price declines.
The conventional single-family serious delinquency rates for
California and Florida, which represent the two largest states
in our single-family mortgage credit book of business in terms
of unpaid principal balance, climbed to 0.30% and 0.99%,
respectively, as of September 30, 2007, from 0.11% and
0.37%, respectively, as of September 30, 2006. We expect
the housing market to continue to deteriorate
53
and home prices to continue to decline in these states and on a
national basis. Accordingly, we expect our single-family serious
delinquency rate to continue to increase for the remainder of
2007 and in 2008.
The decline in our multifamily serious delinquency rate as of
September 30, 2007 from our rate as of September 30,
2006 was due primarily to payoffs and the resolution of problems
associated with loans secured by properties affected by
Hurricane Katrina.
Foreclosure
and REO Activity
Foreclosure and real estate owned (REO) activity
affect the level of our credit losses. Table 25 below provides
information, by region, on our foreclosure activity for the
first nine months of 2007 and 2006. Regional REO acquisition and
charge-off trends generally follow a pattern that is similar to,
but lags, that of regional delinquency trends.
Table
25: Single-Family and Multifamily Foreclosed
Properties
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Single-family foreclosed properties (number of properties):
|
|
|
|
|
|
|
|
|
Beginning of year inventory of single-family foreclosed
properties
(REO)(1)
|
|
|
25,125
|
|
|
|
20,943
|
|
Acquisitions by geographic
area:(2)
|
|
|
|
|
|
|
|
|
Midwest
|
|
|
14,754
|
|
|
|
11,799
|
|
Northeast
|
|
|
2,826
|
|
|
|
1,944
|
|
Southeast
|
|
|
8,559
|
|
|
|
6,857
|
|
Southwest
|
|
|
7,230
|
|
|
|
5,858
|
|
West
|
|
|
1,586
|
|
|
|
408
|
|
|
|
|
|
|
|
|
|
|
Total properties acquired through foreclosure
|
|
|
34,955
|
|
|
|
26,866
|
|
Dispositions of REO
|
|
|
(30,456
|
)
|
|
|
(23,743
|
)
|
|
|
|
|
|
|
|
|
|
End of period inventory of single-family foreclosed properties
(REO)(1)
|
|
|
29,624
|
|
|
|
24,066
|
|
|
|
|
|
|
|
|
|
|
Carrying value of single-family foreclosed properties (dollars
in
millions)(3)
|
|
$
|
2,913
|
|
|
$
|
1,905
|
|
|
|
|
|
|
|
|
|
|
Single-family foreclosure
rate(4)
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
Multifamily foreclosed properties (number of properties):
|
|
|
|
|
|
|
|
|
Ending inventory of multifamily foreclosed properties (REO)
|
|
|
12
|
|
|
|
9
|
|
Carrying value of multifamily foreclosed properties (dollars in
millions)(3)
|
|
$
|
63
|
|
|
$
|
57
|
|
|
|
|
(1) |
|
Includes deeds in lieu of
foreclosure.
|
|
(2) |
|
See footnote 3 to Table 24 for
states included in each geographic region.
|
|
(3) |
|
Excludes foreclosed property claims
receivables, which are reported in our condensed consolidated
balance sheets as a component of Acquired property,
net.
|
|
(4) |
|
Estimated based on the total number
of properties acquired through foreclosure as a percentage of
the total number of loans in our conventional single-family
mortgage credit book as of the end of each respective period.
|
The increase in foreclosures during the first nine months of
2007 was driven by the housing market downturn and the continued
impact of weak economic conditions in the Midwest, particularly
Ohio, Indiana and Michigan. The Midwest accounted for
approximately 20% of the loans in our conventional single-family
mortgage credit book of business as of December 31, 2006;
however, this region accounted for approximately 42% of the
single-family properties we acquired through foreclosure during
the first nine months of 2007.
The continued weakness in regional economic conditions in the
Midwest and the continued housing market downturn and decline in
home prices on a national basis has resulted in a higher
percentage of our mortgage loans that transition from delinquent
to foreclosure status, as well as a faster transition from
delinquent to foreclosure status, particularly for loans
originated in 2006 and 2007. In addition, the combined effect of
the
54
disruption in the subprime market, the overall erosion of
property values and near record levels of unsold properties have
slowed the sale of, and reduced the sales prices of, our
foreclosed single-family properties. As a result, we expect an
increase in our overall level of foreclosures and credit losses
for 2007 as compared with 2006. We believe that our level of
foreclosures and credit losses is likely to continue to increase
in 2008.
Credit
Losses
Credit losses consist of (1) charge-offs, excluding losses on
delinquent loans we purchase from our MBS trusts, net of
recoveries, plus (2) foreclosed property expense. Table 26 below
presents credit losses for the three and nine months ended
September 30, 2007 and 2006.
Table
26: Credit Loss Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Rate(1)
|
|
|
2006
|
|
|
Rate(1)
|
|
|
2007
|
|
|
Rate(1)
|
|
|
2006
|
|
|
Rate(1)
|
|
|
|
(Dollars in millions)
|
|
|
Charge-offs, net of recoveries
|
|
$
|
838
|
|
|
|
12.3
|
bp
|
|
$
|
104
|
|
|
|
1.7
|
bp
|
|
$
|
1,222
|
|
|
|
6.2
|
bp
|
|
$
|
330
|
|
|
|
1.8
|
bp
|
Foreclosed property expense
|
|
|
113
|
|
|
|
1.7
|
|
|
|
52
|
|
|
|
0.8
|
|
|
|
269
|
|
|
|
1.3
|
|
|
|
89
|
|
|
|
0.5
|
|
Less excess of purchase price over fair value of delinquent
loans purchased from
trusts(2)
|
|
|
(670)
|
|
|
|
(9.9)
|
|
|
|
(37)
|
|
|
|
(0.6)
|
|
|
|
(805)
|
|
|
|
(4.1)
|
|
|
|
(153)
|
|
|
|
(0.8)
|
|
Impact of
SOP 03-3
on charge-offs and foreclosed property
expense(3)
|
|
|
62
|
|
|
|
0.9
|
|
|
|
20
|
|
|
|
0.4
|
|
|
|
113
|
|
|
|
0.6
|
|
|
|
56
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
losses(4)(5)
|
|
$
|
343
|
|
|
|
5.0
|
bp
|
|
$
|
139
|
|
|
|
2.3
|
bp
|
|
$
|
799
|
|
|
|
4.0
|
bp
|
|
$
|
322
|
|
|
|
1.8
|
bp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on annualized amount for line
item presented divided by the average total mortgage credit book
of business during the period.
|
|
(2) |
|
Represents the amount we record as
a loss when the purchase price we pay to purchase delinquent
loans from Fannie Mae MBS trusts exceeds the fair value of the
loan at the time of purchase. Under our MBS trust agreements, we
have the option to purchase loans from the MBS trust, at par
plus accrued interest, if four or more consecutive monthly
payments have not been made. When we purchase a delinquent loan
from one of our MBS trusts, we record the delinquent loan at the
lower of the loans acquisition price or its fair value in
accordance with
SOP 03-3.
To the extent that the purchase price of the loan exceeds the
fair value of the loan, we recognize a loss at the time we
acquire the loan.
|
|
(3) |
|
Represents the impact of previously
recorded
SOP 03-3
reductions to the amount of charge-offs and foreclosed property
expense for delinquent loans purchased from MBS trusts that go
to foreclosure. Because the carrying value of these loans has
been reduced below the purchase price, any charge-off and
foreclosed property expense amounts that we record if we
foreclose on the mortgage also are reduced. In order to reflect
in our credit losses the total loss associated with
SOP 03-3
loans that we subsequently determine are uncollectible, we have
added back to our credit losses the loss we record at the date
of purchase when the fair value is below the purchase price.
|
|
(4) |
|
Excludes impact of excess of
purchase price over fair value of delinquent loans purchased
from trusts.
|
|
(5) |
|
Interest forgone on nonperforming
loans in our mortgage portfolio reduces our net interest income
but is not reflected in our credit losses total. In addition,
other-than-temporary impairment resulting from deterioration in
credit quality of our mortgage-related securities is not
included in our credit losses total.
|
The decline in home prices on a national basis during the first
nine months of 2007 contributed to higher default rates and loss
severities, causing an increase in charge-offs and foreclosed
property expense for the first nine months of 2007. In addition,
we experienced a substantial increase in losses recorded on
delinquent loans we purchased from our MBS trusts during the
third quarter of 2007, as the disruption in the mortgage credit
market and the continued decline in home prices substantially
reduced the fair value of the delinquent loans we purchased from
our MBS trusts.
We have revised our presentation of credit losses to reflect
only our realized credit losses. Accordingly, we have excluded
from our credit losses, and from our credit loss ratio, any
initial losses that we are required to record pursuant to
SOP 03-3
when the purchase price of delinquent loans that we purchase
from Fannie Mae MBS trusts exceeds the fair value of the loans
at the time of purchase. These initial losses affect our
provision for
55
credit losses and are reported as a component of our
charge-offs, net of recoveries in our condensed consolidated
financial statements.
In our 2006
Form 10-K,
we provided an estimate that our credit loss ratio for 2007
would be within a range of 4 to 6 basis points. As of the
date of this filing, we believe our credit loss ratio for 2007,
based on our credit losses as reported in Table 26, will remain
within our normal historical average range of 4 to 6 basis
points. In certain periods, we expect our credit loss ratio is
likely to move outside of this historical average range,
primarily due to market conditions and the risk profile of our
mortgage credit book of business. We expect that, in 2008, our
credit loss ratio will increase above our normal historical
average range of 4 to 6 basis points.
Pursuant to our September 1, 2005 agreement with OFHEO, we
agreed to disclose on a quarterly basis the estimated impact on
our expected credit losses from an immediate 5% decline in
single-family home prices for the entire United States, which we
believe is a stressful scenario based on housing data from
OFHEO. Table 27 shows our single-family credit loss sensitivity,
before and after consideration of the effect of projected credit
risk sharing proceeds, such as private mortgage insurance claims
and other credit enhancement, as of September 30, 2007,
June 30, 2007, March 31, 2007 and December 31,
2006. The significant increase in the net credit loss
sensitivity that occurred during the first nine months of 2007
from the end of 2006 was primarily attributable to the decline
in home prices during the first nine months of 2007.
Table
27: Single-Family Credit Loss
Sensitivity(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Gross credit loss
sensitivity(2)
|
|
$
|
5,808
|
|
|
$
|
5,185
|
|
|
$
|
4,258
|
|
|
$
|
3,887
|
|
Less: Projected credit risk sharing proceeds
|
|
|
(2,969
|
)
|
|
|
(2,577
|
)
|
|
|
(2,069
|
)
|
|
|
(1,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit loss sensitivity
|
|
$
|
2,839
|
|
|
$
|
2,608
|
|
|
$
|
2,189
|
|
|
$
|
1,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family whole loans and Fannie Mae MBS
|
|
$
|
2,421,550
|
|
|
$
|
2,333,256
|
|
|
$
|
2,260,575
|
|
|
$
|
2,203,246
|
|
Single-family net credit loss sensitivity as a percentage of
single-family whole loans and Fannie Mae MBS
|
|
|
0.12
|
%
|
|
|
0.11
|
%
|
|
|
0.10
|
%
|
|
|
0.09
|
%
|
|
|
|
(1) |
|
Represents total economic credit
losses, which include net charge-offs/recoveries, foreclosed
property expenses, forgone interest and the cost of carrying
foreclosed properties. Excludes amounts recorded as losses in
accordance with
SOP 03-3
when the purchase price we pay to purchase delinquent loans from
Fannie Mae MBS trusts exceeds the fair value of the loan at the
time of purchase. Calculations based on approximately 93% of our
total single-family mortgage credit book of business as of
September 30, 2007, June 30, 2007, March 31, 2007
and 92% as of December 31, 2006. The mortgage loans and
mortgage-related securities that are included in these estimates
consist of: (i) single-family Fannie Mae MBS (whether held
in our portfolio or held by third parties), excluding certain
whole loan REMICs and private-label wraps;
(ii) single-family mortgage loans, excluding mortgages
secured only by second liens, subprime mortgages, manufactured
housing chattel loans and reverse mortgages; and
(iii) long-term standby commitments. We expect the
inclusion in our estimates of the excluded products may impact
the estimated sensitivities set forth in the preceding
paragraphs.
|
|
(2) |
|
Reflects the gross sensitivity of
our expected future credit losses to an immediate 5% decline in
home values for first lien single-family whole loans we own or
that back Fannie Mae MBS. After the initial shock, we estimate
home price growth rates return to the rate projected by our
credit pricing models.
|
Allowance
for Loan Losses and Reserve for Guaranty Losses
The combined allowance for loan losses and reserve for guaranty
losses increased to $1.4 billion as of September 30,
2007, from $859 million as of December 31, 2006. This
increase was due to higher charge-offs, attributable to the
increase in loan loss severities and default rates due to the
national decline in home prices and the impact of continued
economic weakness in the Midwest.
56
OFHEO Direction on Interagency Guidance on Nontraditional
Mortgages and Subprime Lending
In September 2006, five federal financial regulatory agencies
jointly issued Interagency Guidance on Nontraditional
Mortgage Product Risks to address risks posed by mortgage
products that allow borrowers to defer repayment of principal or
interest, and the layering of risks that results from combining
these product types with other features that may compound risk.
In June 2007, the same financial regulatory agencies issued the
Statement on Subprime Mortgage Lending, which
addresses risks relating to certain subprime mortgages. The
September 2006 and June 2007 interagency guidance directed
regulated financial institutions that originate nontraditional
and subprime mortgage loans to follow prudent lending practices,
including safe and sound underwriting practices and providing
borrowers with clear and balanced information about the relative
benefits and risks of these products sufficiently early in the
process to enable them to make informed decisions.
OFHEO directed us to apply the risk management, underwriting and
consumer protection principles of both the September 2006 and
June 2007 interagency guidance to the mortgage loans and
mortgage-related securities that we acquire for our portfolio
and for securitization into Fannie Mae MBS. Accordingly, we have
made changes to our underwriting standards implementing the
interagency guidance. In addition to the changes made to
implement the interagency guidance, we have tightened loan
eligibility in most high risk loan categories. We are actively
managing our single-family eligibility standards and pricing to
account for rapidly changing market conditions.
Institutional
Counterparty Credit Risk Management
Institutional counterparty risk is the risk that institutional
counterparties may be unable to fulfill their contractual
obligations to us. Our primary exposure to institutional
counterparty risk exists with our lending partners and
servicers, mortgage insurers, dealers who distribute our debt
securities or who commit to sell mortgage pools or loans,
issuers of investments included in our liquid investment
portfolio, and derivatives counterparties. Refer to
Part IItem 1ARisk Factors of
our 2006
Form 10-K,
filed with the SEC on August 16, 2007, as updated by
Part IIItem 1ARisk Factors of
this report for a description of the risks associated with our
institutional counterparties.
Mortgage
Insurers
As of September 30, 2007, we were the beneficiary of
primary mortgage insurance coverage on $329.0 billion of
single-family loans in our portfolio or underlying Fannie Mae
MBS, which represented approximately 14% of our single-family
mortgage credit book of business, compared with
$272.1 billion, or approximately 12%, of our single-family
mortgage credit book of business as of December 31, 2006.
In addition, as of September 30, 2007, we were the
beneficiary of pool mortgage insurance coverage on
$128.3 billion of single-family loans, including
conventional and government loans, in our portfolio or
underlying Fannie Mae MBS, compared with $106.6 billion as
of December 31, 2006.
Two of our seven primary mortgage insurers have recently had
their external ratings for claims paying ability or insurer
financial strength downgraded by Fitch from AA to AA-. Both have
maintained their Standard & Poors and
Moodys ratings of AA and Aa3, respectively. As of
September 30, 2007, these two mortgage insurers provided
primary and pool mortgage insurance coverage on
$59.1 billion and $27.8 billion, respectively, of the
single-family loans in our portfolio or underlying Fannie Mae
MBS, which represented approximately 2% and 1%, respectively, of
our single-family mortgage credit book of business. Ratings
downgrades imply an increased risk that these mortgage insurers
will fail to fulfill their obligations to reimburse us for
claims under insurance policies. We continue to closely monitor
our exposure to our mortgage insurer counterparties.
Before we consider an insurer to be a qualified mortgage
insurer, we generally require that an insurer obtain and
maintain external ratings of claims paying ability of at least
Aa3 from Moodys and AA- from Standard &
Poors and Fitch. If a mortgage insurer were downgraded
below AA-/Aa3 by any of the three national rating agencies, we
would evaluate the insurer, the current market environment and
our alternative sources of credit enhancement. Based on the
outcome of our evaluation, we could restrict that insurer from
conducting certain
57
types of business with us and we may take actions that may
include not purchasing loans insured by that mortgage insurer.
Restricting our business activity with one or more of the seven
primary mortgage insurers would increase our concentration risk
with the remaining insurers in the industry.
Recent
Events Relating to Lender Customers and Mortgage
Servicers
Mortgage and credit market conditions deteriorated rapidly in
the third quarter of 2007. Factors negatively affecting the
mortgage and credit markets in recent months include significant
volatility, lower levels of liquidity, wider credit spreads,
rating agency downgrades and significantly higher levels of
mortgage foreclosures and delinquencies, particularly with
respect to subprime mortgage loans. These challenging market
conditions have adversely affected, and are expected to continue
to adversely affect, the liquidity and financial condition of a
number of our lender customers and mortgage servicers. Several
of our lender customers and servicers have experienced ratings
downgrades and liquidity constraints, including Countrywide
Financial Corporation and its affiliates, our largest lender
customer and servicer. The weakened financial condition and
liquidity position of some of our lender customers and mortgage
servicers may negatively affect their ability to perform their
obligations to us and the quality of the services that they
provide to us. In addition, our arrangements with our lender
customers and mortgage servicers could result in significant
exposure to us if any one of our significant lender customers
were to default or experience a serious liquidity event. The
failure of any of our primary lender customers or mortgage
servicers to meet their obligations to us could have a material
adverse effect on our results of operations and financial
condition.
In response to these market conditions, we have increased the
frequency and depth of our counterparty monitoring, including
targeting higher risk counterparties for additional financial
and on-site
reviews. We have also changed the assumptions of our stress
analyses to reflect deteriorating market conditions and are
implementing measures to reduce our potential loss exposure to
some of our higher risk counterparties.
Interest
Rate Risk Management and Other Market Risks
Market risk represents the exposure to potential changes in the
fair value of our net assets from changes in prevailing market
conditions. A significant market risk we face and actively
manage for our net portfolio is interest rate riskthe risk
of changes in our long-term earnings or in the value of our net
assets due to changes in interest rates. Our net portfolio
consists of our existing investments in mortgage assets,
investments in non-mortgage securities, our outstanding debt
used to fund those assets, and the derivatives used to
supplement our debt instruments and manage interest rate risk.
It also includes any priced asset, debt and derivatives
commitments, but excludes our existing guaranty business. Our
Capital Markets group, which has primary responsibility for
managing the interest rate risk of our net portfolio, employs an
integrated interest rate risk management strategy that includes
asset selection and structuring of our liabilities, including
debt and derivatives, to match and offset the interest rate
characteristics of our balance sheet assets and liabilities as
much as possible.
Derivatives
Activity
The primary tool we use to manage the interest rate risk
implicit in our mortgage assets is the variety of debt
instruments we issue. We supplement our issuance of debt with
derivative instruments, which are an integral part of our
strategy in managing interest rate risk. Table 28 presents, by
derivative instrument type, our risk management derivative
activity for the nine months ended September 30, 2007,
along with the stated maturities of derivatives outstanding as
of September 30, 2007.
58
Table
28: Activity and Maturity Data for Risk Management
Derivatives(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
Swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-
|
|
|
Receive-
|
|
|
|
|
|
Foreign
|
|
|
Pay-
|
|
|
Receive-
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
Fixed(2)
|
|
|
Fixed(3)
|
|
|
Basis(4)
|
|
|
Currency
|
|
|
Fixed
|
|
|
Fixed
|
|
|
Rate Caps
|
|
|
Other(5)
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Notional balance as of December 31, 2006
|
|
$
|
268,068
|
|
|
$
|
247,084
|
|
|
$
|
950
|
|
|
$
|
4,551
|
|
|
$
|
95,350
|
|
|
$
|
114,921
|
|
|
$
|
14,000
|
|
|
$
|
469
|
|
|
$
|
745,393
|
|
Additions
|
|
|
153,321
|
|
|
|
115,994
|
|
|
|
7,951
|
|
|
|
791
|
|
|
|
3,120
|
|
|
|
22,408
|
|
|
|
100
|
|
|
|
255
|
|
|
|
303,940
|
|
Terminations(6)
|
|
|
(91,732
|
)
|
|
|
(106,176
|
)
|
|
|
(500
|
)
|
|
|
(1,700
|
)
|
|
|
(12,276
|
)
|
|
|
(11,014
|
)
|
|
|
(11,350
|
)
|
|
|
(220
|
)
|
|
|
(234,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional balance as of September 30, 2007
|
|
$
|
329,657
|
|
|
$
|
256,902
|
|
|
$
|
8,401
|
|
|
$
|
3,642
|
|
|
$
|
86,194
|
|
|
$
|
126,315
|
|
|
$
|
2,750
|
|
|
$
|
504
|
|
|
$
|
814,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future maturities of notional
amounts:(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1 year
|
|
$
|
14,530
|
|
|
$
|
77,330
|
|
|
$
|
|
|
|
$
|
2,269
|
|
|
$
|
7,480
|
|
|
$
|
13,530
|
|
|
$
|
2,000
|
|
|
$
|
|
|
|
$
|
117,139
|
|
1 year to 5 years
|
|
|
146,872
|
|
|
|
125,023
|
|
|
|
25
|
|
|
|
504
|
|
|
|
41,514
|
|
|
|
36,415
|
|
|
|
750
|
|
|
|
194
|
|
|
|
351,297
|
|
5 years to 10 years
|
|
|
138,457
|
|
|
|
43,883
|
|
|
|
7,350
|
|
|
|
|
|
|
|
32,700
|
|
|
|
65,020
|
|
|
|
|
|
|
|
310
|
|
|
|
287,720
|
|
Over 10 years
|
|
|
29,798
|
|
|
|
10,666
|
|
|
|
1,026
|
|
|
|
869
|
|
|
|
4,500
|
|
|
|
11,350
|
|
|
|
|
|
|
|
|
|
|
|
58,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
329,657
|
|
|
$
|
256,902
|
|
|
$
|
8,401
|
|
|
$
|
3,642
|
|
|
$
|
86,194
|
|
|
$
|
126,315
|
|
|
$
|
2,750
|
|
|
$
|
504
|
|
|
$
|
814,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average interest rate as of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay rate
|
|
|
5.17
|
%
|
|
|
5.48
|
%
|
|
|
5.13
|
%
|
|
|
|
|
|
|
6.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive rate
|
|
|
5.43
|
%
|
|
|
5.17
|
%
|
|
|
6.68
|
%
|
|
|
|
|
|
|
|
|
|
|
4.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.16
|
%
|
|
|
|
|
|
|
|
|
Weighted-average interest rate as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay rate
|
|
|
5.10
|
%
|
|
|
5.35
|
%
|
|
|
5.29
|
%
|
|
|
|
|
|
|
6.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive rate
|
|
|
5.36
|
%
|
|
|
5.01
|
%
|
|
|
6.58
|
%
|
|
|
|
|
|
|
|
|
|
|
4.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes mortgage commitments
accounted for as derivatives. Dollars represent notional
amounts, which indicate only the amount on which payments are
being calculated and do not represent the amount at risk of loss.
|
|
(2) |
|
Notional amounts include swaps
callable by Fannie Mae of $8.2 billion and
$10.8 billion as of September 30, 2007 and
December 31, 2006, respectively.
|
|
(3) |
|
Notional amounts include swaps
callable by derivatives counterparties of $18.5 billion and
$6.7 billion as of September 30, 2007 and
December 31, 2006, respectively.
|
|
(4) |
|
Notional amounts include swaps
callable by derivatives counterparties of $8.0 billion and
$600 million as of September 30, 2007 and
December 31, 2006, respectively.
|
|
(5) |
|
Includes MBS options, forward
starting debt and swap credit enhancements.
|
|
(6) |
|
Includes matured, called,
exercised, assigned and terminated amounts. Also includes
changes due to foreign exchange rate movements.
|
|
(7) |
|
Based on contractual maturities.
|
The outstanding notional balance of our risk management
derivatives increased by $69.0 billion during the first
nine months of 2007, to $814.4 billion as of
September 30, 2007, from $745.4 billion as of
December 31, 2006. As the expected duration of our mortgage
assets lengthened during the first nine months of 2007, we
increased our net pay-fixed swap position to extend the duration
of our liabilities to more closely match the expected duration
of our mortgage assets.
