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Organization and Conservatorship<br /><br />We are a stockholder-owned corporation organized and existing under the Federal National Mortgage Association Charter Act (&#8220;The Charter Act&#8221; or our &#8220;charter&#8221;). We are a government-sponsored enterprise (&#8220;GSE&#8221;), and we are subject to government oversight and regulation. Our regulators include the Federal Housing Finance Agency (&#8220;FHFA&#8221;), the U.S.&#160;Department of Housing and Urban Development (&#8220;HUD&#8221;), the U.S.&#160;Securities and Exchange Commission (&#8220;SEC&#8221;), and the U.S.&#160;Department of Treasury (&#8220;Treasury&#8221;). Through July&#160;29, 2008, we were regulated by the Office of Federal Housing Enterprise Oversight (&#8220;OFHEO&#8221;), which was replaced on July&#160;30, 2008 with FHFA upon the enactment of the Federal Housing Finance Regulatory Reform Act of 2008 (&#8220;Regulatory Reform Act&#8221;). On September&#160;6, 2008, we were placed into conservatorship by the Director of FHFA. See &#8220;Conservatorship&#8221; below in this note. The U.S.&#160;government does not guarantee, directly or indirectly, our securities or other obligations.<br /><br />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.<br /><br />We operate under three business segments: Single-Family Credit Guaranty (&#8220;Single-Family&#8221;), Housing and Community Development (&#8220;HCD&#8221;) and Capital Markets. Our Single-Family segment generates revenue primarily from the guaranty fees on the mortgage loans underlying guaranteed single-family Fannie Mae mortgage-backed securities (&#8220;Fannie Mae MBS&#8221;). Our HCD segment generates revenue from a variety of sources, including guaranty fees 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, HCD investments in rental housing projects eligible for the federal low-income housing tax credit (&#8220;LIHTC&#8221;) generate both tax credits and net operating losses. As described in &#8220;Note&#160;12, Income Taxes,&#8221; we determined that it is more likely than not that we will not realize a portion of our deferred tax assets in the future. As a result, we are not recognizing a majority of the tax benefits associated with tax credits and net operating losses in our condensed consolidated financial statements. Other investments in affordable rental and for-sale housing generate revenue and losses from operations and the eventual sale of the assets. Our Capital Markets segment invests in mortgage loans, mortgage-related securities and other investments, and generates income primarily from the difference, or spread, between the yield on the mortgage assets we own and the interest we pay on the debt we issue in the global capital markets to fund the purchases of these mortgage assets. Changes in the fair value of the derivative instruments and trading securities and the impairments on available-for-sale securities also affect the net income of our Capital Market segment.<br /><br />On September&#160;7, 2008, the Secretary of the Treasury and the Director of FHFA announced several actions taken by Treasury and FHFA regarding Fannie Mae, which included: (1)&#160;placing us in conservatorship; (2)&#160;the execution of a senior preferred stock purchase agreement by our conservator, on our behalf, and Treasury, pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase common stock; and (3)&#160;Treasury&#8217;s agreement to establish a temporary secured lending credit facility that is available to us and the other GSEs regulated by FHFA under identical terms. We entered into a lending agreement with Treasury pursuant to which Treasury established this secured lending credit facility on September&#160;19, 2008.<br /><br />Conservatorship<br /><br />On September&#160;6, 2008, at the request of the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve and the Director of FHFA, our Board of Directors adopted a resolution consenting to the company&#8217;s placement into conservatorship. After obtaining this consent, the Director of FHFA appointed FHFA as our conservator on September&#160;6, 2008, in accordance with the Regulatory Reform Act and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.<br /><br />Upon its appointment, the conservator immediately succeeded to all rights, titles, powers and privileges of Fannie Mae, and of any stockholder, officer or director of Fannie Mae with respect to Fannie Mae and its assets, and succeeded to the title to the books, records and assets of any other legal custodian of Fannie Mae. The conservator has the power to take over our assets and operate our business with all the powers of our stockholders, directors and officers, and to conduct all business of the company.<br /><br />FHFA, in its role as conservator, has overall management authority over our business. The conservator has since delegated specified authorities to our Board of Directors and has delegated to management the authority to conduct our day-to-day operations. The conservator retains the authority to withdraw its delegations at any time.<br /><br />As of August 6, 2009, the conservator has advised us that it has not disaffirmed or repudiated any contracts we entered into prior to its appointment as conservator. The Regulatory Reform Act requires FHFA to exercise its right to disaffirm or repudiate most contracts within a reasonable period of time after its appointment as conservator. Additionally, the conservator had not determined whether or not a reasonable period of time had passed for purposes of the applicable provisions of the Regulatory Reform Act and, therefore, the conservator may still possess this right.<br /><br />The conservator also has the power to transfer or sell any asset or liability of Fannie Mae (subject to limitations and post-transfer notice provisions for transfers of qualified financial contracts) without any approval, assignment of rights or consent of any party. The Regulatory Reform Act, however, provides that mortgage loans and mortgage-related assets that have been transferred to a Fannie Mae MBS trust must be held by the conservator for the beneficial owners of the Fannie Mae MBS and cannot be used to satisfy the general creditors of the company. As of August 6, 2009, FHFA has not exercised this power.<br /><br />Neither the conservatorship nor the terms of our agreements with Treasury changes our obligation to make required payments on our debt securities or perform under our mortgage guaranty obligations.<br /><br />The conservatorship has no specified termination date. There can be no assurance as to when or how the conservatorship will be terminated, whether we will continue to exist following the conservatorship or what our business structure will be during or following the conservatorship.<br /><br />Treasury and FHFA, acting on our behalf in its capacity as our conservator, entered into an amendment to the senior preferred stock purchase agreement between us and Treasury on May&#160;6, 2009. The financial terms of the amendment to the senior preferred stock purchase agreement are as follows:<br /><br />&#8226;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;Treasury&#8217;s maximum funding commitment to us under the agreement was increased from $100&#160;billion to $200&#160;billion.<br /><br />&#8226;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;The covenant limiting the amount of mortgage assets we can own on December&#160;31, 2009 was increased from $850&#160;billion to $900&#160;billion. We continue to be required to reduce our mortgage assets, beginning on December&#160;31, 2010 and each year thereafter, to 90% of the amount of our mortgage assets as of December 31 of the immediately preceding calendar year, until the amount of our mortgage assets reaches $250&#160;billion.<br /><br />&#8226;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;The covenant limiting the amount of our indebtedness was changed. Prior to the amendment, our debt cap was equal to 110% of our indebtedness as of June&#160;30, 2008. As amended, our debt cap through December&#160;30, 2010 equals $1,080&#160;billion. Beginning December&#160;31, 2010, and on December 31 of each year thereafter, our debt cap that will apply through December 31 of the following year will equal 120% of the amount of mortgage assets we are allowed to hold on December 31 of the immediately preceding calendar year.<br /><br />&#8226;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;The agreement continues to provide that, for purposes of evaluating our compliance with the limitation on the amount of mortgage assets we may own, the effect of changes in generally accepted accounting principles that occur subsequent to the date of the agreement and that require us to recognize additional mortgage assets on our consolidated balance sheet (Statement of Financial Accounting Standards (&#8220;SFAS&#8221;)&#160;No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (a replacement of FASB Statement No.&#160;125) (&#8220;SFAS&#160;140&#8221;)), will not be considered. In addition, the definition of indebtedness in the agreement was revised to clarify that it also does not give effect to any change that may be made in respect of SFAS&#160;140 or any similar accounting standard.<br /><br />We received $19.0 billion from Treasury on June 30, 2009 under the terms of the senior preferred stock purchase agreement. We also received $15.2 billion from Treasury on March 31, 2009. As a result, the aggregate liquidation preference of the senior preferred stock has increased to $35.2&#160;billion.<br /><br /></p></font></div></body></html> <html><head><meta content="text/html; charset=utf-8" /></head><body><div><font size="2"><p>2.&#160;&#160;Summary of Significant Accounting Policies<br /><br />Basis of Presentation<br /><br />The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (&#8220;GAAP&#8221;) for the interim financial information and with the SEC&#8217;s instructions to Form&#160;10-Q and Article&#160;10 of Regulations S-X. Accordingly, they do not include all of the information and note disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. Results for the three and six months ended June 30, 2009&#160;may not necessarily be indicative of the results for the year ending December&#160;31, 2009. The unaudited interim condensed consolidated financial statements as of June 30, 2009 and our condensed consolidated financial statements as of December&#160;31, 2008 should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form&#160;10-K for the year ended December&#160;31, 2008, filed with the SEC on February&#160;26, 2009. We have completed our analysis of subsequent events&#160;related to our condensed consolidated financial statements through August 6, 2009.<br /><br />We are currently in conservatorship, with FHFA acting as our conservator. As conservator, FHFA succeeded to all rights, titles, powers and privileges of the company and of any shareholder, officer or director of the company with respect to the company and its assets. As a result, we are currently under the control of our conservator. FHFA, in its role as conservator, has overall management authority over our business.<br /><br />We receive, directly and indirectly, substantial support from various agencies of the United States Government, including the Federal Reserve, Treasury, and FHFA, as our conservator and regulator. We are dependent upon the continued support of the U.S.&#160;Government and these agencies in order to maintain a positive net worth, which avoids our being placed into receivership. We also believe that our improved access to the debt markets is due to federal government support. Based on consideration of all the relevant conditions and events affecting our operations, including our dependence on the U.S.&#160;Government, we continue to operate as a going concern and in accordance with our delegation of authority from FHFA.<br /><br />The conservatorship has no specified termination date and the future structure of our business following termination of the conservatorship is uncertain. We do not know when or how the conservatorship will be terminated or what changes to our business structure will be made during or following the termination of the conservatorship. We do not know whether we will exist in the same or a similar form or continue to conduct our business as we did before the conservatorship, or whether the conservatorship will end in receivership. Under the Regulatory Reform Act, FHFA must place us into receivership if the Director of FHFA makes a written determination that our assets are less than our obligations or if we have not been paying our debts, in either case, for a period of 60&#160;days. In addition, we could be put in receivership at the discretion of the Director of FHFA at any time for other reasons, including conditions that FHFA has already asserted existed at the time the Director of FHFA placed us into conservatorship. Placement into receivership would have a material adverse effect on holders of our common stock, preferred stock, debt securities and Fannie Mae MBS. Should we be placed in receivership, different assumptions would be required to determine the carrying value of our assets, which could lead to substantially different financial results.<br /><br />Because we fund our business and operations primarily through the issuance of debt, we are subject to &#8220;roll-over,&#8221; or refinancing, risk on our outstanding debt. Our roll-over risk increases when our outstanding short-term debt increases as a percentage of our total outstanding debt, as it did when we experienced significant deterioration in our access to the unsecured debt markets, particularly for our callable and non-callable long-term debt, from July through November 2008. Our access to callable and non-callable long-term debt funding improved significantly during the first half of 2009, however, due to a variety of actions taken by the federal government to support us and the financial markets. Due to the combination of our improved access to long-term debt funding, improved market conditions, the reduced proportion of our outstanding debt that consists of short-term debt, and our expected reduced debt funding needs in the future, our debt roll-over risk has significantly declined since November 2008. <br /><br />As noted above, we believe that the improvement in our access to long-term debt funding since November 2008 stems from actions taken by the federal government to support us and the financial markets. Actions the government has taken to support us include: <br /><br />&#61623;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; Treasury&#8217;s $200 billion funding commitment to us under the senior preferred stock purchase agreement; <br />&#61623;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; making the Treasury credit facility available to us; <br />&#61623;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; the Federal Reserve&#8217;s active program to purchase up to $200 billion in debt securities of Fannie Mae, Freddie Mac and the Federal Home Loan Banks, as well as up to $1.25 trillion in Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities; and<br /><ul><li>Treasury&#8217;s agency MBS purchase program.