10-K 1 fanniemae201610k.htm 10-K Document
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission File No.: 0-50231
Federal National Mortgage Association
(Exact name of registrant as specified in its charter)
Fannie Mae
Federally chartered corporation
52-0883107
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3900 Wisconsin Avenue, NW
Washington, DC
(Address of principal executive offices)
20016
(zip code)
Registrant’s telephone number, including area code:
(800) 2FANNIE (800-232-6643)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
None
 
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of class)
8.25% Non-Cumulative Preferred Stock, Series T, stated value $25 per share
(Title of class)
8.75% Non-Cumulative Mandatory Convertible Preferred Stock, Series 2008-1, stated value $50 per share
(Title of class)
Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series S, stated value $25 per share
(Title of class)
7.625% Non-Cumulative Preferred Stock, Series R, stated value $25 per share
(Title of class)
6.75% Non-Cumulative Preferred Stock, Series Q, stated value $25 per share
(Title of class)
Variable Rate Non-Cumulative Preferred Stock, Series P, stated value $25 per share
(Title of class)
Variable Rate Non-Cumulative Preferred Stock, Series O, stated value $50 per share
(Title of class)
5.375% Non-Cumulative Convertible Series 2004-1 Preferred Stock, stated value $100,000 per share
(Title of class)
5.50% Non-Cumulative Preferred Stock, Series N, stated value $50 per share
(Title of class)
4.75% Non-Cumulative Preferred Stock, Series M, stated value $50 per share
(Title of class)
5.125% Non-Cumulative Preferred Stock, Series L, stated value $50 per share
(Title of class)
5.375% Non-Cumulative Preferred Stock, Series I, stated value $50 per share
(Title of class)
5.81% Non-Cumulative Preferred Stock, Series H, stated value $50 per share
(Title of class)
Variable Rate Non-Cumulative Preferred Stock, Series G, stated value $50 per share
(Title of class)
Variable Rate Non-Cumulative Preferred Stock, Series F, stated value $50 per share
(Title of class)
5.10% Non-Cumulative Preferred Stock, Series E, stated value $50 per share
(Title of class)
5.25% Non-Cumulative Preferred Stock, Series D, stated value $50 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨      No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨        No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer  o
Non-accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No þ
The aggregate market value of the common stock held by non-affiliates of the registrant computed by reference to the last reported sale price of the common stock quoted on the OTC Bulletin Board on June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $2.3 billion.
As of January 31, 2017, there were 1,158,082,750 shares of common stock of the registrant outstanding.
 


TABLE OF CONTENTS
 
 
Page
Item 1.
 
 
 
 
 
 
 
Legislation and Regulation
 
 
 
 
 
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
 
 
 
 
Retained Mortgage Portfolio
 
Mortgage Credit Book of Business
 
 
 
 
 
 
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
 
 
 

Fannie Mae 2016 Form 10-K
 
i



Fannie Mae 2016 Form 10-K
 
ii

TABLE REFERENCE
Table
Description
Page
 
 
 
1
2015 Housing Goals Performance
27
2
Summary of Consolidated Results of Operations
60
3
Analysis of Net Interest Income and Yield
61
4
Rate/Volume Analysis of Changes in Net Interest Income
62
5
Fair Value Losses, Net
63
6
Total Loss Reserves
66
7
Changes in Combined Loss Reserves
67
8
Troubled Debt Restructurings and Nonaccrual Loans
69
9
Credit Loss Performance Metrics
70
10
Credit Loss Concentration Analysis
71
11
Summary of Consolidated Balance Sheets
72
12
Summary of Mortgage-Related Securities at Fair Value
73
13
Retained Mortgage Portfolio
74
14
Retained Mortgage Portfolio Profile
75
15
Composition of Mortgage Credit Book of Business
76
16
Single-Family Housing and Mortgage Market Indicators
80
17
Single-Family Business Key Performance Data
81
18
Single-Family Business Financial Results
82
19
Representation and Warranty Status of Single-Family Conventional Loans Acquired in 2013-2016
87
20
Credit Risk Transfer Transactions
89
21
Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period
91
22
Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business
92
23
Single-Family Adjustable-Rate Mortgage and Rate Reset Modifications by Year
97
24
Delinquency Status and Activity of Single-Family Conventional Loans
98
25
Single-Family Conventional Seriously Delinquent Loan Concentration Analysis
99
26
Statistics on Single-Family Loan Workouts
101
27
Single-Family Troubled Debt Restructuring Activity
102
28
Percentage of Single-Family Loan Modifications That Were Current or Paid Off at One and Two Years Post-Modification
102
29
Single-Family Foreclosed Properties
103
30
Single-Family Acquired Property Concentration Analysis
104
31
Multifamily Business Key Performance Data
108
32
Multifamily Business Financial Results
109
33
Multifamily Guaranty Book of Business Key Risk Characteristics
110
34
Activity in Debt of Fannie Mae
114
35
Outstanding Short-Term Borrowings and Long-Term Debt
116
36
Outstanding Short-Term Borrowings
117
37
Contractual Obligations
118
38
Cash and Other Investments Portfolio
119
39
Fannie Mae Credit Ratings
119

Fannie Mae 2016 Form 10-K
 
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Table
Description
Page
40
Mortgage Insurance Coverage
126
41
Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve
134
42
Derivative Impact on Interest Rate Risk (50 Basis Points)
135


Fannie Mae 2016 Form 10-K
 
iv
 
 
Business | Introduction



PART I
 
 
 
 
We have been under conservatorship, with the Federal Housing Finance Agency (“FHFA”) acting as conservator, since September 6, 2008. As conservator, FHFA succeeded to all rights, titles, powers and privileges of the company, and of any shareholder, officer or director of the company with respect to the company and its assets. The conservator has since delegated specified authorities to our Board of Directors and has delegated to management the authority to conduct our day-to-day operations. Our directors do not have any fiduciary duties to any person or entity except to the conservator and, accordingly, are not obligated to consider the interests of the company, the holders of our equity or debt securities or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator. We describe the rights and powers of the conservator, key provisions of our agreements with the U.S. Department of the Treasury (“Treasury”), and their impact on shareholders in “Business—Conservatorship and Treasury Agreements.”

 
 
 
 
This report contains forward-looking statements that are based on management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “Business—Forward-Looking Statements” for more information on the forward-looking statements in this report. Our actual results may differ materially from those reflected in our forward-looking statements due to a variety of factors including, but not limited to, those discussed in “Risk Factors” and elsewhere in this report.
You can find a “Glossary of Terms Used in This Report” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (‘MD&A’).”
Item 1. Business
Introduction
Fannie Mae is a government-sponsored enterprise (“GSE”) chartered by Congress. We serve as a stable source of liquidity for purchases of homes and financing of multifamily rental housing, as well as for refinancing existing mortgages. Our role in the market enables qualified borrowers to have reliable access to affordable mortgage credit, including a variety of conforming mortgage products such as the prepayable 30-year fixed-rate mortgage that protects homeowners from fluctuations in interest rates.
We operate in the secondary mortgage market. We support the liquidity and stability of the U.S. mortgage market primarily by securitizing mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee, which we refer to as Fannie Mae MBS. We also purchase mortgage loans and mortgage-related securities, primarily for securitization and sale at a later date. We use the term “acquire” in this report to refer to both our securitizations and our purchases of mortgage-related assets. We do not originate loans or lend money directly to consumers in the primary mortgage market.
We remain in conservatorship and our conservatorship has no specified termination date. We do not know when or how the conservatorship will terminate, what further changes to our business will be made during or following conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated or whether we will continue to exist following conservatorship. In addition, as a result of our agreements with Treasury and directives from our conservator, we are not permitted to retain our net worth (other than a limited amount that will decrease to zero in 2018), rebuild our capital position or pay dividends or other distributions to stockholders other than Treasury. Our senior preferred stock purchase agreement with Treasury also includes covenants that significantly restrict our business activities. Congress continues to consider options for reform of the housing finance system, including the GSEs. We cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation or actions the Administration or FHFA may take with respect to housing finance reform. We provide additional information on the uncertainty of our future, the conservatorship, the provisions of our agreements with Treasury, and their impact on our business in “Conservatorship and Treasury Agreements” and “Risk Factors.” We describe recent actions and statements relating to housing finance reform by the Administration, Congress and FHFA in “Legislation and Regulation—Housing Finance Reform.”
Although Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock, and has made a commitment under a senior preferred stock purchase agreement to provide us with funds to maintain a positive net worth under specified conditions, the U.S. government does not guarantee our securities or other obligations.

Fannie Mae 2016 Form 10-K
 
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Business | Introduction



Our common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol “FNMA.” Our debt securities are actively traded in the over-the-counter market.
Executive Summary
Please read this Executive Summary together with our MD&A and our consolidated financial statements as of December 31, 2016 and related notes to the consolidated financial statements.
Summary of Our Financial Performance
We recognized comprehensive income of $11.7 billion in 2016, consisting of net income of $12.3 billion, partially offset by other comprehensive loss of $648 million. In comparison, we recognized comprehensive income of $10.6 billion in 2015, consisting of net income of $11.0 billion, partially offset by other comprehensive loss of $326 million. The increase in our net income in 2016 was primarily driven by a shift from credit-related expense in 2015 to credit-related income in 2016 and lower fair value losses, partially offset by lower net revenues.
The table below highlights our key financial performance data and results for 2016 and 2015. See “MD&A—Consolidated Results of Operations” for more information on our financial results.
Key Performance Data and Results
2016 vs. 2015
2015 vs. 2014
Comprehensive income of $11.7 billion in 2016 increased 10% from 2015.
Comprehensive income of $10.6 billion in 2015 decreased 28% from 2014.
Net income of $12.3 billion in 2016 increased 12% from 2015.
Net income of $11.0 billion in 2015 decreased 23% from 2014.
Net revenues, which consist of net interest income and fee and other income, of $22.3 billion in 2016 decreased 2% from 2015. Net interest income of $21.3 billion in 2016 was primarily derived from guaranty fees from our guaranty book of business and remained relatively flat compared with 2015.
Net revenues of $22.8 billion in 2015 decreased 12% from 2014, driven by a decrease in fee and other income partially offset by an increase in net interest income.
We recognized credit-related income of $1.5 billion in 2016, a shift from credit-related expense of $834 million in 2015. Credit-related income in 2016 was driven by a
benefit for credit losses primarily resulting from an increase in home prices.
We recognized credit-related expense of $834 million in 2015, a shift from credit-related income of $3.8 billion in 2014. Credit related expense in 2015 was driven by foreclosed property expense on our single-family foreclosed properties.
Net fair value losses of $1.1 billion in 2016 decreased 39% from 2015. We recognized fair value losses for 2016 primarily as a result of a decrease in the fair value of our risk management derivatives in the first half of 2016 due to declines in longer-term swap rates during the period. These losses were partially offset by an increase in the fair value of our risk management derivatives in the second half of 2016 due to an increase in longer-term swap rates during the period.
Net fair value losses of $1.8 billion in 2015 decreased 63% from 2014. We recognized fair value losses in 2015 primarily as a result of decreases in the fair value of our risk management derivatives due to declines in longer-term swap rates during the year.
Our retained mortgage portfolio declined by 21% to $272.4 billion as of December 31, 2016.
Our retained mortgage portfolio declined by 17% to $345.1 billion as of December 31, 2015.
Our single-family guaranty book of business was $2.8 trillion as of December 31, 2016.
Our single-family guaranty book of business was $2.8 trillion as of December 31, 2015.
Our net worth increased to $6.1 billion as of December 31, 2016.
Our net worth increased to $4.1 billion as of December 31, 2015.
The capital reserve amount applicable to our dividend payment for the first quarter of 2017 based on our net worth as of December 31, 2016 is $600 million. The capital reserve amount applicable to our dividends paid in 2016 was $1.2 billion.
The capital reserve amount applicable to our dividend payment for the first quarter of 2016 based on our net worth as of December 31, 2015 was $1.2 billion. The capital reserve amount applicable to our dividends paid in 2015 was $1.8 billion.
We paid $9.6 billion in dividends to Treasury in 2016.
We paid $10.3 billion in dividends to Treasury in 2015.

Fannie Mae 2016 Form 10-K
 
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Business | Executive Summary

We expect volatility from period to period in our financial results from a number of factors, particularly changes in market conditions that result in fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings. These instruments include derivatives and certain securities. The estimated fair value of our derivatives and securities may fluctuate substantially from period to period because of changes in interest rates, the yield curve, mortgage and credit spreads, and implied volatility, as well as activity related to these financial instruments. We use derivatives to manage the interest rate risk exposure of our net portfolio, which consists of our retained mortgage portfolio, cash and other investments portfolio, and outstanding debt of Fannie Mae. Some of these financial instruments in our net portfolio are not recorded at fair value in our consolidated financial statements, and as a result we may experience accounting gains or losses due to changes in interest rates or other market conditions that may not be indicative of the economic interest rate risk exposure of our net portfolio. See “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management” for more information. In addition, our credit-related income or expense can vary substantially from period to period based on a number of factors such as changes in actual and expected home prices, fluctuations in interest rates, borrower payment behavior, the types and volume of our loss mitigation activities, the volume of foreclosures completed, and redesignations of loans from held for investment (“HFI”) to held for sale (“HFS”).
Our Strategy and Business Objectives
Our vision is to be America’s most valued housing partner and to provide liquidity, access to credit and affordability in all U.S. housing markets at all times, while effectively managing and reducing risk to our business, taxpayers and the housing finance system. In support of this vision, we are focused on:
•
advancing a sustainable and reliable business model that reduces risk to the housing finance system and taxpayers;
•
providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners; and
•
serving customer needs by building a company that is efficient, innovative and continuously improving.
Advancing a sustainable and reliable business model that reduces risk to the housing finance system and taxpayers
We have significantly changed our business model since we entered conservatorship in 2008 and our business continues to evolve. We have strengthened our underwriting and eligibility standards and transitioned from a portfolio-focused business to a guaranty-focused business. In addition, we are transferring an increasing portion of the credit risk on our guaranty book of business. These changes have transformed our business model and reduced certain risks of our business as compared with our business prior to entering conservatorship.
Our business also continues to evolve as a result of our many other efforts to build a safer and sustainable housing finance system and to pursue the strategic goals identified by our conservator. See “Legislation and Regulation—Housing Finance Reform—Conservator Developments and Strategic Goals” for a discussion of some of these efforts and FHFA’s strategic goals for our conservatorship.

Fannie Mae 2016 Form 10-K
 
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Business | Executive Summary

Stronger underwriting and eligibility standards
We strengthened our underwriting and eligibility standards for loans we acquired beginning in late 2008 and 2009. These changes have improved the credit quality of our single-family guaranty book of business and contributed to improvement in our credit performance. As of December 31, 2016, 88% of our single-family conventional guaranty book of business consisted of loans acquired since 2009. Our single-family serious delinquency rate has decreased each quarter since the first quarter of 2010.
fanniemae201_chart-53579.jpg
__________
(1) 
Calculated as of the end of each period based on the number of single-family conventional loans that are 90 days or more past due and loans that have been referred to foreclosure but not yet foreclosed upon, divided by the number of loans in our single-family conventional guaranty book of business.
(2) 
We have acquired HARP loans and other Refi Plus loans under our Refi PlusTM initiative since 2009. Our Refi Plus initiative offers refinancing flexibility to eligible borrowers who are current on their loans and whose loans are owned or guaranteed by us and meet certain additional criteria. HARP loans, which have loan-to-value (“LTV”) ratios at origination greater than 80%, refers to loans we have acquired pursuant to the Home Affordable Refinance Program® (“HARP®”). Other Refi Plus loans, which have LTV ratios at origination of 80% or less, refers to loans we have acquired under our Refi Plus initiative other than HARP loans. Loans we acquire under Refi Plus and HARP are refinancings of loans that were originated prior to June 2009.
See “MD&A—Business Segments—Single-Family Business” for information on our recent single-family acquisitions and the credit performance of our single-family mortgage loans.
Transition to a guaranty-focused business
We have two primary sources of revenues: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets. Our retained mortgage portfolio refers to the mortgage-related assets we own (which excludes the portion of assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties).

Fannie Mae 2016 Form 10-K
 
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Business | Executive Summary

As shown in the chart below, in recent years, an increasing portion of our net interest income has been derived from guaranty fees, rather than from our retained mortgage portfolio assets. This shift has been driven by both the guaranty fee increases we implemented in 2012 and the reduction of our retained mortgage portfolio in accordance with the requirements of our senior preferred stock purchase agreement with Treasury and direction from FHFA. More than two-thirds of our 2016 net interest income was derived from the loans underlying our Fannie Mae MBS in consolidated trusts, which primarily generate income through guaranty fees. We expect that guaranty fees will continue to account for an increasing portion of our net interest income.
fanniemae201_chart-56169.jpg
Transferring a portion of the mortgage credit risk on our single-family book of business
In late 2013, we began entering into credit risk transfer transactions with the goal of transferring, to the extent economically sensible, a portion of the mortgage credit risk on some of the recently-acquired loans in our single-family book of business in order to reduce the economic risk to us and to taxpayers of future borrower defaults. Our primary method of achieving this objective has been through our Connecticut Avenue SecuritiesTM (“CAS”) and Credit Insurance Risk TransferTM (“CIRTTM”) transactions. In these transactions, we transfer to investors a portion of the mortgage credit risk associated with losses on a reference pool of mortgage loans and in exchange we pay investors a premium that effectively reduces the guaranty fee income we retain on the loans. As of December 31, 2016, $647.5 billion in outstanding unpaid principal balance of our single-family loans, or approximately 23% of the loans in our single-family conventional guaranty book of business measured by unpaid principal balance, were included in a reference pool for a credit risk transfer transaction. Over time, we expect that a larger portion of our single-family conventional guaranty book of business will be covered by credit risk transfer transactions.

Fannie Mae 2016 Form 10-K
 
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Business | Executive Summary

The chart below shows as of the dates specified the total outstanding unpaid principal balance of our single-family loans, as well as the percentage of our total single-family conventional guaranty book of business measured by unpaid principal balance, that were included in a reference pool for a credit risk transfer transaction.
fanniemae201_chart-57418.jpg
For further discussion of our credit risk transfer transactions, including information on the portion of the credit risk of these loans we have transferred, see “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk—Credit Risk Transfer Transactions.”
Providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners
We continued to provide reliable, large-scale access to affordable mortgage credit to the U.S. housing market and to help struggling homeowners in 2016:
•
We provided approximately $637 billion in liquidity to the mortgage market in 2016 through our purchases of loans and guarantees of loans and securities. This liquidity enabled borrowers to complete approximately 1,401,000 mortgage refinancings and approximately 1,122,000 home purchases, and provided financing for approximately 724,000 units of multifamily housing.
•
We provided approximately 103,500 loan workouts in 2016 to help homeowners stay in their homes or otherwise avoid foreclosure. Our loan workout efforts have helped to stabilize neighborhoods, home prices and the housing market.
•
We helped borrowers refinance loans, including through our Refi PlusTM initiative, which offers refinancing flexibility to eligible borrowers who are current on their loans, whose loans are owned or guaranteed by us and who meet certain additional criteria. We acquired approximately 141,000 Refi Plus loans in 2016. Refinancings delivered to us through Refi Plus in the fourth quarter of 2016 reduced borrowers’ monthly mortgage payments by an average of $221.
•
We support affordability in the multifamily rental market. Approximately 90% of the multifamily units we financed in 2016 were affordable to families earning at or below 120% of the median income in their area, providing support for both workforce housing and affordable housing.
Serving customer needs by building a company that is efficient, innovative and continuously improving
We are committed to providing our lender customers with the products, services and tools they need to serve the housing market more effectively and efficiently, as well as continuing to improve our business processes. We have implemented a number of changes in recent years designed to help our customers originate mortgages with increased certainty, efficiency and lower costs, such as the following:
•
Introduced Innovative Tools. We have introduced a number of new, innovative tools that lenders can use to ensure the quality of the loans they deliver to us, such as our EarlyCheckTM loan verification tool and our Collateral Underwriter® appraisal review tool, which we make available to lenders at no cost.

Fannie Mae 2016 Form 10-K
 
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Business | Executive Summary

•
Launched New Loan Delivery Platform. We launched a new loan delivery platform to help lenders deliver loans more efficiently and with greater transparency and certainty.
•
Eliminated Technology Fees. We eliminated fees charged to customers for using our Desktop Underwriter® and Desktop Originator® underwriting systems.
•
Reduced Repurchase Risk. We have significantly reduced lenders’ repurchase risk relating to loans they deliver to us by implementing a revised representation and warranty framework and other enhancements that clarify and limit lenders’ repurchase liability. As of December 31, 2016, over 3 million loans in our book of business had obtained relief from repurchases for breaches of certain representations and warranties pursuant to this revised framework, and over 5 million loans remained eligible for relief in the future.
We continue to focus on improvements to our business processes and policies to better serve our customers and to promote stronger risk management and greater digitization of data and processes in the mortgage industry. In addition to providing value to our customers, we believe many of these improvements will increase access to mortgage credit by encouraging lenders to safely expand their lending to a wider range of qualified borrowers. New enhancements and innovations that we implemented in recent months or are currently working on include the following:
•
Trended Credit Data. We incorporated trended credit data into our Desktop Underwriter automated underwriting system in September 2016. Trended credit data refers to additional historical information on a borrower’s use of revolving credit accounts, including the balance, scheduled payments and actual payments made on these accounts. Incorporating trended credit data is expected to improve Desktop Underwriter’s credit risk assessment and benefit borrowers who regularly pay down their revolving debt.
•
Day 1 Certainty. We introduced our new Day 1 CertaintyTM initiative in October 2016. As part of Day 1 Certainty, we began offering third-party validation of borrower income, asset and employment data through Desktop Underwriter in the fourth quarter of 2016. We also leveraged these new verification tools to expand the representation and warranty relief we provide to lenders. In the fourth quarter of 2016, we began providing lenders with additional representation and warranty relief with respect to borrower income, asset and employment data that has been validated through Desktop Underwriter and with respect to property value where the appraisal has received a qualifying risk score in our Collateral Underwriter appraisal review tool. See “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards—Representation and Warranty Relief” for further discussion of the actions we have taken to reduce and clarify lenders’ repurchase risk.
•
eMortgages. We are investing in technology and resources to support the ability of lenders to deliver eMortgages to us. An eMortgage is an electronic mortgage submission where the loan documentation is created, executed, transferred and stored electronically. In 2016, we partnered with lenders, servicers and technology solution providers to implement eMortgage solutions and promote more entrants to the eMortgage marketplace. We plan to transition to a streamlined, less complex eNote format—MISMO SMART Doc® Version 3.0—to align the eNote format with Uniform Closing Dataset standards. We will continue to conduct educational outreach to industry and market stakeholders in 2017 to further drive eMortgage awareness and adoption.
Treasury Draws and Dividend Payments
Treasury has made a commitment under a senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. Pursuant to this agreement and the senior preferred stock we issued to Treasury in 2008, the Director of FHFA has directed us to pay dividends to Treasury on a quarterly basis since entering into conservatorship in 2008.

Fannie Mae 2016 Form 10-K
 
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Business | Executive Summary

The chart below shows the funds we have drawn from Treasury pursuant to the senior preferred stock purchase agreement, as well as the dividend payments we have made to Treasury on the senior preferred stock, since entering into conservatorship.
fanniemae201_chart-53498.jpg
__________
(1) 
Under the terms of the senior preferred stock purchase agreement, dividend payments we make to Treasury do not offset our prior draws of funds from Treasury, and we are not permitted to pay down draws we have made under the agreement except in limited circumstances. Accordingly, the current aggregate liquidation preference of the senior preferred stock is $117.1 billion, due to the initial $1.0 billion liquidation preference of the senior preferred stock (for which we did not receive cash proceeds) and the $116.1 billion we have drawn from Treasury. Amounts may not sum due to rounding.
(2) 
Treasury draws are shown in the period for which requested, not when the funds were received by us. We have not requested a draw for any period since 2012.
We expect to pay Treasury a dividend of $5.5 billion for the first quarter of 2017 by March 31, 2017, calculated based on our net worth of $6.1 billion as of December 31, 2016, less the current capital reserve amount of $600 million. We expect to retain only a limited amount of any future net worth because we are required by the dividend provisions of the senior preferred stock and quarterly directives from our conservator to pay Treasury each quarter any dividends declared consisting of the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. This capital reserve amount is $600 million for each quarter of 2017 and will decrease to zero in 2018. Those dividend payment provisions are referred to as “net worth sweep” dividend provisions.
If we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership. As of the date of this filing, the maximum amount of remaining funding under the agreement is $117.6 billion. If we were to draw additional funds from Treasury under the agreement in a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the agreement. For a description of the terms of the senior preferred stock purchase agreement and the senior preferred stock, see “Conservatorship and Treasury Agreements—Treasury Agreements.” See “Risk Factors” for a discussion of the risks associated with our limited and declining capital reserves, and “Outlook” for our current expectations for our future financial results.

Fannie Mae 2016 Form 10-K
 
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Business | Executive Summary

As described in “Legal Proceedings” and “Note 18, Commitments and Contingencies,” several lawsuits have been filed by preferred and common stockholders of Fannie Mae and Freddie Mac against one or more of the United States, Treasury and FHFA challenging actions taken by the defendants relating to the senior preferred stock purchase agreements and the conservatorships of Fannie Mae and Freddie Mac, including challenges to the net worth sweep dividend provisions of the senior preferred stock. We are also a party to some of those lawsuits. We cannot predict the course or the outcome of these lawsuits, or the actions the U.S. government (including Treasury or FHFA) may take in response to any ruling or finding in any of these lawsuits.
2016 Market Share
We estimate that our single-family acquisition market share was 29% in 2016 and 27% in 2015. These amounts represent our single-family mortgage acquisitions for each year, excluding delinquent loans we purchased from our MBS trusts, as a percentage of the single-family first-lien mortgages we currently estimate were originated in the United States that year. Our estimate of mortgage originations in prior periods is subject to change as additional data become available; therefore, these market share estimates may change in the future, perhaps materially.
We were the largest issuer of single-family mortgage-related securities in the secondary market in 2016, with an estimated market share of new single-family mortgage-related securities issuances of 39%, compared with 37% in 2015. We estimate our market share of new single-family mortgage-related securities issuances was 41% in the fourth quarter of 2016, compared with 38% in the third quarter of 2016 and 36% in the fourth quarter of 2015. The chart below shows our market share of single-family mortgage-related securities issuances in 2016 compared with that of our primary competitors.
fanniemae201_chart-53530.jpg
We remained a continuous source of liquidity in the multifamily market in 2016. We owned or guaranteed approximately 19% of the outstanding debt on multifamily properties as of September 30, 2016 (the latest date for which information is available) and approximately 18% as of December 31, 2015.
Outlook
In this section, we present a number of estimates and expectations regarding our future performance, as well as future housing market conditions. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous factors. See “Forward-Looking Statements” and “Risk Factors” for a discussion of factors that could cause actual results to differ materially from our current estimates and expectations. Due to the large size of our guaranty book of business, even small changes in these factors could have a significant impact on our financial results for a particular period.
Financial Results. Our financial results continued to be strong in 2016, with net income of $12.3 billion. We expect to remain profitable on an annual basis for the foreseeable future; however, certain factors, such as changes in interest rates or home prices, could result in significant volatility in our financial results from quarter to quarter or year to year. Our future financial results also will be affected by a number of other factors, including: our guaranty

Fannie Mae 2016 Form 10-K
 
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Business | Executive Summary

fee rates; the volume of single-family mortgage originations in the future; the size, composition and quality of our retained mortgage portfolio and guaranty book of business; and economic and housing market conditions. Although we expect to remain profitable on an annual basis for the foreseeable future, due to our limited and declining capital reserves (which decrease to zero in 2018) and the potential for significant volatility in our financial results, we could experience a net worth deficit in a future quarter. If we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership.
Our expectations for our future financial results do not take into account the impact on our business of potential future legislative or regulatory changes, which could have a material impact on our financial results, particularly the enactment of housing finance reform legislation, corporate income tax reform legislation and changes in accounting standards. For example, the current Administration proposes reducing the U.S. corporate income tax rate. Under applicable accounting standards, a significant reduction in the U.S. corporate income tax rate would require that we record a substantial reduction in the value of our deferred tax assets in the quarter in which the legislation is enacted. Thus, if legislation significantly lowering the U.S. corporate income tax rate is enacted, we expect to incur a significant net loss and net worth deficit for the quarter in which the legislation is enacted and we could potentially incur a net loss for that year. As noted above, if we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership.
See “Risk Factors” for a discussion of the risks associated with our limited and declining capital reserves and the potential impact of legislative and regulatory actions.
Revenues. We have two primary sources of revenues: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets.
Our guaranty fee revenues consist of two primary components: (1) the base guaranty fees that we receive over the life of the loan; and (2) upfront fees we receive at loan acquisition which are amortized over the contractual life of the loan. When mortgage loans prepay faster due to a lower interest rate environment, we typically have higher amortization income. Conversely, when mortgage loans prepay more slowly due to a higher interest rate environment, we typically have lower amortization income. Our guaranty fee revenues increased in 2015 and 2016 primarily driven by: (1) loans with higher base guaranty fees comprising a larger part of our guaranty book of business; and (2) an increase in amortization income as a lower interest rate environment during portions of these years increased prepayments on mortgage loans. We expect loans with lower guaranty fees to continue to liquidate from our book of business and be replaced with new loans that typically have higher guaranty fees, which will contribute to increasing guaranty fee revenues; however, the impact of this trend on our guaranty fee revenues could be offset by lower amortization income if interest rates remain at higher levels and result in lower prepayments on mortgage loans. Accordingly, our guaranty fee revenues may remain relatively flat in the near term.
We expect the size of our retained mortgage portfolio to continue to decrease, which will continue to negatively impact our net interest income and net revenues.
Factors that may affect our future revenues include: changes to guaranty fee pricing we may make in the future and their impact on our competitive environment and guaranty fee revenues; economic and housing market conditions, including changes in interest rates and home prices; the size, composition and quality of our guaranty book of business; the life of the loans in our guaranty book of business; the size, composition and quality of our retained mortgage portfolio; our market share; and legislative and regulatory changes.
Overall Market Conditions. While we expect the single-family serious delinquency rate for the overall mortgage market will continue to decline, we believe the rate of decline will be gradual. We expect the national single-family serious delinquency rate will remain high compared with pre-housing crisis levels because it will take some time for the remaining delinquent loans originated prior to 2009 to work their way through the foreclosure process.
We forecast that total originations in the U.S. single-family mortgage market in 2017 will decrease from 2016 levels by approximately 19% from an estimated $1.94 trillion in 2016 to $1.57 trillion in 2017, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will decrease from an estimated $927 billion in 2016 to $510 billion in 2017.

Fannie Mae 2016 Form 10-K
 
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Business | Executive Summary

Home Prices. Based on our home price index, we estimate that home prices on a national basis increased by 5.9% in 2016. We expect the rate of home price appreciation in 2017 to be slightly lower than the rate in 2016. We also expect significant regional variation in the timing and rate of home price growth.
Credit Losses. Our credit losses, which include our charge-offs, net of recoveries, reflect our realization of losses on our loans. Our credit losses were $3.7 billion in 2016, down from $10.7 billion in 2015. We expect our credit losses to be lower in 2017 than in 2016, absent further significant redesignations related to loan sales; however, we expect a significantly smaller decline in credit losses in 2017 as compared with the decline in 2016. See “MD&A—Consolidated Results of Operations—Credit-Related Income (Expense)” for a discussion of our credit losses for 2016 and 2015, including the impact on our 2015 credit losses of our adoption of FHFA’s Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” (the “Advisory Bulletin”) and a change in our accounting policy for nonaccrual loans, which collectively resulted in $3.6 billion in charge offs in 2015.
Loss Reserves. Our combined loss reserves were $23.8 billion as of December 31, 2016, down from $28.6 billion as of December 31, 2015. Our loss reserves have declined substantially from their peak and are expected to decline further in 2017; however, we expect a smaller decline in our loss reserves in 2017 as compared with the decline in 2016. For a discussion of the factors that contributed to the decline in our loss reserves in 2016, see “MD&A—Consolidated Results of Operations—Credit-Related Income (Expense)” and “MD&A—Consolidated Balance Sheet Analysis—Mortgage Loans and Allowance for Loan Losses.”
Residential Mortgage Market
We conduct business in the U.S. residential mortgage market and the global securities market. According to the Federal Reserve, total U.S. residential mortgage debt outstanding was estimated to be approximately $11.4 trillion as of September 30, 2016 (the latest date for which information is available). We owned or guaranteed mortgage assets representing approximately 27% of total U.S. residential mortgage debt outstanding as of September 30, 2016.
We operate our business solely in the United States and its territories, and accordingly, we generate no revenue from and have no long-lived assets, other than financial instruments, in geographic locations other than the United States and its territories.
For a discussion of housing and mortgage market and economic conditions in the single-family U.S. residential housing market, see “MD&A—Business Segments—Single-Family Business—Single-Family Housing and Mortgage Market and Economic Conditions.” For a discussion of conditions in the multifamily U.S. residential housing market, see “MD&A—Business Segments—Multifamily Business—Multifamily Mortgage Market.”
Business Segments
We have two reportable business segments: Single-Family and Multifamily. Our Single-Family and Multifamily businesses engage in business activities that provide liquidity to the mortgage market and increase the availability and affordability of housing in the United States. The Single-Family business operates in the secondary mortgage market relating to loans secured by properties containing four or fewer residential dwelling units, which are referred to as single-family mortgage loans. The Multifamily business operates in the secondary mortgage market relating primarily to loans secured by properties containing five or more residential units, which are referred to as multifamily mortgage loans.
Previously, we had a third reportable business segment—Capital Markets. In the fourth quarter of 2016, we realigned the composition of our reportable business segments to incorporate the activities of the Capital Markets group into the Single-Family or Multifamily segments. Throughout this filing, all segment information for the years ended December 31, 2015 and December 31, 2014 has been revised to conform to our new segment reporting presentation. For additional information on our change in segment reporting presentation, see “MD&A—Business Segments” and “Note 12, Segment Reporting.”

Fannie Mae 2016 Form 10-K
 
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Business | Business Segments

The table below summarizes the primary business activities and the primary sources of revenue and expense for each of our business segments.
Primary Business Activities
Primary Drivers of Revenue
Primary Drivers of Expense
Single-Family Business
Mortgage securitizations: Works with our lender customers to acquire and securitize single-family mortgage loans delivered to us by lenders into Fannie Mae MBS. Also issues structured Fannie Mae MBS backed by single-family mortgage assets and provides other services to our lender customers.
Credit risk management: Prices and manages the credit risk on loans in our single-family guaranty book of business. Also enters into transactions that transfer a portion of the credit risk on some of the loans in our single-family guaranty book of business.
Credit loss management: Works to reduce costs of defaulted single-family loans through home retention solutions and foreclosure alternatives, management of foreclosures and our real estate owned (“REO”) inventory, selling nonperforming loans, and pursuing contractual remedies from lenders, servicers and providers of credit enhancement.
Net interest income: Single-family net interest income is generated from two primary sources: (1) guaranty fees received as compensation for assuming and managing the credit risk on single-family loans underlying Fannie Mae MBS held by third parties; and (2) the difference between the interest income earned on single-family mortgage assets in our retained mortgage portfolio and the interest expense associated with the debt funding those assets. Revenues from single-family guaranty fees include revenues generated by the 10 basis point increase in guaranty fees we implemented in 2012 pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”).
Fee and other income: Compensation received for engaging in structured transactions and providing other lender services. Also includes income resulting from settlement agreements resolving certain claims relating to PLS sold to us or that we have guaranteed.

Credit-related expense: Consists of the provision for single-family credit losses and foreclosed property expense on loans underlying our single-family guaranty book of business.
Fair value gains and losses: Primarily consists of fair value gains and losses on risk management and mortgage commitment derivatives, trading securities, and other financial instruments associated with our single-family mortgage credit book of business.
Investment gains and losses: Primarily consists of gains and losses on the sale of single-family mortgage assets.
Administrative expenses: Consists of salaries and benefits, occupancy costs, professional services, and other expenses associated with our Single-Family business operations.
TCCA fees: Consists of the portion of our single-family guaranty fees that is remitted to Treasury pursuant to the TCCA.
Multifamily Business
Mortgage securitizations: Works with our lender customers, primarily through our Delegated Underwriting and Servicing, or DUS®, program, to acquire and securitize multifamily mortgage loans delivered to us by lenders into Fannie Mae MBS. Also issues structured Fannie Mae MBS backed by multifamily mortgage assets and provides other services to our lender customers.
Credit risk management: Prices and manages the credit risk on loans in our multifamily guaranty book of business. Lenders retain a portion of the credit risk in most multifamily transactions.
Credit loss management: Works to reduce costs of defaulted multifamily loans through foreclosure alternatives, management of foreclosures and our REO inventory, and pursuing contractual remedies from lenders, servicers and providers of credit enhancement.
Net interest income: Multifamily net interest income is generated from two primary sources: (1) guaranty fees received as compensation for assuming and managing the credit risk on multifamily loans underlying Fannie Mae MBS held by third parties; and (2) the difference between the interest income earned on multifamily mortgage assets in our retained mortgage portfolio and the interest expense associated with the debt funding those assets.
Fee and other income: Other fees associated with multifamily business activities, including yield maintenance income.
Credit-related expense: Consists of the provision for multifamily credit losses and foreclosed property expense on loans underlying our multifamily guaranty book of business.
Fair value gains and losses: Primarily consists of fair value gains and losses on MBS commitment derivatives, trading securities, and other financial instruments associated with our multifamily mortgage credit book of business.
Investment gains and losses: Primarily consists of (1) gains and losses on the sale of multifamily mortgage assets; and (2) gains and losses related to consolidation activities.
Administrative expenses: Consists of salaries and benefits, occupancy costs, professional services, and other expenses associated with our Multifamily business operations.


Fannie Mae 2016 Form 10-K
 
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Business | Business Segments

The chart below displays the total net revenues for each of our business segments. Net revenues consist of net interest income and fee and other income.
fanniemae201_chart-53671.jpg
For more information about the financial results and performance, and total assets, of each of our business segments, as well as more information about the activities of each segment, see “MD&A—Business Segments” and “Note 12, Segment Reporting.”
Mortgage Securitizations
We support market liquidity by issuing Fannie Mae MBS that are readily traded in the capital markets. We create Fannie Mae MBS by placing mortgage loans in a trust and issuing securities that are backed by those mortgage loans. Monthly payments received on the loans are the primary source of payments passed through to Fannie Mae MBS holders. We guarantee to the MBS trust that we will supplement amounts received by the MBS trust as required to permit timely payment of principal and interest on the trust certificates. In return for this guaranty, we receive guaranty fees. 
Below we discuss (1) three broad categories of securitization transactions: lender swaps, portfolio securitizations and structured securitizations; (2) features of our MBS trusts; (3) single-class and multi-class Fannie Mae MBS; and (4) circumstances under which we purchase loans from MBS trusts.
Lender Swaps, Portfolio Securitizations and Structured Securitizations
We currently securitize a substantial majority of the single-family and multifamily mortgage loans we acquire. Our securitization transactions primarily fall within three broad categories: lender swap transactions; portfolio securitizations; and structured securitizations.
Lender swaps. Our most common type of securitization transaction is our “lender swap transaction.” In a single-family lender swap transaction, a mortgage lender that operates in the primary mortgage market generally delivers a pool of mortgage loans to us in exchange for Fannie Mae MBS backed by these mortgage loans. A pool of mortgage loans is a group of mortgage loans with similar characteristics. After receiving the mortgage loans in a lender swap transaction, we place them in a trust for which we serve as trustee. This trust is established for the sole purpose of holding the mortgage loans separate and apart from our corporate assets. We deliver to the lender (or its designee) Fannie Mae MBS that are backed by the pool of mortgage loans in the trust and that represent an undivided beneficial ownership interest in each of the mortgage loans. We guarantee to each MBS trust that we will supplement amounts received by the MBS trust as required to permit timely payment of principal and interest on the related Fannie Mae MBS. We retain a portion of the interest payment as a fee for providing our guaranty. The mortgage servicer also retains a portion of the interest payment as a fee for servicing the loan. Then, on behalf of the trust, we make monthly distributions to the Fannie Mae MBS certificateholders from the principal and interest payments and other collections on the underlying mortgage loans.

Fannie Mae 2016 Form 10-K
 
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Business | Mortgage Securitizations

Our Multifamily business generally creates multifamily Fannie Mae MBS in lender swap transactions in a manner similar to our Single-Family business. Our multifamily lender customers typically deliver only one mortgage loan to back each multifamily Fannie Mae MBS. The characteristics of each mortgage loan are used to establish guaranty fees on a risk-adjusted basis. Securitizing a single multifamily mortgage loan into a Fannie Mae MBS facilitates its sale into the secondary market.
Portfolio securitization transactions. In contrast to our lender swap securitizations, in which a mortgage lender delivers a pool of mortgage loans to us that we immediately place in a trust for securitization, our “portfolio securitization transactions” involve creating and issuing Fannie Mae MBS using mortgage loans and mortgage-related securities that we hold in our retained mortgage portfolio. Most of our portfolio securitization transactions are driven by our single-family whole loan conduit activities, pursuant to which we purchase single-family whole loans from a large group of lenders principally for the purpose of securitizing the loans into Fannie Mae MBS, which may then be sold to dealers and investors. We also securitize loans that have been held in our portfolio for a longer period of time, including reperforming loans, to hold or to sell, which provides more flexibility to manage our risk and reduce the size of our retained mortgage portfolio. Reperforming loans are mortgage loans on which the borrower had previously been delinquent but subsequently became current, either with or without a modification. We also have created portfolio securitization transactions backed by multifamily mortgage loans.
Structured securitizations. In a “structured securitization transaction,” we create structured Fannie Mae MBS, typically for our lender customers or securities dealer customers, in exchange for a transaction fee. In these transactions, the customer “swaps” a mortgage-related asset that it owns (typically a mortgage security) in exchange for a structured Fannie Mae MBS we issue. The process for issuing Fannie Mae MBS in a structured securitization is similar to the process involved in our lender swap securitizations described above.
We also issue structured transactions backed by multifamily Fannie Mae MBS through the Fannie Mae Guaranteed Multifamily Structures (“Fannie Mae GeMSTM”) program, which provides additional liquidity and stability to the multifamily market, while expanding the investor base for multifamily Fannie Mae MBS.
Features of Our MBS Trusts
Our MBS trusts hold either single-family or multifamily mortgage loans or mortgage-related securities. Each trust operates in accordance with a trust agreement or a trust indenture. Each MBS trust is also governed by an issue supplement documenting the formation of that MBS trust, the identification of its related assets and the issuance of the related Fannie Mae MBS. The trust agreement or the trust indenture, together with the issue supplement and any amendments, are considered the “trust documents” that govern an individual MBS trust.
Single-Class and Multi-Class Fannie Mae MBS
Fannie Mae MBS trusts may be single-class or multi-class. Single-class MBS are MBS in which the investors receive principal and interest payments on the mortgage loans backing the MBS directly in proportion to their percentage ownership of the MBS issuance. Multi-class MBS are MBS, including Real Estate Mortgage Investment Conduits (“REMICs”), in which the cash flows on the underlying mortgage assets are divided, creating several classes of securities, each of which represents a beneficial ownership interest in the assets of the related MBS trust and entitles the related holder to a specific portion and priority of cash flows. Terms to maturity of some multi-class Fannie Mae MBS, particularly REMIC classes, may match or be shorter than the maturity of the underlying mortgage loans and/or mortgage-related securities. After these classes mature, cash flows received on the underlying mortgage assets are allocated to the remaining classes in accordance with the payment terms of the securities. As a result, each of the classes in a multi-class MBS may have a different coupon rate, average life, repayment sensitivity or final maturity. Structured Fannie Mae MBS are either multi-class MBS or single-class MBS that are typically resecuritizations of other single-class Fannie Mae MBS. In a resecuritization, pools of MBS are collected and securitized.
Purchases of Loans from Our MBS Trusts
Under the terms of our MBS trust documents, we have the option or, in some instances, the obligation, to purchase mortgage loans that meet specific criteria from an MBS trust. Our acquisition cost for these loans is the unpaid principal balance of the loan plus accrued interest.
In deciding whether and when to exercise our option to purchase a loan from a single-family MBS trust, we consider a variety of factors, including: our legal ability to purchase loans under the terms of the trust documents; whether we have agreed to modify the loan; our mission and public policy; our loss mitigation strategies and the

Fannie Mae 2016 Form 10-K
 
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Business | Mortgage Securitizations

exposure to credit losses we face under our guaranty; our cost of funds; the impact on our results of operations; relevant market yields; the accounting impact; the administrative costs associated with purchasing and holding the loans; counterparty exposure to lenders that have agreed to cover losses associated with delinquent loans; and general market conditions. The weight we give to these factors changes depending on market circumstances and other factors.
The cost of purchasing most delinquent loans from single-family Fannie Mae MBS trusts and holding them in our retained mortgage portfolio is currently less than the cost of advancing delinquent payments to security holders. We generally purchase loans from single-family MBS trusts as they become four or more consecutive monthly payments delinquent. During 2016, we purchased delinquent loans with an unpaid principal balance of $11.1 billion from our single-family MBS trusts. We expect to continue purchasing loans from single-family MBS trusts as they become four or more consecutive monthly payments delinquent subject to market conditions, economic benefit, servicer capacity and other factors, including the limit on the amount of mortgage assets that we may own pursuant to the senior preferred stock purchase agreement and FHFA’s portfolio plan requirements.
For our multifamily MBS trusts, we typically exercise our option to purchase a loan from the trust if the loan is delinquent as to four or more consecutive monthly payments, whether those payments were missed in whole or in part.
Conservatorship and Treasury Agreements
Conservatorship
On September 6, 2008, the Director of FHFA appointed FHFA as our conservator, pursuant to authority provided by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended, including by the Federal Housing Finance Regulatory Reform Act of 2008 (together, the “GSE Act”). The conservatorship is a statutory process designed to preserve and conserve our assets and property and put the company in a sound and solvent condition.
The conservatorship has no specified termination date and there continues to be significant uncertainty regarding the future of our company, including how long the company will continue to exist in its current form, the extent of our role in the market, how long we will be in conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated, and whether we will continue to exist following conservatorship. For more information on the risks to our business relating to the conservatorship and uncertainties regarding the future of our company and business, as well as the adverse effects of the conservatorship on the rights of holders of our common and preferred stock, see “Risk Factors.”
Our conservatorship could terminate through a receivership. For information on the circumstances under which FHFA is required or permitted to place us into receivership and the potential consequences of receivership, see “Legislation and Regulation—GSE Act and Other Regulation of Our Business—Receivership” and “Risk Factors.”
Management of the Company during Conservatorship
Upon its appointment, the conservator immediately succeeded to (1) all rights, titles, powers and privileges of Fannie Mae, and of any shareholder, officer or director of Fannie Mae with respect to Fannie Mae and its assets, and (2) title to the books, records and assets of any other legal custodian of Fannie Mae. The conservator subsequently delegated specified authorities to our Board of Directors and delegated to management the authority to conduct our day-to-day operations. In connection with its delegation of authority, FHFA has instructed the Board to oversee that management consults with and obtains the written approval of the conservator before taking action in any of the areas described in “Directors, Executive Officers and Corporate Governance—Corporate Governance—Conservatorship and Delegation of Authority to Board of Directors,” which includes matters that require the approval of or consultation with Treasury under the senior preferred stock purchase agreement. FHFA’s instructions also require the company to notify FHFA of planned changes in business processes or operations, so that FHFA may participate in decision-making as FHFA determines appropriate. The conservator retains the authority to amend or withdraw its delegations at any time.
Our directors serve on behalf of the conservator and exercise their authority as directed by and with the approval, where required, of the conservator. Our directors have no fiduciary duties to any person or entity except to the

Fannie Mae 2016 Form 10-K
 
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Business | Conservatorship and Treasury Agreements

conservator. Accordingly, our directors are not obligated to consider the interests of the company, the holders of our equity or debt securities or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator.
Because we are in conservatorship, our common stockholders currently do not have the ability to elect directors or to vote on other matters. The conservator eliminated common and preferred stock dividends (other than dividends on the senior preferred stock issued to Treasury) during the conservatorship.
Powers of the Conservator under the GSE Act
FHFA has broad powers when acting as our conservator. As conservator, FHFA can direct us to enter into contracts or enter into contracts on our behalf. Further, FHFA may transfer or sell any of our assets or liabilities (subject to limitations and post-transfer notice provisions for transfers of certain types of financial contracts), without any approval, assignment of rights or consent of any party. The GSE Act provides, however, 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. Neither the conservatorship nor the terms of our agreements with Treasury change our obligation to make required payments on our debt securities or perform under our mortgage guaranty obligations.
Treasury Agreements
On September 7, 2008, we, through FHFA, in its capacity as conservator, and Treasury entered into a senior preferred stock purchase agreement, which was amended and restated on September 26, 2008. The amended and restated agreement was subsequently amended on May 6, 2009, December 24, 2009 and August 17, 2012. Unless the context indicates otherwise, references in this report to the senior preferred stock purchase agreement refer to the agreement as amended through August 17, 2012. The terms of the senior preferred stock purchase agreement, senior preferred stock and the warrant discussed below continue to apply to us even if we are released from conservatorship. See “Risk Factors” for a description of the risks to our business relating to the Treasury agreements, as well as the adverse effects of the senior preferred stock and the warrant on the rights of holders of our common stock and other series of preferred stock.
Senior Preferred Stock Purchase Agreement and Related Issuance of Senior Preferred Stock and Common Stock Warrant
Senior Preferred Stock Purchase Agreement
Under the senior preferred stock purchase agreement, we issued to Treasury (a) one million shares of Variable Liquidation Preference Senior Preferred Stock, Series 2008-2, which we refer to as the “senior preferred stock,” and (b) a warrant to purchase, for a nominal price, shares of common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis at the time the warrant is exercised, which we refer to as the “warrant.”
The senior preferred stock and warrant were issued to Treasury as an initial commitment fee in consideration of the commitment from Treasury to provide funds to us under the terms and conditions set forth in the senior preferred stock purchase agreement. The senior preferred stock purchase agreement provides that, on a quarterly basis, we may draw funds up to the amount, if any, by which our total liabilities exceed our total assets, as reflected in our consolidated balance sheet, prepared in accordance with generally accepted accounting principles (“GAAP”), for the applicable fiscal quarter (referred to as the “deficiency amount”), up to the maximum amount of remaining funding under the agreement. As of the date of this filing, the maximum amount of remaining funding under the agreement is $117.6 billion. If we were to draw additional funds from Treasury under the agreement in a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the agreement. The senior preferred stock purchase agreement provides that the deficiency amount will be calculated differently if we become subject to receivership or other liquidation process.
The terms of the senior preferred stock purchase agreement provided for the payment of an unspecified quarterly commitment fee to Treasury; however, the August 2012 amendment to the agreement provided that this commitment fee will not be set, accrue or be payable, as long as the current dividend payment provisions of the senior preferred stock remain in effect.

Fannie Mae 2016 Form 10-K
 
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Treasury’s funding commitment under the senior preferred stock purchase agreement has no expiration date. The senior preferred stock purchase agreement provides that Treasury’s funding commitment will terminate under any of the following circumstances: (1) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding commitment at that time; (2) the payment in full of, or reasonable provision for, all of our liabilities (whether or not contingent, including mortgage guaranty obligations); or (3) the funding by Treasury of the maximum amount that may be funded under the agreement. In addition, Treasury may terminate its funding commitment and declare the senior preferred stock purchase agreement null and void if a court vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of the conservator or otherwise curtails the conservator’s powers. Treasury may not terminate its funding commitment under the agreement solely by reason of our being in conservatorship, receivership or other insolvency proceeding, or due to our financial condition or any adverse change in our financial condition.
The senior preferred stock purchase agreement provides that most provisions of the agreement may be waived or amended by mutual written agreement of the parties; however, no waiver or amendment of the agreement is permitted that would decrease Treasury’s aggregate funding commitment or add conditions to Treasury’s funding commitment if the waiver or amendment would adversely affect in any material respect the holders of our debt securities or guaranteed Fannie Mae MBS.
In the event of our default on payments with respect to our debt securities or guaranteed Fannie Mae MBS, if Treasury fails to perform its obligations under its funding commitment and if we and/or the conservator are not diligently pursuing remedies in respect of that failure, the holders of our debt securities or Fannie Mae MBS may file a claim in the United States Court of Federal Claims for relief requiring Treasury to fund to us the lesser of (1) the amount necessary to cure the payment defaults on our debt and Fannie Mae MBS and (2) the lesser of (a) the deficiency amount and (b) the maximum amount that may be funded under the agreement less the aggregate amount of funding previously provided under the commitment. Any payment that Treasury makes under those circumstances will be treated for all purposes as a draw under the senior preferred stock purchase agreement that will increase the liquidation preference of the senior preferred stock.
Senior Preferred Stock
Pursuant to the senior preferred stock purchase agreement, we issued one million shares of senior preferred stock to Treasury on September 8, 2008 with an aggregate initial liquidation preference of $1.0 billion. The stock’s liquidation preference is subject to adjustment. For any dividend period for which dividends are payable, to the extent that dividends are not paid in cash they will accrue and be added to the liquidation preference. In addition, any amounts Treasury pays to us pursuant to its funding commitment under the senior preferred stock purchase agreement and any quarterly commitment fees that are either not paid in cash to Treasury or not waived by Treasury will be added to the liquidation preference. Accordingly, the aggregate liquidation preference of the senior preferred stock was $117.1 billion as of December 31, 2016.
Treasury, as holder of the senior preferred stock, is entitled to receive, when, as and if declared, out of legally available funds, cumulative quarterly cash dividends. Pursuant to the August 2012 amendment to the agreement, beginning in 2013, the method for calculating the amount of dividends for each quarter was changed from an annual rate of 10% per year on the then-current liquidation preference of the senior preferred stock to an amount determined based on our net worth as of the end of the immediately preceding fiscal quarter. Our net worth as defined by the agreement is the amount, if any, by which our total assets (excluding Treasury’s funding commitment and any unfunded amounts related to the commitment) exceed our total liabilities (excluding any obligation in respect of capital stock), in each case as reflected on our balance sheet prepared in accordance with GAAP. For each dividend period from January 1, 2013 through and including December 31, 2017, the dividend amount will be the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. The capital reserve amount was initially $3.0 billion for dividend periods in 2013 and decreases by $600 million each year until it reaches zero on January 1, 2018. Accordingly, the capital reserve amount was $1.2 billion for dividend periods in 2016 and decreased to $600 million for dividend periods in 2017. For each dividend period beginning in 2018, the dividend amount will be the entire amount of our net worth, if any, as of the end of the immediately preceding fiscal quarter. As a result of these dividend payment provisions and quarterly directives from our conservator, when we have quarterly earnings that result in a net worth greater than the applicable capital reserve amount, we will pay dividends to Treasury in the next quarter; but if our net worth does not exceed the applicable capital reserve amount as of the end of a quarter, then we will not be required to accrue or pay any dividends in the next quarter. See “Risk Factors” for a discussion

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of the risks relating to our limited and declining capital reserves and our dividend obligations to Treasury on the senior preferred stock.
The senior preferred stock ranks ahead of our common stock and all other outstanding series of our preferred stock, as well as any capital stock we issue in the future, as to both dividends and rights upon liquidation. The senior preferred stock provides that we may not, at any time, declare or pay dividends on, make distributions with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any common stock or other securities ranking junior to the senior preferred stock unless (1) full cumulative dividends on the outstanding senior preferred stock (including any unpaid dividends added to the liquidation preference) have been declared and paid in cash, and (2) all amounts required to be paid with the net proceeds of any issuance of capital stock for cash (as described in the following paragraph) have been paid in cash. Shares of the senior preferred stock are not convertible. Shares of the senior preferred stock have no general or special voting rights, other than those set forth in the certificate of designation for the senior preferred stock or otherwise required by law. The consent of holders of at least two-thirds of all outstanding shares of senior preferred stock is generally required to amend the terms of the senior preferred stock or to create any class or series of stock that ranks prior to or on parity with the senior preferred stock.
We are not permitted to redeem the senior preferred stock prior to the termination of Treasury’s funding commitment under the senior preferred stock purchase agreement. Moreover, we are not permitted to pay down the liquidation preference of the outstanding shares of senior preferred stock except to the extent of (1) accrued and unpaid dividends previously added to the liquidation preference and not previously paid down; and (2) quarterly commitment fees previously added to the liquidation preference and not previously paid down. In addition to these exceptions, if we issue any shares of capital stock for cash while the senior preferred stock is outstanding, the net proceeds of the issuance must be used to pay down the liquidation preference of the senior preferred stock; however, the liquidation preference of each share of senior preferred stock may not be paid down below $1,000 per share prior to the termination of Treasury’s funding commitment. Following the termination of Treasury’s funding commitment, we may pay down the liquidation preference of all outstanding shares of senior preferred stock at any time, in whole or in part.
In December 2015, as part of a funding bill, Congress enacted legislation prohibiting Treasury from disposing of its Fannie Mae and Freddie Mac senior preferred stock until January 1, 2018, unless legislation is enacted that includes specific instruction for its disposition.
Common Stock Warrant
Pursuant to the senior preferred stock purchase agreement, on September 7, 2008, we, through FHFA, in its capacity as conservator, issued a warrant to purchase common stock to Treasury. The warrant gives Treasury the right to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis on the date of exercise, for an exercise price of $0.00001 per share. The warrant may be exercised in whole or in part at any time on or before September 7, 2028.
Covenants under Treasury Agreements
The senior preferred stock purchase agreement and warrant contain covenants that significantly restrict our business activities and require the prior written consent of Treasury before we can take certain actions. As a result of these covenants, we can no longer obtain additional equity financing (other than pursuant to the senior preferred stock purchase agreement) and we are limited in the amount and type of debt financing we may obtain.
These covenants prohibit us from taking a number of actions, including:
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paying dividends or other distributions on or repurchasing our equity securities (other than the senior preferred stock or warrant);
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issuing additional equity securities (except in limited instances);
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selling, transferring, leasing or otherwise disposing of any assets, except for dispositions for fair market value in limited circumstances including if (a) the transaction is in the ordinary course of business and consistent with past practice or (b) in one transaction or a series of related transactions if the assets have a fair market value individually or in the aggregate of less than $250 million;
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issuing subordinated debt; 

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entering into any new compensation arrangements or increasing amounts or benefits payable under existing compensation arrangements for any of our executive officers (as defined by Securities and Exchange Commission (“SEC”) rules) without the consent of the Director of FHFA, in consultation with the Secretary of the Treasury; and
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seeking or permitting the termination of our conservatorship, other than in connection with a receivership.
We also are subject to limits, which are described below, on the amount of mortgage assets that we may own and the total amount of our indebtedness.
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Mortgage Asset Limit. We are restricted in the amount of mortgage assets that we may own. Pursuant to the August 2012 amendment to the agreement, the maximum allowable amount of our mortgage assets was reduced to $650 billion on December 31, 2012 and, on each December 31 thereafter, we are required to reduce our mortgage assets to 85% of the maximum allowable amount that we were permitted to own as of December 31 of the immediately preceding calendar year, until the amount of our mortgage assets reaches $250 billion in 2018. Our mortgage asset limit under the agreement was $339.3 billion as of December 31, 2016 and will be $288.4 billion as of December 31, 2017. For purposes of the agreement, the definition of mortgage asset is based on the unpaid principal balance of such assets and does not reflect market valuation adjustments, allowance for loan losses, impairments, unamortized premiums and discounts and the impact of our consolidation of variable interest entities. Based on this definition, our mortgage assets were $272.4 billion as of December 31, 2016. We disclose the amount of our mortgage assets on a monthly basis under the caption “Gross Mortgage Portfolio” in our Monthly Summaries, which are available on our website and announced in a press release.
In 2014, FHFA requested that we cap the portfolio each year at 90% of the annual limit under our senior preferred stock purchase agreement with Treasury. FHFA’s request noted that we may seek FHFA permission to increase this cap up to 95% of the annual limit under our senior preferred stock purchase agreement with Treasury upon written request and with a documented basis for exception, such as changed market conditions. To comply with FHFA’s request, we reduced our mortgage portfolio to $272.4 billion as of December 31, 2016, below the $305.4 billion cap requested by FHFA. See “MD&A—Retained Mortgage Portfolio” for more information about our retained mortgage portfolio.
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Debt Limit. We are subject to a limit on the amount of our indebtedness. Our debt limit in 2016 was $479.0 billion and in 2017 is $407.2 billion. For every year thereafter, our debt cap will equal 120% of the amount of mortgage assets we are allowed to own under the senior preferred stock purchase agreement on December 31 of the immediately preceding calendar year. The definition of indebtedness for purposes of our debt cap is based on the par value of each applicable loan and does not reflect the impact of consolidation of variable interest entities. Under this definition, our indebtedness as of December 31, 2016 was $328.8 billion. We disclose the amount of our indebtedness on a monthly basis under the caption “Total Debt Outstanding” in our Monthly Summaries, which are available on our website and announced in a press release.
Annual Risk Management Plan Covenant. We are required to provide an annual risk management plan to Treasury each year we remain in conservatorship. Each plan is required to set out our strategy for reducing our risk profile, describe the actions we will take to reduce the financial and operational risk associated with each of our business segments, and include an assessment of our performance against the planned actions described in the prior year’s plan. We submitted our most recent annual risk management plan to Treasury in December 2016.
Lawsuits Challenging the Senior Preferred Stock Purchase Agreements and Conservatorship
Several lawsuits have been filed by preferred and common stockholders of Fannie Mae and Freddie Mac against one or more of the United States, Treasury and FHFA challenging actions taken by the defendants relating to the senior preferred stock purchase agreements and the conservatorships of Fannie Mae and Freddie Mac. Some of these lawsuits also contain claims against Fannie Mae and Freddie Mac. For a description of these lawsuits, see “Legal Proceedings” and “Note 18, Commitments and Contingencies.”