Measuring
Interest Rate Risk
Because no single measure can reflect all aspects of the
interest rate risk inherent in our mortgage portfolio, we
utilize various risk metrics that together provide a more
complete assessment of our interest rate risk.
59
Pursuant to our September 1, 2005 agreement with OFHEO, we
committed to present to OFHEO proposals for enhanced and uniform
public disclosures of our risk measures. Our proposals entailed
reporting additional market risk measures with the filing of
current financial statements. We now disclose on a monthly basis
two interest rate risk sensitivity measures: (i) duration
gap and (ii) fair value sensitivity to interest rate level
and slope shock. We provide these measures in our Monthly
Summary Report, which is submitted to the SEC in a Current
Report on
Form 8-K
and made available on our Web site.
These interest rate risk measures are based on our net portfolio
defined above. The measures exclude the interest rate
sensitivity of our existing guaranty business. We discuss these
measures below, and we also describe the potential effect of
changes in interest rates and other market conditions on the
fair value of our guaranty business.
Duration
Gap
Duration measures the price sensitivity of our assets and
liabilities to changes in interest rates by quantifying the
difference between the estimated durations of our assets and
liabilities. Duration gap summarizes the extent to which
estimated cash flows for assets and liabilities are matched, on
average, over time and across interest rate scenarios. A
positive duration gap signals a greater exposure to rising
interest rates because it indicates that the duration of our
assets exceeds the duration of our liabilities. Our average
effective monthly duration gap did not exceed plus or minus one
month during the period December 2006 through September 2007
(the most recent date for which this information is available.)
The table below presents our monthly effective duration gap for
December 2006, March 2007, June 2007 and September 2007.
|
|
|
|
|
|
|
Effective
|
|
Month
|
|
Duration Gap
|
|
|
December 2006
|
|
|
0
|
|
March 2007
|
|
|
(1
|
)
|
June 2007
|
|
|
1
|
|
September 2007
|
|
|
0
|
|
Beginning with June 2007, and for months after June 2007, we
changed the methodology we use to calculate our monthly
effective duration gap. The revised monthly calculation reflects
the difference between the proportional fair value weightings of
our assets and liabilities, based on the daily average for the
reported month. In prior months, the duration gap was not
calculated on a weighted basis and was simply the daily average
of the difference between the duration of our assets and the
duration of our liabilities. Our revised methodology presents
our effective duration gap on a basis that is consistent with
the fair value sensitivity measures of changes in the level and
slope of the yield curve discussed below. Under our revised
methodology, a duration gap of zero implies that the change in
the fair value of our assets from an interest rate move will be
offset by an equal change in the fair value of our liabilities,
resulting in no change in the fair value of our net assets.
Based on the revised methodology, our duration gap was plus
one month for the month of June 2007. Under the previous
methodology, our duration gap for June 2007 would have measured
minus one month, or approximately two months less than the
effective duration gap under the revised methodology.
While we maintained our duration gap within a relatively narrow
range during the first nine months of 2007, a large
movement in interest rates or increased interest rate volatility
could cause our duration gap to extend outside of the range we
have experienced recently.
Fair
Value Sensitivity to Changes in Level and Slope of Yield
Curve
For the month of June 2007, we began disclosing on a monthly
basis the estimated adverse impact on our financial condition of
a 50 basis point shift in interest rates and a
25 basis point change in the slope of the yield curve. We
believe these changes represent moderate movements in interest
rates. We calculate these sensitivity measures based on the
estimated amount of pre-tax losses for our net portfolio, or
reduction in fair value, that would result from an immediate
adverse 50 basis point parallel shift in the level of
interest rates and an immediate adverse 25 basis point
change in the slope of the yield curve, expressed as a
percentage of
60
the estimated after-tax fair value of our net assets. We track
these measures daily and report the monthly measures based on
the daily average for the month. We estimate that the adverse
impact on the fair value of our net portfolio to a 50 basis
point shift in the level of interest rates and a 25 basis
point change in the slope of the yield curve was (1)% and 0% for
both June 2007 and September 2007.
Table 29 below is an extension of our monthly net sensitivity
measures. It includes the identical population of assets and
liabilities included in our monthly sensitivity measures;
however, it is based on the sensitivities as of
September 30, 2007, rather than the average for the month
of September. In addition, we expand our monthly interest rate
shock disclosures to include the estimated adverse impact on our
net portfolio of a more severe movement in interest rates of
100 basis points. We also provide the dollar sensitivity
for our net portfolio and include aggregate sensitivities for
our trading securities and for our trading securities together
with our derivatives.
Table
29: Interest Rate Sensitivity to Changes in Level and
Slope of Yield Curve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
|
Rate Level Shock
|
|
|
Slope Shock
|
|
|
|
Adverse Impact of
|
|
|
Adverse Impact of
|
|
|
Adverse Impact of
|
|
|
|
50 basis points
|
|
|
100 basis points
|
|
|
25 basis points
|
|
|
|
$
|
|
|
%(1)
|
|
|
$
|
|
|
%(1)
|
|
|
$
|
|
|
%(1)
|
|
|
|
(Dollars in millions)
|
|
|
Trading financial instruments
|
|
$
|
(723
|
)
|
|
|
(2
|
)%
|
|
$
|
(1,515
|
)
|
|
|
(4
|
)%
|
|
$
|
(31
|
)
|
|
|
|
|
Trading financial instruments and derivative assets and
liabilities, net
|
|
|
(2,077
|
)
|
|
|
(6
|
)
|
|
|
(3,666
|
)
|
|
|
(11
|
)
|
|
|
(174
|
)
|
|
|
(1
|
)
|
Net portfolio of interest-rate sensitive assets and
liabilities(2)
|
|
|
(397
|
)
|
|
|
(1
|
)
|
|
|
(2,052
|
)
|
|
|
(6
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
(1) |
|
Calculated based on the reported
dollar amount sensitivity divided by the after-tax estimated
fair value of our net assets of $34.2 billion as of
September 30, 2007.
|
|
(2) |
|
Assets included in these interest
rate sensitivity measures consist of our existing mortgage
portfolio, non-mortgage investments and priced asset
commitments. Liabilities consist of our existing debt
instruments, derivative instruments and priced debt and
derivative commitments.
|
The sensitivity measures in Table 29 indicate that the value of
our net portfolio would decrease by approximately 1% and 6% as a
result of an adverse movement in interest rates of 50 basis
points and 100 basis points, respectively. We believe these
sensitivities, together with our duration gap, indicate a
relatively small level of interest rate risk exposure for our
net portfolio as of September 30, 2007. We have not
experienced a material change in our interest rate
sensitivities, on a net portfolio basis, since December 31,
2006.
The fair value of our trading securities and derivatives are
highly sensitive to changes in interest rates, and changes in
fair value of these instruments are primary drivers of the
short-term volatility in our earnings and capital position. We
increased our portfolio of trading securities during the first
nine months of 2007 to approximately $48.7 billion as of
September 30, 2007, from $11.5 billion as of
December 31, 2006. As a result of this increase, the
adverse impact of a change in interest rates on our trading
securities was more substantial as of September 30, 2007,
as compared with December 31, 2006. Although the recent
dislocations in the financial markets disrupted certain
historical pricing relationships, we generally expect the
interest rate sensitivity of our trading securities to partially
offset the interest rate sensitivity of our derivative
instruments. Accordingly, we disclose not only the separate
sensitivities for our trading securities, but also the
sensitivities of our trading securities and derivatives on a
combined basis.
Because we do not hedge the interest rate risk of our guaranty
business, these sensitivity measures exclude the interest rate
sensitivity of our existing guaranty business, which is based on
the difference between the estimated fair value of the guaranty
assets and the estimated fair value of the guaranty obligations
we assume. The interest rate sensitivity of our net guaranty
assets tends to be fairly stable if there is no significant
movement in long-term interest rates. Although there was not a
significant change in long-term interest rates as of
September 30, 2007 compared with December 31, 2006, we
experienced a change in the interest rate sensitivities of our
net guaranty assets. As of September 30, 2007, the
estimated sensitivity resulting from a
61
50 basis point decrease in interest rates was lower than
the sensitivity of $(1.3) billion we reported as of
December 31, 2006, while the estimated sensitivity of a
100 basis point increase in interest rates was greater than
the $1.7 billion we reported as of December 31, 2006.
The change in these sensitivities was due to changes in the
sensitivity of our guaranty obligations attributable to the
lower initial level of home prices, an increase in implied
volatility and growth in our guaranty obligation resulting from
the growth in our guaranty book of business. We do not believe
that periodic changes in fair value due to movements in interest
rates are the best indication of the economic value of our
guaranty business because they do not take into account future
business activity. Based on our historical experience, we
believe that the guaranty fee income generated from future
business activity will more than replace any guaranty fee income
lost as a result of mortgage prepayments.
Our interest rate sensitivity measures are limited in that they
do not capture the potential impact of certain other market
risks, such as changes in credit spreads and implied volatility.
The impact of these market risks may be significant. See
Supplemental Non-GAAP InformationFair Value
Balance Sheets for further information. In addition, our
interest rate sensitivity measures contemplate only certain
hypothetical movements in interest rates and are performed at a
particular point in time based on the estimated fair value of
our existing net portfolio. These measures and hypothetical
scenarios do not incorporate other factors that may have a
significant effect on our overall financial performance, most
notably the value from expected future business activities and
strategic actions that management may take to manage interest
rate risk. Accordingly, the preceding estimates should not be
viewed as a precise forecast of the potential adverse economic
impact that a change in interest rates would have on us.
IMPACT
OF FUTURE ADOPTION OF ACCOUNTING PRONOUNCEMENTS
We identify and discuss the expected impact on our consolidated
financial statements of recently issued accounting
pronouncements in Notes to Condensed Consolidated
Financial StatementsNote 1, Summary of Significant
Accounting Policies.
FORWARD-LOOKING
STATEMENTS
This report contains forward-looking statements, which are
statements about matters that are not historical facts. In
addition, our senior management may from time to time make
forward-looking statements orally to analysts, investors, the
news media and others. Forward-looking statements often include
words such as expects, anticipates,
intends, plans, believes,
seeks, estimates, would,
should, could, may, or
similar words.
Among the forward-looking statements in this report are
statements relating to:
|
|
|
|
|
our expectation that housing market weakness will continue in
2007 and 2008;
|
|
|
|
our projections for mortgage originations and MDO growth for
2007 and 2008;
|
|
|
|
our estimates regarding our 2007 business results and market
share;
|
|
|
|
our expectations that our single-family guaranty book of
business will grow at a faster rate than the rate of overall MDO
growth, and our guaranty fee income will continue to increase;
|
|
|
|
our expectation that our net interest yield will remain
relatively stable for the remainder of 2007;
|
|
|
|
our expectation that our accounting for changes in the fair
value of our derivatives and our trading securities will
continue to be a major driver of volatility in our earnings, in
our stockholders equity and in our regulatory capital;
|
|
|
|
our expectation that our losses on certain guaranty contracts
will increase significantly for 2007 as compared with 2006;
|
|
|
|
our expectation that other-than-temporary impairment on
investment securities will be significantly lower for 2007 as
compared with 2006;
|
62
|
|
|
|
|
our expectation that we will reduce our administrative expenses
by more than $200 million in 2007;
|
|
|
|
our expectation that our ongoing operations costs will be
reduced to approximately $2 billion in 2008;
|
|
|
|
our expectation that our credit-related expenses and credit
losses will significantly increase for 2007 and 2008;
|
|
|
|
our expectation that our credit loss ratio will be within our
normal historical range of 4 to 6 basis points in 2007, and
will increase above this range in 2008;
|
|
|
|
our belief that our delinquencies and foreclosures will increase
for the remainder of 2007 and in 2008;
|
|
|
|
our belief that our sources of liquidity will remain adequate to
meet both our short-term and long-term funding needs;
|
|
|
|
our estimate of the effect of hypothetical declines in home
prices on our credit losses;
|
|
|
|
our estimate of the effect of hypothetical changes in interest
rates on the fair value of our financial instruments; and
|
|
|
|
our belief that our remaining material weaknesses will be
remediated on or before December 31, 2007 and that we will
have effective disclosure controls and procedures by
December 31, 2007.
|
Forward-looking statements reflect our managements
expectations or predictions of future conditions, events or
results based on various assumptions and managements
estimates of trends and economic factors in the markets in which
we are active, as well as our business plans. They are not
guarantees of future performance. By their nature,
forward-looking statements are subject to risks and
uncertainties. Our actual results and financial condition may
differ, possibly materially, from the anticipated results and
financial condition indicated in these forward-looking
statements. There are a number of factors that could cause
actual conditions, events or results to differ materially from
those described in the forward-looking statements contained in
this report, including those factors described in
Part IItem 1ARisk Factors of
our 2006
Form 10-K,
filed with the SEC on August 16, 2007, as updated by
Part IIItem 1ARisk Factors of
this report.
Readers are cautioned to place forward-looking statements in
this report or that we make from time to time into proper
context by carefully considering the factors discussed in
Part IItem 1ARisk Factors of
our 2006
Form 10-K
and in Part IIItem 1ARisk
Factors of 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.
63
|
|
Item 1.
|
Financial
Statements
|
FANNIE
MAE
Condensed
Consolidated Balance Sheets
(Dollars in millions, except share
amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Cash and cash equivalents (includes cash equivalents pledged as
collateral that may be sold or repledged of $215 as of
December 31, 2006)
|
|
$
|
4,480
|
|
|
$
|
3,239
|
|
Restricted cash
|
|
|
496
|
|
|
|
733
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
8,349
|
|
|
|
12,681
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
Trading, at fair value (includes Fannie Mae MBS of $17,320 and
$11,070 as of September 30, 2007 and December 31,
2006, respectively)
|
|
|
48,683
|
|
|
|
11,514
|
|
Available-for-sale,
at fair value (includes Fannie Mae MBS of $155,034 and $185,608
as of September 30, 2007 and December 31, 2006,
respectively)
|
|
|
315,012
|
|
|
|
378,598
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
|
363,695
|
|
|
|
390,112
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
Loans held for sale, at lower of cost or market
|
|
|
5,053
|
|
|
|
4,868
|
|
Loans held for investment, at amortized cost
|
|
|
394,945
|
|
|
|
379,027
|
|
Allowance for loan losses
|
|
|
(395
|
)
|
|
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
Total loans held for investment, net of allowance
|
|
|
394,550
|
|
|
|
378,687
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
399,603
|
|
|
|
383,555
|
|
Advances to lenders
|
|
|
11,738
|
|
|
|
6,163
|
|
Accrued interest receivable
|
|
|
3,865
|
|
|
|
3,672
|
|
Acquired property, net
|
|
|
3,107
|
|
|
|
2,141
|
|
Derivative assets at fair value
|
|
|
3,172
|
|
|
|
4,931
|
|
Guaranty assets
|
|
|
9,438
|
|
|
|
7,692
|
|
Deferred tax assets
|
|
|
9,890
|
|
|
|
8,505
|
|
Partnership investments
|
|
|
10,383
|
|
|
|
10,571
|
|
Other assets
|
|
|
11,567
|
|
|
|
9,941
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
839,783
|
|
|
$
|
843,936
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
$
|
8,168
|
|
|
$
|
7,847
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
1,645
|
|
|
|
700
|
|
Short-term debt
|
|
|
153,146
|
|
|
|
165,810
|
|
Long-term debt
|
|
|
608,619
|
|
|
|
601,236
|
|
Derivative liabilities at fair value
|
|
|
1,336
|
|
|
|
1,184
|
|
Reserve for guaranty losses (includes $78 and $46 as of
September 30, 2007 and December 31, 2006,
respectively, related to Fannie Mae MBS included in Investments
in securities)
|
|
|
1,012
|
|
|
|
519
|
|
Guaranty obligations (includes $319 and $390 as of
September 30, 2007 and December 31, 2006,
respectively, related to Fannie Mae MBS included in Investments
in securities)
|
|
|
14,322
|
|
|
|
11,145
|
|
Partnership liabilities
|
|
|
3,348
|
|
|
|
3,695
|
|
Other liabilities
|
|
|
8,144
|
|
|
|
10,158
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
799,740
|
|
|
|
802,294
|
|
|
|
|
|
|
|
|
|
|
Minority interests in consolidated subsidiaries
|
|
|
121
|
|
|
|
136
|
|
Commitments and contingencies (see Note 16)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, 200,000,000 shares
authorized150,175,000 and 132,175,000 shares issued
and outstanding as of September 30, 2007 and
December 31, 2006, respectively
|
|
|
9,008
|
|
|
|
9,108
|
|
Common stock, no par value, no maximum
authorization1,129,090,420 shares issued as of
September 30, 2007 and December 31, 2006;
973,750,241 shares and 972,110,681 shares outstanding
as of September 30, 2007 and December 31, 2006,
respectively
|
|
|
593
|
|
|
|
593
|
|
Additional paid-in capital
|
|
|
1,888
|
|
|
|
1,942
|
|
Retained earnings
|
|
|
37,737
|
|
|
|
37,955
|
|
Accumulated other comprehensive loss
|
|
|
(1,791
|
)
|
|
|
(445
|
)
|
Treasury stock, at cost, 155,340,179 shares and
156,979,739 shares as of September 30, 2007 and
December 31, 2006, respectively
|
|
|
(7,513
|
)
|
|
|
(7,647
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
39,922
|
|
|
|
41,506
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
839,783
|
|
|
$
|
843,936
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
64
FANNIE
MAE
Condensed
Consolidated Statements of Income
(Dollars and shares in millions,
except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities
|
|
$
|
5,900
|
|
|
$
|
5,976
|
|
|
$
|
17,162
|
|
|
$
|
17,189
|
|
Mortgage loans
|
|
|
5,572
|
|
|
|
5,209
|
|
|
|
16,582
|
|
|
|
15,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
11,472
|
|
|
|
11,185
|
|
|
|
33,744
|
|
|
|
32,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
2,401
|
|
|
|
2,124
|
|
|
|
6,811
|
|
|
|
5,681
|
|
Long-term debt
|
|
|
8,013
|
|
|
|
7,533
|
|
|
|
23,488
|
|
|
|
21,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
10,414
|
|
|
|
9,657
|
|
|
|
30,299
|
|
|
|
27,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,058
|
|
|
|
1,528
|
|
|
|
3,445
|
|
|
|
5,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income (includes imputed interest of $380 and $297
for the three months ended September 30, 2007 and 2006,
respectively, and $963 and $827 for the nine months ended
September 30, 2007 and 2006, respectively)
|
|
|
1,232
|
|
|
|
1,084
|
|
|
|
3,450
|
|
|
|
2,968
|
|
Losses on certain guaranty contracts
|
|
|
(294
|
)
|
|
|
(103
|
)
|
|
|
(1,038
|
)
|
|
|
(181
|
)
|
Trust management income
|
|
|
146
|
|
|
|
|
|
|
|
460
|
|
|
|
|
|
Investment gains (losses), net
|
|
|
136
|
|
|
|
550
|
|
|
|
(102
|
)
|
|
|
(758
|
)
|
Derivatives fair value losses, net
|
|
|
(2,244
|
)
|
|
|
(3,381
|
)
|
|
|
(891
|
)
|
|
|
(854
|
)
|
Debt extinguishment gains, net
|
|
|
31
|
|
|
|
72
|
|
|
|
72
|
|
|
|
158
|
|
Losses from partnership investments
|
|
|
(147
|
)
|
|
|
(197
|
)
|
|
|
(527
|
)
|
|
|
(579
|
)
|
Fee and other income
|
|
|
76
|
|
|
|
234
|
|
|
|
546
|
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income (expense)
|
|
|
(1,064
|
)
|
|
|
(1,741
|
)
|
|
|
1,970
|
|
|
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
362
|
|
|
|
307
|
|
|
|
1,067
|
|
|
|
883
|
|
Professional services
|
|
|
192
|
|
|
|
333
|
|
|
|
654
|
|
|
|
1,042
|
|
Occupancy expenses
|
|
|
64
|
|
|
|
64
|
|
|
|
180
|
|
|
|
192
|
|
Other administrative expenses
|
|
|
42
|
|
|
|
57
|
|
|
|
117
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
|
660
|
|
|
|
761
|
|
|
|
2,018
|
|
|
|
2,249
|
|
Minority interest in earnings (losses) of consolidated
subsidiaries
|
|
|
(4
|
)
|
|
|
2
|
|
|
|
(3
|
)
|
|
|
7
|
|
Provision for credit losses
|
|
|
1,087
|
|
|
|
145
|
|
|
|
1,770
|
|
|
|
368
|
|
Foreclosed property expense
|
|
|
113
|
|
|
|
52
|
|
|
|
269
|
|
|
|
89
|
|
Other expenses
|
|
|
122
|
|
|
|
99
|
|
|
|
317
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,978
|
|
|
|
1,059
|
|
|
|
4,371
|
|
|
|
2,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes and extraordinary
gains (losses)
|
|
|
(1,984
|
)
|
|
|
(1,272
|
)
|
|
|
1,044
|
|
|
|
3,824
|
|
Provision (benefit) for federal income taxes
|
|
|
(582
|
)
|
|
|
(639
|
)
|
|
|
(468
|
)
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary gains (losses)
|
|
|
(1,402
|
)
|
|
|
(633
|
)
|
|
|
1,512
|
|
|
|
3,444
|
|
Extraordinary gains (losses), net of tax effect
|
|
|
3
|
|
|
|
4
|
|
|
|
(3
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,399
|
)
|
|
$
|
(629
|
)
|
|
$
|
1,509
|
|
|
$
|
3,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and issuance costs at redemption
|
|
|
(119
|
)
|
|
|
(131
|
)
|
|
|
(372
|
)
|
|
|
(380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
(1,518
|
)
|
|
$
|
(760
|
)
|
|
$
|
1,137
|
|
|
$
|
3,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before extraordinary gains (losses)
|
|
$
|
(1.56
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
1.17
|
|
|
$
|
3.16
|
|
Extraordinary gains (losses), net of tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(1.56
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
1.17
|
|
|
$
|
3.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before extraordinary gains (losses)
|
|
$
|
(1.56
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
1.17
|
|
|
$
|
3.15
|
|
Extraordinary gains (losses), net of tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
(1.56
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
1.17
|
|
|
$
|
3.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share
|
|
$
|
0.50
|
|
|
$
|
0.26
|
|
|
$
|
1.40
|
|
|
$
|
0.78
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
974
|
|
|
|
972
|
|
|
|
973
|
|
|
|
971
|
|
Diluted
|
|
|
974
|
|
|
|
972
|
|
|
|
975
|
|
|
|
972
|
|
See Notes to Condensed Consolidated Financial Statements.