<br /></li></ul><br /><br />In addition, the Federal Reserve and Treasury have implemented a number of programs to support the liquidity of the financial markets overall, including several asset purchase programs and several asset financing programs. These programs have improved overall financial market conditions, which has contributed to the improvement in our access to debt funding.<br /><br />Accordingly, we believe that our status as a GSE and continued federal government support of our business and the financial markets is essential to maintaining our access to debt funding, and changes or perceived changes in the government&#8217;s support of us or the markets could lead to an increase in our debt roll-over risk in future periods and have a material adverse effect on our ability to fund our operations. Additionally, demand for our debt securities could decline if the government does not extend or replace the Treasury credit facility and the Federal Reserve&#8217;s agency debt and MBS purchase programs, each of which expire on December 31, 2009. The Obama Administration has stated that recommendations on the future of Fannie Mae, Freddie Mac and the Federal Home Loan Bank system will be provided at the time of the President&#8217;s 2011 budget release, which is currently expected to be in February 2010. These recommendations may have a material impact on our ability to issue debt or refinance existing debt as it becomes due.<br /><br />The Treasury credit facility and the senior preferred stock purchase agreement with Treasury may provide additional sources of funding in the event that we cannot adequately access the unsecured debt markets. There are limitations on our ability to use either of these sources of funding, however.<br /><br />Agencies of the U.S.&#160;Government continue to provide active and ongoing support to Fannie Mae&#8217;s operations consistent with their objective of stabilizing the housing market and the economy. Under our senior preferred stock purchase agreement with Treasury, as amended on May&#160;6, 2009, Treasury generally has committed to provide us, on a quarterly basis, funds of up to a total of $200&#160;billion in the amount, if any, by which our total liabilities exceed our total assets, as reflected on our condensed consolidated balance sheet, prepared in accordance with GAAP, for the applicable fiscal quarter. To the extent of its unused portion, this funding commitment is available to us (as specified in the agreement) or, in the event of our default on payments with respect to our debt securities or guaranteed Fannie Mae MBS, to the holders of that debt and MBS. In the six months ended June 30, 2009, Treasury began purchasing Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity in the marketplace.<br /><br />The accompanying unaudited interim condensed consolidated financial statements include our accounts as well as the accounts of other entities in which we have a controlling financial interest. All intercompany balances and transactions have been eliminated.<br /><br />As a result of our issuance to Treasury of a warrant to purchase shares of Fannie Mae common stock equal to 79.9% of the total number of shares of Fannie Mae common stock, on a fully diluted basis, that is exercisable at any time through September&#160;7, 2028, we and the Treasury are deemed related parties. No transactions outside of normal business activities have occurred between us and Treasury during the six months ended June 30, 2009, excluding Treasury&#8217;s $34.2&#160;billion investment in senior preferred stock and Treasury&#8217;s engagement of us to serve as program administrator for the Home Affordable Modification Program.<br /><br />In addition, FHFA&#8217;s common control of both us and Freddie Mac has caused us to be related parties. No transactions outside of normal business activities have occurred between us and Freddie Mac. As of June 30, 2009 and December&#160;31, 2008, we held Freddie Mac mortgage-related securities with an unpaid principal balance of $39.1&#160;billion and $33.9 billion, respectively, and accrued interest receivable of $215 million and $198 million, respectively. We recognized interest income on Freddie Mac mortgage-related securities held by us of $408 million and $409&#160;million for the three months ended June 30, 2009 and 2008, respectively, and $815&#160;million and $803&#160;million for the six months ended June 30, 2009, and 2008, respectively. In addition, Freddie Mac may be an investor in variable interest entities that we have consolidated, and we may be an investor in variable interest entities that Freddie Mac has consolidated.<br /><br />Use of Estimates<br /><br />The preparation of consolidated financial statements in accordance with 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 our 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, the allowance for loan losses and reserve for guaranty losses, other-than-temporary impairment of investment securities and LIHTC partnerships, and our assessment of realizing our deferred tax assets. Actual results could be different from these estimates.<br /><br />Principles of Consolidation<br /><br />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 (&#8220;VIEs&#8221;) under Financial Accounting Standards Board (&#8220;FASB&#8221;) Interpretation (&#8220;FIN&#8221;) No.&#160;46 (revised December 2003), Consolidation of Variable Interest Entities (an interpretation of ARB No.&#160;51) (&#8220;FIN&#160;46R&#8221;), to determine when we must consolidate the assets, liabilities and noncontrolling interests of a VIE.<br /><br />We are required to evaluate whether to consolidate a VIE when we first become involved and upon subsequent reconsideration events (e.g., a purchase of additional beneficial interests). Generally, if we are the primary beneficiary of a VIE, then we initially record the assets and liabilities of the VIE in our condensed consolidated financial statements at fair value.<br /><br />With our adoption of SFAS&#160;No.&#160;141 (revised 2007), Business Combinations (&#8220;SFAS&#160;141(R)&#8221;), on January&#160;1, 2009, we began recording any difference between the fair value and the previous carrying amount of our interests in a VIE that holds only financial assets as &#8220;Investment losses, net&#8221; in our condensed consolidated statements of operations, as required by FIN&#160;46R. Prior to our adoption of SFAS&#160;141(R), such differences were classified as &#8220;Extraordinary losses, net of tax effect&#8221; in our condensed consolidated statements of operations.<br /><br />If a consolidated VIE subsequently should not be consolidated because we cease to be deemed the primary beneficiary or we qualify for one of the scope exceptions of FIN&#160;46R (for example, the entity is a qualifying special purpose entity (&#8220;QSPE&#8221;) that we no longer have the unilateral ability to liquidate), we deconsolidate the VIE. With our adoption of SFAS&#160;No.&#160;160, Noncontrolling Interests in Consolidated Financial Statements (&#8220;SFAS&#160;160&#8221;), which amended Accounting Research Bulletin&#160;No.&#160;51, Consolidated Financial Statements, on January, 1, 2009, we began recording any retained interests in a deconsolidated VIE at their respective fair values. Any difference between the fair values and the previous carrying amounts of our investment in the VIE is recorded as &#8220;Investment losses&#8221; in our condensed consolidated statements of operations. Prior to our adoption of SFAS&#160;160, we deconsolidated the VIE by carrying over our net basis in the consolidated assets and liabilities to our investment in the VIE.<br /><br />Other-Than-Temporary Impairment of Debt Securities<br /><br />On April 1, 2009, we adopted FASB Staff Position No. FAS 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (&#8220;FSP FAS 115-2&#8221;), which applies to existing and new debt securities held by us as of April 1, 2009. Under this FSP, an other-than-temporary impairment is considered to have occurred when the fair value of a debt security is below its amortized cost basis and we intend to sell or it is more likely than not that we will be required to sell the security before recovery. In this case, the entire difference between the amortized cost basis of the security and its fair value is recognized in earnings. An other-than-temporary impairment is also considered to have occurred if we do not expect to recover the entire amortized cost basis of a debt security even if we do not intend and it is not more likely than not we will be required to sell the security before recovery. In this case, the entire difference between the amortized cost basis of the security and its fair value is separated into the amount representing the credit loss, which is recognized in our condensed consolidated statement of operations, and the amount related to all other factors, which is recognized in &#8220;Other comprehensive loss,&#8221; net of applicable taxes. In determining whether a credit loss exists, we use the present value of our best estimate of cash flows expected to be collected from the debt security. <br /><br />As a result of adopting FSP FAS 115-2, we recorded a cumulative-effect adjustment at April 1, 2009 of $8.5 billion on a pre-tax basis ($5.6 billion after tax) to reclassify the noncredit portion of previously recognized other-than-temporary impairments from &#8220;Accumulated deficit&#8221; to &#8220;Accumulated other comprehensive loss.&#8221; We also reduced the &#8220;Accumulated deficit&#8221; and valuation allowance by $3.0 billion for the deferred tax asset related to the amounts previously recognized as other-than-temporary impairments in our condensed consolidated statement of operations based upon the assertion of our intent and ability to hold certain of these securities until recovery. The adoption of FSP FAS 115-2 resulted in $344 million of noncredit related losses for the three months ended June 30, 2009 being recognized in &#8220;Other comprehensive loss&#8221; instead of being recorded in our condensed consolidated statement of operation, as previously required. Refer to &#8220;Note 6, Investments in Securities&#8221; for disclosures related to our investments in securities and other-than-temporary impairments and &#8220;Note 12, Income Taxes&#8221; for disclosures related to our deferred tax assets and related valuation allowance.<br /><br />Allowance for Loan Losses and Reserve for Guaranty Losses<br /><br />The allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related to our recorded investment in HFI loans. The reserve for guaranty losses is a liability account in our condensed consolidated balance sheets that reflects an estimate of incurred credit losses related to our guaranty to each Fannie Mae MBS trust that we will supplement amounts received by the Fannie Mae MBS trust as required to permit timely payment of principal and interest on the related Fannie Mae MBS. We recognize incurred losses by recording a charge to the &#8220;Provision for credit losses&#8221; in our condensed consolidated statements of operations. <br /><br />Credit losses related to groups of similar single-family and multifamily HFI loans that are not individually impaired, or those that are collateral for Fannie Mae MBS, are recognized when (i) available information as of each balance sheet date indicates that it is probable a loss has occurred and (ii) the amount of the loss can be reasonably estimated in accordance with SFAS No. 5, Accounting for Contingencies. Single-family and multifamily loans that we evaluate for individual impairment are measured in accordance with the provisions of SFAS No. 114, Accounting by Creditors for Impairment of a Loan (an amendment of FASB Statement No. 5 and 15). When making an assessment as to whether a loan is individually impaired, we also take into account insignificant delays in payments. Determination of whether a delay in payment or shortfall of amount is insignificant requires management&#8217;s judgment as to the facts and circumstances surrounding the loan. We record charge-offs as a reduction to the allowance for loan losses or reserve for guaranty losses when losses are confirmed through the receipt of assets such as cash in a preforeclosure sale or the underlying collateral in full satisfaction of the mortgage loan upon foreclosure.<br /><br />Collateral<br /><br />We enter into various transactions where we pledge and accept collateral, the most common of which are our derivative transactions. Required collateral levels vary depending on the credit rating and type of counterparty. We also pledge and receive collateral under our repurchase and reverse repurchase agreements. In order to reduce potential exposure to repurchase counterparties, a third party custodian typically maintains the collateral and any margin. The fair value of the collateral received from our counterparties is monitored, and we may require additional collateral from those counterparties, as deemed appropriate. Collateral received under early funding agreements with lenders, whereby we advance funds to lenders prior to the settlement of a security commitment, must meet our standard underwriting guidelines for the purchase or guarantee of mortgage loans.<br /><br />Cash Collateral<br /><br />For derivative positions with the same counterparty under master netting arrangements to the extent that we pledge cash collateral and give up control to a counterparty, we remove it from &#8220;Cash and cash equivalents&#8221; and reclassify it as part of &#8220;Derivative liabilities at fair value&#8221; in our condensed consolidated balance sheets as a part of our counterparty netting calculation. We pledged $19.9&#160;billion and $20.3&#160;billion in cash collateral as of June 30, 2009 and December&#160;31, 2008, respectively, related primarily to our derivatives and other operating activities. Cash collateral accepted from a counterparty that we have the right to use is recorded as &#8220;Cash and cash equivalents&#8221; in our condensed consolidated balance sheets. Cash collateral accepted from a counterparty that we do not have the right to use is recorded as &#8220;Restricted cash&#8221; in our condensed consolidated balance sheets. Our obligation to return cash collateral pledged to us is recorded as part of &#8220;Derivative assets at fair value&#8221; in our condensed consolidated balance sheets as a part of our counterparty netting calculation. We accepted cash collateral of $2.7&#160;billion and $4.0&#160;billion as of June 30, 2009 and December&#160;31, 2008, respectively, of which $510&#160;million and $330&#160;million, respectively, was restricted.