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Legislation and Regulation
Housing Finance Reform
Policymakers and others have focused significant attention in recent years on how to reform the nation’s housing finance system, including what role, if any, the GSEs should play. We describe below recent actions and statements relating to housing finance reform from the Administration and Congress, as well as actions our conservator has been taking to further housing finance reform.
Administration Developments
The previous Administration endorsed the wind down of Fannie Mae and Freddie Mac through a responsible transition and the enactment of comprehensive housing finance reform legislation. The current Administration has not articulated a formal position on housing finance reform or the future of the GSEs; however, the Treasury Secretary indicated in his confirmation hearing that he is focused on housing finance reform and a solution to the current status of Fannie Mae and Freddie Mac.
Legislative Developments
Several bills were introduced and considered in the Senate and the House of Representatives in prior sessions of Congress relating to housing finance reform. The current session of Congress began in January 2017. The current Chairman of the Senate Committee on Banking, Housing and Urban Affairs and the current Chairman of the House Committee on Financial Services have both stated that passing comprehensive housing finance reform is a priority of their committees. Accordingly, we expect Congress to continue to consider housing finance reform legislation in the current congressional session that could result in significant changes in our structure and role in the future, including proposals that would result in Fannie Mae’s liquidation or dissolution. As a result, there continues to be significant uncertainty regarding the future of our company. See “Risk Factors” for a discussion of the risks to our business relating to the uncertain future of our company.
Conservator Developments and Strategic Goals
FHFA has taken a number of steps as conservator to further the reform of the housing finance system. FHFA’s current strategic goals for Fannie Mae and Freddie Mac’s conservatorships are to:
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Maintain, in a safe and sound manner, credit availability and foreclosure prevention activities for new and refinanced mortgages to foster liquid, efficient, competitive and resilient national housing finance markets.
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Reduce taxpayer risk through increasing the role of private capital in the mortgage market.
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Build a new single-family infrastructure for use by Fannie Mae and Freddie Mac and adaptable for use by other participants in the secondary market in the future.
Beginning in 2012, FHFA has released annual corporate performance objectives for Fannie Mae and Freddie Mac, referred to as the conservatorship scorecard. The conservatorship scorecard details the specific priorities each year for implementing FHFA’s strategic goals. Some of the actions we are taking pursuant to the mandates of the scorecards are helping to build the policies and infrastructure for a safer and sustainable housing finance system. FHFA’s conservatorship scorecards in recent years have included objectives relating to credit risk transfer transactions, development of a common securitization platform for Fannie Mae and Freddie Mac, development of a single mortgage-backed security for Fannie Mae and Freddie Mac, and mortgage data standardization initiatives.
For several years, FHFA’s conservatorship scorecards have included objectives relating to the development of a common securitization platform that can be used to perform certain aspects of the securitization process and the development of a single mortgage-backed security for Fannie Mae and Freddie Mac. FHFA’s 2017 conservatorship scorecard states that the common securitization platform and single security are significant, multi-year initiatives, and FHFA expects these inter-related projects to remain ongoing conservatorship priorities. More information on these initiatives is provided below.
Common Securitization Platform. In October 2013, at the direction of our conservator, Fannie Mae and Freddie Mac established Common Securitization Solutions, LLC (“CSS”), a jointly owned limited liability company formed to design, develop, build and ultimately operate a common securitization platform. The intended purpose of the common securitization platform is to replace certain elements of Fannie Mae’s and Freddie Mac’s respective

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proprietary systems for securitizing mortgages and performing associated back office and administrative functions. In addition, FHFA has specified that the design of the common securitization platform should allow for the integration of additional market participants in the future.
In 2014, Fannie Mae and Freddie Mac executed three agreements relating to the governance and operation of CSS, and appointed a chief executive officer and four members of the CSS Board of Managers, two each from Fannie Mae and Freddie Mac. CSS currently operates as a separate company from us and Freddie Mac, with funding and limited administrative support services and other resources provided to it by us and Freddie Mac. In November 2016, Fannie Mae, Freddie Mac and CSS entered into a Customer Services Agreement that sets forth the terms under which CSS will provide securitization services to us and Freddie Mac.
In November 2016, Freddie Mac began using the common securitization platform for some activities relating to the issuance of its current single-class fixed-rate mortgage-backed securities. We continue to work with FHFA, Freddie Mac and CSS on building and testing the common securitization platform, as well as on implementing required changes to our systems and operations to integrate with the common securitization platform. In addition, we continue to consult with an industry advisory group on the common securitization platform and single security.
Single Security. Since 2014, we, Freddie Mac and FHFA have been working on developing and implementing a single mortgage-backed security for Fannie Mae and Freddie Mac. FHFA has determined that the following features will apply to these single securities:
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Fannie Mae and Freddie Mac will each issue and guarantee single securities directly backed by mortgage loans it has acquired, referred to as first-level securities, and will not cross-guarantee each other’s first-level securities;
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mortgage loans backing first-level single securities will be limited to fixed-rate mortgage loans now eligible for financing through the “To-Be-Announced” (“TBA”) market;
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Fannie Mae and Freddie Mac will each be able to issue second-level single securities, also referred to as resecuritizations, backed by first- or second-level securities issued by either company;
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the key features of the new single security will be the same as those of the current Fannie Mae MBS;
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the loan- and security-level disclosures for single securities will closely resemble those of Freddie Mac participation certificates (“Freddie Mac PCs”); and
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investors in Freddie Mac PCs will have the option to exchange legacy Freddie Mac PCs for comparable single securities backed by the same mortgage loans; there will not be an exchange option for legacy Fannie Mae MBS because FHFA expects investors to treat them as fungible with the single securities.
In December 2016, FHFA announced that it expects to announce in the first quarter of 2017 a timeframe for implementation of the single security by Fannie Mae and Freddie Mac.
Historically, Fannie Mae MBS has had a trading advantage over comparable Freddie Mac PCs. One of FHFA’s stated objectives in developing a single security is to reduce the costs to Freddie Mac and taxpayers that result from differences in liquidity of Fannie Mae MBS and Freddie Mac PCs. As the implementation date of the single security approaches, some Fannie Mae MBS and comparable Freddie Mac PCs have traded closer to or at parity. See “Risk Factors” for a discussion of the risks to our business associated with a single security for Fannie Mae and Freddie Mac.
For more information on FHFA’s 2017 conservatorship scorecard objectives, see our Current Report on Form 8-K filed with the SEC on December 16, 2016. For information on actions we took in 2016 pursuant to FHFA’s 2016 conservatorship scorecard, see “Executive Compensation—Compensation Discussion and Analysis—Determination of 2016 Compensation—Assessment of Corporate Performance on 2016 Conservatorship Scorecard.”
Charter Act
Fannie Mae is a shareholder-owned corporation organized and existing under the Federal National Mortgage Association Charter Act, which we refer to as the Charter Act or our charter. We were initially established in 1938.
The Charter Act defines our mission of providing liquidity, increasing stability and promoting affordability in the residential mortgage market. Specifically, the Charter Act states that our purposes are to:
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provide stability in the secondary market for residential mortgages;

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respond appropriately to the private capital market;
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provide ongoing assistance to the secondary market for residential mortgages (including activities relating to mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and
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promote access to mortgage credit throughout the nation (including central cities, rural areas and underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing.
The Charter Act also sets forth the activities that we are permitted to conduct and describes our general corporate powers. We summarize these provisions of the Charter Act below.
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Purchase and securitization of mortgage loans. Our charter permits us to purchase and securitize mortgage loans secured by single-family and multifamily properties. We are also authorized to service, sell, lend on the security of, and otherwise deal in mortgage loans.
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Principal balance limitations. Single-family conventional mortgage loans that we purchase or securitize are subject to maximum original principal balance limits, known as “conforming loan limits.” The conforming loan limits are established each year based on the average prices of one-family residences. FHFA set the national conforming loan limit for mortgages that finance one-family residences at $424,100 for 2017, with higher limits for mortgages secured by two-family to four-family residences and in four statutorily-designated states and territories (Alaska, Hawaii, Guam and the U.S. Virgin Islands). In addition, higher loan limits of up to 150% of the otherwise applicable loan limit apply in designated high-cost areas. FHFA provides Fannie Mae with the designated high-cost areas annually. For 2006 to 2016, the national conforming loan limit for one-family residences was set at $417,000. The Charter Act does not impose maximum original principal balance limits on loans we purchase or securitize that are insured by the Federal Housing Administration (“FHA”) or guaranteed by the Department of Veterans Affairs (“VA”) or on multifamily mortgage loans that we purchase or securitize.
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Credit enhancement requirements. The Charter Act generally requires credit enhancement on any single-family conventional mortgage loan that we purchase or securitize that has a loan-to-value (“LTV”) ratio over 80% at the time of purchase. The credit enhancement required by our charter may take the form of one or more of the following: (1) insurance or a guaranty by a qualified insurer on the portion of the unpaid principal balance of the mortgage that exceeds 80%; (2) a seller’s agreement to repurchase or replace the mortgage in the event of default; or (3) retention by the seller of at least a 10% participation interest in the mortgage. Regardless of LTV ratio, the Charter Act does not require us to obtain credit enhancement to purchase or securitize loans insured by FHA or guaranteed by the VA.
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Issuances of our securities. We are authorized, upon the approval of the Secretary of the Treasury, to issue debt obligations and mortgage-related securities. Neither the U.S. government nor any of its agencies guarantees, directly or indirectly, our debt or mortgage-related securities.
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Authority of Treasury to purchase our securities. At the discretion of the Secretary of the Treasury, Treasury may purchase our obligations up to a maximum of $2.25 billion outstanding at any one time.
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Exemptions for our securities. The Charter Act generally provides that our securities are exempt under the federal securities laws administered by the SEC. As a result, we are not required to file registration statements with the SEC under the Securities Act of 1933 with respect to offerings of any of our securities. Our non-equity securities are also exempt securities under the Securities Exchange Act of 1934 (the “Exchange Act”). However, our equity securities are not treated as exempt securities for purposes of Sections 12, 13, 14 or 16 of the Exchange Act. Consequently, we are required to file periodic and current reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
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Exemption from specified taxes. Fannie Mae is exempt from taxation by states, territories, counties, municipalities and local taxing authorities, except for taxation by those authorities on our real property. We are not exempt from the payment of federal corporate income taxes.
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Limitations. We may not originate mortgage loans in the primary mortgage market. We also may not advance funds to a mortgage seller on an interim basis, using mortgage loans as collateral, pending the sale

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of the mortgages in the secondary market. In addition, we may only purchase or securitize mortgages on properties located in the United States and its territories.
GSE Act and Other Regulation of Our Business
As a federally chartered corporation, we are subject to government regulation and oversight. FHFA is our primary regulator, and regulates our safety and soundness and our mission. FHFA is an independent agency of the federal government with general supervisory and regulatory authority over Fannie Mae, Freddie Mac and the Federal Home Loan Banks (“FHLBs”). The Department of Housing and Urban Development (“HUD”) is our regulator with respect to fair lending matters. Our regulators also include the SEC and Treasury.
The GSE Act provides FHFA with safety and soundness authority that is comparable to and in some respects broader than that of the federal banking agencies. We describe below regulations applicable to us pursuant to the GSE Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and other legislation. The current Administration and some members of Congress have indicated a desire to amend the Dodd-Frank Act. If the Dodd-Frank Act is amended, it could affect regulations currently applicable to us and our customers and counterparties.
Capital
We are required by the GSE Act to maintain sufficient capital to meet minimum and risk-based capital levels established by FHFA in order to be classified as “adequately capitalized.” However, because we are under conservatorship, FHFA has suspended our capital classifications and advised us that we will not be subject to corrective action requirements that would ordinarily result from our receiving a capital classification of “undercapitalized.” We continue to submit capital reports to FHFA and FHFA monitors our capital levels, but FHFA has stated that it does not intend to publish our risk-based capital level or our critical capital level during the conservatorship.
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Minimum Capital. Under the GSE Act, we are required to maintain an amount of core capital that equals or exceeds our minimum capital requirement. The GSE Act defines core capital as the sum of the stated value of outstanding common stock (common stock less treasury stock), the stated value of outstanding non-cumulative perpetual preferred stock, paid-in capital, and retained earnings, as determined in accordance with GAAP. Our minimum capital requirement is generally equal to the sum of 2.50% of on-balance sheet assets and 0.45% of off-balance sheet obligations. For purposes of minimum capital, FHFA has directed us to continue reporting loans backing Fannie Mae MBS held by third parties based on 0.45% of the unpaid principal balance regardless of whether these loans have been consolidated pursuant to accounting rules. The GSE Act provides FHFA with broad authority to increase the level of our required minimum capital and to establish capital or reserve requirements for specific products and activities.
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Risk-Based Capital. The GSE Act requires FHFA to establish risk-based capital requirements for Fannie Mae and Freddie Mac, to ensure that we operate in a safe and sound manner. Existing risk-based capital regulation under the GSE Act ties our capital requirements to the risk in our book of business, as measured by a stress test model. FHFA has discontinued stress test simulations under the existing rule. We continue to submit detailed profiles of our books of business to FHFA to support FHFA’s monitoring of our business activity and their research into future risk-based capital rules.
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Critical Capital. The GSE Act also establishes a critical capital requirement, which is the amount of core capital below which we would be classified as “critically undercapitalized.” Under the GSE Act, such classification is a discretionary ground for appointing a conservator or receiver. Our critical capital requirement is generally equal to the sum of 1.25% of on-balance sheet assets and 0.25% of off-balance sheet obligations. FHFA has directed us, for purposes of critical capital, to continue reporting loans backing Fannie Mae MBS held by third parties based on 0.25% of the unpaid principal balance, notwithstanding our consolidation of substantially all of the loans backing these securities.
Stress Testing
The Dodd-Frank Act requires certain financial companies to conduct annual stress tests to determine whether the companies have the capital necessary to absorb losses as a result of adverse economic conditions. Under FHFA regulations implementing this requirement, each year we are required to conduct a stress test using three different scenarios of financial conditions provided by FHFA: baseline, adverse and severely adverse. In conducting the stress test, we are required to calculate the impact of the scenario conditions on our capital levels and other

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specified measures of financial condition and performance over a period of at least nine quarters. In accordance with FHFA regulations, we submitted our most recent stress test results to FHFA and the Federal Reserve Board of Governors in May 2016 and published our most recent stress test results for the severely adverse scenario on our website in August 2016.
Portfolio
The GSE Act requires FHFA to establish standards governing our portfolio holdings, to ensure that they are backed by sufficient capital and consistent with our mission and safe and sound operations. FHFA is also required to monitor our portfolio and, in some circumstances, may require us to dispose of or acquire assets. In 2010, FHFA adopted, as the standard for our portfolio holdings, the portfolio limits specified in the senior preferred stock purchase agreement described under “Conservatorship and Treasury Agreements—Treasury Agreements—Covenants under Treasury Agreements,” as it may be amended from time to time. The rule is effective for as long as we remain subject to the terms and obligations of the senior preferred stock purchase agreement.
New Products and Activities
The GSE Act requires us to request FHFA’s approval before initially offering any new product, subject to certain exceptions. The GSE Act also requires us to provide FHFA with written notice before commencing any new activity. In July 2009, FHFA published an interim final rule implementing these provisions of the GSE Act. Subsequently, the then-Acting Director of FHFA concluded that permitting us to engage in new products was inconsistent with the goals of the conservatorship. FHFA therefore instructed us not to submit new product requests under the rule. In December 2016, FHFA published a final rule implementing our duty to serve three specified underserved markets, which is described below under “Duty to Serve Underserved Markets.” Among other things, the rule states that we may propose a new product for FHFA consideration if we determine that it would facilitate our duty to serve obligations and would be consistent with safety and soundness.
Prudential Management and Operations Standards
As required by the GSE Act, in June 2012, FHFA published a final rule establishing prudential standards relating to the management and operations of Fannie Mae, Freddie Mac and the FHLBs in ten areas: (1) internal controls and information systems; (2) independence and adequacy of internal audit systems; (3) management of market risk exposure; (4) management of market risk—measurement systems, risk limits, stress testing, and monitoring and reporting; (5) adequacy and maintenance of liquidity and reserves; (6) management of asset and investment portfolio growth; (7) investments and acquisitions of assets; (8) overall risk management processes; (9) management of credit and counterparty risk; and (10) maintenance of adequate records. The rule also includes provisions addressing the general responsibilities of boards of directors and senior management. In November 2015, FHFA amended these provisions and designated them as an additional prudential standard in order to clarify that they have the same effect and can be enforced in the same manner as the ten enumerated standards.
Affordable Housing Allocations
The GSE Act requires us to set aside in each fiscal year an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of our total new business purchases and to pay this amount to specified HUD and Treasury funds. FHFA suspended this requirement in November 2008 and directed us to not set aside or allocate funds until further notice. In December 2014, FHFA terminated this suspension and directed us to begin making contributions to the funds. FHFA’s directive reinstating these contributions requires us to set aside amounts during each fiscal year beginning in fiscal year 2015, and to allocate or otherwise transfer the amounts set aside within 60 days after the end of each fiscal year, unless during such fiscal year we have made a draw from Treasury under the terms of the senior preferred stock purchase agreement or unless such allocation or transfer would cause us to have to make a draw from Treasury under the agreement, in which case we will make no allocation or transfer for that year and the amounts set aside for that year will be reversed. We are prohibited from redirecting or passing through the cost of these allocations to originators of mortgages that we purchase or securitize.
Executive Compensation
Fannie Mae’s Charter provides that the company has the power to pay compensation to our executives that the Board of Directors determines is reasonable and comparable with the compensation of executives performing similar duties in similar businesses, except that a significant portion of potential compensation must be based on

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our performance. The GSE Act directs FHFA to prohibit us from providing unreasonable or non-comparable compensation to our executive officers. FHFA may at any time review the reasonableness and comparability of an executive officer’s compensation and may require us to withhold any payment to the officer during such review. In addition, pursuant to the Stop Trading on Congressional Knowledge Act (the “STOCK Act”) and related regulations issued by FHFA, our senior executives are prohibited from receiving bonuses during any period of conservatorship on or after April 4, 2012.
FHFA is authorized by the GSE Act to prohibit or limit certain golden parachute and indemnification payments to directors, officers and certain other parties. FHFA regulation requires the approval of the Director of FHFA before we may enter into any agreement providing compensation in connection with the termination of an executive officer’s employment. FHFA regulation also generally prohibits us from making golden parachute payments to any current or former director, officer, employee, controlling stockholder or agent of the company during any period in which we are in conservatorship, receivership or other troubled condition unless either a specific exception applies or the Director of FHFA approves the payments.
In November 2015, the Equity in Government Compensation Act of 2015 was enacted. This law directs the Director of FHFA to suspend the compensation packages approved for 2015 for Fannie Mae’s and Freddie Mac’s chief executive officers and, in lieu of such packages, to establish the compensation and benefits that were in effect for such officers as of January 1, 2015. The law also provides that these officers’ compensation and benefits may not thereafter be increased and these restrictions on chief executive officer compensation are applicable as long as Fannie Mae and Freddie Mac are in conservatorship or receivership. In accordance with this law, on December 1, 2015, the Director of FHFA directed Fannie Mae to decrease the total target annual direct compensation of our chief executive officer to $600,000, effective November 25, 2015. 
In April 2016, FHFA reissued its portion of a proposed rule under Section 956 of the Dodd-Frank Act relating to incentive compensation. Section 956 requires that FHFA and other financial regulators issue rules or guidelines: (1) prohibiting incentive-based payment arrangements that the regulators determine encourage inappropriate risks by providing excessive compensation or that could lead to material financial loss; and (2) requiring enhanced disclosure and reporting of incentive-based compensation arrangements. The proposed rule provides that, while we are in conservatorship, FHFA will determine how to best fulfill the requirements and purpose of Section 956, taking into consideration the possible duration of the conservatorship, the nature of our governance, the need to attract and retain management and other talent, limitations on the ability to employ equity-like instruments as incentive-based compensation, and any other circumstances FHFA deems relevant. 
For more information on our executive compensation program and regulatory and other legal requirements affecting our executive compensation, see “Executive Compensation.”
Fair Lending
The GSE Act requires the Secretary of HUD to assure that the GSEs meet their fair lending obligations. Among other things, HUD periodically reviews and comments on our underwriting and appraisal guidelines to ensure consistency with the Fair Housing Act. 
Guaranty Fees
In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) under which, at the direction of FHFA, we increased the guaranty fee on all single-family residential mortgages delivered to us by 10 basis points effective April 1, 2012. The revenue generated by this fee increase is paid to Treasury and helps offset the cost of a two-month extension of the payroll tax cut from January 1, 2012 through February 29, 2012. FHFA and Treasury advised us to remit this fee increase to Treasury with respect to all loans acquired by us on or after April 1, 2012 and before January 1, 2022, and to continue to remit these amounts to Treasury on and after January 1, 2022 with respect to loans we acquired before this date until those loans are paid off or otherwise liquidated.
From time to time, FHFA establishes requirements for our guaranty fee pricing. In July 2016, FHFA advised us that, as a result of its recently completed comprehensive review of our guaranty fee levels for new acquisitions of single-family mortgages, FHFA, in its regulatory capacity, determined that it was necessary to set minimum base guaranty fees for us. FHFA’s objective is to ensure that guaranty fee reductions do not result in unsafe and unsound conditions. As a result, FHFA established minimum base guaranty fees that generally apply to our acquisitions of 30-year and 15-year fixed-rate loans in lender swap transactions. These new minimum base guaranty fees were implemented in November 2016.

Fannie Mae 2016 Form 10-K
 
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Housing Goals
We are subject to housing goals established by FHFA in accordance with the GSE Act. The housing goals establish specified requirements for our mortgage acquisitions relating to affordability or location. Our single-family performance is measured against the lower of benchmarks established by FHFA or goals-qualifying originations in the primary mortgage market. Multifamily goals are established as a number of units to be financed. We describe these goals and our 2015 performance against the goals below.
Single-Family Housing Goals
FHFA established the following single-family home purchase and refinance housing goal benchmarks for 2015 through 2017. A home purchase mortgage may be counted toward more than one home purchase benchmark.
•
Low-Income Families Home Purchase Benchmark: At least 24% of our acquisitions of single-family owner-occupied purchase money mortgage loans must be affordable to low-income families (defined as income equal to or less than 80% of area median income).
•
Very Low-Income Families Home Purchase Benchmark: At least 6% of our acquisitions of single-family owner-occupied purchase money mortgage loans must be affordable to very low-income families (defined as income equal to or less than 50% of area median income).
•
Low-Income Areas Home Purchase Goal Benchmark: The benchmark level for our acquisitions of single-family owner-occupied purchase money mortgage loans for families in low-income areas is set annually by notice from FHFA, based on the benchmark level for the low-income areas home purchase subgoal (below), plus an adjustment factor reflecting the additional incremental share of mortgages for moderate-income families (defined as income equal to or less than 100% of area median income) in designated disaster areas. FHFA set the overall low-income areas home purchase benchmark goal at 19% for 2015 and at 17% for 2016.
•
Low-Income and High-Minority Areas Home Purchase Subgoal Benchmark: At least 14% of our acquisitions of single-family owner-occupied purchase money mortgage loans must be affordable to families in low-income census tracts or to moderate-income families in high-minority census tracts.
•
Low-Income Families Refinancing Benchmark: At least 21% of our acquisitions of single-family owner-occupied refinance mortgage loans must be affordable to low-income families.
Under the rule, not all of our single-family loan acquisitions that fall within these categories may be counted towards our housing goals. Certain types of loan acquisitions are excluded, such as single-family government loans and loans for single-family rental properties.
If we do not meet these benchmarks, we may still meet our goals. Our single-family housing goals performance is measured against both these benchmarks and against our share of goals-qualifying originations in the primary mortgage market after the release of data reported under the Home Mortgage Disclosure Act (“HMDA”), which is typically released each year in the fall. We are in compliance with the housing goals if we meet either the benchmarks or market share measures.
Multifamily Housing Goals
FHFA established the following multifamily goals and subgoals for 2015 through 2017.
•
Low-Income Families Goal: At least 300,000 multifamily units per year must be affordable to low-income families.
•
Very Low-Income Families Subgoal: At least 60,000 multifamily units per year must be affordable to very low-income families.
•
Small Affordable Multifamily Properties Subgoal: The subgoal for purchases of mortgages on small multifamily properties affordable to low-income families increases each year: 6,000 units in 2015; 8,000 units in 2016; and 10,000 units in 2017.
There is no market-based alternative measurement for the multifamily goal or subgoals.

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Performance Against Housing Goals
In December 2016, FHFA determined that we met three of our five single-family housing goals and all of our multifamily housing goals for 2015. Table 1 displays our performance for 2015 against our single-family housing benchmarks and market share measures, as well as our multifamily housing goals, as validated by FHFA.
Table 1: 2015 Housing Goals Performance
 
 
2015
 
 
 
Result
 
Benchmark
 
Single-Family
Market Level
 
Single-family housing goals:(1)
 
 
 
 
 
 
 
Low-income families home purchases
23.5

%
24

%
23.6

%
 
Very low-income families home purchases
5.6

 
6

 
5.8

 
 
Low-income areas home purchases
20.4

 
19

 
19.8

 
 
Low-income and high-minority areas home purchases
15.6

 
14

 
15.2

 
 
Low-income families refinancing
22.1

 
21

 
22.5

 
 
 
2015
 
 
 
Result
 
Goal
 
 
(in units)
 
Multifamily housing goals:
 
 
 
 
 
Low-income families
307,510

 
300,000

 
 
Very low-income families
69,078

 
60,000

 
 
Small affordable multifamily properties
6,731

 
6,000

 
 
__________
(1) 
Our single-family results and benchmarks are expressed as a percentage of the total number of eligible mortgages acquired during the period.
As shown in Table 1, FHFA determined that we did not meet the single-family low-income families and very-low income families home purchase goals for 2015. FHFA notified us that it determined that achievement of these goals by us was feasible, based on the size and composition of the conventional conforming primary mortgage market for 2015. However, FHFA also determined that, because this was the first year since 2013 that we did not achieve these goals and we missed the goals by narrow amounts, FHFA will not require us to submit a formal housing plan under the GSE Act.
We will report our performance with respect to the 2016 housing goals in March 2017. FHFA will issue a final determination on our 2016 performance after the release of data reported under HMDA later this year.
As described in “Risk Factors,” actions we may take to meet our housing goals and duty to serve requirements described below may increase our credit losses and credit-related expense.
Duty to Serve Underserved Markets
The GSE Act requires that we serve very low-, low-, and moderate-income families in three specified underserved markets: manufactured housing, affordable housing preservation and rural areas. In December 2016, FHFA published a final rule implementing our duty to serve these underserved markets. Under the rule, we are required to adopt an underserved markets plan for each underserved market covering a three-year period that sets forth the activities and objectives we will undertake to meet our duty to serve that market. The development of these plans is subject to a public notice and comment process, and the plans will require FHFA’s “non-objection” before becoming final. Under the current timetable set forth by FHFA, we anticipate our first underserved markets plans will become effective in 2018.
The types of activities that are eligible for duty to serve credit in each underserved market are summarized below:
•
Manufactured housing market. For the manufactured housing market, duty to serve credit will be available for eligible activities relating to manufactured homes (whether titled as real property or personal property (known as chattel)) and loans for specified categories of manufactured housing communities.

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•
Affordable housing preservation market. For the affordable housing preservation market, duty to serve credit will be available for eligible activities relating to preserving the affordability of housing for renters and buyers under specified programs enumerated in the GSE Act and other comparable affordable housing programs administered by state and local governments, subject to FHFA approval. Duty to serve credit will also be available for activities related to small (5 to 50 units) multifamily rental properties, energy efficiency improvements on existing multifamily rental and single-family first lien properties, certain shared equity homeownership programs, the purchase or rehabilitation of certain distressed properties, and activities under HUD’s Choice Neighborhoods Initiative and Rental Assistance Demonstration programs.
•
Rural housing market. For the rural housing market, duty to serve credit will be available for eligible activities related to housing in rural areas, including activities related to housing in high-needs rural regions and for high-needs rural populations.
FHFA could also approve duty to serve credit for additional activities identified in our underserved markets plans. Qualifying activities that promote residential economic diversity in one or more underserved markets could receive extra duty to serve credit. As provided under the rule, FHFA posted its proposed evaluation guidance in January 2017. The guidance communicates FHFA’s expectations regarding the development of the underserved markets plans and describes the annual process by which FHFA will evaluate our achievements under the underserved markets plans. Our performance results will be reported to Congress. If FHFA determines that we failed to meet the requirements of an underserved markets plan, it may result in the imposition of a housing plan.
Swap Transactions; Minimum Capital and Margin Requirements
The Dodd-Frank Act includes provisions requiring additional regulation of swap transactions. Because we are a user of interest rate swaps, the Dodd-Frank Act requires us, among other items, to submit new swap transactions for clearing to a derivatives clearing organization. Additionally, in October 2015, an inter-agency body of regulators issued a final rule under the Dodd-Frank Act governing margin and capital requirements applicable to entities that are subject to their oversight. The first phase of this rule becomes applicable on March 1, 2017 and requires us to collect and provide collateral in excess of the amounts we have historically collected or provided relative to our level of activity, and changes the types of collateral that can be posted. The second phase of this rule is expected to become applicable on September 1, 2020 and will require additional collateral from us and our counterparties, which will increase the costs associated with hedging our retained mortgage portfolio.
Ability to Repay
The Dodd-Frank Act amended the Truth in Lending Act (“TILA”) to require creditors to determine that borrowers have a “reasonable ability to repay” most mortgage loans prior to making such loans. In 2013, the Consumer Financial Protection Bureau (the “CFPB”) issued a final rule under Regulation Z that, among others things, requires creditors to determine a borrower’s “ability to repay” a mortgage loan. If a creditor fails to comply, a borrower may be able to offset a portion of the amount owed in a foreclosure proceeding or recoup monetary damages. The rule offers several options for complying with the ability to repay requirement, including making loans that meet certain terms and characteristics (referred to as “qualified mortgages”), which may provide creditors and their assignees with special protection from liability. Generally, a loan will be a qualified mortgage under the rule if, among other things, (1) the points and fees paid in connection with the loan do not exceed 3% of the total loan amount, (2) the loan term does not exceed 30 years, (3) the loan is fully amortizing with no negative amortization, interest-only or balloon features and (4) the debt-to-income ratio on the loan does not exceed 43% at origination. The CFPB also defined a special class of conventional mortgage loans that will be qualified mortgages if they (1) meet the points and fees, term and amortization requirements of qualified mortgages generally and (2) are eligible for sale to Fannie Mae or Freddie Mac. This class of qualified mortgages expires on the earlier of January 10, 2021 or when the GSEs cease to be in conservatorship or receivership.
Although TILA does not apply to us, as we do not originate loans in the primary mortgage market, these rules apply to the lenders from which we acquire single-family mortgage loans. In May 2013, FHFA directed Fannie Mae and Freddie Mac to limit our acquisition of single-family loans to those loans that meet the points and fees, term and amortization requirements for qualified mortgages, or to loans that are exempt from the ability-to-repay rule, such as loans made to investors. This limitation applies to loans with application dates on or after January 10, 2014, the effective date of the ability-to-repay rule.

Fannie Mae 2016 Form 10-K
 
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Business | Legislation and Regulation

Risk Retention
The Dodd-Frank Act requires financial regulators to jointly prescribe regulations requiring securitizers to retain a portion of the credit risk in assets transferred, sold or conveyed through the issuance of asset-backed securities, with certain exceptions. In October 2014, an inter-agency body of regulators issued a final rule implementing this credit risk retention requirement. The final rule generally requires securitizers to retain at least 5% of the credit risk of the assets they securitize. The rule offers several compliance options, one of which is to have either Fannie Mae or Freddie Mac (so long as they are in conservatorship or receivership with capital support from the United States) securitize and fully guarantee the assets, in which case no further retention of credit risk is required. In addition, securities backed solely by mortgage loans meeting the definition of a “qualified residential mortgage” are exempt from the risk retention requirements of the rule. The rule defines “qualified residential mortgage” to have the same meaning as the term “qualified mortgage” as defined by the CFPB in connection with its ability-to-repay rule under Regulation Z discussed above. The final risk retention rule became effective on December 24, 2015 for single-family mortgage loans and on December 24, 2016 for multifamily mortgage loans.
TILA-RESPA Integrated Disclosure (“TRID”)
The Dodd-Frank Act required the CFPB to streamline and simplify the disclosures required under TILA and the Real Estate Settlement Procedures Act (“RESPA”). In October 2015, the CFPB’s final rule implementing these changes went into effect. Although this rule applies to mortgage originators and is not directly applicable to us, we could face potential liability for certain errors in the new required disclosures in connection with the loans we acquire from lenders. At this time, it is not yet clear what sorts of errors will give rise to liability. Also in October 2015, FHFA directed us and Freddie Mac not to conduct post-purchase loan file reviews for technical compliance with TRID. Consistent with FHFA’s directive, we currently do not intend to exercise our contractual remedies, including requiring the lender to repurchase the loan, for noncompliance with the newly applicable provisions of TRID, except in two limited circumstances: if the required form is not used; or if a particular practice would impair enforcement of the note or mortgage or would result in assignee liability, and a court of law, regulator or other authoritative body has determined that such practice violates TRID. 
Receivership
Under the GSE Act, FHFA must place us into receivership if the Director of FHFA makes a written determination that our assets are less than our obligations (that is, we have a net worth deficit) or if we have not been paying our debts as they become due, in either case, for a period of 60 days. FHFA has notified us that the measurement period for any mandatory receivership determination with respect to our assets and liabilities would commence no earlier than the SEC public filing deadline for our quarterly or annual financial statements and would continue for 60 calendar days thereafter. FHFA has advised us that if, during that 60-day period, we receive funds from Treasury in an amount at least equal to the deficiency amount under the senior preferred stock purchase agreement, the Director of FHFA will not make a mandatory receivership determination.
In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other reasons set forth in the GSE Act. The statutory grounds for discretionary appointment of a receiver include: a substantial dissipation of assets or earnings due to unsafe or unsound practices; the existence of an unsafe or unsound condition to transact business; an inability to meet our obligations in the ordinary course of business; a weakening of our condition due to unsafe or unsound practices or conditions; critical undercapitalization; undercapitalization and no reasonable prospect of becoming adequately capitalized; the likelihood of losses that will deplete substantially all of our capital; or by consent.
The appointment of FHFA as receiver would immediately terminate the conservatorship. In the event of a receivership, the GSE Act requires FHFA, as the receiver, to organize a limited-life regulated entity with respect to Fannie Mae. Among other requirements, the GSE Act provides that this limited-life regulated entity:
•
would succeed to Fannie Mae’s charter and thereafter operate in accordance with and subject to such charter;
•
would assume, acquire or succeed to our assets and liabilities to the extent that such assets and liabilities are transferred by FHFA to the entity; and
•
would not be permitted to assume, acquire or succeed to any of our obligations to shareholders.
Placement into receivership would likely have a material adverse effect on holders of our common stock and preferred stock, and could have a material adverse effect on holders of our debt securities and Fannie Mae MBS.

Fannie Mae 2016 Form 10-K
 
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Business | Legislation and Regulation

Should we be placed into receivership, different assumptions would be required to determine the carrying value of our assets, which could lead to substantially different financial results. For more information on the risks to our business relating to receivership and uncertainties regarding the future of our business, see “Risk Factors.”
Our Customers
Our principal customers are lenders that operate within the primary mortgage market where mortgage loans are originated and funds are loaned to borrowers. Our customers include mortgage banking companies, savings and loan associations, savings banks, commercial banks, credit unions, community banks, specialty servicers, insurance companies, and state and local housing finance agencies. Lenders originating mortgages in the primary mortgage market often sell them in the secondary mortgage market in the form of whole loans or in the form of mortgage-related securities.
We have a diversified funding base of domestic and international investors. Purchasers of Fannie Mae MBS or Fannie Mae debt securities include fund managers, commercial banks, pension funds, insurance companies, Treasury, foreign central banks, corporations, state and local governments, and other municipal authorities.
During 2016, approximately 1,200 lenders delivered single-family mortgage loans to us. We acquire a significant portion of our single-family mortgage loans from several large mortgage lenders. During 2016, our top five lender customers, in the aggregate, accounted for approximately 30% of our single-family business volume, compared with approximately 29% in 2015. Wells Fargo Bank, N.A., together with its affiliates, was the only customer that accounted for 10% or more of our single-family business volume in 2016, with approximately 14%.
Competition
We compete to acquire mortgage assets in the secondary market. We also compete for the issuance of mortgage-related securities to investors. Competition in these areas is affected by many factors, including the number of residential mortgage loans offered for sale in the secondary market by loan originators and other market participants, the nature of the residential mortgage loans offered for sale (for example, whether the loans represent refinancings), the current demand for mortgage assets from mortgage investors, the interest rate risk investors are willing to assume and the yields they will require as a result, and the credit risk and prices associated with available mortgage investments.
Competition to acquire mortgage assets is significantly affected by both our and our competitors’ pricing and eligibility standards, as well as investor demand for our and our competitors’ mortgage-related securities. Our competitive environment also may be affected by many other factors, such as new legislation or regulations. See “Legislation and Regulation” and “Risk Factors” for information on matters that could affect our business and competitive environment.
Our competitors for the acquisition of single-family mortgage assets are financial institutions and government agencies that manage residential mortgage credit risk or invest in residential mortgage loans, including Freddie Mac, FHA, the VA, Ginnie Mae (which primarily guarantees securities backed by FHA-insured loans and VA-guaranteed loans), the FHLBs, U.S. banks and thrifts, securities dealers, insurance companies, pension funds, investment funds and other mortgage investors. Our primary competitors for the issuance of single-family mortgage-related securities are Freddie Mac and Ginnie Mae, as many private market competitors dramatically reduced or ceased their activities in the single-family secondary mortgage market following the 2008 housing crisis. For the acquisition of multifamily mortgage assets and the issuance of multifamily mortgage-related securities, we primarily compete with Freddie Mac, life insurers, U.S. banks and thrifts, other institutional investors, Ginnie Mae and private-label issuers of commercial mortgage-backed securities. See “Executive Summary—2016 Market Share” for a discussion of our market share compared with that of our competitors in 2016.
We also compete for low-cost debt funding with institutions that hold mortgage portfolios, including Freddie Mac and the FHLBs.

Fannie Mae 2016 Form 10-K
 
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Business | Employees

Employees
As of January 31, 2017, we employed approximately 7,000 personnel, including full-time and part-time employees, term employees and employees on leave.
Where You Can Find Additional Information
We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other SEC reports and amendments to those reports as soon as reasonably practicable after we electronically file the material with, or furnish it to, the SEC. Our website address is www.fanniemae.com. Materials that we file with the SEC are also available from the SEC’s website, www.sec.gov. You may also request copies of any filing from us, at no cost, by calling the Fannie Mae Fixed-Income Securities Helpline at 1-800-2FANNIE (1-800-232-6643), Option 2, or by writing to Fannie Mae, Attention: Fixed-Income Securities, 3900 Wisconsin Avenue, NW, Area 2H-3N, Washington, DC 20016.
All references in this report to our website addresses or the website address of the SEC are provided solely for your information. Information appearing on our website or on the SEC’s website is not incorporated into this annual report on Form 10-K.
Forward-Looking Statements
This report includes statements that constitute forward-looking statements within the meaning of Section 21E of the Exchange Act. In addition, our senior management may from time to time make forward-looking statements orally to analysts, investors, the news media and others. Forward-looking statements often include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “forecast,” “project,” “would,” “should,” “could,” “likely,” “may,” “will” or similar words. Examples of forward-looking statements in this report include, but are not limited to, statements relating to our expectations regarding the following matters:
•
our profitability and financial results, and the factors that will affect our profitability and financial results;
•
our revenues and the factors that will affect our revenues;
•
our business plans and strategies and the impact of such plans and strategies;
•
our capital reserves and our dividend payments to Treasury;
•
our payments to HUD and Treasury funds under the GSE Act;
•
the consequences of our conservatorship and possible receivership;
•
the impact of legislation, regulation and accounting guidance on our business or financial results, including the impact of corporate income tax legislation and impairment accounting guidance;
•
housing and mortgage market conditions, including home price appreciation, and the impact of such conditions on our financial results;
•
the risks to our business;
•
our credit losses and loss reserves;
•
our serious delinquency rates and foreclosures;
•
our engagement in credit risk transfer transactions and the effects of those transactions;
•
factors that will affect or mitigate our credit risk exposure;
•
the performance of the loans in our book of business and factors that will affect such performance;
•
our single-family loan acquisitions and the credit risk profile of such acquisitions; and
•
factors that will affect our liquidity and ability to meet our debt obligations and factors relating to our liquidity contingency plans.
Forward-looking statements reflect our management’s expectations, forecasts or predictions of future conditions, events or results based on various assumptions and management’s estimates of trends and economic factors in

Fannie Mae 2016 Form 10-K
 
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Business | Forward-Looking Statements

the markets in which we are active, as well as our business plans. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. Our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.
There are a number of factors that could cause actual conditions, events or results to differ materially from those described in the forward-looking statements contained in this report, including, but not limited to, the following: the uncertainty of our future; future legislative and regulatory requirements or changes affecting us, such as the enactment of housing finance reform legislation or corporate income tax reform legislation; actions by FHFA, Treasury, HUD or other regulators that affect our business; the timing and level of, as well as regional variation in, home price changes; changes in interest rates, including negative interest rates; changes in unemployment rates and other macroeconomic and housing market variables; our future guaranty fee pricing and the impact of that pricing on our competitive environment and guaranty fee revenues; the size, composition and quality of our guaranty book of business and retained mortgage portfolio; our market share; the life of the loans in our guaranty book of business; challenges we face in retaining and hiring qualified executives and other employees; our future serious delinquency rates; the deteriorated credit performance of many loans in our guaranty book of business; the conservatorship and its effect on our business; the investment by Treasury and its effect on our business; adverse effects from activities we undertake to support the mortgage market and help borrowers; actions we may be required to take by FHFA, in its role as our conservator or as our regulator, such as changes in the type of business we do or implementation of a single security for Fannie Mae and Freddie Mac; limitations on our business imposed by FHFA, in its role as our conservator or as our regulator; our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers; a decrease in our credit ratings; limitations on our ability to access the debt capital markets; disruptions in the housing and credit markets; significant changes in modification and foreclosure activity; the volume and pace of future nonperforming loan sales and their impact on our results and serious delinquency rates; changes in borrower behavior; the effectiveness of our loss mitigation strategies, management of our REO inventory and pursuit of contractual remedies; defaults by one or more institutional counterparties; resolution or settlement agreements we may enter into with our counterparties; our need to rely on third parties to fully achieve some of our corporate objectives; our reliance on mortgage servicers; changes in GAAP; guidance by the Financial Accounting Standards Board (“FASB”); future changes to our accounting policies; changes in the fair value of our assets and liabilities; operational control weaknesses; our reliance on models; future updates to our models, including the assumptions used by these models; the level and volatility of interest rates and credit spreads; changes in the fiscal and monetary policies of the Federal Reserve, including any change in the Federal Reserve’s policy towards the reinvestment of principal payments of mortgage-backed securities or any future sales of such securities; changes in the structure and regulation of the financial services industry; credit availability; global political risks; natural disasters, environmental disasters, terrorist attacks, pandemics or other major disruptive events; information security breaches or threats; and those factors described in “Risk Factors.”
Readers are cautioned to place forward-looking statements in this report or that we make from time to time into proper context by carefully considering the factors discussed in this report. These forward-looking statements are representative only as of the date they are made, and we undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under the federal securities laws.
Item 1A. Risk Factors
Refer to “MD&A—Risk Management” and “MD&A—Business Segments” for more detailed descriptions of the primary risks to our business and how we seek to manage those risks.
The risks we face could materially adversely affect our business, results of operations, financial condition, liquidity and net worth, and could cause our actual results to differ materially from our past results or the results contemplated by forward-looking statements contained in this report. However, these are not the only risks we face. In addition to the risks we discuss below, we face risks and uncertainties not currently known to us or that we currently believe are immaterial.

Fannie Mae 2016 Form 10-K
 
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Risk Factors

Risks Relating To Our Business
The future of our company is uncertain.
There continues to be significant uncertainty regarding the future of our company, including how long the company will continue to exist in its current form, the extent of our role in the market, how long we will be in conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated, and whether we will continue to exist following conservatorship. The conservatorship is indefinite in duration and the timing, conditions and likelihood of our emerging from conservatorship are uncertain. Our conservatorship could terminate through a receivership. Termination of the conservatorship, other than in connection with a receivership, requires Treasury’s consent under the senior preferred stock purchase agreement.
The previous Administration endorsed the wind down of Fannie Mae and Freddie Mac through a responsible transition and the enactment of comprehensive housing finance reform legislation. The current Administration has not articulated a formal position on housing finance reform or the future of the GSEs; however, the Treasury Secretary indicated in his confirmation hearing that he is focused on housing finance reform and a solution to the current status of Fannie Mae and Freddie Mac.
Last year, Congress continued to consider legislation that could materially affect our business if enacted. We expect that Congress will continue to consider legislation that could result in significant changes in our structure and role in the future, including proposals that would result in Fannie Mae’s liquidation or dissolution. Congress or FHFA may also consider legislation or regulation aimed at increasing the competition we face, reducing our market share, expanding our obligations to provide funds to Treasury or constraining our business operations. We cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation or other legislation related to our activities.
We may not have sufficient capital reserves to avoid a net worth deficit if we experience a comprehensive loss in a future quarter. If we have a net worth deficit in a future quarter, we will be required to draw funds from Treasury in order to avoid being placed into receivership.
As a result of the dividend provisions of the senior preferred stock and quarterly directives from our conservator, we are obligated to pay Treasury each quarter any dividends declared consisting of the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount, which is $600 million for each quarter of 2017 and decreases to zero in 2018. Because we are permitted to retain only $600 million in capital reserves through 2017, we may not have sufficient reserves to avoid a net worth deficit if we experience a comprehensive loss in a future quarter. In addition, beginning in 2018, we are not permitted to retain any capital reserves against losses in subsequent quarters; therefore, if we have a comprehensive loss for a quarter we will also have a net worth deficit for that quarter.
We have experienced and expect to continue to experience volatility in our financial results from period to period due to a number of factors, particularly changes in market conditions that result in fluctuations in the estimated fair value of the financial instruments, such as derivatives and certain securities, that we mark to market through our earnings. Our credit-related income or expense also can vary substantially from period to period based on a number of factors such as changes in actual and expected home prices, fluctuations in interest rates, borrower payment behavior, the types and volume of our loss mitigation activities, the volume of foreclosures completed, and redesignations of loans from HFI to HFS. Accordingly, although we expect to remain profitable on an annual basis for the foreseeable future, the potential volatility in our financial results, which may be significant from quarter to quarter, could result in a net worth deficit in a future quarter.
In addition, other factors such as legislative actions or changes in accounting standards could result in a net worth deficit in a future quarter. For example:
•
The current Administration proposes reducing the U.S. corporate income tax rate. Under applicable accounting standards, a significant reduction in the U.S. corporate income tax rate would require that we record a substantial reduction in the value of our deferred tax assets in the quarter in which the legislation is enacted. Thus, if legislation significantly lowering the U.S. corporate income tax rate is enacted, we expect to incur a significant net loss and net worth deficit for the quarter in which the legislation is enacted and we could potentially incur a net loss for that year.

Fannie Mae 2016 Form 10-K
 
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Risk Factors

•
In June 2016, the FASB issued guidance that changes the impairment model for most financial assets and certain other instruments, which will become effective January 1, 2020 with early adoption permitted on January 1, 2019. We are continuing to evaluate the impact of this guidance on our consolidated financial statements, including the timing of adoption. The adoption of this guidance will decrease, perhaps substantially, our retained earnings and increase our allowance for loan losses, which could result in a net worth deficit for the quarter in which we adopt the guidance.
For any quarter for which we have a net worth deficit, we will be required to draw funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership. As of the date of this filing, the maximum amount of remaining funding under the agreement is $117.6 billion. If we were to draw additional funds from Treasury under the agreement in a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the agreement. Accordingly, if we experience multiple quarters of net worth deficits, the amount of remaining funding available under the senior preferred stock purchase agreement could be significantly reduced from its current level.
Our regulator is authorized or required to place us into receivership under specified conditions, which would result in the liquidation of our assets. Amounts recovered from the liquidation may not be sufficient to repay the liquidation preference of any series of our preferred stock or to provide any proceeds to common shareholders.
FHFA is required to place us into receivership if the Director of FHFA makes a written determination that our assets are less than our obligations for a period of 60 days after the filing deadline for our Form 10-K or Form 10-Q with the SEC. Although Treasury committed to providing us funds in accordance with the terms of the senior preferred stock purchase agreement, if we need funding from Treasury to avoid triggering FHFA’s obligation, Treasury may not be able to provide sufficient funds to us within the required 60 days if it has exhausted its borrowing authority, if there is a government shutdown, or if the funding we need exceeds the amount available to us under the agreement. In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other reasons set forth in the GSE Act, including if we are critically undercapitalized or if we are undercapitalized and have no reasonable prospect of becoming adequately capitalized.
A receivership would terminate the conservatorship. In addition to the powers FHFA has as our conservator, the appointment of FHFA as our receiver would terminate all rights and claims that our shareholders and creditors may have against our assets or under our charter arising from their status as shareholders or creditors, except for their right to payment, resolution or other satisfaction of their claims as permitted under the GSE Act. If we are placed into receivership and do not or cannot fulfill our guaranty to the holders of our Fannie Mae MBS, there may be significant delays of any payments to our MBS holders, and the MBS holders could become unsecured creditors of ours with respect to claims made under our guaranty to the extent the mortgage collateral underlying the Fannie Mae MBS is insufficient to satisfy the claims of the MBS holders.
In the event of a liquidation of our assets, only after payment of the administrative expenses of the receiver and the immediately preceding conservator, the secured and unsecured claims against the company (including repaying all outstanding debt obligations), and the liquidation preference of the senior preferred stock, would any liquidation proceeds be available to repay the liquidation preference on any other series of preferred stock. Finally, only after the liquidation preference on all series of preferred stock is repaid would any liquidation proceeds be available for distribution to the holders of our common stock. We believe that in the event of a liquidation of our assets it is unlikely that there would be sufficient proceeds to make any distribution to holders of our preferred stock or common stock, other than possibly to Treasury as a holder of our senior preferred stock.
Our business and results of operations may be materially adversely affected if we are unable to retain and recruit well-qualified senior executives and other employees. The conservatorship, the uncertainty of our future, limitations on our executive and employee compensation, and negative publicity concerning the GSEs put us at a disadvantage compared to many other companies in attracting and retaining these employees.
Our business processes are highly dependent on the talents and efforts of our senior executives and other employees. The conservatorship, the uncertainty of our future, limitations on executive and employee compensation, and negative publicity concerning the GSEs have had and are likely to continue to have an adverse effect on our ability to retain and recruit well-qualified executives and other employees. Our business is highly complex and we are currently undertaking critical work to help build a sustainable housing finance system;

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therefore, continuity of our current management team under the leadership of our Chief Executive Officer is important. Turnover in key management positions and challenges in integrating new management could harm our ability to manage our business effectively and successfully finalize the implementation of our and FHFA’s current strategic initiatives, and ultimately could adversely affect our financial performance.
Actions taken by Congress, FHFA and Treasury to date, or that may be taken by them or other government agencies in the future, have had, and may continue to have, an adverse effect on the retention and recruitment of senior executives and other employees. We are subject to significant restrictions on the amount and type of compensation we may pay our executives and other employees under conservatorship. In November 2015, the Equity in Government Compensation Act of 2015 was enacted. This law sets the annual direct compensation of our Chief Executive Officer at $600,000 while we are in conservatorship or receivership. We are also subject to the STOCK Act, which was enacted in April 2012 and includes a provision that prohibits our senior executives from receiving bonuses during any period of conservatorship on or after the date of enactment of the law. In addition, we are unable to offer equity-based compensation. As a result of these restrictions, we have not been able to incent and reward excellent performance with compensation structures that provide upside potential to our executives, which places us at a disadvantage compared to many other companies in attracting and retaining executives. In addition, the uncertainty of potential congressional action with respect to housing finance reform, which may result in the wind-down of the company, also negatively affects our ability to retain and recruit executives and other employees.
In many cases, the amount of compensation we pay our senior executives is significantly less than the compensation of executives in similar roles at many companies in our comparator group. Limitations on our ability to increase executive compensation to market levels for the foreseeable future puts us at greater risk of attrition, and also hampers our ability to recruit new executives. Moreover, limitations on our ability to offer market-based compensation makes succession planning difficult. In particular, the limit on the annual direct compensation of our Chief Executive Officer to $600,000 significantly elevates our risk that we will not be able to retain our Chief Executive Officer and negatively affects our succession planning and our ability to attract qualified candidates for this critical role.
We face competition from within the financial services industry and from businesses outside of the financial services industry for qualified executives and other employees. Additionally, with an improving economy, attractive opportunities have become available to our executives and other employees. Our competitors for talent are generally not subject to the same limitations on executive compensation. The constraints on our executive compensation could adversely affect our ability to attract and retain qualified candidates.
If we are unable to retain, promote and attract executives and other employees with the necessary skills and talent, we would face increased risks for operational failures. If there were several high-level departures at approximately the same time, our ability to conduct our business would likely be materially adversely affected, which could have a material adverse effect on our results of operations and financial condition.
Our business activities are significantly affected by the conservatorship and the senior preferred stock purchase agreement.
We are currently under the control of our conservator, FHFA, and we do not know when or how the conservatorship will terminate. As conservator, FHFA can direct us to enter into contracts or enter into contracts on our behalf, and generally has the power to transfer or sell any of our assets or liabilities. In addition, our directors do not have fiduciary duties to any person or entity except to the conservator. Accordingly, our directors are not obligated to consider the interests of the company, the holders of our equity or debt securities, or the holders of Fannie Mae MBS in making or approving a decision unless specifically directed to do so by the conservator.
We are subject to significant restrictions on our business activities during conservatorship. We may be prevented by our conservator from engaging in business activities or transactions that we believe would benefit our business and financial results. For example, because FHFA must approve changes to the national loan level price adjustments we charge and can direct us to make other changes to our guaranty fee pricing, our ability to address changing market conditions, pursue certain strategic objectives, or manage the mix of loans lenders choose to deliver to us is constrained. We publish national risk-based loan level price adjustment grids that specify the additional cash fees we charge at the time we acquire a loan based on the credit characteristics of the loan. These fees allow us to price appropriately for the credit risk we assume in providing our guaranty on the loans. We do not have the ability to implement changes to these pricing grids without the approval of FHFA. If the mix of

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our single-family loan acquisitions changes, and FHFA does not approve requested changes to our pricing grids in response to these changes, it could adversely affect our financial results and condition. In addition, if FHFA directs us to change our pricing in any manner—including increases or decreases in our base guaranty fees or our loan-level price adjustments—it could result in a decrease in our guaranty fee revenues in future periods, a decrease in our single-family business volume or a negative impact on the credit risk profile of our new single-family acquisitions, any of which could adversely affect our financial results and condition.
Because we are under the control of our conservator, our business objectives may not be consistent with the investment objectives of our investors. We may be required by our conservator to engage in activities that are operationally difficult, costly to implement or unprofitable, or that may adversely affect our financial results or the credit risk profile of our book of business. FHFA has changed our business objectives significantly since we entered conservatorship, and could make additional changes at any time. Actions we take to meet FHFA’s strategic goals and objectives for our conservatorship could adversely affect our financial results. For example, FHFA’s conservatorship scorecards in recent years have included objectives relating to the development of a single security for Fannie Mae and Freddie Mac. As the implementation date of the single security approaches, some Fannie Mae MBS and comparable Freddie Mac PCs have traded closer to or at parity. If our market share declines in the future due to this trend or other factors, it could adversely affect our financial results. In addition, FHFA’s conservatorship scorecards have included objectives relating to the sale of nonperforming loans in our book of business. These transactions could result in the sale of mortgage loans we hold at prices below the levels recorded in our financial statements or the sale of loans that may be more financially advantageous for us to hold. Moreover, we are devoting significant resources to meeting FHFA’s goals for our conservatorship and expect to continue to do so.
The senior preferred stock purchase agreement with Treasury includes a number of covenants that significantly restrict our business activities. We cannot, without the prior written consent of Treasury: pay dividends (except on the senior preferred stock); sell, issue, purchase or redeem Fannie Mae equity securities; sell, transfer, lease or otherwise dispose of assets in specified situations; engage in transactions with affiliates other than on arm’s-length terms or in the ordinary course of business; issue subordinated debt; or incur indebtedness that would result in our aggregate indebtedness exceeding 120% of the amount of mortgage assets we are allowed to own under the agreement. In deciding whether to consent to any request for approval it receives from us under the agreement, Treasury has the right to withhold its consent for any reason and is not required by the agreement to consider any particular factors, including whether or not management believes that the transaction would benefit the company. Pursuant to the senior preferred stock purchase agreement, the maximum allowable amount of mortgage assets we were permitted to own as of December 31, 2016 was $339.3 billion, and on each December 31 thereafter, our mortgage assets may not exceed 85% of the maximum allowable amount that we were permitted to own as of December 31 of the immediately preceding calendar year until the amount of our mortgage assets reaches $250 billion. In addition, FHFA has requested that we further cap our mortgage assets each year at 90% of the annual limit under our senior preferred stock purchase agreement with Treasury.
Actions taken by the conservator and the restrictions set forth in the senior preferred stock purchase agreement could adversely affect our business, results of operations, financial condition, liquidity and net worth.
A number of lawsuits have been filed against the U.S. government relating to the senior preferred stock purchase agreement and the conservatorship. See “Note 18, Commitments and Contingencies” and “Legal Proceedings” for a description of these lawsuits. We cannot predict the course or the outcome of these lawsuits, or the actions the U.S. government (including Treasury or FHFA) may take in response to any ruling or finding in any of these lawsuits. Accordingly, we cannot predict what impact, if any, these lawsuits will have on our business.
The conservatorship and agreements with Treasury have had, and will continue to have, a material adverse effect on our common and preferred shareholders.
We do not know when or how the conservatorship will terminate. Moreover, even if we are released from conservatorship, we remain subject to the terms of the senior preferred stock purchase agreement, senior preferred stock and warrant, which can only be canceled or modified with the consent of Treasury. The conservatorship and agreements with Treasury have had, and will continue to have, material adverse effects on our common and preferred shareholders, including the following:
No voting rights during conservatorship. The rights and powers of our shareholders are suspended during conservatorship. During conservatorship, our common shareholders do not have the ability to elect directors or to vote on other matters unless the conservator delegates this authority to them.

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No dividends to common or preferred shareholders, other than to Treasury. Our conservator announced in September 2008 that we would not pay any dividends on the common stock or on any series of preferred stock, other than the senior preferred stock, while we are in conservatorship. In addition, under the terms of the senior preferred stock purchase agreement, dividends may not be paid to common or preferred shareholders (other than on the senior preferred stock) without the prior written consent of Treasury, regardless of whether we are in conservatorship.
Our profits are distributed to Treasury. As described in a risk factor above, pursuant to the dividend provisions of the senior preferred stock and quarterly directives from our conservator, we are obligated to pay Treasury each quarter any dividends declared consisting of the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount, which will decrease to zero in 2018. As a result, our net income is not available to common shareholders or preferred shareholders other than Treasury as holder of the senior preferred stock.
Liquidation preference of senior preferred stock is high and could increase. The senior preferred stock ranks prior to our common stock and all other series of our preferred stock, as well as any capital stock we issue in the future, as to both dividends and distributions upon liquidation. Accordingly, if we are liquidated, the senior preferred stock is entitled to its then-current liquidation preference, plus any accrued but unpaid dividends, before any distribution is made to the holders of our common stock or other preferred stock. The liquidation preference on the senior preferred stock is currently $117.1 billion and would increase if we draw on Treasury’s funding commitment in any future quarters or if we do not pay dividends owed on the senior preferred stock. If we are liquidated, we believe it is unlikely that there would be sufficient funds remaining after payment of amounts to our creditors and to Treasury as holder of the senior preferred stock to make any distribution to holders of our common stock and other preferred stock.
Exercise of the Treasury warrant would substantially dilute investment of current shareholders. If Treasury exercises its warrant to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis, the ownership interest in the company of our then-existing common shareholders will be substantially diluted, and we would thereafter have a controlling shareholder.
No longer managed for the benefit of shareholders. Because we are in conservatorship, we are no longer managed with a strategy to maximize shareholder returns.
For additional description of the conservatorship and our agreements with Treasury, see “Business—Conservatorship and Treasury Agreements.”
We may incur significant credit losses and credit-related expenses on the loans in our mortgage credit book of business, which could materially adversely affect our earnings, financial condition and net worth.
We are exposed to a significant amount of mortgage credit risk on our $3.1 trillion mortgage credit book of business, which includes mortgage assets that back our guaranteed Fannie Mae MBS, mortgage assets in our retained mortgage portfolio and credit enhancements we provide. Borrowers of mortgage loans that we own or guaranty may fail to make required payments of principal and interest on their mortgage loans, exposing us to the risk of credit losses and credit-related expenses.
Although we strengthened our underwriting and eligibility standards in late 2008 and 2009, we continue to have loans in our book of business that were originated under our prior standards. As of December 31, 2016, 12% of our single-family conventional guaranty book of business consisted of loans acquired prior to 2009 and another 16% consisted of Refi Plus loans, which represent refinancings of loans that were originated prior to June 2009. Moreover, some of the loans we acquired prior to 2009 that remain in our single-family book of business as of December 31, 2016 have certain characteristics that expose us to greater credit risk than other types of mortgage loans, such as Alt-A loans (3% of our single-family conventional guaranty book), interest-only loans (2% of our single-family conventional guaranty book) and loans with FICO credit scores at origination of less than 620 (2% of our single-family conventional guaranty book). In addition, 16% of our single-family conventional guaranty book of business as of December 31, 2016 consisted of loans with original LTV ratios greater than 90%, which may pose a higher credit risk than loans with lower LTV ratios. We present detailed information about the risk characteristics of our single-family conventional guaranty book of business in “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management,” and we present information on our 2016 credit-related expenses and credit losses in “MD&A—Consolidated Results of Operations—Credit-Related Income (Expense).” The credit performance of loans in our book of business could deteriorate in the future, particularly if we experience national or regional declines in home prices, weakening economic conditions or high

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unemployment, resulting in higher credit losses and credit-related expenses. Increases in our credit-related expenses would reduce our earnings and adversely affect our financial condition and net worth.
While we use certain credit enhancements to mitigate some of our potential future credit losses, these credit enhancements may provide less protection than we expect for a number of reasons. Some of the credit enhancements we use, such as mortgage insurance and credit insurance risk transfer transactions, are subject to the risk that the counterparties may not meet their obligations to us. Our credit risk transfer transactions have limited terms (typically 10 or 12.5 years), after which they provide limited or no further credit protection on the covered loans. Due to differences in accounting, there also could be a significant lag between the time when we recognize a provision for credit losses and when we recognize the related recovery from our CAS transactions. While a credit expense on a loan in a reference pool for a CAS transaction is recorded when it is probable that we have incurred a loss, for our CAS issued beginning in 2016, a recovery is recorded when an actual loss event occurs. In addition, it is uncertain if there will be adequate demand for our credit risk transfer transactions over the long term to meet our goals for these transactions. Moreover, our credit risk transfer transactions are not designed to shield us from all losses because we retain a portion of the risk of future losses on loans covered by these transactions, including all or a portion of the first loss risk in most transactions.
The processing of foreclosures of single-family loans continues to be slow in some states, which has negatively affected our foreclosure timelines and our single-family serious delinquency rate. We also believe the slow pace of foreclosures in certain states is contributing to a slower recovery of those housing markets.
A failure in our operational systems or infrastructure, or those of third parties, could materially adversely affect our business, impair our liquidity, cause financial losses and harm our reputation.
Shortcomings or failures in our internal processes, people, data management or systems could disrupt our business or have a material adverse effect on our risk management, liquidity, financial statement reliability, financial condition and results of operations. Such a failure could result in legislative or regulatory intervention or sanctions, liability to customers, financial losses, business disruptions and damage to our reputation. For example, our business is highly dependent on our ability to manage and process, on a daily basis, an extremely large number of transactions, many of which are highly complex, across numerous and diverse markets and in an environment in which we must adapt to changing external conditions. These transactions are subject to various legal, accounting and regulatory standards. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control, adversely affecting our ability to process these transactions or manage associated data with reliability and integrity. In addition, we rely on information provided by third parties in processing many of our transactions; that information may be incorrect or we may fail to properly manage or analyze it or properly monitor its data quality.
We rely upon business processes that are highly dependent on people, technology and equipment, data and the use of numerous complex systems and models to manage our business and produce books and records upon which our financial statements and risk reporting are prepared. This reliance increases the risk that we may be exposed to financial, reputational or other losses as a result of inadequately designed internal processes or data management architecture, inflexible technology or the failure of our systems. While we continue to enhance our technology, infrastructure, operational controls and organizational structure in order to reduce our operational risk, these actions may not be effective to manage these risks and may create additional operational risk as we execute these enhancements. In addition, our use of third-party service providers for some of our business functions increases the risk that an operational failure by a third party will adversely affect us.
Our ability to manage and aggregate data may be limited by the effectiveness of our policies, programs, processes, systems and practices that govern how data is acquired, validated, stored, protected, processed and shared. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs.
We also face the risk of operational failure, termination or capacity constraints of any of the clearing agents, exchanges, clearinghouses or other financial intermediaries we use to facilitate our securities and derivatives transactions. In recent years, there has been significant consolidation among clearing agents, exchanges and clearing houses. This consolidation and interconnectivity increases the risk of operational failure, on both an individual basis and an industry-wide basis, as disparate complex systems need to be integrated, often on an accelerated basis. Any such failure, termination or constraint could adversely affect our ability to effect

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transactions or manage our exposure to risk, and could have a significant adverse impact on our business, liquidity, financial condition, net worth and results of operations.
Substantially all of our employees and business operations functions are consolidated in two metropolitan areas: Washington, DC and Dallas, Texas. As a result of this concentration of our employees and facilities, a catastrophic event at either location, such as a terrorist attack, natural disaster, extreme weather event or disease pandemic could impact our ability to operate notwithstanding the business continuity plans and facilities that we have in place. Although we have an out-of-region data center for disaster recovery, this data center will take several days to become operational in the event it becomes necessary as a result of the catastrophic loss of our in-region data center. Moreover, because of the concentration of our employees in the Washington, DC and Dallas metropolitan areas, if a regional disruption occurs in one of these areas, our employees may not be not able to occupy our facilities, work remotely, or communicate with or travel to other locations. Accordingly, we may not be able to successfully implement our contingency plans if a catastrophic event occurs, which could materially adversely affect our ability to conduct our business and lead to financial losses.
A breach of the security of our systems or facilities, or those of third parties with which we do business, including as a result of cyber attacks, could damage or disrupt our business or result in the disclosure or misuse of confidential information, which could damage our reputation, increase our costs and cause losses.
Our operations rely on the secure receipt, processing, storage and transmission of confidential and other information in our computer systems and networks and with our business partners, including proprietary, confidential or personal information that is subject to privacy laws, regulations or contractual obligations. Information security risks for large institutions like us have significantly increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct or automate financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state-sponsored actors. These actors may fraudulently entice users to provide unauthorized access to our systems, network and data. From time to time we have been, and likely will continue to be, the target of attempted cyber attacks, computer viruses, malicious code, phishing attacks, denial of service attacks and other information security threats. To date, we have not experienced any material losses relating to cyber attacks; however, we could suffer such losses in the future and we are not able to predict the severity of these attacks. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the current global economic and political environment, our prominent size and scale and our role in the financial services industry, the outsourcing of some of our business operations, and the interconnectivity and interdependence of third parties to our systems.
Although we take measures to protect the security of our software and network-enabled computers and systems, our software, computers and systems may be vulnerable to cyber attacks, breaches, unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. The occurrence of such an event could jeopardize or result in the unauthorized disclosure, gathering, monitoring, misuse, corruption, loss or destruction of confidential and other information that belongs to us, our customers, our counterparties, third-party service providers or borrowers that is processed and stored in, and transmitted through, our computer systems and networks. The occurrence of such an event could also result in damage to our software, computers or systems, or otherwise cause interruptions or malfunctions in our, our customers’, our counterparties’ or third parties’ operations. This could result in significant losses, loss of customers and business opportunities, reputational damage, litigation, regulatory fines, penalties or intervention, reimbursement or other compensatory costs, or otherwise adversely affect our business, financial condition or results of operations. In addition, we may be required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. Although we maintain insurance coverage relating to cybersecurity risks, our insurance may not be sufficient to provide adequate loss coverage in all circumstances.
Third parties with which we do business may also be sources of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the external storage and processing of our information, as well as customer, counterparty and borrower information, including on cloud-based systems. While we engage in actions to mitigate our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss or destruction of data or other cybersecurity incidents with increased costs and consequences to us such as those described above.