65
Condensed Consolidated Statements of Cash Flows
(Dollars in millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,509
|
|
|
$
|
3,455
|
|
Amortization of debt cost basis adjustments
|
|
|
7,372
|
|
|
|
6,299
|
|
Derivatives fair value adjustments
|
|
|
1,884
|
|
|
|
799
|
|
Purchases of loans held for sale
|
|
|
(23,326
|
)
|
|
|
(22,908
|
)
|
Net change in trading securities (excluding non-cash transfers
of $63,183 and $35,015 for the nine months ended
September 30, 2007 and 2006, respectively)
|
|
|
27,206
|
|
|
|
38,394
|
|
Other
|
|
|
2,301
|
|
|
|
(395
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
16,946
|
|
|
|
25,644
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities
|
|
|
(110,472
|
)
|
|
|
(168,337
|
)
|
Proceeds from maturities of available-for-sale securities
|
|
|
112,299
|
|
|
|
126,902
|
|
Proceeds from sales of available-for-sale securities
|
|
|
49,108
|
|
|
|
70,687
|
|
Purchases of loans held for investment
|
|
|
(48,448
|
)
|
|
|
(43,930
|
)
|
Proceeds from repayments of loans held for investment
|
|
|
45,202
|
|
|
|
55,047
|
|
Advances to lenders
|
|
|
(50,067
|
)
|
|
|
(38,170
|
)
|
Net proceeds from disposition of foreclosed properties
|
|
|
1,049
|
|
|
|
2,136
|
|
Net change in federal funds sold and securities purchased under
agreements to resell
|
|
|
2,767
|
|
|
|
(7,903
|
)
|
Other
|
|
|
(692
|
)
|
|
|
(1,288
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
746
|
|
|
|
(4,856
|
)
|
Cash flows used in financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of short-term debt
|
|
|
1,284,191
|
|
|
|
1,650,737
|
|
Payments to redeem short-term debt
|
|
|
(1,306,772
|
)
|
|
|
(1,688,018
|
)
|
Proceeds from issuance of long-term debt
|
|
|
149,577
|
|
|
|
138,480
|
|
Payments to redeem long-term debt
|
|
|
(143,149
|
)
|
|
|
(120,096
|
)
|
Net change in federal funds purchased and securities sold under
agreements to repurchase
|
|
|
1,525
|
|
|
|
(509
|
)
|
Other
|
|
|
(1,823
|
)
|
|
|
(1,123
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(16,451
|
)
|
|
|
(20,529
|
)
|
Net increase in cash and cash equivalents
|
|
|
1,241
|
|
|
|
259
|
|
Cash and cash equivalents at beginning of period
|
|
|
3,239
|
|
|
|
2,820
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
4,480
|
|
|
$
|
3,079
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
29,269
|
|
|
$
|
25,413
|
|
Income taxes
|
|
|
1,888
|
|
|
|
238
|
|
See Notes to Condensed Consolidated Financial Statements.
66
Condensed Consolidated Statements of Changes in
Stockholders Equity
(Dollars and shares in millions,
except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Shares Outstanding
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Equity
|
|
|
Balance as of January 1, 2006
|
|
|
132
|
|
|
|
971
|
|
|
$
|
9,108
|
|
|
$
|
593
|
|
|
$
|
1,913
|
|
|
$
|
35,555
|
|
|
$
|
(131
|
)
|
|
$
|
(7,736
|
)
|
|
$
|
39,302
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,455
|
|
|
|
|
|
|
|
|
|
|
|
3,455
|
|
Other comprehensive income, net of tax effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on available-for-sale securities (net of tax
of $157)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(292
|
)
|
|
|
|
|
|
|
(292
|
)
|
Reclassification adjustment for gains included in net income
(net of tax of $39)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72
|
)
|
|
|
|
|
|
|
(72
|
)
|
Unrealized gains on guaranty assets and guaranty fee
buy-ups (net
of tax of $5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
Net cash flow hedging losses (net of tax of $1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,099
|
|
Common stock dividends ($0.78 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(758
|
)
|
|
|
|
|
|
|
|
|
|
|
(758
|
)
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(380
|
)
|
|
|
|
|
|
|
|
|
|
|
(380
|
)
|
Treasury stock issued for stock options and benefit plans
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2006
|
|
|
132
|
|
|
|
972
|
|
|
$
|
9,108
|
|
|
$
|
593
|
|
|
$
|
1,915
|
|
|
$
|
37,872
|
|
|
$
|
(487
|
)
|
|
$
|
(7,663
|
)
|
|
$
|
41,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
132
|
|
|
|
972
|
|
|
$
|
9,108
|
|
|
$
|
593
|
|
|
$
|
1,942
|
|
|
$
|
37,955
|
|
|
$
|
(445
|
)
|
|
$
|
(7,647
|
)
|
|
$
|
41,506
|
|
Cumulative effect from the adoption of FIN 48, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2007, adjusted
|
|
|
132
|
|
|
|
972
|
|
|
|
9,108
|
|
|
|
593
|
|
|
|
1,942
|
|
|
|
37,959
|
|
|
|
(445
|
)
|
|
|
(7,647
|
)
|
|
|
41,510
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,509
|
|
|
|
|
|
|
|
|
|
|
|
1,509
|
|
Other comprehensive income, net of tax effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on available-for-sale securities (net of tax
of $634)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,177
|
)
|
|
|
|
|
|
|
(1,177
|
)
|
Reclassification adjustment for gains included in net income
(net of tax of $154)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(286
|
)
|
|
|
|
|
|
|
(286
|
)
|
Unrealized gains on guaranty assets and guaranty fee
buy-ups (net
of tax of $40)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
74
|
|
Net cash flow hedging losses (net of tax of $2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
Amortization of net loss and prior service cost from defined
benefit plans (net of tax of $25)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163
|
|
Common stock dividends ($1.40 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,369
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,369
|
)
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(362
|
)
|
|
|
|
|
|
|
|
|
|
|
(362
|
)
|
Preferred stock redeemed
|
|
|
(22
|
)
|
|
|
|
|
|
|
(1,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,100
|
)
|
Preferred stock issuance
|
|
|
40
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
990
|
|
Treasury stock issued for stock options and benefit plans
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
134
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2007
|
|
|
150
|
|
|
|
974
|
|
|
$
|
9,008
|
|
|
$
|
593
|
|
|
$
|
1,888
|
|
|
$
|
37,737
|
|
|
$
|
(1,791
|
)
|
|
$
|
(7,513
|
)
|
|
$
|
39,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
67
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
1.
|
Summary
of Significant Accounting Policies
|
We are a stockholder-owned corporation organized and existing
under the Federal National Mortgage Association Charter Act,
which we refer to as the Charter Act or our
charter (the Federal National Mortgage Association
Charter Act, 12 U.S.C. § 1716 et seq.). We were
established in 1938 as a U.S. government entity. We became
a mixed-ownership corporation by legislation enacted in 1954,
with our preferred stock owned by the federal government and our
common stock held by private investors. We became a fully
privately-owned corporation by legislation enacted in 1968. The
U.S. government does not guarantee, directly or indirectly,
our securities or other obligations. Our regulators include the
Office of Federal Housing Enterprise Oversight
(OFHEO), the Department of Housing and Urban
Development, the U.S. Securities and Exchange Commission
(SEC) and the Department of Treasury.
We operate in the secondary mortgage market by purchasing
mortgage loans and mortgage-related securities, including
mortgage-related securities guaranteed by us, from primary
mortgage market institutions, such as commercial banks, savings
and loan associations, mortgage banking companies, securities
dealers and other investors. We do not lend money directly to
consumers in the primary mortgage market. We provide additional
liquidity in the secondary mortgage market by issuing guaranteed
mortgage-related securities.
We operate under three business segments: Single-Family Credit
Guaranty (Single-Family), Housing and Community
Development (HCD) and Capital Markets. Our
Single-Family segment generates revenue primarily from the
guaranty fees the segment receives as compensation for assuming
the credit risk on the mortgage loans underlying guaranteed
single-family Fannie Mae mortgage-backed securities
(Fannie Mae MBS). Our HCD segment generates revenue
from a variety of sources, including guaranty fees the segment
receives as compensation for assuming the credit risk on the
mortgage loans underlying multifamily Fannie Mae MBS,
transaction fees associated with the multifamily business and
bond credit enhancement fees. In addition, HCD investments in
housing projects eligible for the low-income housing tax credit
(LIHTC) and other investments generate both tax
credits and net operating losses that reduce our federal income
tax liability. Our Capital Markets segment invests in mortgage
loans, mortgage-related securities and liquid investments, and
generates income primarily from the difference, or spread,
between the yield on the mortgage assets we own and the cost of
the debt we issue in the global capital markets to fund these
assets.
Use of
Estimates
The preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the
United States of America (GAAP) requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the consolidated
financial statements and the amounts of revenues and expenses
during the reporting period. Management has made significant
estimates in a variety of areas, including but not limited to,
valuation of certain financial instruments and other assets and
liabilities, amortization of cost basis adjustments, the
allowance for loan losses and reserve for guaranty losses, and
assumptions used in evaluating whether we should consolidate
variable interest entities. Actual results could be different
from these estimates.
Basis
of Presentation
The accompanying condensed consolidated financial statements
have been prepared in accordance with GAAP for interim financial
information and with the SECs instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by GAAP for complete consolidated financial
statements. In the opinion of management, all adjustments of a
normal recurring nature considered necessary for a fair
presentation have been included. Results for the three and nine
months ended September 30, 2007 may not necessarily be
indicative of the results for the year ending December 31,
2007. The unaudited interim condensed consolidated financial
statements as of September 30,
68
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
2007 and the condensed consolidated financial statements as of
December 31, 2006 should be read in conjunction with our
audited consolidated financial statements and related notes
included in our Annual Report on
Form 10-K
for the year ended December 31, 2006, filed with the SEC on
August 16, 2007.
The accompanying unaudited condensed consolidated financial
statements include our accounts as well as other entities in
which we have a controlling financial interest. All significant
intercompany balances and transactions have been eliminated.
The typical condition for a controlling financial interest is
ownership of a majority of the voting interests of an entity. A
controlling financial interest may also exist in entities
through arrangements that do not involve voting interests. We
evaluate entities deemed to be variable interest entities
(VIEs) under Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 46R
(revised December 2003), Consolidation of Variable Interest
Entities (an interpretation of ARB No. 51)
(FIN 46R), to determine when we must
consolidate the assets, liabilities and non-controlling
interests of a VIE.
Guaranty
Accounting
As guarantor of our Fannie Mae MBS issuances, we recognize a
non-contingent liability for the fair value of our obligation to
stand ready to perform over the term of the guaranty as a
component of Guaranty obligations in our condensed
consolidated balance sheets. The fair value of this obligation
represents managements estimate of the amount that we
would be required to pay a third party of similar credit
standing to assume our obligation. This amount is based on
market information from spot transactions, when available. In
instances where such observations are not available, this amount
is based on the present value of expected cash flows using
managements best estimates of certain key assumptions,
which include default and severity rates and a market rate of
return. The fair value of our Guaranty obligations
as of September 30, 2007 and December 31, 2006 is
displayed in Note 15, Fair Value of Financial
Instruments.
Trust Management
Income
As master servicer, issuer and trustee for Fannie Mae MBS, we
earn a fee that is derived from float income, which is interest
earned on cash flows from the date of remittance by servicers
until the date of distribution to MBS certificateholders. In
2007, we have included such compensation as Trust
management income in our condensed consolidated statement
of income consistent with our change in practice to segregate
the funds. Prior to November 2006, funds received from servicers
were commingled with our corporate assets. As such, our
compensation for these roles could not be segregated and,
therefore, was previously included as a component of
Interest income in our condensed consolidated
statements of income.
Pledged
Non-Cash Collateral
As of September 30, 2007, we pledged a total of
$2.3 billion, comprised of $13 million of
available-for-sale
(AFS) securities, $1.5 billion of trading
securities, and $793 million of loans held for investment,
which the counterparties had the right to sell or repledge. As
of December 31, 2006, we pledged a total of
$663 million, comprised of $265 million of AFS
securities, $34 million of trading securities,
$149 million of loans held for investment and
$215 million of cash equivalents, which the counterparty
had the right to sell or repledge.
Reclassifications
Certain prior period amounts previously recorded as a component
of Fee and other income in the condensed
consolidated statements of income have been reclassified as
Guaranty fee income to conform to the current period
presentation.
69
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
New
Accounting Pronouncements
SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments and DIG Issue No. B40, Embedded
Derivatives: Application of Paragraph 13(b) to Securitized
Interests in Prepayable Financial Assets
In February 2006, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 155,
Accounting for Certain Hybrid Financial Instruments,
an amendment of SFAS 133 and SFAS 140
(SFAS 155). This statement:
(i) clarifies which interest-only strips and principal-only
strips are not subject to SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities
(SFAS 133); (ii) establishes a
requirement to evaluate interests in securitized financial
instruments that contain an embedded derivative requiring
bifurcation; (iii) clarifies that concentration of credit
risks in the form of subordination are not embedded derivatives;
and (iv) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that
otherwise would require bifurcation.
In January 2007, FASB issued Derivatives Implementation Group
(DIG) Issue No. B40 (DIG B40). The
objective of DIG B40 is to provide a narrow scope exception to
certain provisions of SFAS 133 for securitized interests
that contain only an embedded derivative that is tied to the
prepayment risk of the underlying financial assets.
SFAS 155 and DIG B40 are effective for all financial
instruments acquired or issued after the beginning of the first
fiscal year that begins after September 15, 2006. We
adopted SFAS 155 effective January 1, 2007 and elected
fair value remeasurement for hybrid financial instruments that
contain embedded derivatives that otherwise require bifurcation.
We also elected to classify some investment securities that may
contain embedded derivatives as trading securities under
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS 115),
which includes
buy-ups and
guaranty assets arising from portfolio securitization
transactions. SFAS 155 is a prospective standard and had no
impact on the consolidated financial statements on the date of
adoption.
SFAS No. 156, Accounting for Servicing of Financial
Assets
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets, an amendment of
FASB Statement No. 140 (SFAS 156).
SFAS 156 modifies SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities (a replacement of FASB Statement No. 125)
(SFAS 140) by requiring that mortgage
servicing rights (MSRs) be initially recognized at
fair value and by providing the option to either (i) carry
MSRs at fair value with changes in fair value recognized in
earnings or (ii) continue recognizing periodic amortization
expense and assess the MSRs for impairment as was originally
required by SFAS 140. This option is available by class of
servicing asset or liability. This statement also changes the
calculation of the gain from the sale of financial assets by
requiring that the fair value of servicing rights be considered
part of the proceeds received in exchange for the sale of the
assets.
SFAS 156 is effective for all separately recognized
servicing assets and liabilities acquired or issued after the
beginning of a fiscal year that begins after September 15,
2006, with early adoption permitted. We adopted SFAS 156
effective January 1, 2007, with no material impact to the
consolidated financial statements, because we are not electing
to measure MSRs at fair value subsequent to their initial
recognition.
SFAS No. 157, Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 provides enhanced guidance for using fair value to
measure assets and liabilities and requires companies to provide
expanded information about assets and liabilities measured at
fair value, including the effect of fair value measurements on
earnings. This statement applies whenever other standards
require (or permit) assets or liabilities to be measured at fair
value, but does not expand the use of fair value in any new
circumstances.
Under SFAS 157, fair value refers to the price that would
be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants in the market
in which the reporting entity
70
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
transacts. This statement clarifies the principle that fair
value should be based on the assumptions market participants
would use when pricing the asset or liability. In support of
this principle, this standard establishes a fair value hierarchy
that prioritizes the information used to develop those
assumptions. The fair value hierarchy gives the highest priority
to quoted prices in active markets and the lowest priority to
unobservable data (for example, a companys own data).
Under this statement, fair value measurements would be
separately disclosed by level within the fair value hierarchy.
SFAS 157 is effective for consolidated financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We intend to
adopt SFAS 157 effective January 1, 2008 and do not
expect its adoption to have a material impact on the
consolidated financial statements.
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits companies
to make a one-time election to report certain financial
instruments at fair value with the changes in fair value
included in earnings. SFAS 159 is effective for
consolidated financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. We intend to adopt SFAS 159
effective January 1, 2008. We are still evaluating which
financial instruments we will elect to report at fair value.
Accordingly, we are not able to reasonably estimate the impact
of adoption on the consolidated financial statements.
FSP
FIN 39-1,
Amendment of FASB Interpretation No. 39
In April 2007, the FASB issued FASB Staff Position
(FSP)
No. 39-1,
Amendment of FASB Interpretation No. 39 (FSP
FIN 39-1).
This FSP amends FIN No. 39, Offsetting of Amounts
Related to Certain Contracts (FIN 39) to
allow an entity to offset cash collateral receivables and
payables reported at fair value against derivative instruments
(as defined by SFAS 133) for contracts executed with
the same counterparty under master netting arrangements. The
decision to offset cash collateral under this FSP must be
applied consistently to all derivatives counterparties where the
entity has master netting arrangements. If an entity nets
derivative positions as permitted under FIN 39, this FSP
requires the entity to also offset the cash collateral
receivables and payables with the same counterparty under a
master netting arrangement. FSP
FIN 39-1
is effective for fiscal years beginning after November 15,
2007. As we have elected to net derivative positions under
FIN 39, we will adopt FSP
FIN 39-1
on January 1, 2008 and are evaluating the impact of its
adoption on the consolidated financial statements.
We have interests in various entities that are considered to be
VIEs, as defined by FIN 46R. These interests include
investments in securities issued by VIEs, such as Fannie Mae MBS
created pursuant to our securitization transactions, mortgage-
and asset-backed trusts that were not created by us, limited
partnership interests in LIHTC partnerships that are established
to finance the construction or development of low-income
affordable multifamily housing and other limited partnerships.
These interests may also include our guaranty to the entity.
As of September 30, 2007 and December 31, 2006, we had
$10.4 billion and $10.6 billion of partnership
investments, respectively. We consolidated our investments in
certain LIHTC funds that were structured as limited
partnerships. The funds that were consolidated, in turn, own a
majority of the limited partnership interests in other LIHTC
operating partnerships, which did not require consolidation
under FIN 46R and are therefore accounted for using the
equity method. Such investments, which are generally funded
through a combination of debt and equity, have a recorded
investment of $3.5 billion and $3.7 billion as of
September 30, 2007 and December 31, 2006, respectively.
71
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
In March 2007, we sold for cash a portfolio of investments in
LIHTC partnerships reflecting approximately $676 million in
future LIHTC tax credits and the release of future capital
obligations relating to the investments. The portfolio for which
these credits were applicable consisted of investments in 12
funds. In July 2007, we sold a portfolio of LIHTC partnerships
reflecting approximately $254 million in future LIHTC tax
credits and the release of future capital obligations relating
to the investments.
As of September 30, 2007 and December 31, 2006, we had
three and five investments, respectively, in limited
partnerships relating to alternative energy sources. The purpose
of these investments is to facilitate the development of
alternative domestic energy sources and to achieve a
satisfactory return on capital via a reduction in our federal
income tax liability as a result of the use of the tax credits
for which the partnerships qualify, as well as the deductibility
of the partnerships net operating losses. We sold two of
these investments for $16 million during the three months
ended March 31, 2007.
The following table displays the characteristics of both
held-for-investment and held-for-sale loans in our mortgage
portfolio as of September 30, 2007 and December 31,
2006, and does not include loans underlying securities that are
not consolidated, since in those instances the mortgage loans
are not included in the condensed consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Single-family(1)
|
|
$
|
321,955
|
|
|
$
|
322,703
|
|
Multifamily
|
|
|
77,465
|
|
|
|
60,342
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance of mortgage
loans(2)
|
|
|
399,420
|
|
|
|
383,045
|
|
Unamortized premiums, discounts and other cost basis
adjustments, net
|
|
|
679
|
|
|
|
943
|
|
Lower of cost or market adjustments on loans held for sale
|
|
|
(101
|
)
|
|
|
(93
|
)
|
Allowance for loan losses for loans held for investment
|
|
|
(395
|
)
|
|
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage loans, net
|
|
$
|
399,603
|
|
|
$
|
383,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes construction to permanent
loans with an unpaid principal balance of $138 million and
$121 million as of September 30, 2007 and
December 31, 2006, respectively.
|
|
(2) |
|
Includes unpaid principal totaling
$100.0 billion and $105.5 billion as of
September 30, 2007 and December 31, 2006,
respectively, related to mortgage-related securities that were
consolidated under FIN 46R and mortgage-related securities
created from securitization transactions that did not meet the
sales criteria under SFAS 140, which effectively resulted
in mortgage-related securities being accounted for as loans.
|
72
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
4.
|
Allowance
for Loan Losses and Reserve for Guaranty Losses
|
We maintain an allowance for loan losses for loans held in our
mortgage portfolio and a reserve for guaranty losses related to
loans that back Fannie Mae MBS. The following table displays
changes in the allowance for loan losses and reserve for
guaranty losses for the three and nine months ended
September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
337
|
|
|
$
|
314
|
|
|
$
|
340
|
|
|
$
|
302
|
|
Provision
|
|
|
148
|
|
|
|
37
|
|
|
|
238
|
|
|
|
114
|
|
Charge-offs(1)
|
|
|
(115
|
)
|
|
|
(57
|
)
|
|
|
(241
|
)
|
|
|
(160
|
)
|
Recoveries
|
|
|
25
|
|
|
|
21
|
|
|
|
58
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
395
|
|
|
$
|
315
|
|
|
$
|
395
|
|
|
$
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for guaranty losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
821
|
|
|
$
|
407
|
|
|
$
|
519
|
|
|
$
|
422
|
|
Provision
|
|
|
939
|
|
|
|
108
|
|
|
|
1,532
|
|
|
|
254
|
|
Charge-offs(2)
|
|
|
(757
|
)
|
|
|
(73
|
)
|
|
|
(1,078
|
)
|
|
|
(241
|
)
|
Recoveries
|
|
|
9
|
|
|
|
5
|
|
|
|
39
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,012
|
|
|
$
|
447
|
|
|
$
|
1,012
|
|
|
$
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes accrued interest of
$32 million and $11 million for the three months ended
September 30, 2007 and 2006, respectively, and
$84 million and $29 million for the nine months ended
September 30, 2007 and 2006, respectively.
|
|
(2) |
|
Includes charge of
$670 million and $37 million for the three months
ended September 30, 2007 and 2006, respectively, and
$805 million and $153 million for the nine months
ended September 30, 2007 and 2006, respectively, for loans
subject to Statement of Position
No. 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
(SOP 03-3),
where the acquisition price exceeded the fair value of the
acquired loan.
|
During the three months ended September 30, 2007, a
decrease in the fair value of loans acquired subject to
SOP 03-3
resulted in a higher charge-off amount than in previous periods
as displayed in the table above.