<br /><br />Pledged Non-Cash Collateral<br /><br />Securities pledged to counterparties are classified as either &#8220;Investments in securities&#8221; or &#8220;Cash and cash equivalents&#8221; in our condensed consolidated balance sheets. Securities pledged to counterparties that have been consolidated under FIN&#160;46R as loans are included as &#8220;Mortgage loans&#8221; in our condensed consolidated balance sheets. As of June 30, 2009, we pledged $1.4 billion available-for-sale (&#8220;AFS&#8221;) securities, which the counterparty had the right to sell or repledge. As of December&#160;31, 2008, we pledged $720&#160;million of AFS securities, which the counterparty had the right to sell or repledge.<br /><br />The fair value of non-cash collateral accepted that we were permitted to sell or repledge was $2.1&#160;billion and $141&#160;million as of June 30, 2009 and December&#160;31, 2008, respectively, none of which was sold or repledged. The fair value of non-cash collateral accepted that we were not permitted to sell or repledge was $9.7 billion and $13.3 billion as of June 30, 2009 and December 31, 2008, respectively. Additionally, non-cash collateral was accepted related to our HCD business of $8.1 billion and $10.6 billion as of June&#160;30, 2009 and December 31, 2008 that we were not permitted to sell or repledge.<br /><br />Our liability to third-party holders of Fannie Mae MBS that arises as the result of a consolidation of a securitization trust is fully collateralized by underlying loans and/or mortgage-related securities.<br /><br />When securities sold under agreements to repurchase meet all of the conditions of a secured financing, the collateral of the transferred securities is reported at fair value, excluding accrued interest. We did not have any repurchase agreements of this type outstanding as of June 30, 2009 and December&#160;31, 2008.<br /><br />Fair Value Losses, Net<br /><br />Fair value losses, net, consists of fair value gains and losses on derivatives, trading securities, debt carried at fair value, foreign currency debt, and adjustments to the carrying amount of hedged mortgage assets. 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align="left"><font size="2">&#160;</font>^{<font size="1"></font>}</td><td height="15" width="642" align="left"><font size="2">and will be accreted through interest income over the life of the hedged assets.</font></td></tr><tr><td height="15" width="26" align="left"><font size="2">&#160;</font>^{<font size="1"></font>}</td><td height="15" width="642" align="left"><font size="2">&#160;</font></td></tr></table></div><div><font size="2"><p>Servicer and MBS trust receivable and payable<br /><br />When servicers advance payments to MBS trusts for delinquent loans, we record a receivable from MBS trusts and a corresponding liability to reimburse the servicers. We recover these amounts from MBS trusts when the loans subsequently become current, or we include the amount as part of our loan basis upon purchase of the loan from the MBS trust or our acquired property basis upon foreclosure.<br /><br />When principal and interest remittances and prepayments have been received from borrowers by servicers but not yet remitted to us or MBS trusts, we record a receivable from servicers and a corresponding liability to MBS trusts. The unscheduled payments are remitted to the MBS trusts in subsequent months.<br /><br />We record a liability to fund the purchase of delinquent loans or acquired property from MBS trusts. For MBS trusts where we are considered the transferor, when the contingency on our option to purchase loans from the trust has been met and we regain effective control over the transferred loan, we recognize the loan on our condensed consolidated balance sheets at fair value and record a corresponding liability to the MBS trust.<br /><br />Fair Value Measurements<br /><br />On April 1, 2009, we adopted FASB Staff Position No. FAS&#160;157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (&#8220;FSP FAS&#160;157-4&#8221;), which reaffirms that (1)&#160;the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction at the date of the financial statements under current market conditions; and (2)&#160;the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The application of the FSP did not have an impact on our condensed consolidated financial statements.<br /><br />Reclassification and Adoption of a New Accounting Pronouncement<br /><br />Pursuant to our January&#160;1, 2009 adoption of SFAS&#160;160 to require noncontrolling interests to be classified as a separate component of equity, we reclassified amounts in our condensed consolidated balance sheet as of December&#160;31, 2008 related to noncontrolling interests. Amounts previously reported as &#8220;Minority interests in consolidated subsidiaries&#8221; are now reported as &#8220;Noncontrolling interest.&#8221; Additionally, amounts reported in our condensed consolidated statement of operations for the three months and six months ended June 30, 2008 as &#8220;Minority interest in losses of consolidated subsidiaries&#8221; are now reported as &#8220;Net income/loss attributable to the noncontrolling interest.&#8221;<br /><br />Additionally, we reclassified $6.5&#160;billion from &#8220;Other assets&#8221; to &#8220;Servicer and MBS trust receivable&#8221; and $6.4&#160;billion from &#8220;Other liabilities&#8221; to &#8220;Servicer and MBS trust payable&#8221; as of December&#160;31, 2008 in our condensed consolidated balance sheet to conform to the current period presentation. Also, we reclassified $507&#160;million&#160;and $562 million for the&#160;three and six months ended June 30, 2008, respectively,&#160;from &#8220;Investment gains (losses), net&#8221;&#160;to &#8220;Net other-than-temporary impairments&#8221;&#160;in our condensed consolidated&#160;statements of operations&#160;to conform to the current period presentation.<br /><br />New Accounting Pronouncements<br /><br />SFAS No. 166, Accounting for Transfer of Financial Assets-an amendment of SFAS&#160;Statement No.&#160;140 (&#8220;SFAS 166&#8221;), and SFAS No. 167, Amendments to FASB Interpretation No.&#160;46(R) (&#8220;SFAS 167&#8221;)<br /><br />On June 12, 2009, the FASB issued SFAS 166 and 167. These two new accounting statements amend the accounting for transfers of financial assets and the consolidation guidance related to variable interest entities.&#160; SFAS 166 eliminates the concept of QSPEs. As a result, the consolidation exemption for QSPEs has been removed and all former QSPEs must be evaluated for consolidation in accordance with the provisions of SFAS 167. &#160;Additionally, SFAS 167 replaces the current consolidation model with a qualitative evaluation that requires consolidation of an entity when the reporting enterprise both (a)&#160;has the power to direct matters which significantly impact the activities and success of the entity, and (b)&#160;has exposure to benefits and/or losses that could potentially be significant to the entity. &#160;Our adoption of these new accounting standards will have a significant impact on our consolidated financial statements. Although we are still assessing the impact of these new accounting standards, we currently expect that we will be required to consolidate the assets and liabilities of the substantial majority of our outstanding MBS trusts that are currently not consolidated. We will apply SFAS 166 to new transfers of financial assets and SFAS 167 to all new and existing variable interest entities on or after January&#160;1, 2010. 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FSP FAS&#160;132R-1 also requires the disclosure of fair value of plan assets at the reporting date by the fair value hierarchy in SFAS&#160;No.&#160;157, Fair Value Measurements (&#8220;SFAS&#160;157&#8221;), and a reconciliation of the beginning and ending balances of plan assets with fair value measured using significant unobservable inputs (Level&#160;3).<br /><br />FSP FAS&#160;132R-1 is effective for fiscal years ending after December&#160;15, 2009. Early application is permitted. As FSP FAS&#160;132R-1 only requires additional note disclosures, it will affect the notes to our condensed consolidated financial statements, but have no impact to our condensed consolidated financial statements.<br /></p></font></div></body></html> <html><head><meta content="text/html; charset=utf-8" /></head><body><div><font size="2"><p>3. Consolidations<br /><br />We have interests in various entities that are considered to be VIEs, as defined by FIN&#160;46R. 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We also acquire loans upon consolidating MBS trusts when the underlying collateral of these trusts includes loans.<br /><br />We account for such acquired loans in accordance with American Institute of Certified Public Accountants Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (&#8220;SOP&#160;03-3&#8221;), if, at acquisition, (i)&#160;there has been evidence of deterioration in the loan&#8217;s credit quality subsequent to origination; and (ii)&#160;it is probable that we will be unable to collect all cash flows, in accordance with the terms of the contractual agreement, from the borrower, ignoring insignificant delays. Determination of whether a delay in payment or shortfall in amount is considered more than insignificant is based on the facts and circumstances surrounding the loan. 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Determining the adequacy of our allowance for loan losses and reserve for guaranty losses is complex and requires judgment about the effect of matters that are inherently uncertain. Although our loss models include extensive historical loan performance data, our loss reserve process is subject to risks and uncertainties particularly in the rapidly changing credit environment. We have experienced higher default and loan loss severity rates during the three and six months ended June 30, 2009 as compared to the three and six months ended June 30, 2008, which has increased our estimates of incurred losses resulting in a significant increase to our allowance for loan losses and reserve for guaranty losses as of June 30, 2009.<br /><br />The following table displays changes in the allowance for loan losses and reserve for guaranty losses for the three and six months ended June 30, 2009 and 2008.</p></font></div><div><table style="border-collapse: collapse; margin-top: 20px;"><tr><td height="14" width="339" align="left"><font size="2"><b>&#160;</b></font>^{<font size="1"><b></b></font>}</td><td width="151" align="center" height="14" colspan="5"><font size="2"><b>For the</b></font></td><td height="14" width="19" align="center"><font size="2">&#160;</font></td><td width="151" align="center" height="14" colspan="5"><font size="2"><b>For 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The key assumptions are discount rate, or yield, derived using a projected interest rate path, or paths, consistent with the observed yield curve at the valuation date (forward rates), and the prepayment speed based on our proprietary models that are consistent with the projected interest rate path, or paths, and expressed as a 12-month constant prepayment rate (&#8220;CPR&#8221;).<br /><br />The fair value of all guaranty obligations measured subsequent to their initial recognition is our estimate of a hypothetical transaction price we would receive if we were to issue our guaranty to an unrelated party in a stand-alone arm&#8217;s length transaction at the measurement date. The key assumptions associated with the fair value of the guaranty obligations are future home prices and current loan to-value ratios.<br /><br />Our investments in Fannie Mae single-class&#160;MBS, Fannie Mae Megas, real estate mortgage investments conduits (&#8220;REMICs&#8221;) and stripped mortgage-backed securities (&#8220;SMBS&#8221;) are interests in securities with active markets. We primarily rely on third party prices to estimate the fair value of these interests. For the purpose of this disclosure, we aggregate similar securities in order to measure the key assumptions associated with the fair values of our interests, which are approximated by solving for the estimated discount rate, or yield, using a projected interest rate path consistent with the observed yield curve at the valuation date (forward rates), and the prepayment speed based on either our proprietary models that are consistent with the projected interest rate path, the pricing speed for newly issued REMICs, or lagging 12-month actual prepayment speed. All prepayment speeds are expressed as a 12-month CPR.<br /><br />To determine the fair value of our securities created via portfolio securitizations, we utilize several independent pricing services. The prices that we receive from pricing services are based on information they obtain on current trading activity, but may be based partly on models where trading activity is not observed. The fair value estimates that we obtain from pricing services are evaluated for reasonableness through multiple means, including our internal price verification organization that uses alternate forms of pricing information to validate the prices. Given that the prices for the retained securities are not based on internal models, but rather are based on observable market inputs obtained by our pricing services, we do not believe that it is meaningful to provide sensitivities to the fair value of the retained securities to changes in assumptions.<br /><br />The following table displays some key characteristics of the securities retained in portfolio securitizations.<br /></p></font></div><div><table style="border-collapse: collapse; margin-top: 20px;"><tr><td height="43" width="19" align="left"><font size="2">&#160;</font></td><td height="43" width="19" align="left"><font size="2">&#160;</font></td><td height="43" width="352" align="left"><font size="2"><b>&#160;</b></font></td><td height="43" width="19" align="left"><font size="2"><b>&#160;</b></font></td><td height="43" width="9" align="left"><font size="2"><b>&#160;</b></font></td><td width="100" align="center" height="60" rowspan="2"><font size="2"><b>Fannie Mae Single-Class 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We primarily issue single-class and multi-class&#160;Fannie Mae MBS and guarantee to the respective MBS trusts that we will supplement amounts received by the MBS trusts 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.<br /><br />We record a guaranty obligation for (i)&#160;guarantees on lender swap transactions issued or modified on or after January&#160;1, 2003, pursuant to FIN&#160;No.&#160;45, Guarantor&#8217;s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (an interpretation of FASB Statements No.&#160;5, 57 and 107 and rescission of FIN&#160;No.&#160;34) (&#8220;FIN&#160;45&#8221;), (ii)&#160;guarantees on portfolio securitization transactions, (iii)&#160;credit enhancements on mortgage revenue bonds, and (iv)&#160;our obligation to absorb losses under long-term standby commitments. Our guaranty obligation represents our obligation to stand ready to perform on these guarantees. Our guaranty obligation is recorded at fair value at inception. The carrying amount of the guaranty obligation, excluding deferred profit, was $10.4&#160;billion and $9.7&#160;billion as of June&#160;30, 2009 and December&#160;31, 2008, respectively. We also record an estimate of incurred credit losses on these guarantees in the &#8220;Reserve for guaranty losses&#8221; in our condensed consolidated balance sheets, as discussed further in &#8220;Note&#160;5, Allowance for Loan Losses and Reserve for Guaranty Losses.