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Our concurrent implementation of multiple new initiatives may increase our operational risk and result in one or more significant deficiencies or material weaknesses in our internal control over financial reporting.
We are currently implementing a number of initiatives in furtherance of our goals to better serve our customers’ needs, improve our business efficiency and help to build a sustainable housing finance system, including initiatives implementing FHFA’s conservatorship scorecard objectives. The magnitude of the many new initiatives we are undertaking may increase our operational risk. Many of these initiatives involve significant changes to our business processes, systems and infrastructure, and present significant operational challenges for us. For example, we are working with FHFA and Freddie Mac on a multi-year effort to build a common securitization platform to eventually replace some of our current securitization infrastructure and to issue a single security on this platform. This initiative, in coordination with related internal infrastructure upgrades, is expected to result in significant changes to our current systems and operations, and involves a high degree of complexity. While implementation of each individual initiative creates operational challenges, implementing multiple initiatives during the same time period significantly increases these challenges. Due to the operational complexity associated with these changes and the limited time periods for implementing them, we believe there is a risk that implementing these changes could result in one or more significant deficiencies or material weaknesses in our internal control over financial reporting in a future period. If this were to occur, we could experience material errors in our reported financial results. In addition, FHFA, Treasury, other agencies of the U.S. government or Congress may require us to take actions in the future that could further increase our operational risk.
We may undertake efforts that adversely affect our business, results of operations, financial condition, liquidity and net worth.
In conservatorship our business is no longer managed with a strategy to maximize shareholder returns while fulfilling our mission. FHFA’s current strategic goals for our conservatorship are described in “Business—Legislation and Regulation—Housing Finance Reform—Conservator Developments and Strategic Goals.” In pursuit of the goals prescribed by our conservator, we are taking a variety of actions that could adversely affect our economic returns, possibly significantly, such as modifying loans to help struggling borrowers; expanding our underwriting and eligibility requirements to increase access to mortgage credit; increasing our use of credit risk transfer transactions, which effectively reduces the guaranty fee income we retain on the covered loans; and preparing to issue a single security. We may also be asked to take additional efforts in support of our conservator’s goals in the future that could adversely affect our economic returns. These activities may have short- and long-term adverse effects on our business, results of operations, financial condition, liquidity and net worth.
Other agencies of the U.S. government or Congress also may ask us to undertake significant efforts to support the housing and mortgage markets, as well as struggling homeowners. They may also ask us to take actions in support of other goals. These actions may adversely affect our financial results and condition. For example, in December 2011 Congress enacted the TCCA under which, at the direction of FHFA, we increased the guaranty fee on all single-family residential mortgages delivered to us by 10 basis points effective April 1, 2012. The revenue generated by this fee increase is paid to Treasury and helps offset the cost of a two-month extension of the payroll tax cut in 2012.
We are also required by the GSE Act to undertake efforts in support of the housing market that could adversely affect our financial results and condition. For example, we are subject to housing goals under the GSE Act that require that a portion of the mortgage loans we acquire must be for low- and very-low income families, families in low-income census tracts and moderate-income families in minority census tracts or designated disaster areas. FHFA’s 2015 to 2017 housing goals include higher benchmarks for most of the goals than those that were applicable in prior years. In addition, in December 2016, FHFA issued a final rule to implement our new duty to serve very low-, low- and moderate-income families in three underserved markets: manufactured housing, affordable housing preservation and rural areas. We will be required to make changes to our business and our acquisitions in the future to comply with our new duty to serve obligations. We may take actions to meet our housing goals and duty to serve obligations that could adversely affect our profitability. For example, we may acquire loans that offer lower expected returns on our investment than our other loan acquisitions and that may potentially increase our credit losses and credit-related expenses. If we do not meet our housing goals or duty to serve requirements, and FHFA finds that the goals or requirements were feasible, we may become subject to a housing plan that could require us to take additional steps that could have an adverse effect on our results of operations and financial condition. The potential penalties for failure to comply with housing plan requirements

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include a cease-and-desist order and civil money penalties. See “Business—Legislation and Regulation—GSE Act and Other Regulation of Our Business” for more information on our housing goals and duty to serve underserved markets.
Limitations on our ability to access the debt capital markets could have a material adverse effect on our ability to fund our operations.
Our ability to fund our business depends primarily on our ongoing access to the debt capital markets. Market concerns about matters such as the extent of government support for our business, the future of our business (including future profitability, future structure, regulatory actions and GSE status) and the creditworthiness of the U.S. government could cause a severe negative effect on our access to the unsecured debt markets, particularly for long-term debt. We believe that our ability in recent years to issue debt of varying maturities at attractive pricing resulted from federal government support of our business. As a result, we believe that our status as a GSE and continued federal government support is essential to maintaining our access to debt funding. Changes or perceived changes in federal government support of our business or our status as a GSE could materially and adversely affect our liquidity, financial condition and results of operations. There can be no assurance that the government will continue to support us, or that our current level of access to debt funding will continue. In addition, due to our reliance on the U.S. government’s support, our access to debt funding also could be materially adversely affected by a change or perceived change in the creditworthiness of the U.S. government.
Future changes or disruptions in the financial markets could significantly change the amount, mix and cost of funds we obtain, as well as our liquidity position. If we are unable to issue both short- and long-term debt securities at attractive rates and in amounts sufficient to operate our business and meet our obligations, it likely would interfere with the operation of our business and have a material adverse effect on our liquidity, results of operations, financial condition and net worth.
Our liquidity contingency plans may be difficult or impossible to execute during a liquidity crisis.
We believe that our liquidity contingency plans may be difficult or impossible to execute during a liquidity crisis. If we cannot access the unsecured debt markets, our ability to repay maturing indebtedness and fund our operations could be eliminated or significantly impaired. In this event, our alternative sources of liquidity—consisting of our cash and other investments portfolio and the unencumbered mortgage assets in our retained mortgage portfolio—may not be sufficient to meet our liquidity needs.
We believe that the amount of mortgage-related assets that we could successfully sell or borrow against in the event of a liquidity crisis or significant market disruption is substantially lower than the amount of mortgage-related assets we hold. Due to the current composition of our retained mortgage portfolio, including the significant amount of distressed assets in our portfolio, there would likely be insufficient market demand for large amounts of the mortgage-related assets in our portfolio over a prolonged period of time, which would limit our ability to borrow against or sell these assets. To the extent that we are able to obtain funding by pledging or selling mortgage-related securities as collateral, we anticipate that a discount would be applied that would reduce the value assigned to those securities. Depending on market conditions at the time, this discount could result in proceeds significantly lower than the current market value of these securities and could thereby reduce the amount of financing we obtain.
A decrease in the credit ratings on our senior unsecured debt could have an adverse effect on our ability to issue debt on reasonable terms, particularly if such a decrease were not based on a similar action on the credit ratings of the U.S. government. A decrease in our credit ratings also could trigger additional collateral requirements under our derivatives contracts.
A reduction in our credit ratings could materially adversely affect our liquidity, our ability to conduct our normal business operations, our financial condition and our results of operations. Credit ratings on our senior unsecured debt, as well as the credit ratings of the U.S. government, are primary factors that could affect our borrowing costs and our access to the debt capital markets. Credit ratings on our debt are subject to revision or withdrawal at any time by the rating agencies. Actions by governmental entities impacting the support we receive from Treasury could adversely affect the credit ratings on our senior unsecured debt. As of December 31, 2016, our long-term debt was rated “AA+” by Standard & Poor’s Ratings Services (“S&P”), “Aaa” by Moody’s Investors Services (“Moody’s”) and “AAA” by Fitch Ratings Limited (“Fitch”).
Because we rely on the U.S. government for capital support, in recent years, when a rating agency has taken an action relating to the U.S. government’s credit rating, they have taken a similar action relating to our ratings at

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approximately the same time. S&P, Moody’s and Fitch have all indicated that they would likely lower their ratings on the debt of Fannie Mae and certain other government-related entities if they were to lower their ratings on the U.S. government. We currently cannot predict whether one or more of these rating agencies will downgrade our debt ratings in the future, nor can we predict the potential impact.
A reduction in our credit ratings may also trigger additional collateral requirements under our derivative contracts because a majority of our over-the-counter (“OTC”) derivative contracts contain provisions that require our senior unsecured debt to maintain a minimum credit rating from S&P and Moody’s. If our senior unsecured debt credit ratings were downgraded to established thresholds in our OTC derivative contracts, which range from A+ to BBB+, we could be required to provide additional collateral to or terminate transactions with certain counterparties. The aggregate fair value of all OTC derivatives with credit-risk-related contingent features that were in a net liability position as of December 31, 2016 was $1.6 billion, for which we posted collateral of $1.4 billion in the normal course of business. If our senior unsecured debt had been downgraded to AA or Aa1, or even to AA- or Aa2, we would not have been required to post any additional collateral under these agreements as of December 31, 2016. If all of the credit-risk-related contingency features underlying these agreements had been triggered, an additional $258 million would have been required either to be posted as collateral or to immediately settle our positions based on the individual agreements and our fair value position as of December 31, 2016. A reduction in our credit ratings also could cause derivatives clearing organizations or their members to demand that we post additional collateral for our cleared derivative contracts. Our credit ratings and ratings outlook are included in “MD&A—Liquidity and Capital Management—Liquidity Management—Credit Ratings.”
One or more of our institutional counterparties may fail to fulfill their contractual obligations to us, resulting in financial losses, business disruption and decreased ability to manage risk.
We routinely enter into a high volume of transactions with counterparties in the financial services industry. We face the risk that one or more of our institutional counterparties may fail to fulfill their contractual obligations to us. Our primary exposures to institutional counterparty risk are with mortgage servicers that service the loans we hold in our retained mortgage portfolio or that back our Fannie Mae MBS; mortgage sellers and servicers that are obligated to repurchase loans from us or reimburse us for losses in certain circumstances; credit guarantors that provide credit enhancements on the mortgage assets that we hold in our retained mortgage portfolio or that back our Fannie Mae MBS, including mortgage insurers, credit insurance risk transfer counterparties, financial guarantors and multifamily lenders with risk sharing arrangements; custodial depository institutions that hold principal and interest payments for loans in our retained mortgage portfolio and for MBS certificateholders, as well as collateral posted by derivatives counterparties, mortgage sellers and mortgage servicers; the financial institutions that issue the investments held in our cash and other investments portfolio; and derivatives counterparties.
We may have multiple exposures to one counterparty as many of our counterparties provide several types of services to us. For example, our lender customers or their affiliates may also act as derivatives counterparties, mortgage servicers, custodial depository institutions or document custodians. Accordingly, if one of these counterparties were to become insolvent or otherwise default on its obligations to us, it could harm our business and financial results in a variety of ways.
An institutional counterparty may default in its obligations to us for a number of reasons, such as changes in financial condition that affect its credit rating, changes in its servicer rating, a reduction in liquidity, operational failures or insolvency. Counterparty defaults or limitations on their ability to do business with us could result in significant financial losses or hamper our ability to do business or manage the risks to our business, which could materially adversely affect our business, results of operations, financial condition, liquidity and net worth.
We depend on our ability to enter into derivatives transactions in order to manage the duration and prepayment risk of our retained mortgage portfolio. If we lose access to our derivatives counterparties, it could adversely affect our ability to manage these risks, which could have a material adverse effect on our business, results of operations, financial condition and liquidity.
Our financial condition or results of operations may be adversely affected if mortgage servicers fail to perform their obligations to us.
We delegate the servicing of the mortgage loans in our guaranty book of business to mortgage servicers; we do not have our own servicing function. Functions performed by mortgage servicers on our behalf include collecting and delivering principal and interest payments, administering escrow accounts, monitoring and reporting

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delinquencies, performing default prevention activities and other functions. The inability of a mortgage servicer to perform these functions due to financial, operational, regulatory or other issues could negatively affect our ability to manage our book of business, delay or prevent our collection of amounts due to us or otherwise result in the failure to perform other servicing duties, resulting in financial losses.
Our servicers also have an active role in our loss mitigation efforts. Our ability to actively manage the troubled loans that we own or guarantee, and to implement our homeownership assistance and foreclosure prevention efforts quickly and effectively, is limited by our reliance on our mortgage servicers. A decline in servicer performance on loss mitigation could adversely affect our credit performance, which could have a material adverse effect on our business, results of operations and financial condition.
A large portion of our single-family guaranty book is serviced by non-depository servicers. The potentially lower financial strength, liquidity and operational capacity of non-depository mortgage sellers and servicers compared with depository mortgage sellers and servicers may negatively affect their ability to satisfy their repurchase or compensatory fee obligations or to service the loans on our behalf. In addition, regulatory bodies have been reviewing the activities of some of our largest non-depository servicers.
If we replace a mortgage servicer, we likely would incur costs and potential increases in servicing fees and could also face operational risks. If a mortgage servicer counterparty fails, it could result in a temporary disruption in servicing and loss mitigation activities relating to the loans serviced by that mortgage servicer, particularly if there is a loss of experienced servicing personnel. We may also face challenges in transferring a large servicing portfolio.
Multifamily mortgage servicing is typically performed by the lenders who sell the mortgages to us. We are exposed to the risk that multifamily servicers could come under financial pressure, which could potentially result in a decline in the quality of the servicing they provide us.
We may incur losses as a result of claims under our mortgage insurance policies not being paid in full or at all.
We rely heavily on mortgage insurers to provide insurance against borrower defaults on single-family conventional mortgage loans with LTV ratios over 80% at the time of acquisition. Although the financial condition of our primary mortgage insurer counterparties currently approved to write new business has improved in recent years, there is still a risk that these counterparties may fail to fulfill their obligations to pay our claims under insurance policies.
In addition, three of our mortgage insurer counterparties who are currently not approved to write new business—PMI Mortgage Insurance Co. (“PMI”), Triad Guaranty Insurance Corporation (“Triad”) and Republic Mortgage Insurance Company (“RMIC”)—are currently under various forms of supervised control by their state regulators and are in run-off. A mortgage insurer that is in run-off continues to collect renewal premiums and process claims on its existing insurance business, but no longer writes new insurance, which increases the risk that the mortgage insurer will pay claims only in part or fail to pay claims at all under existing insurance policies. Entering run-off may close off a source of profits and liquidity that may have otherwise assisted a mortgage insurer in paying claims under insurance policies, and could also cause the quality and speed of its claims processing to deteriorate. PMI and Triad have been paying only a portion of policyholder claims and deferring the remaining portion. PMI is currently paying 71.5% of claims under its mortgage insurance policies in cash and is deferring the remaining 28.5%, and Triad is currently paying 75% of claims in cash and deferring the remaining 25%. It is uncertain whether PMI or Triad will be permitted in the future to pay their deferred policyholder claims and/or increase or decrease the amount of cash they pay on claims. RMIC is no longer deferring payments on policyholder claims and has paid us its previously outstanding deferred payment obligations; however, RMIC has not paid us interest on its deferred payment obligations and remains in run-off and under the supervisory control of its state regulator. PMI, Triad and RMIC provided a combined $8.0 billion, or 6%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of December 31, 2016.
On at least a quarterly basis, we assess our mortgage insurer counterparties’ respective abilities to fulfill their obligations to us, and our loss reserves take into account this assessment. If our assessment indicates their ability to pay claims has deteriorated significantly or if our projected claim amounts have increased, it could result in an increase in our loss reserves and our credit losses.

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Challenges to the MERS® company, system and processes could pose operational, reputational and legal risks for us.
MERSCORP Holdings, Inc. (“MERSCORP”) is a privately held company that maintains an electronic registry (the “MERS System”) that tracks servicing rights and ownership of loans in the United States. Mortgage Electronic Registration Systems, Inc. (“MERS”), a wholly owned subsidiary of MERSCORP, can serve as a nominee for the owner of a mortgage loan and, in that role, become the mortgagee of record for the loan in local land records. Fannie Mae sellers and servicers may choose to use MERS as a nominee; however, we have prohibited servicers from initiating foreclosures on Fannie Mae loans in MERS’s name. A large portion of the loans we own or guarantee are registered in MERS’s name and the related servicing rights are tracked in the MERS System. The MERS System is widely used by participants in the mortgage finance industry. Along with a number of other organizations in the mortgage finance industry, we are a shareholder of MERSCORP. In 2016, Intercontinental Exchange, Inc. acquired a majority equity position in MERSCORP.
Numerous legal challenges have been made disputing MERS’s ability to initiate foreclosures, act as nominee in local land records, and/or assign mortgages or take other action on behalf of the loan owner. These challenges seek judicial relief ranging from money damages, fines and penalties to injunctive/declaratory relief seeking the prevention of mortgage assignments by MERS and/or the voiding of completed foreclosures in which MERS appeared in the chain of title. These challenges have focused public attention on MERS and on how loans are recorded in local land records. As a result, these challenges could negatively affect MERS’s ability to serve as the mortgagee of record in some jurisdictions, which could cause additional costs and time in the recordation process and could negatively impact our interest in the loans. These challenges also could result in court decisions that substantially delay new or pending foreclosures, or void completed foreclosures in certain jurisdictions, which would require that we re-foreclose on the affected properties, thereby increasing our costs and lengthening the time it takes for us to foreclose on and dispose of the properties.
In addition, where MERS is the mortgagee of record, it must execute assignments of mortgages, affidavits and other legal documents in connection with foreclosure proceedings. In April 2011, federal banking regulators and FHFA announced a consent order with MERS and MERSCORP to address significant weaknesses in, among other things, oversight, management supervision and corporate governance at MERS and MERSCORP that were uncovered as part of the regulators’ review of mortgage servicers’ foreclosure processing. Failures by MERS or MERSCORP to apply prudent and effective process controls and to comply with legal and other requirements could pose counterparty, operational, reputational and legal risks for us. If investigations or new regulation or legislation restricts servicers’ use of MERS, our counterparties may be required to record all mortgage transfers in land records, incurring additional costs and time in the recordation process. The legal challenges against MERS and MERSCORP remain ongoing. The outcome of these legal challenges could adversely affect our business, results of operations or financial condition.
Changes in accounting standards and policies can be difficult to predict and can materially impact how we record and report our financial results.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the FASB or the SEC changes the financial accounting and reporting standards or the policies that govern the preparation of our financial statements. In addition, FHFA provides guidance that affects our adoption or implementation of financial accounting or reporting standards. These changes can be difficult to predict and expensive to implement, and can materially impact how we record and report our financial condition and results of operations. We could be required to apply new or revised guidance retrospectively, which may result in the revision of prior period financial statements by material amounts. The implementation of new or revised accounting guidance, such as the new impairment guidance issued in June 2016 described above and in “Note 1, Summary of Significant Accounting Policies—New Accounting Guidance,” could have a material adverse effect on our financial results or net worth and result in or contribute to the need for additional draws from Treasury under the senior preferred stock purchase agreement.
Material weaknesses in our internal control over financial reporting could result in errors in our reported results or disclosures that are not complete or accurate.
Management has determined that, as of the date of this filing, we have ineffective disclosure controls and procedures that result in a material weakness in our internal control over financial reporting. In addition, our independent registered public accounting firm, Deloitte & Touche LLP, has expressed an adverse opinion on our internal control over financial reporting because of the material weakness. Our ineffective disclosure controls and

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procedures and material weakness could result in errors in our reported results or disclosures that are not complete or accurate, which could have a material adverse effect on our business and operations.
Our material weakness relates specifically to the impact of the conservatorship on our disclosure controls and procedures. Because we are under the control of FHFA, some of the information that we may need to meet our disclosure obligations may be solely within the knowledge of FHFA. As our conservator, FHFA has the power to take actions without our knowledge that could be material to our shareholders and other stakeholders, and could significantly affect our financial performance or our continued existence as an ongoing business. Because FHFA currently functions as both our regulator and our conservator, there are inherent structural limitations on our ability to design, implement, test or operate effective disclosure controls and procedures relating to information known to FHFA. As a result, we have not been able to update our disclosure controls and procedures in a manner that adequately ensures the accumulation and communication to management of information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws, including disclosures affecting our financial statements. Given the structural nature of this material weakness, we do not expect to remediate this weakness while we are under conservatorship. See “Controls and Procedures” for further discussion of management’s conclusions on our disclosure controls and procedures and internal control over financial reporting.
In many cases, our accounting policies and methods, which are fundamental to how we report our financial condition and results of operations, require management to make judgments and estimates about matters that are inherently uncertain. Management also relies on models in making these estimates.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in applying many of these accounting policies and methods so that these policies and methods comply with GAAP and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the appropriate accounting policy or method from two or more alternatives, any of which might be reasonable under the circumstances but might affect the amounts of assets, liabilities, revenues and expenses that we report. See “Note 1, Summary of Significant Accounting Policies” for a description of our significant accounting policies.
We have identified two of our accounting policies as being critical to the presentation of our financial condition and results of operations. These accounting policies are described in “MD&A—Critical Accounting Policies and Estimates.” We believe these policies are critical because they require management to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions.
Because our financial statements involve estimates for amounts that are very large, even a small change in the estimate can have a significant impact for the reporting period. For example, because our total loss reserves are so large, even a change that has a small impact relative to the size of our loss reserves can have a meaningful impact on our results for the quarter in which we make the change.
Many of our accounting methods involve substantial use of models. Models are inherently imperfect predictors of actual results because they are based on assumptions, including assumptions about future events. Our actual results could differ significantly from those generated by our models. As a result, the estimates that we use to prepare our financial statements, as well as our estimates of our future results of operations, may be inaccurate, perhaps significantly.
Failure of our models to produce reliable results may adversely affect our ability to manage risk and make effective business decisions.
We make significant use of quantitative models to measure and monitor our risk exposures and to manage our business. For example, we use models to measure and monitor our exposures to interest rate, credit and market risks, and to forecast credit losses. The information provided by these models is used in making business decisions relating to strategies, initiatives, transactions, pricing and products.
Models are inherently imperfect predictors of actual results because they are based on historical data and assumptions regarding factors such as future loan demand, borrower behavior, creditworthiness and home price trends. Other potential sources of inaccurate or inappropriate model results include errors in computer code, bad data, misuse of data, or use of a model for a purpose outside the scope of the model’s design. Modeling often

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assumes that historical data or experience can be relied upon as a basis for forecasting future events, an assumption that may be especially tenuous in the face of unprecedented events.  
Given the challenges of predicting future behavior, management judgment is used at every stage of the modeling process, from model design decisions regarding core underlying assumptions, to interpreting and applying final model output. To control for these inherent imperfections, our models are validated by an independent model risk management team within our Enterprise Risk Division and are subject to control requirements set by our model risk policies.
When market conditions change quickly and in unforeseen ways, there is an increased risk that the model assumptions and data inputs for our models are not representative of the most recent market conditions. Under such circumstances, we must rely on management judgment to make adjustments or overrides to our models. A formal model update is typically an extensive process that involves basic research, testing, independent validation and production implementation. In a rapidly changing environment, it may not be possible to update existing models quickly enough to properly account for the most recently available data and events. Management adjustments to modeled results are applied within the confines of the governance structure provided by a combination of our model risk management team and our finance and risk committees.
If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk management decisions, including decisions affecting loan purchases, management of credit losses, guaranty fee pricing, and asset and liability management. Any of these decisions could adversely affect our business, results of operations, liquidity, net worth and financial condition. Furthermore, strategies we employ to manage and govern the risks associated with our use of models may not be effective or fully reliable.
Changes in interest rates or our loss of the ability to manage interest rate risk successfully could adversely affect our financial results and condition, and increase interest rate risk.
We fund our operations primarily through the issuance of debt and invest our funds primarily in mortgage-related assets that permit mortgage borrowers to prepay their mortgages at any time. These business activities expose us to market risk, which is the risk of loss resulting from adverse changes in the value of financial instruments caused by changes in market conditions. Market risk includes interest rate risk, which is the risk of loss from adverse changes in the value of our assets or liabilities or our future earnings due to changes in interest rates. We describe these risks in more detail in “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management.” Changes in interest rates affect both the value of our mortgage assets and prepayment rates on our mortgage loans.
Changes in interest rates could have a material adverse effect on our business, results of operations, financial condition, liquidity and net worth. Our ability to manage interest rate risk depends on our ability to issue debt instruments with a range of maturities and other features, including call provisions, at attractive rates and to engage in derivatives transactions. We must exercise judgment in selecting the amount, type and mix of debt and derivative instruments that will most effectively manage our interest rate risk. The amount, type and mix of financial instruments that are available to us may not offset possible future changes in the spread between our borrowing costs and the interest we earn on our mortgage assets.
We mark to market changes in the estimated fair value of our derivatives through our earnings on a quarterly basis, but we do not similarly mark to market changes in some of the financial instruments that generate our interest rate risk exposures. As a result, changes in interest rates, particularly significant changes, can have a significant adverse effect on our earnings and net worth for the quarter in which the changes occur, depending on the nature of the changes and the derivatives we hold at that time. We have experienced significant fair value losses in some periods due to changes in interest rates, and we expect to continue to experience volatility from period to period in our financial results as a result of fair value losses or gains on our derivatives.
Changes in interest rates also can affect our credit losses. When interest rates increase, our credit losses from loans with adjustable payment terms may increase as borrower payments increase at their reset dates, which increases the borrower’s risk of default, particularly for adjustable-rate loans with interest-only features. Rising interest rates may also reduce the opportunity for these borrowers to refinance into a fixed-rate loan. Similarly, many borrowers may have additional debt obligations, such as home equity lines of credit and second liens, that also have adjustable payment terms. If a borrower’s payment on his or her other debt obligations increases due to rising interest rates or a change in amortization, it increases the risk that the borrower may default on a loan we own or guarantee. In addition to increasing the risk of future borrower defaults, rising interest rates reduce

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expected future loan prepayments, which lengthens the expected life of our individually impaired loans and therefore increases our impairment related to concessions we have provided on those loans.
While we have not experienced negative interest rates in the United States, some central banks in Europe and Asia have cut interest rates below zero. If U.S. interest rates were to fall below zero, it could negatively impact our financial results and increase our operational risk.
Changes in spreads could materially impact our results of operations, net worth and the fair value of our net assets.
Spread risk or basis risk is the resulting impact of changes in the spread between our mortgage assets and our debt and derivatives we use to hedge our position. Changes in market conditions, including changes in interest rates, liquidity, prepayment and default expectations, and the level of uncertainty in the market for a particular asset class may cause fluctuations in spreads. Changes in mortgage spreads have contributed to significant volatility in our financial results in certain periods, due to fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings, and this could occur again in a future period. A widening of mortgage spreads could cause significant fair value losses, and could adversely affect our near-term financial results and net worth. We do not actively manage or hedge our spread risk after we purchase mortgage assets, other than through asset monitoring and disposition.
Our business is subject to laws and regulations that restrict our activities and operations, which limit our ability to diversify our business and may prohibit us from undertaking activities that management believes would benefit our business.
As a federally chartered corporation, we are subject to the limitations imposed by the Charter Act, extensive regulation, supervision and examination by FHFA and regulation by other federal agencies, including Treasury, HUD and the SEC. As a company under conservatorship, our primary regulator has management authority over us in its role as our conservator. We are also subject to other laws and regulations that affect our business, including those regarding taxation and privacy.
The Charter Act defines our permissible business activities. For example, we may not originate mortgage loans or purchase single-family loans in excess of the conforming loan limits, and our business is limited to the U.S. housing finance sector. In addition, as described in a previous risk factor, our business activities are subject to significant restrictions as a result of the conservatorship and the senior preferred stock purchase agreement. As a result of these limitations on our ability to diversify our operations, our financial condition and results of operations depend almost entirely on conditions in a single sector of the U.S. economy, specifically, the U.S. housing market. Weak or unstable conditions in the housing market can therefore have a significant adverse effect on our results of operations, financial condition and net worth.
Our business and financial results could be materially adversely affected by legal or regulatory proceedings.
We are a party to various claims and other legal proceedings. We also have been, and in the future may be, involved in government investigations. We may be required to establish accruals and to make substantial payments in the event of adverse judgments or settlements of any such claims, investigations or proceedings, which could have a material adverse effect on our business, results of operations, financial condition, liquidity and net worth. Any legal proceeding or governmental investigation, even if resolved in our favor, could result in negative publicity or cause us to incur significant legal and other expenses.
Developments in, outcomes of, impacts of, and costs, expenses, settlements and judgments related to these legal proceedings and governmental investigations may differ from our expectations and exceed any amounts for which we have accrued or require adjustments to such accruals. In addition, responding to these matters could divert significant internal resources away from managing our business.
An active trading market in our equity securities may cease to exist, which would adversely affect the market price and liquidity of our common and preferred stock.
Our common stock and preferred stock are now traded exclusively in the over-the-counter market. We cannot predict the actions of market makers, investors or other market participants, and can offer no assurances that the market for our securities will be stable. If there is no active trading market in our equity securities, the market price and liquidity of the securities will be adversely affected.

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Mortgage fraud could result in significant financial losses and harm to our reputation.
We use a process of delegated underwriting in which lenders make specific representations and warranties about the characteristics of the mortgage loans we purchase and securitize. As a result, we do not independently verify most borrower information that is provided to us. This exposes us to the risk that one or more of the parties involved in a transaction (the borrower, seller, broker, appraiser, title agent, lender or servicer) will engage in fraud by misrepresenting facts about a mortgage loan. Similarly, we rely on delegated servicing of loans and use of a variety of external resources to manage our REO. We have experienced financial losses resulting from mortgage fraud, including institutional fraud perpetrated by counterparties. In the future, we may experience additional financial losses or reputational damage as a result of mortgage fraud.
Risks Relating To Our Industry
Our business and financial results are affected by general economic conditions, particularly home prices and employment trends, and a deterioration of economic conditions or the financial markets may materially adversely affect our results of operations, net worth and financial condition.
Our business is significantly affected by the status of the U.S. economy, particularly home prices and employment trends. A prolonged period of slow growth in the U.S. economy or any deterioration in general economic conditions or the financial markets could materially adversely affect our results of operations, net worth and financial condition. For example, if home prices decrease or the unemployment rate increases, it could result in significantly higher levels of credit losses and credit-related expense.
Global economic conditions can also adversely affect our business and financial results. Changes or volatility in market conditions resulting from deterioration in or uncertainty regarding global economic conditions can adversely affect the value of our assets, which could materially adversely affect our results of operations, net worth and financial condition. For example, concerns about the impact of Brexit contributed to a decline in interest rates in the second quarter of 2016. This decline in interest rates contributed to the fair value losses on our derivatives in the second quarter of 2016. Global economic conditions also could negatively affect the credit performance of the loans in our book of business.
Volatility or uncertainty in global political conditions also can significantly affect economic conditions and the financial markets. We describe above the risks to our business posed by changes in interest rates and changes in spreads. In addition, as described above, future changes or disruptions in the financial markets could significantly change the amount, mix and cost of funds we obtain, as well as our liquidity position.
A decline in activity in the U.S. housing market or increasing interest rates could lower our business volumes.
Our business volume is affected by the rate of growth in total U.S. residential mortgage debt outstanding and the size of the U.S. residential mortgage market. A decline in mortgage debt outstanding reduces the unpaid principal balance of mortgage loans available for us to acquire, which in turn could reduce our net interest income. Even if we were able to increase our share of the secondary mortgage market, it may not be sufficient to make up for a decline in the rate of growth in mortgage originations.
Mortgage interest rates also affect our business volume. Rising interest rates generally result in fewer mortgage originations, particularly for refinances. An increase in interest rates, particularly if the increase is sudden and steep, could significantly reduce our business volume. Significant reductions in our business volume could adversely affect our results of operations and financial condition. In December 2016, the Federal Reserve raised the target range for the federal funds rate and stated that it expects economic conditions to evolve in a manner that will warrant only gradual increases in the federal funds rate. The Federal Reserve may increase rates at a faster rate than it is currently expecting. Moreover, the Federal Reserve’s federal funds rate path is not the only factor that affects long-term interest rates. Accordingly, our business remains subject to the risk of sudden and steep interest rate increases.
A reduction or end to the Federal Reserve’s acquisition of agency mortgage-backed securities could adversely affect our business, results of operations, financial condition, liquidity and net worth.
In recent years, the Federal Reserve has purchased a significant amount of mortgage-backed securities issued by us, Freddie Mac and Ginnie Mae. The Federal Reserve began to taper these purchases in January 2014 and

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concluded its asset purchase program in October 2014. Since concluding its asset purchase program, the Federal Reserve has maintained its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities; therefore, it has continued to purchase a significant amount of agency mortgage-backed securities. In a statement issued in February 2017, the Federal Reserve indicated that it anticipates maintaining its current reinvestment policy “until normalization of the level of the federal funds rate is well under way.” Any change in the Federal Reserve’s policy towards the reinvestment of principal payments of mortgage-backed securities, or possible future sales of mortgage-backed securities by the Federal Reserve, could result in increases in mortgage interest rates, adversely affect our business volume and reduce demand for Fannie Mae MBS, which could adversely affect our business, results of operations, financial condition, liquidity and net worth.
Changing regulations applicable to U.S. banks could materially adversely affect demand by banks for our debt securities and Fannie Mae MBS in the future.
U.S. banking regulators have issued a number of new regulations in recent years, including regulations relating to capital requirements, liquidity requirements, stress testing and other matters. These new requirements could materially adversely affect demand by U.S. banks for our debt securities and Fannie Mae MBS in the future and could limit the ability of banks to create markets for our debt securities and Fannie Mae MBS, which could adversely affect the price of those securities and could have a material adverse effect on our business, results of operations, financial condition, liquidity and net worth. For example, U.S. banking regulators issued a regulation that became effective January 1, 2015 setting minimum liquidity standards for large U.S. banks generally in accordance with Basel III standards. Under the rule, U.S. banks subject to the standards are required to hold a minimum level of high-quality liquid assets based on projections of their short-term cash needs. The debt and mortgage-related securities of Fannie Mae and Freddie Mac are permitted to count toward only up to 40% of the banks’ high-quality liquid asset requirement, and then only after applying a 15% discount to the market value of those securities. U.S. banks currently hold large amounts of our outstanding debt and MBS securities, and prior U.S. banking regulations did not limit the amount of these securities that banks were permitted to count toward their liquidity requirements. Accordingly, this rule could materially adversely affect demand by banks for Fannie Mae debt securities and Fannie Mae MBS in the future and could limit the ability of banks to create markets for our debt securities and Fannie Mae MBS.
The Dodd-Frank Act and regulatory changes in the financial services industry may negatively impact our business.
The Dodd-Frank Act has significantly changed the regulation of the financial services industry. This legislation is affecting and is expected to continue to affect many aspects of our business and could affect us in substantial and unforeseeable ways. The Dodd-Frank Act and related regulatory changes have required us to change certain business practices, limit the types of products we offer and incur additional costs. Additionally, implementation of this legislation has resulted in and is expected to continue to result in increased supervision and more comprehensive regulation of our customers and counterparties in the financial services industry, which may have a significant impact on the business practices of our customers and counterparties, as well as on our counterparty credit risk. The Dodd-Frank Act’s impact on our customers’ and counterparties’ business practices could indirectly adversely affect our business. For example, if our customers reduce the amount of their mortgage originations, it would adversely affect the number of mortgages available for us to purchase or guarantee.
Examples of aspects of the Dodd-Frank Act and related regulatory changes that have affected us or may affect us in the future include: rules requiring the clearing of certain derivatives transactions and margin and capital rules for uncleared derivative trades, which impose additional costs on us; the CFPB’s “ability-to-repay” rule, which has limited the types of products we offer and could impact the volume of loans sold to us in the future; and the development of single-counterparty credit limit regulations, which could cause our customers to change their business practices.
The Dodd-Frank Act also established the Financial Stability Oversight Council to ensure that all financial companies—not just banks—whose failure could pose a threat to the financial stability of the United States will be subject to strong oversight. Under the Dodd-Frank Act, the Financial Stability Oversight Council is responsible for designating systemically important nonbank financial companies. It is possible that we could be designated as a systemically important nonbank financial company by the Financial Stability Oversight Council, although we have not received any notification of possible designation. If this were to occur, we would become subject to regulation by the Federal Reserve Board, which could impose stricter prudential standards on us.

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The current Administration and some members of Congress have indicated a desire to amend the Dodd-Frank Act. If the Dodd-Frank Act is amended, it could affect regulations currently applicable to us and our customers and counterparties. We cannot predict the prospects for the enactment of amendments to the Dodd-Frank Act or how they might impact our business or our customers and counterparties.
In addition, the actions of Treasury, the Commodity Futures Trading Commission, the SEC, the FDIC, the Federal Reserve and international central banking authorities directly or indirectly impact financial institutions’ cost of funds for lending, capital-raising and investment activities, which could increase our borrowing costs or make borrowing more difficult for us. Changes in monetary policy are beyond our control and difficult to anticipate.
Overall, these legislative and regulatory changes could affect us in substantial and unforeseeable ways and could have a material adverse effect on our business, results of operations, financial condition, liquidity and net worth.
Legislative, regulatory or judicial actions could negatively impact our business, results of operations, financial condition or net worth.
Legislative, regulatory or judicial actions at the federal, state or local level could negatively impact our business, results of operations, financial condition or net worth. Legislative, regulatory or judicial actions could affect us in a number of ways, including by imposing significant additional costs on us and diverting management attention or other resources. For example, we could be affected by legislative or regulatory changes that expand our or our servicers’ responsibility and liability for securing, maintaining or otherwise overseeing vacant properties prior to foreclosure, which could increase our costs. We also could be affected by state laws and court decisions granting new or expanded priority rights to homeowners associations over our mortgages, which could adversely affect our ability to recover our losses on affected loans. In addition, as described above, our business could be materially adversely affected by legislative and regulatory actions relating to housing finance reform, corporate income tax reform or the financial services industry, or by legal or regulatory proceedings.
The occurrence of a major natural or other disaster in the United States could negatively impact our credit losses and credit-related expenses.
We conduct our business in the residential and multifamily mortgage markets and own or guarantee the performance of mortgage loans throughout the United States. The occurrence of a major natural or environmental disaster, terrorist attack, cyber attack, pandemic, or similar event (a “major disruptive event”) in a regional geographic area of the United States could negatively impact our credit losses and credit-related expenses in the affected area or, depending on the nature of the event, nationally.
The occurrence of a major disruptive event could negatively impact a geographic area in a number of different ways, depending on the nature of the event. A major disruptive event that either damages or destroys residential or multifamily real estate securing mortgage loans in our book of business or negatively impacts the ability of borrowers to continue to make principal and interest payments on mortgage loans in our book of business could increase our delinquency rates, default rates and average loan loss severity of our book of business in the affected region or regions, which could have a material adverse effect on our business, results of operations, financial condition, liquidity and net worth. While we attempt to create a geographically diverse mortgage credit book of business, there can be no assurance that a major disruptive event, depending on its magnitude, scope and nature, will not generate significant credit losses and credit-related expenses.
Item 1B.  Unresolved Staff Comments
None.
Item 2.  Properties
We own or lease ten office facilities in the Washington, DC area with a total square footage of approximately 2,161,000 square feet.
In January 2015, we entered into a lease for a future principal office in a building to be built at 1100 15th Street, NW, Washington, DC. Accordingly, we sold our current principal office located at 3900 Wisconsin Ave, NW, Washington, DC, as well as two other Washington, DC office facilities, in November 2016. We currently occupy these three facilities pursuant to lease arrangements.
We also maintain approximately 680,000 square feet of office space in leased premises in Dallas, Texas and other locations in the United States.

Fannie Mae 2016 Form 10-K
 
50
 
 
Legal Proceedings

Item 3.  Legal Proceedings
This item describes our material legal proceedings. We describe additional material legal proceedings in “Note 18, Commitments and Contingencies,” which is incorporated herein by reference. In addition to the matters specifically described or incorporated by reference in this item, we are involved in a number of legal and regulatory proceedings that arise in the ordinary course of business that do not have a material impact on our business. Litigation claims and proceedings of all types are subject to many factors that generally cannot be predicted accurately.
We record accruals for legal claims when losses associated with those claims become probable and the amounts can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims. For matters where the likelihood or extent of a loss is not probable or cannot be reasonably estimated, we do not recognize in our consolidated financial statements the potential liability that may result from these matters. We presently cannot determine the ultimate resolution of the matters described below or incorporated by reference into this item. If certain of these matters are determined against us, FHFA or Treasury it could have a material adverse effect on our results of operations, liquidity and financial condition, including our net worth.
FHFA Private-Label Mortgage-Related Securities Litigation
In the third quarter of 2011, FHFA, as conservator, filed 16 lawsuits on behalf of both Fannie Mae and Freddie Mac against various financial institutions, their officers and affiliated and unaffiliated underwriters that were responsible for marketing and selling private-label mortgage-related securities to us. Fourteen of these lawsuits were resolved during 2013 and 2014, and two remain pending.
These two remaining lawsuits, which were both filed on September 2, 2011, seek to recover losses we and Freddie Mac incurred on the private-label mortgage-related securities the defendants sold to us and Freddie Mac. The lawsuits allege that the defendants violated federal and state securities laws by making material misstatements and omissions regarding the characteristics of the loans underlying the securities in the offering documents for the securities that were sold to Fannie Mae and Freddie Mac. The complaints seek, among other things, rescission and recovery of consideration paid for the securities at issue in the lawsuits and interest.
One of the remaining lawsuits is against Nomura Holding America Inc., RBS Securities Inc. and certain related entities and individuals. On May 15, 2015, the U.S. District Court for the Southern District of New York entered a final judgment in the Nomura action, holding the defendants liable for claims brought under state and federal securities laws. On June 10, 2015, defendants in the Nomura action appealed this judgment to the U.S. Court of Appeals for the Second Circuit, which heard oral argument on November 18, 2016. The judgment, if affirmed in full, requires defendants to pay Fannie Mae $27 million and Freddie Mac $779 million, and requires Fannie Mae and Freddie Mac to deliver the securities at issue in the complaint to the defendants. In addition, if the judgment is affirmed in full, defendants are required to pay $33 million to cover attorneys’ fees and costs for both us and Freddie Mac.
The other remaining lawsuit is against The Royal Bank of Scotland Group PLC and certain related entities and individuals, and is pending in the U.S. District Court for the District of Connecticut.
Senior Preferred Stock Purchase Agreements Litigation
Between June 2013 and October 2016, several lawsuits were filed by preferred and common stockholders of Fannie Mae and Freddie Mac in the U.S. Court of Federal Claims, the U.S. District Court for the District of Columbia, the U.S. District Court for the Southern District of Iowa, the U.S. District Court for the Northern District of Iowa, the U.S. District Court for the District of Delaware, the U.S. District Court for the Eastern District of Kentucky, the U.S. District Court for the Northern District of Illinois, the U.S. District Court for the Western District of Texas and the U.S. District Court for the Southern District of Texas against one or more of the United States, Treasury and FHFA, challenging actions taken by the defendants relating to the senior preferred stock purchase agreements and the conservatorships of Fannie Mae and Freddie Mac. Some of these lawsuits also contain claims against Fannie Mae and Freddie Mac. The legal claims being advanced by one or more of these lawsuits include challenges to the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendments to the agreements, the payment of dividends to Treasury under the net worth sweep dividend provisions, and FHFA’s decision to require Fannie Mae and Freddie Mac to draw funds from Treasury in order to pay dividends to Treasury prior to the August 2012 amendments. The

Fannie Mae 2016 Form 10-K
 
51
 
 
Legal Proceedings

plaintiffs seek various forms of equitable and injunctive relief, including rescission of the August 2012 amendments, as well as damages.
On September 30, 2014, the U.S. District Court for the District of Columbia dismissed all but one of the cases then pending before that court. The plaintiffs in each of the dismissed cases filed a notice of appeal and on October 27, 2014, the U.S. Court of Appeals for the D.C. Circuit consolidated these appeals. The plaintiffs in the case that was not dismissed by the court voluntarily dismissed their lawsuit on October 31, 2014. On February 3, 2015, the U.S. District Court for the Southern District of Iowa dismissed the case pending before it. On April 15, 2016, the U.S. Court of Appeals for the D.C. Circuit heard oral argument on the consolidated appeals. On September 9, 2016, the U.S. District Court for the Eastern District of Kentucky dismissed the case pending before it. The plaintiff in that case filed a notice of appeal and the appeal was docketed on November 17, 2016. A case filed in the U.S. District Court for the District of Columbia in June 2016, after the dismissal of the initial set of cases filed in that court, was dismissed on December 19, 2016. The matters where Fannie Mae is a named defendant are described below or in “Note 18, Commitments and Contingencies.”
Fannie Mae is a nominal defendant in two actions filed against the United States in the U.S. Court of Federal Claims: Fisher v. United States of America, filed on December 2, 2013, and Rafter v. United States of America, filed on August 14, 2014. Plaintiffs in these cases allege that the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendment to the senior preferred stock purchase agreement constitute a taking of Fannie Mae’s property without just compensation in violation of the U.S. Constitution. The Fisher plaintiffs are pursuing this claim derivatively on behalf of Fannie Mae, while the Rafter plaintiffs are pursing the claim directly against the United States. Plaintiffs in Rafter also allege a derivative claim that the government breached an implied contract with Fannie Mae’s Board of Directors by implementing the net worth sweep dividend provisions. Plaintiffs in Fisher request just compensation to Fannie Mae in an unspecified amount. Plaintiffs in Rafter seek just compensation for themselves on their constitutional claim and payment of damages to Fannie Mae on their derivative claim for breach of an implied contract. The United States filed a motion to dismiss the Fisher case on January 23, 2014; however, the court has stayed proceedings in this case until discovery in a related case, Fairholme Funds v. United States, is complete and the court sets a date for the Fairholme Funds plaintiffs to respond to the government’s motion to dismiss filed in that case. In the Rafter case, the court has ordered the government to file a response to the complaint within sixty days after discovery is complete in the Fairholme Funds case.
Fannie Mae is also a nominal defendant in a case filed against FHFA and Treasury in the U.S. District Court for the District of Delaware: Jacobs v. FHFA, filed on August 17, 2015. The plaintiffs allege that the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendments to the agreements violate Delaware law. The plaintiffs are pursuing this claim derivatively on behalf of Fannie Mae and directly against the government. The plaintiffs have also alleged direct breach of contract claims and breach of fiduciary duty claims against the government. The government filed motions to dismiss the case on November 13, 2015.
On March 14, 2016, Timothy Pagliara filed a lawsuit against Fannie Mae in the Delaware Court of Chancery: Pagliara v. Federal National Mortgage Association. The plaintiff owns Fannie Mae preferred stock and seeks access to Fannie Mae’s books and records under a provision of Delaware state law. The plaintiff alleges that he is entitled to inspect Fannie Mae’s books and records in order to investigate potential breaches of duties to stockholders related to the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendment to the senior preferred stock purchase agreement, as well as Fannie Mae’s involvement in the common securitization platform, Common Securitization Solutions, LLC, and the single security. On March 25, 2016, Fannie Mae and FHFA removed the case to the U.S. District Court for the District of Delaware. On July 18, 2016, FHFA filed a motion to substitute itself for the plaintiff.
LIBOR Lawsuit
On October 31, 2013, Fannie Mae filed a lawsuit in the U.S. District Court for the Southern District of New York against Barclays Bank PLC, UBS AG, The Royal Bank of Scotland Group PLC, The Royal Bank of Scotland PLC, Deutsche Bank AG, Credit Suisse Group AG, Credit Suisse International, Bank of America Corp., Bank of America, N.A., Citigroup Inc., Citibank, N.A., J.P. Morgan Chase & Co., J.P. Morgan Chase Bank, N.A., Coöperative Centrale Raiffeisen-Boerenleenbank B.A., the British Bankers Association (the “BBA”) and BBA LIBOR Ltd. alleging they manipulated LIBOR. On October 6, 2014, Fannie Mae filed an amended complaint alleging, among other things, that the banks submitted false borrowing costs to the BBA in order to suppress

Fannie Mae 2016 Form 10-K
 
52
 
 
Legal Proceedings

LIBOR. The amended complaint seeks compensatory and punitive damages based on claims for breach of contract, breach of the implied duty of good faith and fair dealing, unjust enrichment, fraud and conspiracy to commit fraud. The defendants filed motions to dismiss the lawsuit on November 5, 2014. On August 4, 2015, the court decided defendants’ motions to dismiss, granting in part and denying in part the relief sought. The court ruled that Fannie Mae had adequately pled its fraud, breach of contract and unjust enrichment claims against the defendants, but that the applicable statute of limitations periods precluded some of our contract and unjust enrichment claims against the defendants from proceeding. In addition, the court dismissed the BBA and Credit Suisse Group AG from the lawsuit.  
Item 4.  Mine Safety Disclosures
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the ticker symbol “FNMA.” The transfer agent and registrar for our common stock is Computershare Trust Company, N.A., P.O. Box 30170, College Station, TX 77842-3170.
Common Stock Data
The following table displays, for the periods indicated, the high and low prices per share of our common stock as reported in the Bloomberg Financial Markets service. These prices represent high and low trade prices. No dividends were declared on shares of our common stock during the periods indicated.
Quarter
High

 
Low

2015
 
 
 
First Quarter
$
3.51

 
$
2.05

Second Quarter
2.96

 
2.27

Third Quarter
2.72

 
2.00

Fourth Quarter
2.70

 
1.58

2016
 
 
 
First Quarter
$
1.83

 
$
0.98

Second Quarter
2.48

 
1.26

Third Quarter
2.08

 
1.57

Fourth Quarter
5.00

 
1.61

Dividends
Our payment of dividends is subject to the following restrictions:
Restrictions Relating to Conservatorship. Our conservator announced on September 7, 2008 that we would not pay any dividends on the common stock or on any series of preferred stock, other than the senior preferred stock. In addition, FHFA’s regulations relating to conservatorship and receivership operations prohibit us from paying any dividends while in conservatorship unless authorized by the Director of FHFA. The Director of FHFA has directed us to make dividend payments on the senior preferred stock on a quarterly basis.
Restrictions Under Senior Preferred Stock Purchase Agreement. The senior preferred stock purchase agreement prohibits us from declaring or paying any dividends on Fannie Mae equity securities (other than the senior preferred stock) without the prior written consent of Treasury. In addition, in 2012 the terms of the senior preferred stock purchase agreement and the senior preferred stock were amended to require that we pay Treasury each quarter any dividends declared consisting of the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount, which will decrease to zero in 2018. As a result, our net income is not available to common stockholders. For more information on the terms of the senior preferred stock purchase agreement and senior preferred stock, see “Business—Conservatorship and

Fannie Mae 2016 Form 10-K
 
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Treasury Agreements—Treasury Agreements—Senior Preferred Stock Purchase Agreement and Related Issuance of Senior Preferred Stock and Common Stock Warrant.”
Additional Restrictions Relating to Preferred Stock. Payment of dividends on our common stock is also subject to the prior payment of dividends on our preferred stock and our senior preferred stock. Payment of dividends on all outstanding preferred stock, other than the senior preferred stock, is also subject to the prior payment of dividends on the senior preferred stock.
Statutory Restrictions. Under the GSE Act, FHFA has authority to prohibit capital distributions, including payment of dividends, if we fail to meet our capital requirements. If FHFA classifies us as significantly undercapitalized, approval of the Director of FHFA is required for any dividend payment. Under the Charter Act and the GSE Act, we are not permitted to make a capital distribution if, after making the distribution, we would be undercapitalized. The Director of FHFA, however, may permit us to repurchase shares if the repurchase is made in connection with the issuance of additional shares or obligations in at least an equivalent amount and will reduce our financial obligations or otherwise improve our financial condition.
Holders
As of January 31, 2017, we had approximately 12,000 registered holders of record of our common stock. In addition, as of January 31, 2017, Treasury held a warrant giving it the right to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis on the date of exercise.
Recent Sales of Unregistered Securities
Under the terms of our senior preferred stock purchase agreement with Treasury, we are prohibited from selling or issuing our equity interests, other than as required by (and pursuant to) the terms of a binding agreement in effect on September 7, 2008, without the prior written consent of Treasury. During the quarter ended December 31, 2016, we did not issue any equity securities.
Information about Certain Securities Issuances by Fannie Mae
Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a material direct financial obligation or become directly or contingently liable for a material obligation under an off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03 or, if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for that offering that are filed with the SEC.
Because the securities we issue are exempted securities under the Securities Act of 1933, we do not file registration statements or prospectuses with the SEC with respect to our securities offerings. To comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial obligations, we report our incurrence of these types of obligations either in offering circulars or prospectuses (or supplements thereto) that we post on our website or in a current report on Form 8-K that we file with the SEC, in accordance with a “no-action” letter we received from the SEC staff in 2004. In cases where the information is disclosed in a prospectus or offering circular posted on our website, the document will be posted on our website within the same time period that a prospectus for a non-exempt securities offering would be required to be filed with the SEC.
The website address for disclosure about our debt securities is www.fanniemae.com/debtsearch. From this address, investors can access the offering circular and related supplements for debt securities offerings under Fannie Mae’s universal debt facility, including pricing supplements for individual issuances of debt securities.
Disclosure about our obligations pursuant to some of the MBS we issue, some of which may be off-balance sheet obligations, can be found at www.fanniemae.com/mbsdisclosure. From this address, investors can access information and documents about our MBS, including prospectuses and related prospectus supplements.
We are providing our website address solely for your information. Information appearing on our website is not incorporated into this report.
Our Purchases of Equity Securities
We did not repurchase any of our equity securities during the fourth quarter of 2016.

Fannie Mae 2016 Form 10-K
 
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Selected Financial Data

Item 6. Selected Financial Data
The selected consolidated financial data displayed below are summarized from our results of operations for the five-year period ended December 31, 2016, as well as selected consolidated balance sheet data as of the end of each year within this five-year period. This data should be reviewed in conjunction with the audited consolidated financial statements and related notes and with the MD&A included in this annual report on Form 10-K.
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(Dollars in millions)
 
Statement of operations data:
 
 
 
 
 
 
 
 
 
 
Net revenues(1)
$
22,261

 
$
22,757

 
$
25,855

 
$
26,334

 
$
22,988

 
Net income attributable to Fannie Mae
12,313

 
10,954

 
14,208

 
83,963

 
17,224

 
New business purchase data:
 
 
 
 
 
 
 
 
 
 
New business purchases(2)
$
637,425

 
$
515,541

 
$
409,834

 
$
759,535

 
$
867,387

 
Performance ratios:
 
 
 
 
 
 
 
 
 
 
Net interest yield(3)
0.67

%
0.68

%
0.63

%
0.70

%
0.68

%
Credit loss ratio (in basis points)(4)
12.0

bps
35.0

bps
19.4

bps
14.7

bps
48.2

bps
 
As of December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(Dollars in millions)
Balance sheet data:
 
 
 
 
 
 
 
 
 
Investments in securities
$
48,925

 
$
60,138

 
$
62,158

 
$
68,939

 
$
103,876

Mortgage loans, net of allowance(5)
3,079,753

 
3,019,644

 
3,019,494

 
3,026,240

 
2,949,406

Total assets
3,287,968

 
3,221,917

 
3,248,176

 
3,270,108

 
3,222,422

Short-term debt
35,579

 
71,950

 
106,572

 
74,449

 
108,716

Long-term debt
3,226,737

 
3,125,721

 
3,115,583

 
3,160,074

 
3,080,801

Total liabilities
3,281,897

 
3,217,858

 
3,244,456

 
3,260,517

 
3,215,198

Senior preferred stock
117,149

 
117,149

 
117,149

 
117,149

 
117,149

Preferred stock
19,130

 
19,130

 
19,130

 
19,130

 
19,130

Total Fannie Mae stockholders’ equity
6,071

 
4,030

 
3,680

 
9,541

 
7,183

Net worth surplus
6,071

 
4,059

 
3,720

 
9,591

 
7,224


Fannie Mae 2016 Form 10-K
 
55
 
 
Selected Financial Data

 
As of December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
(Dollars in millions)
 
Book of business data:
 
 
 
 
 
 
 
 
 
 
Mortgage credit book of business(6)
$
3,102,503

 
$
3,065,955

 
$
3,091,102

 
$
3,136,765

 
$
3,116,842

 
Guaranty book of business(7)
3,092,271

 
3,043,141

 
3,056,219

 
3,090,538

 
3,039,457

 
Credit quality:
 
 
 
 
 
 
 
 
 
 
Total troubled debt restructurings on accrual status
$
127,494

 
$
140,964

 
$
145,294

 
$
141,227

 
$
136,064

 
Total nonaccrual loans(8)
44,450

 
49,412

 
64,959

 
83,606

 
114,833

 
Total loss reserves
23,929

 
28,774

 
38,173

 
47,290

 
62,629

 
Total loss reserves as a percentage of total guaranty book of business
0.77

%
0.95

%
1.25

%
1.53

%
2.06

%
Total loss reserves as a percentage of total nonaccrual loans
53.83

 
58.23

 
58.76

 
56.56

 
54.54

 
__________
(1) 
Consists of net interest income and fee and other income.
(2) 
New business purchases consist of single-family and multifamily whole mortgage loans purchased during the period and single-family and multifamily mortgage loans underlying Fannie Mae MBS issued during the period pursuant to lender swaps.
(3) 
Calculated based on net interest income for the period divided by the average balance of total interest-earning assets during the period, expressed as a percentage.
(4) 
Consists of (a) charge-offs, net of recoveries and (b) foreclosed property expense (income) for the reporting period (adjusted to exclude the impact of fair value losses resulting from credit-impaired loans acquired from MBS trusts) divided by the average guaranty book of business during the period, expressed in basis points. See “MD&A—Consolidated Results of Operations—Credit-Related Income (Expense)—Credit Loss Performance Metrics” for a discussion of how our credit loss metrics are calculated. Our credit loss ratio in 2015 was impacted by charge-offs of (1) $1.8 billion in loans held for investment and $724 million in preforeclosure property taxes and insurance receivable that we recognized on January 1, 2015 upon our adoption of the Advisory Bulletin and (2) $1.1 billion in accrued interest receivable that we recognized on January 1, 2015 upon our adoption of a change in accounting policy related to loans placed on nonaccrual status. See “Note 1, Summary of Significant Accounting Policies” for additional information.
(5) 
Mortgage loans consist solely of domestic residential real-estate mortgages.
(6) 
Refers to the sum of the unpaid principal balance of: (a) mortgage loans of Fannie Mae; (b) mortgage loans underlying Fannie Mae MBS; (c) non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio; and (d) other credit enhancements that we provide on mortgage assets.
(7) 
Reflects mortgage credit book of business less non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
(8) 
We generally classify single-family loans as nonaccrual when the payment of principal or interest on the loan is 60 days or more past due. Multifamily loans are placed on nonaccrual status when the loan becomes 90 days or more past due according to its contractual terms or is deemed individually impaired. See “Note 1, Summary of Significant Accounting Policies” for more information about our policies on nonaccrual loans.

Fannie Mae 2016 Form 10-K
 
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MD&A | Critical Accounting Policies and Estimates

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read this MD&A in conjunction with our consolidated financial statements as of December 31, 2016 and related notes to the consolidated financial statements, and with “Business—Executive Summary.” Please also see “Glossary of Terms Used in This Report.”
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in “Note 1, Summary of Significant Accounting Policies.”
We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. Management has discussed any significant changes in judgments and assumptions in applying our critical accounting policies with the Audit Committee of our Board of Directors. See “Risk Factors” for a discussion of the risks associated with the need for management to make judgments and estimates in applying our accounting policies and methods. We have identified two of our accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition: fair value measurement and combined loss reserves.
Fair Value Measurement
The use of fair value to measure our assets and liabilities is fundamental to our financial statements and our fair value measurement is a critical accounting estimate because we account for and record a portion of our assets and liabilities at fair value. In determining fair value, we use various valuation techniques. We describe the valuation techniques and inputs used to determine the fair value of our assets and liabilities and disclose their carrying value and fair value in “Note 17, Fair Value.”
The fair value accounting rules provide a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. Each asset or liability is assigned to a level based on the lowest level of any input that is significant to its fair value measurement. The three levels of the fair value hierarchy are described below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities.
Level 3: Unobservable inputs.
The majority of the financial instruments that we report at fair value in our consolidated financial statements fall within the Level 2 category and are valued primarily utilizing inputs and assumptions that are observable in the marketplace, that can be derived from observable market data or that can be corroborated by recent trading activity of similar instruments with similar characteristics. For example, we generally request non-binding prices from at least three independent pricing services to estimate the fair value of our trading and available-for-sale securities at an individual security level. We use the average of these prices to determine the fair value.
In the absence of such information or if we are not able to corroborate these prices by other available, relevant market information, we estimate their fair values based on single source quotations from brokers or dealers or by using internal calculations or discounted cash flow techniques that incorporate inputs, such as prepayment rates, discount rates and delinquency, default and cumulative loss expectations, that are implied by market prices for similar securities and collateral structure types. Because these valuation techniques rely on significant unobservable inputs, the fair value estimation is classified as Level 3. The process for determining fair value using unobservable inputs is generally more subjective and involves a high degree of management judgment and assumptions. These assumptions may have a significant effect on our estimates of fair value, and the use of

Fannie Mae 2016 Form 10-K
 
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MD&A | Critical Accounting Policies and Estimates

different assumptions as well as changes in market conditions could have a material effect on our results of operations or financial condition.
Fair Value Hierarchy—Level 3 Assets and Liabilities
The assets and liabilities that we have classified as Level 3 consist primarily of financial instruments for which there is limited market activity and therefore little or no price transparency. As a result, the valuation techniques that we use to estimate the fair value of Level 3 instruments involve significant unobservable inputs, which generally are more subjective and involve a high degree of management judgment and assumptions. Our Level 3 assets and liabilities consist of certain mortgage-backed securities and residual interests, certain mortgage loans, acquired property, certain long-term debt arrangements and certain highly structured, complex derivative instruments. We provide a detailed discussion of our Level 3 assets and liabilities, including the valuation techniques and significant unobservable inputs used to measure the fair value of these instruments, in “Note 17, Fair Value.”
Valuation Control Processes
We have control processes that are designed to ensure that our fair value measurements are appropriate and reliable, that they are based on observable inputs wherever possible and that our valuation approaches are consistently applied and the assumptions used are reasonable. Our control processes consist of a framework that provides for a segregation of duties and oversight of our fair value methodologies and valuations, as well as validation procedures. We provide a detailed discussion of our valuation control processes in “Note 17, Fair Value.”
Combined Loss Reserves
Our combined loss reserves consist of the following components:
•
Allowance for loan losses
•
Reserve for guaranty losses
These components can be further allocated into our single-family and multifamily loss reserves.
We maintain an allowance for loan losses for loans classified as held for investment, including both loans we hold in our portfolio and loans held in consolidated Fannie Mae MBS trusts. We maintain a reserve for guaranty losses for loans held in unconsolidated Fannie Mae MBS trusts we guarantee and loans we have guaranteed under long-term standby commitments and other credit enhancements we have provided. These amounts, which we collectively refer to as our combined loss reserves, represent probable losses incurred related to loans in our guaranty book of business, including concessions granted to borrowers upon modifications of their loans, as of the balance sheet date.
The allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related to our loans held for investment. The reserve for guaranty losses is a liability account in our consolidated balance sheets that reflects an estimate of incurred credit losses related to our guaranty to each unconsolidated Fannie Mae MBS trust that we will supplement amounts received by the Fannie Mae MBS trust as required to permit timely payments of principal and interest on the related Fannie Mae MBS. As a result, the guaranty reserve considers not only the principal and interest due on the loan at the current balance sheet date, but also an estimate of any additional interest payments due to the trust from the current balance sheet date until the point of loan acquisition or foreclosure. Our loss reserves consist of a specific loss reserve for individually impaired loans and a collective loss reserve for all other loans.
We have an established process, using analytical tools, benchmarks and management judgment, to determine our loss reserves. Our process for determining our loss reserves is complex and involves significant management judgment. Although our loss reserve process benefits from extensive historical loan performance data, this process is subject to risks and uncertainties, including a reliance on historical loss information that may not be representative of current conditions. We continually monitor prepayment, delinquency, modification, default and loss severity trends and periodically make changes in our historically developed assumptions and estimates as necessary to better reflect present conditions, including current trends in borrower risk, general economic trends, changes in risk management practices, and changes in public policy and the regulatory environment. We also consider the recoveries that we expect to receive on mortgage insurance and other loan-specific credit

Fannie Mae 2016 Form 10-K
 
58
 
MD&A | Critical Accounting Policies and Estimates

enhancements entered into contemporaneously with and in contemplation of a guaranty or loan purchase transaction, as such recoveries reduce the severity of the loss associated with defaulted loans.
We provide more detailed information on our accounting for the allowance for loan losses in “Note 1, Summary of Significant Accounting Policies.”
Single-Family Loss Reserves
We establish a specific single-family loss reserve for individually impaired loans, which includes loans we restructure in troubled debt restructurings (“TDRs”), certain nonperforming loans in MBS trusts and acquired credit-impaired loans that have been further impaired subsequent to acquisition. The single-family loss reserve for individually impaired loans represents the majority of our single-family loss reserves due to the high volume of restructured loans. We typically measure impairment based on the difference between our recorded investment in the loan and the present value of the estimated cash flows we expect to receive, which we calculate using the effective interest rate of the original loan or the effective interest rate at acquisition for an acquired credit-impaired loan. However, when foreclosure is probable on an individually impaired loan, we measure impairment based on the difference between our recorded investment in the loan and the fair value of the underlying property, adjusted for the estimated discounted costs to sell the property and estimated insurance or other proceeds we expect to receive. When a loan has been restructured or modified, we measure impairment using a cash flow analysis discounted at the loan’s original effective interest rate.
We establish a collective single-family loss reserve for all other single-family loans in our single-family guaranty book of business using a model that estimates the probability of default of loans to derive a loss reserve estimate given multiple factors such as: origination year, mark-to-market LTV ratio, delinquency status and loan product type. The loss severity estimates we use in determining our loss reserves reflect current available information on actual events and conditions as of each balance sheet date, including current home prices. Our loss severity estimates do not incorporate assumptions about future changes in home prices. We do, however, use recent regional historical sales and appraisal information, including the sales of our own foreclosed properties, to develop our loss severity estimates for all loan categories.
Multifamily Loss Reserves
We establish a collective multifamily loss reserve for all loans in our multifamily guaranty book of business that are not individually impaired using an internal model that applies loss factors to loans in similar risk categories. Our loss factors are developed based on our historical default and loss severity experience. Management may also apply judgment to adjust the loss factors derived from our models, taking into consideration model imprecision and specific, known events, such as current credit conditions, that may affect the credit quality of our multifamily loan portfolio but are not yet reflected in our model-generated loss factors.
We establish a specific multifamily loss reserve for multifamily loans that we determine are individually impaired. We identify multifamily loans for evaluation for impairment through a credit risk assessment process. As part of this assessment process, we stratify multifamily loans into different internal risk categories based on the credit risk inherent in each individual loan and management judgment. We categorize loan credit risk, taking into consideration available operating statements and expected cash flows from the underlying property, the estimated value of the property, the historical loan payment experience and current relevant market conditions that may impact credit quality. If we conclude that a multifamily loan is impaired, we measure the impairment based on the difference between our recorded investment in the loan and the fair value of the underlying property less the estimated discounted costs to sell the property and any lender loss sharing or other proceeds we expect to receive. When a multifamily loan is deemed individually impaired because we have modified it, we measure the impairment based on the difference between our recorded investment in the loan and the present value of expected cash flows discounted at the loan’s original interest rate unless foreclosure is probable, at which time we measure impairment the same way we measure it for other individually impaired multifamily loans.
Consolidated Results of Operations
This section provides a discussion of our consolidated results of operations for the periods indicated and should be read together with our consolidated financial statements, including the accompanying notes.