73
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
5.
|
Investments
in Securities
|
Our securities portfolio contains mortgage-related and
non-mortgage-related securities. The following table displays
our investments in securities, which are presented at fair value
as of September 30, 2007 and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
Non-Fannie Mae structured
|
|
$
|
104,713
|
|
|
$
|
97,300
|
|
Fannie Mae single-class MBS
|
|
|
100,246
|
|
|
|
121,994
|
|
Fannie Mae structured MBS
|
|
|
72,108
|
|
|
|
74,684
|
|
Non-Fannie Mae single-class
|
|
|
27,668
|
|
|
|
27,590
|
|
Mortgage revenue bonds
|
|
|
16,112
|
|
|
|
17,221
|
|
Other
|
|
|
3,317
|
|
|
|
3,750
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
324,164
|
|
|
|
342,539
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
20,367
|
|
|
|
18,914
|
|
Corporate debt securities
|
|
|
17,621
|
|
|
|
17,594
|
|
Commercial paper
|
|
|
1,305
|
|
|
|
10,010
|
|
Other
|
|
|
238
|
|
|
|
1,055
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
39,531
|
|
|
|
47,573
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
$
|
363,695
|
|
|
$
|
390,112
|
|
|
|
|
|
|
|
|
|
|
Trading
Securities
Trading securities are recorded at fair value with subsequent
changes in fair value recorded as Investment gains
(losses), net in the condensed consolidated statements of
income. The following table displays our investments in trading
securities and the amount of net losses recognized from holding
these securities as of September 30, 2007 and
December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Non-Fannie Mae structured mortgage-related securities
|
|
$
|
30,415
|
|
|
$
|
|
|
Fannie Mae single-class MBS
|
|
|
12,532
|
|
|
|
11,070
|
|
Fannie Mae structured MBS
|
|
|
4,788
|
|
|
|
|
|
Non-Fannie Mae single-class mortgage-related securities
|
|
|
582
|
|
|
|
444
|
|
Mortgage revenue bonds
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,683
|
|
|
$
|
11,514
|
|
|
|
|
|
|
|
|
|
|
Losses on trading securities held in our portfolio, net
|
|
$
|
454
|
|
|
$
|
274
|
|
|
|
|
|
|
|
|
|
|
74
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
In connection with our adoption of SFAS 155 on
January 1, 2007, we elected to classify some investment
securities that may contain embedded derivatives as trading
securities under SFAS 115 resulting in a significant
increase in our trading portfolio as of September 30, 2007
as displayed in the table above.
We record gains and losses from both the sale of trading
securities and from changes in fair value from holding trading
securities in our investment portfolio in Investment gains
(losses), net in the condensed consolidated statements of
income. The following table displays the realized gains and
losses from the sale of trading securities as well as the net
change in gains and losses from holding trading securities for
the three and nine months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Realized gains (losses) from the sale of trading securities
|
|
$
|
52
|
|
|
$
|
(5
|
)
|
|
$
|
41
|
|
|
$
|
10
|
|
Net change in gains (losses) from holding trading securities
|
|
|
249
|
|
|
|
364
|
|
|
|
(180
|
)
|
|
|
(25
|
)
|
Included as a component of Accumulated other comprehensive
income (AOCI) are unrealized gains and losses
on AFS securities, net of tax effect. As of September 30,
2007 and December 31, 2006, gross unrealized gains on AFS
securities included in AOCI were $1.8 billion and
$2.8 billion, respectively, and gross unrealized losses on
AFS securities included in AOCI were $5.0 billion and
$3.7 billion, respectively.
We generate revenue by absorbing the credit risk of mortgage
loans and mortgage-related securities backing our Fannie Mae MBS
in exchange for a guaranty fee. We primarily issue single-class
and multi-class Fannie Mae MBS and guarantee to the
respective MBS trusts 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,
irrespective of the cash flows received from borrowers. We also
provide credit enhancements on taxable or tax-exempt mortgage
revenue bonds issued by state and local governmental entities to
finance multifamily housing for low- and moderate-income
families. Additionally, we issue long-term standby commitments
that require us to purchase loans from lenders if the loans meet
certain delinquency criteria.
We record a guaranty obligation for (i) guaranties on
lender swap transactions issued or modified pursuant to
FIN No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of
FIN No. 34) (FIN 45),
(ii) guaranties on portfolio securitization transactions,
(iii) credit enhancements on mortgage revenue bonds, and
(iv) our obligation to absorb losses under long-term
standby commitments. Our guaranty obligation represents our
estimated obligation to stand ready to perform on these
guaranties.
The maximum exposure of guaranties recorded in the condensed
consolidated balance sheets is primarily comprised of the unpaid
principal balance of the underlying mortgage loans, which
totaled $2.0 trillion and $1.7 trillion as of September 30,
2007 and December 31, 2006, respectively. In addition, we
had exposure of $220.8 billion and $254.6 billion for
other guaranties not recorded in the condensed consolidated
balance sheets as of September 30, 2007 and
December 31, 2006, respectively. The maximum number of
interest payments we would make with respect to each delinquent
mortgage loan pursuant to these guaranties is typically 24
because generally we are contractually required to purchase
loans from trusts when the loan is 24 months past due.
Further, we expect that the amount of interest payments would be
less to the extent that loans are either purchased earlier than
the mandatory purchase date or are foreclosed upon prior to
24 months of delinquency.
75
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The maximum exposure from our guaranties is not representative
of the actual loss we are likely to incur, based on our
historical loss experience. In the event we were required to
make payments under our guaranties, we would pursue recovery of
these payments by exercising our rights to the collateral
backing the underlying loans or through available credit
enhancements, which includes all recourse with third parties and
mortgage insurance. The maximum amount we could recover through
available credit enhancements and recourse with third parties on
guaranties recorded in the condensed consolidated balance sheets
was $105.7 billion and $99.4 billion as of
September 30, 2007 and December 31, 2006,
respectively. The maximum amount we could recover through
available credit enhancements and recourse with all third
parties on other guaranties not recorded in the condensed
consolidated balance sheets was $24.6 billion and
$28.8 billion as of September 30, 2007 and
December 31, 2006, respectively.
The following table displays changes in our Guaranty
obligations for the three and nine months ended
September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Balance as of beginning of period
|
|
$
|
12,954
|
|
|
$
|
10,975
|
|
|
$
|
11,145
|
|
|
$
|
10,016
|
|
Additions to guaranty
obligations(1)
|
|
|
2,383
|
|
|
|
1,149
|
|
|
|
5,857
|
|
|
|
3,465
|
|
Amortization of guaranty obligations into guaranty fee income
|
|
|
(777
|
)
|
|
|
(742
|
)
|
|
|
(2,248
|
)
|
|
|
(1,899
|
)
|
Impact of consolidation
activity(2)
|
|
|
(238
|
)
|
|
|
(87
|
)
|
|
|
(432
|
)
|
|
|
(287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
14,322
|
|
|
$
|
11,295
|
|
|
$
|
14,322
|
|
|
$
|
11,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the fair value of the
contractual obligation and deferred profit at issuance of new
guaranties.
|
|
(2) |
|
Upon consolidation of MBS trusts,
we derecognize our guaranty obligation to the respective trust.
|
Deferred profit is a component of Guaranty
obligations in the condensed consolidated balance sheets
and is included in the table above. We record deferred profit on
guaranties issued or modified on or after the adoption date of
FIN 45 if the consideration we expect to receive for our
guaranty exceeds the estimated fair value of the guaranty
obligation. Deferred profit had a carrying amount of
$4.4 billion and $4.6 billion as of September 30,
2007 and December 31, 2006, respectively. For the three
months ended September 30, 2007 and 2006, we recognized
deferred profit amortization of $221 million and
$281 million, respectively. For the nine months ended
September 30, 2007 and 2006, we recognized deferred profit
amortization of $714 million and $771 million,
respectively.
76
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
7. Acquired
Property, Net
Acquired property, net includes foreclosed property received in
full satisfaction of a loan net of a valuation allowance for
subsequent fair value declines. The following table displays the
activity in acquired property and the related valuation
allowance for the three and nine month periods ended
September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2007
|
|
|
September 30, 2007
|
|
|
|
Acquired
|
|
|
Valuation
|
|
|
Acquired
|
|
|
Acquired
|
|
|
Valuation
|
|
|
Acquired
|
|
|
|
Property
|
|
|
Allowance
|
|
|
Property, Net
|
|
|
Property
|
|
|
Allowance
|
|
|
Property, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
|
|
|
|
Balance as of beginning of period
|
|
$
|
2,810
|
|
|
$
|
(135
|
)
|
|
$
|
2,675
|
|
|
$
|
2,257
|
|
|
$
|
(116
|
)
|
|
$
|
2,141
|
|
Additions
|
|
|
1,449
|
|
|
|
(78
|
)
|
|
|
1,371
|
|
|
|
3,794
|
|
|
|
(88
|
)
|
|
|
3,706
|
|
Disposals
|
|
|
(986
|
)
|
|
|
83
|
|
|
|
(903
|
)
|
|
|
(2,778
|
)
|
|
|
224
|
|
|
|
(2,554
|
)
|
Write-downs, net of recoveries
|
|
|
|
|
|
|
(36
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
(186
|
)
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
3,273
|
|
|
$
|
(166
|
)
|
|
$
|
3,107
|
|
|
$
|
3,273
|
|
|
$
|
(166
|
)
|
|
$
|
3,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Short-term
Borrowings and Long-term Debt
|
Short-term
Borrowings
Our short-term borrowings (borrowings with an original
contractual maturity of one year or less) consist of both
Federal funds purchased and securities sold under
agreements to repurchase and Short-term debt
in the condensed consolidated balance sheets. The following
table displays our short-term borrowings as of
September 30, 2007 and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
Outstanding
|
|
|
Rate(1)
|
|
|
Outstanding
|
|
|
Rate(1)
|
|
|
|
(Dollars in millions)
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
$
|
1,645
|
|
|
|
5.60
|
%
|
|
$
|
700
|
|
|
|
5.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
|
$
|
150,162
|
|
|
|
5.06
|
%
|
|
$
|
158,785
|
|
|
|
5.16
|
%
|
Foreign exchange discount notes
|
|
|
183
|
|
|
|
4.32
|
|
|
|
194
|
|
|
|
4.09
|
|
Other short-term debt
|
|
|
2,124
|
|
|
|
5.15
|
|
|
|
5,707
|
|
|
|
5.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed short-term debt
|
|
|
152,469
|
|
|
|
5.06
|
|
|
|
164,686
|
|
|
|
5.16
|
|
Debt from consolidations
|
|
|
677
|
|
|
|
5.35
|
|
|
|
1,124
|
|
|
|
5.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
$
|
153,146
|
|
|
|
5.06
|
%
|
|
$
|
165,810
|
|
|
|
5.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes discounts, premiums and
other cost basis adjustments.
|
77
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Long-term
Debt
Long-term debt represents borrowings with an original
contractual maturity of greater than one year. The following
table displays our long-term debt as of September 30, 2007
and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate(1)
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate(1)
|
|
|
|
(Dollars in millions)
|
|
|
Senior fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benchmark notes and bonds
|
|
|
2007-2030
|
|
|
$
|
261,539
|
|
|
|
5.11
|
%
|
|
|
2007-2030
|
|
|
$
|
277,453
|
|
|
|
4.98
|
%
|
Medium-term notes
|
|
|
2007-2017
|
|
|
|
241,693
|
|
|
|
5.11
|
|
|
|
2007-2016
|
|
|
|
239,033
|
|
|
|
4.75
|
|
Foreign exchange notes and bonds
|
|
|
2007-2028
|
|
|
|
3,459
|
|
|
|
3.38
|
|
|
|
2007-2028
|
|
|
|
4,340
|
|
|
|
3.88
|
|
Other long-term debt
|
|
|
2007-2038
|
|
|
|
68,655
|
|
|
|
6.01
|
|
|
|
2007-2038
|
|
|
|
55,273
|
|
|
|
6.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total senior fixed
|
|
|
|
|
|
|
575,346
|
|
|
|
5.20
|
|
|
|
|
|
|
|
576,099
|
|
|
|
4.98
|
|
Senior floating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
|
2007-2017
|
|
|
|
14,727
|
|
|
|
5.81
|
|
|
|
2007-2016
|
|
|
|
5,522
|
|
|
|
5.06
|
|
Other long-term debt
|
|
|
2022-2037
|
|
|
|
924
|
|
|
|
6.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total senior floating
|
|
|
|
|
|
|
15,651
|
|
|
|
5.87
|
|
|
|
|
|
|
|
5,522
|
|
|
|
5.06
|
|
Subordinated fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
|
2008-2011
|
|
|
|
3,500
|
|
|
|
5.62
|
|
|
|
2007-2011
|
|
|
|
5,500
|
|
|
|
5.38
|
|
Other subordinated debt
|
|
|
2012-2019
|
|
|
|
7,480
|
|
|
|
6.37
|
|
|
|
2012-2019
|
|
|
|
7,352
|
|
|
|
6.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subordinated fixed
|
|
|
|
|
|
|
10,980
|
|
|
|
6.13
|
|
|
|
|
|
|
|
12,852
|
|
|
|
5.91
|
|
Debt from consolidations
|
|
|
2007-2039
|
|
|
|
6,642
|
|
|
|
5.84
|
|
|
|
2007-2039
|
|
|
|
6,763
|
|
|
|
5.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term
debt(2)
|
|
|
|
|
|
$
|
608,619
|
|
|
|
5.25
|
%
|
|
|
|
|
|
$
|
601,236
|
|
|
|
5.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes discounts, premiums and
other cost basis adjustments.
|
|
(2) |
|
Reported amounts include a net
premium and other cost basis adjustments of $12.4 billion
and $11.9 billion as of September 30, 2007 and
December 31, 2006, respectively.
|
|
|
9.
|
Derivative
Instruments
|
We use derivative instruments, in combination with our debt
issuances, to reduce the duration and prepayment risk relating
to the mortgage assets we own. We also enter into commitments to
purchase and sell mortgage-related securities and commitments to
purchase mortgage loans. We account for some of these
commitments as derivatives. Typically, we settle the notional
amount of our mortgage commitments; however, we do not settle
the notional amount of our derivative instruments. Notional
amounts, therefore, simply provide the basis for calculating
actual payments or settlement amounts.
Although derivative instruments are critical to our interest
rate risk management strategy, we did not apply hedge accounting
to instruments entered into during any period presented. As
such, all fair value changes and gains and losses on these
derivatives, including accrued interest, were recognized as
Derivatives fair value losses, net in the condensed
consolidated statements of income.
78
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays the outstanding notional balances
and fair value of our derivative instruments as of
September 30, 2007 and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
|
|
Notional
|
|
|
Value(1)
|
|
|
Notional
|
|
|
Value(1)
|
|
|
|
(Dollars in millions)
|
|
|
Risk management derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
$
|
329,657
|
|
|
$
|
(3,986
|
)
|
|
$
|
268,068
|
|
|
$
|
(1,447
|
)
|
Receive-fixed
|
|
|
256,902
|
|
|
|
1,221
|
|
|
|
247,084
|
|
|
|
(615
|
)
|
Basis
|
|
|
8,401
|
|
|
|
(112
|
)
|
|
|
950
|
|
|
|
(2
|
)
|
Foreign currency
|
|
|
3,642
|
|
|
|
431
|
|
|
|
4,551
|
|
|
|
371
|
|
Swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive-fixed
|
|
|
86,194
|
|
|
|
1,076
|
|
|
|
114,921
|
|
|
|
3,721
|
|
Pay-fixed
|
|
|
126,315
|
|
|
|
3,688
|
|
|
|
95,350
|
|
|
|
1,102
|
|
Interest rate caps
|
|
|
2,750
|
|
|
|
19
|
|
|
|
14,000
|
|
|
|
124
|
|
Other(2)
|
|
|
504
|
|
|
|
64
|
|
|
|
469
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
814,365
|
|
|
|
2,401
|
|
|
|
745,393
|
|
|
|
3,319
|
|
Accrued interest (payable) receivable
|
|
|
|
|
|
|
(590
|
)
|
|
|
|
|
|
|
406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk management derivatives
|
|
$
|
814,365
|
|
|
$
|
1,811
|
|
|
$
|
745,393
|
|
|
$
|
3,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage commitment derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage commitments to purchase whole loans
|
|
$
|
1,985
|
|
|
$
|
(3
|
)
|
|
$
|
1,741
|
|
|
$
|
(6
|
)
|
Forward contracts to purchase mortgage-related securities
|
|
|
40,328
|
|
|
|
86
|
|
|
|
16,556
|
|
|
|
(25
|
)
|
Forward contracts to sell mortgage-related securities
|
|
|
42,319
|
|
|
|
(58
|
)
|
|
|
21,631
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage commitment derivatives
|
|
$
|
84,632
|
|
|
$
|
25
|
|
|
$
|
39,928
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the net of
Derivative assets at fair value and Derivative
liabilities at fair value.
|
|
(2) |
|
Includes MBS options, swap credit
enhancements and mortgage insurance contracts that are accounted
for as derivatives and certain forward starting debt. The
mortgage insurance contracts have payment provisions that are
not based on a notional amount.
|
In July 2006, the FASB issued FIN No. 48,
Accounting for Uncertainty in Income Taxes (an interpretation
of FASB Statement No. 109) (FIN 48).
FIN 48 supplements SFAS No. 109, Accounting
for Income Taxes, by defining a threshold for recognizing
tax benefits in the consolidated financial statements.
FIN 48 provides a two-step approach to recognizing and
measuring tax benefits when a benefits realization is
uncertain. First, income tax benefits should be recognized when,
based on the technical merits of a tax position, we believe that
it is more likely than not (a probability of greater than 50%)
that the tax position would be sustained as filed. Second, the
benefit recognized for a tax position that meets the
more-likely-than-not criterion is measured based on the largest
amount of tax benefit that is more than 50% likely to be
realized upon ultimate settlement with the taxing authority,
taking into consideration the amounts and probabilities of the
outcomes upon settlement.
In May 2007, the FASB issued FSP
FIN 48-1,
Definition of Settlement in FASB Interpretation No. 48
(FSP
FIN 48-1)
to provide guidance on determining whether or not a tax position
has been effectively settled for
79
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
the purpose of recognizing previously unrecognized tax benefits.
FIN 48 and FSP
FIN 48-1
are effective for consolidated financial statements beginning in
the first quarter of 2007. The cumulative effect of applying the
provisions of FIN 48 upon adoption is reported as an
adjustment to beginning retained earnings.
On January 1, 2007, we adopted FIN 48 and FSP
FIN 48-1
and recorded an increase to stockholders equity of
$4 million to record the cumulative effect adjustment
related to uncertain tax positions. Upon adoption, we had
unrecognized tax benefits of $163 million, of which
$8 million, if resolved favorably, would reduce our
effective tax rate in future periods. The remaining
$155 million represents temporary differences. Also, as of
the adoption date, we had accrued interest payable related to
unrecognized tax benefits of $21 million and did not
recognize any tax penalty payable as part of the cumulative
effect adjustment. It is reasonably possible that changes in our
gross balance of unrecognized tax benefits may occur within the
next 12 months, including possible changes arising from an
Internal Revenue Service (IRS) review of our tax
treatment of certain securities. As of November 8, 2007,
any potential change in such unrecognized tax benefits related
to pending tax matters cannot be estimated.
Effective with our adoption of FIN 48, we elected to
recognize potential accrued interest and penalties related to
unrecognized tax benefits as Other expenses in our
condensed consolidated statement of income. Previously, such
amounts were recorded as a component of Provision
(benefit) for federal income taxes in our condensed
consolidated statements of income.
Our effective tax rate is the provision for federal income
taxes, excluding the tax effect of extraordinary items,
expressed as a percentage of income before federal income taxes.
Our effective rate is different from the federal statutory rate
of 35% primarily due to the benefits of our investments in
housing projects eligible for the low-income housing tax credit
and other equity investments that provide tax credits, as well
as our holdings of tax-exempt investments. For the three months
ended September 30, 2007 and 2006, we recorded a tax
benefit of 29% and 50%, respectively. For the nine months ended
September 30, 2007, we recorded a tax benefit of 45%,
compared to a tax provision of 10% for the nine months ended
September 30, 2006.
We are subject to federal income tax, but we are exempt from
state and local income taxes. The IRS is currently examining our
2005 and 2006 federal income tax returns. The IRS Appeals
Division is currently considering issues related to tax years
1999-2004.
We and the IRS have resolved all issues raised by the IRS for
the years prior to 1999.
80
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays the computation of basic and
diluted earnings per share of common stock for the three and
nine months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars and shares in millions,
|
|
|
|
except per share amounts)
|
|
|
Income (loss) before extraordinary gains (losses)
|
|
$
|
(1,402
|
)
|
|
$
|
(633
|
)
|
|
$
|
1,512
|
|
|
$
|
3,444
|
|
Extraordinary gains (losses), net of tax effect
|
|
|
3
|
|
|
|
4
|
|
|
|
(3
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(1,399
|
)
|
|
|
(629
|
)
|
|
|
1,509
|
|
|
|
3,455
|
|
Preferred stock dividends and issuance costs at redemption
|
|
|
(119
|
)
|
|
|
(131
|
)
|
|
|
(372
|
)
|
|
|
(380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common
stockholders(1)
|
|
$
|
(1,518
|
)
|
|
$
|
(760
|
)
|
|
$
|
1,137
|
|
|
$
|
3,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstandingbasic
|
|
|
974
|
|
|
|
972
|
|
|
|
973
|
|
|
|
971
|
|
Stock-based
awards(2)
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstandingdiluted
|
|
|
974
|
|
|
|
972
|
|
|
|
975
|
|
|
|
972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before extraordinary gains
(losses)(3)
|
|
$
|
(1.56
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
1.17
|
|
|
$
|
3.16
|
|
Extraordinary gains (losses), net of tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(1.56
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
1.17
|
|
|
$
|
3.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before extraordinary gains
(losses)(3)
|
|
$
|
(1.56
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
1.17
|
|
|
$
|
3.15
|
|
Extraordinary gains (losses), net of tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
(1.56
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
1.17
|
|
|
$
|
3.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In the computation of diluted EPS,
convertible preferred stock dividends are added back to net
income available to common stockholders when the assumed
conversion of the preferred shares is dilutive and is assumed to
be converted from the beginning of the period. For all periods,
the assumed conversion of the preferred shares had an
anti-dilutive effect.
|
|
(2) |
|
Represents incremental shares from
in-the-money nonqualified stock options and other performance
awards. Weighted-average options to purchase approximately
14 million and 21 million shares of common stock for
the three months ended September 30, 2007 and 2006,
respectively, and 17 million and 23 million shares of
common stock for the nine months ended September 30, 2007
and 2006, respectively, were outstanding in each period, but
were excluded from the computation of diluted EPS since they
would have been anti-dilutive.
|
|
(3) |
|
Amount is net of preferred stock
dividends and issuance costs at redemption.
|
81
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
12.
|
Employee
Retirement Benefits
|
The following table displays components of our net periodic
benefit cost for our qualified and nonqualified pension plans
and postretirement health care plan for the three and nine
months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
|
(Dollars in millions)
|
|
|
Service cost
|
|
$
|
17
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
13
|
|
|
$
|
2
|
|
|
$
|
3
|
|
Interest cost
|
|
|
12
|
|
|
|
2
|
|
|
|
4
|
|
|
|
11
|
|
|
|
2
|
|
|
|
3
|
|
Expected return on plan assets
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
1
|
|
|
|
(1
|
)
|
Amortization of initial transition asset
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Curtailment gain
|
|
|
1
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
16
|
|
|
$
|
5
|
|
|
$
|
18
|
|
|
$
|
13
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
|
(Dollars in millions)
|
|
|
Service cost
|
|
$
|
45
|
|
|
$
|
9
|
|
|
$
|
11
|
|
|
$
|
40
|
|
|
$
|
7
|
|
|
$
|
9
|
|
Interest cost
|
|
|
36
|
|
|
|
7
|
|
|
|
9
|
|
|
|
33
|
|
|
|
7
|
|
|
|
8
|
|
Expected return on plan assets
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
|
|
6
|
|
|
|
3
|
|
|
|
1
|
|
Amortization of prior service cost
|
|
|
1
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
2
|
|
|
|
(1
|
)
|
Amortization of initial transition asset
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Curtailment gain
|
|
|
1
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
41
|
|
|
$
|
19
|
|
|
$
|
31
|
|
|
$
|
45
|
|
|
$
|
19
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007, contributions of $4 million
have been made to the nonqualified pension plans and
$4 million to our postretirement benefit plan. We
anticipate contributing an additional $1 million to fund
our nonqualified pension plans in 2007 for a total of
$5 million. Also, we anticipate contributing an additional
$1 million to fund our postretirement benefit plan in 2007
for a total of $5 million.