&#8221;<br /><br />We have a portion of our guarantees reflected in our condensed consolidated balance sheets. For those guarantees recorded in our condensed consolidated balance sheets, our maximum potential exposure under these guarantees is primarily comprised of the unpaid principal balance of the underlying mortgage loans, which totaled $2.5 trillion and $2.4 trillion as of June 30, 2009 and December&#160;31, 2008, respectively. In addition, we had exposure of $152.5&#160;billion and $172.2&#160;billion for other guarantees not recorded in our condensed consolidated balance sheets as of June&#160;30, 2009 and December&#160;31, 2008, respectively, which primarily represents the unpaid principal balance of loans underlying guarantees issued prior to the effective date of FIN&#160;45.<br /><br />The maximum exposure from our guarantees 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 guarantees, we would pursue recovery of these payments by exercising our rights to the collateral backing the underlying loans and 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 guarantees recorded in our condensed consolidated balance sheets was $120.8&#160;billion and $124.4&#160;billion as of June&#160;30, 2009 and December&#160;31, 2008, respectively. The maximum amount we could recover through available credit enhancements and recourse with all third parties on guarantees not recorded in our condensed consolidated balance sheets was $15.4&#160;billion and $17.6&#160;billion as of June&#160;30, 2009 and December&#160;31, 2008, respectively. Recoverability of such credit enhancements and recourse is subject to, but not limited to, our mortgage insurers&#8217; and financial guarantors&#8217; ability to meet their obligations to us. Refer to &#8220;Note&#160;17, Concentrations of Credit Risk&#8221; for additional information.<br /><br />Risk Characteristics of our Book of Business<br /><br />We gauge our performance risk under our guaranty based on the delinquency status of the mortgage loans we hold in portfolio, or in the case of mortgage-backed securities, the underlying mortgage loans of the related securities. Management also monitors the serious delinquency rate, which is the percentage of single-family loans three or more months past due and the percentage of multifamily loans two or more months past due, of loans with certain risk characteristics such as mark-to-market, loan-to-value ratio, vintage and operating debt service coverage. We use this information, in conjunction with housing market and economic conditions, to ensure that our pricing and our eligibility and underwriting criteria accurately reflect the current risk of loans with these high-risk characteristics, and in some cases we decide to significantly reduce our participation in riskier loan product categories. Management also uses this data together with other credit risk measures to identify key trends that guide the development of our loss mitigation strategies.<br /><br />The following tables display the current delinquency status and certain risk characteristics of our conventional single-family and total multifamily book of business as of June&#160;30, 2009 and December&#160;31, 2008.<br /></p></font></div><div><table style="border-collapse: collapse; margin-top: 20px;"><tr><td height="15" width="19" align="left"><font size="2">&#160;</font></td><td height="15" width="189" align="left"><font size="2"><b>&#160;</b></font>^{<font size="1"><b></b></font>}</td><td height="15" width="8" align="left"><font size="2"><b>&#160;</b></font></td><td width="230" align="center" colspan="7" style="border-bottom: 1px solid #000000;" height="15"><font size="2"><b>As of June 30, 2009</b></font></td><td height="15" width="12" align="center"><font size="2"><b>&#160;</b></font></td><td height="15" width="6" 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We post collateral which, in some circumstances, the secured party has the right to repledge to third parties. As these lines of credit are uncommitted intraday loan facilities, we may not be able to draw on them if and when needed. As of June 30, 2009 and December&#160;31, 2008, we had secured uncommitted lines of credit of $30.0&#160;billion and unsecured uncommitted lines of credit of $500&#160;million. No amounts were drawn on these lines of credit as of June 30, 2009 or December&#160;31, 2008.<br /><br />Credit Facility with Treasury<br /><br />On September&#160;19, 2008, we entered into a lending agreement with Treasury under which we may request loans until December&#160;31, 2009. Loans under the Treasury credit facility require approval from Treasury at the time of request. Treasury is not obligated under the credit facility to make, increase, renew or extend any loan to us. The credit facility does not specify a maximum amount that may be borrowed under the credit facility, but any loans made to us by Treasury pursuant to the credit facility must be collateralized by Fannie Mae MBS or Freddie Mac MBS.<br /><br />The credit facility does not specify the maturities or interest rate of loans that may be made by Treasury under the credit facility. In a Fact Sheet regarding the credit facility published by Treasury on September&#160;7, 2008, Treasury indicated that loans made pursuant to the credit facility will be for short-term durations and would in general be expected to be for less than one month but no shorter than one week. The Fact Sheet further indicated that the interest rate on loans made pursuant to the credit facility ordinarily will be based on the daily London Interbank Offered Rate (&#8220;LIBOR&#8221;) for a similar term of the loan plus 50&#160;basis points. As of August 6, 2009, we have not drawn on this credit facility. If we borrow under this credit facility, we will account for the draw as a secured borrowing.<br /></p></font></div></body></html> <html><head><meta content="text/html; charset=utf-8" /></head><body><div><font size="2"><p>11.&#160;&#160;Derivative Instruments and Hedging Activities<br /><br />We adopted SFAS&#160;161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No.&#160;133 (&#8220;SFAS&#160;161&#8221;), effective January&#160;1, 2009. SFAS&#160;161 amends and expands the disclosure provisions in SFAS&#160;No.&#160;133, Accounting for Derivative Instruments and Hedging Activities (&#8220;SFAS&#160;133&#8221;), for derivative instruments and hedging activities. As SFAS&#160;161 only requires additional note disclosures, it impacts the notes to our condensed consolidated financial statements, but has no impact to our condensed consolidated financial statements themselves.<br /><br />We account for our derivatives pursuant to SFAS&#160;133, as amended and interpreted, and recognize all derivatives as either assets or liabilities in our condensed consolidated balance sheets at their fair value on a trade date basis. Fair value amounts are recorded in &#8220;Derivative assets at fair value&#8221; or &#8220;Derivative liabilities at fair value&#8221; in our condensed consolidated balance sheets. With the exception of commitments accounted for as derivatives, 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.<br /><br />The derivatives we use for interest rate risk management purposes consist primarily of over-the-counter contracts that fall into three broad categories:<br /><br />&#8226;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;Interest rate swap contracts.&#160;&#160;An interest rate swap is a transaction between two parties in which each agrees to exchange payments tied to different interest rates or indices for a specified period of time, generally based on a notional amount of principal. The types of interest rate swaps we use include pay-fixed swaps, receive-fixed swaps, and basis swaps.<br /><br />&#8226;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;Interest rate option contracts.&#160;&#160;These contracts primarily include pay-fixed swaptions, receive-fixed swaptions, cancelable swaps and interest rate caps.<br /><br />&#8226;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;Foreign currency swaps.&#160;&#160;These swaps convert debt that we issue in foreign-denominated currencies into U.S.&#160;dollars. We enter into foreign currency swaps only to the extent that we issue foreign currency debt.<br /><br />Although derivative instruments are critical to our interest rate risk management strategy, we did not apply hedge accounting&#160;during&#160;2009. In the three months ended June 30,&#160;2008, we&#160;employed fair value hedge accounting for some of our interest rate risk management activities by designating hedging relationships between certain of our interest rate derivatives and mortgage assets. We achieved&#160;hedge accounting by designating all or a fixed percentage of a pay-fixed receive variable interest rate swap&#160;as a hedge of the changes in the fair value attributable to the changes in LIBOR for a specific mortgage asset.&#160;All derivative gains and losses, including&#160;accrued interest, are recorded in &#8220;Fair value gains (losses), net&#8221;&#160;in our condensed consolidated statements of operations.<br /><br />When we determined&#160;that a hedging relationship&#160;was highly effective, changes in the fair value of the hedged&#160;item attributable to changes in the benchmark interest rate&#160;were recorded as an adjustment to the carrying value&#160;of the hedged item. 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Our assessment of hedge effectiveness excluded a derivative loss of&#160;$35 million, which was not related to changes in the benchmark interest rate for the three and six months&#160;ended June 30, 2008.<br /><br />We enter into forward purchase and sale commitments that lock in the future delivery of mortgage loans and mortgage-related securities at a fixed price or yield. Certain commitments to purchase mortgage loans and purchase or sell mortgage-related securities meet the criteria of a derivative. 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In addition, our effective tax rates for the three and six months ended June 30, 2009 were also impacted by a valuation allowance of $5.3&#160;billion and $14.1 billion, respectively, as well as a benefit for our ability to carry back net operating losses expected to be generated in the current year to prior years. Our effective tax rates for the three and six months ended June 30, 2008 were also impacted by the benefits of our investments in housing projects eligible for the low-income housing tax credit and other equity investments that provide tax credits.<br /><br />We recognize deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits. Our deferred tax assets, net of a valuation allowance, totaled $3.8&#160;billion and $3.9&#160;billion as of June 30, 2009 and December&#160;31, 2008, respectively. We evaluate our deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including our historical profitability and projections of future taxable income. We are required to establish a valuation allowance for deferred tax assets and record a charge in our condensed consolidated statements of operations or Fannie Mae stockholders&#8217; equity (deficit) if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we estimate future taxable income based on management-approved business plans and ongoing tax planning strategies. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between our projected operating performance, our actual results and other factors.<br /><br />We are in a cumulative book taxable loss position and have been for more than a twelve-quarter period. For purposes of establishing a deferred tax valuation allowance, this cumulative book taxable loss position is considered significant, objective evidence that we may not be able to realize some portion of our deferred tax assets in the future. Our cumulative book taxable loss position was caused by the negative impact on our results from the weak housing and credit market conditions. These conditions deteriorated dramatically during 2008, causing a significant increase in our pre-tax loss, due in part to much higher credit losses, and downward revisions to our projections of future results. Because of the volatile economic conditions, our projections of future credit losses have become more uncertain.<br /><br />During the third quarter of 2008, we concluded that it was more likely than not that we would not generate sufficient future taxable income in the foreseeable future to realize all of our deferred tax assets. Our conclusion was based on our consideration of the relative weight of the available evidence, including the rapid deterioration of market conditions discussed above, the uncertainty of future market conditions on our results of operations and significant uncertainty surrounding our future business model as a result of the placement of the company into conservatorship by FHFA. As a result, we recorded a valuation allowance on our deferred tax asset for the portion of the future tax benefit that more likely than not will not be utilized in the future. We did not, however, establish a valuation allowance for the deferred tax asset amount that is related to unrealized losses recorded through AOCI for certain available-for-sale securities. We believe this deferred tax amount is recoverable because we have the intent and ability to hold these securities until recovery of the unrealized loss amounts. There have been no changes to our conclusion as of June 30, 2009. For the three and six months ended June 30, 2009, we also did not establish a valuation allowance for the benefit recognized related to our ability to carry back net operating losses expected to be generated in the current year to prior years.<br /><br />As a result of adopting FSP FAS 115-2, we recorded a cumulative-effect adjustment at April 1, 2009 of $8.5 billion on a pre-tax basis ($5.6 billion after tax) to reclassify the noncredit portion of previously recognized other-than-temporary impairments from &#8220;Accumulated deficit&#8221; to &#8220;Accumulated other comprehensive loss.&#8221; We also reduced the &#8220;Accumulated deficit&#8221; and valuation allowance by $3.0 billion for the deferred tax asset related to the amounts previously recognized as other-than-temporary impairments in our condensed consolidated statements of operations based upon the assertion of our intent and ability to hold certain available-for-sale securities until recovery.<br />&#160;<br />The Internal Revenue Service (&#8220;IRS&#8221;) has completed the field audit of our 2005 and 2006 federal income tax returns. We have reached a settlement with the IRS with an expected conclusion in the third quarter of 2009. We and the IRS appeals division have reached a tentative settlement for issues related to the tax years 1999-2004 with an expected conclusion in the fourth quarter of 2009.