Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

Income Tax

Income Taxes

We operate as a government-sponsored enterprise. We are subject to federal income tax, but we are exempt from state and local income taxes.

Deferred Tax Assets and Liabilities

We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We evaluate the recoverability of our deferred tax assets, weighing all positive and negative evidence, and are required to establish or maintain a valuation allowance for these assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary to support a conclusion that a valuation allowance is not needed.

Our framework for assessing the recoverability of deferred tax assets requires us to weigh all available evidence, including:    

• the sustainability of recent profitability required to realize the deferred tax assets;

• the cumulative net losses in our consolidated statements of operations in recent years;

• unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years; and

• the carryforward periods for net operating losses and tax credits.

As of December 31, 2012, we have concluded that it is more likely than not that our deferred tax asset will not be realized in its entirety and that therefore we should retain the valuation allowance against our net deferred tax assets. The valuation allowance as of December 31, 2012 was $58.9 billion. Giving more weight to evidence that could be objectively verified than to evidence that could not be objectively verified, we determined that the factors in favor of releasing the allowance were outweighed by the evidence against releasing the valuation allowance. The factors that weighed against releasing the allowance as of December 31, 2012 and ultimately outweighed the factors in favor of releasing the reserve discussed below were the following:

• on a cumulative basis, we reported losses in our consolidated statements of operations for the three-years ended December 31, 2012;

• the impact of a reduction in funds available to us under the senior preferred stock purchase agreement that would have resulted from releasing the valuation allowance during the three months ended December 31, 2012, which we discuss below;

• stability in the housing market is relatively recent and home prices, while improving, are still well below their peak, which results in uncertainty regarding our projections of future credit losses;

• the uncertainty surrounding the future of our company given we are in conservatorship; and

• we have a limited recent history of profitability and a large number of delinquent loans in our book of business.

Under the terms of the senior preferred stock purchase agreement, the amount of funding available to us after December 31, 2012 is adjusted based on our positive net worth as of December 31, 2012 and is not affected by any positive net worth we may have on future dates. Accordingly, the amount of funding available under the senior preferred stock purchase agreement will be reduced only to the extent that we draw funds from Treasury under the agreement in the future. A decision to release the valuation allowance in 2013 will not reduce the funding available to us under the senior preferred stock purchase agreement.

Releasing the valuation allowance during the three months ended December 31, 2012 would have decreased our available funding under the senior preferred stock purchase agreement to approximately $84 billion, compared to approximately $118 billion of available funding that resulted from not releasing the valuation allowance in the fourth quarter.

There was significant uncertainty regarding the effects that an approximately $34 billion reduction in the funds available to us under the senior preferred stock purchase agreement would have had on our business and financial results, including regulatory actions that would limit our business operations to ensure safety and soundness of the company, particularly in view of the fact that stability in the housing market and improvements in our financial results are relatively recent. This uncertainty was a significant consideration in our determination not to release the valuation allowance as of December 31, 2012.

In addition, it is difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. We utilize a rolling three years of pre-tax income or loss as the primary measure of cumulative losses in recent years. Over the three years ended December 31, 2012, we remain in a cumulative loss position. However, we expect that as of the three months ended March 31, 2013, we will report income for the fifth consecutive quarter and we will show cumulative profits for the past twelve quarters.

The following factors weighed in favor of releasing the allowance as of December 31, 2012:

• our 2012 profitability and our expectations regarding the sustainability of profits;

• the strong credit profile of the loans we have acquired since 2009;

• the significant size of our guaranty book of business and our contractual rights for future revenue from this book of business;

• our taxable income for 2012 and our expectations regarding the likelihood of future taxable income; and

• the carryforward periods for our net operating losses and tax credits.

We will continue to evaluate the recoverability of our deferred tax assets. Our evaluation in future quarters will be made by reviewing all relevant factors as of the end of those periods including the factors discussed above to the extent applicable. Releasing all or a portion of the valuation allowance after December 31, 2012 will not reduce the funding available to us under the senior preferred stock purchase agreement as discussed above. In addition, we expect that, for the three months ended March 31, 2013, we will no longer be in a three-year cumulative loss position. Accordingly, although we have not completed the analysis, we believe that, after considering all relevant factors, we may release the valuation allowance as early as the three months ended March 31, 2013.

If we reverse all or a significant portion of our valuation allowance in a future period we would record a material tax benefit in net income reflecting the reversal. This tax benefit would increase our net worth as of the end of the period in which we record it and, as a result, the amount of the dividend we will be required to pay Treasury in the following quarter pursuant to the terms of the senior preferred stock purchase agreement. This tax benefit would also result in a large negative effective tax rate in the period in which the valuation allowance is released.

In addition, if all or a significant portion of the valuation allowance is reversed, our effective tax rate will approach the statutory tax rate after the year in which the reversal is recorded. Our recorded effective tax rate has been at or close to zero since we established our valuation allowance because our provision or benefit for income taxes, as it relates to the change in the deferred tax asset balance, has been offset by a corresponding decrease or increase to our valuation allowance.

The following table displays our deferred tax assets, deferred tax liabilities, and valuation allowance as of December 31, 2012 and 2011.