As a result of our reduction in workforce from involuntary
severance and our voluntary early retirement program offered
during the third quarter of 2007, our pension and
post-retirement assets and liabilities were remeasured as of
August 31, 2007. This remeasurement resulted in a
curtailment charge that increased Salaries and employee
benefits expense in the condensed consolidated statements
of income by $10 million for the three and nine months
ended September 30, 2007. There are no additional cash
contributions required as a result of this curtailment, and we
recorded a $13 million prepaid asset in our condensed
consolidated balance sheet as of September 30, 2007 to
reflect the overfunded status of our pension plans.
82
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
As a result of the remeasurement, the discount rate used to
calculate net periodic benefit cost increased to 6.35% beginning
September 1, 2007 based on current yields on high-quality,
corporate fixed-income debt instruments with maturities
corresponding to the expected duration of our benefit
obligations and supported by cash flow matching analysis based
on expected cash flows specific to the characteristics of our
plan participants. No other assumptions changed as a result of
the remeasurement.
We manage our business using three operating segments:
Single-Family; HCD; and Capital Markets. The following table
displays our segment results for the three and nine months ended
September 30, 2007 and 2006.
Our segment financial results include directly attributable
revenues and expenses. Additionally, we allocate to each of our
segments: (i) capital using OFHEO minimum capital
requirements adjusted for over- or under-capitalization;
(ii) indirect administrative costs; and (iii) a
provision for federal income taxes. In addition, we allocate
intercompany guaranty fee income as a charge to Capital Markets
from the Single-Family and HCD segments for managing the credit
risk on mortgage loans held by the Capital Markets segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
September 30, 2007
|
|
|
|
Single-
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Family
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
100
|
|
|
$
|
(106
|
)
|
|
$
|
1,064
|
|
|
$
|
1,058
|
|
Guaranty fee income
(expense)(2)
|
|
|
1,424
|
|
|
|
115
|
|
|
|
(307
|
)
|
|
|
1,232
|
|
Losses on certain guaranty contracts
|
|
|
(292
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
(294
|
)
|
Trust management income
|
|
|
138
|
|
|
|
8
|
|
|
|
|
|
|
|
146
|
|
Investment (gains) losses, net
|
|
|
(47
|
)
|
|
|
|
|
|
|
183
|
|
|
|
136
|
|
Derivatives fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(2,244
|
)
|
|
|
(2,244
|
)
|
Debt extinguishment gains, net
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
31
|
|
Losses from partnership investments
|
|
|
|
|
|
|
(147
|
)
|
|
|
|
|
|
|
(147
|
)
|
Fee and other income (expense)
|
|
|
72
|
|
|
|
70
|
|
|
|
(66
|
)
|
|
|
76
|
|
Administrative expenses
|
|
|
(370
|
)
|
|
|
(134
|
)
|
|
|
(156
|
)
|
|
|
(660
|
)
|
Provision for credit losses
|
|
|
(1,084
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(1,087
|
)
|
Other expenses
|
|
|
(225
|
)
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes and extraordinary gains
|
|
|
(284
|
)
|
|
|
(204
|
)
|
|
|
(1,496
|
)
|
|
|
(1,984
|
)
|
Benefit for federal income taxes
|
|
|
(98
|
)
|
|
|
(301
|
)
|
|
|
(183
|
)
|
|
|
(582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary gains
|
|
|
(186
|
)
|
|
|
97
|
|
|
|
(1,313
|
)
|
|
|
(1,402
|
)
|
Extraordinary gains, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(186
|
)
|
|
$
|
97
|
|
|
$
|
(1,310
|
)
|
|
$
|
(1,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
income (expense) allocated to Single-Family and HCD from Capital
Markets for absorbing the credit risk on mortgage loans held in
our portfolio.
|
83
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
September 30, 2006
|
|
|
|
Single-
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Family
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
257
|
|
|
$
|
(81
|
)
|
|
$
|
1,352
|
|
|
$
|
1,528
|
|
Guaranty fee income
(expense)(2)(3)
|
|
|
1,242
|
|
|
|
120
|
|
|
|
(278
|
)
|
|
|
1,084
|
|
Losses on certain guaranty contracts
|
|
|
(101
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
(103
|
)
|
Investment gains, net
|
|
|
21
|
|
|
|
|
|
|
|
529
|
|
|
|
550
|
|
Derivatives fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(3,381
|
)
|
|
|
(3,381
|
)
|
Debt extinguishment gains, net
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
72
|
|
Losses from partnership investments
|
|
|
|
|
|
|
(197
|
)
|
|
|
|
|
|
|
(197
|
)
|
Fee and other
income(3)
|
|
|
67
|
|
|
|
50
|
|
|
|
117
|
|
|
|
234
|
|
Administrative expenses
|
|
|
(391
|
)
|
|
|
(144
|
)
|
|
|
(226
|
)
|
|
|
(761
|
)
|
Provision for credit losses
|
|
|
(142
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(145
|
)
|
Other income (expense)
|
|
|
(141
|
)
|
|
|
(14
|
)
|
|
|
2
|
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes and extraordinary gains
|
|
|
812
|
|
|
|
(271
|
)
|
|
|
(1,813
|
)
|
|
|
(1,272
|
)
|
Provision (benefit) for federal income taxes
|
|
|
283
|
|
|
|
(360
|
)
|
|
|
(562
|
)
|
|
|
(639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary gains
|
|
|
529
|
|
|
|
89
|
|
|
|
(1,251
|
)
|
|
|
(633
|
)
|
Extraordinary gains, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
529
|
|
|
$
|
89
|
|
|
$
|
(1,247
|
)
|
|
$
|
(629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
income (expense) allocated to Single-Family and HCD from Capital
Markets for absorbing the credit risk on mortgage loans held in
our portfolio.
|
|
(3) |
|
Certain prior period amounts that
previously were included as a component of Fee and other
income have been reclassified to Guaranty fee
income to conform to the current period presentation.
|
84
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2007
|
|
|
|
Single-
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Family
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
293
|
|
|
$
|
(303
|
)
|
|
$
|
3,455
|
|
|
$
|
3,445
|
|
Guaranty fee income
(expense)(2)
|
|
|
4,015
|
|
|
|
326
|
|
|
|
(891
|
)
|
|
|
3,450
|
|
Losses on certain guaranty contracts
|
|
|
(1,023
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
(1,038
|
)
|
Trust management income
|
|
|
433
|
|
|
|
27
|
|
|
|
|
|
|
|
460
|
|
Investment losses, net
|
|
|
(46
|
)
|
|
|
|
|
|
|
(56
|
)
|
|
|
(102
|
)
|
Derivatives fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(891
|
)
|
|
|
(891
|
)
|
Debt extinguishment gains, net
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
72
|
|
Losses from partnership investments
|
|
|
|
|
|
|
(527
|
)
|
|
|
|
|
|
|
(527
|
)
|
Fee and other income
|
|
|
229
|
|
|
|
251
|
|
|
|
66
|
|
|
|
546
|
|
Administrative expenses
|
|
|
(1,108
|
)
|
|
|
(420
|
)
|
|
|
(490
|
)
|
|
|
(2,018
|
)
|
(Provision) benefit for credit losses
|
|
|
(1,771
|
)
|
|
|
1
|
|
|
|
|
|
|
|
(1,770
|
)
|
Other expenses
|
|
|
(558
|
)
|
|
|
(17
|
)
|
|
|
(8
|
)
|
|
|
(583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes and extraordinary
losses
|
|
|
464
|
|
|
|
(677
|
)
|
|
|
1,257
|
|
|
|
1,044
|
|
Provision (benefit) for federal income taxes
|
|
|
159
|
|
|
|
(1,047
|
)
|
|
|
420
|
|
|
|
(468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary losses
|
|
|
305
|
|
|
|
370
|
|
|
|
837
|
|
|
|
1,512
|
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
305
|
|
|
$
|
370
|
|
|
$
|
834
|
|
|
$
|
1,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
income (expense) allocated to Single-Family and HCD from Capital
Markets for absorbing the credit risk on mortgage loans held in
our portfolio.
|
85
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2006
|
|
|
|
Single-
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Family
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
765
|
|
|
$
|
(237
|
)
|
|
$
|
4,879
|
|
|
$
|
5,407
|
|
Guaranty fee income
(expense)(2)(3)
|
|
|
3,406
|
|
|
|
381
|
|
|
|
(819
|
)
|
|
|
2,968
|
|
Losses on certain guaranty contracts
|
|
|
(175
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
(181
|
)
|
Investment gains (losses), net
|
|
|
73
|
|
|
|
|
|
|
|
(831
|
)
|
|
|
(758
|
)
|
Derivatives fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(854
|
)
|
|
|
(854
|
)
|
Debt extinguishment gains, net
|
|
|
|
|
|
|
|
|
|
|
158
|
|
|
|
158
|
|
Losses from partnership investments
|
|
|
|
|
|
|
(579
|
)
|
|
|
|
|
|
|
(579
|
)
|
Fee and other
income(3)
|
|
|
192
|
|
|
|
156
|
|
|
|
219
|
|
|
|
567
|
|
Administrative expenses
|
|
|
(1,113
|
)
|
|
|
(423
|
)
|
|
|
(713
|
)
|
|
|
(2,249
|
)
|
Provision for credit losses
|
|
|
(356
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
(368
|
)
|
Other expense
|
|
|
(285
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes and extraordinary gains
|
|
|
2,507
|
|
|
|
(721
|
)
|
|
|
2,038
|
|
|
|
3,824
|
|
Provision (benefit) for federal income taxes
|
|
|
871
|
|
|
|
(1,045
|
)
|
|
|
554
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gains
|
|
|
1,636
|
|
|
|
324
|
|
|
|
1,484
|
|
|
|
3,444
|
|
Extraordinary gains, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,636
|
|
|
$
|
324
|
|
|
$
|
1,495
|
|
|
$
|
3,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
income (expense) allocated to Single-Family and HCD from Capital
Markets for absorbing the credit risk on mortgage loans held in
our portfolio.
|
|
(3) |
|
Certain prior period amounts that
previously were included as a component of Fee and other
income have been reclassified to Guaranty fee
income to conform to the current period presentation.
|
As of September 30, 2007 and December 31, 2006, we had
preferred stock outstanding of $9.0 billion and
$9.1 billion, respectively. On February 28, 2007, we
redeemed all 14,000,000 shares of our Variable Rate
Non-Cumulative Preferred Stock, Series J, with an aggregate
stated value of $700 million. On April 2, 2007, we
redeemed all 8,000,000 shares of our Variable Rate
Non-Cumulative Preferred Stock, Series K, with an aggregate
stated value of $400 million. For the nine months ended
September 30, 2007, we recorded $10 million of
issuance costs as a reduction of net income attributable to
common stockholders as Preferred stock dividends and
issuance costs at redemption in our condensed consolidated
statements of income.
On September 28, 2007, we received gross proceeds of
$1.0 billion from the issuance of 40,000,000 shares of
Variable Rate Non-Cumulative Preferred Stock Series P with
a stated value of $25 per share. The dividend rate will reset
quarterly on each March 31, June 30, September 30 and
December 31, beginning December 31, 2007, at a per
annum rate equal to the greater of
(i) 3-Month
LIBOR plus 0.75% and (ii) 4.50%. The Series P
Preferred Stock may be redeemed, at our option, on or after
September 30, 2012.
|
|
15.
|
Fair
Value of Financial Instruments
|
We carry financial instruments at fair value, amortized cost or
lower of cost or market. Fair value is the amount at which a
financial instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation
sale. When available, the fair value of our financial
instruments is based
86
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
on observable market prices, or market prices that we obtain
from third parties. Pricing information we obtain from third
parties is internally validated for reasonableness prior to use
in the consolidated financial statements.
When observable market prices are not readily available, we
estimate the fair value using market data and model-based
interpolation using standard models that are widely accepted
within the industry. Market data includes prices of financial
instruments with similar maturities and characteristics,
duration, interest rate yield curves, measures of volatility and
prepayment rates. If market data needed to estimate fair value
is not available, we estimate fair value using internally
developed models that employ a discounted cash flow approach.
These estimates are based on pertinent information available to
us at the time of the applicable reporting periods. In certain
cases, fair values are not subject to precise quantification or
verification and may fluctuate as economic and market factors
vary, and our evaluation of those factors changes. Although we
use our best judgment in estimating the fair value of these
financial instruments, there are inherent limitations in any
estimation technique. In these cases, any minor change in an
assumption could result in a significant change in our estimate
of fair value thereby increasing or decreasing consolidated
assets, liabilities, stockholders equity and net income.
The disclosure included herein excludes certain financial
instruments, such as plan obligations for pension and other
postretirement benefits, employee stock option and stock
purchase plans, and also excludes all non-financial instruments.
The disclosure includes commitments to purchase multifamily
mortgage loans, which are off balance sheet financial
instruments that are not recorded in the condensed consolidated
balance sheets. The fair value of these commitments is included
as Mortgage loans held for investment, net of allowance
for loan losses. As a result, the following presentation
of the fair value of our financial assets and liabilities does
not represent the underlying fair value of the total
consolidated assets or liabilities.
87
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents(1)
|
|
$
|
4,976
|
|
|
$
|
4,976
|
|
|
$
|
3,972
|
|
|
$
|
3,972
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
8,349
|
|
|
|
8,351
|
|
|
|
12,681
|
|
|
|
12,681
|
|
Trading securities
|
|
|
48,683
|
|
|
|
48,683
|
|
|
|
11,514
|
|
|
|
11,514
|
|
Available-for-sale securities
|
|
|
315,012
|
|
|
|
315,012
|
|
|
|
378,598
|
|
|
|
378,598
|
|
Mortgage loans held for sale
|
|
|
5,053
|
|
|
|
5,072
|
|
|
|
4,868
|
|
|
|
4,796
|
|
Mortgage loans held for investment, net of allowance for loan
losses
|
|
|
394,550
|
|
|
|
389,757
|
|
|
|
378,687
|
|
|
|
376,688
|
|
Advances to lenders
|
|
|
11,738
|
|
|
|
11,616
|
|
|
|
6,163
|
|
|
|
6,011
|
|
Derivative assets
|
|
|
3,172
|
|
|
|
3,172
|
|
|
|
4,931
|
|
|
|
4,931
|
|
Guaranty assets and
buy-ups
|
|
|
10,332
|
|
|
|
14,544
|
|
|
|
8,523
|
|
|
|
12,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
801,865
|
|
|
$
|
801,183
|
|
|
$
|
809,937
|
|
|
$
|
811,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
$
|
1,645
|
|
|
$
|
1,647
|
|
|
$
|
700
|
|
|
$
|
700
|
|
Short-term debt
|
|
|
153,146
|
|
|
|
153,345
|
|
|
|
165,810
|
|
|
|
165,747
|
|
Long-term debt
|
|
|
608,619
|
|
|
|
618,935
|
|
|
|
601,236
|
|
|
|
606,594
|
|
Derivative liabilities
|
|
|
1,336
|
|
|
|
1,336
|
|
|
|
1,184
|
|
|
|
1,184
|
|
Guaranty obligations
|
|
|
14,322
|
|
|
|
16,093
|
|
|
|
11,145
|
|
|
|
8,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
779,068
|
|
|
$
|
791,356
|
|
|
$
|
780,075
|
|
|
$
|
782,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes restricted cash of
$496 million and $733 million as of September 30,
2007 and December 31, 2006, respectively.
|
Notes
to Fair Value of Financial Instruments
The following discussion summarizes the significant
methodologies and assumptions we use to estimate the fair values
of our financial instruments in the preceding table.
Cash and Cash EquivalentsThe carrying value of cash
and cash equivalents is a reasonable estimate of their
approximate fair value.
Federal Funds Sold and Securities Purchased Under Agreements
to ResellThe carrying value of our federal funds sold
and securities purchased under agreements to resell approximates
the fair value of these instruments due to their short-term
nature.
Trading Securities and Available-for-Sale
SecuritiesOur investments in securities are recognized
at fair value in the condensed consolidated financial
statements. Fair values of securities are primarily based on
observable market prices or prices obtained from third parties.
Details of these estimated fair values by type are displayed in
Note 5, Investments in Securities.
Mortgage Loans Held for SaleHFS loans are reported
at LOCOM in the condensed consolidated balance sheets. We
determine the fair value of our mortgage loans based on
comparisons to Fannie Mae MBS with
88
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
similar characteristics. Specifically, we use the observable
market value of our Fannie Mae MBS as a base value, from which
we subtract or add the fair value of the associated guaranty
asset, guaranty obligation and master servicing arrangements.
Mortgage Loans Held for Investment, net of allowance for loan
lossesHFI loans are recorded in the condensed
consolidated balance sheets at the principal amount outstanding,
net of unamortized premiums and discounts, cost basis
adjustments and an allowance for loan losses. We determine the
fair value of our mortgage loans based on comparisons to Fannie
Mae MBS with similar characteristics. Specifically, we use the
observable market value of our Fannie Mae MBS as a base value,
from which we subtract or add the fair value of the associated
guaranty asset, guaranty obligation and master servicing
arrangements.
Advances to LendersThe carrying value of our
advances to lenders approximates the fair value of the majority
of these instruments due to their short-term nature. Advances to
lenders for which the carrying value does not approximate fair
value are valued based on comparisons to Fannie Mae MBS with
similar characteristics, and applying the same pricing
methodology as used for HFI loans as described above.
Derivatives Assets and Liabilities (collectively,
Derivatives)Our risk management
derivatives and mortgage commitment derivatives are recognized
in the condensed consolidated balance sheets at fair value,
taking into consideration the effects of any legally enforceable
master netting agreements that allow us to settle derivative
asset and liability positions with the same counterparty on a
net basis. We use observable market prices or market prices
obtained from third parties for derivatives, when available. For
derivative instruments where market prices are not readily
available, we estimate fair value using model-based
interpolation based on direct market inputs. Direct market
inputs include prices of instruments with similar maturities and
characteristics, interest rate yield curves and measures of
interest rate volatility. Details of these estimated fair values
by type are displayed in Note 9, Derivative
Instruments.
Guaranty Assets and
Buy-upsWe
estimate the fair value of guaranty assets based on the present
value of expected future cash flows of the underlying mortgage
assets using managements best estimate of certain key
assumptions, which include prepayment speeds, forward yield
curves, and discount rates commensurate with the risks involved.
These cash flows are projected using proprietary prepayment,
interest rate and credit risk models. Because the guaranty
assets are like an interest-only income stream, the projected
cash flows from our guaranty assets are discounted using
interest spreads from a representative sample of interest-only
trust securities. We reduce the spreads on interest-only trusts
to adjust for the less liquid nature of the guaranty asset. The
fair value of the guaranty asset as presented in the table above
includes the fair value of any associated
buy-ups,
which is estimated in the same manner as guaranty assets but are
recorded separately as a component of Other assets
in the condensed consolidated balance sheets. While the fair
value of the guaranty asset reflects all guaranty arrangements,
the carrying value primarily reflects only those arrangements
entered into subsequent to our adoption of FIN 45.
Federal Funds Purchased and Securities Sold Under Agreements
to RepurchaseThe carrying value of our federal funds
purchased and securities sold under agreements to repurchase
approximate the fair value of these instruments due to the
short-term nature of these liabilities, exclusive of dollar roll
repurchase transactions.
Short-Term Debt and Long-Term DebtAs of
September 30, 2007, we estimate the fair value of our
non-callable debt using an average of vendor bid prices and then
applying an adjustment to convert the average vendor bid prices
to ask level prices. As of December 31, 2006 and when
vendor pricing is not available, we estimate the fair value of
our non-callable debt using the discounted cash flow approach
based on the Fannie Mae yield curve with an adjustment to
reflect fair values at the offer side of the market. We estimate
the fair value of our callable bonds using an option adjusted
spread (OAS) approach using the Fannie Mae yield
curve and market-calibrated volatility. The OAS applied to
callable bonds approximates market levels where we have executed
secondary market transactions. We continue to use third party
prices for subordinated debt.
89
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Guaranty ObligationsOur estimate of the fair value
of the guaranty obligation is based on managements
estimate of the amount that we would be required to pay a third
party of similar credit standing to assume our obligation. This
amount is based on market information from spot transactions,
when available. In instances when such observations are not
available, this amount is based on the present value of expected
cash flows using managements best estimates of certain key
assumptions, which include default and severity rates and a
market rate of return. While the fair value of the guaranty
obligation reflects all guaranty arrangements, the carrying
value primarily reflects only those arrangements entered into
subsequent to our adoption of FIN 45.
|
|
16.
|
Commitments
and Contingencies
|
We are party to various types of legal proceedings that are
subject to many uncertain factors that are not recorded in the
condensed consolidated financial statements. Each of these is
described below.
Legal
Contingencies
Litigation, claims and proceedings of all types are subject to
many uncertain factors that generally cannot be predicted with
assurance. The following describes the material legal
proceedings, examinations and other matters that: (1) were
pending as of September 30, 2007; (2) were terminated
during the period from January 1, 2007 through
November 8, 2007; or (3) are pending as of the filing
of this report. An unfavorable outcome in certain of these legal
proceedings could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. In view of the inherent difficulty of predicting the
outcome of these proceedings, we cannot state with confidence
what the eventual outcome of the pending matters will be.
Because we concluded that a loss with respect to any pending
matter discussed below was not both probable and estimable as of
November 8, 2007, we have not recorded a reserve for any of
those matters. We intend to vigorously defend our interests in
these lawsuits.