<br /><br />Unrecognized Tax Benefits<br /><br />We had $169&#160;million and $1.7&#160;billion of unrecognized tax benefits as of June 30, 2009 and December&#160;31, 2008, respectively. Of these amounts, we had $8&#160;million as of both June 30, 2009 and December&#160;31, 2008, which, if resolved favorably, would reduce our effective tax rate in future periods. We have reached a settlement with the IRS with an expected conclusion in the third quarter of 2009 for the field audit of our 2005 and 2006 federal income tax returns. We and the IRS appeals division have reached a tentative settlement for issues related to the tax years 1999-2004 with an expected conclusion in the fourth quarter of 2009. As a result, it is reasonably possible that changes in our gross balance of unrecognized tax benefits may occur within the next 12&#160;months of $20 million to $30 million for the tax years 2005 and 2006 and $90 million to $110 million for the tax years 1999-2004. The decrease in our unrecognized tax benefit during the six months ended June 30, 2009 is due to our settlement reached with the IRS regarding certain tax positions related to fair market value losses. The decrease in our unrecognized tax benefit represents a temporary difference; therefore, it does not result in a change to our effective tax rate.<br /><br />The following table displays the changes in our unrecognized tax benefits for the three and six months ended June 30, 2009 and 2008, respectively.<br /></p></font></div><div><table style="border-collapse: collapse; margin-top: 20px;"><tr><td height="15" width="352" align="left"><font size="2"><b>&#160;</b></font>^{<font size="1"></font>}</td><td width="145" align="center" height="15" colspan="5"><font size="2"><b>For the Three Months</b></font></td><td height="15" width="19" align="left"><font size="2">&#160;</font></td><td width="145" align="center" height="15" colspan="5"><font size="2"><b>For the Six Months</b></font></td></tr><tr><td height="15" width="352" align="left"><font size="2"><b>&#160;</b></font>^{<font size="1"></font>}</td><td width="145" align="center" height="15" colspan="5"><font 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We will continue to submit capital reports to FHFA during the conservatorship and FHFA will continue to closely monitor our capital levels. FHFA has stated that it does not intend to report our critical capital, risk-based capital or subordinated debt levels during the conservatorship. As of June 30, 2009 and December&#160;31, 2008, we had a minimum capital deficiency of $72.4&#160;billion and $42.2&#160;billion, respectively. These amounts exclude the funds provided to us by Treasury pursuant to the senior preferred stock purchase agreement, since senior preferred stock is not included in core capital due to its cumulative dividend provisions.<br /><br />FHFA has directed us, during the time we are under conservatorship, to focus on managing to a positive net worth. As of June 30, 2009 and December&#160;31, 2008, we had a net worth deficit of $10.6&#160;billion and $15.2&#160;billion, respectively.<br /><br />Pursuant to the Regulatory Reform Act, if our total assets are less than our total obligations for a period of 60&#160;days, FHFA will be mandated by law to appoint a receiver for Fannie Mae. Treasury&#8217;s funding commitment under the senior preferred stock purchase agreement is intended to ensure that we avoid a net worth deficit, in order to avoid this mandatory trigger of receivership under the Regulatory Reform Act. In order to avoid a net worth deficit, we may draw up to $200&#160;billion in funds from Treasury under the senior preferred stock purchase agreement as amended on May&#160;6, 2009.<br /><br />Under the senior preferred stock purchase agreement, we are restricted from engaging in certain capital transactions, such as the declaration of dividends (other than on the senior preferred stock), without the prior written consent of Treasury, until the senior preferred stock is repaid or redeemed in full.<br /></p></font></div></body></html> <html><head><meta content="text/html; charset=utf-8" /></head><body><div><font size="2"><p>17.&#160;&#160;Concentrations of Credit Risk<br /><br />Non-traditional Loans; Alt-A and Subprime Loans and Securities<br /><br />We own and guarantee loans with non-traditional features, such as interest-only loans and negative-amortizing loans. We also own and guarantee Alt-A and subprime mortgage loans and mortgage-related securities. An Alt-A mortgage loan generally refers to a mortgage loan that can be underwritten with reduced or alternative documentation than that required for a full documentation mortgage loan but may also include other alternative product features. As a result, 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. We have classified private-label mortgage-related securities held in our investment portfolio as Alt-A if the securities were labeled as such when issued. 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. We have classified private-label mortgage-related securities held in our investment portfolio as subprime if the securities were labeled as such when issued. 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Our business with our mortgage servicers is concentrated. Our ten largest single-family mortgage servicers, including their affiliates, serviced 81% of our single-family mortgage credit book of business as of June 30, 2009 and December&#160;31, 2008. Our ten largest multifamily mortgage servicers including their affiliates serviced 76% and 75% of our multifamily mortgage credit book of business as of June 30, 2009 and December&#160;31, 2008, respectively.<br /><br />If one of our principal mortgage servicers fails to meet its obligations to us, it could increase our credit-related expenses and credit losses, result in financial losses to us and have a material adverse effect on our earnings, liquidity, financial condition and net worth.<br /><br />Mortgage Insurers.&#160;&#160;Mortgage insurance &#8220;risk in force&#8221; represents our maximum potential loss recovery under the applicable mortgage insurance policies. We had primary and pool mortgage insurance coverage risk in force on single-family mortgage loans in our guaranty book of business of $104.1&#160;billion and $8.4&#160;billion, respectively, as of June 30, 2009, compared with $109.0&#160;billion and $9.7&#160;billion, respectively, as of December&#160;31, 2008. Over 99% of our mortgage insurance was provided by eight mortgage insurance companies as of both June 30, 2009 and December&#160;31, 2008.<br /><br />Increases in mortgage insurance claims due to higher defaults and credit losses in recent periods have adversely affected the financial results and financial condition of many mortgage insurers. We had total mortgage insurance coverage risk in force of $112.5 billion on the single-family mortgage loans in our guaranty book of business as of June 30, 2009, which represented approximately 4% of our single-family guaranty book of business as of June 30, 2009. The current weakened financial condition of our mortgage insurer counterparties creates an increased risk that these counterparties will fail to fulfill their obligations to reimburse us for claims under insurance policies. If we determine that it is probable that we will not collect all of our claims from one or more of these mortgage insurer counterparties, it could result in an increase in our loss reserves, which could adversely affect our earnings, liquidity, financial condition and net worth. We had outstanding receivables from mortgage insurers of $1.4&#160;billion as of June 30, 2009 and $1.1&#160;billion as of December&#160;31, 2008, related to amounts claimed on insured, defaulted loans that we have not yet received. We have included a reserve for probable losses from one mortgage insurer counterparty of $293 million in our loss reserves as of June 30, 2009 due to their inability to fully pay claims. We did not record a reserve for probable losses from our mortgage insurer counterparties in the three or six months ended June 30, 2008.<br /><br />Financial Guarantors.&#160;&#160;We were the beneficiary of financial guarantees totaling approximately $9.8&#160;billion and $10.2&#160;billion as of June 30, 2009 and December&#160;31, 2008, respectively, on securities held in our investment portfolio or on securities that have been resecuritized to include a Fannie Mae guaranty and sold to third parties. The securities covered by these guarantees consist primarily of private-label mortgage-related securities and mortgage revenue bonds. We obtained these guarantees from nine financial guaranty insurance companies. In addition, we are the beneficiary of financial guarantees totaling $49.6&#160;billion and $43.5&#160;billion as of June 30, 2009 and December&#160;31, 2008, respectively, obtained from Freddie Mac, the federal government, and its agencies. These financial guaranty contracts assure the collectability of timely interest and ultimate principal payments on the guaranteed securities if the cash flows generated by the underlying collateral are not sufficient to fully support these payments.<br /><br />If a financial guarantor fails to meet its obligations to us with respect to the securities for which we have obtained financial guarantees, it could reduce the fair value of our mortgage-related securities and result in financial losses to us, which could have a material adverse effect on our earnings, liquidity, financial condition and net worth. During the first six months of 2009, we noted a decline in the financial strength of some of our financial guarantors. We considered the financial strength of our financial guarantors in assessing our securities for other-than-temporary impairment.<br /><br />Derivatives Counterparties.&#160;&#160;For information on credit risk associated with our derivatives transactions refer to &#8220;Note&#160;11, Derivative Instruments and Hedging Activities.&#8221;<br /></p></font></div></body></html> <html><head><meta content="text/html; charset=utf-8" /></head><body><div><font size="2"><p>18.&#160;&#160;Fair Value of Financial Instruments<br /><br />The fair value of financial instruments disclosure required by SFAS&#160;No.&#160;107, Disclosures about Fair Value of Financial Instruments, includes commitments to purchase multifamily mortgage loans and single-family reverse mortgage loans, which are off-balance sheet financial instruments that are not recorded in our condensed consolidated balance sheets. 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The fair value of our dollar roll resell transactions reflects prices for similar securities in the market.<br /><br />Trading Securities and Available-for-Sale Securities&#8212;Our investments in securities are recognized at fair value in our 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 &#8220;Note&#160;6, Investments in Securities.&#8221;<br /><br />Mortgage Loans Held for Sale&#8212;Held for sale (&#8220;HFS&#8221;) loans are reported at the lower of cost or fair value in our condensed consolidated balance sheets. 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.<br /><br />Mortgage Loans Held for Investment&#8212;Held for investment (&#8220;HFI&#8221;) loans are recorded in our 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. Certain loans that do not qualify for Fannie Mae MBS securitization are valued using market based data for similar loans or through a model approach that simulates a loan sale via a synthetic structure.<br /><br />Advances to Lenders&#8212;The carrying value of the majority of our advances to lenders approximates the fair value 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.<br /><br />Derivatives Assets and Liabilities (collectively, &#8220;Derivatives&#8221;)&#8212;Our risk management derivatives and mortgage commitment derivatives are recognized in our 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, as well as cash collateral. 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 &#8220;Note&#160;11, Derivative Instruments and Hedging Activities.&#8221;<br /><br />Guaranty Assets and Buy-ups&#8212;We estimate the fair value of guaranty assets based on the present value of expected future cash flows of the underlying mortgage assets using management&#8217;s best estimate of certain key assumptions, which include prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. These cash flows are projected using proprietary prepayment, interest rate and credit risk models. Because guaranty assets are like an interest-only income stream, the projected cash flows from our guaranty assets are discounted using one month LIBOR plus the option-adjusted spread (&#8220;OAS&#8221;) for interest-only trust securities. The interest-only OAS is calibrated using prices of a representative sample of interest-only trust securities. We believe the remitted fee income is less liquid than interest-only trust securities and more like an excess servicing strip. We take a further haircut of the present value for liquidity considerations. The haircut is based on market quotes from dealers. The fair value of the guaranty assets as presented in the table above and the recurring fair value measurement table below include the fair value of any associated buy-ups, which is estimated in the same manner as guaranty assets but is recorded separately as a component of &#8220;Other assets&#8221; in our condensed consolidated balance sheets. While the fair value of the guaranty assets reflect all guaranty arrangements, the carrying value primarily reflects only those arrangements entered into subsequent to our adoption of FIN&#160;45.<br /><br />Federal Funds Purchased and Securities Sold Under Agreements to Repurchase&#8212;The carrying value of our federal funds purchased and securities sold under agreements to repurchase approximates the fair value of these instruments due to the short-term nature of these liabilities, exclusive of dollar roll repurchase transactions.<br /><br />Short-Term Debt and Long-Term Debt&#8212;We value the majority of our short-term and long-term debt using pricing services. Where third-party pricing is not available on non-callable debt, we use a 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. When third-party pricing is not available for callable bonds, we use internally-developed models calibrated to market to price these bonds. To estimate the fair value of structured notes, cash flows are evaluated taking into consideration any derivatives through which we have swapped out of the structured features of the notes. We continue to use third-party prices to value our subordinated debt.<br /><br />Guaranty Obligations&#8212;The fair value of all guaranty obligations (&#8220;GO&#8221;), measured subsequent to their initial recognition, is our estimate of a hypothetical transaction price we would receive if we were to issue our guaranty to an unrelated party in a standalone arm&#8217;s-length transaction at the measurement date. We estimate the fair value of the GO using our internal GO valuation models which calculate the present value of expected cash flows based on management&#8217;s best estimate of certain key assumptions such as default rates, severity rates and required rate of return. We further adjust the model values based on our current market pricing when such transactions reflect credit characteristics that are similar to our outstanding guaranty obligations. While the fair value of the GO reflects all guaranty arrangements, the carrying value primarily reflects only those arrangements entered into subsequent to our adoption of FIN&#160;45.