Fannie Mae 2016 Form 10-K
 
59
 
 
MD&A | Consolidated Results of Operations

Table 2: Summary of Consolidated Results of Operations
 
For the Year Ended December 31,
 
Variance
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
 
(Dollars in millions)
Net interest income
$
21,295

 
$
21,409

 
$
19,968

 
 
$
(114
)
 
 
 
$
1,441

 
Fee and other income
966

 
1,348

 
5,887

 
 
(382
)
 
 
 
(4,539
)
 
Net revenues
22,261

 
22,757

 
25,855

 
 
(496
)
 
 
 
(3,098
)
 
Investment gains, net
1,256

 
1,336

 
936

 
 
(80
)
 
 
 
400

 
Fair value losses, net
(1,081
)
 
(1,767
)
 
(4,833
)
 
 
686

 
 
 
3,066

 
Administrative expenses
(2,741
)
 
(3,050
)
 
(2,777
)
 
 
309

 
 
 
(273
)
 
Credit-related income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
Benefit for credit losses
2,155

 
795

 
3,964

 
 
1,360

 
 
 
(3,169
)
 
Foreclosed property expense
(644
)
 
(1,629
)
 
(142
)
 
 
985

 
 
 
(1,487
)
 
Total credit-related income (expense)
1,511

 
(834
)
 
3,822

 
 
2,345

 
 
 
(4,656
)
 
TCCA fees
(1,845
)
 
(1,621
)
 
(1,375
)
 
 
(224
)
 
 
 
(246
)
 
Other expenses, net
(1,028
)
 
(613
)
 
(478
)
 
 
(415
)
 
 
 
(135
)
 
Income before federal income taxes
18,333

 
16,208

 
21,150

 
 
2,125

 
 
 
(4,942
)
 
Provision for federal income taxes
(6,020
)
 
(5,253
)
 
(6,941
)
 
 
(767
)
 
 
 
1,688

 
Net income
12,313

 
10,955

 
14,209

 
 
1,358

 
 
 
(3,254
)
 
Less: Net income attributable to noncontrolling interest
—

 
(1
)
 
(1
)
 
 
1

 
 
 
—

 
Net income attributable to Fannie Mae
$
12,313

 
$
10,954

 
$
14,208

 
 
$
1,359

 
 
 
$
(3,254
)
 
Total comprehensive income attributable to Fannie Mae
$
11,665

 
$
10,628

 
$
14,738

 
 
$
1,037

 
 
 
$
(4,110
)
 
Net Interest Income
We have two primary sources of net interest income: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets.
Guaranty fees consist of two primary components: (1) base guaranty fees that we receive over the life of the loan; and (2) upfront fees that we receive at the time of loan acquisition primarily related to single-family loan level pricing adjustments and other fees we receive from lenders, which are amortized over the contractual life of the loan. We recognize almost all of our guaranty fee revenue in net interest income due to the consolidation of the substantial majority of loans underlying our Fannie Mae MBS in consolidated trusts on our balance sheet. Those guaranty fees are the primary component of the difference between the interest income on loans in consolidated trusts and the interest expense on the debt of consolidated trusts.
Table 3 displays an analysis of our net interest income, average balances, and related yields earned on assets and incurred on liabilities for the periods indicated. For most components of the average balances, we use a daily weighted average of amortized cost. When daily average balance information is not available, such as for mortgage loans, we use monthly averages. Table 4 displays the change in our net interest income between periods and the extent to which that variance is attributable to: (1) changes in the volume of our interest-earning assets and interest-bearing liabilities or (2) changes in the interest rates of these assets and liabilities.

Fannie Mae 2016 Form 10-K
 
60
 
 
MD&A | Consolidated Results of Operations

Table 3: Analysis of Net Interest Income and Yield
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
(Dollars in millions)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of Fannie Mae
$
228,786

 
$
9,376

 
4.10
%
 
$
257,870

 
$
9,728

 
3.77
%
 
$
286,042

 
$
10,285

 
3.60
%
Mortgage loans of consolidated trusts
2,838,453

 
95,266

 
3.36

 
2,794,050

 
97,971

 
3.51

 
2,769,418

 
101,835

 
3.68

Total mortgage loans(1)
3,067,239

 
104,642

 
3.41

 
3,051,920

 
107,699

 
3.53

 
3,055,460

 
112,120

 
3.67

Mortgage-related securities
69,561

 
2,743

 
3.94

 
109,749

 
4,880

 
4.45

 
143,934

 
6,713

 
4.66

Elimination of Fannie Mae MBS held in retained mortgage portfolio
(48,131
)
 
(1,868
)
 
3.88

 
(76,250
)
 
(3,351
)
 
4.39

 
(98,778
)
 
(4,572
)
 
4.63

Total mortgage-related securities, net
21,430

 
875

 
4.08

 
33,499

 
1,529

 
4.56

 
45,156

 
2,141

 
4.74

Non-mortgage-related securities(2)
54,355

 
261

 
0.48

 
46,498

 
71

 
0.15

 
35,184

 
34

 
0.10

Federal funds sold and securities purchased under agreements to resell or similar arrangements
27,917

 
141

 
0.51

 
31,173

 
60

 
0.19

 
33,631

 
32

 
0.10

Advances to lenders
4,583

 
102

 
2.23

 
4,063

 
83

 
2.04

 
3,454

 
78

 
2.26

Total interest-earning assets
$
3,175,524

 
$
106,021

 
3.34
%
 
$
3,167,153

 
$
109,442

 
3.46
%
 
$
3,172,885

 
$
114,405

 
3.61
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term funding debt
$
51,270

 
$
202

 
0.39
%
 
$
88,885

 
$
145

 
0.16
%
 
$
86,866

 
$
92

 
0.11
%
Long-term funding debt
305,945

 
6,946

 
2.27

 
339,181

 
7,561

 
2.23

 
398,876

 
8,508

 
2.13

Total funding debt
357,215

 
7,148

 
2.00

 
428,066

 
7,706

 
1.80

 
485,742

 
8,600

 
1.77

Debt securities of consolidated trusts
2,883,364

 
79,446

 
2.76

 
2,845,123

 
83,678

 
2.94

 
2,824,638

 
90,409

 
3.20

Elimination of Fannie Mae MBS held in retained mortgage portfolio
(48,131
)
 
(1,868
)
 
3.88

 
(76,250
)
 
(3,351
)
 
4.39

 
(98,778
)
 
(4,572
)
 
4.63

Total debt securities of consolidated trusts held by third parties
2,835,233

 
77,578

 
2.74

 
2,768,873

 
80,327

 
2.90

 
2,725,860

 
85,837

 
3.15

Total interest-bearing liabilities
$
3,192,448

 
$
84,726

 
2.65
%
 
$
3,196,939

 
$
88,033

 
2.75
%
 
$
3,211,602

 
$
94,437

 
2.94
%
Net interest income/net interest yield
 
 
$
21,295

 
0.67
%
 
 
 
$
21,409

 
0.68
%
 
 
 
$
19,968

 
0.63
%
 
As of December 31,
 
2016
 
2015
 
2014
Selected benchmark interest rates:
 
 
 
 
 
 
 
 
3-month LIBOR
1.00
%
 
0.61
%
 
0.26
%
2-year swap rate
1.45
 
 
1.18
 
 
0.90
 
5-year swap rate
1.98
 
 
1.74
 
 
1.77
 
10-year swap rate
2.34
 
 
2.19
 
 
2.28
 
30-year Fannie Mae MBS par coupon rate
3.13
 
 
3.00
 
 
2.83
 
__________
(1) 
Average balance includes mortgage loans on nonaccrual status. Typically, interest income on nonaccrual mortgage loans is recognized when cash is received. Interest income not recognized for loans on nonaccrual status was $1.3 billion, $1.6 billion and $1.8 billion for the years ended December 31, 2016, 2015 and 2014, respectively.
(2) 
Includes cash equivalents.

Fannie Mae 2016 Form 10-K
 
61
 
 
MD&A | Consolidated Results of Operations

Table 4: Rate/Volume Analysis of Changes in Net Interest Income
 
2016 vs. 2015
 
2015 vs. 2014
 
Total
 
Variance Due to:(1)
 
Total
 
Variance Due to:(1)
  
Variance
 
Volume
 
Rate
 
Variance
 
Volume
 
Rate
 
(Dollars in millions)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of Fannie Mae
$
(352
)
 
$
(1,151
)
 
$
799

 
$
(557
)
 
$
(1,046
)
 
$
489

Mortgage loans of consolidated trusts
(2,705
)
 
1,539

 
(4,244
)
 
(3,864
)
 
899

 
(4,763
)
Total mortgage loans
(3,057
)
 
388

 
(3,445
)
 
(4,421
)
 
(147
)
 
(4,274
)
Total mortgage-related securities, net
(654
)
 
(506
)
 
(148
)
 
(612
)
 
(532
)
 
(80
)
Non-mortgage-related securities(2)
190

 
14

 
176

 
37

 
13

 
24

Federal funds sold and securities purchased under agreements to resell or similar arrangements
81

 
(7
)
 
88

 
28

 
(2
)
 
30

Advances to lenders
19

 
11

 
8

 
5

 
13

 
(8
)
Total interest income
$
(3,421
)
 
$
(100
)
 
$
(3,321
)
 
$
(4,963
)
 
$
(655
)
 
$
(4,308
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Short-term funding debt
$
57

 
$
(81
)
 
$
138

 
$
53

 
$
2

 
$
51

Long-term funding debt
(615
)
 
(752
)
 
137

 
(947
)
 
(1,317
)
 
370

Total funding debt
(558
)
 
(833
)
 
275

 
(894
)
 
(1,315
)
 
421

Total debt securities of consolidated trusts held by third parties
(2,749
)
 
2,238

 
(4,987
)
 
(5,510
)
 
1,651

 
(7,161
)
Total interest expense
$
(3,307
)
 
$
1,405

 
$
(4,712
)
 
$
(6,404
)
 
$
336

 
$
(6,740
)
Net interest income
$
(114
)
 
$
(1,505
)
 
$
1,391

 
$
1,441

 
$
(991
)
 
$
2,432

__________
(1) 
Combined rate/volume variances are allocated to both rate and volume based on the relative size of each variance.
(2) 
Includes cash equivalents.
Net interest income and net interest yield decreased in 2016 compared with 2015 primarily due to a decline in the average balance of our retained mortgage portfolio as we continued to reduce this portfolio pursuant to the requirements of our senior preferred stock purchase agreement with Treasury and FHFA’s additional portfolio cap. The average balance of our retained mortgage portfolio was 19% lower in 2016 compared with 2015. See “Retained Mortgage Portfolio” for more information about our retained mortgage portfolio. The decrease in net interest income due to the decline in our portfolio was almost entirely offset by an increase in guaranty fee income primarily driven by: (1) loans with higher base guaranty fees comprising a larger part of our guaranty book of business in 2016 than in 2015; and (2) an increase in amortization income in 2016 as a lower interest rate environment during the first nine months of the year increased prepayments on mortgage loans of consolidated trusts, which accelerated the amortization of the cost basis adjustments on the loans and related debt.
Net interest income and net interest yield increased in 2015 compared with 2014 due to an increase in guaranty fee income primarily driven by: (1) an increase in amortization income as the lower interest rate environment in the first half of 2015 increased prepayments on mortgage loans of consolidated trusts, which accelerated the amortization of cost basis adjustments on the loans and related debt; and (2) loans with higher base guaranty fees comprising a larger part of our guaranty book of business in 2015 than in 2014. The increase in net interest income due to higher guaranty fee income was partially offset by a decline in the average balance of our retained mortgage portfolio, as we reduced the average balance of our retained portfolio by 15% in 2015. The increase in net interest yield was partially offset by the decline in the percentage of net interest income from our retained mortgage portfolio, which has a higher net interest yield than the net interest yield from guaranty fees.
We initially recognize mortgage loans and debt of consolidated trusts in our consolidated balance sheets at fair value. We recognize the difference between: (1) the initial fair value of the consolidated trust’s mortgage loans and debt and (2) the unpaid principal balance of these mortgage loans and debt as cost basis adjustments in our consolidated balance sheets. We amortize cost basis adjustments, including premiums and discounts on mortgage loans and securities, as a yield adjustment over the contractual life of the loan or security as a component of net interest income. Net unamortized premiums on debt of consolidated trusts exceeded net unamortized premiums on the related mortgage loans of consolidated trusts by $34.7 billion as of December 31,

Fannie Mae 2016 Form 10-K
 
62
 
 
MD&A | Consolidated Results of Operations

2016, compared with $31.3 billion as of December 31, 2015. The amortization of this net premium position will contribute to our net interest income over time.
We had $10.4 billion in net unamortized discounts and other cost basis adjustments on mortgage loans of Fannie Mae included in our consolidated balance sheets as of December 31, 2016, compared with $11.8 billion as of December 31, 2015. This net discount position on mortgage loans was primarily recorded upon the acquisition of credit-impaired loans and the extent to which we may record them as income in future periods will be based on the actual performance of the loans.
Fee and Other Income
Fee and other income includes transaction fees, multifamily fees, technology fees and other miscellaneous income. Fee and other income decreased in 2016 compared with 2015 primarily due to lower multifamily fees in 2016 driven by a decrease in yield maintenance income. In addition, we recognized lower technology fees in 2016 as a result of eliminating fees charged to our customers for using our Desktop Underwriter and Desktop Originator systems beginning in June 2015.
Fee and other income decreased in 2015 compared with 2014 primarily due to higher revenue recognized in 2014 as a result of settlement agreements resolving certain lawsuits relating to PLS sold to us.
Investment Gains, Net
Investment gains, net primarily includes gains and losses recognized from the sale of available-for-sale (“AFS”) securities, sale of loans, gains and losses recognized on the consolidation and deconsolidation of securities, net other-than-temporary impairments recognized on our investments, and lower of cost or fair value adjustments on HFS loans. Investment gains, net in 2016, 2015 and 2014 were primarily driven by the sale of AFS securities.
Investment gains increased in 2015 compared with 2014 primarily due to higher sales volume of non-agency mortgage-related securities in 2015.
Fair Value Losses, Net
Table 5 displays the components of our fair value gains and losses.
Table 5: Fair Value Losses, Net
  
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
(Dollars in millions)
Risk management derivatives fair value gains (losses) attributable to:
 
 
 
 
 
Net contractual interest expense accruals on interest rate swaps
$
(1,125
)
 
$
(960
)
 
$
(1,062
)
Net change in fair value during the period 
2

 
(160
)
 
(3,562
)
Total risk management derivatives fair value losses, net
(1,123
)
 
(1,120
)
 
(4,624
)
Mortgage commitment derivatives fair value gains (losses), net
288

 
(393
)
 
(1,140
)
Total derivatives fair value losses, net
(835
)
 
(1,513
)
 
(5,764
)
Trading securities gains (losses), net
28

 
(368
)
 
485

CAS debt gains (losses), net
(645
)
 
28

 
221

Other, net(1)
371

 
86

 
225

Fair value losses, net
$
(1,081
)
 
$
(1,767
)
 
$
(4,833
)
_________
(1) 
Consists of fair value gains and losses on non-CAS debt and mortgage loans.
Risk Management Derivatives Fair Value Losses, Net
Risk management derivative instruments are an integral part of our interest rate risk management strategy. We supplement our issuance of debt securities with derivative instruments to further reduce duration risk, which includes prepayment risk. We purchase option-based risk management derivatives to economically hedge prepayment risk. In cases where options obtained through callable debt issuances are not needed for risk management derivative purposes, we may sell options in the over-the-counter derivatives market in order to offset the options obtained in the callable debt. Our principal purpose in using derivatives is to manage our aggregate

Fannie Mae 2016 Form 10-K
 
63
 
 
MD&A | Consolidated Results of Operations

interest rate risk profile within prescribed risk parameters. We generally use only derivatives that are relatively liquid and straightforward to value. We consider the cost of derivatives used in our management of interest rate risk to be an inherent part of the cost of funding and hedging our mortgage investments and economically similar to the interest expense that we recognize on the debt we issue to fund our mortgage investments.
We present, by derivative instrument type, the fair value gains and losses on our derivatives in “Note 9, Derivative Instruments.”
The primary factors that may affect the fair value of our risk management derivatives include the following:
•
Changes in interest rates: Our derivatives, in combination with our issuances of debt securities, are intended to offset changes in the fair value of our mortgage assets. Mortgage assets tend to increase in value when interest rates decrease and, conversely, decrease in value when interest rates rise. Pay-fixed swaps decrease in value and receive-fixed swaps increase in value as swap rates decrease (with the opposite being true when swap rates increase). Because the composition of our pay-fixed and receive-fixed derivatives varies across the yield curve, different yield curve changes (e.g., parallel, steepening or flattening) will generate different gains and losses.
•
Changes in our derivative activity: As interest rates change, we are likely to rebalance our portfolio to manage our interest rate exposure. As interest rates decrease, expected mortgage prepayments are likely to increase, which reduces the duration of our mortgage investments. In this scenario, we generally will rebalance our existing portfolio to manage this risk by adding receive-fixed swaps, which shortens the duration of our liabilities. Conversely, when interest rates increase and the duration of our mortgage assets increases, we are likely to add pay-fixed swaps, which have the effect of extending the duration of our liabilities. We use derivatives to rebalance our portfolio when the duration of our mortgage assets changes as the result of mortgage purchases or sales. We also use foreign-currency swaps to manage the foreign exchange impact of our foreign currency-denominated debt issuances.
•
Implied interest rate volatility: Our derivatives portfolio includes option-based derivatives, which we purchase to economically hedge the prepayment option embedded in our mortgage investments and sell to offset the options obtained through callable debt issuances when those options are not needed for risk management purposes. A key variable in estimating the fair value of option-based derivatives is implied volatility, which reflects the market’s expectation of the magnitude of future changes in interest rates. Assuming all other factors are held equal, including interest rates, a decrease in implied volatility would reduce the fair value of our purchased options and an increase in implied volatility would increase the fair value of our purchased options, while having the opposite effect on the options that we have sold.
•
Time value of purchased options: Intrinsic value and time value are the two primary components of an option’s price. The intrinsic value is determined by the amount by which the market rate exceeds or is below the exercise, or strike rate, such that the option is in-the-money. The time value of an option is the amount by which the price of an option exceeds its intrinsic value. Time decay refers to the diminishing value of an option over time as less time remains to exercise the option.
We recognized risk management derivative fair value losses for 2016 primarily as a result of a decrease in the fair value of our pay-fixed derivatives in the first half of 2016 due to declines in longer-term swap rates during the period. These losses were partially offset by an increase in the fair value of our pay-fixed derivatives in the second half of 2016 due to an increase in longer-term swap rates during the period.
We recognized risk management derivative fair value losses in 2015 and 2014 primarily as a result of decreases in the fair value of our pay-fixed derivatives due to declines in longer-term swap rates during each year.
Because risk management derivatives are an important part of our interest rate risk management strategy, it is important to evaluate the impact of our derivatives in the context of our interest rate risk profile and in conjunction with the other mark-to-market gains and losses presented in Table 5. For additional information on our use of derivatives to manage interest rate risk, see “Risk Management—Market Risk Management, Including Interest Rate Risk Management—Interest Rate Risk Management.”
Mortgage Commitment Derivatives Fair Value Gains (Losses), Net
Certain commitments to purchase or sell mortgage-related securities and to purchase single-family mortgage loans are generally accounted for as derivatives. For open mortgage commitment derivatives, we include changes in their fair value in our consolidated statements of operations and comprehensive income. When derivative

Fannie Mae 2016 Form 10-K
 
64
 
 
MD&A | Consolidated Results of Operations

purchase commitments settle, we include the fair value of the commitment on the settlement date in the cost basis of the loan or security we purchase. When derivative commitments to sell securities settle, we include the fair value of the commitment on the settlement date in the cost basis of the security we sell. Purchases of securities issued by our consolidated MBS trusts are treated as extinguishments of debt; we recognize the fair value of the commitment on the settlement date as a component of debt extinguishment gains and losses in “Other expenses, net.” Sales of securities issued by our consolidated MBS trusts are treated as issuances of consolidated debt; we recognize the fair value of the commitment on the settlement date as a component of debt in the cost basis of the debt issued.
We recognized fair value gains on our mortgage commitments in 2016 primarily due to gains on commitments to sell mortgage-related securities driven by a decrease in prices as interest rates increased during commitment periods in the fourth quarter of 2016. This was partially offset by an increase in prices as interest rates declined during the commitment periods in the first nine months of the year.
We recognized fair value losses on our mortgage commitments in 2015 and 2014 primarily due to losses on commitments to sell mortgage-related securities driven by increases in prices as interest rates decreased during the commitment periods.
CAS Debt Fair Value Gains (Losses), Net
We enter into credit risk transfer transactions, including the issuance of CAS debt, in order to reduce the economic risk to us and to taxpayers of future borrower defaults. CAS debt we issued prior to 2016 is reported at fair value as “Debt of Fannie Mae” in our consolidated balance sheets. We recognized fair value losses on CAS debt reported at fair value in 2016 primarily due to tightening spreads between CAS yields and LIBOR. We recognized fair value gains on CAS debt reported at fair value in 2015 and 2014 primarily due to widening spreads between CAS yields and LIBOR. For further discussion of our credit risk transfer transactions, see “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk—Credit Risk Transfer Transactions.”
Administrative Expenses
Administrative expenses decreased in 2016 compared with 2015 primarily due to the recognition of expenses related to the settlement of our defined benefit pension plan obligations in 2015. This settlement also caused the increase in administrative expenses in 2015 compared with 2014. The actuarial losses of $305 million, previously recorded in “Accumulated other comprehensive income,” were recognized in “Administrative expenses” and the associated tax amounts were recognized in “Provision for federal income taxes” in our consolidated statements of operations and comprehensive income for the year ended December 31, 2015.
Credit-Related Income (Expense)
We refer to our provision (benefit) for loan losses and provision (benefit) for guaranty losses collectively as our “provision (benefit) for credit losses.” Credit-related income (expense) consists of our provision (benefit) for credit losses and foreclosed property expense (income).
Provision (Benefit) for Credit Losses
Our total loss reserves provide for an estimate of credit losses incurred in our guaranty book of business, including concessions we granted borrowers upon modification of their loans. We establish our loss reserves through our provision for credit losses for losses that we believe have been incurred and will eventually be realized over time in our financial statements. When we reduce our loss reserves, we recognize a benefit for credit losses. When we determine that a loan is uncollectible, typically upon foreclosure or other liquidation event (such as a deed-in-lieu of foreclosure or a short-sale), we recognize a charge-off against our loss reserves. For a subset of delinquent single-family loans, we charge off the portion of the loan that is deemed uncollectible prior to foreclosure when the loans have been delinquent for a specified length of time and meet specified mark-to-market LTV ratios. We also recognize a charge-off upon the redesignation of loans from HFI to HFS. We record recoveries of previously charged-off amounts as a reduction to charge-offs.
Table 6 displays the components of our total loss reserves and our total fair value losses previously recognized on loans purchased out of unconsolidated MBS trusts reflected in our consolidated balance sheets. Because these fair value losses lowered our recorded loan balances, we have fewer inherent losses in our guaranty book of business and consequently require lower total loss reserves. For these reasons, we consider these fair value

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losses as an “effective reserve,” apart from our total loss reserves, to the extent that we expect to realize these amounts as credit losses on the acquired loans in the future. The fair value losses shown in Table 6 represent credit losses we expect to realize in the future or amounts that will eventually be recovered, either through net interest income for loans that cure or through foreclosed property income for loans where the sale of the collateral exceeds our recorded investment in the loan. We exclude these fair value losses from our credit loss calculation as described in “Credit Loss Performance Metrics.”
Table 6: Total Loss Reserves
 
As of December 31,
 
2016
 
2015
 
(Dollars in millions)
Allowance for loan losses
$
23,465

 
$
27,951

Reserve for guaranty losses
370

 
639

Combined loss reserves
23,835

 
28,590

Other
94

 
184

Total loss reserves
23,929

 
28,774

Fair value losses previously recognized on acquired credit impaired loans(1)
6,627

 
8,083

Total loss reserves and fair value losses previously recognized on acquired credit-impaired loans
$
30,556

 
$
36,857

__________
(1) 
Represents the fair value losses on loans purchased out of unconsolidated MBS trusts reflected in our consolidated balance sheets.


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MD&A | Consolidated Results of Operations

Table 7: Changes in Combined Loss Reserves
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(Dollars in millions)
Changes in combined loss reserves:
 
 
 
 
 
 
 
 
 
Beginning balance
$
28,590

 
$
36,787

 
$
45,295

 
$
60,026

 
$
73,150

Benefit for credit losses
(2,155
)
 
(795
)
 
(3,964
)
 
(8,949
)
 
(852
)
Charge-offs(1)
(3,334
)
 
(9,864
)
 
(6,589
)
 
(9,017
)
 
(15,313
)
Recoveries
644

 
1,260

 
1,436

 
2,627

 
1,856

Other(2)
90

 
1,202

 
609

 
608

 
1,185

Ending balance
$
23,835

 
$
28,590

 
$
36,787

 
$
45,295

 
$
60,026

Allocation of combined loss reserves:
 
 
 
 
 
 
 
 
 
Balance at end of each period attributable to:
 
 
 
 
 
 
 
 
 
Single-family
$
23,639

 
$
28,325

 
$
36,383

 
$
44,705

 
$
58,809

Multifamily
196

 
265

 
404

 
590

 
1,217

Total
$
23,835

 
$
28,590

 
$
36,787

 
$
45,295

 
$
60,026

Combined loss reserves as a percentage of applicable guaranty book of business:
 
 
 
 
 
 
 
 
 
Single-family
0.83
%
 
1.00
%
 
1.28
%
 
1.55
%
 
2.08
%
Multifamily
0.08

 
0.12

 
0.20

 
0.29

 
0.59

Combined loss reserves as a percentage of:
 
 
 
 
 
 
 
 
 
Total guaranty book of business
0.77
%
 
0.94
%
 
1.20
%
 
1.47
%
 
1.97
%
Recorded investment in nonaccrual loans
53.62

 
57.86

 
56.63

 
54.20

 
52.31

Certain higher risk loan categories as a percentage of single-family combined loss reserves:
 
 
 
 
 
 
 
 
 
2005-2008 loan vintages
81
%
 
81
%
 
81
%
 
84
%
 
85
%
Alt-A loans
23

 
23

 
25

 
26

 
27

_________
(1) 
Our charge-offs for 2015 include $2.5 billion of initial charge-offs associated with our adoption of the charge-off provisions of the Advisory Bulletin, as well as $1.1 billion of charge-offs relating to a change in accounting policy for nonaccrual loans.
(2) 
Amounts represent changes in other loss reserves which are reflected in benefit for credit losses, charge-offs and recoveries.
The amount of our provision or benefit for credit losses may vary from period to period based on a number of factors such as changes in actual and expected home prices, fluctuations in interest rates, borrower payment behavior, the types and volumes of our loss mitigation activities, the volume of foreclosures completed, and redesignations of loans from HFI to HFS. In addition, our provision or benefit for credit losses and our loss reserves can be impacted by updates to the models, assumptions and data used in determining our allowance for loan losses.
Our benefit for credit losses increased in 2016 compared with 2015 primarily due to a smaller impact resulting from the redesignation of loans from HFI to HFS in 2016 compared with 2015.
Our benefit for credit losses decreased in 2015 compared with 2014 primarily driven by decreases in interest rates in 2014, which decreased the impairment on our individually impaired loans related to concessions provided on our modified loans and resulted in an increase in our benefit for credit losses in 2014. In addition, although home prices increased in both 2014 and 2015, home price increases had a smaller impact on our benefit for credit losses in 2015 than in 2014, primarily due to the smaller number of nonperforming loans held for investment in our guaranty book of business in 2015 as compared with 2014. Also contributing to our lower benefit for credit losses in 2015 was our redesignation of certain nonperforming single-family loans from HFI to HFS in connection with our plans to sell these loans.

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MD&A | Consolidated Results of Operations

We recognized a benefit for credit losses in 2016 primarily due to an increase in home prices, including distressed property valuations. Higher home prices decrease the likelihood that loans will default and reduce the amount of credit loss on loans that do default, which impacts our estimate of losses and ultimately reduces our total loss reserves and provision for credit losses. As we continue to reduce the number of single-family nonperforming and reperforming loans held for investment in our book of business, we expect changes in home prices will have a lesser impact on our provision for credit losses.
The following factors impacted our benefit for credit losses in 2015:
•
Home prices increased in 2015, which contributed to our benefit for credit losses in 2015.
•
We redesignated certain nonperforming single-family loans with an aggregate unpaid principal balance of $9.3 billion from HFI to HFS in 2015. Those loans were adjusted to the lower of cost or fair value, which reduced our benefit for credit losses by approximately $900 million. Those nonperforming single-family loans were redesignated to HFS as we intend to sell or have sold them.
The following factors contributed to our benefit for credit losses in 2014:
•
Home prices increased in 2014.
•
Mortgage interest rates declined in 2014 resulting in higher discounted cash flow projections on our individually impaired loans. Lower mortgage interest rates shorten the expected lives of modified loans, which reduces the impairment on these loans and results in a decrease in the provision for credit losses.
•
We updated the model and the assumptions used to estimate cash flows for individually impaired single-family loans within our allowance for loan losses, which resulted in a decrease to our allowance for loan losses and an incremental benefit for credit losses.
We discuss our expectations regarding our future loss reserves in “Business—Executive Summary—Outlook—Loss Reserves.”

Fannie Mae 2016 Form 10-K
 
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MD&A | Consolidated Results of Operations

Troubled Debt Restructurings and Nonaccrual Loans
Table 8 displays the composition of loans restructured in a TDR that are on accrual status and loans on nonaccrual status. The table includes our recorded investment in HFI and HFS mortgage loans. For information on the impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 3, Mortgage Loans.” For activity related to our single-family TDRs, see “Table 27: Single-Family Troubled Debt Restructuring Activity” in “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management.”
Table 8: Troubled Debt Restructurings and Nonaccrual Loans
 
As of December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(Dollars in millions)
TDRs on accrual status:
 
 
 
 
 
 
 
 
 
Single-family
$
127,353

 
$
140,588

 
$
144,649

 
$
140,512

 
$
135,196

Multifamily
141

 
376

 
645

 
715

 
868

Total TDRs on accrual status
$
127,494

 
$
140,964

 
$
145,294

 
$
141,227

 
$
136,064

Nonaccrual loans:
 
 
 
 
 
 
 
 
 
Single-family
$
44,047

 
$
48,821

 
$
64,136

 
$
81,355

 
$
112,555

Multifamily
403

 
591

 
823

 
2,209

 
2,206

Total nonaccrual loans
$
44,450

 
$
49,412

 
$
64,959

 
$
83,564

 
$
114,761

Accruing on-balance sheet loans past due 90 days or more(1)
$
402

 
$
499

 
$
585

 
$
719

 
$
3,580

 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(Dollars in millions)
Interest related to on-balance sheet TDRs and nonaccrual loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income forgone(2)
 
$
4,123

 
 
 
$
5,227

 
 
 
$
5,945

 
 
 
$
6,805

 
 
 
$
7,554

 
Interest income recognized(3)
 
6,005

 
 
 
6,511

 
 
 
6,886

 
 
 
6,710

 
 
 
7,425

 
__________
(1) 
Includes loans that, as of the end of each period, are 90 days or more past due and continuing to accrue interest. The majority of these amounts consists of loans insured or guaranteed by the U.S. government and loans for which we have recourse against the seller in the event of a default. Amount as of December 31, 2012 includes loans of $2.8 billion which were repurchased by the lender in January 2013 pursuant to a resolution agreement.
(2) 
Represents the amount of interest income we did not recognize, but would have recognized during the period for nonaccrual loans and TDRs on accrual status as of the end of each period had the loans performed according to their original contractual terms.
(3) 
Represents interest income recognized during the period, including the amortization of any deferred cost basis adjustments, for loans classified as either nonaccrual loans or TDRs on accrual status as of the end of each period. Includes primarily amounts accrued while the loans were performing and cash payments received on nonaccrual loans.
Foreclosed Property Expense
Foreclosed property expense decreased in 2016 compared with 2015 primarily due to a decline in the number of foreclosed properties.
Foreclosed property expense increased in 2015 compared with 2014 primarily due to higher expenses relating to property tax and insurance costs on our single-family foreclosed properties and a decrease in the amount of income from the resolution of compensatory fees and representation and warranty matters. Compensatory fees are amounts we charge our primary servicers to reimburse us for damages and losses related to certain violations of our Servicing Guide, which sets forth our policies and procedures related to servicing our single-family mortgages.

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Credit Loss Performance Metrics
Our credit-related income (expense) should be considered in conjunction with our credit loss performance metrics. Our credit loss performance metrics, however, are not defined terms within GAAP and may not be calculated in the same manner as similarly titled measures reported by other companies. Because management does not view changes in the fair value of our mortgage loans as credit losses, we adjust our credit loss performance metrics for the impact associated with our acquisition of credit-impaired loans from unconsolidated MBS trusts. We also exclude interest forgone on nonaccrual loans and TDRs, other-than-temporary impairment losses resulting from deterioration in the credit quality of our mortgage-related securities and accretion of interest income on acquired credit-impaired loans from credit losses. We believe that credit loss performance metrics may be useful to investors as the losses are presented as a percentage of our book of business and have historically been used by analysts, investors and other companies within the financial services industry. Moreover, by presenting credit losses with and without the effect of fair value losses associated with the acquisition of credit-impaired loans, investors are able to evaluate our credit performance on a more consistent basis among periods. Table 9 displays the components of our credit loss performance metrics as well as our single-family and multifamily initial charge-off severity rates.
Table 9: Credit Loss Performance Metrics
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
 
 
(Dollars in millions)
Charge-offs, net of recoveries  
 
$
2,690

 
 
8.8

bps
 
 
$
5,049

 
 
16.6

bps
 
 
$
5,153

 
 
16.8

bps
Adoption of Advisory Bulletin and change in accounting policy(2)
 
—

 
 
—

 
 
 
3,555

 
 
11.7

 
 
 
—

 
 
—

 
Foreclosed property expense
 
644

 
 
2.1

 
 
 
1,629

 
 
5.3

 
 
 
142

 
 
0.5

 
Credit losses including the effect of fair value losses on acquired credit-impaired loans
 
3,334

 
 
10.9

 
 
 
10,233

 
 
33.6

 
 
 
5,295

 
 
17.3

 
Plus: Impact of acquired credit-impaired loans on charge-offs and foreclosed property expense(3)
 
340

 
 
1.1

 
 
 
442

 
 
1.4

 
 
 
637

 
 
2.1

 
Credit losses and credit loss ratio 
 
$
3,674

 
 
12.0

bps
 
 
$
10,675

 
 
35.0

bps
 
 
$
5,932

 
 
19.4

bps
Credit losses attributable to: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family 
 
$
3,678

 
 
 
 
 
 
$
10,731

 
 
 
 
 
 
$
5,978

 
 
 
 
Multifamily(4)
 
(4
)
 
 
 
 
 
 
(56
)
 
 
 
 
 
 
(46
)
 
 
 
 
Total 
 
$
3,674

 
 
 
 
 
 
$
10,675

 
 
 
 
 
 
$
5,932

 
 
 
 
Single-family initial charge-off severity rate(5)
 
 
 
 
19.7

%
 
 
 
 
 
26.0

%
 
 
 
 
 
19.6

%
Multifamily initial charge-off severity rate(5)
 
 
 
 
14.9

%
 
 
 
 
 
22.5

%
 
 
 
 
 
25.1

%
__________
(1) 
Basis points are based on the amount for each line item presented divided by the average guaranty book of business during the period.
(2) 
Our charge-offs for 2015 include the initial charge-offs associated with our adoption of the charge-off provisions of the Advisory Bulletin, as well as charge-offs relating to a change in accounting policy for nonaccrual loans.
(3) 
Includes fair value losses from acquired credit-impaired loans.
(4) 
Negative credit losses are the result of recoveries on previously charged-off amounts.
(5) 
Single-family and multifamily rates exclude fair value losses on credit-impaired loans acquired from MBS trusts and any costs, gains or losses associated with REO after initial acquisition through final disposition. The single-family rate includes charge-offs pursuant to the provisions of the Advisory Bulletin and charge-offs of property tax and insurance receivables, while it excludes charge-offs from short sales and third-party sales. Multifamily rate is net of risk sharing agreements.
Credit losses and our credit loss ratio decreased in 2016 compared with 2015 primarily due to our adoption of the charge-off provisions of the Advisory Bulletin and a change in our accounting policy for nonaccrual loans in the first quarter of 2015. Additionally, lower charge-offs in 2016 compared with 2015 contributed to the decrease in our credit losses and credit loss ratio in 2016. See “Note 1, Summary of Significant Accounting Policies” for additional information on our adoption of the charge-off provisions of the Advisory Bulletin.

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MD&A | Consolidated Results of Operations

Our credit losses and credit loss ratio increased in 2015 compared with 2014 primarily due to our adoption of the charge-off provisions of the Advisory Bulletin on January 1, 2015, a change in our accounting policy for nonaccrual loans, the recognition of losses associated with the redesignation of certain nonperforming single-family loans from HFI to HFS and an increase in expenses on our single-family foreclosed properties.
We discuss our expectations regarding our future credit losses in “Business—Executive Summary—Outlook—Credit Losses.”
Table 10 displays concentrations of our single-family credit losses based on geography, credit characteristics and loan vintages.
Table 10: Credit Loss Concentration Analysis
 
Percentage of Single-Family Conventional Guaranty Book of Business Outstanding(1)
 
Percentage of Single-Family Credit Losses(2)
 
As of December 31,
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
Geographical distribution:
 
 
 
 
 
 
 
 
 
 
 
California(3)
19
%
 
20
%
 
20
%
 
2
%
 
1
%
 
(1
)%
Florida
6

 
6

 
6

 
8

 
21

 
33

Illinois
4

 
4

 
4

 
9

 
8

 
11

New Jersey
4

 
4

 
4

 
16

 
22

 
7

New York
5

 
5

 
5

 
18

 
16

 
5

All other states
62

 
61

 
61

 
47

 
32

 
45

Select higher-risk product features(4)
21

 
22

 
22

 
60

 
59

 
51

Vintages:(5)
 
 
 
 
 
 
 
 
 
 
 
2004 and prior
5

 
5

 
7

 
16

 
12

 
12

2005 - 2008
8

 
10

 
12

 
65

 
78

 
75

2009 - 2016
87

 
85

 
81

 
19

 
10

 
13

__________
(1) 
Calculated based on the unpaid principal balance of loans, where we have detailed loan level information, for each category divided by the unpaid principal balance of our single-family conventional guaranty book of business as of the end of each period.
(2) 
Excludes the impact of recoveries resulting from resolution agreements related to representation and warranty matters and compensatory fee income related to servicing matters that have not been allocated to specific loans.
(3) 
Negative credit losses in 2014 are the result of recoveries on previously recognized credit losses.
(4) 
Includes Alt-A loans, subprime loans, interest-only loans, loans with original LTV ratios greater than 90% and loans with FICO credit scores less than 620.
(5) 
Credit losses on mortgage loans typically do not peak until the third through sixth years following origination; however, this range can vary based on many factors, including changes in macroeconomic conditions and foreclosure timelines.
As shown in Table 10, the majority of our credit losses in 2016 continued to be driven by loans originated in 2005 through 2008. Our credit losses in Florida, as well as credit losses on loans originated in 2005 through 2008, were higher in 2015 compared with 2016 primarily because, pursuant to the revised charge-off policy we implemented in 2015, we charged off a portion of excessively delinquent loans in this state that related to these vintages and that remained in the foreclosure process. We provide more detailed single-family credit performance information, including serious delinquency rate share and foreclosure activity, in “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management.”
TCCA Fees
Pursuant to the TCCA, in 2012, FHFA directed us to increase our single-family guaranty fees by 10 basis points and remit this increase to Treasury. This TCCA-related revenue is included in “Net interest income” and the expense is recognized as “TCCA fees.” TCCA fees increased in 2016 compared with 2015, and in 2015 compared

Fannie Mae 2016 Form 10-K
 
71
 
 
MD&A | Consolidated Results of Operations

with 2014, as our book of business subject to the TCCA continued to grow. We expect the guaranty fees collected and expenses incurred under the TCCA to continue to increase in the future.
Federal Income Taxes
We recognized a provision for federal income taxes of $6.0 billion in 2016, $5.3 billion in 2015 and $6.9 billion in 2014. Our effective tax rates, which were 32.8% in 2016, 32.4% in 2015 and 32.8% in 2014, were different from the federal statutory rate of 35% primarily due to the benefits of our investments in housing projects eligible for low-income housing tax credits. See “Note 10, Income Taxes” for information on our income taxes.
Consolidated Balance Sheet Analysis
This section provides a discussion of our consolidated balance sheets as of the dates indicated and should be read together with our consolidated financial statements, including the accompanying notes.
Table 11: Summary of Consolidated Balance Sheets
 
As of December 31,
 
 
 
2016
 
2015
 
Variance
 
(Dollars in millions)
Assets
 
 
 
 
 
 
 
Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar arrangements
$
55,639

 
 
$
42,024

 
 
$
13,615

Restricted cash
36,953

 
 
30,879

 
 
6,074

Investments in securities(1)
48,925

 
 
60,138

 
 
(11,213
)
Mortgage loans:
 
 
 
 
 
 
 
Of Fannie Mae
207,190

 
 
238,397

 
 
(31,207
)
Of consolidated trusts
2,896,028

 
 
2,809,198

 
 
86,830

Allowance for loan losses
(23,465
)
 
 
(27,951
)
 
 
4,486

Mortgage loans, net of allowance for loan losses
3,079,753

 
 
3,019,644

 
 
60,109

Deferred tax assets, net
33,530

 
 
37,187

 
 
(3,657
)
Other assets
33,168

 
 
32,045

 
 
1,123

Total assets
$
3,287,968

 
 
$
3,221,917

 
 
$
66,051

Liabilities and equity
 
 
 
 
 
 
 
Debt:
 
 
 
 
 
 
 
Of Fannie Mae
$
327,097

 
 
$
386,135

 
 
$
(59,038
)
Of consolidated trusts
2,935,219

 
 
2,811,536

 
 
123,683

Other liabilities
19,581

 
 
20,187

 
 
(606
)
Total liabilities
3,281,897

 
 
3,217,858

 
 
64,039

Equity
6,071

 
 
4,059

 
 
2,012

Total liabilities and equity
$
3,287,968

 
 
$
3,221,917

 
 
$
66,051

__________
(1) 
Includes $32.3 billion as of December 31, 2016 and $29.5 billion as of December 31, 2015 of U.S. Treasury securities that are included in our other investments portfolio, which we present in “Table 38: Cash and Other Investments Portfolio.”
Cash and Other Investments Portfolio
Our cash and other investments portfolio consists of cash and cash equivalents, securities purchased under agreements to resell or similar arrangements, and investments in U.S. Treasury securities. See “Liquidity and Capital Management—Liquidity Management—Cash and Other Investments Portfolio” for additional information on our cash and other investments portfolio.
Investments in Mortgage-Related Securities
Our investments in mortgage-related securities are classified in our consolidated balance sheets as either trading or available-for-sale and are measured at fair value. Table 12 displays the fair value of our investments in

Fannie Mae 2016 Form 10-K
 
72
 
MD&A | Consolidated Balance Sheet Analysis

mortgage-related securities, including trading and available-for-sale securities. We classify private-label securities as Alt-A, subprime or commercial mortgage-backed securities (“CMBS”) if the securities were labeled as such when issued. We have also invested in subprime private-label mortgage-related securities that we have resecuritized to include our guaranty.
Table 12: Summary of Mortgage-Related Securities at Fair Value
 
 
As of December 31,
 
2016
 
2015
 
2014
 
(Dollars in millions)
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
Fannie Mae
 
$
7,323

 
 
 
$
9,034

 
 
$
10,579

Freddie Mac
 
1,445

 
 
 
5,613

 
 
6,897

Ginnie Mae
 
1,160

 
 
 
817

 
 
642

Alt-A private-label securities
 
1,608

 
 
 
3,114

 
 
6,598

Subprime private-label securities
 
1,737

 
 
 
3,925

 
 
6,547

CMBS
 
1,580

 
 
 
3,596

 
 
3,912

Mortgage revenue bonds
 
1,293

 
 
 
3,150

 
 
4,745

Other mortgage-related securities
 
462

 
 
 
1,404

 
 
2,772

Total
 
$
16,608

 
 
 
$
30,653

 
 
$
42,692

The decrease in mortgage-related securities at fair value in 2016 was primarily driven by higher sales volumes, as well as liquidations. We continue to reduce the size of our retained mortgage portfolio to comply with the requirements of our senior preferred stock purchase agreement with Treasury and FHFA’s request to further cap our portfolio. See “Retained Mortgage Portfolio” for additional information related to the reduction in our retained mortgage portfolio.
See “Note 5, Investments in Securities” for additional information on our investments in mortgage-related securities, including the composition of our trading and available-for-sale securities at amortized cost and fair value and the gross unrealized gains and losses related to our available-for-sale securities as of December 31, 2016 and 2015.
Mortgage Loans and Allowance for Loan Losses
The mortgage loans reported in our consolidated balance sheets include loans owned by Fannie Mae and loans held in consolidated trusts and are classified as either HFS or HFI. The increase in the balance of mortgage loans, net of allowance, as of December 31, 2016 compared with December 31, 2015 was driven by an increase in mortgage loans of consolidated trusts due to securitization activity from our lender swap and portfolio securitization programs and a decrease in our allowance for loan losses. Offsetting these factors was a decline in mortgage loans of Fannie Mae resulting from liquidations, portfolio securitizations and sales outpacing acquisitions. For additional information on our mortgage loans, see “Note 3, Mortgage Loans,” and for changes in our allowance for loan losses, see “Note 4, Allowance for Loan Losses.”
The decrease in our allowance for loan losses during 2016 was primarily driven by liquidations of mortgage loans and charge-offs, which relieved the allowance on these loans, as well as an increase in home prices. For information on our benefit for credit losses, see “Consolidated Results of Operations—Credit-Related Income (Expense)—Provision (Benefit) for Credit Losses.”
Debt
Debt of Fannie Mae is the primary means of funding our mortgage investments. Debt of consolidated trusts represents the amount of Fannie Mae MBS issued from consolidated trusts and held by third-party certificateholders. We provide a summary of the activity of the debt of Fannie Mae and a comparison of the mix between our outstanding short-term and long-term debt in “Liquidity and Capital Management—Liquidity Management—Debt Funding.” Also see “Note 8, Short-Term Borrowings and Long-Term Debt” for additional information on our outstanding debt.

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MD&A | Consolidated Balance Sheet Analysis

The decrease in debt of Fannie Mae in 2016 was primarily driven by lower funding needs, as our retained mortgage portfolio decreased. The increase in the balance of debt of consolidated trusts during 2016 was primarily driven by sales of Fannie Mae MBS, which are accounted for as reissuances of debt of consolidated trusts in our consolidated balance sheets, since the MBS certificate ownership is transferred from us to a third party.
Stockholders’ Equity
Our net equity increased as of December 31, 2016 compared with December 31, 2015 primarily due to our comprehensive income recognized during the year, partially offset by the payment of senior preferred stock dividends to Treasury during the year.
Retained Mortgage Portfolio
Our retained mortgage portfolio consists of mortgage loans and mortgage-related securities that we own and includes Fannie Mae MBS and non-Fannie Mae mortgage-related securities. Assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties are not included in our retained mortgage portfolio.
The amount of mortgage assets that we may own is restricted by our senior preferred stock purchase agreement with Treasury and FHFA’s additional cap, as described in “Business—Conservatorship and Treasury Agreements—Treasury Agreements.” We reduced our retained mortgage portfolio to $272.4 billion as of December 31, 2016, below the $339.3 billion senior preferred stock purchase agreement cap and the $305.4 billion cap requested by FHFA. We plan to reduce our retained mortgage portfolio to no more than the FHFA cap of $259.6 billion as of December 31, 2017, which also would be in compliance with the senior preferred stock purchase agreement cap of $288.4 billion. Table 13 displays the unpaid principal balance of our retained mortgage portfolio.
Table 13: Retained Mortgage Portfolio
 
As of December 31,
 
2016
 
2015
 
(Dollars in millions)
Single-family:
 
 
 
Mortgage loans(1)
$
181,219

 
$
207,378

Reverse mortgages
29,443

 
32,849

Mortgage-related securities:
 
 
 
Agency securities(2)
25,667

 
51,792

Fannie Mae-wrapped reverse mortgage securities
7,420

 
8,076

Other Fannie Mae-wrapped securities
3,773

 
3,864

Private-label and other securities
4,980

 
10,366

Total single-family mortgage-related securities(3)
41,840

 
74,098

Total single-family mortgage loans and mortgage-related securities
252,502

 
314,325

Multifamily:
 
 
 
Mortgage loans(4)
9,407

 
13,365

Mortgage-related securities:
 
 
 
Agency securities(2)
7,693

 
10,945

CMBS
1,567

 
3,515

Mortgage revenue bonds
1,185

 
2,953

Total multifamily mortgage-related securities(5)
10,445

 
17,413

Total multifamily mortgage loans and mortgage-related securities
19,852

 
30,778

Total retained mortgage portfolio
$
272,354

 
$
345,103


Fannie Mae 2016 Form 10-K
 
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MD&A | Retained Mortgage Portfolio

________
(1) 
Includes single-family loans restructured in a TDR that were on accrual status of $119.4 billion and $136.8 billion as of December 31, 2016 and 2015, respectively, and single-family loans on nonaccrual status of $38.7 billion and $46.6 billion as of December 31, 2016 and 2015, respectively.
(2) 
Includes Fannie Mae, Freddie Mac and Ginnie Mae mortgage-related securities, excluding Fannie Mae-wrapped reverse mortgage securities and other Fannie Mae-wrapped securities.
(3) 
The fair value of these single-family mortgage-related securities was $42.9 billion and $77.2 billion as of December 31, 2016 and 2015, respectively.
(4) 
Includes multifamily loans restructured in a TDR that were on accrual status of $131 million and $365 million as of December 31, 2016 and 2015, respectively, and multifamily loans on nonaccrual status of $246 million and $414 million as of December 31, 2016 and 2015, respectively.
(5) 
The fair value of these multifamily mortgage-related securities was $11.2 billion and $18.8 billion as of December 31, 2016 and 2015, respectively.
Our retained mortgage portfolio decreased by 21% in 2016, as we continued to reduce the size of our retained mortgage portfolio to comply with the requirements of our senior preferred stock purchase agreement with Treasury and FHFA’s request to further cap our portfolio. The overall portfolio decrease was driven by higher sales volume, partially offset by increased purchases as a result of a higher volume of mortgage originations in 2016 compared with 2015.
In the third quarter of 2016, we began to securitize reperforming loans held in our retained mortgage portfolio into Fannie Mae MBS, and also began to sell Fannie Mae MBS backed by reperforming loans. Our securitization and sale of Fannie Mae MBS backed by reperforming loans provides us with more flexibility to manage our risk and reduce the size of our retained mortgage portfolio. In addition, in December 2016, we completed our first sale of reperforming whole loans as part of our ongoing effort to reduce the size of our retained mortgage portfolio.
We primarily use our retained mortgage portfolio to: (1) provide liquidity to the mortgage market and (2) support our loss mitigation activities. Previously, we also used our retained mortgage portfolio for investment purposes.
Table 14 below separates the instruments within our retained mortgage portfolio by unpaid principal balance into three categories based on each instrument’s use. “Lender liquidity,” which includes balances related to our whole loan conduit activity, supports our efforts to provide liquidity to the Single-Family and Multifamily mortgage markets. “Loss mitigation” supports our loss mitigation efforts through the purchase of delinquent loans from MBS trusts. “Other” represents assets that were previously purchased for investment purposes. More than half of the balance of “Other” consisted of reverse mortgage loans and Fannie Mae-wrapped reverse mortgage securities as of December 31, 2016. We expect the amount of assets in “Other” will decline over time as they liquidate, mature or are sold.
Table 14: Retained Mortgage Portfolio Profile
 
As of December 31,
 
2016
 
2015
 
Single-Family 
 
Multifamily
 
Total 
 
% of Mortgage Credit Book of Business
 
Single-Family 
 
Multifamily 
 
Total 
 
% of Mortgage Credit Book of Business
 
(Dollars in millions)
Lender liquidity
$
36,272

 
$
7,694

 
$
43,966

 
2
%
 
$
25,829

 
$
16,408

 
$
42,237

 
1
%
Loss mitigation
164,028

 
376

 
164,404

 
5

 
192,441

 
778

 
193,219

 
6

Other
52,202

 
11,782

 
63,984

 
2

 
96,055

 
13,592

 
109,647

 
4

Total
$
252,502

 
$
19,852

 
$
272,354

 
9
%
 
$
314,325

 
$
30,778

 
$
345,103

 
11
%
Mortgage Credit Book of Business
Table 15 displays the composition of our mortgage credit book of business based on unpaid principal balance. Our single-family mortgage credit book of business accounted for 92% of our mortgage credit book of business as of December 31, 2016 and 93% of our mortgage credit book of business as of December 31, 2015. While our

Fannie Mae 2016 Form 10-K
 
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MD&A | Mortgage Credit Book of Business

mortgage credit book of business includes all of our mortgage-related assets, both on- and off-balance sheet, our guaranty book of business excludes non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
Table 15: Composition of Mortgage Credit Book of Business
 
As of December 31,
 
2016
 
2015
 
Single-Family 
 
Multifamily 
 
Total 
 
Single-Family 
 
Multifamily 
 
Total 
 
(Dollars in millions)
Mortgage loans and Fannie Mae MBS(1)
$
2,838,086

 
$
229,896

 
$
3,067,982

 
$
2,817,251

 
$
198,342

 
$
3,015,593

Unconsolidated Fannie Mae MBS, held by third parties(2)
7,795

 
1,159

 
8,954

 
9,818

 
1,226

 
11,044

Other credit guarantees(3)
2,193

 
13,142

 
15,335

 
2,652

 
13,852

 
16,504

Guaranty book of business
$
2,848,074

 
$
244,197

 
$
3,092,271

 
$
2,829,721

 
$
213,420

 
$
3,043,141

Other agency mortgage-related securities(4)
2,500

 
—

 
2,500

 
5,973

 
7

 
5,980

Other mortgage-related securities(5)
4,980

 
2,752

 
7,732

 
10,365

 
6,469

 
16,834

Mortgage credit book of business
$
2,855,554

 
$
246,949

 
$
3,102,503

 
$
2,846,059

 
$
219,896

 
$
3,065,955

Guaranty Book of Business Detail:
 
 
 
 
 
 
 
 
 
 
 
Conventional guaranty book of business(6)
$
2,802,572

 
$
242,834

 
$
3,045,406

 
$
2,778,254

 
$
211,975

 
$
2,990,229

Government guaranty book of business(7)
$
45,502

 
$
1,363

 
$
46,865

 
$
51,467

 
$
1,445

 
$
52,912

__________
(1) 
Consists of mortgage loans and Fannie Mae MBS recognized in our consolidated balance sheets. The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.
(2) 
The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.
(3) 
Consists of single-family and multifamily credit enhancements that we have provided and that are not otherwise reflected in the table.
(4) 
Consists of mortgage-related securities issued by Freddie Mac and Ginnie Mae.
(5) 
Primarily includes mortgage revenue bonds, Alt-A and subprime PLS, and CMBS.
(6) 
Refers to mortgage loans and mortgage-related securities that are not guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies.
(7) 
Refers to mortgage loans and mortgage-related securities guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies.
The GSE Act requires us to set aside each year an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of our total new business purchases and to pay this amount to specified HUD and Treasury funds. New business purchases consist of single-family and multifamily whole mortgage loans purchased during the period and single-family and multifamily mortgage loans underlying Fannie Mae MBS issued during the period pursuant to lender swaps. Our new business purchases were $637.4 billion for the year ended December 31, 2016. Accordingly, we recognized an expense of $268 million related to this obligation for the year ended December 31, 2016. We expect to pay this amount to the funds on or before March 1, 2017. See “Business—Legislation and Regulation—GSE Act and Other Regulation of Our Business—Affordable Housing Allocations” for more information regarding this obligation.
Business Segments
Overview
We have two reportable business segments: Single-Family and Multifamily. Our CEO is the chief operating decision maker, and allocates resources and assesses performance based on these two business segments. In the fourth quarter of 2016, our CEO changed the way he allocates resources and evaluates operating results. This change resulted in realigning the composition of our reportable business segments to incorporate the

Fannie Mae 2016 Form 10-K
 
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activities of the Capital Markets group, which was previously a separate reportable business segment, into the Single-Family or Multifamily segments. The Capital Markets group’s activities relating to single-family mortgage assets were incorporated into the Single-Family segment, and its activities relating to multifamily mortgage assets were incorporated into the Multifamily segment. Mortgage assets, debt funding those assets and associated revenues and expenses previously reported in the Capital Markets group segment are now reported in the Single-Family or Multifamily segments based on whether the underlying mortgage asset is a single-family or multifamily mortgage asset. Administrative expenses previously reported in the Capital Markets group segment have been allocated either directly, where applicable, or indirectly, based on the size of each segment’s mortgage credit book of business. Results of our two business segments are intended to reflect each segment as if it were a stand-alone business. Under our new segment reporting, we have no reconciling items; therefore, the sum of the results for our two business segments equals our consolidated results of operations. We have revised the presentation of our segment results for prior years to be consistent with the current year presentation. We describe the management reporting and allocation process used to generate our segment results in “Note 12, Segment Reporting.”
This section describes the following for each of our business segments:
•
the principal business activities of the segment;
•
market conditions relating to the business;
•
the segment’s business and financial results; and
•
credit risk management relating to the business.
This section should be read together with our comparative discussion of our consolidated results of operations in “Consolidated Results of Operations.”
Single-Family Business
Single-Family Business Activities
Overview
Working with our lender customers, our Single-Family business provides liquidity to the mortgage market primarily by acquiring single-family loans from lenders through lender swap transactions and our whole loan conduit, and securitizing those loans into Fannie Mae MBS, which are either delivered to the lenders or sold to investors or dealers. We describe our securitization transactions and the types of Fannie Mae MBS that we issue in “Business—Mortgage Securitizations” above. Our Single-Family business also supports liquidity in the mortgage market and the businesses of our lender customers through other activities, such as issuing structured Fannie Mae MBS backed by single-family mortgage assets and buying and selling single-family agency mortgage-backed securities.
A single-family loan is secured by a property with four or fewer residential units. Our Single-Family business securitizes and purchases primarily conventional (not federally insured or guaranteed) single-family fixed-rate or adjustable-rate, first-lien mortgage loans, or mortgage-related securities backed by these types of loans. We also securitize or purchase loans insured by FHA, loans guaranteed by the VA, loans guaranteed by the Rural Development Housing and Community Facilities Program of the U.S. Department of Agriculture, manufactured housing mortgage loans and other mortgage-related securities.
Revenues for our Single-Family business are derived primarily from net interest income. Our two primary sources of single-family net interest income are: (1) the guaranty fees we receive as compensation for assuming and managing the credit risk on the single-family mortgage loans underlying Fannie Mae MBS held by third parties; and (2) the difference between the interest income earned on the single-family mortgage assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets. Our Single-Family business also earns revenues from other fees associated with single-family business activities, including transaction fees for issuing structured Fannie Mae MBS backed by single-family mortgage assets.
Single-Family Loan Transaction Channels
Loans from our lender customers are delivered to us through either our “flow” or “bulk” transaction channels. In our flow business, we enter into agreements that generally set agreed-upon guaranty fees and other contract terms for a lender’s future delivery of individual loans to us over a specified time period. Our bulk business

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generally consists of transactions in which a set of loans is delivered to us in bulk, typically with guaranty fees and other contract terms negotiated individually for each transaction.
Other Services Provided to Single-Family Lender Customers
Our Single-Family business also supports liquidity in the U.S. mortgage market through additional activities, such as the following:
•
Early Funding. Lenders who deliver single-family whole loans or pools of single-family whole loans to us in exchange for MBS typically must wait between 30 and 45 days from the closing and settlement of the loans or pools and the issuance of the MBS. This delay may limit lenders’ ability to originate new loans. Under our early lender funding programs, we purchase single-family whole loans or pools of single-family loans on an accelerated basis, allowing lenders to receive quicker payment for the whole loans and pools, which replenishes their funds and allows them to originate more mortgage loans.
•
MBS Trading. We regularly enter into purchase and sale transactions with other market participants involving single-family mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, which we refer to as “agency MBS.” These transactions can provide for the future delivery of mortgage-backed securities with underlying single-family loans that share certain general characteristics (often referred to as the “TBA market”). The Securities Industry and Financial Markets Association, or SIFMA, determines the requirements for securities that are eligible to be traded in the TBA market. These purchase and sale transactions also can provide for the future delivery of specifically identified mortgage-backed securities with underlying loans that have other characteristics considered desirable by some investors (often referred to as the “Specified Pools market”). Through our trading activity in the TBA and Specified Pools markets, we provide significant liquidity to the agency MBS markets.
Single-Family Mortgage Servicing
Generally, the servicing of the mortgage loans that are held in our retained mortgage portfolio or that back our Fannie Mae MBS is performed by mortgage servicers on our behalf. Some loans are serviced for us by the lenders that initially sold the loans to us. In other cases, our loans are serviced by third-party servicers that did not originate or sell the loans to us. For loans we own or guarantee, the lender or servicer must obtain our approval before selling servicing rights to another servicer.
Our mortgage servicers typically collect and deliver principal and interest payments, administer escrow accounts, monitor and report delinquencies, perform default prevention activities, evaluate transfers of ownership interests, respond to requests for partial releases of security, and handle proceeds from casualty and condemnation losses. Our mortgage servicers are the primary point of contact for borrowers and perform a key role in the effective implementation of our homeownership assistance initiatives, negotiation of workouts of troubled loans, and other loss mitigation activities. If necessary, mortgage servicers inspect and preserve properties and process foreclosures and bankruptcies. Because we generally delegate the servicing of our mortgage loans to mortgage servicers and do not have our own servicing function, our ability to actively manage troubled loans that we own or guarantee is limited. For more information on the risks of our reliance on servicers, refer to “Risk Factors” and “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management.”
We compensate servicers primarily by permitting them to retain a specified portion of each interest payment on a serviced mortgage loan as a servicing fee. Servicers also generally retain assumption fees, late payment charges and other similar charges, to the extent they are collected from borrowers, as additional servicing compensation. We also compensate servicers for negotiating workouts on problem loans.
Our servicers are required to develop, follow and maintain written procedures relating to loan servicing and legal compliance in accordance with our Servicing Guide. We oversee servicer compliance with our Servicing Guide requirements and execution of our loss mitigation programs by conducting reviews of select servicers. These reviews are designed to test a servicer’s quality control processes and compliance with our requirements across key servicing functions. Issues identified through these Servicing Guide compliance reviews are provided to the servicer with prescribed corrective actions and expected resolution due dates, and we monitor servicers’ remediation of their compliance issues.
Performance management staff measure, monitor and manage overall servicer performance by providing loss mitigation workout goals to targeted servicers, discussing performance against each goal and tracking action items to improve, and following up on remediation of findings identified from compliance reviews. Additionally, we

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employ a servicer performance management program called the STARTM Program, which provides our largest servicers a transparent framework of key metrics and operational assessments to recognize strong performance and identify areas of weakness.
Repercussions for poor performance by a servicer may include lost incentive income, reduced opportunity for STAR Program recognition, compensatory fees, monetary and non-monetary remedies, performance improvement plans and servicing transfers.
Single-Family Housing and Mortgage Market and Economic Conditions
According to the U.S. Bureau of Economic Analysis advance estimate, the inflation-adjusted U.S. gross domestic product, or GDP, rose by 1.6% in 2016, moderating from 2.6% in 2015. According to the U.S. Bureau of Labor Statistics as of January 2017, the economy created an estimated 2.1 million non-farm jobs in 2016 and 2.7 million non-farm jobs in 2015. The unemployment rate declined to 4.7% in December 2016 from 5.0% in December 2015. In January 2017, non-farm payrolls increased by 227,000 jobs, and the unemployment rate increased to 4.8%.
The most comprehensive measure of the unemployment rate, which includes those working part-time who would rather work full-time and those not looking for work but who want to work and are available for work, declined to 9.2% in December 2016 from 9.9% in December 2015.
Housing activity improved in 2016 as compared with 2015. Total existing home sales of 5.5 million units in 2016 represent an increase of 3.8% from 2015, compared with a 6.3% increase in 2015, according to data from the National Association of REALTORS®. Sales of foreclosed homes and preforeclosure, or “short,” sales (together, “distressed sales”) accounted for 7.0% of existing home sales in December 2016, compared with 8.0% in December 2015. According to the U.S. Census Bureau, new single-family home sales increased 12.4% in 2016, after increasing by 14.6% in 2015. Homebuilding activity continued to increase in 2016, as single-family housing starts rose approximately 9% in 2016, compared with an increase of 10% in 2015.
At the end of 2016, the number of months’ supply, or the inventory/sales ratio, of available existing homes and of new homes were each below their historical average. According to the U.S. Census Bureau, the months’ supply of new single-family unsold homes was 5.8 months as of December 31, 2016, compared with 5.2 months as of December 31, 2015. According to the National Association of REALTORS®, the months’ supply of existing unsold homes was 3.6 months as of December 31, 2016, compared with a 3.9 months’ supply as of December 31, 2015.
The overall mortgage market serious delinquency rate fell to 3.1% as of December 31, 2016, according to the Mortgage Bankers Association’s National Delinquency Survey, compared with 3.4% as of December 31, 2015. We provide information about Fannie Mae’s serious delinquency rate, which also decreased during 2016, in “Single-Family Mortgage Credit Risk Management” below.