In addition to the matters specifically described herein, we are
also involved in a number of legal and regulatory proceedings
that arise in the ordinary course of business that do not have a
material impact on our business.
Pursuant to the provisions of our bylaws and indemnification
agreements, directors and officers have a right to have their
reasonable legal fees and expenses indemnified to the fullest
extent permitted by applicable law if such fees and expenses are
incurred in connection with certain proceedings due to such
persons serving or having served as a director or officer
of Fannie Mae. Until an entitlement to indemnification is
determined, we are under an obligation to advance those fees and
expenses. During 2007, we advanced those fees and expenses of
certain current and former officers and directors for various
proceedings. None of these amounts were material.
Restatement-Related
Matters
In re
Fannie Mae Securities Litigation
Beginning on September 23, 2004, 13 separate complaints
were filed by holders of our securities against us, as well as
certain of our former officers, in three federal district
courts. The complaints in these lawsuits purport to have been
made on behalf of a class of plaintiffs consisting of purchasers
of Fannie Mae securities between April 17, 2001 and
September 21, 2004. The complaints alleged that we and
certain of our former officers made material misrepresentations
and/or omissions of material facts in violation of the federal
securities laws. Plaintiffs claims were based on findings
contained in OFHEOs September 2004 interim report
regarding its findings to that date in its special examination
of our accounting policies, practices and controls.
All of the cases were consolidated
and/or
transferred to the U.S. District Court for the District of
Columbia. A consolidated complaint was filed on March 4,
2005 against us and former officers Franklin D. Raines, J.
90
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Timothy Howard and Leanne Spencer. The court entered an order
naming the Ohio Public Employees Retirement System and State
Teachers Retirement System of Ohio as lead plaintiffs. The
consolidated complaint generally made the same allegations as
the individually-filed complaints. More specifically, the
consolidated complaint alleged that the defendants made
materially false and misleading statements in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and SEC
Rule 10b-5
promulgated thereunder, largely with respect to accounting
statements that were inconsistent with the GAAP requirements
relating to hedge accounting and the amortization of premiums
and discounts. Plaintiffs contend that the alleged fraud
resulted in artificially inflated prices for our common stock.
Plaintiffs seek unspecified compensatory damages,
attorneys fees, and other fees and costs. Discovery
commenced in this action following the denial of the motions to
dismiss filed by us and the former officer defendants on
February 10, 2006.
On April 17, 2006, the plaintiffs in the consolidated class
action filed an amended consolidated complaint that added
purchasers of publicly traded call options and sellers of
publicly traded put options to the putative class and sought to
extend the end of the putative class period from
September 21, 2004 to September 27, 2005. On
August 14, 2006, the plaintiffs filed a second amended
complaint adding KPMG LLP and Goldman, Sachs & Co. as
additional defendants and adding allegations based on the May
2006 report issued by OFHEO and the February 2006 report issued
by Paul, Weiss, Rifkind, Wharton & Garrison LLP. Our
answer to the second amended complaint was filed on
January 16, 2007. Plaintiffs filed a motion for class
certification on May 17, 2006, and a hearing on that motion
was held on June 21, 2007.
On April 16, 2007, KPMG filed cross-claims against us in
this action for breach of contract, fraudulent
misrepresentation, fraudulent inducement, negligent
misrepresentation, and contribution. KPMG is seeking unspecified
compensatory, consequential, restitutionary, rescissory, and
punitive damages, including purported damages related to injury
to KPMGs reputation, legal costs, exposure to legal
liability, costs and expenses of responding to investigations
related to our accounting, and lost fees. KPMG is also seeking
attorneys fees, costs, and expenses. We filed a motion to
dismiss certain of KPMGs cross-claims. That motion was
denied on June 27, 2007. Our separately filed accounting
malpractice lawsuit against KPMG LLP was consolidated for
pretrial purposes into this action on June 13, 2007. Also
on June 13, 2007, KPMGs motion to dismiss our
accounting malpractice complaint was denied.
In addition, two individual securities cases have been filed by
institutional investor shareholders in the U.S. District
Court for the District of Columbia. The first case was filed on
January 17, 2006 by Evergreen Equity Trust, Evergreen
Select Equity Trust, Evergreen Variable Annuity Trust and
Evergreen International Trust against us and the following
current and former officers and directors: Franklin D. Raines,
J. Timothy Howard, Leanne Spencer, Thomas P. Gerrity, Anne M.
Mulcahy, Frederick V. Malek, Taylor Segue, III, William
Harvey, Joe K. Pickett, Victor Ashe, Stephen B. Ashley, Molly
Bordonaro, Kenneth M. Duberstein, Jamie Gorelick, Manuel Justiz,
Ann McLaughlin Korologos, Donald B. Marron, Daniel H. Mudd, H.
Patrick Swygert and Leslie Rahl.
The second individual securities case was filed on
January 25, 2006 by 25 affiliates of Franklin Templeton
Investments against us, KPMG LLP, and the following current and
former officers and directors: Franklin D. Raines, J. Timothy
Howard, Leanne Spencer, Thomas P. Gerrity, Anne M. Mulcahy,
Frederick V. Malek, Taylor Segue, III, William Harvey, Joe
K. Pickett, Victor Ashe, Stephen B. Ashley, Molly Bordonaro,
Kenneth M. Duberstein, Jamie Gorelick, Manuel Justiz, Ann
McLaughlin Korologos, Donald B. Marron, Daniel H. Mudd, H.
Patrick Swygert and Leslie Rahl. On April 27, 2007, KPMG
also filed cross-claims against us in this action that are
essentially identical to those it alleges in the consolidated
shareholder class action case.
The individual securities actions assert various federal and
state securities law and common law claims against us and
certain of our current and former officers and directors based
upon essentially the same alleged conduct as that at issue in
the consolidated shareholder class action, and also assert
insider trading claims against
91
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
certain former officers. Both cases seek unspecified
compensatory and punitive damages, attorneys fees, and
other fees and costs. In addition, the Evergreen plaintiffs seek
an award of treble damages under state law.
On May 12, 2006, the individual securities plaintiffs
voluntarily dismissed defendants Victor Ashe and Molly Bordonaro
from both cases. On June 29, 2006 and then again on August
14 and 15, 2006, the individual securities plaintiffs filed
first amended complaints and then second amended complaints
adding additional allegations regarding improper accounting
practices. The second amended complaints each added Radian
Guaranty Inc. as a defendant. The court has consolidated these
individual securities actions into the consolidated shareholder
class action for pretrial purposes and possibly through final
judgment.
On July 31, 2007, the court dismissed all of the individual
securities plaintiffs claims against Thomas P. Gerrity,
Anne M. Mulcahy, Frederick V. Malek, Taylor Segue, III,
William Harvey, Joe K. Pickett, Victor Ashe, Stephen B. Ashley,
Molly Bordonaro, Kenneth M. Duberstein, Jamie Gorelick, Manuel
Justiz, Ann McLaughlin Korologos, Donald B. Marron, Daniel H.
Mudd, H. Patrick Swygert, Leslie Rahl, and Radian Guaranty Inc.
In addition, the court dismissed the individual securities
plaintiffs state law claims and certain of their federal
securities law claims against us, Franklin D. Raines, J. Timothy
Howard, and Leanne Spencer. It also limited the individual
securities plaintiffs insider trader claims against
Franklin D. Raines, J. Timothy Howard and Leanne Spencer.
In re
Fannie Mae Shareholder Derivative Litigation
Beginning on September 28, 2004, ten plaintiffs filed
twelve shareholder derivative actions (i.e., lawsuits
filed by shareholder plaintiffs on our behalf) in three
different federal district courts and the Superior Court of the
District of Columbia against certain of our current and former
officers and directors and against us as a nominal defendant.
Plaintiffs contend that the defendants purposefully misapplied
GAAP, maintained poor internal controls, issued a false and
misleading proxy statement, and falsified documents to cause our
financial performance to appear smooth and stable, and that
Fannie Mae was harmed as a result. The claims are for breaches
of the duty of care, breach of fiduciary duty, waste, insider
trading, fraud, gross mismanagement, violations of the
Sarbanes-Oxley Act of 2002, and unjust enrichment. Plaintiffs
seek unspecified compensatory damages, punitive damages,
attorneys fees, and other fees and costs, as well as
injunctive relief directing us to adopt certain proposed
corporate governance policies and internal controls.
All of these shareholder derivative actions have been
consolidated into the U.S. District Court for the District
of Columbia and the court entered an order naming Pirelli
Armstrong Tire Corporation Retiree Medical Benefits Trust and
Wayne County Employees Retirement System as co-lead
plaintiffs. A consolidated complaint was filed on
September 26, 2005. The consolidated complaint named the
following current and former officers and directors as
defendants: Franklin D. Raines, J. Timothy Howard, Thomas P.
Gerrity, Frederick V. Malek, Joe K. Pickett, Anne M. Mulcahy,
Daniel H. Mudd, Kenneth M. Duberstein, Stephen B. Ashley, Ann
McLaughlin Korologos, Donald B. Marron, Leslie Rahl, H. Patrick
Swygert, and John K. Wulff.
The plaintiffs filed an amended complaint on September 1,
2006. Among other things, the amended complaint added the
Goldman Sachs Group, Inc., Goldman, Sachs & Co., Inc.,
Lehman Brothers, Inc., and Radian Insurance Inc. as defendants,
added allegations concerning the nature of certain transactions
between these entities and Fannie Mae, and added additional
allegations from OFHEOs May 2006 report on its special
examination and the Paul Weiss report. The plaintiffs have since
voluntarily dismissed those newly added defendants. We filed
motions to dismiss the first amended complaint and on
May 31, 2007, the court issued a Memorandum Opinion and
Order dismissing plaintiffs derivative lawsuit for failing
to make a demand on the Board of Directors or to plead specific
facts demonstrating that such a demand was excused based upon
futility. On June 27, 2007, plaintiffs filed a Notice of
Appeal and their appeal is currently pending with the
U.S. Court of Appeals for the District of Columbia.
92
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
On September 20, 2007, one of the original derivative
plaintiffs, James Kellmer, filed a motion for clarification or,
in the alternative, for relief of judgment from the Courts
May 31, 2007 Order dismissing the consolidated case.
Mr. Kellmer had originally filed a shareholder derivative
action on January 10, 2005, which was later consolidated
into the main derivative case. His motion seeks clarification
that the Courts May 31, 2007 dismissal order does not
apply to his January 10, 2005 action, and that his case can
now proceed. This motion has been fully briefed and is pending.
On June 29, 2007, Mr. Kellmer also filed a new
derivative action in the U.S. District Court for the
District of Columbia. Mr. Kellmers new complaint
alleges that he made a demand on the Board of Directors on
September 24, 2004, and that this new action should now be
allowed to proceed. In addition to naming all of the defendants
who were named in the amended consolidated complaint,
Mr. Kellmer names the following new defendants: James
Johnson, Lawrence Small, Jamie Gorelick, Robert Levin, Victor
Ashe, Molly Bordonaro, William Harvey, Taylor Segue, III,
Manuel Justiz, Vincent Mai, Roger Birk, Stephen Friedman, Garry
Mauro, Maynard Jackson, Esteban Torres, KPMG LLP and the Goldman
Sachs Group, Inc. On November 5, 2007, Mr. Kellmer
voluntarily dismissed Messrs. Ashley and Marron and
Ms. Korologos from this action, as well as from his
original 2005 complaint.
The factual allegations in Mr. Kellmers new complaint
are largely duplicative of those in the amended consolidated
complaint and the complaints claims are based on theories
of breach of fiduciary duty, indemnification, negligence,
violations of the Sarbanes-Oxley Act of 2002 and unjust
enrichment. The complaint seeks unspecified money damages,
including legal fees and expenses, disgorgement and punitive
damages, as well as injunctive relief.
In addition, another derivative action based on
Mr. Kellmers alleged September 24, 2004 demand
was filed on July 6, 2007 by Arthur Middleton in the United
States District Court for the District of Columbia. This
complaint names the following current and former officers and
directors as defendants: Franklin D. Raines, J. Timothy Howard,
Daniel H. Mudd, Kenneth M. Duberstein, Stephen B. Ashley, Thomas
P. Gerrity, Ann Korologos, Frederic V. Malek, Donald B. Marron,
Joe K. Pickett, Leslie Rahl, H. Patrick Swygert, Anne M.
Mulcahy, John K. Wulff, the Goldman Sachs Group, Inc., and
Goldman, Sachs & Co. The allegations in this new
complaint are essentially identical to the allegations in the
amended consolidated complaint referenced above, and this
plaintiff seeks identical relief.
On July 27, 2007, Mr. Kellmer filed a motion to
consolidate the two new derivative cases and to be appointed
lead counsel. On August 10, 2007, we filed our opposition
to that motion. This motion has been held in abeyance pending
the outcome of our motions to dismiss the newly filed derivative
actions. We filed a motion to dismiss Mr. Middletons
complaint for lack of standing on October 3, 2007, and a
motion to dismiss Mr. Kellmers new complaint for lack
of subject matter jurisdiction on October 12, 2007.
Mr. Kellmer filed his opposition on November 5, 2007.
In re Fannie Mae ERISA Litigation (formerly David
Gwyer v. Fannie Mae)
Three cases, based on the Employee Retirement Income Security
Act of 1974 (ERISA), have been filed against us, our
Board of Directors Compensation Committee, and against the
following former and current officers and directors: Franklin D.
Raines, J. Timothy Howard, Daniel H. Mudd, Vincent A. Mai,
Stephen Friedman, Anne M. Mulcahy, Ann McLaughlin Korologos, Joe
K. Pickett, Donald B. Marron, Kathy Gallo and Leanne Spencer.
On October 15, 2004, David Gwyer filed a class action
complaint in the U.S. District Court for the District of
Columbia. Two additional class action complaints were filed by
other plaintiffs on May 6, 2005 and May 10, 2005.
These cases were consolidated on May 24, 2005 in the
U.S. District Court for the District of Columbia. A
consolidated complaint was filed on June 15, 2005. The
plaintiffs in the consolidated ERISA-based lawsuit purport to
represent a class of participants in our Employee Stock
Ownership Plan between January 1, 2001
93
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
and the present. Their claims are based on alleged breaches of
fiduciary duty relating to accounting matters discussed in our
SEC filings and in OFHEOs interim report. Plaintiffs seek
unspecified damages, attorneys fees, and other fees and
costs, and other injunctive and equitable relief. We and the
other defendants filed motions to dismiss the consolidated
complaint. These motions were denied on May 8, 2007. We
filed our answer to the consolidated complaint on July 9,
2007. On July 23, 2007, the Compensation Committee of our
Board of Directors filed a second motion to dismiss.
Department
of Labor ESOP Investigation
In November 2003, the Department of Labor commenced a review of
our Employee Stock Ownership Plan (ESOP) and
Retirement Savings Plan. The Department of Labor concluded its
investigation of our Retirement Savings Plan, but continued to
review the ESOP.
On September 12, 2007, the Department of Labor notified us
that it had concluded its investigation of our ESOP. The
Department of Labor indicated that the matters raised in the
course of the investigation had been addressed and corrected,
and that it would take no further action with regard to these
matters.
Other
Legal Proceedings
Former
CEO Arbitration
On September 19, 2005, Franklin D. Raines, our former
Chairman and Chief Executive Officer, initiated arbitration
proceedings against Fannie Mae before the American Arbitration
Association. On April 10, 2006, the parties convened an
evidentiary hearing before the arbitrator. The principal issue
before the arbitrator was whether we were permitted to waive a
requirement contained in Mr. Rainess employment
agreement that he provide six months notice prior to retiring.
On April 24, 2006, the arbitrator issued a decision finding
that we could not unilaterally waive the notice period, and that
the effective date of Mr. Rainess retirement was
June 22, 2005, rather than December 21, 2004 (his
final day of active employment). Under the arbitrators
decision, Mr. Rainess election to receive an
accelerated, lump-sum payment of a portion of his deferred
compensation must now be honored. Moreover, we must pay
Mr. Raines any salary and other compensation to which he
would have been entitled had he remained employed through
June 22, 2005, less any pension benefits that
Mr. Raines received during that period. On November 7,
2006, the parties entered into a consent award, which partially
resolved the issue of amounts due Mr. Raines. In accordance
with the consent award, we paid Mr. Raines
$2.6 million on November 17, 2006. By agreement, final
resolution of the unresolved issues was deferred until after our
accounting restatement results were announced. On June 26,
2007, counsel for Mr. Raines notified the arbitrator that
the parties have been unable to resolve the following issues:
Mr. Rainess entitlement to additional shares of
common stock under our performance share plan for the three-year
performance share cycle that ended in 2003;
Mr. Raines entitlement to shares of common stock
under our performance share plan for the three-year performance
share cycles that ended in each of 2004, 2005 and 2006; and
Mr. Raines entitlement to additional compensation of
approximately $140,000.
In re
G-Fees Antitrust Litigation
Since January 18, 2005, we have been served with 11
proposed class action complaints filed by single-family
borrowers that allege that we and Freddie Mac violated the
Clayton and Sherman Acts and state antitrust and consumer
protection statutes by agreeing to artificially fix, raise,
maintain or stabilize the price of our and Freddie Macs
guaranty fees. Two of these cases were filed in state courts.
The remaining cases were filed in federal court. The two state
court actions were voluntarily dismissed. The federal court
actions were consolidated in the U.S. District Court for
the District of Columbia. Plaintiffs filed a consolidated
amended complaint on August 5, 2005. Plaintiffs in the
consolidated action seek to represent a class of consumers whose
loans allegedly contain a guarantee fee set by us or
Freddie Mac between January 1, 2001 and the
94
FANNIE
MAE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
present. The consolidated amended complaint alleges violations
of federal and state antitrust laws and state consumer
protection and other laws. Plaintiffs seek unspecified damages,
treble damages, punitive damages, and declaratory and injunctive
relief, as well as attorneys fees and costs.
We and Freddie Mac filed a motion to dismiss on October 11,
2005. The motion to dismiss has been fully briefed and remains
pending. On June 12, 2007, we and Freddie Mac filed a
supplemental memorandum in support of the October 11, 2005
motion to dismiss.
Casa Orlando Apartments, Ltd., et al. v. Federal
National Mortgage Association (formerly known as Medlock
Southwest Management Corp., et al. v. Federal National
Mortgage Association)
A complaint was filed against us in the U.S. District Court
for the Eastern District of Texas (Texarkana Division) on
June 2, 2004, in which plaintiffs purport to represent a
class of multifamily borrowers whose mortgages are insured under
Sections 221(d)(3), 236 and other sections of the National
Housing Act and are held or serviced by us. The complaint
identified as a class low- and moderate-income apartment
building developers who maintained uninvested escrow accounts
with us or our servicer. Plaintiffs Casa Orlando Apartments,
Ltd., Jasper Housing Development Company, and the Porkolab
Family Trust No. 1 allege that we violated fiduciary
obligations that they contend we owed to borrowers with respect
to certain escrow accounts and that we were unjustly enriched.
In particular, plaintiffs contend that, starting in 1969, we
misused these escrow funds and are therefore liable for any
economic benefit we received from the use of these funds.
Plaintiffs seek a return of any profits, with accrued interest,
earned by us related to the escrow accounts at issue, as well as
attorneys fees and costs.
Our motions to dismiss and motion for summary judgment were
denied on March 10, 2005. We filed a partial motion for
reconsideration of our motion for summary judgment, which was
denied on February 24, 2006.
Plaintiffs filed an amended complaint on December 16, 2005
and a motion for class certification on January 3, 2006,
which was fully briefed and remains pending.
Investigation
by the New York Attorney General
On November 6, 2007, the New York Attorney Generals
Office issued a letter to us discussing that Offices
investigation into appraisal practices in the mortgage industry.
The letter also discussed a complaint filed by the Attorney
General of New York against First American Corporation and its
subsidiary eAppraiseIT related to inappropriate appraisal
practices engaged in by First American and eAppraiseIT with
respect to loans appraised for Washington Mutual, Inc. We are
cooperating with the Attorney General, and have agreed to
appoint an independent examiner to review these matters. The
Attorney Generals Office has issued a subpoena to us
regarding appraisals and valuations as they may relate to our
mortgage purchases and securitizations.
Preferred
Stock
On October 4, 2007, we received gross proceeds of
$375 million from the issuance of 15,000,000 shares of
Non-Cumulative Preferred Stock Series Q with a stated value
of $25 per share at a dividend rate of 6.75% per annum. The
Series Q Preferred Stock may be redeemed, at our option, on
or after September 30, 2010.
On October 16, 2007, our Board of Directors approved a
revision to our Bylaws to increase the number of authorized
shares of preferred stock from 200,000,000 to 700,000,000.
95
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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Quantitative and qualitative disclosure about market risk is set
forth in
Part IItem 2MD&ARisk
ManagementInterest Rate Risk Management and Other Market
Risks.
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Item 4.
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Controls
and Procedures
|
OVERVIEW
This section discusses managements evaluation of our
disclosure controls and procedures as of March 31, 2007,
June 30, 2007 and September 30, 2007. This section
also describes our efforts from January 1, 2007 through the
date of this filing to remediate the material weaknesses in
internal control over financial reporting as of
December 31, 2006 that were identified by our management
and are described in our Annual Report on
Form 10-K
for the year ended December 31, 2006. It begins with an
overview of the remediation statusas of March 31,
2007, June 30, 2007, September 30, 2007, and through
the date of this filingof each of the material weaknesses
reported as of December 31, 2006. This overview is followed
by a discussion of managements evaluation of disclosure
controls and procedures and managements discussion of
changes in our internal control over financial reporting.
As shown in the following table, six of the eight material
weaknesses reported as of December 31, 2006 were remediated
as of the date of this filing. We describe the actions that we
took during 2007 to remediate these six material weaknesses
under the heading Remediation Activities and Changes in
Internal Control Over Financial ReportingDescription of
Remediation Actions below. This section then describes the
remediation actions underway relating to the two remaining
material weaknesses.
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Material Weakness Reported
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Status as of
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Status as of
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Status as of
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Status as of
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as of December 31, 2006
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March 31, 2007
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June 30, 2007
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September 30, 2007
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Filing Date
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1.
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Application of
GAAP
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Remediation in
process
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Remediation in
process
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Remediation in
process
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Remediated
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2.
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Financial Statement Preparation and Reporting
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Remediation in
process
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Remediation in
process
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Remediation in
process
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Remediation in
process
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3.
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Disclosure Controls
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Remediation in
process
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Remediation in
process
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Remediation in
process
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Remediation in
process
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4.
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Journal Entry
Controls
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Remediation in
process
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Remediated
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*
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*
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5.
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Reconciliation
Controls
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Remediation in
process
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Remediation in
process
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Remediated
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*
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6.
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Access Control
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Remediation in
process
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Remediation in
process
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Remediated
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*
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7.
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Pricing and
Independent Price
Verification
ProcessesPricing
Controls
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Remediation in
process
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Remediation in
process
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Remediated
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*
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8.
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Multifamily Lender
Loan Loss Sharing
Modifications
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Remediation in
process
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Remediation in
process
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Remediated
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*
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*
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Since remediation, this control has
continued to be effective.