<br /><br />Fair Value Measurement<br /><br />The inputs used to determine fair value can be readily observable, market corroborated or unobservable. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.<br /><br />Valuation Hierarchy<br /><br />The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. We perform a detailed analysis of the assets and liabilities that are subject to SFAS&#160;157 to determine the appropriate level based on the observability of the inputs used in the valuation techniques. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories based on the lowest level input that is significant to the fair value measurement in its entirety:<br /><br />Level&#160;1:&#160;&#160;Quoted prices (unadjusted) in active markets for identical assets or liabilities.<br /><br />Level&#160;2:&#160;&#160;Observable market-based inputs other than quoted prices in active markets for&#160;identical assets or liabilities.<br /><br />Level&#160;3:&#160;&#160;Unobservable inputs. <br /><br />Level&#160;1 consists of instruments whose value is based on quoted market prices in active markets, such as U.S.&#160;Treasuries.<br /><br />Level&#160;2 includes instruments that are primarily valued using valuation techniques that use observable market-based inputs or unobservable inputs that are corroborated by market data. These inputs consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable market data or are supported by observable levels at which transactions are executed in the marketplace. This category also includes instruments whose values are based on quoted market prices provided by a single dealer that is corroborated by a recent transaction. Instruments in this category include mortgage and non-mortgage-related securities, mortgage loans held for sale, debt and derivatives.<br /><br />Level&#160;3 is comprised of instruments whose fair value is estimated based on a market approach using alternate techniques or internally developed models using significant inputs that are generally less readily observable because of limited market activity or little or no price transparency. We include instruments whose value is based on a single source such as a dealer, broker or pricing service which cannot be corroborated by recent market transactions. Included in this category are guaranty assets and buy-ups, master servicing assets and liabilities, mortgage loans, mortgage and non-mortgage-related securities, long-term debt, derivatives, and acquired property.<br /><br />Recurring Change in Fair Value<br /><br />The following tables display our assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis subsequent to initial recognition, including instruments for which we have elected the fair value option as of June 30, 2009 and December 31, 2008. 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size="2">&#160;</font></td><td height="17" width="38" align="right"><font size="2"> (200)</font>^{<font size="1"></font>}</td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="40" align="right"><font size="2"> 2,692&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="87" align="right"><font size="2"> 124&#160;</font>^{<font size="1"></font>}</td></tr><tr><td height="17" width="12" align="left"><font size="2">&#160;</font></td><td height="17" width="12" align="left"><font size="2">&#160;</font></td><td width="137" align="left" height="17" colspan="3"><font size="2">Mortgage revenue bonds</font></td><td height="17" width="9" align="center"><font size="2">&#160;</font></td><td height="17" width="49" align="right"><font size="2"> 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size="2"> (330)</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="39" align="right"><font size="2"> (516)</font>^{<font size="1"></font>}</td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="46" align="right"><font size="2"> 2,692&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="87" align="right"><font size="2"> (37)</font>^{<font size="1"></font>}</td></tr><tr><td height="17" width="12" align="left"><font size="2">&#160;</font></td><td height="17" width="12" align="left"><font size="2">&#160;</font></td><td width="144" align="left" height="17" colspan="3"><font size="2">Mortgage revenue 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size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="43" align="right"><font size="2"> -&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="65" align="right"><font size="2"> -&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="51" align="right"><font size="2"> -&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="39" align="right"><font size="2"> -&#160;</font>^{<font size="1"></font>}</td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="46" align="right"><font size="2"> -&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="87" align="right"><font size="2"> -&#160;</font>^{<font size="1"></font>}</td></tr><tr><td height="17" width="12" align="left"><font size="2">&#160;</font></td><td width="156" align="left" height="17" colspan="4"><font size="2">Non-mortgage-related securities:</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="44" align="right"><font size="2">&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="43" align="right"><font size="2">&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="65" align="right"><font size="2">&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="51" align="right"><font size="2">&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="39" align="right"><font size="2">&#160;</font>^{<font size="1"></font>}</td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="46" align="right"><font size="2">&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" 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size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="51" align="right"><font size="2"> (42)</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="39" align="right"><font size="2"> (1,369)</font>^{<font size="1"></font>}</td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="46" align="right"><font size="2"> 19&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="87" align="right"><font size="2"> 1&#160;</font>^{<font size="1"></font>}</td></tr><tr><td height="17" width="12" align="left"><font size="2">&#160;</font></td><td height="17" 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width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="39" align="right"><font size="2"> 56&#160;</font>^{<font size="1"></font>}</td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="46" align="right"><font size="2"> -&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="87" align="right"><font size="2"> -&#160;</font>^{<font size="1"></font>}</td></tr><tr><td height="17" width="12" align="left"><font size="2">&#160;</font></td><td height="17" width="12" align="left"><font size="2">&#160;</font></td><td width="144" align="left" height="17" colspan="3"><font size="2">Other</font></td><td height="17" style="border-bottom: 1px solid 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height="17" style="border-bottom: 1px solid #000000;" align="right" width="51"><font size="2"> -&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" style="border-bottom: 1px solid #000000;" align="right" width="9"><font size="2">&#160;</font></td><td height="17" style="border-bottom: 1px solid #000000;" align="right" width="39"><font size="2"> -&#160;</font>^{<font size="1"></font>}</td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" style="border-bottom: 1px solid #000000;" align="right" width="9"><font size="2">&#160;</font></td><td height="17" style="border-bottom: 1px solid #000000;" align="right" width="46"><font size="2"> -&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" style="border-bottom: 1px solid #000000;" align="right" width="9"><font size="2">&#160;</font></td><td height="17" style="border-bottom: 1px solid #000000;" align="right" width="87"><font size="2"> -&#160;</font>^{<font size="1"></font>}</td></tr><tr><td width="168" align="left" height="17" colspan="5"><font size="2">Total Trading Securities</font></td><td height="17" style="border-top: 1px solid #000000;border-bottom: 1px solid #000000;" align="right" width="9"><font size="2">$</font></td><td height="17" style="border-top: 1px solid #000000;border-bottom: 1px solid #000000;" align="right" width="44"><font size="2"> 12,765&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" style="border-top: 1px solid #000000;border-bottom: 1px solid #000000;" align="right" width="9"><font size="2">$</font></td><td height="17" style="border-top: 1px solid #000000;border-bottom: 1px solid #000000;" align="right" width="43"><font size="2"> 53&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" style="border-top: 1px solid #000000;border-bottom: 1px solid #000000;" align="right" width="9"><font size="2">$</font></td><td height="17" style="border-top: 1px solid #000000;border-bottom: 1px solid #000000;" align="right" width="65"><font size="2"> -&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" style="border-top: 1px solid #000000;border-bottom: 1px solid #000000;" align="right" width="9"><font size="2">$</font></td><td height="17" style="border-top: 1px solid #000000;border-bottom: 1px solid #000000;" align="right" width="51"><font size="2"> (1,205)</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" style="border-top: 1px solid #000000;border-bottom: 1px solid #000000;" align="right" width="9"><font size="2">$</font></td><td height="17" style="border-top: 1px solid #000000;border-bottom: 1px solid #000000;" align="right" width="39"><font size="2"> (1,885)</font>^{<font size="1"></font>}</td><td height="17" width="12" 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size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="39" align="right"><font size="2"> -&#160;</font>^{<font size="1"></font>}</td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="46" align="right"><font size="2"> 13,015&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" width="9" align="right"><font size="2">&#160;</font></td><td height="17" width="87" align="right"><font size="2"> -&#160;</font>^{<font size="1"></font>}</td></tr><tr><td height="17" width="12" align="left"><font size="2">&#160;</font></td><td height="17" width="12" align="left"><font size="2">&#160;</font></td><td width="144" align="left" height="17" colspan="3"><font size="2">Other</font></td><td height="17" style="border-bottom: 1px solid #000000;" align="right" 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size="2">&#160;</font></td><td height="17" width="120" align="left"><font size="2">&#160;</font></td><td height="17" style="border-top: 1px solid #000000;" align="right" width="9"><font size="2">&#160;</font></td><td height="17" style="border-top: 1px solid #000000;" align="right" width="44"><font size="2">&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" style="border-top: 1px solid #000000;" align="right" width="9"><font size="2">&#160;</font></td><td height="17" style="border-top: 1px solid #000000;" align="right" width="43"><font size="2">&#160;</font></td><td height="17" width="12" align="right"><font size="2">&#160;</font></td><td height="17" style="border-top: 1px solid #000000;" align="right" width="9"><font size="2">&#160;</font></td><td height="17" style="border-top: 1px solid #000000;" align="right" width="65"><font size="2">&#160;</font></td><td height="17" width="12" align="right"><font 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Securities, such as U.S.&#160;Treasuries, whose value is based on quoted market prices in active markets for identical assets are classified as level&#160;1. If quoted market prices in active markets for identical assets are not available, we use quoted market prices in active markets for similar securities that we adjust for observable or corroborated pricing services market information. A significant amount of the population is valued using prices provided by four pricing services for identical assets. In the absence of observable or corroborated market data, we use internally developed estimates, incorporating market-based assumptions wherever such information is available. The fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Such instruments may generally be classified within level&#160;2 of the valuation hierarchy. Where there is limited activity or less transparency around inputs to the valuation, securities are classified as level&#160;3.<br /><br />Mortgage Loans Held for Sale&#8212;Includes loans where fair value is determined on a pool level, loan level or product and interest rate basis. Level&#160;2 inputs include MBS values. Level&#160;3 inputs include MBS values where price is influenced significantly by extrapolation from observable market data, products in inactive markets or unobservable inputs.<br /><br />Mortgage Loans Held for Investment&#8212;Represents individually impaired loans, classified as level&#160;3, where fair value is less than carrying value. Includes modified and delinquent loans acquired from MBS trusts under SOP&#160;03-3. Valuations are based on indicative dealer prices and level 3 inputs include the estimated value of primary mortgage insurance on loans that have coverage.<br /><br />Acquired Property, Net&#8212;Includes foreclosed property received in full satisfaction of a loan. The fair value of our foreclosed properties is determined by third-party appraisals, when available. When third-party appraisals are not available, we estimate fair value based on factors such as prices for similar properties in similar geographical areas and/or assessment through observation of such properties. Our acquired property is classified within level&#160;3 of the valuation hierarchy because significant inputs are unobservable.<br /><br />Derivatives Assets and Liabilities (collectively, &#8220;Derivatives&#8221;)&#8212;The valuation of risk management derivatives uses observable market data provided by third-party sources where available, resulting in level&#160;2 classification. Certain highly complex derivatives use only a single source of price information due to lack of transparency in the market and may be modeled using significant assumptions, resulting in level&#160;3 classification. Mortgage commitment derivatives use observable market data, quotes and actual transaction levels adjusted for market movement and are typically classified as level&#160;2. Adjustments for market movement that require internal model results and cannot be corroborated by observable market data are classified as level&#160;3.