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Table 16 displays several key indicators related to the U.S. single-family residential mortgage market.
Table 16: Single-Family Housing and Mortgage Market Indicators(1)
 
 
 
 
 
 
 
% Change
 
 
2016
 
2015
 
2014
 
2016
vs. 2015
 
2015
vs. 2014
 
Home sales (units in thousands)
6,013

 
5,751

 
5,377

 
4.6

%
7.0

%
New home sales
563

 
501

 
437

 
12.4

 
14.6

 
Existing home sales
5,450

 
5,250

 
4,940

 
3.8

 
6.3

 
Home price change based on Fannie Mae Home Price Index (“HPI”)(2)
5.9

%
4.7

%
4.3

%
 
 
 
 
Annual average 30-year fixed-rate mortgage interest rate(3)
3.7

%
3.9

%
4.2

%
 
 
 
 
Average 30-year fixed-rate mortgage interest rate, at end of period(3)
4.3

%
4.0

%
3.9

%
 
 
 
 
Single-family mortgage originations (in billions)
$
1,940

 
$
1,730

 
$
1,301

 
12.1

 
33.0

 
Refinance share of mortgage originations
48

%
47

%
40

%
 
 
 
 
Adjustable-rate share of mortgage applications
7

%
8

%
9

%
 
 
 
 
Single-family U.S. mortgage debt outstanding (in billions)(4)
$
10,216

 
$
10,042

 
$
9,945

 
1.7

 
1.0

 
Fannie Mae percentage of total single-family mortgage debt outstanding, at end of period(4)
28

%
28

%
29

%
 
 
 
 
__________
(1) 
The sources of the housing and mortgage market data in this table are the Federal Reserve Board, the U.S. Census Bureau, HUD, the National Association of REALTORS® and the Mortgage Bankers Association. Home sales data are based on information available through January 2017. Single-family mortgage originations, as well as refinance shares, are based on February 2017 estimates from Fannie Mae’s Economic & Strategic Research group. The adjustable-rate mortgage share is based on the number of conventional mortgage applications data reported by the Mortgage Bankers Association. Certain previously reported data may have been changed to reflect revised historical data from any or all of these organizations.
(2) 
Calculated internally using property data information on loans purchased by Fannie Mae, Freddie Mac and other third-party home sales data. Fannie Mae’s HPI is a weighted repeat transactions index, measuring average price changes in repeat sales on the same properties. Fannie Mae’s HPI excludes prices on properties sold in foreclosure. The reported home price change reflects the percentage change in Fannie Mae’s HPI from the fourth quarter of the prior year to the fourth quarter of the reported year.
(3) 
Based on Freddie Mac’s Primary Mortgage Market Survey® rate, which represents the national average mortgage commitment rate to a qualified borrower exclusive of any fees and points required by the lender.
(4) 
Information labeled as of December 31, 2016 is as of September 30, 2016 and is based on the Federal Reserve’s December 2016 mortgage debt outstanding release, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for single-family residences. Prior period amounts have been changed to reflect revised historical data from the Federal Reserve.
Based on our home price index, we estimate that home prices on a national basis increased by 5.9% in 2016, following increases of 4.7% in 2015 and 4.3% in 2014. Despite the recent increases in home prices, we estimate that, through December 31, 2016, home prices on a national basis remained 1.0% below their peak in the third quarter of 2006. Our home price estimates are based on preliminary data and are subject to change as additional data become available.

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Single-Family Business Metrics
Table 17: Single-Family Business Key Performance Data
 
For the Year Ended December 31,
 
 
2016
 
2015
 
2014
 
 
(Dollars in millions)
Securitization Activity/New Business
 
 
 
 
 
 
Single-family Fannie Mae MBS issuances
$
582,817

 
$
472,471

 
$
375,676

 
Single-family Fannie Mae MBS outstanding, at end of period
$
2,675,565

 
$
2,618,258

 
$
2,617,773

 
Portfolio Data
 
 
 
 
 
 
Single-family retained mortgage portfolio, at end of period
$
252,502

 
$
314,325

 
$
363,310

 
Credit Guaranty Activity
 
 
 
 
 
 
Average single-family guaranty book of business(1)
$
2,828,644

 
$
2,836,447

 
$
2,867,787

 
Average charged guaranty fee on single-family guaranty book of business:(2)
 
 
 
 
 
 
Fee, net of TCCA fees (in basis points)(3)
41.5

 
40.0

 
37.6

 
Total fee (in basis points)
48.6

 
46.2

 
42.9

 
Average charged guaranty fee on new single-family acquisitions:(2)
 
 
 
 
 
 
Fee, net of TCCA fees (in basis points)(3)
46.7

 
50.5

 
52.9

 
Total fee (in basis points)
56.7

 
60.5

 
62.9

 
Single-family credit loss ratio (in basis points)(4)
13.0

 
37.8

 
20.8

 
Single-family serious delinquency rate, at end of period(5)
1.20

%
1.55

%
1.89

%
__________
(1) 
Our single-family guaranty book of business consists of (a) single-family mortgage loans of Fannie Mae, (b) single-family mortgage loans underlying Fannie Mae MBS, and (c) other credit enhancements that we provide on single-family mortgage assets, such as long-term standby commitments. It excludes non-Fannie Mae single-family mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
(2) 
Calculated based on the average guaranty fee rate for our single-family guaranty arrangements entered into during the period plus the recognition of any upfront cash payments over an estimated average life.
(3) 
Excludes the impact of a 10 basis point guaranty fee increase implemented in 2012 pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us.
(4) 
Calculated based on single-family segment credit losses divided by the average single-family guaranty book of business.
(5) 
Calculated based on the number of single-family conventional loans that are 90 days or more past due or in the foreclosure process, divided by the number of loans in our single-family conventional guaranty book of business.
Our single-family Fannie Mae MBS issuances increased in 2016 compared with 2015, driven primarily by an increase in refinance activity in 2016. Higher refinance activity also drove an increase in liquidations of loans from our single-family guaranty book of business in 2016 compared with 2015. Accordingly, the size of our single-family guaranty book of business remained relatively flat.
Our average charged guaranty fee on newly acquired single-family loans decreased in 2016 compared with 2015 primarily due to both: (1) changes in the base guaranty fee rates we charged for some loan types in response to market conditions; and (2) a decrease in the loan level price adjustments we charged on our acquisitions driven by improved credit risk metrics on these acquisitions as compared with our acquisitions in 2015. Loan level price adjustments are one-time cash fees that we charge at the time we acquire a loan based on the loan’s features.
In July 2016, FHFA advised us that it had established minimum base guaranty fees that generally apply to our acquisitions of 30-year and 15-year fixed-rate loans in lender swap transactions. These new minimum base guaranty fees were implemented in November 2016 and may affect our average charged guaranty fee on newly-acquired single family loans in future periods. For further discussion of FHFA’s establishment of minimum base guaranty fees, see “Business—Legislation and Regulation—GSE Act and Other Regulation of Our Business—Guaranty Fees.”

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Single-Family Business Financial Results
Table 18: Single-Family Business Financial Results
 
For the Year Ended December 31,
 
Variance
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
 
(Dollars in millions)
Net interest income(1)
$
19,010

 
$
19,301

 
$
18,204

 
 
$
(291
)
 
 
 
$
1,097

 
Fee and other income
521

 
636

 
5,393

 
 
(115
)
 
 
 
(4,757
)
 
Net revenues
19,531

 
19,937

 
23,597

 
 
(406
)
 
 
 
(3,660
)
 
Credit-related income (expense)(2)
1,439

 
(1,035
)
 
3,625

 
 
2,474

 
 
 
(4,660
)
 
Investment gains, net
944

 
970

 
675

 
 
(26
)
 
 
 
295

 
Fair value losses, net
(1,040
)
 
(1,505
)
 
(4,788
)
 
 
465

 
 
 
3,283

 
Administrative expenses
(2,418
)
 
(2,711
)
 
(2,467
)
 
 
293

 
 
 
(244
)
 
TCCA fees(1)
(1,845
)
 
(1,621
)
 
(1,375
)
 
 
(224
)
 
 
 
(246
)
 
Other expenses(3)
(1,012
)
 
(831
)
 
(718
)
 
 
(181
)
 
 
 
(113
)
 
Income before federal income taxes
15,599

 
13,204

 
18,549

 
 
2,395

 
 
 
(5,345
)
 
Provision for federal income taxes
(5,417
)
 
(4,593
)
 
(6,410
)
 
 
(824
)
 
 
 
1,817

 
Net income attributable to Fannie Mae
$
10,182

 
$
8,611

 
$
12,139

 
 
$
1,571

 
 
 
$
(3,528
)
 
__________
(1) 
Reflects the impact of a 10 basis point guaranty fee increase implemented in 2012 pursuant to the TCCA, the incremental revenue from which is remitted to Treasury. The resulting revenue is included in net interest income and the expense is recognized as “TCCA fees.”
(2) 
Consists of the benefit (provision) for credit losses and foreclosed property income (expense).
(3) 
Consists of gains (losses) from partnership investments, debt extinguishment (gains) losses, and other expenses.
2016 compared with 2015
Single-family net income increased in 2016 compared with 2015 driven primarily by a shift to credit-related income in 2016 from credit-related expense in 2015, lower fair value losses and lower administrative expenses, partially offset by a decrease in net interest income.
We recognized credit-related income in 2016 compared with credit-related expense in 2015. This shift was primarily driven by a higher benefit for credit losses primarily due to a smaller impact resulting from the redesignation of loans from HFI to HFS in 2016 compared with 2015. Also contributing to the shift to credit-related income in 2016 was a decrease in foreclosed property expense primarily due to a decline in the number of single-family foreclosed properties. See “Consolidated Results of Operations—Credit-Related Income (Expense)” for more information on the drivers of our credit-related income.
Fair value losses decreased in 2016 compared with 2015. The fair value losses that are reported for the single-family segment are consistent with the fair value losses reported in our consolidated statements of operations and comprehensive income. We discuss our derivatives fair value gains and losses in “Consolidated Results of Operations—Fair Value Losses, Net.”
Administrative expenses decreased in 2016 compared with 2015, primarily as a result of the recognition of expenses related to the settlement of our defined benefit pension plan obligations in 2015.
Single-family net interest income decreased in 2016 compared with 2015, primarily due to a decline in the average balance of our single-family retained mortgage portfolio. This decrease in net interest income due to the decline in our portfolio was almost entirely offset by an increase in guaranty fee income primarily driven by: (1) loans with higher base guaranty fees comprising a larger part of our single-family guaranty book of business in 2016 than in 2015; and (2) an increase in amortization income in 2016 as a lower interest rate environment during the first nine months of the year increased prepayments on single-family mortgage loans of consolidated trusts, which accelerated the amortization of the cost basis adjustments on the loans and related debt.
2015 compared with 2014
Single-family net income decreased in 2015 compared with 2014, primarily due to a decrease in fee and other

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income in 2015 and a shift to credit-related expense in 2015 from credit-related income in 2014, partially offset by lower fair value losses and an increase in net interest income.
Fee and other income decreased in 2015 compared with 2014, primarily due to higher revenue recognized in 2014 as a result of settlement agreements resolving certain lawsuits relating to PLS sold to us.
We recognized credit-related expense in 2015 compared with credit-related income in 2014. This shift was primarily driven by a lower benefit for credit losses in 2015. Our benefit for credit losses decreased in 2015 compared with 2014 primarily driven by decreases in interest rates in 2014, which decreased the impairment on our individually impaired loans related to concessions provided on our modified loans and resulted in an increase in our benefit for credit losses in 2014. In addition, although home prices increased in both 2014 and 2015, home price increases had a smaller impact on our benefit for credit losses in 2015 than in 2014, primarily due to the smaller number of nonperforming loans held for investment in our guaranty book of business in 2015 as compared with 2014. Also contributing to our lower benefit for credit losses in 2015 was our redesignation of certain nonperforming single-family loans from HFI to HFS in connection with our plans to sell these loans. Foreclosed property expense increased in 2015 compared with 2014 primarily due to higher expenses relating to property tax and insurance costs on our single-family foreclosed properties and a decrease in the amount of income from the resolution of compensatory fees and representation and warranty matters.
Fair value losses decreased in 2015 compared with 2014. We discuss our derivatives fair value gains and losses in “Consolidated Results of Operations—Fair Value Losses, Net.”
Single-family net interest income increased in 2015 compared with 2014 due to an increase in guaranty fee income primarily driven by: (1) an increase in amortization income as the lower interest rate environment in the first half of 2015 increased prepayments on mortgage loans of consolidated trusts, which accelerated the amortization of cost basis adjustments on the loans and related debt; and (2) loans with higher base guaranty fees comprising a larger part of our single-family guaranty book of business in 2015 than in 2014. The increase in net interest income due to higher guaranty fee income was partially offset by a decline in the average balance of our single-family retained mortgage portfolio in 2015.
Single-Family Mortgage Credit Risk Management
Our strategy in managing single-family mortgage credit risk consists of five primary components:
•
our acquisition and servicing policies along with our underwriting and servicing standards;
•
the transfer of credit risk through risk transfer transactions and the use of credit enhancements; 
•
portfolio diversification and monitoring;
•
management of problem loans; and
•
REO management.
The single-family credit statistics we focus on and report in the sections below generally relate to our single-family conventional guaranty book of business, which represents the substantial majority of our total single-family guaranty book of business. In addition, we exclude from these credit statistics approximately 1% of our single-family conventional guaranty book of business for which our loan level information is incomplete as of December 31, 2016 and 2015. We typically obtain this data from the sellers or servicers of the mortgage loans in our guaranty book of business and receive representations and warranties from them as to the accuracy of the information. While we perform various quality assurance checks by sampling loans to assess compliance with our underwriting and eligibility criteria, we do not independently verify all reported information and we rely on lender representations regarding the accuracy of the characteristics of loans in our guaranty book of business. See “Risk Factors” for a discussion of the risk that we could experience mortgage fraud as a result of this reliance on lender representations. We provide information on non-Fannie Mae mortgage-related securities held in our portfolio in “Note 5, Investments in Securities.”
Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards
Overview
Our Single-Family business, with the oversight of our Enterprise Risk Management division, is responsible for pricing and managing credit risk relating to the portion of our single-family mortgage credit book of business

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consisting of single-family mortgage loans and Fannie Mae MBS backed by single-family mortgage loans (whether held in our portfolio or held by third parties).
Desktop Underwriter, our proprietary automated underwriting system, measures credit risk by assessing the primary risk factors of a mortgage and was used to evaluate over 80% of the non-Refi Plus single-family loans we acquired in 2016. As part of our regular evaluation of Desktop Underwriter, we conduct periodic examinations of the underlying risk assessment models and recalibrate the models based on actual loan performance and market assumptions to improve Desktop Underwriter’s ability to effectively analyze risk. Subject to our prior approval, we also may purchase and securitize mortgage loans that have been underwritten using other automated underwriting systems, as well as manually underwritten mortgage loans that meet our stated underwriting requirements or meet agreed-upon standards that differ from our standard underwriting and eligibility criteria. We periodically update Desktop Underwriter to reflect changes to both our underwriting and eligibility guidelines and to our Selling Guide, which sets forth our underwriting and eligibility guidelines as well as our policies and procedures related to selling single-family mortgages to us.
Our servicing policies establish the requirements our servicers must follow in processing and remitting loan payments; working with delinquent borrowers on loss mitigation activities; managing and protecting Fannie Mae’s interest in the pledged property; and processing bankruptcies and foreclosures. Our goal is to ensure that our policies support management of risk over the life of the mortgage loan by enabling default prevention activities, promoting loss mitigation in the event of default and providing for the preservation and protection of the collateral supporting the mortgage loan.
Recent Changes
In recent years, we implemented a number of changes designed to help our customers originate mortgages with increased certainty, efficiency and lower costs, including making new verification tools such as Collateral Underwriter and EarlyCheck available to lenders and eliminating fees charged to customers for using our Desktop Underwriter and Desktop Originator systems.
In 2016, we continued to implement a number of changes to Desktop Underwriter designed to help originate mortgages with increased certainty, efficiency and lower costs, including making new verification tools available to lenders:
•
In September 2016, we incorporated trended credit data into Desktop Underwriter. Trended credit data refers to additional historical information on a borrower’s use of revolving credit accounts, including the balance, scheduled payments and actual payments made on these accounts. Incorporating trended credit data is expected to improve Desktop Underwriter’s credit risk assessment and benefit borrowers who regularly pay down their revolving debt.
•
In September 2016, we also added the ability in Desktop Underwriter to underwrite loans where the borrower does not have a credit score, automating what was previously a manual process for lenders.
•
As part of our Day 1 Certainty initiative, we began offering the following options to lenders through Desktop Underwriter in the fourth quarter of 2016:
◦
Third-party validation of borrower income, asset and employment data; and
◦
A property inspection waiver for certain refinance transactions that meet specified eligibility criteria, including a requirement that a prior appraisal for the subject property associated with one of the borrowers for the refinance must already be in Uniform Collateral Data Portal®. The majority of our loan acquisitions will continue to require an appraisal to establish market value.
Our Day 1 Certainty initiative also offers lenders additional relief from certain representations and warranties, as described in “Representation and Warranty Relief” below.
Quality Control Process
Beginning with loans delivered in 2013, and in conjunction with our revised representation and warranty framework described below, we have made changes in our quality control process that move the primary focus of our quality control review from the time a loan defaults to shortly after the loan is delivered to us. We have implemented new tools to help identify loans delivered to us that may not have met our underwriting or eligibility guidelines and use these tools to help select discretionary samples of performing loans for quality control review shortly after delivery. Our quality control process includes reviewing and recording underwriting defects noted in

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the loan file and determining if the loan met our underwriting and eligibility guidelines. We also select random samples of performing loans for quality control review shortly after delivery. We also use these reviews to provide lenders with earlier feedback on underwriting defects.
We derive an eligibility defect rate from our random reviews, which represents the proportion of loans in the sample population with underwriting defects that would make them potentially ineligible for delivery to us. The eligibility defect rate does not necessarily indicate how well the loans will ultimately perform. Instead, we use the eligibility defect rate to estimate the percentage of loans we acquired that potentially had a significant error in the underwriting process. As of December 31, 2016, the eligibility defect rate for our single-family non-Refi Plus loan acquisitions made during the twelve months ended April 2016 was 0.41%. We continue to work with lenders to reduce the number of defects.
Repurchase Requests
If we determine that a mortgage loan did not meet our underwriting or eligibility requirements, loan representations or warranties were violated or a mortgage insurer rescinded coverage, then our mortgage sellers and/or servicers are obligated to either repurchase the loan or foreclosed property, reimburse us for our losses or provide other remedies, unless the loan is eligible for representation and warranty relief under our representation and warranty framework described below. We collectively refer to our demands that mortgage sellers and servicers meet these obligations as repurchase requests. The unpaid principal balance of single-family loans that are subject to a repurchase request has declined significantly since we strengthened our underwriting standards in late 2008 and 2009, implemented changes to our quality control process in 2013 and implemented our revised representation and warranty framework described below. As of December 31, 2016, we had issued repurchase requests on approximately 0.15% of the $461.7 billion of unpaid principal balance of single-family loans delivered to us during the twelve months ended May 2016.
Our total outstanding repurchase requests as of December 31, 2016 were $303 million, compared with $696 million as of December 31, 2015. The dollar amounts of our outstanding repurchase requests are based on the unpaid principal balance of the loans underlying the repurchase request, not the actual amount we have requested from the lenders. In some cases, we allow lenders to remit payment equal to our loss, including imputed interest, on the loan after we have disposed of the related REO, which may be substantially less than the unpaid principal balance of the loan. As a result, we expect our actual cash receipts relating to these outstanding repurchase requests to be significantly lower than the unpaid principal balance of the loans. If we are unable to resolve our repurchase requests, either through collection or additional remedies, we will not recover the losses we have recognized on the associated loans.
Representation and Warranty Relief
We implemented a revised representation and warranty framework in 2013 to provide lenders with a higher degree of certainty and clarity regarding their exposure to repurchase requests on future deliveries, as well as greater consistency around repurchase timelines and remedies. This framework was further revised in 2014. Under the framework, lenders are relieved of certain repurchase liabilities for loans that meet specific requirements. The chart below summarizes our current representation and warranty framework.
Relief Criteria
R&W Framework Version 1
(Announced Sept 2012)
R&W Framework Version 2
(Announced May 2014)
Relief provided with respect to:
Underwriting representations and warranties. Excludes life of loan representations and warranties(1)
Underwriting representations and warranties. Excludes life of loan representations and warranties(1)
Effective date—loans acquired or MBS issue date
January 1, 2013 up to July 1, 2014
On and after July 1, 2014
Required consecutive monthly payments
- 36 for non-Refi Plus loans
- 12 for Refi Plus (including HARP) loans
- 36 for non-Refi Plus loans
- 12 for Refi Plus (including HARP) loans
Delinquencies permitted to remain eligible for relief
None
Up to two 30 day delinquencies (but not in the 36th consecutive month’s payment)
Eligible for relief after satisfactory conclusion of a full-file quality control review
No
Yes

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__________
(1) 
No relief from enforcement is available for “life of loan” representations and warranties, regardless of the number of payments made by a borrower or whether there has been a satisfactory conclusion of a full-file quality control review. Examples of life of loan representations and warranties include that the loan has been originated in compliance with applicable laws and that the loan conforms to our charter requirements.
We have continued to provide value to our customers by developing new tools that enable them to obtain relief from certain representations and warranties at an earlier date. Our Day 1 Certainty initiative implemented in the fourth quarter of 2016 offers lenders representation and warranty relief for:
•
borrower income, asset and employment data that has been validated through Desktop Underwriter;
•
appraised property value for appraisals that have received a qualifying risk score in Collateral Underwriter; and
•
property value, condition and marketability for lenders that exercise the property inspection waiver option available on certain eligible refinance transactions.
Relief for validated borrower income data is available for loans acquired on or after October 24, 2016 and relief for the other validated data referenced above is available for loans acquired on or after December 10, 2016.
Other improvements we have implemented to clarify and limit lenders’ repurchase liability include providing more specific guidance on what types of loan defects would lead to a repurchase request, offering alternatives to repurchase in some cases, and implementing a new independent dispute resolution process for loans delivered to us on or after January 1, 2016. We believe the changes we have made to lenders’ representation and warranty obligations, as well as to our quality control process described above, have significantly reduced uncertainty surrounding lenders’ repurchase risk on loans they deliver to us.
As of December 31, 2016, approximately 48% of the outstanding loans in our single-family conventional guaranty book of business were acquired after January 1, 2013 and are subject to the revised representation and warranty framework, compared with 38% as of December 31, 2015. Table 19 below displays information regarding the relief status of single-family conventional loans, based only on payment history or the satisfactory conclusion of a full-file quality control review, delivered to us beginning in 2013 under the revised representation and warranty framework.

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Table 19: Representation and Warranty Status of Single-Family Conventional Loans Acquired in 2013-2016
 
As of December 31, 2016
 
Refi Plus
 
Non-Refi Plus
 
Total
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
(Dollars in millions)
Single-family conventional loans that:
 
 
 
 
 
 
 
 
 
 
 
Obtained relief
$
168,773

 
1,207,630

 
$
355,375

 
1,857,770

 
$
524,148

 
3,065,400

Remain eligible for relief
25,140

 
164,417

 
1,033,573

 
4,856,337

 
1,058,713

 
5,020,754

Are not eligible for relief
4,261

 
28,214

 
12,873

 
69,384

 
17,134

 
97,598

Total outstanding loans acquired since January 1, 2013
$
198,174

 
1,400,261

 
$
1,401,821

 
6,783,491

 
$
1,599,995

 
8,183,752

 
As of December 31, 2015
 
Refi Plus
 
Non-Refi Plus
 
Total
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
(Dollars in millions)
Single-family conventional loans that:
 
 
 
 
 
 
 
 
 
 
 
Obtained relief
$
165,069

 
1,135,903

 
$
21,924

 
97,199

 
$
186,993

 
1,233,102

Remain eligible for relief
33,190

 
220,006

 
1,053,727

 
5,100,603

 
1,086,917

 
5,320,609

Are not eligible for relief
3,643

 
23,636

 
7,001

 
37,619

 
10,644

 
61,255

Total outstanding loans acquired since January 1, 2013
$
201,902

 
1,379,545

 
$
1,082,652

 
5,235,421

 
$
1,284,554

 
6,614,966

As of December 31, 2016, approximately 37% of loans acquired under the revised representation and warranty framework had obtained relief, compared with 19% as of December 31, 2015. The increase in the percentage of loans that have obtained repurchase relief in 2016 was driven by the large number of non-Refi Plus single-family loans purchased in 2013 that have now received representation and warranty relief by meeting the 36-month timely payment history requirement. Providing lenders with relief from repurchasing loans for breaches of certain representations and warranties on loans acquired beginning in 2013 that meet specified eligibility requirements shifts some of the risk of non-compliance with our requirements back to us. However, we believe that we have taken appropriate steps to mitigate this risk, including moving the primary focus and timing of our quality control reviews to shortly after loan delivery. We also retain the right to review all loans, including reviews for any violations of “life of loan” representations and warranties.
Transfer of Mortgage Credit Risk
Mortgage Insurance
Our charter generally requires credit enhancement on any single-family conventional mortgage loan that we purchase or securitize if it has an LTV ratio over 80% at the time of purchase. Borrower-paid primary mortgage insurance is the most common type of credit enhancement in our single-family guaranty book of business. Primary mortgage insurance transfers varying portions of the credit risk associated with a mortgage loan to a third-party insurer. In order for us to receive a payment in settlement of a claim under a primary mortgage insurance policy, the insured loan must be in default and the borrower’s interest in the property that secured the loan must have been extinguished, generally in a foreclosure action. The claims process for primary mortgage insurance typically takes three to six months after title to the property has been transferred.
Mortgage insurers may also provide pool mortgage insurance, which is insurance that applies to a defined group of loans. Pool mortgage insurance benefits typically are based on actual loss incurred and are subject to an aggregate loss limit. Under some of our pool mortgage insurance policies, we are required to meet specified loss

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deductibles before we can recover under the policy. We typically collect claims under pool mortgage insurance three to six months after disposition of the property that secured the loan. For a discussion of our aggregate mortgage insurance coverage as of December 31, 2016 and 2015, see “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Credit Guarantors—Mortgage Insurers.”
Credit Risk Transfer Transactions
Our Single-Family business has developed risk-sharing capabilities to transfer portions of our single-family mortgage credit risk to the private market. The goal of these transactions is, to the extent economically sensible, to transfer a portion of the existing mortgage credit risk on a portion of recently acquired loans in our single-family guaranty book of business in order to reduce the economic risk to us and to taxpayers of future borrower defaults. Our primary method of achieving this objective has been through our CAS and CIRT transactions. In these transactions, we transfer to investors a portion of the mortgage credit risk associated with losses on a reference pool of mortgage loans and in exchange we pay investors a premium that effectively reduces the guaranty fee income we retain on the loans. We enter into other types of credit risk transfer transactions in addition to our CAS and CIRT transactions, including lender risk-sharing transactions.
As of December 31, 2016, $647.5 billion in outstanding unpaid principal balance of our single-family loans, or approximately 23% of the loans in our single-family conventional guaranty book of business measured by unpaid principal balance, were included in a reference pool for a credit risk transfer transaction. During 2016, pursuant to our credit risk transfer transactions, we transferred a portion of the mortgage credit risk on single-family mortgages with an unpaid principal balance of over $330 billion at the time of the transactions.
We generally include approximately half of our recent single-family acquisitions in credit risk transfer transactions, as we target only certain types of loan categories for these transactions. Loan categories we have targeted for CAS and CIRT transactions generally consist of fixed-rate 30-year single-family conventional loans that meet certain credit performance characteristics, are non-Refi Plus and have LTV ratios between 60% and 97%. These targeted loan categories constituted over half of our loan acquisitions for the twelve months ended December 2015, and over 95% of the loans in these categories that we acquired in the twelve months ended December 2015 were included in a CAS or CIRT transaction. Loans are generally included in reference pools for CAS and CIRT transactions on a lagged basis; typically, about six months to one year after we initially acquire the loans. The portion of our single-family loan acquisitions we include in credit risk transfer transactions can vary from period to period based on market conditions and other factors.
In a CAS transaction, we transfer to investors a portion of the mortgage credit risk associated with losses on a reference pool of mortgage loans. We create a reference pool consisting of recently acquired single-family mortgage loans included in our guaranty book of business. We then create a hypothetical securitization structure with notional credit risk positions, or tranches (that is, first loss, mezzanine and senior), and issue CAS debt related to the first loss and mezzanine risk positions. CAS debt is generally issued with a stated final maturity date of either 10 or 12.5 years from issuance, after which the CAS debt provides no further credit protection with respect to the remaining loans in the reference pool underlying that CAS transaction.
Credit losses on the loans in the reference pool for a CAS transaction are first applied to reduce the outstanding principal balance of the first loss tranche. If credit losses on these loans exceed the outstanding principal balance of the first loss tranche, losses would then be applied to reduce the outstanding principal balance of the mezzanine loss tranche. Because we retain the senior loss tranche in CAS transactions, we would absorb any losses that exceed the outstanding principal balance of both the first loss and mezzanine loss tranches. The credit protection provided by the first loss and mezzanine loss tranches is expected to absorb all of the losses we estimate would be incurred on these loans in a stressed credit environment, such as a severe or prolonged economic downturn. Our initial CAS transactions sold only a portion of the mezzanine loss tranche to investors. We began to sell a portion of the first loss tranche to investors in 2016. Table 20 below identifies the loss positions we have transferred to investors in CAS and CIRT transactions.
Beginning in 2016, we recognize CAS debt we issue to investors at amortized cost as “Debt of Fannie Mae” in our consolidated balance sheets. CAS debt we issued prior to 2016 is recognized at fair value as “Debt of Fannie Mae” in our consolidated balance sheets. The principal balance of CAS debt decreases as a result of credit losses on loans in the related reference pool. These write downs of the principal balance reduce the total amount of payments we are obligated to make to investors on the CAS debt. We have recognized minimal credit losses on the loans in reference pools underlying CAS issuances to date primarily because the loans were acquired in

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recent years, after we implemented improvements in our credit underwriting practices, and because recent macroeconomic factors such as unemployment rates and home prices have been favorable.
CIRT deals are insurance transactions whereby we obtain actual loss coverage on pools of loans either directly from an insurance provider that retains the risk, or from an insurance provider that simultaneously cedes all of its risk to one or more reinsurers. CIRT deals are structured so that we retain an aggregate amount of initial losses on the loans in the pool, typically 0.5% of the pool unpaid principal balance at the effective date of the coverage, before the insurance layer, typically 2.5% of the pool unpaid principal balance at the effective date of the coverage, attaches. We currently retain the risk of any remaining losses above the insurance layer. The insurance layer typically provides coverage for losses on the pool that are likely to occur only in a stressed economic environment. Insurance benefits are received after the underlying property has been liquidated and all applicable proceeds, including private mortgage insurance benefits, have been applied to the loss. CIRT transactions completed to date have generally been written for ten-year terms. A portion of the insurers’ or reinsurers’ obligations is collateralized with highly-rated liquid assets held in a trust account. The required amount of collateral is initially determined according to the ratings of such insurer or reinsurer. There are contractual provisions that require additional collateral to be posted in the event of adverse developments with the counterparty, such as a ratings downgrade. We make premium payments on CIRT deals that we recognize in “Other expenses, net” in our consolidated statements of operations and comprehensive income.
We also enter into customized upfront lender risk-sharing transactions. In most lender risk-sharing transactions, lenders invest directly in a portion of the credit risk on mortgage loans they originate and/or service in exchange for a reduced fee. These transactions are structured so that a portion of the credit risk on the underlying mortgage loans is transferred without increasing our counterparty exposure.
Table 20 displays the mortgage credit risk transferred to third parties and retained by Fannie Mae pursuant to our single-family credit risk transfer transactions.
Table 20: Credit Risk Transfer Transactions

At Issuance
 
As of December 31, 2016
 
 
Credit Risk Retained by Fannie Mae
 
Credit Risk Transferred to Third Parties(1)
 
 
 
 
 
First Loss Position
 
Mezzanine Loss Position
 
Senior Loss Position
 
First Loss Position
 
Mezzanine Loss Position
 
Total Initial Reference Pool(2)
 
Total Outstanding Reference Pool(1)(2)(3)
 
 
(Dollars in millions)
 
CAS issuances:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
$
1,747

 
$
355

 
$
230,107

 
$
649

 
$
6,743

 
$
239,601

 
$
215,398

 
Prior CAS issuances
1,983

 
714

 
422,411

 
—

 
12,445

 
437,553

 
307,019

 
Total CAS issuances
$
3,730

 
$
1,069

 
$
652,518

 
$
649

 
$
19,188

 
677,154

 
522,417

 
CIRT transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
$
358

 
 
 
$
73,453

 
 
 
$
1,805

 
75,616

 
65,352

 
Prior CIRT transactions(4)
251

 
 
 
51,834

 
 
 
1,324

 
53,409

 
35,924

 
Total CIRT transactions
$
609

 
 
 
$
125,287

 
 
 
$
3,129

 
129,025

 
101,276

 
Lender risk-sharing:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
15,511

 
13,511

 
Prior lender risk-sharing
 
12,775

 
10,298

 
Total lender risk-sharing
 
28,286

 
23,809

 
Total credit risk transfer transactions
 
$
834,465

 
$
647,502

 
Total outstanding reference pool as a percentage of single-family conventional guaranty book of business
 
23.10

%
__________
(1) 
Includes $19.3 billion outstanding for the loss tranches transferred to third parties as of December 31, 2016.

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(2) 
For CIRT and some lender risk-sharing transactions, “reference pool” reflects a pool of covered loans.
(3) 
For CAS and some lender risk-sharing transactions represents outstanding reference pools, not the outstanding unpaid principal balance of the underlying loans, as of December 31, 2016.
(4) 
Includes mortgage pool insurance transactions covering loans with an unpaid principal balance of $6.7 billion.
In October 2016, we announced a new pilot front-end CIRT transaction. In contrast to our previous CIRT transactions, in which we obtained credit risk transfer insurance coverage on single-family loans we had previously acquired, in this front-end CIRT structure, the insurance coverage is committed prior to our acquisition of the covered loans and therefore is effective as soon as the loans are acquired. This pilot transaction shifted a portion of the credit risk on pools of single-family loans to a group of affiliates of our mortgage insurer counterparties. We plan to continue to offer our traditional CIRT transactions that cover existing single-family loans in our portfolio as well.
We intend to continue to engage in credit risk transfer transactions on an ongoing basis, subject to market conditions. FHFA’s 2017 conservatorship scorecard noted that FHFA expects Fannie Mae and Freddie Mac to continue single-family and multifamily credit risk transfers as core business practices. Accordingly, FHFA’s 2017 conservatorship scorecard includes several objectives relating to our single-family credit risk transfer transactions.
Although we have designed our credit risk transfer transactions to mitigate some of our potential future credit losses, they are not designed to shield us from all losses. As shown in Table 20 above, we retain a portion of the risk of future credit losses on loans covered by CAS and CIRT transactions, including all or at least half of the first loss positions and all of the senior loss positions. We have structured the transactions this way because we believe the cost of transferring most of the first loss and the senior loss positions generally exceeds the benefit we would receive from such transfers. See “Risk Factors” for a discussion of factors that may limit our ability to use credit risk transfer transactions to mitigate some of our potential future credit losses, including factors that may result in these transactions providing less protection than we expect.
Single-Family Portfolio Diversification and Monitoring
Overview
Diversification within our single-family mortgage credit book of business by product type, loan characteristics and geography is an important factor that influences credit quality and performance and may reduce our credit risk. We monitor various loan attributes, in conjunction with housing market and economic conditions, to determine if our pricing, eligibility and underwriting criteria accurately reflect the risk associated with loans we acquire or guarantee. In some cases, we may decide to significantly reduce our participation in riskier loan product categories. We also review the payment performance of loans in order to help identify potential problem loans early in the delinquency cycle and to guide the development of our loss mitigation strategies.
The profile of our guaranty book of business is comprised of the following key loan attributes:
•
LTV ratio. LTV ratio is a strong predictor of credit performance. The likelihood of default and the gross severity of a loss in the event of default are typically lower as the LTV ratio decreases. This also applies to the estimated mark-to-market LTV ratios, particularly those over 100%, as this indicates that the borrower’s mortgage balance exceeds the property value.
•
Product type. Certain loan product types have features that may result in increased risk. Generally, intermediate-term, fixed-rate mortgages exhibit the lowest default rates, followed by long-term, fixed-rate mortgages. Historically, adjustable-rate mortgages (“ARMs”), including negative-amortizing and interest-only loans, and balloon/reset mortgages have exhibited higher default rates than fixed-rate mortgages, partly because the borrower’s payments rose, within limits, as interest rates changed.
•
Number of units. Mortgages on one-unit properties tend to have lower credit risk than mortgages on two-, three- or four-unit properties.
•
Property type. Certain property types have a higher risk of default. For example, condominiums generally are considered to have higher credit risk than single-family detached properties.
•
Occupancy type. Mortgages on properties occupied by the borrower as a primary or secondary residence tend to have lower credit risk than mortgages on investment properties.

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•
Credit score. Credit score is a measure often used by the financial services industry, including our company, to assess borrower credit quality and the likelihood that a borrower will repay future obligations as expected. A higher credit score typically indicates lower credit risk.
•
Loan purpose. Loan purpose refers to how the borrower intends to use the funds from a mortgage loan—either for a home purchase or refinancing of an existing mortgage. Cash-out refinancings have a higher risk of default than either mortgage loans used for the purchase of a property or other refinancings that restrict the amount of cash returned to the borrower.
•
Geographic concentration. Local economic conditions affect borrowers’ ability to repay loans and the value of collateral underlying loans. Geographic diversification reduces mortgage credit risk.
•
Loan age. We monitor year of origination and loan age, which is defined as the number of years since origination. Credit losses on mortgage loans typically do not peak until the third through sixth year following origination; however, this range can vary based on many factors, including changes in macroeconomic conditions and foreclosure timelines.
Credit Risk Profile of Our Single-Family Acquisitions and Book of Business
We initiated underwriting and eligibility changes that became effective for deliveries in late 2008 and 2009 and that focused on strengthening our underwriting and eligibility standards to promote sustainable homeownership. The result of many of these changes is reflected in the substantially improved credit risk profile of our single-family loan acquisitions since 2009.
Table 21 below displays information regarding the credit characteristics of the loans in our single-family conventional guaranty book of business by acquisition period.
Table 21: Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period
 
As of December 31, 2016
 
% of Single-Family Conventional Guaranty Book of Business(1)
 
Current Estimated Mark-to-Market LTV Ratio(2)
 
Current Estimated Mark-to-Market LTV Ratio >100%(3)
 
Serious Delinquency Rate(4)
2009-2016 acquisitions, excluding HARP and other Refi Plus loans
72

%
 
59

%
 
*
%
 
0.25

%
HARP loans(5)
9

 
 
76

 
 
10

 
 
1.15

 
Other Refi Plus loans(6)
7

 
 
45

 
 
*
 
 
0.44

 
2005-2008 acquisitions
8

 
 
72

 
 
12

 
 
6.21

 
2004 and prior acquisitions
4

 
 
43

 
 
1

 
 
2.85

 
Total single-family conventional guaranty book of business
100

%
 
60

%
 
2

%
 
1.20

%
__________
*
Represents less than 0.5%.
(1) 
Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business as of December 31, 2016.
(2) 
The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loans as of December 31, 2016 divided by the estimated current value of the properties, which we calculate using an internal valuation model that estimates periodic changes in home value. Excludes loans for which this information is not readily available.
(3) 
The current estimated mark-to-market LTV ratio greater than 100% is based on the unpaid principal balance of the loans with mark-to-market LTV ratios greater than 100% for each category as of December 31, 2016 divided by the aggregate unpaid principal balance of loans for each category in our single-family conventional guaranty book of business as of December 31, 2016.
(4) 
The serious delinquency rates for loans acquired in more recent years will be higher after the loans have aged, but we do not expect them to approach the levels of the December 31, 2016 serious delinquency rates of loans acquired in 2005 through 2008.
(5) 
HARP loans, which we began to acquire in 2009, have LTV ratios at origination in excess of 80%.
(6) 
Other Refi Plus loans, which we began to acquire in 2009, includes all other Refi Plus loans that are not HARP loans.

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Table 22 displays our single-family conventional business volumes and our single-family conventional guaranty book of business, based on certain key risk characteristics that we use to evaluate the risk profile and credit quality of our single-family loans.
Table 22: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1)
 
Percent of Single-Family Conventional Business Volume at Acquisition(2)
For the Year Ended December 31,
 
Percent of Single-Family
Conventional Guaranty Book of Business(3)(4)
As of December 31,
 
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
 
Original LTV ratio:(5)
 
 
 
 
 
 
 
 
 
 
 
 
<= 60%
21

%
18

%
16

%
21

%
21

%
21

%
60.01% to 70%
14

 
14

 
12

 
14

 
14

 
14

 
70.01% to 80%
38

 
40

 
40

 
38

 
38

 
38

 
80.01% to 90%
12

 
12

 
13

 
11

 
11

 
11

 
90.01% to 100%
15

 
15

 
16

 
12

 
12

 
11

 
Greater than 100%
*

 
1

 
3

 
4

 
4

 
5

 
Total
100

%
100

%
100

%
100

%
100

%
100

%
Weighted average
74

%
75

%
77

%
75

%
75

%
75

%
Average loan amount
$
230,249

 
$
220,090

 
$
202,834

 
$
163,200

 
$
160,741

 
$
159,997

 
Estimated mark-to-market LTV ratio:(6)
 
 
 
 
 
 
 
 
 
 
 
 
<= 60%
 
 
 
 
 
 
49

%
46

%
42

%
60.01% to 70%
 
 
 
 
 
 
19

 
19

 
19

 
70.01% to 80%
 
 
 
 
 
 
17

 
17

 
18

 
80.01% to 90%
 
 
 
 
 
 
9

 
10

 
10

 
90.01% to 100%
 
 
 
 
 
 
4

 
5

 
6

 
Greater than 100%
 
 
 
 
 
 
2

 
3

 
5

 
Total
 
 
 
 
 
 
100

%
100

%
100

%
Weighted average
 
 
 
 
 
 
60

%
62

%
64

%
Product type:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate:(7)
 
 
 
 
 
 
 
 
 
 
 
 
Long-term
81

%
81

%
78

%
77

%
76

%
74

%
Intermediate-term
17

 
17

 
17

 
17

 
17

 
17

 
Interest-only
—

 
—
 
—
 
*

 
*

 
1

 
Total fixed-rate
98

 
98

 
95

 
94

 
93

 
92

 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-only
—

 
—
 
*
 
1

 
2

 
2

 
Other ARMs
2

 
2

 
5

 
5

 
5

 
6

 
Total adjustable-rate
2

 
2

 
5

 
6

 
7

 
8

 
Total
100

%
100

%
100

%
100

%
100

%
100

%
Number of property units:
 
 
 
 
 
 
 
 
 
 
 
 
1 unit
98

%
97

%
97

%
97

%
97

%
97

%
2-4 units
2

 
3

 
3

 
3

 
3

 
3

 
Total
100

%
100

%
100

%
100

%
100

%
100

%
Property type:
 
 
 
 
 
 
 
 
 
 
 
 
Single-family homes
90

%
90

%
90

%
91

%
91

%
91

%
Condo/Co-op
10

 
10

 
10

 
9

 
9

 
9

 
Total
100

%
100

%
100

%
100

%
100

%
100

%

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Percent of Single-Family Conventional Business Volume at Acquisition(2)
For the Year Ended December 31,
 
Percent of Single-Family
Conventional Guaranty Book of Business(3)(4)
As of December 31,
 
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
 
Occupancy type:
 
 
 
 
 
 
 
 
 
 
 
 
Primary residence
90

%
88

%
87

%
88

%
88

%
88

%
Second/vacation home
4

 
4

 
4

 
4

 
4

 
4

 
Investor
6

 
8

 
9

 
8

 
8

 
8

 
Total
100

%
100

%
100

%
100

%
100

%
100

%
FICO credit score at origination:
 
 
 
 
 
 
 
 
 
 
 
 
< 620(8)
*

%
1

%
1

%
2

%
2

%
3

%
620 to < 660
4

 
5

 
6

 
5

 
5

 
5

 
660 to < 700
11

 
12

 
13

 
12

 
12

 
12

 
700 to < 740
21

 
20

 
21

 
20

 
20

 
19

 
>= 740
64

 
62

 
59

 
61

 
61

 
61

 
Total
100

%
100

%
100

%
100

%
100

%
100

%
Weighted average
750

 
748

 
744

 
745

 
744

 
744

 
Loan purpose: 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
44

%
45

%
52

%
35

%
33

%
31

%
Cash-out refinance
19

 
19

 
16

 
20

 
20

 
20

 
Other refinance
37

 
36

 
32

 
45

 
47

 
49

 
Total
100

%
100

%
100

%
100

%
100

%
100

%
Geographic concentration:(9)
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
14

%
14

%
15

%
15

%
15

%
15

%
Northeast
14

 
14

 
15

 
18

 
19

 
19

 
Southeast
21

 
20

 
20

 
22

 
22

 
22

 
Southwest
19

 
20

 
20

 
17

 
16

 
16

 
West
32

 
32

 
30

 
28

 
28

 
28

 
Total
100

%
100

%
100

%
100

%
100

%
100

%
Origination year:
 
 
 
 
 
 
 
 
 
 
 
 
<= 2007
 
 
 
 
 
 
11

%
13

%
17

%
2008
 
 
 
 
 
 
2

 
2

 
2

 
2009
 
 
 
 
 
 
4

 
5

 
6

 
2010
 
 
 
 
 
 
5

 
7

 
9

 
2011
 
 
 
 
 
 
6

 
8

 
10

 
2012
 
 
 
 
 
 
17

 
21

 
24

 
2013
 
 
 
 
 
 
15

 
18

 
21

 
2014
 
 
 
 
 
 
8

 
11

 
11

 
2015
 
 
 
 
 
 
14

 
15

 
—

 
2016
 
 
 
 
 
 
18

 
—

 
—

 
Total
 
 
 
 
 
 
100

%
100

%
100

%
__________
*
Represents less than 0.5% of single-family conventional business volume or book of business.
(1) 
Second lien mortgage loans held by third parties are not reflected in the original LTV or mark-to-market LTV ratios in this table.
(2) 
Calculated based on unpaid principal balance of single-family loans for each category at time of acquisition.
(3) 
Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business as of the end of each period.
(4) 
Our single-family conventional guaranty book of business includes jumbo-conforming and high-balance loans that represented approximately 6% of our single-family conventional guaranty book of business as of December 31, 2016 and

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5% as of December 31, 2015 and 2014. See “Business—Legislation and Regulation—Charter Act” and “Jumbo-Conforming and High-Balance Loans” for information on our loan limits.
(5) 
The original LTV ratio generally is based on the original unpaid principal balance of the loan divided by the appraised property value reported to us at the time of acquisition of the loan. Excludes loans for which this information is not readily available.
(6) 
The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of each reported period divided by the estimated current value of the property, which we calculate using an internal valuation model that estimates periodic changes in home value. Excludes loans for which this information is not readily available.
(7) 
Long-term fixed-rate consists of mortgage loans with maturities greater than 15 years, while intermediate-term fixed-rate loans have maturities equal to or less than 15 years. Loans with interest-only terms are included in the interest-only category regardless of their maturities.
(8) 
Loans acquired after 2009 with FICO credit scores at origination below 620 consist primarily of the refinance of existing loans under our Refi Plus initiative.
(9) 
Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD and WI. Northeast consists of CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI, VT and VI. Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA and WV. Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX and UT. West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.
Our acquisitions in 2016 continued to have a strong credit profile with a weighted average original LTV ratio of 74% and a weighted average FICO credit score at origination of 750. The credit profile of our future acquisitions will depend on many factors, including: our future guaranty fee pricing and our competitors’ pricing, and any impact of that pricing on the volume and mix of loans we acquire; our future eligibility standards and those of mortgage insurers, FHA and VA; the percentage of loan originations representing refinancings; changes in interest rates; our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers; government policy; market and competitive conditions; and the volume and characteristics of HARP and high LTV refinance loans we acquire in the future. We expect the ultimate performance of all our loans will be affected by borrower behavior, public policy and macroeconomic trends, including unemployment, the economy and home prices. In addition, if lender customers retain more of the higher-quality loans they originate, it could negatively affect the credit profile of our new single-family acquisitions.
Providing Access to Credit Opportunities for Creditworthy Borrowers
Pursuant to FHFA’s conservatorship scorecards and our statutory mission, we are continuing to work to increase access to mortgage credit for creditworthy borrowers, consistent with the full extent of our applicable credit requirements and risk management practices. As part of this effort, in 2014 we worked with FHFA to revise our eligibility criteria to address a specific segment of creditworthy borrowers—those who can afford a mortgage but who lack resources for a substantial down payment—in a responsible manner by taking into account factors that would compensate for the high LTV ratios of their loans. Specifically, we changed our eligibility requirements to increase our maximum LTV ratio from 95% to 97% for loans meeting certain criteria. In addition, in 2015 we announced an improved affordable lending product, HomeReady®, which is designed for creditworthy borrowers with lower and moderate incomes and provides expanded eligibility for financing homes in designated low-income, minority and disaster-impacted communities. Our eligibility requirements for loans acquired under our revised eligibility criteria and under HomeReady include compensating factors and risk mitigants, which reduce the incidence of loans with multiple higher-risk characteristics.
In 2016, pursuant to our revised eligibility criteria and HomeReady, we acquired approximately 50,000 single-family loans with 95.01% to 97% LTV ratios from approximately 800 lenders. These loans represented 2% of the single-family loans we acquired in 2016. Although a higher LTV ratio may indicate that a loan presents a higher credit risk than a loan with a lower LTV ratio, we expect our acquisition of these loans under our revised eligibility criteria and under HomeReady will not materially affect our overall credit risk because we expect that (1) the eligibility requirements these loans must meet will limit their effect on our credit risk and (2) these loans will constitute a small portion of our acquisitions. In addition, we have experience managing the credit risk associated with loans with LTV ratios in this range.
We continue to seek new ways to responsibly expand access to mortgage credit. FHFA’s 2017 conservatorship scorecard specifies that in 2017 we should continue to work to increase access to single-family mortgage credit for creditworthy borrowers, including underserved segments of the market. To the extent we are able to encourage lenders to increase access to mortgage credit, we may acquire a greater number of single-family loans with higher risk characteristics than we acquired in recent periods; however, we expect our single-family

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acquisitions will continue to have a strong overall credit risk profile given our current underwriting and eligibility standards and product design.
HARP and Refi Plus Loans
Since 2009, we have offered HARP under our Refi Plus initiative, which was designed to expand refinancing opportunities for borrowers who may otherwise be unable to refinance their mortgage loans due to a decline in home values. HARP offers refinancing flexibility to eligible borrowers who are current on their loans and whose loans are owned or guaranteed by us and meet certain additional criteria. Under HARP, we allow our borrowers who have mortgage loans that have note dates prior to June 2009 with current LTV ratios greater than 80% to refinance their mortgages without obtaining new mortgage insurance in excess of what is already in place. Accordingly, HARP loans have LTV ratios at origination in excess of 80%. HARP loans cannot (1) be an adjustable-rate mortgage loan, if the initial fixed period is less than five years; (2) have an interest only feature, which permits the payment of interest without a payment of principal; (3) be a balloon mortgage loan; or (4) have the potential for negative amortization.
The loans we acquire under HARP have higher LTV ratios than we would otherwise permit, greater than 100% in some cases. Since 2012, we have acquired HARP loans with LTV ratios greater than 125% for fixed-rate loans of eligible borrowers. In addition to the high LTV ratios that characterize HARP loans, some borrowers for HARP and Refi Plus loans may also have lower FICO credit scores and may provide less documentation than we would otherwise require. As of December 31, 2016, HARP loans, which constituted 9% of our single-family book of business, had a weighted average FICO credit score at origination of 726 compared with 745 for loans in our single-family book of business overall.
Loans we acquire under Refi Plus and HARP represent refinancings of loans that are already in our guaranty book of business. The credit risk associated with the newly acquired loans essentially replaces the credit risk on the loans that we already held prior to the refinancing. These loans have higher risk profiles and higher serious delinquency rates than the other loans we have acquired since the beginning of 2009. However, we expect these loans will perform better than the loans they replace because HARP and Refi Plus loans should either reduce the borrowers’ monthly payments or provide more stable terms than the borrowers’ old loans (for example, by refinancing into a mortgage with a fixed interest rate instead of an adjustable rate). HARP loans constituted approximately 1% of our total single-family acquisitions in 2016, compared with approximately 2% of total single-family acquisitions in 2015 and 6% in 2014. We expect the volume of refinancings under HARP to continue to remain a small percentage of our acquisitions between now and the program’s expiration, due to the small population of borrowers with loans that have high LTV ratios who are willing to refinance and would benefit from refinancing.
For information on the serious delinquency rates and current mark-to-market LTV ratios as of December 31, 2016 of single-family loans we acquired under HARP and Refi Plus, compared with other single-family loans we have acquired, see “Table 21: Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period.”
In August 2016, FHFA directed us and Freddie Mac to implement a new high LTV refinance offering aimed at borrowers who are making their mortgage payments on time but whose LTV ratio exceeds the maximum allowed for our standard refinance products. Unlike HARP, the new high LTV refinance offering will not be limited to mortgage loans made prior to June 2009; however, existing Refi Plus (including HARP) mortgage loans will not be eligible for the offering. As with HARP, borrowers eligible for the offering generally will not be subject to a minimum credit score and there generally will be no maximum debt-to-income ratio or maximum LTV ratio. Borrower eligibility requirements will include being current on their mortgage payments and not having any 30-day delinquencies within the past six months and no more than one 30-day delinquency in the past twelve months. This new high LTV refinance offering is scheduled to be available beginning in October 2017. To ensure that high LTV borrowers who are eligible for HARP will not be without a refinance option while the new refinance offering is being implemented, FHFA also directed us and Freddie Mac to extend the HARP sunset date from December 31, 2016 to September 30, 2017. We have also extended the end date of our Refi Plus initiative to September 30, 2017.
Alt-A Loans
We classify certain loans as Alt-A so that we can discuss our exposure to Alt-A loans in this Form 10-K and elsewhere. However, there is no universally accepted definition of Alt-A loans. Our single-family conventional

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guaranty book of business includes loans with some features that are similar to Alt-A loans that we have not classified as Alt-A because they do not meet our classification criteria.
We do not rely solely on our classifications of loans as Alt-A to evaluate the credit risk exposure relating to these loans in our single-family conventional guaranty book of business. For more information about the credit risk characteristics of loans in our single-family guaranty book of business, see “Table 22: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business,” “Note 3, Mortgage Loans” and “Note 15, Concentrations of Credit Risk.”
Our exposure to Alt-A loans included in our single-family conventional guaranty book of business, based on the classification criteria described in this section, does not include (1) our investments in private-label mortgage-related securities backed by Alt-A loans or (2) resecuritizations of private-label mortgage-related securities backed by Alt-A mortgage loans that we have guaranteed. See “Note 5, Investments in Securities” for more information on our exposure to private-label mortgage-related securities backed by Alt-A loans.
We have classified a mortgage loan as Alt-A if and only if the lender that delivered the loan to us classified the loan as Alt-A, based on documentation or other features. The unpaid principal balance of Alt-A loans included in our single-family conventional guaranty book of business of $86.8 billion as of December 31, 2016, represented approximately 3% of our single-family conventional guaranty book of business. Because we discontinued the purchase of newly originated Alt-A loans in 2009, except for those that represent the refinancing of a loan we acquired prior to 2009, we expect our acquisitions of Alt-A mortgage loans to continue to be minimal in future periods and the percentage of the book of business attributable to Alt-A to continue to decrease over time.
Jumbo-Conforming and High-Balance Loans
The outstanding unpaid principal balance of our jumbo-conforming and high-balance loans was $166.0 billion, or 6.0% of our single-family conventional guaranty book of business as of December 31, 2016, compared with $149.1 billion, or 5.4% of our single-family conventional guaranty book of business as of December 31, 2015. The standard conforming loan limit for a one-unit property was $417,000 from 2006 to 2016. From 2008 to 2011, our loan limits were higher in specified high-cost areas, reaching as high as $729,750 for one-unit properties; however, our loan limits for loans originated after September 30, 2011 to December 31, 2016 decreased in specified high-cost areas to an amount not to exceed $625,500 for one-unit properties. See “Business—Legislation and Regulation—Charter Act” for additional information on our loan limits, including the higher loan limits that apply in 2017.
Reverse Mortgages
The outstanding unpaid principal balance of reverse mortgage loans and Fannie Mae MBS backed by reverse mortgage loans in our guaranty book of business was $36.9 billion as of December 31, 2016 and $40.9 billion as of December 31, 2015. In 2010, we ceased acquisitions of newly originated reverse mortgages. The principal balance of our reverse mortgage loans could increase over time, as each month the scheduled and unscheduled payments, interest, mortgage insurance premium, servicing fee and default-related costs accrue to increase the unpaid principal balance. The majority of these loans are home equity conversion mortgages insured by the federal government through FHA.
Mortgage Products with Rate Resets
ARMs are mortgage loans with an interest rate that adjusts periodically over the life of the mortgage based on changes in a specified index. Interest-only loans allow the borrower to pay only the monthly interest due, and none of the principal, for a fixed term. The majority of our interest-only loans are ARMs. Our negative-amortizing loans are ARMs that allow the borrower to make monthly payments that are less than the interest actually accrued for the period. The unpaid interest is added to the principal balance of the loan, which increases the outstanding loan balance. ARMs represented approximately 6% of our single-family conventional guaranty book of business as of December 31, 2016 and 7% as of December 31, 2015.
Rate reset modifications are mortgage loans we have modified with terms that include a reduction in the borrowers’ interest rate that is fixed for an initial period and is followed by one or more annual interest rate increases in the future. The majority of these rate reset modifications are performing loans that were modified under the Home Affordable Modification Program (“HAMP®”) and have fixed interest rates for an initial five-year period followed by annual interest rate increases, of up to 1 percent per year, until the mortgage rate reaches the prevailing market rate at the time of modification. The outstanding unpaid principal balance of rate reset

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modifications in our guaranty book of business was $64.3 billion as of December 31, 2016. During 2016, approximately 72% of these modified loans experienced an interest rate reset to a weighted average interest rate of 3.78%. In anticipation of potential financial hardship related to interest rate increases, we have directed servicers to evaluate rate reset modifications for a re-modification if the loan is at imminent risk of default and the borrower requests a loan modification or if the loan becomes 60 days delinquent within the first 12 months after an interest rate adjustment. Additionally, for borrowers with HAMP modifications we extended “pay for performance” incentives, in the form of principal curtailment, to encourage borrowers to stay current on their mortgages after the initial interest rate reset and to reduce their monthly payments in cases where the borrower chooses to re-amortize their unpaid principal balance following receipt of the incentive.
Table 23 displays the unpaid principal balance for ARMs, rate reset modifications and fixed-rate interest-only loans in our single-family guaranty book of business, aggregated by product type and categorized by the year of their next scheduled contractual reset date. The contractual reset is either an adjustment to the loan’s interest rate or a scheduled change to the loan’s monthly payment to begin to reflect the payment of principal. The timing of the actual reset dates may differ from those presented due to a number of factors, including refinancing or exercising of other provisions within the terms of the mortgage.
Table 23: Single-Family Adjustable-Rate Mortgage and Rate Reset Modifications by Year(1)
 
Reset Year
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
(Dollars in millions)
ARMs—Amortizing
$
28,739

 
$
5,176

 
$
8,452

 
$
7,215

 
$
8,194

 
$
13,583

 
$
71,359

ARMs—Interest Only and Negative Amortizing
22,308

 
627

 
737

 
688

 
223

 
756

 
25,339

Rate Reset Modifications
46,820

 
4,841

 
3,616

 
2,108

 
1,676

 
106

 
59,167

Fixed-Rate Interest Only
2,238

 
466

 
29

 
63

 
62

 
52

 
2,910

__________
(1) 
Excludes loans for which there is not an additional reset for the remaining life of the loan.
We have not observed a materially different performance trend for rate reset modifications, interest-only loans or negative-amortizing loans that have recently reset as compared to those that are still in the initial period. We believe the current performance trend for interest-only loans and negative-amortizing loans is the result of the current low interest rate environment and expect that this trend may not continue if interest rates rise significantly.
Problem Loan Management
Overview
Our problem loan management strategies are primarily focused on reducing defaults to avoid losses that would otherwise occur and pursuing foreclosure alternatives to attempt to minimize the severity of the losses we incur. If a borrower does not make required payments, or is in jeopardy of not making payments, we work with the loan servicer to offer workout solutions to minimize the likelihood of foreclosure as well as the severity of loss. Our loan workouts reflect our various types of home retention solutions, including loan modifications, repayment plans and forbearances, and foreclosure alternatives, including short sales and deeds-in-lieu of foreclosure. When appropriate, we seek to move to foreclosure expeditiously.
In the following section, we present statistics on our problem loans, describe efforts undertaken to manage these loans and prevent foreclosures, and provide metrics regarding the performance of our loan workout activities. Unless otherwise noted, single-family delinquency data is calculated based on number of loans. We include single-family conventional loans that we own and those that back Fannie Mae MBS in the calculation of the single-family delinquency rate. Seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process. Percentage of book outstanding calculations are based on the unpaid principal balance of loans for each category divided by the unpaid principal balance of our total single-family guaranty book of business for which we have detailed loan level information.