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96
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
As required by
Rule 13a-15
under the Securities Exchange Act of 1934 (the Exchange
Act), management has evaluated, with the participation of
our Chief Executive Officer and Chief Financial Officer, the
effectiveness of our disclosure controls and procedures as of
March 31, 2007, June 30, 2007 and September 30,
2007. Disclosure controls and procedures refer to controls and
other procedures designed to ensure that information required to
be disclosed in the reports we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file or
submit under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding our required disclosure. In designing and evaluating
our disclosure controls and procedures, management recognizes
that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management was required to
apply its judgment in evaluating and implementing possible
controls and procedures.
As described in our 2006
Form 10-K,
as of December 31, 2006, management identified eight
material weaknesses in our internal control over financial
reporting, which management considers an integral component of
our disclosure controls and procedures. As a result of these
material weaknesses, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were not effective at a reasonable assurance level as
of March 31, 2007, June 30, 2007, September 30,
2007 or the date of filing this report.
We have made progress toward achieving effectiveness at a
reasonable assurance level in our disclosure controls and
procedures. Specifically, we have taken, and are taking, the
actions described below under Remediation Activities and
Changes in Internal Control Over Financial Reporting to
remediate the material weaknesses in our internal control over
financial reporting.
We continue to strive to improve our disclosure controls and
procedures to enable us to provide complete and accurate public
disclosure on a timely basis. Todays filing of our
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 constitutes our
first timely periodic filing since the filing of our Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2004 on August 9, 2004.
Management believes that the material weakness relating to our
disclosure controls will be remediated once we have remediated
the material weakness in our financial statement preparation and
reporting process. We currently estimate that we will remediate
these two remaining material weaknesses on or before
December 31, 2007.
To address our remaining material weaknesses, management
performed additional analyses and other post-closing procedures
designed to ensure that our consolidated interim financial
statements were prepared in accordance with GAAP. These
procedures included data validation and certification procedures
from the source systems through the general ledger, testing and
documentation of systems, validation of results, disclosure
review, and pre- and post-closing analytics. As a result,
management believes that the consolidated interim financial
statements included in this report fairly present in all
material respects the companys financial position, results
of operations and cash flows for the periods presented.
REMEDIATION
ACTIVITIES AND CHANGES IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
Overview
Management has evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, whether any
changes in our internal control over financial reporting that
occurred during the period from January 1, 2007 through the
date of this filing have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting. Based on the evaluations management conducted,
substantial changes were implemented and tested during the
period from January 1, 2007 through September 30, 2007
to remediate our material weaknesses in internal control over
financial reporting.
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Management believes the measures that we have implemented during
2007 to remediate the material weaknesses in internal control
over financial reporting have had a material impact on our
internal control over financial reporting since
December 31, 2006. Changes in our internal control over
financial reporting from January 1, 2007 through the date
of this filing that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting are described below.
Description
of Remediation Actions
Remediation
Actions Relating to Remediated Material Weaknesses
The discussion below describes the actions that management took
during the first three quarters of 2007 to remediate the six
material weaknesses in our internal control over financial
reporting that were identified as of December 31, 2006 and
that were remediated by September 30, 2007.
Application
of GAAP
Description
of Material Weakness as of December 31, 2006
We did not maintain effective internal control over financial
reporting relating to designing our process and information
technology applications to comply with GAAP as specified in
SOP 03-3,
which affects our accounting conclusions related to loans
purchased from trusts under our default call option. Although we
did not have the process and information technology applications
in place to comply with
SOP 03-3
as of December 31, 2006, our consolidated financial
statements for 2005 and 2006 appropriately reflect our adoption
of
SOP 03-3
for loans acquired out of trusts on or after January 1,
2005.
We did not maintain effective internal control over financial
reporting relating to our accounting for certain 2006 securities
sold under agreements to repurchase and certain 2006 securities
purchased under agreements to resell to comply with GAAP as
specified in SFAS 140. Our evaluation of these transactions
was insufficient, and, as a result, we initially incorrectly
recorded these 2006 transactions as purchases and sales although
they did not qualify for such treatment under SFAS 140.
Description
of 2007 Remediation
Actions
We completed remediation of this material weakness in the fourth
quarter of 2007.
In the first quarter of 2007, we assessed the impact of
SOP 03-3
and modified our process and information technology applications
to ensure the appropriate application of GAAP in accordance with
the recently issued standard.
In the fourth quarter of 2007, we analyzed certain transactions
to redefine our controls relating to accounting for certain
securities sold under agreements to repurchase and certain
securities purchased under agreements to resell to comply with
GAAP as specified in SFAS 140. We redesigned our controls
to identify these transactions as financings and appropriately
record them in accordance with SFAS 140.
Financial
Reporting ProcessJournal Entry Controls
Description
of Material Weakness as of December 31, 2006
We did not maintain effective internal control over financial
reporting relating to the recording of journal entries, both
recurring and non-recurring. Specifically, the design and
operation of this control was inadequate for ensuring that
journal entries were prepared by personnel with adequate
knowledge of the activity being posted. The entries were not
supported by appropriate documentation and were not reviewed at
the appropriate level to ensure the accuracy and completeness of
the entries recorded.
Description
of 2007 Remediation
Actions
We completed remediation of this material weakness in the second
quarter of 2007.
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In the first quarter of 2007, we completed additional training
on our journal entry controls related to new controls developed
as a result of our restatement of our financial statements for
the years ended December 31, 2003 and 2002. Our training
focused on controls relating to the review and approval of
journal entries, requirements for supporting documentation, and
the validation of journal entries. During the second quarter of
2007, we completed implementation of these enhanced controls in
our journal entry creation and approval process.
Financial
Reporting ProcessReconciliation Controls
Description
of Material Weakness as of December 31,
2006
We did not maintain effective internal control over financial
reporting relating to the reconciliation of many of our
financial statement accounts and other data records that served
as inputs to those accounts. Specifically, the design and
operation of this control was inadequate for ensuring that our
accounts were complete, accurate and in agreement with detailed
supporting documentation. In addition, this control did not
ensure proper review and approval of reconciliations by
appropriate personnel.
Description
of 2007 Remediation Actions
We completed remediation of this material weakness in the third
quarter of 2007.
Training on account reconciliations was provided during the
first quarter of 2007 with a focus on reconciliation
completeness and accuracy. We further enhanced our controls
during the second quarter of 2007 to focus on primary and
secondary account management responsibilities and the timeliness
of reconciliations, including independent monitoring.
Implementation of enhanced controls was completed in the third
quarter prior to the filing of our 2006
Form 10-K
on August 16, 2007.
Access
Controls for Information Technology Applications and
Infrastructure
Description
of Material Weakness as of December 31, 2006
We did not maintain effective internal control over financial
reporting relating to the design of controls over access to
financial reporting applications and data. Specifically,
ineffective controls included inappropriate access to programs
and data, lack of periodic review and monitoring of such access,
and lack of clearly communicated policies and procedures
governing information technology security and access.
Furthermore, we did not maintain effective logging and
monitoring of servers and databases to ensure that access was
both appropriate and authorized. Given the pervasive nature of
this material weakness, it could have materially impacted our
financial statement accounts and disclosures.
Description
of 2007 Remediation Actions
We completed remediation of this material weakness in the third
quarter of 2007.
During the first quarter of 2007, we began a review of platforms
relevant to our financial reporting process. In this review, we
evaluated and updated expired access and passwords. Detailed
application and technology platform reviews were implemented in
the second quarter of 2007 to review the level of access in both
our production and development environments for applications and
platforms that are material to our financial reporting process.
We updated the role definition for access to our applications
and updated our workflow to reflect these revised roles. We also
implemented additional procedures to monitor our platforms and
databases, with corresponding escalation and review of potential
incidents. In the third quarter of 2007, we implemented enhanced
controls designed to more systematically manage access for
employees transferring within the company. We also provided
additional training to our employees on our access management
procedures.
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Pricing
and Independent Price Verification ProcessesPricing
Controls
Description
of Material Weakness as of December 31, 2006
We did not maintain effective internal control over financial
reporting with respect to the design of our controls related to
our pricing processes for securities. As a result, our
accounting conclusions, including certain conclusions related to
the fair value of our securities and unrealized gains and
losses, could have been materially affected.
Description
of 2007 Remediation Actions
We completed remediation of this material weakness in the third
quarter of 2007.
During the second quarter of 2007, we began implementing
improvements to our control processes for pricing securities,
which included supervisory review over data inputs, model
outputs and computational accuracy. Implementation of enhanced
controls was completed in the third quarter prior to the filing
of our 2006
Form 10-K
on August 16, 2007.
Multifamily
Lender Loss Sharing Modifications
Description
of Material Weakness as of December 31, 2006
We did not maintain effective internal control over financial
reporting with respect to the design of our controls related to
maintaining and recording accurate multifamily lender loss
sharing information in our information systems. As a result, our
accounting conclusions, including certain conclusions related to
consolidation, could have been materially affected.
Description
of 2007 Remediation Actions
We completed remediation of this material weakness in the third
quarter of 2007.
During the second quarter of 2007, we implemented data reviews
of the lender loss sharing data in our information systems. In
the third quarter of 2007, we completed our implementation of
monthly validation controls that provide verification of
recourse data associated with multifamily loans and deals with
product characteristics and lender agreements. Further, we
redesigned our controls for monitoring changes to contractual
arrangements, and updating and validating such changes in our
systems.
Remediation
Actions Relating to Remaining Material Weaknesses
The discussion below describes the actions that management has
taken during 2007 and is in the process of taking to remediate
our two remaining material weaknesses in internal control over
financial reporting.
Financial
Reporting ProcessFinancial Statement Preparation and
Reporting
Description
of Material Weakness as of December 31, 2006
We identified errors in the processes and systems developed to
prepare our financial information. Specifically, we identified
design errors in these processes and systems which resulted in
extensive process and system design changes as well as
correcting journal entries. These errors were corrected prior to
issuance of our 2006 consolidated financial statements. However,
based upon the nature and extent of these errors, our financial
reporting processes and systems did not have adequate controls
to ensure that they may be executed on a routine, repeatable
basis.
Description
of 2007 Remediation Actions
Although we have not yet remediated this material weakness, we
have continued to enhance the financial statement preparation
and reporting process during 2007 by developing enhanced data
sourcing and business processes to create a sustainable,
repeatable financial close and reporting process. During the
first quarter of 2007, we provided training on cash flow
statement and disclosure preparation, and identified and
100
communicated requirements earlier, while ensuring that our
systems have adequate controls and documentation prior to
implementation. During the second quarter of 2007, we made
continued progress on remediation through additional executions
and validations of our results, including ongoing assessment of
control effectiveness, to support the filing of our 2006
Form 10-K.
In the third quarter of 2007, we implemented significant system
enhancements to facilitate the processing of a monthly close
within the timelines required to file our financial statements
on a timely basis. In addition, we enhanced our pricing and
valuation platforms to price our assets and liabilities on a
timely basis; we updated our accounting systems to run monthly;
we replaced several end user computing systems with applications
designed to ensure sustainability; and we automated our data
sourcing and reconciliation processes.
We continue to enhance our controls relating to our financial
statement preparation and reporting process, and we are
currently performing tests to assess the effectiveness of these
controls. As of the date of this filing, we estimate that we
will complete our implementation of these new controls and
remediate this material weakness by December 31, 2007.
Financial
Reporting ProcessDisclosure Controls and
Procedures
Description
of Material Weakness as of December 31, 2006
We did not maintain effective disclosure controls and
procedures. Specifically, we have not filed periodic reports on
a timely basis as required by the rules of the SEC and the New
York Stock Exchange.
Description of 2007 Remediation Actions
While we have made progress toward achieving effectiveness at a
reasonable assurance level in our disclosure controls and
procedures, as discussed under Evaluation of Disclosure
Controls and Procedures above, management believes that
this material weakness will not be remediated until we have
remediated all other material weaknesses in our internal control
over financial reporting. As noted above, we currently estimate
that this will occur by December 31, 2007.
101
PART IIOTHER
INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
The following information supplements and amends our discussion
set forth under Part IItem 3Legal
Proceedings in our 2006
Form 10-K.
In addition to the matters specifically described in this item,
we are involved in a number of legal and regulatory proceedings
that arise in the ordinary course of business that do not have a
material impact on our business.
RESTATEMENT-RELATED
MATTERS
Securities
Class Action Lawsuits
In re
Fannie Mae Securities Litigation/KPMG Accounting Malpractice
Action
In the consolidated class action lawsuit against us and certain
of our former officers by holders of our securities, we filed
our answer to the second amended complaint on January 16,
2007, and a hearing was held on plaintiffs May 17,
2006 motion for class certification on June 21, 2007.
On April 16, 2007, KPMG LLP, a co-defendant and our former
auditor, filed cross-claims against us for breach of contract,
fraudulent misrepresentation, fraudulent inducement, negligent
misrepresentation, and contribution. KPMG is seeking unspecified
compensatory, consequential, restitutionary, rescissory, and
punitive damages, including purported damages related to injury
to KPMGs reputation, legal costs, exposure to legal
liability, costs and expenses of responding to investigations
related to our accounting, and lost fees. KPMG is also seeking
attorneys fees, costs, and expenses. We filed a motion to
dismiss certain of KPMGs cross-claims. That motion was
denied on June 27, 2007. Our separately filed accounting
malpractice lawsuit against KPMG LLP was consolidated for
pretrial purposes into this action on June 13, 2007. Also
on June 13, 2007, KPMGs motion to dismiss our
accounting malpractice complaint was denied.
In the individual securities cases filed by affiliates of
Franklin Templeton Investments, on April 27, 2007, KPMG
filed cross-claims against us that are essentially identical to
those it alleges against us in its cross-claims in the
consolidated shareholder class action case discussed above.
In connection with both of the individual securities cases, on
July 31, 2007, the court dismissed all of the individual
securities plaintiffs claims against Thomas P. Gerrity,
Anne M. Mulcahy, Frederick V. Malek, Taylor Segue, III,
William Harvey, Joe K. Pickett, Victor Ashe, Stephen B. Ashley,
Molly Bordonaro, Kenneth M. Duberstein, Jamie Gorelick, Manuel
Justiz, Ann McLaughlin Korologos, Donald B. Marron, Daniel H.
Mudd, H. Patrick Swygert, Leslie Rahl, and Radian Guaranty Inc.
In addition, the court dismissed the individual securities
plaintiffs state law claims and certain of their federal
securities law claims against us, Franklin D. Raines, J. Timothy
Howard, and Leanne Spencer. It also limited the individual
securities plaintiffs insider trading claims against
Franklin D. Raines, J. Timothy Howard and Leanne Spencer.
Shareholder
Derivative Lawsuits
In re
Fannie Mae Shareholder Derivative Litigation
On May 31, 2007, the court issued a Memorandum Opinion and
Order dismissing plaintiffs derivative lawsuit against all
defendants. On June 27, 2007, plaintiffs filed a Notice of
Appeal and their appeal is currently pending in the
U.S. Court of Appeals for the District of Columbia.
On September 20, 2007, one of the original derivative
plaintiffs, James Kellmer, filed a motion for clarification or,
in the alternative, for relief of judgment from the Courts
May 31, 2007 Order dismissing the consolidated case.
Mr. Kellmer had originally filed a shareholder derivative
action on January 10, 2005, which was later consolidated
into the main derivative case. His motion seeks clarification
that the Courts May 31, 2007 dismissal order does not
apply to his January 10, 2005 action, and that his case can
now proceed. This motion has been fully briefed and is pending.
102
On June 29, 2007, Mr. Kellmer also filed a new
derivative action in the U.S. District Court for the
District of Columbia. Mr. Kellmers new complaint
alleges that he made a demand on the Board of Directors on
September 24, 2004, and that this new action should now be
allowed to proceed. In addition to naming all of the defendants
who were named in the amended consolidated complaint,
Mr. Kellmer names the following new defendants: James
Johnson, Lawrence Small, Jamie Gorelick, Robert Levin, Victor
Ashe, Molly Bordonaro, William Harvey, Taylor Segue, III,
Manuel Justiz, Vincent Mai, Roger Birk, Stephen Friedman, Garry
Mauro, Maynard Jackson, Esteban Torres, KPMG LLP and the Goldman
Sachs Group, Inc. On November 5, 2007, Mr. Kellmer
voluntarily dismissed Messrs. Ashley and Marron and
Ms. Korologos from this action, as well as from his
original 2005 complaint.
The factual allegations in Mr. Kellmers new complaint
are largely duplicative of those in the amended consolidated
complaint and the complaints claims are based on theories
of breach of fiduciary duty, indemnification, negligence,
violations of the Sarbanes-Oxley Act of 2002 and unjust
enrichment. The complaint seeks unspecified money damages,
including legal fees and expenses, disgorgement and punitive
damages, as well as injunctive relief.
In addition, another derivative action based on
Mr. Kellmers alleged September 24, 2004 demand
was filed on July 6, 2007 by Arthur Middleton in the United
States District Court for the District of Columbia. This
complaint names the following current and former officers and
directors as defendants: Franklin D. Raines, J. Timothy
Howard, Daniel H. Mudd, Kenneth M. Duberstein, Stephen B.
Ashley, Thomas P. Gerrity, Ann Korologos, Frederic V. Malek,
Donald B. Marron, Joe K. Pickett, Leslie Rahl, H. Patrick
Swygert, Anne M. Mulcahy, John K. Wulff, the Goldman Sachs
Group, Inc., and Goldman, Sachs & Co. The allegations
in this new complaint are essentially identical to the
allegations in the amended consolidated complaint referenced
above, and this plaintiff seeks the identical relief.
On July 27, 2007, Mr. Kellmer filed a motion to
consolidate the two new derivative cases and to be appointed
lead counsel. On August 10, 2007 we filed our opposition to
that motion. This motion has been held in abeyance pending the
outcome of our motions to dismiss the newly filed derivative
actions. We filed a motion to dismiss Mr. Middletons
complaint for lack of standing on October 3, 2007, and a
motion to dismiss Mr. Kellmers new complaint for lack
of subject matter jurisdiction on October 12, 2007.
Mr. Kellmer filed his opposition on November 5, 2007.
ERISA
Action
In re
Fannie Mae ERISA Litigation (formerly David Gwyer v. Fannie
Mae)
In the consolidated ERISA-based case, our motions to dismiss
were denied on May 8, 2007, and we filed our answer to the
consolidated complaint on July 9, 2007. On July 23,
2007, the Compensation Committee of our Board of Directors filed
a second motion to dismiss.
OTHER
LEGAL PROCEEDINGS
Former
CEO Arbitration
In the pending arbitration proceeding with Franklin D. Raines,
our former Chairman and Chief Executive Officer, on
June 26, 2007, counsel for Mr. Raines notified the
arbitrator that the parties have been unable to resolve the
following issues: Mr. Rainess entitlement to
additional shares of common stock under our performance share
plan for the three-year performance share cycle that ended in
2003; Mr. Rainess entitlement to shares of common
stock under our performance share plan for the three-year
performance share cycles that ended in each of 2004, 2005 and
2006; and Mr. Rainess entitlement to additional
compensation of approximately $140,000.
103
Antitrust
Lawsuits
In re
G-Fees Antitrust Litigation
In the consolidated class action, on June 12, 2007, we and
Freddie Mac filed a supplemental memorandum in support of our
previously filed motion to dismiss. A ruling has not yet been
issued.
Department
of Labor ESOP Investigation
On September 12, 2007, the Department of Labor notified us
that it had concluded its investigation of Fannie Maes
Employee Stock Ownership Plan. The Department of Labor indicated
that the matters raised in the course of the investigation had
been addressed and corrected, and that it would take no further
action with regard to these matters.
Investigation
by the New York Attorney General
On November 6, 2007, the New York Attorney Generals
Office issued a letter to us discussing that Offices
investigation into appraisal practices in the mortgage industry.
The letter also discussed a complaint filed by the Attorney
General of New York against First American Corporation and its
subsidiary eAppraiseIT related to inappropriate appraisal
practices engaged in by First American and eAppraiseIT with
respect to loans appraised for Washington Mutual, Inc. We are
cooperating with the Attorney General, and have agreed to
appoint an independent examiner to review these matters. The
Attorney Generals Office has issued a subpoena to us
regarding appraisals and valuations as they may relate to our
mortgage purchases and securitizations.
Our 2006
Form 10-K,
in Item 1A, summarizes the material risks to our business.
The discussion below supplements and updates the discussion of
risk factors in our 2006
Form 10-K,
primarily to take into account recent developments in the
housing, mortgage and credit markets. We believe that this
discussion and the discussion in our 2006
Form 10-K
represent the material risks relevant to us, our business and
our industry. Also refer to the discussion in
Part IItem 2Managements
Discussion and Analysis of Financial Condition and Results of
Operations in this report for additional information that
may supplement or update the discussion of risk factors in our
2006
Form 10-K.
In addition, new material risks to our business may emerge that
we are currently unable to predict.
You should consider the risks described in our 2006
Form 10-K
and in this report carefully in evaluating our business because
they could cause our actual results to differ materially from
our historical results or the results contemplated by the
forward-looking statements contained in this report.
Increased delinquencies and credit losses relating to our
mortgage assets and the mortgage loans that back our Fannie Mae
MBS continue to adversely affect our results of operations and
could affect our financial condition.
We are experiencing increasing mortgage loan delinquencies and
credit losses. Weak economic conditions in the Midwest and home
price declines on a national basis have increased our
single-family serious delinquency rates and contributed to
higher default rates and loan loss severities in the first nine
months of 2007. We have experienced increases in serious
delinquency rates across our conventional single-family mortgage
credit book, including in higher risk loan categories, such as
subprime loans, Alt-A loans, adjustable-rate loans,
interest-only loans, loans made for the purchase of investment
properties,
negative-amortizing
loans, loans to borrowers with lower credit scores and loans
with high loan-to-value ratios. We have experienced particularly
rapid increases in our conventional single-family serious
delinquency rates in some higher risk loan categories, such as
Alt-A loans, interest-only loans, loans with subordinate
financing and loans made for the purchase of condominiums. If
current housing market trends continue, we expect that we will
continue to experience
104
increased delinquencies and credit losses for 2007 and 2008.
Moreover, if a recession occurs that negatively impacts economic
conditions in the United States as a whole or in specific
regions of the country, we could experience significantly higher
delinquencies and credit losses. An increase in our credit
losses would reduce our earnings and adversely affect our
financial condition.
We are subject to increased credit risk exposures related
to subprime and Alt-A mortgage loans that back our private-label
mortgage-related securities investments, and any increased
delinquency rates and credit losses could adversely affect the
yield on or value of our investments, which could negatively
affect our earnings and financial condition.
We invest in private-label mortgage-related securities that are
backed by Alt-A and subprime mortgage loans. In October 2007,
Standard & Poors downgraded the credit ratings
of a small number of private-label securities held in our
portfolio that are backed by subprime mortgage loans, and
Moodys placed under review for possible downgrade several
additional subprime-backed private-label securities held in our
portfolio. In recent months, mortgage loan delinquencies and
credit losses generally have increased, particularly in the
subprime and Alt-A sectors. In addition, home prices in many
states have declined, after extended periods during which home
prices appreciated. If delinquency and loss rates on subprime
and Alt-A mortgages continue to increase, or there is a further
decline in home prices, we could experience reduced yields or
losses on our investments in private-label mortgage-related
securities backed by subprime or Alt-A loans. In addition, the
fair value of these investments may be adversely affected. A
reduction in the fair value of these investments could
negatively affect our earnings and financial condition.