<br /><br />Guaranty Assets and Buy-ups&#8212;Guaranty assets related to our portfolio securitizations are measured at fair value on a recurring basis and are classified within level&#160;3 of the valuation hierarchy. Guaranty assets in a lender swap transactions that are impaired under EITF&#160;99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interest and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets are measured at fair value on a non-recurring basis and are classified within level&#160;3 of the fair value hierarchy. As described above, level&#160;3 inputs include management&#8217;s best estimate of certain key assumptions.<br /><br />Master Servicing Assets and Liabilities&#8212;We value our master servicing assets and liabilities based on the present value of expected cash flows of the underlying mortgage assets using management&#8217;s best estimates of certain key assumptions, which include prepayment speeds, forward yield curves, adequate compensation, and discount rates commensurate with the risks involved. Changes in anticipated prepayment speeds, in particular, result in fluctuations in the estimated fair values of our master servicing assets and liabilities. If actual prepayment experience differs from the anticipated rates used in our model, this difference may result in a material change in the fair value. Our master servicing assets and liabilities are classified within level&#160;3 of the valuation hierarchy.<br /><br />Partnership Investments&#8212;Our investments in LIHTC partnerships trade in a market with limited observable transactions. We determine fair value based on internal models designed to estimate the present value of expected future tax benefits (tax credits and tax deductions for net operating losses) of the underlying operating properties using management&#8217;s assumptions about significant inputs, including discount rates and projections related to the amount and timing of tax benefits, used by market participants. We compare the model results to the limited number of observed market transactions and make adjustments to reflect differences between the risk profiles of the LIHTC investments and that of the observed market transactions. Our equity investments in LIHTC limited partnerships are classified within the level&#160;3 hierarchy of fair value measurement.<br /><br />Short-Term Debt and Long-Term Debt&#8212;The majority of our debt instruments are priced using pricing services. When third-party pricing is not available on non-callable debt, we use a 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. When third-party pricing is not available for callable bonds, we use internally-developed models calibrated to market to price these bonds. Included within short-term debt and long-term debt are structured notes for which we elected the fair value option under SFAS&#160;No.&#160;159, The Fair Value Option for Financial Assets and Financial Liabilities (&#8220;SFAS&#160;159&#8221;). To estimate the fair value of structured notes, cash flows are evaluated taking into consideration any derivatives through which we have swapped out of the structured features of the notes. Where the inputs into the valuation are primarily based upon observable market data, our debt is classified within level&#160;2 of the valuation hierarchy. Where significant inputs are unobservable or valued with a quote from a single source, our debt is classified within level&#160;3 of the valuation hierarchy.<br /><br />Other Liabilities&#8212;Represents dollar roll repurchase transactions that reflect prices for similar securities in the market. Valuations are based on observable market-based inputs, quoted market prices and actual transaction levels adjusted for market movement and are typically classified as level&#160;2. Adjustments for market movement that require internal model results that cannot be corroborated by observable market data are classified as level&#160;3.<br /><br />Fair Value Option<br /><br />SFAS&#160;159 allows companies the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities, and requires that the difference between the carrying value before election of the fair value option and the fair value of these instruments be recorded as an adjustment to beginning retained earnings in the period of adoption on a contract-by-contract basis.<br /><br />Elections<br /><br />The following is a discussion of the primary financial instruments for which we made fair value elections and the basis for those elections.<br /><br />Non-mortgage-related securities<br /><br />We elected the fair value option for all non-mortgage-related securities, as these securities are held primarily for liquidity risk management purposes. The fair value of these instruments reflects the most transparent basis of reporting. Instruments which were held at adoption had an aggregate fair value of $10.7 billion and $16.5&#160;billion as of June 30, 2009 and December 31, 2008, respectively.<br /><br />Prior to the adoption of SFAS&#160;159, these available-for-sale securities were recorded at fair value in accordance with SFAS&#160;No.&#160;115, Accounting for Certain Investments in Debt and Equity Securities (&#8220;SFAS&#160;115&#8221;), with changes in fair value recorded in AOCI. Following the election of the fair value option, these securities were reclassified to &#8220;Trading securities&#8221; in our condensed consolidated balance sheet and are now recorded at fair value with subsequent changes in fair value recorded in &#8220;Fair value losses, net&#8221; in our condensed consolidated statements of operations.<br /><br />Mortgage-related securities<br /><br />We elected the fair value option for certain 15-year and 30-year agency mortgage-related securities that were previously classified as available-for-sale securities in our mortgage portfolio. These securities were selected for the fair value option primarily in order to reduce the volatility in earnings that results from accounting asymmetry between our derivatives that are accounted for at fair value through earnings and our available-for-sale securities that are accounted for at fair value through AOCI. Instruments which were held at adoption had an aggregate fair value of $14.8&#160;billion and $16.4&#160;billion as of June 30, 2009 and December 31, 2008, respectively.<br /><br />Prior to the adoption of SFAS&#160;159, these available-for-sale securities were recorded at fair value in accordance with SFAS&#160;115 with changes recorded in AOCI. Following the election of the fair value option, these securities were reclassified to &#8220;Trading securities&#8221; in our condensed consolidated balance sheet and are now recorded at fair value with subsequent changes in fair value recorded in &#8220;Fair value losses, net&#8221; in our condensed consolidated statements of operations.<br /><br />Structured debt instruments<br /><br />We elected the fair value option for short-term and long-term structured debt instruments that are issued in response to specific investor demand and have interest rates that are based on a calculated index or formula and that are economically hedged with derivatives at the time of issuance. By electing the fair value option for these instruments, we are able to eliminate the volatility in our results of operations that would otherwise result from the accounting asymmetry created by the accounting for these structured debt instruments at cost while accounting for the related derivatives at fair value.<br /><br />As of June 30, 2009, these instruments had both an aggregate fair value and unpaid principal balance of $22.4&#160;billion recorded in &#8220;Long-term debt,&#8221; in our condensed consolidated balance sheet. There were no outstanding short-term structured debt instruments elected under the fair value option remaining as of June 30, 2009.<br /><br />As of December 31, 2008, these instruments had both an aggregate fair value and unpaid principal balance of $4.5&#160;billion recorded in &#8220;Short-term debt,&#8221; and an aggregate fair value and unpaid principal balance of $21.6&#160;billion and $21.5&#160;billion, respectively, recorded in &#8220;Long-term debt,&#8221; in our condensed consolidated balance sheet.<br /><br />Following the election of the fair value option, these debt instruments are recorded at fair value with subsequent changes in fair value recorded in &#8220;Fair value losses, net.&#8221; These structured debt instruments continue to be classified as either &#8220;Short-term debt&#8221; or &#8220;Long-term debt&#8221; in our condensed consolidated balance sheets based on their original maturities. Interest accrued on these short-term and long-term debt instruments continues to be recorded in &#8220;Interest expense&#8221; in our condensed consolidated statements of operations.<br /><br />Changes in Fair Value under the Fair Value Option Election<br /><br />The following tables display debt fair value losses, net, including changes attributable to instrument-specific credit risk. 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width="11" align="right"><font size="2">&#160;</font></td><td height="18" style="border-top: 1px solid #000000;border-bottom: 3px double #000000;" align="center" width="9"><font size="2">$</font></td><td height="18" style="border-top: 1px solid #000000;border-bottom: 3px double #000000;" align="right" width="54"><font size="2"> 14&#160;</font></td></tr></table></div><div><font size="2"><p>In determining the instrument-specific risk, the changes in Fannie Mae debt spreads to LIBOR that occurred during the period were taken into consideration with the overall change in the fair value of the debt for which we elected the fair value option under SFAS&#160;159. Specifically, cash flows are evaluated taking into consideration any derivatives through which Fannie Mae has swapped out of the structured features of the notes and thus created a floating rate LIBOR-based debt instrument. The change in value of these LIBOR-based cash flows based on the Fannie Mae yield curve at the beginning and end of the period represents the instrument-specific risk.<br /></p></font></div></body></html> <html><head><meta content="text/html; charset=utf-8" /></head><body><div><font size="2"><p>19.&#160;&#160;Commitments and Contingencies<br /><br />Legal Contingencies<br /><br />We are party to various types of legal proceedings. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. The following describes our material legal proceedings, investigations and other matters. An unfavorable outcome in certain of these legal proceedings could have a material adverse effect on our business, financial condition, results of operations, cash flows, and net worth. 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 and we may ultimately pay amounts that differ materially from our estimates. Reserves are established for legal claims when losses associated with the claims become probable and the amounts can be reasonably estimated.&#160; In the first quarter of 2009, we recorded a reserve for legal claims related to matters for which we were able to determine a loss was probable and reasonably estimable. We did not record any additional reserves for such matters in the second quarter of 2009.&#160; For all other pending matters, we have concluded that a loss was not both probable and reasonably estimable as of August&#160;6, 2009; therefore, we have not recorded a reserve for those matters. With respect to the lawsuits described below, whether or not we have recorded a reserve, we believe we have valid defenses to the claims in these lawsuits and intend to defend these lawsuits vigorously.&#160; <br /><br />In addition to the matters specifically described herein, we are involved in a number of legal and regulatory proceedings that arise in the ordinary course of business that we do not expect will have a material impact on our business.<br /><br />During 2009 and 2008, we advanced fees and expenses of certain current and former officers and directors in connection with various legal proceedings pursuant to indemnification agreements. None of these amounts was material.&#160; <br /><br />Securities Class&#160;Action Lawsuits<br /><br />In re Fannie Mae Securities Litigation<br /><br />Beginning on September&#160;23, 2004, 13 separate complaints were filed by holders of certain of our securities against us, as well as certain of our former officers, in three federal district courts. All of the cases were consolidated and/or transferred to the U.S.&#160;District Court for the District of Columbia. The court entered an order naming the Ohio Public Employees Retirement System and State Teachers Retirement System of Ohio as lead plaintiffs. The lead plaintiffs filed a consolidated complaint on March&#160;4, 2005 against us and certain of our former officers, which complaint was subsequently amended on April&#160;17, 2006 and on August&#160;14, 2006. The lead plaintiffs&#8217; second amended complaint added KPMG LLP and Goldman, Sachs&#160;&amp; Co. as additional defendants. The lead plaintiffs allege that the defendants made materially false and misleading statements in violation of Sections&#160;10(b) and 20(a) of the Securities Exchange Act of 1934, and SEC Rule&#160;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. The lead plaintiffs contend that the alleged fraud resulted in artificially inflated prices for our common stock and seek unspecified compensatory damages, attorneys&#8217; fees, and other fees and costs.<br /><br />On January&#160;7, 2008, the court issued an order that certified the action as a class action, and appointed the lead plaintiffs as class representatives and their counsel as lead counsel. The court defined the class as all purchasers of Fannie Mae common stock and call options and all sellers of publicly traded Fannie Mae put options during the period from April&#160;17, 2001 through December&#160;22, 2004.<br /><br />On April&#160;16, 2007, KPMG LLP, our former outside auditor and a co-defendant in the shareholder class action suit, filed cross-claims against us in this action for breach of contract, fraudulent misrepresentation, fraudulent inducement, negligent misrepresentation and contribution. KPMG amended these cross-claims on February&#160;25, 2008. KPMG is seeking unspecified compensatory, consequential, restitutionary, rescissory and punitive damages, including purported damages related to legal costs, exposure to legal liability, costs and expenses of responding to investigations related to our accounting, lost fees, attorneys&#8217; fees, costs and expenses.<br /><br />On October&#160;17, 2008, FHFA, as conservator for Fannie Mae, intervened in the consolidated shareholder class action.<br /><br />In re Fannie Mae 2008 Securities Litigation<br /><br />Beginning on August&#160;7, 2008, a series of shareholder lawsuits were filed against underwriters of issuances of certain Fannie Mae common and preferred stock. Several of these lawsuits were also filed against us and/or against certain current and former Fannie Mae officers and directors. Most of these lawsuits were filed in the U.S.