		As of December 31,
		2012				2011
	(Dollars in millions)
Deferred tax assets:
Allowance for loan losses and basis in acquired property, net			$	26,263			$	29,935
Mortgage and mortgage-related assets			14,912				12,358
Debt and derivative instruments			5,450				6,562
Partnership credits			5,933				5,473
Partnership and other equity investments			1,610				1,809
Unrealized losses on AFS securities, net			—				442
Net operating loss and alternative minimum tax credit carryforwards			2,586				5,904
Other, net			2,084				2,053
Total deferred tax assets			58,838				64,536
Deferred tax liabilities:
Unrealized gains on AFS securities, net			496				—
Other, net			—				23
Total deferred tax liabilities			496				23
Valuation allowance			(58,851		)		(64,080		)
Net deferred tax (liabilities) assets			$	(509	)		$	433

As of December 31, 2012, we had $8.3 billion of net operating loss carryforwards that expire in 2030 through 2031, $1.5 billion of capital loss carryforwards that expire in 2014 through 2017, $5.9 billion of partnership tax credit carryforwards that expire in various years through 2031, and $344 million of alternative minimum tax credit carryforwards that have an indefinite carryforward period.

Benefit for Income Taxes

The following table displays the components of our benefit for federal income taxes for the years ended December 31, 2012, 2011 and 2010.

	For the Year Ended December 31,
	2012			2011			2010
	(Dollars in millions)
Current income tax benefit		$	—		$	90		$	82
Deferred income tax benefit (1)		—			—			—
Benefit for federal income taxes		$	—		$	90		$	82

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⁽¹⁾  Amount excludes the income tax effect of items recognized directly in “Fannie Mae stockholders’ equity (deficit).”

During 2011, we received a refund of $1.1 billion from the IRS related to the carryback of our 2009 operating loss to the 2008 and 2007 tax years. In addition, we effectively settled our 2007 and 2008 tax years with the IRS and, as a result, we recognized an income tax benefit of $90 million in our consolidated statements of operations and comprehensive loss for 2011.

The following table displays the difference between our effective tax rates and the statutory federal tax rates for the years ended December 31, 2012, 2011 and 2010, respectively.

	For the Year Ended December 31,
	2012				2011				2010
Statutory corporate tax rate		35.0		%		35.0		%		35.0		%
Tax-exempt interest		(0.7	)			0.9				1.3
Equity investments in affordable housing projects		(3.9	)			4.8				6.3
Other		0.2				1.0				0.1
Valuation allowance		(30.6	)			(41.2	)			(42.1	)
Effective tax rate		—		%		0.5		%		0.6		%

Our effective tax rate is the benefit for federal income taxes expressed as a percentage of income or loss before federal income taxes. Our effective tax rate was different from the federal statutory rate of 35% for the year ended December 31, 2012 due primarily to the decrease to our valuation allowance for our net deferred tax assets that resulted in the recognition of $5.3 billion in our benefit for income taxes, fully offset by a corresponding decrease in our deferred tax assets. Our effective tax rates were different from the federal statutory rate of 35% for the years ended December 31, 2011 and 2010 due primarily to the increase to our valuation allowance for our net deferred tax assets that resulted in the recognition of $7.0 billion and $5.9 billion, respectively, in our provision for income taxes, fully offset by a corresponding increase in our deferred tax assets in each period. Our effective tax rate for the year ended December 31, 2011 was further impacted by the release of a portion of the valuation allowance for deferred tax assets resulting from a settlement agreement reached with the IRS for our unrecognized tax benefits for the tax years 2007 through 2008.

Unrecognized Tax Benefits

We had $648 million, $758 million, and $864 million of unrecognized tax benefits as of December 31, 2012, 2011 and 2010, respectively. Of these amounts, we had $60 million as of December 31, 2010 that was resolved favorably in 2011 and reduced our effective tax rate in 2011. There are no unrecognized tax benefits as of December 31, 2012 and 2011 that would reduce our effective tax rate in future periods. As of December 31, 2012 and 2011, we had no accrued interest payable related to unrecognized tax benefits. As of December 31, 2010, we had accrued interest payable related to unrecognized tax benefits of $5 million. For the years ended December 31, 2012 and 2011, we had no interest expense related to unrecognized tax benefits and did not have any tax expense related to tax penalties. For the year ended 2010, we had total interest expense related to unrecognized tax benefits of $2 million and did not have any tax expense related to tax penalties.

The IRS is currently examining our federal income tax returns related to the 2009 and 2010 tax years. In 2011, we effectively settled our federal income tax returns for the tax years 2007 and 2008 with the IRS, which resulted in a $105 million reduction in our gross balance of unrecognized tax benefits. In 2010, we and the IRS appeals division reached an agreement for all issues related to the tax years 1999 through 2004, which resulted in a $99 million reduction in our gross balance of unrecognized tax benefits for the tax years 1999 through 2004.

The following table displays the changes in our unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010, respectively.

	For the Year Ended December 31,
	2012				2011				2010
	(Dollars in millions)
Unrecognized tax benefits as of January 1		$	758			$	864			$	911
Gross increases—tax positions in prior years		—				1				83
Gross decreases—tax positions in prior years		(110		)		(2		)		(31		)
Settlements		—				(105		)		(99		)
Unrecognized tax benefits as of December 31(1)		$	648			$	758			$	864

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⁽¹⁾  Amounts exclude tax credits and net operating losses of $648 million, $758 million and $804 million as of December 31, 2012, 2011 and 2010, respectively.