Fannie Mae 2016 Form 10-K
 
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Problem Loan Statistics
Table 24 displays the delinquency status of loans in our single-family conventional guaranty book of business (based on number of loans) and changes in the balance of seriously delinquent loans in our single-family conventional guaranty book of business.
Table 24: Delinquency Status and Activity of Single-Family Conventional Loans
 
As of December 31,
 
2016
 
2015
 
2014
Delinquency status:
 
 
 
 
 
30 to 59 days delinquent
1.51
%
 
1.46
%
 
1.47
%
60 to 89 days delinquent
0.41

 
0.41

 
0.43

Seriously delinquent (“SDQ”)
1.20

 
1.55

 
1.89

Percentage of SDQ loans that have been delinquent for more than 180 days
59
%
 
67
%
 
70
%
Percentage of SDQ loans that have been delinquent for more than two years
21

 
30

 
34

 
For the Year Ended December 31,
 
2016
 
2015
 
2014
Single-family SDQ loans (number of loans):
 
 
 
 
 
Beginning balance
267,174

 
329,590

 
418,837

Additions
252,590

 
266,136

 
306,464

Removals:
 
 
 
 
 
Modifications and other loan workouts
(77,800
)
 
(91,241
)
 
(118,860
)
Liquidations and sales
(117,459
)
 
(117,884
)
 
(151,586
)
Cured or less than 90 days delinquent
(117,956
)
 
(119,427
)
 
(125,265
)
Total removals
(313,215
)
 
(328,552
)
 
(395,711
)
Ending balance
206,549

 
267,174

 
329,590

Our single-family serious delinquency rate was 1.20% as of December 31, 2016, compared to 1.55% as of December 31, 2015. The decrease in our serious delinquency rate in 2016 was primarily the result of home retention solutions, foreclosure alternatives and completed foreclosures, improved loan payment performance and nonperforming loan sales. Additionally, the percentage of seriously delinquent loans that have been delinquent for more than 180 days and for more than two years decreased in 2016 primarily due to nonperforming loan sales of loans that had been delinquent for more than two years.
We expect our single-family serious delinquency rate to continue to decline; however, as our single-family serious delinquency rate has already declined significantly over the past several years, we expect more modest declines in this rate in the future. Our single-family serious delinquency rate and the period of time that loans remain seriously delinquent continue to be negatively affected by the length of time required to complete a foreclosure in some states. Other factors that affect our single-family serious delinquency rate include the pace of loan modifications, the timing and volume of nonperforming loan sales we make, servicer performance, and changes in home prices, unemployment levels and other macroeconomic conditions.
Certain higher-risk loan categories, such as Alt-A loans, loans with higher mark-to-market LTV ratios, and our 2005 through 2008 loan vintages, continue to exhibit higher than average delinquency rates and/or account for a higher share of our credit losses. Single-family loans originated in 2005 through 2008 constituted 8% of our single-family book of business as of December 31, 2016, but constituted 51% of our seriously delinquent single-family loans as of December 31, 2016 and drove 65% of our 2016 single-family credit losses. In addition, loans in certain states such as Florida, New Jersey and New York have exhibited higher than average delinquency rates and/or account for a higher share of our credit losses.
Table 25 displays the serious delinquency rates for, and the percentage of our total seriously delinquent single-family conventional loans represented by, the specified loan categories. We also include information for our loans

Fannie Mae 2016 Form 10-K
 
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in California, as this state accounts for a large share of our single-family conventional guaranty book of business. The reported categories are not mutually exclusive.
Table 25: Single-Family Conventional Seriously Delinquent Loan Concentration Analysis
 
As of December 31,
 
2016
 
2015
 
2014
 
Percentage of Book Outstanding
 
Percentage of Seriously Delinquent Loans(1)
 
Serious Delinquency Rate
 
Percentage of Book Outstanding
 
Percentage of Seriously Delinquent Loans(1)
 
Serious Delinquency Rate
 
Percentage of Book Outstanding
 
Percentage of Seriously Delinquent Loans(1)
 
Serious Delinquency Rate
States:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
California
19
%
 
6
%
 
0.50
%
 
20
%
 
5
%
 
0.58
%
 
20
%
 
5
%
 
0.70
%
Florida
6

 
10

 
1.89

 
6

 
12

 
2.86

 
6

 
15

 
4.42

New Jersey
4

 
8

 
3.07

 
4

 
10

 
4.87

 
4

 
10

 
5.78

New York
5

 
10

 
2.65

 
5

 
11

 
3.55

 
5

 
10

 
4.17

All other states
66

 
66

 
1.11

 
65

 
62

 
1.34

 
65

 
60

 
1.57

Product type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alt-A
3

 
15

 
5.00

 
4

 
17

 
6.53

 
4

 
18

 
7.77

Vintages:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2004 and prior
5

 
26

 
2.82

 
5

 
26

 
3.06

 
7

 
28

 
3.26

2005-2008
8

 
51

 
6.39

 
10

 
57

 
7.60

 
12

 
59

 
8.39

2009-2016
87

 
23

 
0.36

 
85

 
17

 
0.36

 
81

 
13

 
0.35

Estimated mark-to-market LTV ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
<= 60%
49

 
33

 
0.70

 
46

 
27

 
0.78

 
42

 
23

 
0.88

60.01% to 70%
19

 
15

 
1.13

 
19

 
14

 
1.28

 
19

 
12

 
1.36

70.01% to 80%
17

 
16

 
1.31

 
17

 
15

 
1.59

 
18

 
14

 
1.75

80.01% to 90%
9

 
13

 
2.11

 
10

 
14

 
2.67

 
10

 
14

 
3.04

90.01% to 100%
4

 
9

 
2.99

 
5

 
11

 
4.05

 
6

 
12

 
4.59

Greater than 100%
2

 
14

 
10.44

 
3

 
19

 
10.76

 
5

 
25

 
10.98

Credit enhanced:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary MI & other(3)
18

 
28

 
2.18

 
16

 
26

 
2.86

 
15

 
26

 
3.77

Credit risk transfer(4)
22

 
2

 
0.17

 
15

 
1

 
0.10

 
9

 
*

 
0.04

Non-credit enhanced
67

 
70

 
1.16

 
73

 
73

 
1.46

 
78

 
74

 
1.71

__________
*
Represents less than 0.5%.
(1) 
Calculated based on the number of single-family loans that were seriously delinquent for each category divided by the total number of single-family conventional loans that were seriously delinquent.
(2) 
The credit-enhanced categories are not mutually exclusive. A loan with primary mortgage insurance that is also covered by a credit risk transfer transaction will be included in both the “Primary MI & other” category and the “Credit risk transfer” category. As a result, the “Credit enhanced” and “Non-credit enhanced” categories do not sum to 100%. The total percentage of our single-family conventional guaranty book of business with some form of credit enhancement as of December 31, 2016 was 33%.
(3) 
Refers to loans included in an agreement used to reduce credit risk by requiring primary mortgage insurance, collateral, letters of credit, corporate guarantees, or other agreements to provide an entity with some assurance that it will be compensated to some degree in the event of a financial loss. Excludes loans covered by credit risk transfer transactions unless such loans are also covered by primary mortgage insurance.
(4) 
Refers to loans included in reference pools for credit risk transfer transactions, including loans in these transactions that are also covered by primary mortgage insurance.
We provide information on our credit-related income and credit losses in “Consolidated Results of Operations—Credit-Related Income (Expense).” See “Table 10: Credit Loss Concentration Analysis” in “Consolidated Results of Operations—Credit-Related Income (Expense)—Credit Loss Performance Metrics” for information on concentrations of our single-family credit losses in recent periods based on geography, credit characteristics and loan vintages.

Fannie Mae 2016 Form 10-K
 
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Role of Servicers
The efforts of our mortgage servicers are critical in keeping people in their homes and preventing foreclosures. In recent years, we issued new standards for mortgage servicers regarding the management of delinquent loans, default prevention, and foreclosure time frames. These standards, reinforced by incentives and compensatory fees, require servicers to take a more consistent approach to homeowner communications, loans modifications and other workouts, and when necessary, foreclosures.
Our problem loan management strategies include transferring servicing on some delinquent loan populations that include loans with higher-risk characteristics to special servicers with which we have worked to develop high-touch protocols for servicing these loans. We believe retaining special servicers to service these loans using high-touch protocols will reduce our future credit losses on the transferred loan portfolio.
Loan Workout Metrics
Our loan workouts reflect our home retention solutions, including loan modifications, repayment plans and forbearances, and foreclosure alternatives, including short sales and deeds-in-lieu of foreclosure. We work with our servicers to implement our home retention solutions and foreclosure alternatives initiatives, and we emphasize the importance of early contact with borrowers and early entry into a home retention solution. We require that servicers first evaluate borrowers for eligibility under a workout option before considering foreclosure.
Loan modifications account for a significant majority of our home retention solutions. Loan modifications involve changes to the original mortgage terms such as product type, interest rate, amortization term, maturity date and/or unpaid principal balance. For many of our modifications, we will ultimately collect less than the contractual amount due under the original loan. Other resolutions and modifications may result in our receiving the full amount due, or certain installments due, under the loan over a period of time that is longer than the period of time originally provided for under the terms of the loan. Additionally, we currently offer up to twelve months of forbearance for those homeowners who are unemployed as an additional tool to help homeowners avoid foreclosure.
Approximately 46% of our performing loan modifications include a reduction in the borrower’s interest rate that is fixed for an initial period and may be followed by one or more annual interest rate increases. The majority of these modifications with rate resets had their second interest rate resets in 2016. See “Table 23: Single-Family Adjustable-Rate Mortgage and Rate Reset Modifications by Year” in “Single-Family Portfolio Diversification and Monitoring—Mortgage Products with Rate Resets” for additional information on the timing of these initial interest rate resets.
Our primary loan modification initiatives have included HAMP, which no longer accepted a complete loss mitigation application after December 31, 2016, and our proprietary Standard and Streamlined Modification initiatives. In December 2016, we announced a new modification program, the Fannie Mae Flex Modification, which will replace both HAMP and our Standard and Streamlined Modification programs with a single modification program that leverages the lessons learned from the housing crisis. The Flex Modification program may be implemented by our servicers as soon as March 1, 2017 but no later than October 1, 2017. The program will offer additional payment relief allowing forbearance of principal to an 80% mark-to-market LTV ratio for eligible borrowers, and will target a 20% payment reduction.
In addition, as directed by FHFA, in April 2016, we announced a new principal reduction modification program. This program is a targeted effort to assist seriously delinquent borrowers with negative equity in their homes avoid foreclosure and help improve the stability of communities that have not yet recovered from the housing crisis. The program offers principal reduction to borrowers who, as of March 1, 2016, met the specific requirements set forth in the program, including the following: the borrower was at least 90 days delinquent, had a loan with an unpaid principal balance of $250,000 or less, and was an owner-occupant. In addition, at the time of evaluation, the loan must have a post-modification mark-to-market LTV ratio of more than 115%. The amount of principal reduction we will provide to a borrower who meets the requirements of the program is the lesser of: (1) the amount that would create a post-modification mark-to-market LTV ratio of 115%; or (2) 30% of the gross post-modified unpaid principal balance of the loan. We estimate that approximately 22,000 loans in our single-family guaranty book of business as of March 31, 2016 were eligible for the principal reduction modification program. We expect trial modifications under this program to continue through the first quarter of 2017, converting to permanent modifications between now and the second quarter of 2017.

Fannie Mae 2016 Form 10-K
 
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We also continue to focus on foreclosure alternatives for borrowers who are unable to retain their homes. Foreclosure alternatives may be more appropriate if the borrower has experienced a significant adverse change in financial condition due to events such as unemployment or reduced income, divorce, or unexpected issues like medical bills and is therefore no longer able to make the required mortgage payments. To avoid foreclosure and satisfy the first-lien mortgage obligation, our servicers work with a borrower to accept a deed-in-lieu of foreclosure, whereby the borrower voluntarily signs over the title to their property to the servicer, or to sell the home prior to foreclosure in a short sale, whereby the borrower sells the home for less than the full amount owed to Fannie Mae under the mortgage loan. These alternatives are designed to reduce our credit losses while helping borrowers avoid having to go through a foreclosure. We work to obtain the highest price possible for the properties sold in short sales and, in 2016, we received net sales proceeds from our short sale transactions equal to 74% of the loans’ unpaid principal balance, compared with 73% in 2015. The existence of a second lien may limit our ability to provide borrowers with loan workout options, particularly those that are part of our foreclosure prevention efforts; however, we are not required to contact a second lien holder to obtain their approval prior to providing a borrower with a loan modification.
Table 26 displays statistics on our single-family loan workouts that were completed, by type. These statistics include loan modifications but do not include trial modifications, loans to certain borrowers who have received bankruptcy relief that are classified as TDRs, or repayment or forbearance plans that have been initiated but not completed. As of December 31, 2016, there were approximately 31,100 loans in a trial modification period.
Table 26: Statistics on Single-Family Loan Workouts
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
 
(Dollars in millions)
 
Home retention solutions:
 
 
 
 
 
 
 
 
 
 
 
 
Modifications
$
13,474

 
80,304

 
$
15,723

 
94,212

 
$
20,686

 
122,823

 
Repayment plans and forbearances completed(1)
904

 
6,423

 
835

 
5,996

 
986

 
7,309

 
Total home retention solutions
14,378

 
86,727

 
16,558

 
100,208

 
21,672

 
130,132

 
Foreclosure alternatives:
 
 
 
 
 
 
 
 
 
 
 
 
Short sales
2,275

 
11,009

 
3,033

 
14,716

 
4,795

 
23,188

 
Deeds-in-lieu of foreclosure
865

 
5,752

 
1,145

 
7,361

 
1,786

 
11,292

 
Total foreclosure alternatives
3,140

 
16,761

 
4,178

 
22,077

 
6,581

 
34,480

 
Total loan workouts
$
17,518

 
103,488

 
$
20,736

 
122,285

 
$
28,253

 
164,612

 
Loan workouts as a percentage of single-family guaranty book of business
0.62

%
0.60

%
0.73

%
0.71

%
0.99

%
0.94

%
__________
(1) 
Repayment plans reflect only those plans associated with loans that were 60 days or more delinquent. Forbearances reflect loans that were 90 days or more delinquent.
The volume of home retention solutions completed in 2016 decreased compared with 2015, primarily due to a decline in the number of delinquent loans in 2016 compared with 2015.
The majority of our home retention strategies, including trial modifications and loans to certain borrowers who received bankruptcy relief, are classified as TDRs upon initiation. Table 27 displays the post-modification unpaid principal balance of single-family HFI loans classified as TDRs. For more information on the impact of TDRs, see “Note 3, Mortgage Loans.”

Fannie Mae 2016 Form 10-K
 
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Table 27: Single-Family Troubled Debt Restructuring Activity
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
(Dollars in millions)
Beginning balance
$
182,655

 
$
197,299

 
$
200,507

New TDRs
9,609

 
12,978

 
19,050

Foreclosures(1)
(4,098
)
 
(7,173
)
 
(10,484
)
Payoffs and other reductions
(22,206
)
 
(20,449
)
 
(11,774
)
Ending balance
$
165,960

 
$
182,655

 
$
197,299

__________
(1) 
Consists of foreclosures, deeds-in-lieu of foreclosure, short sales and third-party sales.
We had single-family HFS loans classified as TDRs with an unpaid principal balance of $2.5 billion as of December 31, 2016 and $3.1 billion as of December 31, 2015. There were no single-family HFS loans classified as TDRs as of December 31, 2014.
Table 28 displays the percentage of our single-family loan modifications completed during 2015 and 2014 that were current or paid off one year after modification, as well as the percentage of our single-family loan modifications completed during 2014 that were current or paid off two years after modification.
Table 28: Percentage of Single-Family Loan Modifications That Were Current or Paid Off at One and Two Years Post-Modification(1)
 
2015
 
2014
 
Q4
 
Q3
 
Q2
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
One Year Post-Modification
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAMP modifications
75
%
 
76
%
 
78
%
 
79
%
 
79
%
 
82
%
 
83
%
 
83
%
Non-HAMP modifications
63

 
63

 
66

 
65

 
65

 
67

 
68

 
70

Total
64

 
64

 
67

 
67

 
67

 
69

 
70

 
72

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Two Years Post-Modification
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAMP modifications
 
 
 
 
 
 
 
 
77
%
 
80
%
 
80
%
 
81
%
Non-HAMP modifications
 
 
 
 
 
 
 
 
65

 
66

 
67

 
68

Total
 
 
 
 
 
 
 
 
67

 
68

 
69

 
70

__________
(1) 
Modifications do not reflect loans currently in trial modifications.
Nonperforming Loan Sales
FHFA’s 2016 and 2017 conservatorship scorecards include objectives relating to reducing the number of our severely-aged delinquent loans, including through nonperforming loan sales. During 2016, we sold approximately 29,600 nonperforming loans with an aggregate unpaid principal balance of $5.5 billion. As of December 31, 2016, we had sold a total of approximately 40,000 nonperforming loans with an aggregate unpaid principal balance of $7.6 billion. We plan to complete additional nonperforming loan sales in the future.
REO Management
Foreclosure and REO activity affect the amount of credit losses we realize in a given period. Table 29 displays our foreclosure activity by region. Regional REO acquisition and charge-off trends generally follow a pattern that is similar to, but lags, that of regional delinquency trends.

Fannie Mae 2016 Form 10-K
 
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Table 29: Single-Family Foreclosed Properties
 
For the Year Ended December 31,
 
 
2016
 
2015
 
2014
 
Single-family foreclosed properties (number of properties):
 
 
 
 
 
 
Beginning of period inventory of single-family foreclosed properties (REO)(1)
57,253

 
87,063

 
103,229

 
Acquisitions by geographic area:(2)
 
 
 
 
 
 
Midwest
12,379

 
17,024

 
26,013

 
Northeast
12,389

 
15,553

 
15,337

 
Southeast
16,977

 
29,618

 
48,647

 
Southwest
6,984

 
8,522

 
13,437

 
West
4,780

 
7,919

 
13,203

 
Total properties acquired through foreclosure(1)
53,509

 
78,636

 
116,637

 
Dispositions of REO
(72,669
)
 
(108,446
)
 
(132,803
)
 
End of period inventory of single-family foreclosed properties (REO)(1)
38,093

 
57,253

 
87,063

 
Carrying value of single-family foreclosed properties (dollars in millions)
$
4,372

 
$
6,608

 
$
9,745

 
Single-family foreclosure rate(3)
0.31

%
0.45

%
0.67

%
REO net sales prices to unpaid principal balance(4)
74

%
72

%
69

%
Short sales net sales price to unpaid principal balance(5)
74

%
73

%
72

%
__________
(1) 
Includes acquisitions through deeds-in-lieu of foreclosure. Also includes held for use properties, which are reported in our consolidated balance sheets as a component of “Other assets.”
(2) 
See footnote 9 to “Table 22: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” for states included in each geographic region.
(3) 
Estimated based on the total number of properties acquired through foreclosure or deeds-in-lieu of foreclosure as a percentage of the total number of loans in our single-family guaranty book of business as of the end of each respective period.
(4) 
Calculated as the amount of sale proceeds received on disposition of REO properties during the respective periods, excluding those subject to repurchase requests made to our sellers or servicers, divided by the aggregate unpaid principal balance of the related loans at the time of foreclosure. Net sales price represents the contract sales price less selling costs for the property and other charges paid by the seller at closing.
(5) 
Calculated as the amount of sale proceeds received on properties sold in short sale transactions during the respective periods divided by the aggregate unpaid principal balance of the related loans. Net sales price represents the contract sales price less the selling costs for the property and other charges paid by the seller at the closing, including borrower relocation incentive payments and subordinate lien(s) negotiated payoffs.
The continued decrease in the number of our seriously delinquent single-family loans resulted in a reduction in the number of REO acquisitions in 2016 compared with 2015 and 2014.
If a loan defaults and we acquire a home through foreclosure or a deed-in-lieu of foreclosure, we market and sell the home through local real estate professionals. Our primary objectives are both to minimize the severity of loss to Fannie Mae by maximizing sales prices and to stabilize neighborhoods by preventing empty homes from depressing home values. In cases where the property does not sell, we use alternative methods of disposition, including selling homes to municipalities, other public entities or non-profit organizations, and selling properties through public auctions.
Neighborhood stabilization is a core principle in our approach to managing our REO inventory. As a result, we seek to keep properties in good condition and, where appropriate, repair them to make them more marketable and increase the likelihood that an owner occupant will purchase the properties. In addition, we encourage homeownership through our First Look™ marketing period. During this First Look period, owner occupants, some nonprofit organizations and public entities may submit offers and purchase properties without competition from investors. Approximately 55% of the single-family properties we sold in 2016 were purchased by owner occupants, nonprofit organizations or public entities.

Fannie Mae 2016 Form 10-K
 
103
 
 
MD&A | Business Segments

In some cases, we engage in third party sales at foreclosure, which allow us to avoid maintenance and other REO expenses we would have incurred had we acquired the property.
We currently lease properties to tenants who occupied the properties before we acquired them into our REO inventory and to eligible borrowers who executed a deed-in-lieu of foreclosure, which can minimize disruption by providing additional time to find alternate housing, help stabilize local communities, provide us with rental income, and support our compliance with state and local laws protecting tenants in foreclosed properties. As of December 31, 2016, approximately 770 tenants leased our REO properties.
We continue to manage our REO inventory to appropriately control costs and maximize sales proceeds. However, we are unable to market and sell a large portion of our inventory, primarily due to occupancy and state or local redemption or confirmation periods, which extends the amount of time it takes to bring our properties to a marketable state and eventually dispose of them. This results in higher foreclosed property expenses, which include costs related to maintaining the property and ensuring that the property is vacant. As of December 31, 2016 approximately 40% of our REO properties were unable to be marketed, 26% of our REO properties were available for sale, 17% of our REO properties were pending sale settlement and 17% of our REO properties were pending appraisals and being prepared to be listed for sale.
Table 30 displays the proportionate share of foreclosures as compared with their share of our single-family guaranty book of business for the states that have a higher concentration of foreclosures. Table 30 also displays this information for California, as this state accounts for a large share of our single-family conventional guaranty book of business.
Table 30: Single-Family Acquired Property Concentration Analysis
 
As of
 
For the Year Ended
 
As of
 
For the Year Ended
 
As of
 
For the Year Ended
 
December 31, 2016
 
December 31, 2015
 
December 31, 2014
 
Percentage of Book Outstanding(1)
 
Percentage of Properties Acquired by Foreclosure(2)
 
Percentage of Book Outstanding(1)
 
Percentage of Properties Acquired by Foreclosure(2)
 
Percentage of Book Outstanding(1)
 
Percentage of Properties Acquired by Foreclosure(2)
States:
 
 
 
 
 
 
 
 
 
 
 
California
20
%
 
4
%
 
20
%
 
4
%
 
20
%
 
5
%
Florida
6

 
13

 
6

 
20

 
6

 
24

Illinois
4

 
6

 
4

 
7

 
4

 
7

New Jersey
4

 
7

 
4

 
6

 
4

 
3

__________
(1) 
Calculated based on the aggregate unpaid principal balance of single-family conventional loans, where we have detailed loan level information, for each category divided by the aggregate unpaid principal balance of our single-family conventional guaranty book of business.
(2) 
Calculated based on the number of properties acquired through foreclosure or deed-in-lieu of foreclosure during the period for each category divided by the total number of properties acquired through foreclosure during the same period.
Multifamily Business
Multifamily Business Activities
Overview
Our Multifamily business provides mortgage market liquidity primarily for properties with five or more residential units, which may be apartment communities, cooperative properties, seniors housing, dedicated student housing or manufactured housing communities. Our Multifamily business works with our lender customers to provide funds to the mortgage market primarily by securitizing multifamily mortgage loans into Fannie Mae MBS. We also purchase multifamily mortgage loans and provide credit enhancement for bonds issued by state and local housing finance authorities to finance multifamily housing. Our Multifamily business also supports liquidity in the mortgage market and the business of our lender customers through other activities, such as issuing structured Fannie Mae MBS backed by multifamily mortgage assets and buying and selling multifamily agency mortgage-backed securities.
Revenues for our Multifamily business are derived primarily from net interest income. Our primary sources of multifamily net interest income are: (1) the guaranty fees we receive as compensation for assuming and

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managing the credit risk on the multifamily mortgage loans underlying Fannie Mae MBS held by third parties; and (2) the difference between the interest income earned on the multifamily mortgage assets in our retained mortgage portfolio, including CMBS and other non-agency securities, and the interest expense associated with the debt that funds those assets. Our Multifamily business also earns revenues from other fees associated with multifamily business activities, including yield maintenance income.
Key Characteristics of the Multifamily Mortgage Market and Fannie Mae’s Multifamily Business
The multifamily mortgage market and our transactions in that market have a number of key characteristics that affect our multifamily activities and distinguish them from our activities in the single-family residential mortgage market.
•
Funding sources: The multifamily market is made up of a wide variety of lending sources, including commercial banks, life insurance companies, investment banks, FHA, state and local housing finance agencies, and the GSEs.
•
Lenders: During 2016, we executed multifamily transactions with 30 lenders. Of these, 25 lenders delivered loans to us under our DUS program. In determining whether to partner with a multifamily lender, we consider the lender’s financial strength, multifamily underwriting and servicing experience, portfolio performance and willingness and ability to share in the risk of loss associated with the multifamily loans they originate.
•
Loan size: The average size of a loan in our multifamily guaranty book of business is $8 million.
•
Collateral: Multifamily loans are collateralized by properties that generate cash flows and effectively operate as businesses, such as garden and high-rise apartment complexes, seniors housing communities, cooperatives, dedicated student housing and manufactured housing communities.
•
Borrower and sponsor profile: Multifamily borrowers are entities that are typically owned, directly or indirectly, by for-profit corporations, limited liability companies, partnerships, real estate investment trusts and individuals who invest in real estate for cash flow and equity returns in exchange for their original investment in the asset. The ultimate owners of a multifamily borrower are referred to as the borrower’s “sponsors.” In this report, we refer to both the borrowing entities and their sponsors as “borrowers.” Because borrowing entities are typically single-asset entities, with the property as their only asset, in evaluating a borrowing entity we also evaluate its sponsors. Multifamily loans are generally non-recourse to the sponsors. When considering a multifamily borrower, creditworthiness is evaluated through a combination of quantitative and qualitative data including liquid assets, net worth, number of units owned, experience in a market and/or property type, multifamily portfolio performance, access to additional liquidity, debt maturities, asset/property management platform, senior management experience, reputation and lender exposure.
•
Borrower and lender alignment: Borrowers are required to contribute equity into multifamily properties on which they borrow, while lenders generally share in any losses realized from the loans that we guarantee.
•
Underwriting process: Multifamily loans require detailed underwriting of the property’s operating cash flow. Our underwriting includes an evaluation of the property’s ability to support the loan, property quality, market and submarket factors, and ability to exit at maturity.
•
Term and lifecycle: In contrast to the standard 30-year single-family residential loan, multifamily loans typically have terms of 5, 7 or 10 years, with balloon payments due at maturity.
•
Prepayment terms: Most multifamily Fannie Mae loans and MBS have protection against prepayments of loans and impose prepayment premiums, primarily yield maintenance, consistent with standard commercial investment terms.
Delegated Underwriting and Servicing
In an effort to promote product standardization in the multifamily marketplace, in 1988 Fannie Mae initiated the DUS® program for acquiring individual multifamily loans.
DUS is a unique business model in the commercial mortgage industry. The standard industry practice for a multifamily loan requires the purchaser or guarantor to underwrite or re-underwrite each loan prior to deciding whether to purchase or guaranty the loan. Under our model, DUS lenders are pre-approved and delegated the authority to underwrite and service loans on behalf of Fannie Mae. In exchange for this authority, DUS lenders are

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required to share with us the risk of loss over the life of the loan, as discussed in more detail in “Multifamily Mortgage Credit Risk Management.” Since DUS lenders share in the credit risk, the servicing fee to the lenders includes compensation for credit risk. Delegation permits lenders to respond to customers more rapidly, as the lender generally has the authority to approve a loan within prescribed parameters, which provides an important competitive advantage.
Our DUS model aligns the interests of the lender and Fannie Mae. Our current 25-member DUS lender network, which is comprised of large financial institutions and independent mortgage lenders, continues to be our principal source of multifamily loan deliveries.
Multifamily Mortgage Servicing
Multifamily mortgage servicing is typically performed by the lenders who sell the mortgages to us. Multifamily mortgage servicers that are members of our DUS network have agreed to accept loss sharing, which we believe increases the alignment of interests between us and our multifamily loan servicers. Because of our loss-sharing arrangements with our multifamily lenders, transfers of multifamily servicing rights are infrequent, and we carefully monitor our servicing relationships and enforce our right to approve servicing transfers. As a seller-servicer, the lender is responsible for evaluating the financial condition of properties and property owners, administering various types of agreements (including agreements regarding replacement reserves, completion or repair, and operations and maintenance), as well as conducting routine property inspections.
The Multifamily Markets in Which We Operate
In the multifamily mortgage market, we aim to address the rental housing needs of a wide range of the population in all markets across the country, with the substantial majority of our focus on supporting rental housing that is affordable to families earning at or below the median income in their area. Our mission requires us to serve the market steadily, rather than moving in and out depending on market conditions. Through the secondary mortgage market, we support rental housing for the workforce population, for senior citizens and students, and for families with the greatest economic need. Approximately 90% of the multifamily units we financed in 2016 were affordable to families earning at or below 120% of the median income in their area, providing support for both workforce housing and affordable housing. Our Multifamily business is organized and operated as an integrated commercial real estate finance business, addressing the spectrum of multifamily housing finance needs, including the needs described below.
•
To meet the growing need for smaller multifamily property financing, we focus on the acquisition of multifamily loans up to $3 million ($5 million in high cost areas). We acquire these loans primarily from DUS lenders; however, we have also acquired these loans from other financial institutions. Over the years, we have been an active purchaser of these loans from both DUS and non-DUS lenders, and, as of December 31, 2016, they represented 48.9% of our multifamily guaranty book of business by loan count and 7.5% based on unpaid principal balance.
•
To serve low- and very low-income households, we have a team that focuses exclusively on relationships with lenders financing privately-owned multifamily properties that receive public subsidies in exchange for maintaining long-term affordable rents. We enable borrowers to leverage housing programs and subsidies provided by local, state and federal agencies. These public subsidy programs are largely targeted to providing housing to families earning less than 60% of area median income (as defined by HUD) and are structured to ensure that the low and very low-income households who benefit from the subsidies pay no more than 30% of their gross monthly income for rent and utilities. As of December 31, 2016, this type of financing represented approximately 13% of our multifamily guaranty book of business, based on unpaid principal balance, including $12.3 billion in bond credit enhancements.
Multifamily Volume Cap
FHFA’s 2017 conservatorship scorecard includes an objective to maintain the dollar volume of new multifamily business at or below $36.5 billion, excluding certain targeted affordable and underserved market business segments. FHFA announced in November 2016 that our multifamily volume cap for 2017 will remain at the same level as it was for 2016, based on its projections of the overall size of the multifamily finance market in 2017. FHFA’s announcement stated that, as in prior years, FHFA will review its estimates of the multifamily loan origination market size on a quarterly basis and adjust the cap if necessary; however, FHFA will not reduce the cap as this could cause disruption in the market.

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Multifamily Mortgage Market Conditions and Outlook
Total multifamily U.S mortgage debt outstanding was $1.15 trillion as of September 30, 2016, the latest date for which the data is available. We owned or guaranteed mortgage assets representing approximately 19% of total U.S. multifamily mortgage debt outstanding as of September 30, 2016.
National multifamily market fundamentals, which include factors such as vacancy rates and rents, remained relatively stable during most of 2016, despite an increase in new apartment supply. Although the national estimated vacancy level increased toward the end of the year, it remained near historic lows, benefiting from steady rental demand coupled with ongoing job growth and new household formation. While it is estimated that no rent growth occurred during the fourth quarter of 2016, rent growth remained positive for the year.
•
Vacancy rates. According to preliminary third-party data, the national multifamily vacancy rate for institutional investment-type apartment properties was an estimated 5.25% as of December 31, 2016, up from an estimated 5.0% as of September 30, 2016 and December 31, 2015.
•
Rents. Effective rents continued to increase during most of 2016, although the rate of growth slowed. National asking rents increased by an estimated 2.5% in 2016, but it is estimated that no rent growth occurred during the fourth quarter of 2016, compared with an estimated increase of 1.0% in the third quarter of 2016.
Continued demand for multifamily rental units was reflected in the estimated positive net absorption (that is, the net change in the number of occupied rental units during the time period) of at least 179,000 units in 2016, according to preliminary data from Reis, Inc. There was positive net absorption of approximately 43,000 units during the fourth quarter of 2016, compared with approximately 38,000 units during the third quarter of 2016. Although an estimated 343,000 multifamily units were added to the nation’s inventory in 2016, demand remained steady for much of the year.
Vacancy rates and rents are important to loan performance because multifamily loans are generally repaid from the cash flows generated by the underlying property. Several years of improvement in these fundamentals helped to increase property values in most metropolitan areas in 2016, and contributed to the ongoing increase in new multifamily construction development. As a result, it is estimated that there will be approximately 400,000 new multifamily units completed in 2017. The bulk of this new supply is concentrated in a limited number of metropolitan areas. We believe this increase in supply will result in a slowdown in national net absorption rates, occupancy levels and effective rents in 2017. Nevertheless, we expect the overall national rental market supply and demand to remain in balance over the longer term, based on expected construction completions, expected obsolescence and positive rental household formation trends.

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Multifamily Business Metrics
Table 31: Multifamily Business Key Performance Data
 
For the Year Ended December 31,
 
 
2016
 
2015
 
2014
 
 
(Dollars in millions)
Securitization Activity/New Business
 
 
 
 
 
 
Multifamily new business volume(1)
$
55,309

 
$
42,342

 
$
28,908

 
Multifamily units financed from new business volume
724,000

 
569,000

 
446,000

 
Multifamily Fannie Mae MBS issuances(2)
$
55,020

 
$
43,923

 
$
31,997

 
Multifamily Fannie Mae structured securities issuances
$
10,559

 
$
11,685

 
$
12,040

 
Multifamily Fannie Mae MBS outstanding, at end of period
$
223,037

 
$
188,212

 
$
167,010

 
Portfolio Data
 
 
 
 
 
 
Multifamily retained mortgage portfolio, at end of period
$
19,852

 
$
30,778

 
$
50,003

 
Credit Guaranty Activity
 
 
 
 
 
 
Average multifamily guaranty book of business(3)
$
227,957

 
$
209,747

 
$
200,150

 
Average charged guaranty fee rate on multifamily guaranty book of business (in basis points)
74.9
 
69.4
 
64.9
 
Multifamily credit loss ratio (in basis points)(4)
(0.2
)
 
(2.7
)
 
(2.3
)
 
Multifamily serious delinquency rate, at end of period
0.05

%
0.07

%
0.05

%
Percentage of multifamily guaranty book of business with lender risk-sharing, at end of period
94

%
92

%
88

%
_________
(1) 
Reflects unpaid principal balance of multifamily Fannie Mae MBS issued (excluding portfolio securitizations), multifamily loans purchased, and credit enhancements provided during the period.
(2) 
Reflects unpaid principal balance of multifamily Fannie Mae MBS issued during the period. Includes: (a) issuances of new multifamily MBS; (b) Fannie Mae multifamily portfolio securitization transactions of $1.8 billion and $3.4 billion for the years ended December 31, 2015 and 2014, respectively. There were no Fannie Mae multifamily portfolio securitization transactions in 2016; and (c) conversions of adjustable-rate loans to fixed-rate loans and discount MBS (“DMBS”) to MBS of $118 million, $4 million and $3 million for the years ended December 31, 2016, 2015 and 2014, respectively. Multifamily MBS reissuances were $19 million and $56 million for the years ended December 31, 2016 and 2015, respectively. There were no multifamily MBS reissuances in 2014.
(3) 
Our multifamily guaranty book of business consists of: (a) multifamily mortgage loans of Fannie Mae; (b) multifamily mortgage loans underlying Fannie Mae MBS; and (c) other credit enhancements that we provide on multifamily mortgage assets. It excludes non-Fannie Mae multifamily mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
(4) 
Calculated based on Multifamily segment credit losses divided by the average multifamily guaranty book of business. Negative credit losses are the result of recoveries on previously charged-off amounts.
Multifamily new business volume increased in 2016 compared with 2015 driven by continued growth in the overall multifamily market. FHFA’s 2016 conservatorship scorecard included an objective to maintain the dollar volume of new multifamily business at or below $36.5 billion excluding certain targeted business segments. Our Multifamily business met this objective with approximately 66% of Fannie Mae’s 2016 multifamily new business volume of $55.3 billion counting towards FHFA’s 2016 multifamily volume cap.

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Multifamily Business Financial Results
Table 32: Multifamily Business Financial Results
 
For the Year Ended December 31,
 
Variance
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
 
(Dollars in millions)
Net interest income
$
2,285

 
$
2,108

 
$
1,764

 
 
$
177

 
 
 
$
344

 
Fee and other income
445

 
712

 
494

 
 
(267
)
 
 
 
218

 
Net revenues
2,730

 
2,820

 
2,258

 
 
(90
)
 
 
 
562

 
Credit-related income(1)
72

 
201

 
197

 
 
(129
)
 
 
 
4

 
Fair value losses, net
(41
)
 
(262
)
 
(45
)
 
 
221

 
 
 
(217
)
 
Gains from partnership investments(2)
91

 
283

 
301

 
 
(192
)
 
 
 
(18
)
 
Administrative expenses
(323
)
 
(339
)
 
(310
)
 
 
16

 
 
 
(29
)
 
Other income(3)
205

 
301

 
200

 
 
(96
)
 
 
 
101

 
Income before federal income taxes
2,734

 
3,004

 
2,601

 
 
(270
)
 
 
 
403

 
Provision for federal income taxes
(603
)
 
(660
)
 
(531
)
 
 
57

 
 
 
(129
)
 
Less: Net income attributable to noncontrolling interest
—

 
(1
)
 
(1
)
 
 
1

 
 
 
—

 
Net income attributable to Fannie Mae
$
2,131

 
$
2,343

 
$
2,069

 
 
$
(212
)
 
 
 
$
274

 
__________
(1) 
Consists of the benefit (provision) for credit losses and foreclosed property income (expense).
(2) 
Gains from partnership investments are included in “Other expenses, net” in our consolidated statements of operations and comprehensive income.
(3) 
Consists of investment gains (losses), debt extinguishment gains (losses), and other income (expenses).
2016 compared to 2015
Multifamily net income decreased in 2016 compared with 2015 primarily due to lower fee and other income, lower gains from partnership investments, and a decrease in credit-related income. This decrease was partially offset by lower fair value losses and an increase in net interest income.
Net interest income increased primarily due to an increase in guaranty fee income as our multifamily guaranty book of business grew and loans with higher guaranty fees became a larger part of our book, while loans with lower guaranty fees continued to liquidate.
Fee and other income decreased in 2016 compared with 2015 primarily due to a decrease in yield maintenance income.
Credit-related income decreased in 2016 compared with 2015 primarily driven by lower gains on sale of multifamily REO properties.
Fair value losses decreased in 2016 compared with 2015. Fair value losses in 2015 were primarily due to higher losses on trading securities as a result of widening spreads on other mortgage-related securities.
Gains from partnership investments decreased in 2016 compared with 2015 as the number of our multifamily partnership investments continued to decline.
2015 compared to 2014
Multifamily net income increased in 2015 compared with 2014 primarily due to higher net interest income and fee and other income, partially offset by higher fair value losses.
Net interest income increased primarily due to an increase in guaranty fee income as our multifamily guaranty book of business grew and loans with higher guaranty fees became a larger part of our book, while loans with lower guaranty fees continued to liquidate.
Fee and other income increased in 2015 compared with 2014 as a result of an increase in yield maintenance income.

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Fair value losses increased in 2015 compared with 2014 driven by higher losses on trading securities in 2015 as a result of widening spreads on other mortgage-related securities.
Multifamily Mortgage Credit Risk Management
The credit risk profile of our multifamily mortgage credit book of business is influenced by the structure of the financing, the type and location of the property, the condition and value of the property, the financial strength of the borrower, market and sub-market trends and growth, and the current and anticipated cash flows from the property. These and other factors affect both the amount of expected credit loss on a given loan and the sensitivity of that loss to changes in the economic environment. We provide information on our multifamily credit-related income and credit losses in “Multifamily Business Financial Results.”
We exclude from the multifamily credit statistics reported below the approximately 1% of our multifamily guaranty book of business for which our loan level information is incomplete as of December 31, 2016 and 2015.
Multifamily Acquisition Policy and Underwriting Standards
Our Multifamily business is responsible for pricing and managing the credit risk on multifamily mortgage loans we purchase and on Fannie Mae MBS backed by multifamily loans (whether held in our retained mortgage portfolio or held by third parties), with oversight from our Enterprise Risk Management division. Our primary multifamily delivery channel is the DUS program. Multifamily loans that we purchase or that back Fannie Mae MBS are underwritten by a Fannie Mae-approved lender and may be subject to our underwriting review prior to closing, depending on the product type, loan size, market and/or other factors. Loans delivered to us by DUS lenders and their affiliates represented 97% of our multifamily guaranty book of business as of December 31, 2016 and 2015, compared with 94% as of December 31, 2014.
We use credit enhancement arrangements, primarily lender risk-sharing, for our multifamily loans. Lenders in the DUS program typically share in loan level credit losses in one of two ways: (1) they bear losses up to the first 5% of the unpaid principal balance of the loan and share in remaining losses up to a prescribed limit; or (2) they share up to one-third of the losses on a pro rata basis with us. Non-DUS lenders typically share or absorb losses based on a negotiated percentage of the loan or the pool balance.
As of December 31, 2016, 94% of the unpaid principal balance of loans in our multifamily guaranty book of business had lender risk-sharing, compared with 92% as of December 31, 2015. Our maximum potential loss recovery from lenders under current risk-sharing agreements represented over 20% of the unpaid principal balance of our multifamily guaranty book of business as of December 31, 2016 and 2015. These risk-sharing agreements not only transfer credit risk, but also better align our interests with those of the lenders.
At the time of our purchase or guarantee of multifamily mortgage loans, we and our lenders rely on sound underwriting standards, which generally include property cash flow analysis and third-party appraisals. Our standards for multifamily loans specify maximum original LTV ratio and minimum original debt service coverage ratio (“DSCR”) values that vary based on loan characteristics. Our experience has been that original LTV ratio and DSCR values have been reliable indicators of future credit performance. At underwriting, we evaluate the DSCR based on both actual and underwritten debt service payments.
The original DSCR is calculated using the underwritten debt service payments for the loan, rather than the actual debt service payments, which depending on the interest rate of the loan and loan structure may result in a more conservative estimate of the debt service payments.
Table 33 displays original LTV ratio and DSCR metrics for our multifamily guaranty book of business.
Table 33: Multifamily Guaranty Book of Business Key Risk Characteristics
 
As of December 31,
 
2016
 
2015
 
2014
Weighted average original LTV ratio
 
67
%
 
 
 
66
%
 
 
 
66
%
 
Original LTV ratio greater than 80%
 
2

 
 
 
3

 
 
 
3

 
Original DSCR less than or equal to 1.10
 
14

 
 
 
11

 
 
 
8

 
The percentage of our book of business with an original DSCR less than or equal to 1.10 has increased to 14% as of December 31, 2016, driven by an increase in business volume funded with adjustable-rate mortgages and

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with fixed-rate mortgages with different loan structures, which are underwritten at higher interest rates than the actual rates on those loans.
Multifamily Portfolio Diversification and Monitoring
Diversification within our multifamily mortgage credit book of business by geographic concentration, term to maturity, interest rate structure, borrower concentration and loan size, as well as credit enhancement coverage, are important factors that influence credit performance and help reduce our credit risk.
We and our lenders monitor the performance and risk characteristics of our multifamily loans and the underlying properties on an ongoing basis throughout the loan term at the asset and portfolio level. We track credit risk characteristics to determine the loan credit quality indicators, which are the internal risk categories and are further discussed in “Note 3, Mortgage Loans.” The credit risk characteristics we use to help determine the internal risk categories include the physical condition of the property, delinquency status, the relevant local market and economic conditions that may signal changing risk or return profiles, and other risk factors. For example, we closely monitor the rental payment trends and vacancy levels in local markets, as well as capitalization rates, to identify loans that merit closer attention or loss mitigation actions. We manage our exposure to refinancing risk for multifamily loans maturing in the next several years. We have a team that proactively manages upcoming loan maturities to minimize losses on maturing loans. This team assists lenders and borrowers with timely and appropriate refinancing of maturing loans with the goal of reducing defaults and foreclosures related to loans maturing in the near term. The primary asset management responsibilities for our multifamily loans are performed by our DUS and other multifamily lenders. We periodically evaluate these lenders’ and our other third party service providers’ performance for compliance with our asset management criteria.
As part of our ongoing credit risk management process, we require lenders to provide quarterly and annual financial updates for the loans where we are contractually entitled to receive such information. We closely monitor loans with an estimated current DSCR below 1.0, as that is an indicator of heightened default risk. The percentage of loans in our multifamily guaranty book of business, calculated based on unpaid principal balance, with a current DSCR less than 1.0 was approximately 2% as of December 31, 2016 and 2015. Our estimates of current DSCRs are based on the latest available income information for these properties. Although we use the most recently available results from our multifamily borrowers, there is a lag in reporting, which typically can range from 3 to 6 months but in some cases may be longer.
Multifamily Problem Loan Management and Foreclosure Prevention
We periodically refine our underwriting standards in response to market conditions and implement proactive portfolio management and monitoring which are each designed to keep credit losses and delinquencies to a low level relative to our multifamily guaranty book of business. The multifamily serious delinquency rate was 0.05% as of December 31, 2016 and 0.07% as of December 31, 2015. We classify multifamily loans as seriously delinquent when payment is 60 days or more past due.
REO Management
The number of multifamily foreclosed properties held for sale remained low at 13 properties with a carrying value of $85 million as of December 31, 2016 compared with 12 properties with a carrying value of $91 million as of December 31, 2015.
Liquidity and Capital Management
Liquidity Management
Our business activities require that we maintain adequate liquidity to fund our operations. Our liquidity risk management framework is designed to address our liquidity risk. Liquidity risk is the risk that we will not be able to meet our funding obligations in a timely manner. Liquidity risk management involves forecasting funding requirements, maintaining sufficient capacity to meet our needs based on our ongoing assessment of financial market liquidity and adhering to our regulatory requirements.

Fannie Mae 2016 Form 10-K
 
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Primary Sources and Uses of Funds
Our primary source of funds is proceeds from the issuance of short-term and long-term debt securities. Accordingly, our liquidity depends largely on our ability to issue unsecured debt in the capital markets. Our status as a GSE and federal government support of our business continue to be essential to maintaining our access to the unsecured debt markets.
In addition to funding we obtain from the issuance of debt securities, our other sources of cash include:
•
principal and interest payments received on mortgage loans, mortgage-related securities and non-mortgage investments we own;
•
proceeds from the sale of mortgage-related securities, mortgage loans and non-mortgage assets, including proceeds from the sales of foreclosed real estate assets;
•
guaranty fees received on Fannie Mae MBS;
•
payments received from mortgage insurance counterparties and other providers of credit enhancement; 
•
net receipts on derivative instruments;
•
receipt of cash collateral; and
•
borrowings under a secured intraday funding line of credit and borrowings against mortgage-related securities and other investment securities we hold pursuant to repurchase agreements and loan agreements.
Our primary funding needs include:
•
the repayment of matured, redeemed and repurchased debt;
•
the purchase of mortgage loans (including delinquent loans from MBS trusts), mortgage-related securities and other investments;
•
interest payments on outstanding debt;
•
dividend payments made to Treasury on the senior preferred stock;
•
net payments on derivative instruments;
•
the pledging of collateral under derivative instruments;
•
administrative expenses;
•
losses incurred in connection with our Fannie Mae MBS guaranty obligations; 
•
payments of federal income taxes;
•
payments to specified HUD and Treasury funds; and
•
payments of TCCA fees to Treasury.
Liquidity Risk Management Practices and Contingency Planning
Our liquidity position could be adversely affected by many factors, both internal and external to our business, including: actions taken by FHFA, the Federal Reserve, Treasury or other government agencies; legislation relating to us or our business; a U.S. government payment default on its debt obligations; a downgrade in the credit ratings of our senior unsecured debt or the U.S. government’s debt from the major ratings organizations; a systemic event leading to the withdrawal of liquidity from the market; an extreme market-wide widening of credit spreads; public statements by key policy makers; a significant decline in our net worth; potential investor concerns about the adequacy of funding available to us under the senior preferred stock purchase agreement; loss of demand for our debt, or certain types of our debt, from a major group of investors; a significant credit event involving one of our major institutional counterparties; a sudden catastrophic operational failure in the financial sector; or elimination of our GSE status. See “Risk Factors” for a discussion of factors that could adversely affect our liquidity. 
We conduct liquidity contingency planning to prepare for an event in which our access to the unsecured debt markets becomes limited. We plan for alternative sources of liquidity that are designed to allow us to meet our cash obligations without relying upon the issuance of unsecured debt for specific periods of time.

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Our liquidity management framework and practices require that we maintain:
•
a portfolio of highly liquid securities to cover a minimum of 30 calendar days of net cash needs, assuming no access to the short- and long-term unsecured debt markets;
•
within our cash and other investments portfolio a daily balance of U.S. Treasury securities and/or cash with the Federal Reserve Bank of New York that has a redemption amount of at least 50% of our average projected 30-day cash needs over the previous three months; and
•
a liquidity profile that meets or exceeds our projected 365-day net cash needs with liquidity holdings and unencumbered agency mortgage securities.
As of December 31, 2016, we were in compliance with our liquidity risk management framework and practices set forth above.
We run routine operational testing of our ability to rely upon mortgage and U.S. Treasury collateral to obtain financing. We enter into relatively small repurchase agreements in order to confirm that we have the operational and systems capability to do so. In addition, we have provided collateral in advance to clearing banks in the event we seek to enter into repurchase agreements in the future. We do not, however, have committed repurchase agreements with specific counterparties, as historically we have not relied on this form of funding. As a result, our use of such facilities and our ability to enter into them in significant dollar amounts may be challenging in a stressed market environment. See “Risk Factors” for the risks associated with our ability to fund operations.
See “Cash and Other Investments Portfolio” and “Unencumbered Mortgage Portfolio” for further discussions of our alternative sources of liquidity if our access to the debt markets were to become limited.
While our liquidity contingency planning attempts to address stressed market conditions and our status under conservatorship and Treasury arrangements, we believe that our liquidity contingency plans may be difficult or impossible to execute for a company of our size in our circumstances. See “Risk Factors” for a description of the risks associated with our liquidity contingency planning.
Debt Funding
We separately present the debt from consolidations (“debt of consolidated trusts”) and the debt issued by us (“debt of Fannie Mae”) in our consolidated balance sheets and in the debt tables below. Our discussion regarding debt funding in this section focuses on the debt of Fannie Mae. We fund our business primarily through the issuance of a variety of short-term and long-term debt securities in the domestic and international capital markets. Because debt issuance is our primary funding source, we are subject to “roll-over,” or refinancing, risk on our outstanding debt.
We have a diversified funding base of domestic and international investors. Purchasers of our debt securities are geographically diversified and include fund managers, commercial banks, pension funds, insurance companies, foreign central banks, corporations, state and local governments, and other municipal authorities.
Our debt funding needs and debt funding activity may vary from quarter to quarter depending on market conditions and are influenced by anticipated liquidity needs, the size of our retained mortgage portfolio and our dividend payment obligations to Treasury. See “Retained Mortgage Portfolio” for information about our retained mortgage portfolio and our requirement to reduce the size of our retained mortgage portfolio.
Fannie Mae Debt Funding Activity
Table 34 displays the activity in debt of Fannie Mae. This activity excludes the debt of consolidated trusts and intraday loans. Activity for short-term debt of Fannie Mae relates to borrowings with an original contractual maturity of one year or less while activity for long-term debt of Fannie Mae relates to borrowings with an original contractual maturity of greater than one year. The reported amounts of debt issued and paid off during the period represent the face amount of the debt at issuance and redemption. The increase in our issuances and payoffs of short-term debt during 2016 compared with 2015 and 2014 was driven by our utilization of short-term notes with overnight maturities in 2016. The increase in our issuances of long-term debt during 2016 compared with 2015 and 2014 was primarily driven by the issuance of debt to fund higher redemptions of callable debt due to lower interest rates during the year.

Fannie Mae 2016 Form 10-K
 
113
 
MD&A | Liquidity and Capital Management

Table 34: Activity in Debt of Fannie Mae
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
(Dollars in millions)
Issued during the period:
 
 
 
 
 
Short-term: 
 
 
 
 
 
Amount 
$
588,082

 
$
182,358

 
$
213,683

Weighted-average interest rate
0.19
%
 
0.16
%
 
0.08
%
Long-term:(1)
 
 
 
 
 
Amount 
$
118,516

 
$
76,268

 
$
45,805

Weighted-average interest rate
1.60
%
 
1.48
%
 
1.79
%
Total issued: 
 
 
 
 
 
Amount 
$
706,598

 
$
258,626

 
$
259,488

Weighted-average interest rate
0.42
%
 
0.55
%
 
0.38
%
Paid off during the period:(2)
 
 
 
 
 
Short-term: 
 
 
 
 
 
Amount 
$
624,169

 
$
216,340

 
$
180,920

Weighted-average interest rate
0.22
%
 
0.10
%
 
0.09
%
Long-term:(1)
 
 
 
 
 
Amount 
$
142,826

 
$
117,350

 
$
148,186

Weighted-average interest rate
1.97
%
 
1.39
%
 
1.80
%
Total paid off: 
 
 
 
 
 
Amount 
$
766,995

 
$
333,690

 
$
329,106

Weighted-average interest rate
0.54
%
 
0.55
%
 
0.86
%
__________
(1) 
Includes credit risk-sharing securities issued under our CAS series. For additional information on our credit risk transfer transactions, see “Business Segments—Single Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk—Credit Risk Transfer Transactions.”
(2) 
Consists of all payments on debt, including regularly scheduled principal payments, payments at maturity, payments resulting from calls and payments for any other repurchases. Repurchases of debt and early retirements of zero-coupon debt are reported at original face value, which does not equal the amount of actual cash payment.
Many factors could affect the amount, mix and cost of our debt funding, reduce demand for our debt securities, increase our liquidity or roll-over risk, or have a material adverse impact on our liquidity, financial condition and results of operations, including:
•
changes or perceived changes in federal government support of our business;
•
our status as a GSE;
•
future changes or disruptions in the financial markets;
•
a change or perceived change in the creditworthiness of the U.S. government, due to our reliance on the U.S. government’s support; or
•
a downgrade in our credit ratings.
We believe that continued federal government support of our business, as well as our status as a GSE, are essential to maintaining our access to debt funding. See “Risk Factors” for a discussion of the risks we face relating to: (1) the uncertain future of our company; (2) our reliance on the issuance of debt securities to obtain funds for our operations and the relative cost to obtain these funds; (3) our liquidity contingency plans; and (4) our credit ratings. Also see “Business—Legislation and Regulation—Housing Finance Reform” for a description of recent actions and statements relating to housing finance reform by the current Administration, Congress and FHFA.

Fannie Mae 2016 Form 10-K
 
114
 
MD&A | Liquidity and Capital Management

Intraday Line of Credit
We use a secured intraday funding line of credit provided by a large financial institution. We post collateral which, in some circumstances, the secured party has the right to repledge to third parties. As this line of credit is an uncommitted intraday loan facility, we may be unable to draw on it if and when needed. The line of credit under this facility was $15.0 billion as of December 31, 2016 and 2015. We had no borrowings outstanding under this line of credit as of December 31, 2016.
Outstanding Debt
Total outstanding debt of Fannie Mae includes short-term and long-term debt, excluding debt of consolidated trusts. Short-term debt of Fannie Mae consists of borrowings with an original contractual maturity of one year or less and, therefore, does not include the current portion of long-term debt. Long-term debt of Fannie Mae consists of borrowings with an original contractual maturity of greater than one year.
Our outstanding short-term debt, based on its original contractual maturity, as a percentage of our total outstanding debt was 11% as of December 31, 2016 compared with 18% as of December 31, 2015. The weighted-average interest rate on our long-term debt, based on its original contractual maturity, decreased to 2.31% as of December 31, 2016 from 2.41% as of December 31, 2015.
Our outstanding debt maturing within one year, including the current portion of our long-term debt and amounts we have announced for early redemption, as a percentage of our total outstanding debt, excluding debt of consolidated trusts, was 32% as of December 31, 2016 and 2015. The weighted-average maturity of our outstanding debt that is maturing within one year was 146 days as of December 31, 2016, compared with 125 days as of December 31, 2015. The weighted-average maturity of our outstanding debt maturing in more than one year was approximately 56 months as of December 31, 2016 and approximately 57 months as of December 31, 2015. For information on the maturity profile of our outstanding long-term debt for each of the years 2017 through 2021 and thereafter, see “Note 8, Short-Term Borrowings and Long-Term Debt.”
We intend to repay our short-term and long-term debt obligations as they become due primarily through proceeds from the issuance of additional debt securities. We also may use proceeds from our mortgage assets to pay our debt obligations.
Pursuant to the terms of the senior preferred stock purchase agreement, we are prohibited from issuing debt without the prior consent of Treasury if it would result in our aggregate indebtedness exceeding our outstanding debt limit, which is 120% of the amount of mortgage assets we were allowed to own under the senior preferred stock purchase agreement on December 31 of the immediately preceding calendar year. Our debt limit under the senior preferred stock purchase agreement was reduced to $479.0 billion in 2016. As of December 31, 2016, our aggregate indebtedness totaled $328.8 billion, which was $150.2 billion below our debt limit. Our debt limit in 2017 is $407.2 billion. The calculation of our indebtedness for purposes of complying with our debt limit reflects the unpaid principal balance and excludes debt basis adjustments and debt of consolidated trusts. Because of our debt limit, we may be restricted in the amount of debt we issue to fund our operations.

Fannie Mae 2016 Form 10-K
 
115
 
MD&A | Liquidity and Capital Management

Table 35 displays information on our outstanding short-term and long-term debt based on its original contractual terms. The amount of our outstanding short-term debt and outstanding long-term debt of Fannie Mae decreased in 2016 compared with 2015 primarily due to lower funding needs as our retained mortgage portfolio decreased.
Table 35: Outstanding Short-Term Borrowings and Long-Term Debt(1)
 
As of December 31,
 
2016
 
2015
 
Maturities
 
Outstanding
 
Weighted-
Average
Interest
Rate
 
Maturities
 
Outstanding
 
Weighted-
Average
Interest
Rate
 
(Dollars in millions)
Federal funds purchased and securities sold under agreements to repurchase(2)
—
 
$
—

 
—
%
 
—
 
$
62

 
—
%
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt:
 
 
 
 
 
 
 
 
 
 
 
Debt of Fannie Mae
—
 
$
34,995

 
0.49
%
 
—
 
$
71,007

 
0.26
%
Debt of consolidated trusts
—
 
584

 
0.48

 
—
 
943

 
0.19

Total short-term debt
 
 
$
35,579

 
0.49
%
 
 
 
$
71,950

 
0.26
%
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
Senior fixed:
 
 
 
 
 
 
 
 
 
 
 
Benchmark notes and bonds
2017 - 2030
 
$
153,983

 
2.16
%
 
2016 - 2030
 
$
154,057

 
2.49
%
Medium-term notes(3)
2017 - 2026
 
82,230

 
1.40

 
2016 - 2025
 
96,997

 
1.53

Other(4)
2017 - 2038
 
12,800

 
6.74

 
2016 - 2038
 
27,772

 
4.88

Total senior fixed
 
 
249,013

 
2.14

 
 
 
278,826

 
2.39

Senior floating:
 
 
 
 
 
 
 
 
 
 
 
Medium-term notes(3)
2017 - 2019
 
21,476

 
0.71

 
2016 - 2019
 
20,791

 
0.27

Connecticut Avenue Securities(5)
2023 - 2029
 
16,511

 
4.77

 
2023 - 2028
 
10,764

 
3.84

Other(6)
2020 - 2037
 
346

 
6.75

 
2020 - 2037
 
368

 
10.46

Total senior floating
 
 
38,333

 
2.48

 
 
 
31,923

 
1.58

Subordinated debentures
2019
 
4,645

 
9.93

 
2019
 
4,227

 
9.93

Secured borrowings(7)
2021 - 2022
 
111

 
1.44

 
2021 - 2022
 
152

 
1.47

Total long-term debt of Fannie Mae
 
 
292,102

 
2.31

 
 
 
315,128

 
2.41

Debt of consolidated trusts
2017 - 2056
 
2,934,635

 
2.57

 
2016 - 2054
 
2,810,593

 
2.94

Total long-term debt 
 
 
$
3,226,737

 
2.54
%
 
 
 
$
3,125,721

 
2.88
%
Outstanding callable debt of Fannie Mae(8)
 
 
$
77,257

 
1.89
%
 
 
 
$
96,199

 
1.92
%
__________
(1) 
Outstanding debt amounts and weighted-average interest rates reported in this table include the effects of discounts, premiums and other cost basis adjustments. Reported outstanding amounts include fair value gains and losses associated with debt that we elected to carry at fair value. Reported amounts for total debt of Fannie Mae include unamortized discounts and premiums, other cost basis adjustments and fair value adjustments of $1.8 billion and $3.2 billion as of December 31, 2016 and 2015, respectively.
(2) 
Represents agreements to repurchase securities for a specified price, with repayment generally occurring on the following day.
(3) 
Includes long-term debt with an original contractual maturity of greater than 1 year and up to 10 years, excluding zero-coupon debt.
(4) 
Includes other long-term debt with an original contractual maturity of greater than 10 years and foreign exchange bonds.
(5) 
Credit risk-sharing securities that transfer a portion of the credit risk on specified pools of mortgage loans in our single-family guaranty book of business to the investors in these securities, a portion of which is reported at fair value. For additional information on our credit risk transfer transactions, see “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk—Credit Risk Transfer Transactions.”

Fannie Mae 2016 Form 10-K
 
116
 
MD&A | Liquidity and Capital Management

(6) 
Consists of structured debt instruments that are reported at fair value.
(7) 
Represents remaining liability resulting from the transfer of financial assets from our consolidated balance sheets that did not qualify as a sale.
(8) 
Consists of the unpaid principal balance of long-term callable debt of Fannie Mae that can be paid off in whole or in part at our option at any time on or after a specified date.
Table 36 below displays additional information for each category of our short-term borrowings.
Table 36: Outstanding Short-Term Borrowings(1)
 
2016
 
As of December 31
 
Average During the Year
 
 
 
Outstanding
 
Weighted-
Average
Interest
Rate
 
Outstanding(2)
 
Weighted-
Average
Interest
Rate
 
Maximum Outstanding(3)
 
(Dollars in millions)
Federal funds purchased and securities sold under agreements to repurchase
$
—

 
—
%
 
$
209

 
—
%
 
$
2,090

Total short-term debt of Fannie Mae
34,995

 
0.49

 
51,061

 
0.37

 
67,444

 
2015
 
As of December 31
 
Average During the Year
 
 
 
Outstanding
 
Weighted-
Average
Interest
Rate
 
Outstanding(2)
 
Weighted-
Average
Interest
Rate
 
Maximum Outstanding(3)
 
(Dollars in millions)
Federal funds purchased and securities sold under agreements to repurchase
$
62

 
—
%
 
$
42

 
—
%
 
$
271

Total short-term debt of Fannie Mae
71,007

 
0.26

 
88,842

 
0.17

 
107,690

 
2014
 
As of December 31
 
Average During the Year
 
 
 
Outstanding
 
Weighted-
Average
Interest
Rate
 
Outstanding(2)
 
Weighted-
Average
Interest
Rate
 
Maximum Outstanding(3)
 
(Dollars in millions)
Federal funds purchased and securities sold under agreements to repurchase
$
50

 
—
%
 
$
28

 
—
%
 
$
273

Total short-term debt of Fannie Mae
105,012

 
0.11

 
86,839

 
0.11

 
114,741

__________
(1) 
Includes the effects of discounts, premiums and other cost basis adjustments.
(2) 
Average amount outstanding has been calculated using daily balances.
(3) 
Maximum outstanding represents the highest daily outstanding balance during the year.

Fannie Mae 2016 Form 10-K
 
117
 
MD&A | Liquidity and Capital Management

Contractual Obligations
Table 37 displays, by remaining maturity, our future cash obligations related to our long term debt, announced calls, operating leases, purchase obligations and other material non-cancelable contractual obligations.
Table 37: Contractual Obligations
 
 
Payment Due by Period as of December 31, 2016
 
 
Total
 
 
Less than 1 Year
 
 
1 to < 3 Years
 
 
3 to 5 Years
 
 
More than 5 Years
 
 
(Dollars in millions)
Long-term debt obligations(1)
 
$
292,102

 
 
$
68,016

 
 
$
119,034

 
 
$
54,159

 
 
$
50,893

Contractual interest on long-term obligations(2)
 
38,445

 
 
5,341

 
 
8,643

 
 
6,271

 
 
18,190

Operating lease obligations(3)
 
887

 
 
47

 
 
76

 
 
99

 
 
665

Purchase obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage commitments(4)
 
67,100

 
 
67,100

 
 
—

 
 
—

 
 
—

Other purchase obligations(5)
 
153

 
 
88

 
 
54

 
 
11

 
 
—

Other liabilities reflected in the consolidated balance sheet(6)
 
602

 
 
578

 
 
11

 
 
13

 
 
—

Total contractual obligations
 
$
399,289

 
 
$
141,170

 
 
$
127,818

 
 
$
60,553

 
 
$
69,748

__________
(1) 
Represents the carrying amount of our long-term debt assuming payments are made in full at maturity. Amounts exclude $2.9 trillion in long-term debt of consolidated trusts. Amounts include a net unamortized discount, fair value adjustments and other cost basis adjustments of $1.8 billion.
(2) 
Excludes contractual interest on long-term debt from consolidations.
(3) 
Includes amounts related to office buildings and equipment leases.
(4) 
Includes on- and off-balance sheet commitments to purchase mortgage loans and mortgage-related securities.
(5) 
Includes unconditional purchase obligations that are subject to a cancellation penalty for certain telecommunications services, software and computer services, and other agreements. Excludes arrangements that may be canceled without penalty.
(6) 
Excludes risk management derivative transactions that may require cash settlement in future periods and our obligations to stand ready to perform under our guarantees relating to Fannie Mae MBS and other financial guarantees, because the amount and timing of payments under these arrangements are generally contingent upon the occurrence of future events. For a description of the amount of our on- and off-balance sheet Fannie Mae MBS and other financial guarantees as of December 31, 2016, see “Mortgage Credit Book of Business” and “Off-Balance Sheet Arrangements.” Includes cash received as collateral and future cash payments due under our contractual obligations to fund low-income housing tax credit partnership investments and other partnerships that are unconditional and legally binding, which are included in our consolidated balance sheets under “Other liabilities.”
Equity Funding
As a result of the covenants under the senior preferred stock purchase agreement, Treasury’s ownership of the warrant to purchase up to 79.9% of the total shares of our common stock outstanding and the uncertainty regarding our future, we effectively no longer have access to equity funding except through draws under the senior preferred stock purchase agreement. For a description of the funding available and the covenants under the senior preferred stock purchase agreement, see “Business—Conservatorship and Treasury Agreements—Treasury Agreements.”
Cash and Other Investments Portfolio
Table 38 displays information on the composition of our cash and other investments portfolio. The balance of our cash and other investments portfolio fluctuates based on changes in our cash flows, liquidity in the fixed income markets and our liquidity risk management framework and practices. See “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Counterparty Credit Exposure of Investments Held in our Cash and Other Investments Portfolio” for additional information on the risks associated with the assets in our cash and other investments portfolio.