&#160;District Court for the Southern District of New York. While the factual allegations in these cases vary to some degree, these plaintiffs generally allege that defendants misled investors by understating the company&#8217;s need for capital, causing putative class members to purchase shares at artificially inflated prices. The various complaints allege violations of Section&#160;12(a)(2) of the Securities Act of 1933 and/or violations of Sections&#160;10(b) (and Rule&#160;10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934 and seek various forms of relief, including rescission, damages, interest, costs, attorneys&#8217; and experts&#8217; fees, and other equitable and injunctive relief.<br /><br />On February&#160;11, 2009, the Judicial Panel on Multidistrict Litigation granted our motion to transfer and coordinate each of the actions filed outside the U.S.&#160;District Court for the Southern District of New York with the other recently filed section&#160;10(b) and section&#160;12(a)(2) actions filed in that court and the ERISA actions filed in the U.S.&#160;District Court for the District of Columbia. As a result, the following cases reported individually in our 2008 Form&#160;10-K were transferred to the U.S.&#160;District Court for the Southern District of New York for coordinated or consolidated pretrial proceedings: Krausz&#160;v. Fannie Mae, et al.; Kramer&#160;v. Fannie Mae, et al.; Genovese&#160;v. Ashley, et al.; Gordon&#160;v. Ashley, et al.; Crisafi&#160;v. Merrill Lynch, et al.; Fogel Capital Mgmt.&#160;v. Fannie Mae, et al.; Jesteadt&#160;v. Ashley, et al.; Sandman&#160;v. J.P.&#160;Morgan Securities, Inc., et al.; Frankfurt&#160;v. Lehman Bros., Inc., et al.; Schweitzer&#160;v. Merrill Lynch, et al.; Williams&#160;v. Ashley, et al.; and Jarmain&#160;v. Merrill Lynch, et al.<br /><br />On April 16, 2009, the district court entered an order consolidating all of the section&#160;10(b) and section&#160;12(a)(2) actions; appointing Tennessee Consolidated Retirement System as lead plaintiff on behalf of purchasers of preferred stock; and appointing the Massachusetts Pension Reserves Investment Management Board and the Boston Retirement Board as lead plaintiffs on behalf of common stockholders. The consolidation order further provided that all individual complaints would be dismissed ten business days after the filing of an amended consolidated complaint unless a plaintiff that initially filed a complaint shows cause before then why their individual complaint should not be dismissed. On May 19, 2009, the U.S.&#160;Court of Appeals for the Second Circuit denied Horizon Asset Management, Inc.&#8217;s petition for a writ of mandamus seeking to be named lead plaintiff on behalf of the common stockholders. &#160;<br /><br />On June 22, 2009, the lead plaintiffs filed a joint consolidated complaint.&#160; The new complaint alleges violations of Sections&#160;12(a)(2) and 15 of the Securities Act of 1933 and violations of Sections&#160;10(b) (and Rule&#160;10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934 and seeks various forms of relief, including rescission, damages, interest, costs, attorneys&#8217; and experts&#8217; fees, and other equitable and injunctive relief. &#160;The complaint asserts Securities Act claims against Fannie Mae, certain current and former Fannie Mae officers, Banc of America Securities, Barclay's Capital, Bear Stearns, Citigroup, Deutsche Bank, E*Trade Securities, Goldman Sachs &amp; Co., J.P. Morgan, Merrill Lynch, Morgan Stanley, UBS, Wachovia Capital, Wachovia Securities, and Wells Fargo.&#160; The complaint also asserts Securities Exchange Act claims against Fannie Mae, certain former Fannie Mae officers and Deloitte &amp; Touche.<br /><br />On July 2, 2009, plaintiff Malka Krausz filed a motion for relief from the district court&#8217;s April 16, 2009 consolidation order requiring the dismissal of her individual complaint. Lead plaintiffs and the defendants have filed oppositions to this motion.<br /><br />On July 13, 2009, we and the other defendants against whom the Securities Act claims were asserted filed a motion to dismiss those claims.<br /><br />&#160;On August 5, 2009, plaintiff Daniel Kramer filed a motion to remand his individual complaint back to state court.<br /><br />Comprehensive Investment Services v. Mudd, et al.<br />&#160;<br />On May 13, 2009, Comprehensive Investment Services, Inc. filed an individual&#160;securities action against certain former Fannie Mae officers and directors, Merrill Lynch, Citigroup, Morgan Stanley, UBS, and Wachovia Capital Markets in the Southern District of Texas.&#160; Plaintiff alleges violations of Section 12(a)(2) of the Securities Act of 1933; violation of &#167;10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; violation of &#167;20(a) of the Securities Exchange Act of 1934; and violations of the Texas Business and Commerce Code, common law fraud, and negligent misrepresentation in connection with Fannie Mae&#8217;s May 2008 $2 billion offering of 8.25% non-cumulative preferred Series T stock.&#160; The complaint seeks various forms of relief, including rescission, damages, interest, costs, attorneys&#8217; and experts&#8217; fees, and other equitable and injunctive relief. On May 15, 2009, we filed a Notice of Potential Tag-Along Action with the Judicial Panel&#160;on&#160;Multidistrict Litigation.&#160; The Panel&#160;issued a conditional transfer order on June 17, 2009, plaintiff did not oppose and this case was transferred to the Southern District of New York on July 7, 2009.<br /><br />ERISA Actions<br /><br />In re Fannie Mae ERISA Litigation (formerly David Gwyer&#160;v. Fannie Mae)<br /><br />On October&#160;14, 2004, David Gwyer filed a proposed class action complaint in the U.S.&#160;District Court for the District of Columbia. Two additional proposed class action complaints were filed by other plaintiffs on May&#160;5, 2005 and May&#160;10, 2005. These cases are based on the Employee Retirement Income Security Act of 1974 (&#8220;ERISA&#8221;) and name us, our Board of Directors&#8217; Compensation Committee and certain of our former and current officers and directors as defendants. These cases were consolidated on May&#160;24, 2005 in the U.S.&#160;District Court for the District of Columbia and a consolidated complaint was filed on June&#160;16, 2005. The plaintiffs in this consolidated ERISA-based lawsuit purport to represent a class of participants in our Employee Stock Ownership Plan (&#8220;ESOP&#8221;) between January&#160;1, 2001 and the present. Their claims are based on alleged breaches of fiduciary duty relating to accounting matters. The plaintiffs seek unspecified damages, attorneys&#8217; fees, and other fees and costs, and other injunctive and equitable relief.<br /><br />On October&#160;17, 2008, FHFA, as conservator for Fannie Mae, intervened in this case.<br /><br />Gwyer&#160;v. Fannie Mae Compensation Committee, et al. (Gwyer II);&#160;Moore&#160;v. Fannie Mae, et al.<br /><br />On October&#160;23, 2008, Mary P. Moore filed a proposed class action complaint in the U.S.&#160;District Court for the District of Columbia against our Board of Directors&#8217; Compensation Committee, our Benefits Plans Committee, and certain current and former Fannie Mae officers and directors. Similarly, on November&#160;25, 2008, David Gwyer filed a nearly identical lawsuit in that same court. Both cases are based on ERISA. Plaintiffs allege that defendants, as fiduciaries of Fannie Mae&#8217;s ESOP, breached their duties to ESOP participants and beneficiaries with regards to the ESOP&#8217;s investment in Fannie Mae common stock when it was no longer prudent to continue to do so. Plaintiffs purport to represent a class of participants and beneficiaries of the ESOP whose accounts invested in Fannie Mae common stock beginning April&#160;17, 2007. The complaints allege that the defendants breached purported fiduciary duties with respect to the ESOP. The plaintiffs seek unspecified damages, attorneys&#8217; fees, and other fees and costs and injunctive and other equitable relief.<br /><br />On February&#160;11, 2009, the Judicial Panel of Multidistrict Litigation entered an order transferring the Moore case to the U.S.&#160;District Court for the Southern District of New York for coordinated or consolidated pretrial proceedings with the other recently filed section&#160;10(b) and section&#160;12(a)(2) suits. Similarly, on March&#160;10, 2009, the Panel transferred the Gwyer&#160;II case to the U.S.&#160;District Court for the Southern District of New York.<br /><br />On&#160;May 15, 2009, the Court granted plaintiffs&#8217; motion for consolidation of their cases, for appointment on an interim basis of co-lead counsel, and for leave to file an amended consolidated complaint. <br /><br />Antitrust Lawsuits<br /><br />In re G-Fees Antitrust Litigation<br /><br />Since January&#160;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 federal and state antitrust and consumer protection statutes by agreeing to artificially fix, raise, maintain or stabilize the price of our and Freddie Mac&#8217;s guaranty fees. The actions were consolidated in the U.S.&#160;District Court for the District of Columbia. Plaintiffs filed a consolidated amended complaint on August&#160;5, 2005. Plaintiffs in the consolidated action seek to represent a class of consumers whose loans allegedly &#8220;contain a guarantee fee set by&#8221; us or Freddie Mac between January&#160;1, 2001 and the present. The plaintiffs seek unspecified damages, treble damages, punitive damages, and declaratory and injunctive relief, as well as attorneys&#8217; fees and costs.<br /><br />On June 26, 2009, the parties filed a Stipulation of Dismissal and the Court issued an order dismissing the case without prejudice.<br /><br />Fees Litigation<br /><br />Okrem&#160;v. Fannie Mae, et al.<br /><br />A complaint was filed on January&#160;2, 2009 against us, Washington Mutual, FSB, the law firm of Zucker, Goldberg&#160;&amp; Ackerman and other unnamed parties in the U.S.&#160;District Court for the District of New Jersey, in which plaintiffs purport to represent a class of borrowers who had home loans that were foreclosed upon and were either held or serviced by Fannie Mae or Washington Mutual and were charged attorneys&#8217; fees and other costs, which they contend were in excess of amounts actually incurred and/or in excess of the amount permitted by law. An amended complaint was filed on February&#160;1, 2009, which made some technical amendments and substituted Washington Mutual Bank for Washington Mutual, FSB. Plaintiffs contend that the defendants were engaged in a scheme to overcharge defaulting borrowers of residential mortgages. The amended complaint contains claims under theories of breach of contract, negligence, breach of duty of good faith and fair dealing, unjust enrichment, unfair and deceptive acts or practices, violations of the New Jersey Consumer Fraud Act, violations of New Jersey state court rules, and violations of the New Jersey Truth-In-Consumer Contract, Warranty and Notice Act. The plaintiffs seek $15&#160;million in damages as well as punitive, exemplary, enhanced and treble damages, restitution, disgorgement, certain equitable relief and their fees and costs.&#160; A second amended complaint was filed on June 19, 2009, adding an additional defendant, the law firm of Brice, Vander, Linden &amp; Wernick.&#160; On July 2, 2009, the court struck the second amended complaint for filing without leave. On July 30, 2009, we filed a motion to dismiss the first amended complaint.<br /><br />Former CFO Arbitration<br /><br />On July&#160;8, 2008, our former Chief Financial Officer and Vice Chairman, J. Timothy Howard, initiated an arbitration proceeding against Fannie Mae before a Federal Arbitration, Inc. panelist. Mr.&#160;Howard claimed that he was entitled to salary continuation under his employment agreement because, in December 2004, he allegedly terminated his employment with Fannie Mae for &#8220;Good Reason,&#8221; as defined in his employment agreement, effective January&#160;31, 2005. The parties stipulated that should Mr.&#160;Howard prevail on his salary continuation claim, the damages awarded on that claim would be approximately $1.7&#160;million plus any interest deemed appropriate by the arbitrator under applicable law. On December&#160;11, 2008, the arbitrator ruled in favor of Mr.&#160;Howard, and awarded him the stipulated amount with interest from the date of the award. On January&#160;23, 2009, Fannie Mae filed a counterclaim seeking recovery of Mr.&#160;Howard&#8217;s 2003 annual incentive plan bonus of approximately $1.2&#160;million plus prejudgment interest. On February&#160;5, 2009, the arbitrator issued an order granting Mr.&#160;Howard prejudgment interest on the award. On April&#160;21, 2009, the arbitrator issued an order dismissing Fannie Mae&#8217;s counterclaim.<br /><br />Investigation by the Securities and Exchange Commission<br /><br />On September&#160;26, 2008, we received notice of an ongoing investigation into Fannie Mae by the SEC regarding certain accounting and disclosure matters. On January&#160;8, 2009, the SEC issued a formal order of investigation. We are cooperating fully with this investigation.<br /><br />Investigation by the Department of Justice<br /><br />On September&#160;26, 2008, we received notice of an ongoing federal investigation by the U.S.&#160;Attorney for the Southern District of New York into certain accounting, disclosure and corporate governance matters. In connection with that investigation, Fannie Mae received a Grand Jury subpoena for documents. That subpoena was subsequently withdrawn. However, we have been informed that the Department of Justice is continuing an investigation. We are cooperating fully with this investigation.<br /><br />Escrow Litigation<br /><br />Casa Orlando Apartments, Ltd., et al.&#160;v. Federal National Mortgage Association (formerly known as Medlock Southwest Management Corp., et al.&#160;v. Federal National Mortgage Association)<br /><br />A complaint was filed against us in the U.S.&#160;District Court for the Eastern District of Texas (Texarkana Division) on June&#160;2, 2004, in which plaintiffs purport to represent a class of multifamily borrowers whose mortgages are insured under Sections&#160;221(d)(3), 236 and other sections of the National Housing Act and are held or serviced by us. The complaint identified as a proposed 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&#160;No.&#160;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. The plaintiffs seek a return of any profits, with accrued interest, earned by us related to the escrow accounts at issue, as well as attorneys&#8217; fees and costs. Our motions to dismiss and for summary judgment with respect to the statute of limitations were denied. Plaintiffs filed an amended complaint on December&#160;16, 2005. On July 13, 2009, the Court denied plaintiffs&#8217; motion for class certification. On July 27, 2009, plaintiffs filed a petition for permission to appeal the Court&#8217;s order.</p></font></div></body></html> Accumulated other comprehensive loss is comprised of $1.5 billion and $6.0 billion in net unrealized losses onavailable-for-sale securities, net of tax, and $(342) million and $291 million in net unrealized gains (losses) on all other components, net of tax, as of June 30, 2009 and 2008, respectively. Also included in accumulated other