Our potential exposure to the risks associated with our
dependence on the institutional counterparties to provide
services that are critical to our business has increased in
recent months, and our earnings and liquidity may be reduced if
one or more of our institutional counterparties defaults on its
obligations to us.
Our primary exposure to institutional counterparty risk is with
our mortgage insurers, mortgage servicers, lender customers,
depository institutions, dealers that commit to sell mortgage
pools or loans to us, issuers of investments held in our liquid
investment portfolio, and derivatives counterparties. Our
business with many of these institutional counterparties is
heavily concentrated. For example, seven mortgage insurance
companies provided over 99% of our total coverage as of
September 30, 2007. In addition, as of September 30,
2007, our ten largest single-family mortgage servicers and their
affiliates serviced 78% of our single-family mortgage credit
book of business, and Countrywide Financial Corporation and its
affiliates, which is our largest single-family mortgage
servicer, serviced 23% of our single-family mortgage credit book
of business.
The products or services that these counterparties provide are
critical to our business operations, and a default by a
counterparty with significant obligations to us could adversely
affect our ability to conduct our operations efficiently and at
cost-effective rates, which in turn could adversely affect our
results of operations and our financial condition.
Mortgage Insurers. In August and September
2007, two of our seven primary mortgage insurers had their
external ratings for claims paying ability or insurer financial
strength downgraded by Fitch from AA to AA-. Both have
maintained their Standard & Poors and
Moodys ratings of AA and Aa3, respectively. As of
September 30, 2007, these two mortgage insurers provided
primary and pool mortgage insurance coverage on
$59.1 billion and $27.8 billion, respectively, of
single-family loans in our portfolio or underlying Fannie Mae
MBS, which represented approximately 2% and 1%, respectively, of
our single-family mortgage credit book of business. Ratings
downgrades imply an increased risk that these mortgage insurers
will fail to fulfill their obligations to reimburse us for
claims under insurance policies. In addition, if a mortgage
insurer were downgraded below AA-/Aa3 by any of the three
national rating agencies, we would evaluate the insurer, the
current market environment and our alternative sources of credit
enhancement. Based on the outcome of our evaluation, we could
restrict that insurer from conducting certain types of business
with us and we may take actions that may include not purchasing
loans insured by that mortgage insurer. Restricting our business
activity with any of our mortgage insurer counterparties would
increase our concentration risk with the remaining insurers in
the industry.
105
Lender Customers and Mortgage
Servicers. Challenging market conditions in
recent months have adversely affected, and may continue to
adversely affect, the liquidity and financial condition of a
number of our lender customers and mortgage servicers. Several
of our lender customers and servicers have experienced ratings
downgrades and liquidity constraints, including Countrywide
Financial Corporation and its affiliates, our largest lender
customer and servicer. These and other lender customers and
mortgage servicers may become subject to serious liquidity
problems that, either temporarily or permanently, negatively
affect the viability of their business plans or reduce their
access to funding sources. Our arrangements with our lender
customers and mortgage servicers could result in significant
exposure to us if any one of our significant lender customers or
servicers were to default or experience a serious liquidity
event. In addition, if current housing market trends continue or
worsen, the number of delinquent mortgage loans serviced by our
counterparties could continue to increase. Managing a
substantially higher volume of non-performing loans could create
operational difficulties for our servicers. The financial
difficulties that a number of our lender customers and mortgage
servicers are currently experiencing, coupled with growth in the
number of delinquent loans on their books of business, may
negatively affect the ability of these counterparties to meet
their obligations to us and the amount or quality of the
products or services they provide to us. The failure of any of
our primary lender customers or mortgage servicers to meet their
obligations to us could increase our credit-related expenses and
credit losses, and have a material adverse effect on our results
of operations and financial condition.
Derivatives counterparties. As of
September 30, 2007, we had outstanding transactions with 21
interest rate and foreign currency derivatives counterparties,
of which eight counterparties accounted for approximately 80% of
the total outstanding notional amount of our derivatives
contracts as of that date. Each of these eight counterparties
accounted for between approximately 5% and 17% of the total
outstanding notional amount of our derivatives contracts as of
September 30, 2007. Downgrades in the credit ratings of any
of our derivatives counterparties could increase the collateral
we hold to reduce our exposure to that counterparty. If a
counterpartys credit rating is downgraded below A-, we may
cease entering into new arrangements with that counterparty,
which would further increase the concentration of our business
with our remaining derivatives counterparties. In addition, a
derivatives counterparty experiencing liquidity or financial
constraints may not be able to meet their obligations to us,
which could adversely affect our results of operations and our
financial condition.
We have several key lender customers, and the loss of
business volume from any one of these customers could adversely
affect our business and result in a decrease in our market share
and earnings.
Our ability to generate revenue from the purchase and
securitization of mortgage loans depends on our ability to
acquire a steady flow of mortgage loans from the originators of
those loans. We acquire a significant portion of our mortgage
loans from several large mortgage lenders. For the first nine
months of 2007, our top five lender customers of single-family
mortgage loans accounted for approximately 57% of our
single-family business volume, and the top five lender customers
of multifamily mortgage loans accounted for approximately 46% of
our multifamily business volume during those periods. In
addition, during the first nine months of 2007, Countrywide,
which is our largest lender customer of single-family mortgage
loans, accounted for approximately 29% of our single-family
business volume, and our largest lender customer of multifamily
mortgage loans accounted for approximately 14% of our
multifamily business volume during those periods. Accordingly,
maintaining our current business relationships and business
volumes with our top lender customers is critical to our
business. Some of our lender customers are experiencing, or may
become subject to, liquidity problems that would affect the
volume of business they are able to generate. If any of our key
lender customers significantly reduces the volume or quality of
mortgage loans that the lender delivers to us or that we are
willing to buy from them, we could lose significant business
volume that we might be unable to replace, which could adversely
affect our business and result in a decrease in our market share
and earnings.
In reporting our financial condition, results of
operations and liquidity position, and in providing
forward-looking statements relating to our results of
operations, management must make estimates and rely on the use
of models about matters that are inherently uncertain, which may
result in significant changes from previously reported
information.
106
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 these
policies and methods comply with GAAP and reflect
managements judgment of the most appropriate manner to
report our financial condition and results of operations. The
recent market price volatility resulting from increased credit
risk has raised issues of how to measure the fair value of
mortgage-related assets in a volatile market. Due to the
complexity of many of our accounting policies, our accounting
methods relating to these policies involve substantial use of
models. Models are inherently imperfect predictors of actual
results because they are based on assumptions, including
assumptions about future events. Our models may not include
assumptions that reflect very positive or very negative market
conditions and, accordingly, 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, potentially significantly.
Our results of operations are subject to uncertainty based
upon continuing developments in the housing and mortgage
markets, making it more difficult for us to operate our business
and manage risk.
The current disruption in the housing and mortgage markets may
continue or worsen. The disruption may adversely impact the
U.S. economy in general and the housing and mortgage
markets in particular. In addition, a variety of legislative,
regulatory and other proposals have been or may be introduced in
an effort to address the disruption. Depending on the scope and
nature of legislative, regulatory or other initiatives, if any,
that are adopted to respond to this disruption and applied to
us, our financial condition, results of operations or liquidity
could, directly or indirectly, benefit or be adversely affected
in a manner that could be material to our business.
Material weaknesses and other control deficiencies
relating to our internal control over financial reporting could
result in errors in our reported results and could have a
material adverse effect on our operations, investor confidence
in our business and the trading prices of our securities.
Managements assessment of our internal control over
financial reporting as of December 31, 2006 identified
eight material weaknesses in our internal control over financial
reporting. We have not yet remediated material weaknesses in our
financial statement preparation and reporting or our disclosure
controls and procedures, which may result in errors in our
financial or other reporting, cause us to fail to meet our
reporting obligations on a timely basis and decrease investor
confidence in our reported information, leading to a decline in
our stock price.
In addition, we may identify additional material weaknesses or
significant deficiencies in our internal control over financial
reporting that we have not discovered to date or that we
believed had been remediated and would not reoccur. In addition,
we cannot be certain that we will be able to maintain effective
disclosure controls and procedures in the future.
Continued declines in our earnings could negatively impact
our regulatory capital position.
We are required to meet various capital standards, including a
requirement that our core capital equal or exceed both our
statutory minimum capital requirement and an OFHEO-directed
minimum capital requirement. Our retained earnings are a
component of our core capital. Accordingly, the level of our
core capital may fluctuate significantly depending on our
results of operations. As described in
Part IItem 2Managements
Discussion and Analysis of Financial Condition and Results of
OperationsConsolidated Results of Operations, our
net income declined in the first nine months of 2007 due to
derivatives fair value losses, a significant reduction in net
interest income, significantly higher losses on certain guaranty
contracts and a substantial increase in credit-related expenses.
If some or all of the market trends that contributed to these
results continue to negatively affect our net income, they will
continue to cause a reduction in our retained earnings and, as a
result, in the amount of our core capital. In order to maintain
our statutory and OFHEO-directed minimum capital surplus, we may
be required to take actions, or refrain from taking actions, to
ensure that we maintain or increase our core capital. These
actions have included, and in the future may include, selling
assets at a time when we believe that it would be economically
advantageous to continue to hold the assets and issuing
additional equity securities, which in general is a more
107
expensive method of funding our operations than issuing debt
securities. Either of these actions may further reduce our net
income. In addition, in order to remain in compliance with our
regulatory capital requirements, we may need to limit or forgo
attractive opportunities to acquire assets, and we may lose
market share as a result.
RISKS
RELATING TO OUR INDUSTRY
A continuing, or broader, decline in home prices or in
activity in the U.S. housing market could negatively impact
our earnings and financial condition.
The continued deterioration of the housing market and national
decline in home prices in the first nine months of 2007, along
with the expected continued decline, is likely to result in
increased delinquencies or defaults on the mortgage assets we
own or that back our guaranteed Fannie Mae MBS. In addition,
home price declines reduce the fair value of our mortgage
assets. Further, the features of a significant portion of
mortgage loans made in recent years, including loans that reset
to higher interest rates either once or throughout their term,
and loans that were made based on limited or no credit or income
documentation, also increase the likelihood of future increases
in delinquencies or defaults on mortgage loans. An increase in
delinquencies or defaults likely will result in a higher level
of credit losses, which in turn will reduce our earnings.
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. We expect total
mortgage originations to decline by 12% in 2007, from $2.8
trillion in 2006 to $2.4 trillion in 2007, and by an additional
18% in 2008 to $2.0 trillion. If we do not continue to increase
our share of the secondary mortgage market, this decline in
mortgage originations could reduce our guaranty fee income.
Changes in general market and economic conditions in the
U.S. and abroad may adversely affect our financial
condition and results of operations.
Our financial condition and results of operations may be
adversely affected by changes in general market and economic
conditions in the U.S. and abroad. These conditions are
beyond our control, and may change suddenly and dramatically.
Changes in market and economic conditions could adversely affect
us in many ways, including the following:
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fluctuations in the global debt and equity capital markets,
including sudden and unexpected changes in short-term or
long-term interest rates, could decrease the fair value of our
mortgage assets, derivatives positions and other investments,
negatively affect our ability to issue debt at attractive rates,
and reduce our net interest income; and
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a recession or other economic downturn, or rising unemployment,
in the United States as a whole or in specific regions of the
country could decrease homeowner demand for mortgage loans and
increase the number of homeowners who become delinquent or
default on their mortgage loans. An increase in delinquencies or
defaults would likely result in a higher level of credit losses,
which would reduce our earnings. Also, decreased homeowner
demand for mortgage loans could reduce our guaranty fee income,
net interest income and the fair value of our mortgage assets. A
recession or other economic downturn could also increase the
risk that our counterparties will default on their obligations
to us, resulting in an increase in our liabilities and a
reduction in our earnings.
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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(a) Unregistered Sales of Equity Securities
Under the Fannie Mae Stock Compensation Plan of 1993 and the
Fannie Mae Stock Compensation Plan of 2003 (the
Plans), we regularly provide stock compensation to
employees and members of the Board of Directors to attract,
motivate and retain these individuals and promote an identity of
interests with shareholders.
During the quarter ended September 30, 2007, we issued
341,758 shares of common stock upon the exercise of stock
options for an aggregate exercise price of approximately
$17.9 million, of which approximately
108
$14.1 million was paid in cash and the remainder was paid
by the delivery to us of 57,393 shares of common stock.
Options granted under the Plans typically vest 25% per year
beginning on the first anniversary of the date of grant and
expire ten years after the grant.
In consideration of services rendered or to be rendered, we also
issued 9,000 shares of restricted stock during the quarter
ended September 30, 2007. In addition, 2,425 restricted
stock units vested, as a result of which 1,603 shares of
common stock were issued and 822 shares of common stock
that otherwise would have been issued were withheld by us in
lieu of requiring the recipients to pay us the withholding taxes
due upon vesting. Shares of restricted stock and restricted
stock units granted under the Plans typically vest in equal
annual installments over three or four years beginning on the
first anniversary of the date of grant. Each restricted stock
unit represents the right to receive a share of common stock at
the time of vesting. As a result, restricted stock units are
generally similar to restricted stock, except that restricted
stock units do not confer voting rights on their holders.
All options, shares of restricted stock and restricted stock
units were granted to persons who were employees or members of
the Board of Directors of Fannie Mae.
As reported in a Current Report on Form 8-K filed with the SEC
on September 28, 2007, we issued 40 million shares of
Variable Rate Non-Cumulative Preferred Stock, Series P, with an
aggregate stated value of $1.0 billion on
September 28, 2007.
The securities we issue are exempted securities
under laws administered by the SEC to the same extent as
securities that are obligations of, or are guaranteed as to
principal and interest by, the United States. As a result, we do
not file registration statements with the SEC with respect to
offerings of our securities.
(b) None.
(c) Share Repurchases
Purchases
of Equity Securities by the Issuer
The following table shows shares of our common stock we
repurchased during the third quarter of 2007.
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Maximum Number
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Total Number of
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of Shares that
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Total Number
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Average
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Shares Purchased
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May Yet be
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of Shares
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Price Paid
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as Part of Publicly
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Purchased Under
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Purchased(1)
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per Share
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Announced
Program(2)
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the
Program(3)
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(Shares in thousands)
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2007
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July 1-31
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15
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$
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64.29
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59,815
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August 1-31
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81
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67.73
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31
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59,353
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September 1-30
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29
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62.98
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9
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59,313
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(1) |
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In addition to shares repurchased
as part of the publicly announced programs described in footnote
2 below, these shares consist of: (a) 20,872 shares of
common stock reacquired from employees to pay an aggregate of
approximately $1.3 million in withholding taxes due upon
the vesting of restricted stock; (b) 6,062 shares of
common stock reacquired from employees to pay an aggregate of
approximately $0.4 million in withholding taxes due upon
the exercise of stock options; (c) 57,393 shares of
common stock repurchased from employees and members of our Board
of Directors to pay an aggregate exercise price of approximately
$3.8 million for stock options; and
(d) 899 shares of common stock repurchased from
employees in a limited number of instances relating to
employees financial hardship.
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(2) |
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Consists of 39,675 shares of
common stock repurchased from employees pursuant to our publicly
announced employee stock repurchase program. On May 9,
2006, we announced that the Board of Directors had authorized a
stock repurchase program (the Employee Stock Repurchase
Program) under which we may repurchase up to
$100 million of Fannie Mae shares from non-officer
employees. On January 21, 2003, we publicly announced that
the Board of Directors had approved a share repurchase program
(the General Repurchase Authority) under which we
could purchase in open market transactions the sum of
(a) up to 5% of the shares of common stock outstanding as
of December 31, 2002 (49.4 million shares) and
(b) additional shares to offset stock issued or expected to
be issued under our employee benefit plans. No shares were
repurchased during the third quarter of 2007 pursuant to the
General Repurchase Authority. The General Repurchase Authority
has no specified expiration date. The Employee Stock Repurchase
Program terminated in November 2007.
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(3) |
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Consists of the total number of
shares that may yet be purchased under the General Repurchase
Authority as of the end of the month, including the number of
shares that may be repurchased to offset stock that may be
issued pursuant to awards outstanding under the Stock
Compensation Plan of 1993 and the Stock Compensation Plan of
2003. Repurchased shares are first offset against any issuances
of stock under our employee benefit plans. To the extent that we
repurchase more shares in a given month than have been issued
under our plans, the excess number of shares is deducted from
the 49.4 million shares approved for repurchase under the
General Repurchase Authority. Because of new stock issuances and
expected issuances pursuant to new grants under our employee
benefit plans, the number of shares that may be purchased under
the General Repurchase Authority fluctuates from month to month.
See Notes to Consolidated Financial
StatementsNote 13, Stock-Based Compensation
Plans, in our 2006
Form 10-K,
filed with the SEC on August 16, 2007 for information about
shares issued, shares expected to be issued, and shares
remaining available for grant under our employee benefit plans.
Shares that remain available for grant under our employee
benefit plans are not yet included in the amount of shares that
may yet be purchased reflected in the table above. The amount in
the table above includes the remaining number of shares that may
yet be repurchased under the Employee Stock Repurchase Program
at the end of each month, based on the average of the high and
low stock prices of Fannie Mae common stock at month-end.
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Item 3.
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Defaults
Upon Senior Securities
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None.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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None.
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Item 5.
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Other
Information
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(a) None.
(b) Changes to Procedures for Recommending Nominees to
the Board of Directors
In October 2007, we revised the procedures by which shareholders
may submit written recommendations for nominees to the Board of
Directors. To assist the Nominating and Corporate Governance
Committee of the Board of Directors in its evaluation of
candidates for the Board of Directors, shareholder
recommendations as to potential candidates should include the
following information regarding nominees for the Board of
Directors:
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(1)
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the name, age, business address and residence address of the
recommended nominee;
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(2)
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the principal occupation or employment of the recommended
nominee;
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(3)
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the class of securities and the number of shares of capital
stock of the corporation which are beneficially owned by the
recommended nominee;
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(4)
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any other information concerning the recommended nominee that
would be required under SEC rules in a proxy statement
soliciting proxies for the election of that nominee as a
director; and
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(5)
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a statement whether the recommended nominee, if elected, intends
to tender, promptly following the nominees election or
re-election, an irrevocable resignation effective upon the
nominees failure to receive the required vote for
re-election at the next meeting of shareholders at which the
nominee faces re-election and upon acceptance of such
resignation by the Board of Directors.
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We also may require any proposed nominee to furnish such other
information as may be reasonably required to determine whether
the proposed nominee is eligible to serve as an independent
director or that could be material to a reasonable
shareholders understanding of the nominees
independence or lack thereof.
Change in Date of Annual Meeting of Shareholders for 2008
Because we currently expect to hold our 2008 annual meeting of
shareholders in the spring of 2008, a shareholder who intends to
submit a proposal for consideration at the 2008 annual meeting
must submit the proposal so that we receive it by no later than
November 30, 2007, in order for the proposal to be
considered for inclusion in the proxy statement and form of
proxy that the Board of Directors will distribute in connection
with that meeting. The shareholder proposal must be delivered
to, or mailed and received by,
110
Fannie Mae Shareholder Proposal,
c/o Office
of the Secretary, Fannie Mae, Mail Stop 1H-2S/05,
3900 Wisconsin Avenue, NW, Washington, DC
20016-2892.
If a shareholder does not wish to have the proposal included in
the proxy statement but still wishes to present a proposal at
the 2008 annual meeting, other than a director nomination, the
shareholder must give written notice to us in accordance with
Section 3.12 of our Bylaws. The written notice should be
sent via U.S. mail addressed to Fannie Mae Shareholder
Proposal,
c/o Office
of the Secretary, Fannie Mae, Mail Stop 1H-2S/05, 3900 Wisconsin
Avenue, NW, Washington, DC
20016-2892.
In the case of proposals for the 2008 annual meeting of
shareholders, the Secretary must receive written notice of the
proposal not earlier than the close of business on
January 21, 2008, and not later than the close of business
on March 21, 2008. The written notice must include or be
accompanied by a brief description of the proposal, the reasons
for bringing the proposal before the annual meeting, the
shareholders name and address, the class and number of
shares beneficially owned by the shareholder, and any material
interest of the shareholder in the proposal. If a shareholder
does not comply with Section 3.12 of our Bylaws, the chair
of the 2008 annual meeting may declare the proposal not properly
brought before the meeting.
An index to exhibits has been filed as part of this report
beginning on
page E-1
and is incorporated herein by reference.
111
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Federal National Mortgage Association
Daniel H. Mudd
President and Chief Executive Officer
Date: November 9, 2007
Stephen M. Swad
Executive Vice President and
Chief Financial Officer
Date: November 9, 2007
112
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Item
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Description
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3
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.1
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Fannie Mae Charter Act (12 U.S.C. § 1716 et seq.)
(Incorporated by reference to Exhibit 3.1 to Fannie
Maes registration statement on Form 10, filed
March 31, 2003.)
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3
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.2
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Fannie Mae Bylaws, as amended through October 16, 2007
(Incorporated by reference to Exhibit 3.1 to Fannie
Maes Current Report on
Form 8-K/A,
filed October 23, 2007.)
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4
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.1
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series D (Incorporated by reference to
Exhibit 4.1 to Fannie Maes registration statement on
Form 10, filed March 31, 2003.)
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4
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.2
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series E (Incorporated by reference to
Exhibit 4.2 to Fannie Maes registration statement on
Form 10, filed March 31, 2003.)
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4
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.3
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series F (Incorporated by reference to
Exhibit 4.3 to Fannie Maes registration statement on
Form 10, filed March 31, 2003.)
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4
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.4
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series G (Incorporated by reference to
Exhibit 4.4 to Fannie Maes registration statement on
Form 10, filed March 31, 2003.)
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4
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.5
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series H (Incorporated by reference to
Exhibit 4.5 to Fannie Maes registration statement on
Form 10, filed March 31, 2003.)
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4
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.6
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series I (Incorporated by reference to
Exhibit 4.6 to Fannie Maes registration statement on
Form 10, filed March 31, 2003.)
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4
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.7
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series L (Incorporated by reference to
Exhibit 4.2 to Fannie Maes Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2003.)
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4
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.8
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series M (Incorporated by reference to
Exhibit 4.2 to Fannie Maes Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003.)
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4
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.9
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series N (Incorporated by reference to
Exhibit 4.1 to Fannie Maes Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2003.)
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4
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.10
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Certificate of Designation of Terms of Fannie Mae Non-Cumulative
Convertible Preferred Stock,
Series 2004-1
(Incorporated by reference to Exhibit 4.1 to Fannie
Maes Current Report on
Form 8-K,
filed January 4, 2005.)
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4
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.11
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series O (Incorporated by reference to
Exhibit 4.2 to Fannie Maes Current Report on
Form 8-K,
filed January 4, 2005.)
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4
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.12
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series P (Incorporated by reference to
Exhibit 4.1 to Fannie Maes Current Report on
Form 8-K,
filed September 28, 2007.)
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4
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.13
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series Q (Incorporated by reference to
Exhibit 4.1 to Fannie Maes Current Report on
Form 8-K,
filed October 5, 2007.)
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31
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.1
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Certification of Chief Executive Officer pursuant to Securities
Exchange Act
Rule 13a-14(a)
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31
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.2
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Certification of Chief Financial Officer pursuant to Securities
Exchange Act
Rule 13a-14(a)
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32
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.1
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Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350
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32
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.2
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Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350
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E-1