Fannie Mae 2016 Form 10-K
 
118
 
MD&A | Liquidity and Capital Management

Table 38: Cash and Other Investments Portfolio
 
As of December 31,
 
2016
 
2015
 
2014
 
(Dollars in millions)
Cash and cash equivalents
$
25,224

 
$
14,674

 
$
22,023

Federal funds sold and securities purchased under agreements to resell or similar arrangements
30,415

 
27,350

 
30,950

U.S. Treasury securities
32,317

 
29,485

 
19,466

Total cash and other investments
$
87,956

 
$
71,509

 
$
72,439

Unencumbered Mortgage Portfolio
Another potential source of liquidity in the event our access to the unsecured debt market becomes impaired is the unencumbered mortgage assets in our retained mortgage portfolio, which could be sold or used as collateral for secured borrowing. We believe that the amount of mortgage-related assets that we could successfully sell or borrow against in the event of a liquidity crisis or significant market disruption is substantially lower than the amount of mortgage-related assets we hold. Our ability to sell whole loans from our retained mortgage portfolio is limited due to the credit-related issues of many of these loans, as well as operational constraints. See “Risk Factors” for a discussion of the limitations on our ability to successfully sell or borrow against the unencumbered mortgage assets in our retained mortgage portfolio in the event of a liquidity crisis.
Credit Ratings
Our credit ratings from the major credit ratings organizations, as well as the credit ratings of the U.S. government, are primary factors that could affect our ability to access the capital markets and our cost of funds. In addition, our credit ratings are important when we seek to engage in certain long-term transactions, such as derivative transactions. S&P, Moody’s and Fitch have all indicated that, if they were to lower the sovereign credit ratings on the U.S., they would likely lower their ratings on the debt of Fannie Mae and certain other government-related entities. We cannot predict whether one or more of these ratings agencies will lower our debt ratings in the future. See “Risk Factors” for a discussion of the risks to our business relating to a decrease in our credit ratings, which could include an increase in our borrowing costs, limits on our ability to issue debt, and additional collateral requirements under our derivatives contracts.
Table 39 displays the credit ratings issued by the three major credit rating agencies.
Table 39: Fannie Mae Credit Ratings
 
December 31, 2016
 
S&P
 
Moody’s
 
Fitch
Long-term senior debt
AA+
 
Aaa
 
AAA
Short-term senior debt
A-1+
 
P-1
 
F1+
Subordinated debt
AA-
 
Aa2
 
AA-
Preferred stock
D
 
Ca
 
C/RR6
Outlook
Stable
 
Stable
 
Stable
 
(for Long-Term Senior Debt and Subordinated Debt)
 
(for Long-Term Senior Debt and Preferred Stock)
 
(for AAA rated Long-Term Issuer Default Ratings)
We have no covenants in our existing debt agreements that would be violated by a downgrade in our credit ratings. However, in connection with certain derivatives counterparties, we could be required to provide additional collateral to or terminate transactions with certain counterparties in the event that our senior unsecured debt ratings are downgraded. The amount of additional collateral required depends on the contract and is usually a fixed incremental amount, the market value of the exposure, or both. See “Note 9, Derivative Instruments” and “Risk Factors” for additional information on collateral we would be required to provide to our derivatives counterparties in the event of downgrades in our credit ratings.

Fannie Mae 2016 Form 10-K
 
119
 
MD&A | Liquidity and Capital Management

Cash Flows
Year Ended December 31, 2016. Cash and cash equivalents increased by $10.6 billion from $14.7 billion as of December 31, 2015 to $25.2 billion as of December 31, 2016. The increase was primarily driven by cash inflows from (1) the sale of Fannie Mae MBS to third parties and (2) proceeds from repayments and sales of loans of Fannie Mae.
Partially offsetting these cash inflows were cash outflows from (1) the redemption of funding debt, which outpaced issuances due to lower funding needs and (2) the acquisition of delinquent loans out of MBS trusts.
Year Ended December 31, 2015. Cash and cash equivalents decreased by $7.3 billion from $22.0 billion as of December 31, 2014 to $14.7 billion as of December 31, 2015. The decrease was primarily driven by cash outflows from (1) the redemption of funding debt, which outpaced issuances due to lower funding needs, (2) the acquisition of delinquent loans out of MBS trusts and (3) the payment of dividends to Treasury under our senior preferred stock purchase agreement.
Partially offsetting these cash outflows were cash inflows from (1) the sale of Fannie Mae MBS to third parties, (2) proceeds from repayments and sales of loans of Fannie Mae, (3) the sale of our acquired property and (4) proceeds from the sale and liquidation of mortgage-related securities.
Capital Management
Regulatory Capital
FHFA stated that, during conservatorship, our existing statutory and FHFA-directed regulatory capital requirements will not be binding and that FHFA will not issue quarterly capital classifications. We report GAAP net worth and the deficit of our core capital over statutory minimum capital in our periodic reports on Form 10-Q and Form 10-K. For information on our minimum capital requirements see “Note 14, Regulatory Capital Requirements.”
Capital Activity
The Director of FHFA has directed us to make dividend payments on the senior preferred stock on a quarterly basis. Our fourth quarter 2016 dividend of $3.0 billion was declared by FHFA and subsequently paid by us on December 30, 2016, bringing our senior preferred stock dividends paid in 2016 to $9.6 billion. Based on the terms of the senior preferred stock, we expect to pay Treasury a dividend for the first quarter of 2017 of $5.5 billion by March 31, 2017.
The terms of our senior preferred stock provide for dividends to accrue at a rate equal to our net worth less an applicable capital reserve amount, which continues to decrease annually. The capital reserve amount was $1.2 billion for dividend periods in 2016, decreased to $600 million for dividend periods in 2017, and will decrease to zero on January 1, 2018. As a result of the “net worth sweep” dividend we pay to Treasury each quarter, we cannot retain capital from the earnings generated by our business operations.
We are effectively unable to raise equity capital from private sources at this time and, therefore, are reliant on the funding available under our senior preferred stock purchase agreement with Treasury to address any net worth deficit. Under the senior preferred stock purchase agreement, Treasury made a commitment to provide funding, under certain conditions, to eliminate deficiencies in our net worth. As of the date of this filing, the amount of remaining available funding under our senior preferred stock purchase agreement is $117.6 billion. If we were to draw additional funds from Treasury under the agreement in a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us from Treasury under the agreement. See “Business—Conservatorship and Treasury Agreements—Treasury Agreements” for more information on the terms of our senior preferred stock and our senior preferred stock purchase agreement with Treasury. See “Risk Factors” for a discussion of the risks relating to our limited and declining capital reserves and our dividend obligations to Treasury on our senior preferred stock.

Fannie Mae 2016 Form 10-K
 
120
 
MD&A | Off-Balance Sheet Arrangements

Off-Balance Sheet Arrangements
We enter into certain business arrangements to facilitate our statutory purpose of providing liquidity to the secondary mortgage market and to reduce our exposure to interest rate fluctuations. Some of these arrangements are not recorded in our consolidated balance sheets or may be recorded in amounts different from the full contract or notional amount of the transaction, depending on the nature or structure of, and accounting required to be applied to, the arrangement. These arrangements are commonly referred to as “off-balance sheet arrangements” and expose us to potential losses in excess of the amounts recorded in our consolidated balance sheets.
Our off-balance sheet arrangements result primarily from the following:
•
our guaranty of mortgage loan securitization and resecuritization transactions, and other guaranty commitments over which we do not have control;
•
liquidity support transactions; and
•
partnership interests.
Our maximum potential exposure to credit losses relating to our outstanding and unconsolidated Fannie Mae MBS and other financial guarantees is primarily represented by the unpaid principal balance of the mortgage loans underlying outstanding and unconsolidated Fannie Mae MBS and other financial guarantees of $24.3 billion as of December 31, 2016 and $27.5 billion as of December 31, 2015.
Our total outstanding liquidity commitments to advance funds for securities backed by multifamily housing revenue bonds totaled $10.4 billion as of December 31, 2016 and $11.4 billion as of December 31, 2015. These commitments require us to advance funds to third parties that enable them to repurchase tendered bonds or securities that are unable to be remarketed. We hold cash and cash equivalents in our cash and other investments portfolio in excess of these commitments to advance funds.
We have historically made investments in various limited partnerships and similar legal entities, which consist of low-income housing tax credit investments, community investments and other entities. When we are not the primary beneficiary, our consolidated balance sheets reflect only our investment rather than the full amount of the partnership’s assets and liabilities.
Risk Management
Our business activities expose us to the following three major categories of risk: credit risk, market risk (including interest rate and liquidity risk), and operational risk. We are also exposed to strategic risk, compliance risk and reputational risk. We seek to actively manage and monitor these risks by using an established risk management program. Our risk management program provides the basis for the principles that govern our risk management activities.
•
Credit Risk. Credit risk is the risk of loss resulting from the failure of a borrower or institutional counterparty to honor its financial or contractual obligations, resulting in a potential loss of earnings. In regards to financial securities or instruments, credit risk is the risk of not receiving principal, interest or any other financial obligation on a timely basis, for any reason. Our credit risk exposure exists primarily in connection with our mortgage credit book of business and our institutional counterparties.
•
Market Risk. Market risk is the risk of loss resulting from adverse changes in the value of financial instruments caused by changes in market conditions. Two significant market risks we face and actively manage are interest rate risk and liquidity risk. Interest rate risk is the risk of loss from adverse changes in the value of our assets or liabilities or our future earnings due to changes in interest rates. Liquidity risk is the risk that we will not be able to meet our funding obligations in a timely manner.
•
Operational Risk. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events.
•
Strategic Risk. Strategic risk is the risk of loss resulting from an unsuccessful business plan or strategy. This risk also encompasses the uncertainty regarding the future of our company, including how long we will continue to be in existence, which we discuss in “Business” and “Risk Factors.”

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•
Compliance Risk. Compliance risk is the risk associated with not complying with the laws, regulations, supervisory guidance, obligations or ethical standards governing how we operate. This risk exposes us to adverse actions by regulators, law enforcement or other government agencies, or private civil action, damaged reputation, and financial losses incurred through fines, legal judgments or civil penalties.
•
Reputational Risk. Reputational risk is the risk to our financial condition, brand value or resilience arising from negative public opinion.
For a description of additional risks facing our business that could materially adversely affect our business, results of operations, financial condition, liquidity and net worth, see “Risk Factors.”
Our risk management program is comprised of five inter-related components that are designed to work together as a comprehensive risk management system aimed at enhancing our performance.
•
Risk Governance and Culture. We set and carry out our strategy and business objectives in accordance with our vision and values. These values promote a culture through which we define how we want to conduct business and how we work to achieve our business objectives. Through our risk governance structure, we define and establish authority, responsibility and accountability for risk management. Risks are managed through the execution of control activities that include delegations of authority, risk committees, risk policies, risk appetite and limits or thresholds, which are designed to act in collaboration with each other.
•
Risk, Strategy and Objective Setting. Enterprise risk management is integrated with our strategy and business objectives. This integration provides insight into the risk profile associated with the strategy and its execution.
•
Risk in Execution. We identify and assess risks generated through the pursuit of our strategy and business objectives. Because risk originates from various sources, the process of identifying, assessing and responding to risks is performed across the company.
•
Risk Information, Communication and Reporting. Risk reporting is the process of identifying, capturing and communicating relevant information in a form and timeframe that enables stakeholders to carry out their responsibilities, including the execution of sound and informed risk management decisions.
•
Monitoring Enterprise Risk Management Performance. We monitor, evaluate and update our enterprise risk management program based on internal or external changes to our business. We also continually monitor our risk management performance to identify improvement opportunities for enterprise risk management components at all levels of the company.
We manage risk by using the industry standard “three lines of defense” structure, which distinguishes between functions that:
•
generate, own and manage risks—the first line of defense;
•
oversee risks—the second line of defense; and
•
provide independent assurance—the third line of defense.
In this structure, each line of defense performs an important function within the integrated risk management program.
•
First line of defense. The first line of defense is responsible for the identification, assessment, mitigation and control, and monitoring and reporting of risks arising from the operations or activities and systems for which they are accountable. The first line of defense is also responsible for conforming to the risk appetite, policies, standards, and limits or thresholds approved by FHFA, the Board and the relevant management-level risk committee.
•
Second line of defense. The second line of defense is comprised of those groups responsible for independent oversight and monitoring of risk management. It includes Enterprise Risk Management and Compliance and Ethics. The second line of defense is also comprised of independent support functions, including Finance (which also includes SOX and the Enterprise Project Management Office), Legal, Human Resources and Communications, which provide specialized services to the business units.
•
Third line of defense. The third line of defense is Internal Audit. Internal Audit is an independent, objective assurance and advisory activity designed to promote the achievement of organizational objectives by providing an independent evaluation of the effectiveness of the system of internal controls employed by management to achieve those objectives.

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The Board of Directors and management-level risk committees are also integral to our risk management program.
•
Board of Directors. Our Board of Directors has established and maintains oversight of our enterprise-wide risk management program in accordance with FHFA regulations. The regulations specify that our enterprise-wide risk management program must include certain risk limitations, appropriate policies and procedures, provisions for monitoring compliance, as well as effective and timely implementation of corrective actions. The Risk Policy & Capital Committee of the Board, pursuant to its Charter and FHFA regulations, assists the Board in overseeing our management of risk and recommends for Board approval enterprise risk governance policy and limits. In addition, the Audit Committee reviews the system of internal controls that we rely upon to provide reasonable assurance of compliance with our enterprise risk management processes. The Board of Directors delegates certain authorities to the Chief Executive Officer and management-level risk committees. Certain activities require the approval of our conservator. See “Directors, Executive Officers and Corporate Governance—Corporate Governance” for information about the Board’s risk management responsibilities and activities that require the approval of our conservator.
•
Management-Level Risk Committees. Management-level risk committees include members of management from the first and second line of defense functions. These committees support governance through policy approval and the establishment of risk parameters within which the business must operate. They provide a forum for discussing and documenting risks and risk mitigation, and communicating across functional lines to enhance risk management. The committees are also used to escalate risk decisions that are not in the ordinary course of business or that may result in new or unusual risk exposure. Our primary management-level risk committees are the Enterprise Risk Committee, the Asset and Liability Committee, the Capital Committee, the Single-Family Risk Committee, the Multifamily Risk Committee, the Operational Risk Committee, the Third Party Risk Committee and the Model Risk Oversight Committee.
Credit Risk Management
We are generally subject to two types of credit risk: mortgage credit risk and institutional counterparty credit risk. The metrics used to measure credit risk are generated using internal models. Our internal models require numerous assumptions and there are inherent limitations in any methodology used to estimate macroeconomic factors such as home prices, unemployment and interest rates, and their impact on borrower behavior. When market conditions change rapidly and dramatically, the assumptions of our models may no longer accurately capture or reflect the changing conditions. Management periodically makes judgments about the appropriateness of the risk assessments indicated by the models. See “Risk Factors” for a discussion of the risks associated with our use of models.
Mortgage Credit Risk Management
Mortgage credit risk is the risk of loss resulting from the failure of a borrower to make required mortgage payments. We are exposed to credit risk on our mortgage credit book of business because we either hold mortgage assets, have issued a guaranty in connection with the creation of Fannie Mae MBS backed by mortgage assets or provided other credit enhancements on mortgage assets. For a discussion of our single-family mortgage credit risk management, see “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management.” For a discussion of our multifamily credit risk management, see “Business Segments—Multifamily Business—Multifamily Mortgage Credit Risk Management.”
Institutional Counterparty Credit Risk Management
We rely on our institutional counterparties to provide services and credit enhancements that are critical to our business. Institutional counterparty credit risk is the risk of loss resulting from the failure of an institutional counterparty to fulfill its contractual obligations to us. Defaults by a counterparty with significant obligations to us could result in significant financial losses to us.
We have exposure primarily to the following types of institutional counterparties:
•
mortgage sellers and/or servicers that service the loans we hold in our retained mortgage portfolio or that back our Fannie Mae MBS and that are obligated to repurchase loans from us or reimburse us for losses in certain circumstances;
•
credit guarantors that provide credit enhancements on the mortgage assets that we hold in our retained mortgage portfolio or that back our Fannie Mae MBS, including mortgage insurers, financial guarantors, credit insurance risk transfer counterparties and multifamily lenders with risk sharing arrangements;

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•
custodial depository institutions that hold principal and interest payments for loans in our retained mortgage portfolio and for MBS certificateholders, as well as collateral posted by derivatives counterparties, mortgage sellers and mortgage servicers;
•
the financial institutions that issue the investments held in our cash and other investments portfolio;
•
derivatives counterparties;
•
mortgage originators, investors and dealers;
•
debt security dealers; and
•
document custodians.
We routinely enter into a high volume of transactions with counterparties in the financial services industry, including brokers and dealers, mortgage lenders and commercial banks, and mortgage insurers, resulting in a significant credit concentration with respect to this industry. We also have significant concentrations of credit risk with particular counterparties. Many of our institutional counterparties provide several types of services for us. For example, many of our lender customers or their affiliates act as mortgage sellers, mortgage servicers, derivatives counterparties, custodial depository institutions or document custodians on our behalf.
In the event of a bankruptcy or receivership of one of our counterparties, we may be required to establish our ownership rights to the assets these counterparties hold on our behalf to the satisfaction of the bankruptcy court or receiver, which could result in a delay in accessing these assets causing a decline in their value. In addition, if we are unable to replace a defaulting counterparty that performs services that are critical to our business with another counterparty, it could adversely affect our ability to conduct our operations. See “Risk Factors” for further discussion of the risks to our business posed by our counterparties’ failure to fulfill their obligations to us.
Mortgage Sellers and Servicers
One of our primary exposures to institutional counterparty risk is with mortgage servicers that service the loans we hold in our retained mortgage portfolio or that back our Fannie Mae MBS, as well as mortgage sellers and servicers that are obligated to repurchase loans from us or reimburse us for losses in certain circumstances.
Mortgage servicers collect mortgage and escrow payments from borrowers, pay taxes and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required activities on our behalf. We have minimum standards and financial requirements for mortgage servicers. We perform periodic on-site and financial reviews of our largest mortgage servicers and monitor their financial and portfolio performance as compared to peers and internal benchmarks. We work with our largest mortgage servicers to establish performance goals and monitor performance against the goals, and our servicing consultants work with mortgage servicers to improve servicing results and compliance with our Servicing Guide.
We likely would incur costs and potential increases in servicing fees and could also face operational risks if we replace a mortgage servicer. If a mortgage servicer defaults, it could result in a temporary disruption in servicing and loss mitigation activities relating to the loans serviced by that mortgage servicer, particularly if there is a loss of experienced servicing personnel. We may also face challenges in transferring a large servicing portfolio.
Our five largest single-family mortgage servicers, including their affiliates, serviced approximately 39% of our single-family guaranty book of business as of December 31, 2016, compared with approximately 44% as of December 31, 2015. Our largest mortgage servicer is Wells Fargo Bank, N.A., which, together with its affiliates, serviced approximately 17% of our single-family guaranty book of business as of December 31, 2016 and 2015. As of December 31, 2015, one additional mortgage servicer, JPMorgan Chase, N.A., with its affiliates, serviced over 10% of our single-family guaranty book of business.
Our five largest multifamily mortgage servicers, including their affiliates, serviced approximately 47% of our multifamily guaranty book of business as of December 31, 2016, compared with approximately 45% as of December 31, 2015. Wells Fargo Bank, N.A. and Walker & Dunlop, LLC each serviced over 10% of our multifamily guaranty book of business as of December 31, 2016 and 2015.
A large portion of our single-family guaranty book is serviced by non-depository servicers. As of December 31, 2016, 16% of our total single-family guaranty book of business, including 51% of our delinquent single-family loans, was serviced by our five largest non-depository servicers, compared with 19% of our total single-family guaranty book of business, including 60% of our delinquent single-family loans, as of December 31, 2015. Compared with depository financial institutions, non-depository servicers pose additional risks to us because non-

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depository servicers may have a greater reliance on third-party sources of liquidity and may, in the event of significant increases in delinquent loan volumes, have less financial capacity to advance funds on our behalf or satisfy repurchase requests or compensatory fee obligations. In addition, regulatory bodies have been reviewing the activities of some of our largest non-depository servicers. See “Risk Factors” for a discussion of the risks of our reliance on servicers.
Because we delegate the servicing of our mortgage loans to mortgage servicers and do not have our own servicing function, mortgage servicers’ lack of appropriate process controls or the loss of business from a significant mortgage servicer counterparty could pose significant risks to our ability to conduct our business effectively. Many mortgage servicers are also subject to federal and state regulatory actions and legal settlements that require the mortgage servicers to correct process deficiencies and improve their servicing practices. This has contributed to extended foreclosure timelines and, therefore, additional holding costs for us, such as property taxes, insurance, repairs and maintenance.
Our five largest single-family mortgage sellers, including their affiliates, accounted for approximately 30% of our single-family business acquisition volume in 2016, compared with approximately 29% in 2015. Our largest mortgage seller is Wells Fargo Bank, N.A., which, together with its affiliates, accounted for approximately 14% of our single-family business acquisition volume in 2016, compared with approximately 13% in 2015.
We acquire a portion of our business volume directly from non-depository and smaller depository financial institutions that may not have the same financial strength or operational capacity as our largest mortgage seller counterparties. We could be required to absorb losses on defaulted loans that a failed mortgage seller is obligated to repurchase from us if we determine there was an underwriting eligibility breach.
Risk management steps we have taken or may take to mitigate our risk to mortgage sellers and servicers with which we have significant counterparty exposure include guaranty of obligations by higher-rated entities, reduction or elimination of exposures, reduction or elimination of certain business activities, transfer of exposures to third parties, receipt of collateral and suspension or termination of the selling and servicing relationship.
We are exposed to the risk that a mortgage seller and servicer or another party involved in a mortgage loan transaction will engage in mortgage fraud by misrepresenting the facts about the loan. We have experienced significant financial losses in the past and may experience significant financial losses and reputational damage in the future as a result of mortgage fraud. See “Risk Factors” for a discussion of the risks to our business as a result of mortgage fraud.
Mortgage sellers and servicers may not meet the terms of their repurchase obligations, and we may be unable to recover on all outstanding loan repurchase obligations resulting from their breaches of contractual obligations. Failure by a significant mortgage seller or servicer, or a number of mortgage sellers or servicers, to fulfill repurchase obligations to us could result in an increase in our credit losses and credit-related expense, and have an adverse effect on our results of operations and financial condition. In addition, actions we take to pursue our contractual remedies could increase our costs, reduce our revenues, or otherwise have an adverse effect on our results of operations or financial condition. See “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards—Repurchase Requests,” for additional information regarding repurchase requests and the balance of our outstanding repurchase requests as of December 31, 2016.
Credit Guarantors
We use various types of credit guarantors to manage our mortgage credit risk, including mortgage insurers, credit insurance risk transfer counterparties, financial guarantors, and multifamily lenders with risk sharing.
Mortgage Insurers
We are generally required, pursuant to our charter, to obtain credit enhancements on single-family conventional mortgage loans that we purchase or securitize with LTV ratios over 80% at the time of purchase. We use several types of credit enhancements to manage our single-family mortgage credit risk, including primary and pool mortgage insurance coverage. Table 40 displays our risk in force for mortgage insurance coverage on single-family loans in our guaranty book of business and our insurance in force for our mortgage insurer counterparties, excluding insurance coverage provided by federal government entities and credit insurance obtained through CIRT deals. The table includes our top ten mortgage insurer counterparties, which provided over 99% of our total mortgage insurance coverage on single-family loans in our guaranty book of business as of December 31, 2016

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and 2015. In addition, for our mortgage insurer counterparties not approved to write new business, we have provided the percentage of their claims payments the counterparties are currently deferring based on the direction of their state regulators, referred to as their deferred payment obligation. As of December 31, 2016 and 2015, under 1% of our total risk in force mortgage insurance coverage was pool insurance. In addition, approximately 1% and 2% of our total insurance in force mortgage insurance coverage was pool insurance as of December 31, 2016 and 2015.
Table 40: Mortgage Insurance Coverage
 
As of December 31,
 
Deferred
 
 
2016
 
2015
 
2016
 
2015
 
Payment
 
 
Risk in Force(1)
 
Insurance in Force(2)
 
Obligation %(3)
 
 
(Dollars in millions)
 
 
 
Counterparty:(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Approved:(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Arch Capital Group Ltd.:(6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Guaranty Residential Insurance Co.
$
27,161

 
 
$
27,396

 
 
$
104,418

 
 
$
105,627

 
 
 
 
Arch Mortgage Insurance Co.
6,059

 
 
3,697

 
 
23,998

 
 
14,822

 
 
 
 
Total Arch Capital Group Ltd.
33,220

 
 
31,093

 
 
128,416

 
 
120,449

 
 
 
 
Radian Guaranty, Inc.
25,866

 
 
25,191

 
 
100,626

 
 
98,274

 
 
 
 
Mortgage Guaranty Insurance Corp.
24,662

 
 
23,850

 
 
95,431

 
 
92,026

 
 
 
 
Genworth Mortgage Insurance Corp.
18,573

 
 
16,700

 
 
73,075

 
 
65,735

 
 
 
 
Essent Guaranty, Inc.
11,213

 
 
8,787

 
 
45,053

 
 
35,673

 
 
 
 
National Mortgage Insurance Corp.
4,388

 
 
1,989

 
 
21,209

 
 
11,997

 
 
 
 
Others
282

 
 
233

 
 
1,724

 
 
1,409

 
 
 
 
Total approved
118,204

 
 
107,843

 
 
465,534

 
 
425,563

 
 
 
 
Not approved:(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PMI Mortgage Insurance Co.(7) 
3,790

 
 
4,805

 
 
15,112

 
 
19,212

 
 
28.5
%
 
Republic Mortgage Insurance Co.(7)
3,104

 
 
3,921

 
 
12,043

 
 
15,450

 
 
—

 
Triad Guaranty Insurance Corp.(7) 
1,106

 
 
1,348

 
 
3,975

 
 
4,864

 
 
25.0
%
 
Others
11

 
 
14

 
 
34

 
 
44

 
 
 
 
Total not approved
8,011

 
 
10,088

 
 
31,164

 
 
39,570

 
 
 
 
Total
$
126,215

 
 
$
117,931

 
 
$
496,698

 
 
$
465,133

 
 
 
 
Total as a percentage of single-family guaranty book of business
4

%
 
4

%
 
17

%
 
16

%
 
 
 
__________
(1) 
Risk in force is generally the maximum potential loss recovery under the applicable mortgage insurance policies in force and is based on the loan level insurance coverage percentage and, if applicable, any aggregate pool loss limit, as specified in the policy. 
(2) 
Insurance in force represents the unpaid principal balance of single-family loans in our guaranty book of business covered under the applicable mortgage insurance policies.
(3) 
Deferred payment obligation represents the percentage of cash payments on policyholder claims being deferred as directed by the insurer’s respective regulator in the state of domicile as of December 31, 2016.
(4) 
Insurance coverage amounts provided for each counterparty may include coverage provided by affiliates and subsidiaries of the counterparty.
(5) 
“Approved” mortgage insurers are counterparties approved to write new insurance with us. “Not approved” mortgage insurers are counterparties that are no longer approved to write new insurance with us.
(6) 
In December 2016, Arch Capital Group Ltd., the ultimate parent company of Arch Mortgage Insurance Co., acquired United Guaranty Corporation. United Guaranty Corporation is the ultimate parent company of United Guaranty Residential Insurance Co.
(7) 
These mortgage insurers are under various forms of supervised control by their state regulators and are in run-off.
We manage our exposure to mortgage insurers by maintaining eligibility requirements that an insurer must meet to be a qualified mortgage insurer. We require a certification and supporting documentation annually from each mortgage insurer and perform periodic reviews of mortgage insurers to confirm compliance with eligibility

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requirements and to evaluate their management, control and underwriting practices. Our monitoring of the mortgage insurers includes in-depth financial reviews and analyses of the insurers’ portfolios and capital adequacy under hypothetical stress scenarios.
Although the financial condition of our primary mortgage insurer counterparties currently approved to write new business has improved in recent years, there is still a risk that these counterparties may fail to fulfill their obligations to pay our claims under insurance policies. In addition, as shown in “Table 40: Mortgage Insurance Coverage,” three of our top mortgage insurer counterparties—PMI Mortgage Insurance Co., Republic Mortgage Insurance Company and Triad Guaranty Insurance Corporation—are currently under various forms of supervised control by their state regulators and are in run-off, which increases the risk that these counterparties will pay claims only in part or fail to pay claims at all under existing insurance policies. See “Risk Factors” for a discussion of the risks to our business of claims under our mortgage insurance policies not being paid in full or at all, including the risks associated with our three mortgage insurance counterparties that are in run-off.
In October 2016, Genworth Financial, Inc., the ultimate parent company of Genworth Mortgage Insurance Corp., announced that it had entered into an agreement to be acquired by China Oceanwide Holdings Group Co., Ltd. The acquisition is subject to regulatory approvals and other closing conditions. In addition, the continued approval of Genworth Mortgage Insurance Corp. as our mortgage insurer counterparty following the acquisition is subject to our review.
When we estimate the credit losses that are inherent in our mortgage loans and under the terms of our guaranty obligations we also consider the recoveries that we will receive on primary mortgage insurance, as mortgage insurance recoveries would reduce the severity of the loss associated with defaulted loans. We evaluate the financial condition of our mortgage insurer counterparties and adjust the contractually due recovery amounts to ensure that only probable losses as of the balance sheet date are included in our loss reserve estimate. As a result, if our assessment of one or more of our mortgage insurer counterparties’ ability to fulfill their respective obligations to us worsens, it could result in an increase in our loss reserves. The amount by which our estimated benefit from mortgage insurance reduced our total loss reserves was $1.4 billion as of December 31, 2016 and $2.3 billion as of December 31, 2015.
When an insured loan held in our retained mortgage portfolio subsequently goes into foreclosure, we charge off the loan, eliminating any previously-recorded loss reserves, and record REO and a mortgage insurance receivable for the claim proceeds deemed probable of recovery, as appropriate. However, if a mortgage insurer rescinds, cancels or denies insurance coverage, the initial receivable becomes due from the mortgage seller or servicer. We had outstanding receivables of $1.0 billion recorded in “Other assets” in our consolidated balance sheets as of December 31, 2016 and $1.2 billion as of December 31, 2015 related to amounts claimed on insured, defaulted loans excluding government insured loans. Of this amount, $141 million as of December 31, 2016 and $241 million as of December 31, 2015 was due from our mortgage sellers or servicers. We assessed the total outstanding receivables for collectibility, and they are recorded net of a valuation allowance of $638 million as of December 31, 2016 and $770 million as of December 31, 2015. The valuation allowance reduces our claim receivable to the amount considered probable of collection as of December 31, 2016 and 2015.
Credit Insurance Risk Transfer Counterparties
In a credit insurance risk transfer transaction, we shift a portion of the credit risk on a reference pool of mortgage loans to a panel of credit insurers or reinsurers. A portion of the credit insurers’ or reinsurers’ obligations are collateralized with highly-rated liquid assets held in a trust account. Our credit insurance risk transfer transactions are described in “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk—Credit Risk Transfer Transactions.”
Financial Guarantors
We are the beneficiary of non-governmental financial guarantees on non-agency securities held in our retained mortgage portfolio and on non-agency securities that have been resecuritized to include a Fannie Mae guaranty and sold to third parties. The total unpaid principal balance of guaranteed non-agency securities in our retained mortgage portfolio was $1.4 billion as of December 31, 2016 and $3.2 billion as of December 31, 2015. See “Note 15, Concentrations of Credit Risk—Other Concentrations” for a further discussion of our exposure to financial guarantors.

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We are also the beneficiary of financial guarantees included in securities issued by Freddie Mac, the federal government and its agencies that totaled $11.6 billion as of December 31, 2016 and $16.7 billion as of December 31, 2015.
Multifamily Lenders with Risk Sharing
We enter into risk sharing agreements with lenders pursuant to which the lenders agree to bear all or some portion of the credit losses on the covered loans. Our maximum potential loss recovery from lenders under risk sharing agreements on DUS and non-DUS multifamily loans was $54.8 billion as of December 31, 2016, compared with $46.2 billion as of December 31, 2015. As of December 31, 2016, 43% of our maximum potential loss recovery on multifamily loans was from four DUS lenders, compared with 40% as of December 31, 2015.
As noted above in “Business Segments—Multifamily Business—Multifamily Mortgage Credit Risk Management—Multifamily Acquisition Policy and Underwriting Standards,” our primary multifamily delivery channel is our DUS program, which is comprised of lenders that range from large depositories to independent non-bank financial institutions. As of December 31, 2016 and 2015, approximately 35% of the unpaid principal balance of loans in our multifamily guaranty book of business serviced by our DUS lenders was from institutions with an external investment grade credit rating or a guaranty from an affiliate with an external investment grade credit rating. Given the recourse nature of the DUS program, the lenders are bound by eligibility standards that dictate, among other items, minimum capital and liquidity levels, and the posting of collateral at a highly rated custodian to secure a portion of the lenders’ future obligations. We actively monitor the financial condition of these lenders to help ensure the level of risk remains within our standards and to ensure required capital levels are maintained and are in alignment with actual and modeled loss projections.
Custodial Depository Institutions
We evaluate our custodial depository institutions to determine whether they are eligible to hold deposits on our behalf based on requirements specified in our Servicing Guide. If a custodial depository institution were to fail while holding remittances of borrower payments of principal and interest due to us in our custodial account, we would be exposed to risk for balances in excess of the deposit insurance protection and might not be able to recover all of the principal and interest payments being held by the depository on our behalf, or there might be a substantial delay in receiving these amounts. If this were to occur, we would be required to replace these amounts with our own funds to make payments that are due to Fannie Mae MBS certificateholders. Accordingly, the insolvency of one of our principal custodial depository institutions could result in significant financial losses to us.
A total of $42.3 billion in deposits for single-family payments were received and held by 258 institutions during the month of December 2016 and a total of $31.5 billion in deposits for single-family payments were received and held by 263 institutions during the month of December 2015. Of these total deposits, 91% as of December 31, 2016, compared with 92% as of December 31, 2015, were held by institutions rated as investment grade by S&P, Moody’s and Fitch. Our transactions with custodial depository institutions are concentrated. Our six largest custodial depository institutions held 80% of these deposits as of December 31, 2016, compared with 83% as of December 31, 2015.
During the month of December 2016, a total of $3.1 billion in deposits for multifamily payments were received and held by 27 institutions and $3.4 billion in deposits for multifamily payments were received and held by 28 institutions during the month of December 2015. Of these total deposits, 98% as of December 31, 2016 and 2015, were held by institutions rated as investment grade by S&P, Moody’s and Fitch. Our transactions with custodial depository institutions are concentrated. Our six largest custodial depository institutions held 91% of these deposits as of December 31, 2016, compared with 95% as of December 31, 2015.
Counterparty Credit Exposure of Investments Held in our Cash and Other Investments Portfolio
Our cash and other investments portfolio consists of cash and cash equivalents, securities purchased under agreements to resell or similar arrangements and U.S. Treasury securities. Our cash and other investment counterparties are primarily financial institutions, including clearing organizations, and the Federal Reserve Bank. See “Liquidity and Capital Management—Liquidity Management—Cash and Other Investments Portfolio” for more detailed information on our cash and other investments portfolio.
As of December 31, 2016, our cash and other investments portfolio totaled $88.0 billion and included $32.3 billion of U.S. Treasury securities. As of December 31, 2015, our cash and other investments portfolio totaled $71.5 billion and included $29.5 billion of U.S. Treasury securities. As of December 31, 2016 and 2015, we held a total

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of $2.0 billion short-term unsecured deposits with two financial institutions that had a short-term credit rating of A-1 from S&P (or its equivalent), based on the lowest credit rating issued by S&P, Moody’s and Fitch, and no other unsecured positions other than U.S. Treasury securities. The remaining amounts in our cash and other investment portfolio other than U.S. Treasury securities were primarily composed of securities purchased under agreements to resell or similar arrangements.
We monitor the credit risk position of our cash and other investments portfolio. If one of these counterparties fails to meet its obligations to us under the terms of the investments, it could result in financial losses to us and have a material adverse effect on our earnings, liquidity, financial condition and net worth.
Derivative Counterparty Credit Exposure
Our derivative counterparty credit exposure relates principally to interest rate derivative contracts. We are exposed to the risk that a counterparty in a derivative transaction will default on payments due to us, which may require us to seek a replacement derivative from a different counterparty. This replacement may be at a higher cost, or we may be unable to find a suitable replacement. Historically, our risk management derivative transactions have been made pursuant to bilateral contracts with a specific counterparty governed by the terms of an International Swaps and Derivatives Association Inc. master agreement. Pursuant to regulations implementing the Dodd-Frank Act, we are required to submit certain categories of new interest rate swaps to a derivatives clearing organization. We refer to our derivative transactions made pursuant to bilateral contracts as our OTC derivative transactions and our derivative transactions accepted for clearing by a derivatives clearing organization as our cleared derivative transactions.
We manage our derivative counterparty credit exposure relating to our OTC derivative transactions through enforceable master netting arrangements. These arrangements allow us to net derivative assets and liabilities with the same counterparty. We also manage our derivative counterparty exposure relating to our OTC derivative transactions by requiring counterparties to post collateral, which includes cash, U.S. Treasury securities, agency debt and agency mortgage-related securities.
Our cleared derivative transactions are submitted to a derivatives clearing organization on our behalf through a clearing member of the organization. A contract accepted by a derivatives clearing organization is governed by the terms of the clearing organization’s rules and arrangements between us and the clearing member of the clearing organization. As a result, we are exposed to the institutional credit risk of both the derivatives clearing organization and the member who is acting on our behalf. We manage our credit exposure relating to our cleared derivative transactions through enforceable master netting arrangements. These arrangements allow us to net our exposure to cleared derivatives by clearing organization and by clearing member.
We will continue to have material exposure to derivatives clearing organizations and certain of their members in the future as cleared derivative contracts comprise a larger percentage of our derivative instruments. We estimate our exposure to credit loss on derivative instruments by calculating the replacement cost, on a present value basis, to settle at current market prices all outstanding derivative contracts in a net gain position at the counterparty level where the right of legal offset exists.
The fair value of derivatives in a gain position is included in our consolidated balance sheets in “Other assets.” Total exposure represents our exposure to credit loss on derivative instruments less the cash and non-cash collateral posted by our counterparties to us. This does not include collateral held in excess of exposure. Our total exposure was $54 million as of December 31, 2016 and $31 million as of December 31, 2015. The majority of our total exposure as of each date consisted of credit risk transfer transactions and mortgage insurance contracts that we account for as derivatives.
As of December 31, 2016 and 2015, we had sixteen counterparties with which we may transact OTC derivative transactions, all of which were subject to enforceable master netting arrangements. We had outstanding notional amounts with all of these counterparties, and the highest concentration by our total outstanding notional amount was approximately 9% as of December 31, 2016 and 7% as of December 31, 2015.
See “Note 9, Derivative Instruments” and “Note 16, Netting Arrangements” for additional information on our derivative contracts as of December 31, 2016 and 2015.
Mortgage Originators, Investors and Dealers
We are routinely exposed to pre-settlement risk through the purchase or sale of closed mortgage loans and mortgage-related securities with mortgage originators, mortgage investors and mortgage dealers. The risk is the

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possibility that the counterparty will be unable or unwilling to either deliver mortgage assets or compensate us for the cost to cancel or replace the transaction. We manage this risk by determining position limits with these counterparties, based upon our assessment of their creditworthiness, and by monitoring and managing these exposures.
Debt Security Dealers
The credit risk associated with dealers that commit to place our debt securities is that they will fail to honor their contracts to take delivery of the debt, which could result in delayed issuance of the debt through another dealer. We manage these risks by establishing approval standards, monitoring our exposure positions and monitoring changes in the credit quality of dealers.
Document Custodians
We use third-party document custodians to provide loan document certification and custody services for some of the loans that we purchase and securitize. In many cases, our lender customers or their affiliates also serve as document custodians for us. Our ownership rights to the mortgage loans that we own or that back our Fannie Mae MBS could be challenged if a lender intentionally or negligently pledges or sells the loans that we purchased or fails to obtain a release of prior liens on the loans that we purchased, which could result in financial losses to us. When a lender or one of its affiliates acts as a document custodian for us, the risk that our ownership interest in the loans may be adversely affected is increased, particularly in the event the lender were to become insolvent. We mitigate these risks through legal and contractual arrangements with these custodians that identify our ownership interest, as well as by establishing qualifying standards for document custodians and requiring removal of the documents to our possession or to an independent third-party document custodian if we have concerns about the solvency or competency of the document custodian.
Market Risk Management, Including Interest Rate Risk Management
We are subject to market risk, which includes interest rate risk, spread risk and liquidity risk. These risks arise from our mortgage asset investments. Interest rate risk is the risk of loss from adverse changes in the value of our assets or liabilities or our future earnings due to changes in interest rates. Spread risk or basis risk is the resulting impact of changes in the spread between our mortgage assets and our debt and derivatives we use to hedge our position. Liquidity risk is the risk that we will not be able to meet our funding obligations in a timely manner.
Interest Rate Risk Management
Our goal is to manage market risk to be neutral to movements in interest rates and volatility, subject to model constraints and prevailing market conditions. We employ an integrated interest rate risk management strategy that allows for informed risk taking within pre-defined corporate risk limits. Decisions regarding our strategy in managing interest rate risk are based upon our corporate market risk policy and limits that are approved by our Board of Directors.
We have actively managed the interest rate risk of our “net portfolio,” which is defined below, through the following techniques: (1) asset selection and structuring (that is, by identifying or structuring mortgage assets with attractive prepayment and other risk characteristics); (2) issuing a broad range of both callable and non-callable debt instruments; and (3) using interest-rate derivatives. We have not actively managed or hedged our spread risk or basis risk, which would include the impact of changes in the spread between our mortgage assets and debt (referred to as mortgage-to-debt spreads) after we purchase mortgage assets, other than through asset monitoring and disposition. For mortgage assets in our portfolio that we intend to hold to maturity to realize the contractual cash flows, we accept period-to-period volatility in our financial performance attributable to changes in mortgage-to-debt spreads that occur after our purchase of mortgage assets. See “Risk Factors” for a discussion of the risks to our business posed by changes in interest rates and changes in spreads.
We monitor current market conditions, including the interest rate environment, to assess the impact of these conditions on individual positions and our interest rate risk profile. In addition to qualitative factors, we use various quantitative risk metrics in determining the appropriate composition of our retained mortgage portfolio, our investments in non-mortgage securities and relative mix of debt and derivatives positions in order to remain within pre-defined risk tolerance levels that we consider acceptable. We regularly disclose two interest rate risk metrics that estimate our interest rate exposure: (1) fair value sensitivity to changes in interest rate levels and the slope of the yield curve and (2) duration gap.

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The metrics used to measure our interest rate exposure are generated using internal models. Our internal models, consistent with standard practice for models used in our industry, require numerous assumptions. There are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. The reliability of our prepayment estimates and interest rate risk metrics depends on the availability and quality of historical data for each of the types of securities in our net portfolio. When market conditions change rapidly and dramatically, as they did during the financial market crisis of late 2008, the assumptions of our models may no longer accurately capture or reflect the changing conditions. On a continuous basis, management makes judgments about the appropriateness of the risk assessments indicated by the models. See “Risk Factors” for a discussion of the risks associated with our reliance on models to manage risk.
Sources of Interest Rate Risk Exposure
The primary source of our interest rate risk is the composition of our net portfolio. Our net portfolio consists of our retained mortgage portfolio assets; cash and other investments portfolio; our outstanding debt of Fannie Mae that is used to fund the retained mortgage portfolio assets and cash and other investments portfolio; mortgage commitments and risk management derivatives. Risk management derivatives along with our debt instruments are used to manage interest rate risk.
Our performing mortgage assets consist mainly of single-family and multifamily mortgage loans. For single-family loans, borrowers have the option to prepay at any time before the scheduled maturity date or continue paying until the stated maturity. Given this prepayment option held by the borrower, we are exposed to uncertainty as to when or at what rate prepayments will occur, which affects the length of time our mortgage assets will remain outstanding and the timing of the cash flows related to these assets. This prepayment uncertainty results in a potential mismatch between the timing of receipt of cash flows related to our assets and the timing of payment of cash flows related to our liabilities.
Changes in interest rates, as well as other factors, influence mortgage prepayment rates and duration and also affect the value of our mortgage assets. When interest rates decrease, prepayment rates on fixed-rate mortgages generally accelerate because borrowers usually can pay off their existing mortgages and refinance at lower rates. Accelerated prepayment rates have the effect of shortening the duration and average life of the fixed-rate mortgage assets we hold in our net portfolio. In a declining interest rate environment, existing mortgage assets held in our net portfolio tend to increase in value or price because these mortgages are likely to have higher interest rates than new mortgages, which are being originated at the then-current lower interest rates. Conversely, when interest rates increase, prepayment rates generally slow, which extends the duration and average life of our mortgage assets and results in a decrease in value.
Although the fair value of our guaranty assets and our guaranty obligations is highly sensitive to changes in interest rates and the market’s perception of future credit performance, we do not actively manage the change in the fair value of our guaranty business that is attributable to changes in interest rates. We do not believe that periodic changes in fair value due to movements in interest rates are the best indication of the long-term value of our guaranty business because these changes do not take into account future guaranty business activity.
Interest Rate Risk Management Strategy
Our goal for managing the interest rate risk of our net portfolio is to be neutral to movements in interest rates and volatility. This involves asset selection and structuring of our liabilities to match and offset the interest rate characteristics of our retained mortgage portfolio and our investments in non-mortgage securities. Our strategy consists of the following principal elements:
•
Debt Instruments. We issue a broad range of both callable and non-callable debt instruments to manage the duration and prepayment risk of expected cash flows of the mortgage assets we own.
•
Derivative Instruments. We supplement our issuance of debt with derivative instruments to further reduce duration and prepayment risks.
•
Monitoring and Active Portfolio Rebalancing. We continually monitor our risk positions and actively rebalance our portfolio of interest rate-sensitive financial instruments to maintain a close match between the duration of our assets and liabilities.

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Debt Instruments
Historically, the primary tool we have used to fund the purchase of mortgage assets and manage the interest rate risk implicit in our mortgage assets is the variety of debt instruments we issue. The debt we issue is a mix that typically consists of short- and long-term, non-callable and callable debt. The varied maturities and flexibility of these debt combinations help us in reducing the mismatch of cash flows between assets and liabilities in order to manage the duration risk associated with an investment in long-term fixed-rate assets. Callable debt helps us manage the prepayment risk associated with fixed-rate mortgage assets because the duration of callable debt changes when interest rates change in a manner similar to changes in the duration of mortgage assets. See “Liquidity and Capital Management—Liquidity Management—Debt Funding” for additional information on our debt activity.
Derivative Instruments
Derivative instruments also are an integral part of our strategy in managing interest rate risk. Derivative instruments may be privately negotiated contracts, which are often referred to as over-the-counter derivatives, or they may be listed and traded on an exchange. When deciding whether to use derivatives, we consider a number of factors, such as cost, efficiency, the effect on our liquidity and results of operations, and our interest rate risk management strategy.
The derivatives we use for interest rate risk management purposes fall into these broad categories:
•
Interest rate swap contracts. An interest rate swap is a transaction between two parties in which each agrees to exchange, or swap, interest payments. The interest payment amounts are tied to different interest rates or indices for a specified period of time and are 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.
•
Interest rate option contracts. These contracts primarily include pay-fixed swaptions, receive-fixed swaptions, cancelable swaps and interest rate caps. A swaption is an option contract that allows us or a counterparty to enter into a pay-fixed or receive-fixed swap at some point in the future.
•
Foreign currency swaps. These swaps convert debt that we issue in foreign denominated currencies into U.S. dollars. We enter into foreign currency swaps only to the extent that we hold foreign currency debt.
•
Futures. These are standardized exchange-traded contracts that either obligate a buyer to buy an asset at a predetermined date and price or a seller to sell an asset at a predetermined date and price. The types of futures contracts we enter into include Eurodollar, U.S. Treasury and swaps.
We use interest rate swaps, interest rate options and futures, in combination with our issuance of debt securities, to better match the duration of our assets with the duration of our liabilities. We are generally an end user of derivatives; our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. We generally only use derivatives that are relatively liquid and straightforward to value. We use derivatives for four primary purposes:
(1)
As a substitute for notes and bonds that we issue in the debt markets;
(2)
To achieve risk management objectives not obtainable with debt market securities;
(3)
To quickly and efficiently rebalance our portfolio; and
(4)
To hedge foreign currency exposure.
Decisions regarding the repositioning of our derivatives portfolio are based upon current assessments of our interest rate risk profile and economic conditions, including the composition of our retained mortgage portfolio, our investments in non-mortgage securities and relative mix of our debt and derivative positions, the interest rate environment and expected trends.
Measurement of Interest Rate Risk
Below we present two quantitative metrics that provide estimates of our interest rate risk exposure: (1) fair value sensitivity of our net portfolio to changes in interest rate levels and slope of yield curve; and (2) duration gap. The metrics presented are calculated using internal models that require standard assumptions regarding interest rates and future prepayments of principal over the remaining life of our securities. These assumptions are derived based on the characteristics of the underlying structure of the securities and historical prepayment rates

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experienced at specified interest rate levels, taking into account current market conditions, the current mortgage rates of our existing outstanding loans, loan age and other factors. On a continuous basis, management makes judgments about the appropriateness of the risk assessments and will make adjustments as necessary to properly assess our interest rate exposure and manage our interest rate risk. The methodologies used to calculate risk estimates are periodically changed on a prospective basis to reflect improvements in the underlying estimation process.
Interest Rate Sensitivity to Changes in Interest Rate Level and Slope of Yield Curve
Pursuant to a disclosure commitment with FHFA, we disclose on a monthly basis the estimated adverse impact on the fair value of our net portfolio that would result from the following hypothetical situations:
•
A 50 basis point shift in interest rates.
•
A 25 basis point change in the slope of the yield curve.
In measuring the estimated impact of changes in the level of interest rates, we assume a parallel shift in all maturities of the U.S. LIBOR interest rate swap curve.
In measuring the estimated impact of changes in the slope of the yield curve, we assume a constant 7-year rate and a shift of 16.7 basis points for the 1-year rate and 8.3 basis points for the 30-year rate. We believe the aforementioned interest rate shocks for our monthly disclosures represent moderate movements in interest rates over a one-month period.
Duration Gap
Duration gap measures the price sensitivity of our assets and liabilities in our net portfolio to changes in interest rates by quantifying the difference between the estimated durations of our assets and liabilities. Our duration gap analysis reflects the extent to which the estimated maturity and repricing cash flows for our assets are matched, on average, over time and across interest rate scenarios to those of our liabilities. A positive duration gap indicates that the duration of our assets exceeds the duration of our liabilities. We disclose duration gap on a monthly basis under the caption “Interest Rate Risk Disclosures” in our Monthly Summary, which is available on our website and announced in a press release.
While our goal is to reduce the price sensitivity of our net portfolio to movements in interest rates, various factors can contribute to a duration gap that is either positive or negative. For example, changes in the market environment can increase or decrease the price sensitivity of our mortgage assets relative to the price sensitivity of our liabilities because of prepayment uncertainty associated with our assets. In a declining interest rate environment, prepayment rates tend to accelerate, thereby shortening the duration and average life of the fixed rate mortgage assets we hold in our net portfolio. Conversely, when interest rates increase, prepayment rates generally slow, which extends the duration and average life of our mortgage assets. Our debt and derivative instrument positions are used to manage the interest rate sensitivity of our retained mortgage portfolio and our investments in non-mortgage securities. As a result, the degree to which the interest rate sensitivity of our retained mortgage portfolio and our investments in non-mortgage securities is offset will be dependent upon, among other factors, the mix of funding and other risk management derivative instruments we use at any given point in time.
The market value sensitivities of our net portfolio are a function of both the duration and the convexity of our net portfolio. Duration provides a measure of the price sensitivity of a financial instrument to changes in interest rates while convexity reflects the degree to which the duration of the assets and liabilities in our net portfolio changes in response to a given change in interest rates. We use convexity measures to provide us with information about how quickly and by how much our net portfolio’s duration may change in different interest rate environments. The market value sensitivity of our net portfolio will depend on a number of factors, including the interest rate environment, modeling assumptions and the composition of assets and liabilities in our net portfolio, which vary over time.
Results of Interest Rate Sensitivity Measures
The interest rate risk measures discussed below exclude the impact of changes in the fair value of our guaranty assets and liabilities resulting from changes in interest rates. We exclude our guaranty business from these sensitivity measures based on our current assumption that the guaranty fee income generated from future business activity will largely replace guaranty fee income lost due to mortgage prepayments.

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Table 41 displays the pre-tax market value sensitivity of our net portfolio to changes in the level of interest rates and the slope of the yield curve as measured on the last day of each period presented. Table 41 also provides the daily average, minimum, maximum and standard deviation values for duration gap and for the most adverse market value impact on the net portfolio to changes in the level of interest rates and the slope of the yield curve for the three months ended December 31, 2016 and 2015.
The sensitivity measures displayed in Table 41, which we disclose on a quarterly basis pursuant to a disclosure commitment with FHFA, are an extension of our monthly sensitivity measures. There are three primary differences between our monthly sensitivity disclosure and the quarterly sensitivity disclosure presented below: (1) the quarterly disclosure is expanded to include the sensitivity results for larger rate level shocks of positive or negative 100 basis points; (2) the monthly disclosure reflects the estimated pre-tax impact on the market value of our net portfolio calculated based on a daily average, while the quarterly disclosure reflects the estimated pre-tax impact calculated based on the estimated financial position of our net portfolio and the market environment as of the last business day of the quarter; and (3) the monthly disclosure shows the most adverse pre-tax impact on the market value of our net portfolio from the hypothetical interest rate shocks, while the quarterly disclosure includes the estimated pre-tax impact of both up and down interest rate shocks.
Table 41: Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve
 
As of December 31,(1)(2)
 
2016
 
2015
 
(Dollars in billions)
Rate level shock:
 
 
 
 
 
 
 
-100 basis points
 
$
(0.2
)
 
 
 
$
0.4

 
-50 basis points
 
0.0

 
 
 
0.1

 
+50 basis points
 
0.0

 
 
 
(0.1
)
 
+100 basis points
 
0.0
 
 
 
(0.4
)
 
Rate slope shock:
 
 
 
 
 
 
 
-25 basis points (flattening)
 
0.0

 
 
 
0.0

 
+25 basis points (steepening)
 
0.0
 
 
 
0.0
 
 
For the Three Months Ended December 31, 2016(1)(3)
 
Duration Gap
 
Rate Slope Shock 25 bps
 
Rate Level Shock 50 bps
 
 
 
Exposure
 
(In months)
 
(Dollars in billions)
Average
0.3
 
 
$
0.0

 
 
 
$
(0.1
)
 
Minimum
(0.3)
 
 
(0.1
)
 
 
 
(0.1
)
 
Maximum
0.9
 
 
0.0
 
 
 
0.0
 
Standard deviation
0.3
 
 
0.0
 
 
 
0.0
 
 
  
 
 
 
 
 
 
 
 
 
For the Three Months Ended December 31, 2015(1)(3)
 
Duration Gap
 
Rate Slope Shock 25 bps
 
Rate Level Shock 50 bps
 
 
 
Exposure
 
(In months)
 
(Dollars in billions)
Average
0.0
 
 
$
0.0

 
 
 
$
0.1

 
Minimum
(1.2)
 
 
0.0

 
 
 
0.0

 
Maximum
1.2
 
 
0.1

 
 
 
0.2

 
Standard deviation
0.5
 
 
0.0

 
 
 
0.1

 
__________
(1) 
Computed based on changes in U.S. LIBOR interest rates swap curve.
(2) 
Measured on the last day of each period presented.

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(3) 
Computed based on daily values during the period presented.
The market value sensitivity of our net portfolio varies across a range of interest rate shocks depending upon the duration and convexity profile of our net portfolio. Because the effective duration gap of our net portfolio was close to zero months in the periods presented, the convexity exposure was the primary driver of the market value sensitivity of our net portfolio as of December 31, 2016 and 2015. In addition, the convexity exposure may result in similar market value sensitivities for positive and negative interest rate shocks of the same magnitude.
A majority of the interest rate risk associated with our mortgage-related securities and loans is hedged with our debt issuances, which include callable debt. We use derivatives to help manage the residual interest rate risk exposure between our assets and liabilities. Derivatives have enabled us to keep our interest rate risk exposure at consistently low levels in a wide range of interest-rate environments. Table 42 displays an example of how derivatives impacted the net market value exposure for a 50 basis point parallel interest rate shock.
Table 42: Derivative Impact on Interest Rate Risk (50 Basis Points)
 
As of December 31,(1)
 
2016
 
2015
 
(Dollars in billions)
Before derivatives
 
$
(1.0
)
 
 
 
$
(1.5
)
 
After derivatives
 
0.0

 
 
 
(0.1
)
 
Effect of derivatives
 
1.0

 
 
 
1.4

 
__________
(1) 
Measured on the last day of each period presented.
Liquidity Risk Management
See “Liquidity and Capital Management” for a discussion of how we manage liquidity risk.
Operational Risk Management
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events. Our corporate operational risk framework is designed in part to comply with the Basel Sound Practices for Operational Risk and has evolved based on the changing needs of our businesses and FHFA regulatory guidance. To quantify our operational risk exposure, we rely on the Basel Standardized Approach, which is based on a percentage of gross income. Our operational risk framework is intended to provide a methodology to identify, assess, mitigate, control and monitor operational risks by embedding the concepts of operational risk in the day-to-day activities of individuals across the company. The framework includes a methodology for business owners to conduct risk and control self-assessments to self-identify potential operational risks and points of execution failure, the effectiveness of associated controls, and document corrective action plans to close identified deficiencies. We continue to enhance our risk-conscious culture, in which all employees are expected to identify, discuss, manage and remediate current and emerging operational risks.
While each business unit is responsible for managing its operational risk, our Operational Risk Management group provides the business units and process owners with the tools, techniques, expertise and guiding principles to assist them in prudent management of their operational risk exposure. The Operational Risk Management group monitors the success of our operational risk efforts by independently verifying the execution of our operational risk programs. Where appropriate, insurance policies are purchased to mitigate the impact of operational losses.
See “Risk Factors” for more information regarding our operational risk and “Risk Management” for more information regarding our governance of operational risk management.
Cybersecurity Risk Management
Our operations rely on the secure receipt, processing, storage and transmission of confidential and other information in our computer systems and networks and with our business partners, including proprietary, confidential or personal information that is subject to privacy laws, regulations or contractual obligations. Information security risks for large institutions like us have significantly increased in recent years and from time to time we have been, and likely will continue to be, the target of attempted cyber attacks and other information

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security threats. These risks are an unavoidable result of being in business, and managing these risks is part of our business activities.
We have developed and continue to enhance our cybersecurity risk management program to protect the security of our computer systems, software, networks and other technology assets against unauthorized attempts to access confidential information or to disrupt or degrade business operations. Our cybersecurity risk management program aligns to the enterprise risk management framework, the National Institute of Standards and Technology Framework for Improving Critical Infrastructure Cybersecurity, and has evolved based on the changing needs of our business, the evolving threat environment and FHFA regulatory guidance. Our cybersecurity risk management program extends to oversight of third parties that could be a source of cybersecurity risk, including customers that use our systems and third-party service providers. We examine the effectiveness and maturity of our cyber defenses through various means, including internal audits, targeted testing, incident response exercises, maturity assessments and industry benchmarking. We inform our Board of Directors on a regular basis of our cybersecurity posture, policies and practices, as well as our prioritization of cybersecurity investments. We continue to strengthen our partnerships with the appropriate government and law enforcement agencies and with other businesses and cybersecurity services in order to understand the full spectrum of cybersecurity risks in the environment, enhance our defenses and improve our resiliency against cybersecurity threats. We also have obtained insurance coverage relating to cybersecurity risks.
To date, we have not experienced any material losses relating to cyber attacks. See “Risk Factors” for additional discussion of cybersecurity risks to our business.
Management of Enterprise Resilience
Our enterprise resiliency program is designed to provide reasonable assurance that we have the ability to recover our critical business functions and supporting assets (i.e., facilities, technology and personnel) in the event of a business interruption. Our program includes corporate governance, awareness and training, as well as strategic and tactical initiatives aimed to ensure that risks are properly identified, assessed and managed. Our enterprise resiliency program aligns to the Federal Emergency Management Agency’s emergency management lifecycle, as well as other industry standards from the International Organization for Standardization, ASIS International and the National Fire Protection Association. This program has evolved based on the changing needs of our business, the evolving internal and external technical environment, and FHFA regulatory guidance. We have established comprehensive tracking and reporting of resiliency plans in order to proactively anticipate and manage various potential disruptive circumstances, such as severe weather and flooding, technology and communications outages, cyber incidents, mass transit shutdowns and terrorist threats, among others. The resiliency measures we have deployed include backup infrastructure for data centers, dedicated recovery facilities, providing technological capabilities to support remote work capacity for displaced staff and accommodation of employees at alternate locations. Our program includes out-of-region data center capabilities for disaster recovery, as well as local resilience for recovery of individual applications.
Despite our planning, testing and preparation of backup venues, our backup systems may not perform adequately, which could result in significant business disruption and financial losses in the event of a loss of facilities, technology, personnel or vendors. We continue to mitigate our business continuity risks by reviewing and testing recovery procedures. See “Risk Factors” for a discussion of the risks to our business relating to a catastrophic event that could disrupt our business.
Non-Mortgage-Related Fraud Risk
Our anti-fraud program provides a framework for managing non-mortgage-related fraud risk. The program is designed to provide reasonable assurance for the prevention and detection of non-mortgage-related fraudulent activity. However, because fraudulent activity requires the intentional circumvention of the internal control structure, the efforts of the program may not always prevent, or immediately detect, instances of such activity.
Impact of Future Adoption of New Accounting Guidance
We identify and discuss the expected impact on our consolidated financial statements of recently issued accounting guidance in “Note 1, Summary of Significant Accounting Policies.”

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Glossary of Terms Used in This Report
Terms used in this report have the following meanings, unless the context indicates otherwise.
An “Acquired credit-impaired loan” refers to a loan we have acquired for which there is evidence of credit deterioration since origination and for which it is probable we will not be able to collect all of the contractually due cash flows. We record our net investment in such loans at the lower of the acquisition cost of the loan or the estimated fair value of the loan at the date of acquisition. Typically, loans we acquire from our unconsolidated MBS trusts pursuant to our option to purchase upon default meet these criteria. Because we acquire these loans from our MBS trusts at par value plus accrued interest, to the extent the par value of a loan exceeds the estimated fair value at the time we acquire the loan, we record the related fair value loss as a charge against the “Reserve for guaranty losses.”
“Advisory Bulletin” refers to FHFA’s Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention.”
“Agency mortgage-related securities” refers to mortgage-related securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.
“Alt-A mortgage loan” or “Alt-A loan” generally refers to a mortgage loan originated under a lender’s program offering 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 have a higher risk of default than non-Alt-A mortgage loans. We classify certain loans as Alt-A so that we can discuss our exposure to Alt-A loans in this Form 10-K and elsewhere. However, there is no universally accepted definition of Alt-A loans. In reporting our Alt-A exposure, we have classified mortgage loans as Alt-A if and only if the lenders that delivered the mortgage loans to us classified the loans as Alt-A, based on documentation or other product features. We have loans with some features that are similar to Alt-A mortgage loans that we have not classified as Alt-A because they do not meet our classification criteria. We do not rely solely on our classifications of loans as Alt-A to evaluate the credit risk exposure relating to these loans in our single-family conventional guaranty book of business. For more information about the credit risk characteristics of loans in our single-family guaranty book of business, see “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management,” “Note 3, Mortgage Loans” and “Note 6, Financial Guarantees.” We have classified private-label mortgage-related securities held in our retained mortgage portfolio as Alt-A if the securities were labeled as such when issued. For more information on the Alt-A loans and securities in our mortgage credit book of business, see “Note 15, Concentrations of Credit Risk.”
“Business volume” refers to the sum in any given period of the unpaid principal balance of: (1) the mortgage loans and mortgage-related securities we purchase for our retained mortgage portfolio; (2) the mortgage loans we securitize into Fannie Mae MBS that are acquired by third parties; and (3) credit enhancements that we provide on our mortgage assets. It excludes mortgage loans we securitize from our portfolio and the purchase of Fannie Mae MBS for our retained mortgage portfolio.
“Charge-off” refers to loan amounts written off as uncollectible bad debts. These loan amounts are removed from our consolidated balance sheet and charged against our loss reserves when the balance is deemed uncollectible, which is generally at foreclosure or other liquidation events (such as deed-in-lieu of foreclosure or a short-sale). Also includes charge-offs related to the redesignation of loans from held for investment (“HFI”) to held for sale (“HFS”) and charge-offs related to the Advisory Bulletin.
“Combined loss reserves” consists of our allowance for loan losses and reserve for guaranty losses. Our combined loss reserves reflects our estimate of the probable losses we have incurred in our guaranty book of business, including concessions we granted borrowers upon modification of their loans.
“Connecticut Avenue Securities” or “CAS” refers to a type of debt structure that allows Fannie Mae to transfer a portion of the credit risk from loan reference pools, consisting of certain single-family mortgage loans in our single-family guaranty book of business, to third-party investors.
“Conventional mortgage” refers to a mortgage loan that is not guaranteed or insured by the U.S. government or its agencies, such as the VA, the FHA or the Rural Development Housing and Community Facilities Program of the Department of Agriculture.

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“Credit enhancement” refers to an agreement used to reduce credit risk by requiring collateral, letters of credit, mortgage insurance, corporate guarantees, inclusion in a credit risk transfer transaction reference pool, or other agreements to provide an entity with some assurance that it will be compensated to some degree in the event of a financial loss.
“Duration” refers to the sensitivity of the value of a financial instrument to changes in interest rates. The duration of a financial instrument is the expected percentage change in its value in the event of a change in interest rates of 100 basis points.
“FHFA” refers to the Federal Housing Finance Agency. FHFA is an independent agency of the federal government with general supervisory and regulatory authority over Fannie Mae, Freddie Mac and the Federal Home Loan Banks. FHFA is our safety and soundness regulator and our mission regulator. FHFA also has been acting as our conservator since September 6, 2008. For more information on FHFA’s authority as our conservator and as our regulator, see “Business—Conservatorship and Treasury Agreements—Conservatorship” and “Business—Legislation and Regulation.”
“GSE Act” refers to the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended, including by the Federal Housing Finance Regulatory Reform Act of 2008. We are subject to regulation applicable to us pursuant to the GSE Act, as described in “Business—Legislation and Regulation—GSE Act and Other Regulation of Our Business.”
“Guaranty book of business” refers to the sum of the unpaid principal balance of: (1) mortgage loans of Fannie Mae; (2) mortgage loans underlying Fannie Mae MBS; and (3) other credit enhancements that we provide on mortgage assets. It excludes non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
“HARP loans” refer to loans we have acquired through the Home Affordable Refinance Program (“HARP”), which allows eligible Fannie Mae borrowers with high LTV ratio loans to refinance into more sustainable loans.
“Implied volatility” refers to the market’s expectation of the magnitude of future changes in interest rates.
“Interest rate swap” refers to 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 principal amount. An interest rate swap is a type of derivative.
“Loans,” “mortgage loans” and “mortgages” refer to both whole loans and loan participations, secured by residential real estate, cooperative shares or by manufactured housing units.
“Mortgage assets,” when referring to our assets, refers to both mortgage loans and mortgage-related securities we hold in our retained mortgage portfolio. For purposes of the senior preferred stock purchase agreement, the definition of mortgage assets is based on the unpaid principal balance of such assets and does not reflect market valuation adjustments, allowance for loan losses, impairments, unamortized premiums and discounts and the impact of our consolidation of variable interest entities. We disclose the amount of our mortgage assets for purposes of the senior preferred stock purchase agreement on a monthly basis under the caption “Gross Mortgage Portfolio” in our Monthly Summaries, which are available on our website and announced in a press release.
“Mortgage-backed securities” or “MBS” refers generally to securities that represent beneficial interests in pools of mortgage loans or other mortgage-related securities. These securities may be issued by Fannie Mae or by others.
“Mortgage credit book of business” refers to the sum of the unpaid principal balance of: (1) mortgage loans of Fannie Mae; (2) mortgage loans underlying Fannie Mae MBS; (3) non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio; and (4) other credit enhancements that we provide on mortgage assets.
“Multifamily mortgage loan” refers to a mortgage loan secured by a property containing five or more residential dwelling units.
“New business purchases” refers to single-family and multifamily whole mortgage loans purchased during the period and single-family and multifamily mortgage loans underlying Fannie Mae MBS issued during the period pursuant to lender swaps.
“Notional amount” refers to the hypothetical dollar amount in an interest rate swap transaction on which exchanged payments are based. The notional amount in an interest rate swap transaction generally is not paid or received by either party to the transaction, or generally perceived as being at risk. The notional amount is typically significantly greater than the potential market or credit loss that could result from such transaction.

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“Outstanding Fannie Mae MBS” refers to the total unpaid principal balance of Fannie Mae MBS that is held by third-party investors and held in our retained mortgage portfolio.
“Pay-fixed swap” refers to an interest rate swap trade under which we pay a predetermined fixed rate of interest based upon a set notional amount and receive a variable interest payment based upon a stated index, with the index resetting at regular intervals over a specified period of time. These contracts generally increase in value as interest rates rise and decrease in value as interest rates fall.
“Private-label securities” or “PLS” refers to mortgage-related securities issued by entities other than agency issuers Fannie Mae, Freddie Mac or Ginnie Mae.
“Receive-fixed swap” refers to an interest rate swap trade under which we make a variable interest payment based upon a stated index, with the index resetting at regular intervals, and receive a predetermined fixed rate of interest based upon a set notional amount and over a specified period of time. These contracts generally increase in value as interest rates fall and decrease in value as interest rates rise.
“Refi Plus loans” refers to loans we acquire under our Refi Plus initiative, which offers refinancing flexibility to eligible borrowers who are current on their loans and whose loans are owned or guaranteed by us and meet certain additional criteria. Refi Plus has no limits on maximum LTV ratio and provides mortgage insurance flexibilities for loans with LTV ratios greater than 80%.
“REMIC” or “Real Estate Mortgage Investment Conduit” refers to a type of mortgage-related security in which interest and principal payments from mortgages or mortgage-related securities are structured into separately traded securities.
“REO” refers to real-estate owned by Fannie Mae because we have foreclosed on the property or obtained the property through a deed-in-lieu of foreclosure.
“Representations and warranties” refers to a lender’s assurance that a mortgage loan sold to us complies with the standards outlined in our Mortgage Selling and Servicing Contract, which incorporates the Selling and Servicing Guides, including underwriting and documentation. Violation of any representation or warranty is a breach of the lender contract, including the warranty that the loan complies with all applicable requirements of the contract, which provides us with certain rights and remedies.
“Retained mortgage portfolio” refers to the mortgage-related assets we own (which excludes the portion of assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties).
“Single-class Fannie Mae MBS” refers to Fannie Mae MBS where the investors receive principal and interest payments in proportion to their percentage ownership of the MBS issue.
“Single-family mortgage loan” refers to a mortgage loan secured by a property containing four or fewer residential dwelling units.
“Structured Fannie Mae MBS” refers to Fannie Mae MBS that are resecuritizations of other Fannie Mae MBS.
“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 were typically originated by lenders specializing in this type of business or by subprime divisions of large lenders, using processes unique to subprime loans. We classify certain loans as subprime so that we can discuss our exposure to subprime loans in this Form 10-K and elsewhere. However, there is no universally accepted definition of subprime loans. In reporting our subprime exposure, we have classified mortgage loans as subprime if and only if the loans were originated by a lender specializing in subprime business or by a subprime division of a large lender; however, we exclude loans originated by these lenders from the subprime classification if we acquired the loans in accordance with our standard underwriting criteria, which typically require compliance by the seller with our Selling Guide (including standard representations and warranties) and/or evaluation of the loans through our Desktop Underwriter system. We have loans with some features that are similar to subprime mortgage loans that we have not classified as subprime because they do not meet our classification criteria. We do not rely solely on our classifications of loans as subprime to evaluate the credit risk exposure relating to these loans in our single-family conventional guaranty book of business. We are not currently acquiring newly originated subprime loans, although we are acquiring refinancings of existing Fannie Mae subprime loans in connection with our Refi Plus initiative. Unlike the loans they replace, these refinancings are not included in our reported subprime loans because they do not meet our classification criteria for subprime loans. We have classified private-label mortgage-related securities held in our

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retained mortgage portfolio as subprime if the securities were labeled as such when issued. For more information on the subprime securities in our mortgage credit book of business, see “Note 5, Investments in Securities.”
“Swaption” refers to an option that gives the option buyer the right, but not the obligation, to enter into an interest rate swap on a future date with the option seller on terms specified on the date the parties agreed to the swaption.
“TCCA fees” refers to the expense recognized as a result of the 10 basis point increase in guaranty fees on all single-family residential mortgages delivered to us on or after April 1, 2012 and before January 1, 2022 pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011, which we remit to Treasury on a quarterly basis.
“Total loss reserves” consists of our allowance for loan losses, our allowance for preforeclosure property taxes and insurance receivable and our reserve for guaranty losses. Our total loss reserves reflect our estimate of the probable losses we have incurred in our guaranty book of business, including concessions we granted borrowers upon modification of their loans.
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk
Information about market risk is set forth in “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management.”
Item 8.  Financial Statements and Supplementary Data
Our consolidated financial statements and notes thereto are included elsewhere in this annual report on Form 10-K as described below in “Exhibits, Financial Statement Schedules.”
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.  Controls and Procedures
Overview
We are required under applicable laws and regulations to maintain controls and procedures, which include disclosure controls and procedures as well as internal control over financial reporting, as further described below.
Evaluation of Disclosure Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures refer to controls and other procedures designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as in effect as of December 31, 2016, the end of the period covered by this report. As a result of management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2016 or as of the date of filing this report.

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Our disclosure controls and procedures were not effective as of December 31, 2016 or as of the date of filing this report because they did not adequately ensure the accumulation and communication to management of information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws. As a result, we were not able to rely upon the disclosure controls and procedures that were in place as of December 31, 2016 or as of the date of this filing, and we continue to have a material weakness in our internal control over financial reporting. This material weakness is described in more detail below under “Management’s Report on Internal Control Over Financial Reporting—Description of Material Weakness.” Based on discussions with FHFA and the structural nature of this material weakness, we do not expect to remediate this material weakness while we are under conservatorship.
Management’s Report on Internal Control Over Financial Reporting
Overview
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in rules promulgated under the Exchange Act, is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our Board of Directors; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making its assessment, management used the criteria established in the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in May 2013. Management’s assessment of our internal control over financial reporting as of December 31, 2016 identified a material weakness, which is described below. Because of this material weakness, management has concluded that our internal control over financial reporting was not effective as of December 31, 2016 or as of the date of filing this report.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on our internal control over financial reporting, expressing an adverse opinion on the effectiveness of our internal control over financial reporting as of December 31, 2016. This report is included below under the heading “Report of Independent Registered Public Accounting Firm.”
Description of Material Weakness
The Public Company Accounting Oversight Board’s Auditing Standard No. 5 defines a material weakness as a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Management has determined that we continued to have the following material weakness as of December 31, 2016 and as of the date of filing this report:

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•
Disclosure Controls and Procedures. We have been under the conservatorship of FHFA since September 6, 2008. Under the GSE Act, FHFA is an independent agency that currently functions as both our conservator and our regulator with respect to our safety, soundness and mission. Because of the nature of the conservatorship under the GSE Act, which places us under the “control” of FHFA (as that term is defined by securities laws), some of the information that we may need to meet our disclosure obligations may be solely within the knowledge of FHFA. As our conservator, FHFA has the power to take actions without our knowledge that could be material to our shareholders and other stakeholders, and could significantly affect our financial performance or our continued existence as an ongoing business. Although we and FHFA attempted to design and implement disclosure policies and procedures that would account for the conservatorship and accomplish the same objectives as a disclosure controls and procedures policy of a typical reporting company, there are inherent structural limitations on our ability to design, implement, test or operate effective disclosure controls and procedures. As both our regulator and our conservator under the GSE Act, FHFA is limited in its ability to design and implement a complete set of disclosure controls and procedures relating to Fannie Mae, particularly with respect to current reporting pursuant to Form 8-K. Similarly, as a regulated entity, we are limited in our ability to design, implement, operate and test the controls and procedures for which FHFA is responsible.
Due to these circumstances, we have not been able to update our disclosure controls and procedures in a manner that adequately ensures the accumulation and communication to management of information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws, including disclosures affecting our consolidated financial statements. As a result, we did not maintain effective controls and procedures designed to ensure complete and accurate disclosure as required by GAAP as of December 31, 2016 or as of the date of filing this report. Based on discussions with FHFA and the structural nature of this weakness, we do not expect to remediate this material weakness while we are under conservatorship.
Mitigating Actions Related to Material Weakness
As described above under “Management’s Report on Internal Control Over Financial Reporting—Description of Material Weakness,” we continue to have a material weakness in our internal control over financial reporting relating to our disclosure controls and procedures. However, we and FHFA have engaged in the following practices intended to permit accumulation and communication to management of information needed to meet our disclosure obligations under the federal securities laws:
•
FHFA has established the Division of Conservatorship, which is intended to facilitate operation of the company with the oversight of the conservator.
•
We have provided drafts of our SEC filings to FHFA personnel for their review and comment prior to filing. We also have provided drafts of external press releases, statements and speeches to FHFA personnel for their review and comment prior to release.
•
FHFA personnel, including senior officials, have reviewed our SEC filings prior to filing, including this annual report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”), and engaged in discussions regarding issues associated with the information contained in those filings. Prior to filing our 2016 Form 10-K, FHFA provided Fannie Mae management with a written acknowledgment that it had reviewed the 2016 Form 10-K, and it was not aware of any material misstatements or omissions in the 2016 Form 10-K and had no objection to our filing the 2016 Form 10-K.
•
The Director of FHFA and our Chief Executive Officer have been in frequent communication, typically meeting on at least a bi-weekly basis.
•
FHFA representatives attend meetings frequently with various groups within the company to enhance the flow of information and to provide oversight on a variety of matters, including accounting, credit and market risk management, external communications and legal matters.
•
Senior officials within FHFA’s Office of the Chief Accountant have met frequently with our senior finance executives regarding our accounting policies, practices and procedures.
In view of these activities, we believe that our consolidated financial statements for the year ended December 31, 2016 have been prepared in conformity with GAAP.

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Changes in Internal Control Over Financial Reporting
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There have been no changes in our internal control over financial reporting since September 30, 2016 that management believes have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Fannie Mae:
We have audited the internal control over financial reporting of Fannie Mae and consolidated entities (in conservatorship) (the “Company”) as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment:
•
Disclosure Controls and Procedures - The Company’s disclosure controls and procedures did not adequately ensure the accumulation and communication to management of information known to the Federal Housing Finance Agency that is needed to meet their disclosure obligations under the federal securities laws as they relate to financial reporting.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2016, of the Company and this report does not affect our report on such financial statements.
In our opinion, because of the effect of the material weakness identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2016, of the Company and our report dated February 17, 2017, expressed an unqualified opinion on those financial

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statements and included an explanatory paragraph regarding the Company’s dependence upon the continued support from various agencies of the United States Government, including the United States Department of Treasury and the Company’s conservator and regulator, the Federal Housing Finance Agency.

/s/ Deloitte & Touche LLP

McLean, Virginia
February 17, 2017


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Other Information

Item 9B.  Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors
Our current directors are listed below. They have provided the following information about their principal occupation, business experience and other matters. Upon FHFA’s appointment as our conservator on September 6, 2008, FHFA succeeded to all rights, titles, powers and privileges of any director of Fannie Mae with respect to Fannie Mae and its assets.
As discussed in more detail below under “Corporate Governance—Conservatorship and Delegation of Authority to Board of Directors,” FHFA, as conservator, appointed an initial group of directors to our Board following our entry into conservatorship, delegated to the Board certain authority, including the authority to appoint directors to subsequent vacancies subject to conservator review, and defined the term of service of directors during conservatorship. The Nominating and Corporate Governance Committee evaluates the qualifications of individual directors on an annual basis. In its assessment of current directors and evaluation of potential candidates for director, the Nominating and Corporate Governance Committee considers, among other things, whether the Board as a whole possesses meaningful experience, qualifications and skills in the following subject areas: business; finance; capital markets; accounting; risk management; public policy; mortgage lending, real estate, low-income housing and/or homebuilding; technology; and the regulation of financial institutions. See “Corporate Governance—Composition of Board of Directors” below for further information on the factors the Nominating and Corporate Governance Committee considers in evaluating and selecting board members.
Amy E. Alving, 54, served as Chief Technology Officer and Senior Vice President at Science Applications International Corporation (“SAIC”), an engineering and technology applications company, from December 2007 to September 2013. Dr. Alving’s prior positions include director of the Special Projects Office at the Defense Advanced Research Projects Agency, White House Fellow, and tenured faculty member at the University of Minnesota. Dr. Alving is currently a member of the Board of Directors of Arconic Inc., where she serves as a member of the Audit Committee and chairs the Cybersecurity Advisory Subcommittee of the Audit Committee. From April 2010 to August 2015, Dr. Alving was a member of the Board of Directors of Pall Corporation, where she served as a member of the Audit Committee and the Nominating/Governance Committee. In addition, she is a member of the Defense Science Board. Dr. Alving has been a Fannie Mae director since October 2013. Dr. Alving serves as Chair of the Strategic Initiatives and Technology Committee and is also a member of the Executive Committee, the Nominating and Corporate Governance Committee, and the Risk Policy and Capital Committee.
Hugh R. Frater, 61, serves as Non-Executive Chairman of the Board of VEREIT, Inc. and as a director of ABR Reinsurance Capital Holdings Ltd. Mr. Frater previously worked at Berkadia Commercial Mortgage LLC (“Berkadia”), a commercial real estate company providing comprehensive capital solutions and investment sales advisory and research services for multifamily and commercial properties. He served as Chairman of Berkadia from April 2014 to December 2015 and he served as Chief Executive Officer of Berkadia from August 2010 to April 2014. From November 2007 to June 2010, Mr. Frater was the Chief Operating Officer of Good Energies, Inc., and from February 2004 to May 2007, Mr. Frater was an Executive Vice President at PNC Financial Services, where he led the real estate division. Mr. Frater was a Founding Partner and Managing Director of BlackRock, Inc. from August 1988 to February 2004, where he led the real estate practice. Mr. Frater serves on the Real Estate Advisory Board at the Columbia University Graduate School of Business and is also a member of its Board of Overseers. Mr. Frater has been a Fannie Mae director since January 2016. Mr. Frater serves as a member of the Audit Committee and the Risk Policy and Capital Committee.
Renee L. Glover, 67, is the Founder and Managing Member of The Catalyst Group, LLC, a national consulting firm focused on urban revitalization, real estate development and community building, urban policy, and business transformation. Ms. Glover is currently a member of the Board of Directors of Enterprise Community Partners, Inc. Ms. Glover served on the Board of Directors of Habitat for Humanity International from November 2006 to November 2015, including serving as Chair of the Board of Directors from November 2013 to November 2015. Committees on which she served during her time as a member of the Board of Directors of Habitat for Humanity

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International included the Audit Committee, Finance Committee, Operations Committee and Executive Committee. Ms. Glover served as a member of the Board of Directors of the Federal Reserve Bank of Atlanta from January 2009 to December 2014, where she served on the Audit and Operational Risk Committee. She also served as a Commissioner of the Bipartisan Policy Center Housing Commission from October 2011 to September 2014. The Commission was responsible for coming up with a set of bipartisan recommendations concerning federal housing policy and housing finance. Ms. Glover served as president and chief executive officer of the Atlanta Housing Authority and its affiliates from September 1994 to September 2013. She also served as a consultant for the Atlanta Housing Authority from September 2013 to November 2013 to facilitate the transition of leadership upon her retirement. Prior to joining the Atlanta Housing Authority, Ms. Glover was a corporate finance attorney in Atlanta and New York. Ms. Glover serves on the Board of Advisors of the University of Pennsylvania’s Institute of Urban Research. Ms. Glover has been a Fannie Mae director since January 2016. Ms. Glover serves as a member of the Nominating and Corporate Governance Committee and the Strategic Initiatives and Technology Committee.
Frederick B. “Bart” Harvey III, 67, retired in March 2008 from his role as chairman of the Board of Trustees of Enterprise Community Partners and Enterprise Community Investment, providers of development capital and technical expertise to create affordable housing and rebuild communities. Enterprise is a national non-profit that raises funds from the private sector to finance homes primarily for low and very low income people. Enterprise has also pioneered “green” affordable housing with its EnterpriseGreen Communities initiative. Mr. Harvey was Enterprise’s chief executive officer from 1993 to 2007. He joined Enterprise in 1984, and a year later became vice chairman. Before joining Enterprise, Mr. Harvey served for 10 years in various domestic and international positions with Dean Witter Reynolds (now Morgan Stanley), leaving as Managing Director of Corporate Finance. Mr. Harvey was a member of the Board of Directors of the Federal Home Loan Bank of Atlanta from 1996 to 1999, a director of the National Housing Trust from 1990 to 2008, and also served as an executive committee member of the National Housing Conference from 1999 to 2008. Over the last year, Mr. Harvey has served as the Chair of the Calvert Foundation, which makes “impact loans” to low-income borrowers and organizations serving low-income borrowers or addressing social issues such as environmental issues, affordable housing, health clinics, charter schools and microfinance. Mr. Harvey initially became a Fannie Mae director in August 2008, before we were put into conservatorship, and FHFA appointed Mr. Harvey to Fannie Mae’s Board in December 2008. Mr. Harvey serves as Chair of the Nominating and Corporate Governance Committee and is also a member of the Executive Committee and the Risk Policy and Capital Committee.
George W. Haywood, 64, has been a self-employed private investor since 1998. Prior to being self-employed, from 1994 to 1998, Mr. Haywood was the Director of Corporate and High Yield Bond Investments for Moore Capital Management, a hedge fund management firm. Prior to joining Moore Capital Management, from 1982 to 1994, Mr. Haywood worked at Lehman Brothers, initially as a corporate bond trader, then as a Managing Director, head of corporate bond trading, and then as Managing Director and proprietary trader. Mr. Haywood has significant experience as a financial entrepreneur. Mr. Haywood is currently a member of the Board of Directors of Denny’s Corporation, where he serves as a member of the Audit and Finance Committee. Mr. Haywood was previously a member of the Board of Directors of XM Satellite Radio Holdings Inc. from 2004 to 2006, where he served as a member of the Finance Committee. Mr. Haywood has been a Fannie Mae director since November 2016. Mr. Haywood serves on the Compensation Committee and the Strategic Initiatives and Technology Committee.
Michael J. Heid, 59, served as Executive Vice President (Home Lending) of Wells Fargo & Company (together with its affiliates, “Wells Fargo”), from 1997 to January 2016. He served in a number of positions at Wells Fargo Home Mortgage, the mortgage banking division of Wells Fargo, including as president from 2011 to September 2015, as co-president from 2004 to 2011, and earlier as chief financial officer and head of Loan Servicing. Mr. Heid was employed by Wells Fargo or its predecessors since 1988. Mr. Heid has been a Fannie Mae director since May 2016. Mr. Heid serves as Vice Chair of the Audit Committee and is also a member of the Compensation Committee.
Robert H. Herz, 63, serves as President of Robert H. Herz LLC, providing consulting services on financial reporting and other matters. He previously served as a senior advisor to and as a member of the Advisory Board of Workiva Inc. (formerly WebFilings LLC), a provider of financial reporting software, from February 2011 to December 2014. From July 2002 to September 2010, Mr. Herz was Chairman of the Financial Accounting Standards Board, or FASB. He was also a part-time member of the International Accounting Standards Board, or IASB, from January 2001 to June 2002. He was a partner in PricewaterhouseCoopers LLP from 1985 until his

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retirement in 2002. He serves on the Accounting Standards Oversight Council of Canada, as a member of the Standing Advisory Group of the Public Company Accounting Oversight Board, as a member of the Board of Directors of the Sustainability Accounting Standards Board, on the Advisory Board of the Manchester Business School in England, on the Advisory Board of AccountAbility, on the Advisory Board of Becker Professional Education, as a member of the Independent Investment Committee of the United Nations Office for Project Services (“UNOPS”), and as an executive in residence at the Columbia Business School. Mr. Herz is currently a member of the Board of Directors of Morgan Stanley, where he serves as Chair of the Audit Committee and as a member of the Nominating and Corporate Governance Committee, a member of the Board of Directors of Workiva Inc., and a member of the Board of Directors of Paxos Trust Company, LLC and its parent Kabompo Holdings, Ltd. Mr. Herz has been a Fannie Mae director since June 2011. Mr. Herz serves as Chair of the Audit Committee and is also a member of the Compensation Committee and the Executive Committee.
Timothy J. Mayopoulos, 57, has been President and Chief Executive Officer of Fannie Mae since June 2012. He previously served as Fannie Mae’s Executive Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary from September 2010 to June 2012, and as Fannie Mae’s Executive Vice President, General Counsel and Corporate Secretary from April 2009 to September 2010. Before joining Fannie Mae, Mr. Mayopoulos was Executive Vice President and General Counsel of Bank of America Corporation from January 2004 to December 2008. He was Managing Director and General Counsel, Americas of Deutsche Bank AG’s Corporate and Investment Bank from January 2002 to January 2004. He was Managing Director and Senior Deputy General Counsel, Americas of Credit Suisse First Boston from November 2000 to May 2001, and Managing Director and Associate General Counsel of Donaldson, Lufkin & Jenrette, Inc. from May 1996 to November 2000. Mr. Mayopoulos was previously in private law practice at Davis Polk & Wardwell and served in the Office of the Independent Counsel during the Whitewater investigation. Mr. Mayopoulos is currently a member of the Boards of Directors of LendingClub Corporation, where he serves as a member of the Audit Committee, and of SAIC, where he serves as a member of the Audit and the Human Resources and Compensation Committees and as Chair of the Nominating and Corporate Governance Committee. Mr. Mayopoulos has been a Fannie Mae director since June 2012. He is a member of the Executive Committee.
Diane C. Nordin, 58, served as a partner of Wellington Management Company, LLP, a private asset management company, from December 1995 to December 2011, and originally joined Wellington in 1991. She served in many global leadership roles at Wellington, most notably as head of Fixed Income, Vice Chair of the Compensation Committee and Audit Chair of the Wellington Management Trust Company. Ms. Nordin spent over three decades in the investment business, having previously been employed by Fidelity Investments and Putnam Investments. Ms. Nordin is a Chartered Financial Analyst. Following her retirement from the asset management industry, Ms. Nordin served as an Advanced Leadership Initiative Fellow at Harvard University from December 2011 to December 2012. Ms. Nordin currently serves as a member of the Board of Directors of Antares Midco, Inc., where she serves as Chair of the Compensation Committee. She serves as a Trustee of Wheaton College, where she is an Executive Committee and Audit Committee member and Chair of the Investment Committee, as a Director of the Appalachian Mountain Club, where she is Chair of the Investment and Audit Committees, and as a member of the Board of Governors of the CFA Institute, where she is a member of the Audit and Risk Committee. Ms. Nordin has been a Fannie Mae director since November 2013. Ms. Nordin serves as Chair of the Compensation Committee and is also a member of the Audit Committee and the Executive Committee.
Egbert L. J. Perry, 61, is the Chairman and Chief Executive Officer of The Integral Group LLC. Founded in 1993 by Mr. Perry, Integral is a real estate development, advisory and investment management company based in Atlanta. Mr. Perry has over 35 years of experience as a real estate professional, including work in urban development, developing and investing in mixed-income, mixed-use communities, affordable/work force housing and commercial real estate projects in markets across the country. Mr. Perry currently serves as Chair of the Advisory Board of the Penn Institute for Urban Research and as a long-time trustee of the University of Pennsylvania. Mr. Perry also served from 2002 through 2008 as a director of the Federal Reserve Bank of Atlanta. Mr. Perry has been a Fannie Mae director since December 2008 and Chairman of Fannie Mae’s Board since March 2014. Mr. Perry is Chair of the Executive Committee.
Jonathan Plutzik, 62, has served as Chairman of Betsy Ross Investors, LLC since August 2005. He also has served as President of the Jonathan Plutzik and Lesley Goldwasser Family Foundation Inc. since January 2003. Mr. Plutzik served as Non-Executive Chairman of the Board of Directors at Firaxis Games from June 2002 to December 2005. Before that, he served from 1978 to June 2002 in various positions with Credit Suisse First Boston, retiring in June 2002 from his role as Vice Chairman. Mr. Plutzik has been a Fannie Mae director since

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November 2009. Mr. Plutzik is Chair of the Risk Policy and Capital Committee and is a member of the Compensation Committee, the Executive Committee and the Strategic Initiatives and Technology Committee.
Ryan A. Zanin, 54, has served as President and CEO of the Restructuring, Strategic Ventures and Insurance Group at GE Capital since May 2015, and has served as Chief Risk Officer of GE Capital since November 2016 and from July 2010 to April 2015. Before joining GE Capital, Mr. Zanin served as Managing Director and Chief Risk Officer, International Capital Markets, at Wells Fargo & Company, from December 2008 to June 2010, and as Chief Risk Officer, Corporate and Investment Bank at Wachovia Corporation, from October 2006 to November 2008. Before that, he spent 14 years in leadership roles across Deutsche Bank AG and Bankers Trust Company. Mr. Zanin has over 30 years of experience in financial services specializing in risk management. Mr. Zanin has served as a member of the Board of Directors of the holding company for GE Capital, General Electric Capital Corporation, since December 2016 and from August 2010 to April 2015. Mr. Zanin has been a Fannie Mae director since September 2016. Mr. Zanin is a member of the Risk Policy and Capital Committee and the Strategic Initiatives and Technology Committee.
Corporate Governance
Conservatorship and Delegation of Authority to Board of Directors
On September 6, 2008, the Director of FHFA appointed FHFA as our conservator in accordance with the GSE Act. As conservator, FHFA succeeded to all rights, titles, powers and privileges of Fannie Mae, and of any shareholder, officer or director of Fannie Mae with respect to Fannie Mae and its assets. As a result, our Board of Directors no longer had the power or duty to manage, direct or oversee our business and affairs.
In November 2008, FHFA, as conservator, reconstituted our Board of Directors and delegated specified authorities to it. FHFA’s delegation of authority to the Board became effective in December 2008, when FHFA appointed nine Board members to serve in addition to the Board Chairman, who was appointed by FHFA in September 2008. The delegation of authority will remain in effect until modified or rescinded by the conservator.
Our directors serve on behalf of the conservator and exercise their authority as directed by and with the approval, where required, of the conservator. Our directors have no fiduciary duties to any person or entity except to the conservator. Accordingly, our directors are not obligated to consider the interests of the company, the holders of our equity or debt securities or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator.
In connection with FHFA’s delegation of authority to the Board, in November 2008, FHFA instructed the Board to consult with and obtain FHFA’s approval before taking action in certain specified areas. FHFA revised and replaced these instructions in November 2012 to provide greater specificity on the respective roles and responsibilities of FHFA, the Board and management in relation to the conservatorship. Since 2012, FHFA has slightly modified the 2012 instructions. As modified, FHFA’s 2012 instructions require the Board to oversee that management consults with and obtains the written approval of the conservator before taking action in the following areas:
•
engaging in redemptions or repurchases of our subordinated debt, except as may be necessary to comply with the senior preferred stock purchase agreement;
•
increases in Board risk limits, material changes in accounting policy, and reasonably foreseeable material increases in operational risk;
•
matters that relate to the conservator’s powers, our conservatorship status, or the legal effect of the conservatorship on contracts;
•
retention and termination of external auditors and law firms serving as consultants to the Board;
•
agreements relating to litigation, claims, regulatory proceedings or tax-related matters where the value of the claim exceeds a specified threshold, including related matters that aggregate to more than the threshold;
•
alterations or changes to the terms of the master agreement between us and one of our top five single-family sellers or top five single-family servicers that are not otherwise mandated by FHFA and that will materially alter the business relationship between the parties;

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•
the termination of a contract between us and one of our top five single-family sellers or top five single-family servicers, other than an expiration pursuant to its terms;
•
actions that in the reasonable business judgment of management, at the time that the action is to be taken, are likely to cause significant reputational risk to us or result in substantial negative publicity;
•
creation of any subsidiary or affiliate, or entering into a substantial transaction with a subsidiary or affiliate, except for the creation of, or a transaction with, a subsidiary or affiliate undertaken in the ordinary course of business;
•
setting or increasing the compensation or benefits payable to members of the Board of Directors;
•
entering into new compensation arrangements or increasing amounts or benefits payable under existing compensation arrangements of executives at the senior vice president level and above, and other executives as FHFA may deem necessary to successfully execute its role as conservator;
•
any establishment or modification by us of performance management processes for executives at the senior vice president level and above and any executives designated as “officers” pursuant to Section 16 of the Exchange Act, including the establishment or modification of a conservator scorecard;
•
establishing the annual operating budget; and
•
matters that require the approval of or consultation with Treasury under the senior preferred stock purchase agreement. See “Note 13, Equity” for a list of matters that require the approval of Treasury under the senior preferred stock purchase agreement.
The 2012 instructions state that, in regards to the matters described above, the Board should review and approve these matters before they are submitted to the conservator for approval. FHFA’s instructions also require the company to notify FHFA of planned changes in business processes or operations, so that FHFA may participate in decision-making as FHFA determines appropriate. For more information on the conservatorship, refer to “Business—Conservatorship and Treasury Agreements—Conservatorship.”
Composition of Board of Directors
In November 2008, FHFA directed that our Board should have a minimum of nine and not more than thirteen directors. There is a non-executive Chairman of the Board, and our Chief Executive Officer is the only corporate officer serving as a director. Our initial directors were appointed by the conservator and subsequent vacancies have been and may continue to be filled by the Board, subject to review by the conservator. Each director serves on the Board until the earlier of (1) resignation or removal by the conservator or (2) the election of a successor director at an annual meeting of shareholders.
Fannie Mae’s bylaws provide that each director holds office for the term for which he or she was elected or appointed and until his or her successor is chosen and qualified or until he or she dies, resigns, retires or is removed from office in accordance with applicable law or regulation, whichever occurs first. Under the Charter Act, each director is elected or appointed for a term ending on the date of our next annual shareholders’ meeting. As noted above, however, the conservator appointed the initial directors to our Board, delegated to the Board the authority to appoint directors to subsequent vacancies subject to conservator review, and defined the term of service of directors during conservatorship.
Under the Charter Act, our Board shall at all times have as members at least one person from each of the homebuilding, mortgage lending and real estate industries, and at least one person from an organization that has represented consumer or community interests for not less than two years or one person who has demonstrated a career commitment to the provision of housing for low-income households. It is the policy of the Board that a substantial majority of Fannie Mae’s directors will be independent, in accordance with the standards adopted by the Board. In addition, our Corporate Governance Guidelines provide that the Board, as a group, must be knowledgeable in business, finance, capital markets, accounting, risk management, public policy, mortgage lending, real estate, low-income housing, homebuilding, regulation of financial institutions, technology and any other areas that may be relevant to the safe and sound operation of Fannie Mae. In addition to expertise in the areas noted above, our Corporate Governance Guidelines specify that the Nominating and Corporate Governance Committee will seek out Board members who possess the highest personal values, judgment, and integrity, and who have an understanding of the regulatory and policy environment in which Fannie Mae does business. The Committee also considers whether a prospective candidate for the Board has the ability to attend meetings and fully participate in the activities of the Board.

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The Nominating and Corporate Governance Committee also considers diversity when evaluating the composition of the Board. Our Corporate Governance Guidelines specify that the Nominating and Corporate Governance Committee is committed to considering minorities, women and individuals with disabilities in the identification and evaluation process of prospective candidates. The Guidelines also specify that the Committee will seek out Board members who represent diversity in ideas and perspectives. These provisions of our Corporate Governance Guidelines implement FHFA regulations that require the company to implement and maintain policies and procedures that, among other things, encourage the consideration of diversity in nominating or soliciting nominees for positions on our Board.
The Nominating and Corporate Governance Committee evaluates the qualifications and performance of current directors on an annual basis. Factors taken into consideration by the Committee in making this evaluation include:
•
a director’s contribution to the effective functioning of the corporation;
•
any change in the director’s principal area of responsibility with his or her company or his or her retirement from the company;
•
whether the director continues to bring relevant experience to the Board;
•
whether the director has the ability to attend meetings and fully participate in the activities of the Board;
•
whether the director has developed any relationships with Fannie Mae or another organization, or other circumstances have arisen, that might make it inappropriate for the director to continue serving on the Board;
•
the director’s age and length of service on the Board; and
•
the director’s particular experience, qualifications, attributes and skills.
In evaluating whether a director should serve on our Board, the Nominating and Corporate Governance Committee considers the experience, qualifications, attributes and skills identified in our Corporate Governance Guidelines. In concluding our directors should continue to serve as directors, the Nominating and Corporate Governance Committee took into account their knowledge in these areas as indicated in the table below, which they gained from their experience described above in “Directors.”
Director
Business
 
Finance and Accounting
 
Capital Markets
 
Risk Management
 
Public Policy
 
Mortgage Lending (ML), Real Estate (RE), Low-Income Housing (LIH), Home Building (HB)
 
Regulation of Financial Institutions
 
Technology
Amy Alving
ü
 
ü
 
 
 
ü
 
ü
 
 
 
 
 
ü
Hugh Frater
ü
 
ü
 
ü
 
ü
 
 
 
ML, RE, LIH
 
ü
 
 
Renee Glover
ü
 
ü
 
 
 
ü
 
ü
 
RE, LIH
 
ü
 
 
Bart Harvey
ü
 
ü
 
ü
 
ü
 
ü
 
RE, LIH, HB
 
 
 
 
George Haywood
ü
 
ü
 
ü
 
ü
 
 
 
 
 
 
 
ü
Michael Heid
ü
 
ü
 
ü
 
ü
 
ü
 
ML, RE
 
ü
 
 
Robert Herz
ü
 
ü
 
ü
 
ü
 
 
 
 
 
ü
 
 
Timothy Mayopoulos
ü
 
ü
 
ü
 
ü
 
ü
 
ML, LIH
 
ü
 
 
Diane Nordin
ü
 
ü
 
ü
 
ü
 
 
 
ML
 
ü
 
 
Egbert Perry
ü
 
ü
 
 
 
ü
 
 
 
RE, LIH, HB
 
 
 
 
Jonathan Plutzik
ü
 
ü
 
ü
 
ü
 
 
 
RE, ML
 
ü
 
 
Ryan Zanin
ü
 
ü
 
ü
 
ü
 
 
 
 
 
ü
 
ü
Board Leadership Structure; Risk Management Oversight
We have had a non-executive Chairman of the Board since 2004. FHFA regulations and our Corporate Governance Guidelines require separate Chairman of the Board and Chief Executive Officer positions and require that the Chairman of the Board be an independent director. Our Board is also structured so that all but one of our directors, our Chief Executive Officer, are independent. A non-executive Chairman structure enables non-management directors to raise issues and concerns for Board consideration without immediately involving

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management and is consistent with the Board’s emphasis on independent oversight, as well as our conservator’s directives.
Our Board has six standing committees: the Audit Committee, the Compensation Committee, the Executive Committee, the Nominating and Corporate Governance Committee, the Risk Policy and Capital Committee, and the Strategic Initiatives and Technology Committee. Pursuant to FHFA direction, the Board and the standing Board committees function in accordance with their designated duties and with the authorities as set forth in federal statutes, regulations and FHFA guidance, Delaware law (insofar as the company has adopted its provisions for corporate governance purposes) and in Fannie Mae’s bylaws and the applicable charters of Fannie Mae’s Board committees. Such duties or authorities may be modified by the conservator at any time.
The Board oversees risk management primarily through the Risk Policy and Capital Committee. FHFA regulations set forth risk management requirements for our Board and our Risk Policy and Capital Committee, as described below, which we meet. These regulations require that our Board of Directors approve, have in effect at all times, and periodically review an enterprise-wide risk management program that establishes and is aligned with our risk appetite, aligns the risk appetite with our strategies and objectives, and addresses our exposure to credit risk, market risk, liquidity risk, business risk and operational risk. Our risk management program must include risk limitations appropriate to each line of business, appropriate policies and procedures relating to risk management governance, risk oversight infrastructure, and processes and systems for identifying and reporting risks, including emerging risks. Our program must also contain provisions for monitoring compliance with our risk limit structure and risk policies and effective and timely implementation of corrective actions. Additional provisions must specify management’s authority and independence to carry out risk management responsibilities and the integration of risk management with management’s goals and compensation structure. FHFA’s regulations require our Risk Policy and Capital Committee to assist the Board in carrying out its oversight of our risk management program. Our Risk Policy and Capital Committee must also:
•
be chaired by a director not serving Fannie Mae in a management capacity;
•
have at least one member with risk management experience that is commensurate with our capital structure, risk appetite, complexity, activities, size and other appropriate risk-related factors;
•
have committee members with a practical understanding of risk management principles and practices relevant to Fannie Mae;
•
fully document its meetings; and
•
report directly to the Board and not as part of, or combined with, another committee.
For more information on the role of our Board and our Chief Risk Officer in risk oversight, see “MD&A—Risk Management.”
Corporate Governance Information, Committee Charters and Codes of Conduct
Our Corporate Governance Guidelines, as well as the charters for our Board’s Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee, Risk Policy and Capital Committee, and Strategic Initiatives and Technology Committee, are posted on our website, www.fanniemae.com, under “Governance” in the “About Us” section of our website. Our Executive Committee does not have a written charter. The responsibilities, duties and authorities of the Executive Committee are set forth in our bylaws, which are also posted on our website, www.fanniemae.com, under “Governance” in the “About Us” section of our website.
We have a Code of Conduct that is applicable to all officers and employees and a Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors. Our Code of Conduct also serves as the code of ethics for our Chief Executive Officer and senior financial officers required by the Sarbanes-Oxley Act of 2002 and implementing regulations of the SEC. We have posted these codes on our website, www.fanniemae.com, under “Governance” in the “About Us” section of our website. We intend to disclose any changes to or waivers from these codes that apply to any of our executive officers or directors by posting this information on our website.
Although our equity securities are no longer listed on the New York Stock Exchange (“NYSE”), we are required by FHFA’s corporate governance regulations to follow specified NYSE corporate governance requirements relating to, among other things, the independence of our Board members and the charters, independence, composition, expertise, duties and other requirements of our Board Committees.

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Audit Committee Membership
Our Board has a standing Audit Committee consisting of Mr. Herz, who is the Chair, Mr. Frater, Mr. Heid and Ms. Nordin, all of whom are independent under the requirements of independence set forth in FHFA’s corporate governance regulations (which requires the standard of independence adopted by the NYSE), Fannie Mae’s Corporate Governance Guidelines and other SEC rules and regulations applicable to audit committees. The Board has determined that Mr. Herz, Mr. Frater, Mr. Heid and Ms. Nordin each have the requisite experience, as discussed in “Directors,” to qualify as an “audit committee financial expert” under the rules and regulations of the SEC and has designated each of them as such.
Executive Sessions
Our non-management directors meet regularly in executive sessions without management present. Our Board of Directors reserves time for executive sessions at every regularly scheduled Board meeting. The non-executive Chairman of the Board, Mr. Perry, presides over these sessions.
Communications with Directors or the Audit Committee
Interested parties wishing to communicate any concerns or questions about Fannie Mae to the non-executive Chairman of the Board or to our non-management directors individually or as a group may do so by electronic mail addressed to “board@fanniemae.com,” or by U.S. mail addressed to Board of Directors, c/o Office of the Corporate Secretary, Fannie Mae, Mail Stop 1H-2S/05, 3900 Wisconsin Avenue NW, Washington, DC 20016-2892. Communications may be addressed to a specific director or directors, including Mr. Perry, the Chairman of the Board, or to groups of directors, such as the independent or non-management directors.
Interested parties wishing to communicate with the Audit Committee regarding accounting, internal accounting controls or auditing matters may do so by electronic mail addressed to “auditcommittee@fanniemae.com,” or by U.S. mail addressed to Audit Committee, c/o Office of the Corporate Secretary, Fannie Mae, Mail Stop 1H-2S/05, 3900 Wisconsin Avenue NW, Washington, DC 20016-2892.
The Office of the Corporate Secretary is responsible for processing all communications to a director or directors. Communications that are deemed by the Office of the Corporate Secretary to be commercial solicitations, ordinary course customer inquiries or complaints, incoherent or obscene are not forwarded to directors.
Director Nominations; Shareholder Proposals
Under the GSE Act, FHFA, as conservator, has all rights, titles, powers and privileges of the shareholders and Board of Directors of Fannie Mae. As a result, Fannie Mae’s common shareholders no longer have the ability to recommend director nominees or elect the directors of Fannie Mae or bring business before any meeting of shareholders pursuant to the procedures in our bylaws. We currently do not plan to hold an annual meeting of shareholders in 2017. For more information on the conservatorship, refer to “Business—Conservatorship and Treasury Agreements—Conservatorship.”
Executive Officers
Our current executive officers who are not also members of the Board of Directors are listed below. They have provided the following information about their principal occupation, business experience and other matters.
David C. Benson, 57, has been Executive Vice President and Chief Financial Officer since April 2013. Mr. Benson previously served as Executive Vice President—Capital Markets, Securitization & Corporate Strategy from September 2012 to April 2013 and as Executive Vice President—Capital Markets from April 2009 to September 2012. He also served as Treasurer from June 2010 to January 2012. Mr. Benson previously served as Fannie Mae’s Executive Vice President—Capital Markets and Treasury from August 2008 to April 2009, as Fannie Mae’s Senior Vice President and Treasurer from March 2006 to August 2008, and as Fannie Mae’s Vice President and Assistant Treasurer from June 2002 to February 2006. Prior to joining Fannie Mae in 2002, Mr. Benson was Managing Director in the fixed income division of Merrill Lynch & Co. From 1988 through 2002, he served in several capacities at Merrill Lynch in the areas of risk management, trading, debt syndication and e-commerce based in New York and London.
Andrew J. Bon Salle, 51, has been Executive Vice President—Single-Family Mortgage Business since December 2014. Prior to that time, he served as Executive Vice President—Single-Family Underwriting, Pricing,

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and Capital Markets, from April 2013 to December 2014. Mr. Bon Salle previously served as Fannie Mae’s Senior Vice President and Head of Underwriting and Pricing from May 2011 to April 2013, Senior Vice President—Capital Markets from March 2006 to May 2011, and as Fannie Mae’s Vice President—Portfolio Management from November 2000 to February 2006. Mr. Bon Salle held the positions of Director, Finance from December 1996 to November 2000 and of Manager, Early Funding Programs from March 1994 to December 1996. Mr. Bon Salle joined Fannie Mae in September 1992 as a senior capital markets analyst.
Brian P. Brooks, 47, has been Executive Vice President, General Counsel and Corporate Secretary since November 2014. Prior to joining Fannie Mae, Mr. Brooks was Vice Chairman of OneWest Bank N.A., from May 2011 to November 2014, where he served as chief legal officer. Previously, Mr. Brooks was a partner at the law firm of O’Melveny & Myers LLP, where he served from February 2008 through January 2011 as managing partner of the Washington, D.C. office and from February 2010 through April 2011 as group leader of the firm’s financial services practice.
Joy C. Cianci, 54, has been Senior Vice President for Special Assets & Corporate Facilities, Security and Resiliency since November 2016. Ms. Cianci has served in various roles at Fannie Mae for over 20 years. She served as Senior Vice President of Credit Portfolio Management from September 2014 to November 2016, as Senior Vice President—Making Home Affordable and Foreclosure Prevention from September 2012 to September 2014 and as Senior Vice President—Making Home Affordable from June 2010 to September 2012. Ms. Cianci was Senior Vice President—Giving and Community Outreach from December 2009 to June 2010, having previously served as Vice President in Fannie Mae’s Office of Community & Charitable Giving, from July 2007 to December 2009, and as Vice President in Fannie Mae’s Housing and Community Development division, from April 2006 to July 2007. Ms. Cianci served as Vice President in various roles in our Single-Family division and in our former eBusiness division, from January 2004 to April 2006. Prior to that time, she served as a Director in our eBusiness division and in our Legal Division. Ms. Cianci joined Fannie Mae in June 1993 as counsel.
Jeffery R. Hayward, 60, Executive Vice President and Head of Multifamily, has served as Head of Multifamily since January 2012, first as Senior Vice President and, since December 2014, as Executive Vice President. Mr. Hayward has served in various roles at Fannie Mae for over 25 years. He previously served as Fannie Mae’s Senior Vice President—National Servicing Organization from April 2010 to January 2012. He also served as Senior Vice President of Community Lending in Fannie Mae’s Multifamily division from May 2004 to April 2010. Prior to that time, Mr. Hayward served as both a Senior Vice President and a Vice President in Fannie Mae’s Single-Family division, including as Senior Vice President in the National Business Center from November 2001 to May 2004, as Vice President for Single-Family Business Strategy from November 1999 to November 2001, as Vice President for Asset Management Services from August 1998 to November 1999 and as Vice President for Quality Control and Operations from January 1996 to August 1998. Mr. Hayward also served as Vice President for Risk Management from June 1993 to January 1996. Before that, he served as Director, Loan Acquisition from October 1992 to June 1993, as Director, Marketing from December 1989 to September 1992, and as Senior Negotiator from July 1988 to December 1989. Mr. Hayward joined the company in April 1987 as a senior MBS representative.
Kimberly Johnson, 44, Executive Vice President and Chief Risk Officer, has served as Chief Risk Officer since November 2015, first as Senior Vice President and, since January 2017, as Executive Vice President. She served as Senior Vice President and Deputy Chief Risk Officer from June 2013 to November 2015. Ms. Johnson served in Fannie Mae’s Multifamily business as Senior Vice President for loans, securities, credit pricing and modeling, and as Vice President in our Capital Markets group with responsibility for trading multifamily loans and securities from September 2009 to June 2013. Prior to that time, Ms. Johnson was responsible for Metrics and Reporting for the Making Home Affordable Program, from March 2009 to September 2009. Ms. Johnson joined Fannie Mae in May 2006 as a Vice President in Capital Markets.
Bruce R. Lee, 51, has been Senior Vice President and Head of Operations and Technology since January 2016. Mr. Lee previously served as Senior Vice President and Chief Information Officer from April 2014, when he joined Fannie Mae, to January 2016. Before joining Fannie Mae, Mr. Lee was Group Chief Information Officer for NYSE Euronext, overseeing technology in the exchange traded securities sector, from 2012 to 2014. From 2006 to 2012, he worked in HSBC’s investment banking and trading business in Canada, the U.S., and Latin America, where he served as Chief Operating Officer.
Under our bylaws, each executive officer holds office until his or her successor is chosen and qualified or until he or she dies, resigns, retires or is removed from office, whichever occurs first.

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Section 16(a) Beneficial Ownership Reporting Compliance
Our directors and officers file with the SEC reports on their ownership of our stock and on changes in their stock ownership. Based on a review of forms filed during 2016 or with respect to 2016 and on written representations from our directors and officers, we believe that all of our directors and officers timely filed all required reports and reported all transactions reportable during 2016.
Item 11. Executive Compensation
Compensation Discussion and Analysis
Named Executives for 2016
This Compensation Discussion and Analysis focuses on compensation decisions relating to our Chief Executive Officer, our Chief Financial Officer, and our next three most highly compensated executive officers during 2016. We refer to these individuals as our named executives, and to our compensation arrangements for 2016 with our named executives other than our Chief Executive Officer as the “2016 executive compensation program.” For 2016, our named executives were:
•
Timothy J. Mayopoulos, President and Chief Executive Officer;
•
David C. Benson, Executive Vice President and Chief Financial Officer;
•
Andrew J. Bon Salle, Executive Vice President—Single-Family Mortgage Business;
•
Brian P. Brooks, Executive Vice President, General Counsel and Corporate Secretary; and
•
Jeffery R. Hayward, Executive Vice President and Head of Multifamily.
This Compensation Discussion and Analysis addresses our executive compensation program that was in effect for 2016.
Executive Summary
Due to our conservatorship status and other legal requirements, FHFA, our conservator and regulator, has significant oversight and approval rights over our executive compensation arrangements and determinations. Congress has also enacted legislation since we entered into conservatorship that significantly impacts the compensation we pay our named executives.
Under the Equity in Government Compensation Act of 2015, the total target direct compensation for the position of chief executive officer is limited to $600,000 annually. This restriction applies as long as we are in conservatorship or receivership. As a result, total target direct compensation for our Chief Executive Officer, Mr. Mayopoulos, is $600,000, which consists solely of base salary.
The program in place for 2016 executive compensation for our other executives was developed by FHFA in consultation with Treasury in 2012 and has not changed substantially since then. Named executives other than our Chief Executive Officer receive two principal elements of compensation: base salary and deferred salary, which is paid after a one-year deferral. There are two components to deferred salary: a fixed portion that is subject to reduction if an executive leaves the company before payment and an at-risk portion that is subject to reduction based on corporate and individual performance. Named executives do not receive bonuses or any form of equity or performance-based long-term incentives.
While reducing pay levels to conserve taxpayer resources was an important objective of FHFA’s redesign of our executive compensation program in 2012, we and FHFA understand that this objective must be balanced against our need to attract and retain able and experienced executives to prudently manage our $3.1 trillion book of business and enable the company to be an effective steward of taxpayer resources.
2016 was a successful year for Fannie Mae. Under the leadership of our experienced executives, including our named executives, we recognized net income of $12.3 billion in 2016. In addition, and as discussed in “Determination of 2016 Compensation,” we achieved many milestones and accomplishments as we strived to be America’s most valued housing partner.

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We completed or substantially completed all of the corporate performance against goals for 2016 set by the conservator, referred to as the 2016 conservatorship scorecard. In January 2017, FHFA determined that the portion of 2016 at-risk deferred salary subject to performance against these goals would be paid at 98% of target. The goals in the 2016 conservatorship scorecard related to the following objectives:
•
Maintain in a safe and sound manner, credit availability and foreclosure prevention activities for new and refinanced mortgages to foster liquid, efficient, competitive, and resilient national housing finance markets;
•
Reduce taxpayer risk through increasing the role of private capital in the mortgage market; and
•
Build a new single-family infrastructure for use by Fannie Mae and Freddie Mac (the “Enterprises”) and adaptable for use by other participants in the secondary market in the future.
We also completed, in all material respects, each of the goals established by our Board of Directors, referred to as the 2016 Board of Directors’ goals, in a manner that the Board of Directors viewed as responsible, timely and of an exceptionally high quality. Based on its January 2017 assessment of the company’s performance, the Compensation Committee recommended and the Board of Directors determined that management should be credited with 100% performance of the goals. The 2016 Board of Directors’ goals were:
•
Sustain and grow partnerships with lenders and other key housing stakeholders;
•
Serve the market by providing products and services that help people own, rent, or stay in their homes;
•
Establish a more sustainable and reliable business model with lower risk to the housing finance system and to taxpayers;
•
Maintain a disciplined risk, control, and compliance environment;
•
Develop an effective, adaptive, and agile organization.
Chief Executive Officer Compensation and 2016 Executive Compensation Program
Overview
FHFA has advised us that the design of our executive compensation program was intended to fulfill, and to balance, three primary objectives:
•
Maintain Reduced Pay Levels to Conserve Taxpayer Resources. Given our conservatorship status, our executive compensation program is designed to reduce pay levels relative to firms that are not in conservatorship.
•
Attract and Retain Executive Talent. The 2016 executive compensation program is intended to attract and retain executive talent with the specialized skills and knowledge necessary to effectively manage a large financial services company. Executives with these qualifications are needed for the company to continue to fulfill its important role in providing liquidity to the mortgage market and supporting the housing market, as well as to prudently manage our $3.1 trillion book of business and enable the company to be an effective steward of the government’s and taxpayers’ support. We face competition from both within the financial services industry and from businesses outside of this industry for qualified executives. The Compensation Committee and the Board of Directors regularly consider and discuss with FHFA the level of our executives’ compensation and whether changes are needed to attract and retain executives.
•
Reduce Pay if Goals Are Not Achieved. To support FHFA’s goals for our conservatorship and encourage performance in furtherance of these goals, 30% of each named executive’s total target direct compensation (other than the Chief Executive Officer’s compensation) consists of “at-risk” deferred salary. At-risk deferred salary is subject to reduction based on corporate performance against the conservatorship scorecard and an assessment of individual performance that takes into account the company’s performance against the Board of Directors’ goals.
Our current executive compensation levels put pressure on our ability to attract and retain executive talent. As discussed in “Other Executive Compensation Considerations—Comparator Group and Role of Benchmark Data,” our Chief Executive Officer’s compensation in 2016 was more than 90% below the market median for comparable firms, and our other named executives’ total target direct compensation under the 2016 executive compensation program was, in aggregate, substantially below the market median. Our inability to offer market-based compensation hinders our succession planning, particularly for our Chief Executive Officer role, and potentially

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our ability to hire other senior executives. See “Risk Factors” for a discussion of the risks associated with executive retention and succession planning.
Impact of Conservatorship and Other Legal Requirements
The conservatorship and legislation enacted since we entered conservatorship in 2008 significantly impacts the compensation we pay our named executives, particularly our Chief Executive Officer, as well as the process by which our executives’ compensation is determined. Regulatory and other legal requirements affecting our executive compensation program and policies include the following:
•
Requirements applicable while we are under conservatorship:
◦
The Equity in Government Compensation Act of 2015 establishes the annual direct compensation for our chief executive officer position at $600,000, consisting solely of base salary. The law also provides that compensation and benefits for our chief executive officer position may not be increased and these restrictions are applicable as long as Fannie Mae is in conservatorship or receivership. 
◦
Pursuant to the STOCK Act and related regulations issued by FHFA, the named executives are prohibited from receiving bonuses during any period of conservatorship on or after the 2012 enactment of the law.
◦
As our conservator, FHFA has retained the authority to approve and to modify both the terms and amount of any executive compensation. FHFA has directed that management consult with and obtain FHFA’s written approval before entering into new compensation arrangements or increasing amounts or benefits payable under existing compensation arrangements of executives at the senior vice president level and above, and other executives as FHFA may deem necessary to successfully execute its role as conservator. FHFA has also directed that management consult with and obtain FHFA’s written approval before establishing or modifying performance management processes for executives at the senior vice president level and above and any executives designated as “officers” pursuant to Section 16 of the Exchange Act.
◦
As our conservator, FHFA, has all powers of our shareholders. Accordingly, we have not held shareholders’ meetings since entering into conservatorship, nor have we held any shareholder advisory votes on executive compensation.
•
Requirements under the terms of our senior preferred stock purchase agreement with Treasury:
◦
We may not enter into any new compensation arrangements with, or increase amounts or benefits payable under existing compensation arrangements of, any named executives or executive officers without the consent of the Director of FHFA, in consultation with the Secretary of the Treasury.
◦
We may not sell or issue any equity securities without the prior written consent of Treasury, other than as required by the terms of any binding agreement in effect on the date of the senior preferred stock purchase agreement. This effectively eliminates our ability to offer stock-based compensation.
•
As our regulator, FHFA must approve any termination benefits we offer to our named executives and certain other officers identified by FHFA.
Compensation of our Chief Executive Officer
Our Chief Executive Officer’s compensation consists solely of a base salary of $600,000 and has been limited to this amount by statute since the enactment of the Equity in Government Compensation Act of 2015. This limit on Chief Executive Officer compensation may negatively affect our ability to retain our Chief Executive Officer and limits our ability to engage in effective succession planning for this critical role.


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Elements of 2016 Executive Compensation Program
Direct Compensation
The table below summarizes the principal elements, objectives and key features of our 2016 executive compensation program for our named executives. Our Chief Executive Officer receives only base salary, not deferred salary. All elements of our named executives’ direct compensation are paid in cash.
Compensation
Element
Form
Primary
Compensation Objectives
Key Features
Base Salary
Fixed cash payments, which are paid during the year on a bi-weekly basis.
Attract and retain named executives by providing a fixed level of current cash compensation.
Base salary reflects each named executive’s level of responsibility and experience, as well as individual performance over time. 
Base salary is capped by statute at $600,000 for our Chief Executive Officer, and by FHFA at $600,000 for our current Chief Financial Officer and at $500,000 for our other executive officers.
Deferred Salary
Deferred salary is earned in bi-weekly increments over the course of the performance year, and is paid in quarterly installments in March, June, September and December of the following year. Interest accrues on deferred salary at one-half of the one-year Treasury Bill rate in effect on the last business day immediately preceding the year in which the deferred salary is earned.
There are two elements of deferred salary:
• a fixed portion that is subject to reduction if an executive leaves the company within one year following the end of the performance year; and
• an at-risk portion that is subject to reduction based on assessments of corporate and individual performance following the end of the performance year. 
Fixed Deferred Salary
Retain named executives.
Earned but unpaid fixed deferred salary is subject to reduction if a named executive leaves the company within one year following the end of the performance year. The amount of earned but unpaid fixed deferred salary received by the named executive will be reduced by 2% for each full or partial month by which the executive’s separation date precedes January 31 of the second year following the performance year (or, if later, the end of the twenty-fourth month following the month in which the named executive first earns deferred salary).

The reduction provisions applicable to payments of earned but unpaid fixed deferred salary do not apply if an officer’s employment terminates other than for cause at or after age 62, or age 55 with 10 years of service with Fannie Mae.
At-Risk Deferred Salary
Retain named executives and encourage them to achieve corporate and individual performance objectives.
Equal to 30% of each named executive’s total target direct compensation. Half of at-risk deferred salary was subject to reduction based on corporate performance against the 2016 conservatorship scorecard as determined by FHFA. The remaining half of at-risk deferred salary was subject to reduction based on individual performance as determined by the Board of Directors, with FHFA’s review, taking into account corporate performance against the 2016 Board of Directors’ goals.

There is no potential for at-risk deferred salary to be paid out at greater than 100% of target; at-risk deferred salary is subject only to reduction. 

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Employee Benefits
Our employee benefits serve as an important tool in attracting and retaining senior executives. We describe the employee benefits available in 2016 to our named executives in the table below. All of our named executives are eligible to participate in the plans and receive the other benefits described in the table below. We provide more detail on our retirement plans in “Compensation Tables.”
Benefit
Form
Primary Objective
401(k) Plan (“Retirement Savings Plan”)
A tax-qualified defined contribution plan (401(k) plan) available to our employee population as a whole.
Attract and retain named executives by providing retirement savings in a tax-efficient manner.
Non-qualified Deferred Compensation (“Supplemental
Retirement Savings Plan”)
The Supplemental Retirement Savings Plan is an unfunded, non-tax-qualified defined contribution plan. The plan supplements our tax-qualified defined contribution plan by providing benefits to participants whose annual eligible earnings exceed the IRS limit on eligible compensation for 401(k) plans.
Attract and retain named executives by providing additional retirement savings.
Health, Welfare and Other Benefits
In general, the named executives are eligible for the same benefits available to our employee population as a whole, including our medical insurance plans, life insurance program and matching charitable gifts program. The named executives are also eligible to participate in our voluntary supplemental long-term disability plan, which is available to many of our employees.
Provide for the well-being of the named executive and his or her family.
In connection with our termination in 2013 of our defined benefit pension plan, for a limited time we are providing additional benefits under our Retirement Savings Plan and our Supplemental Retirement Savings Plan for employees close to retirement who meet age and length of service criteria, including Mr. Benson and Mr. Hayward. These benefits are described in “Compensation Tables.”
The perquisites we provided to all of our named executives in aggregate in 2016 did not exceed $1,000.
Severance Benefits
We have not entered into agreements with any of our named executives that entitle the executive to severance benefits. Under the 2016 executive compensation program, a named executive is entitled to receive a specified portion of his or her earned but unpaid deferred salary if his or her employment is terminated for any reason other than for cause. See “Compensation Tables—Potential Payments Upon Termination or Change-in-Control” for information on compensation that we may pay to a named executive in certain circumstances in the event the executive’s employment is terminated.

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Determination of 2016 Compensation
Summary of 2016 Compensation Actions
The table below displays the 2016 base salary and compensation targets for each of our named executives. Each of our named executives will be paid 98% of his corporate performance-based at-risk deferred salary target and 100% of his individual performance-based at-risk deferred salary target for 2016. This table is presented on a different basis from, and is not intended to replace, the Summary Compensation Table required under applicable SEC rules, which is included below under “Compensation Tables—Summary Compensation Table for 2016, 2015 and 2014.”
Named Executive
 
2016 Base Salary ($)
 
2016 Fixed Deferred Salary ($)
 
2016 Corporate Performance-Based At-Risk Deferred Salary Target ($)
 
2016 Individual Performance-Based At-Risk Deferred Salary Target ($)
 
Total ($)
 
 
(Dollars in whole numbers)
Timothy Mayopoulos
 
600,000

 
—

 
—

 
—

 
600,000

President and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
David Benson
 
600,000

 
1,500,000

 
450,000

 
450,000

 
3,000,000

Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
Andrew Bon Salle(1)
 
500,000

 
1,287,692

 
383,077

 
383,077

 
2,553,846

Executive Vice President—Single-Family Mortgage Business
 
 
 
 
 
 
 
 
 
 
Brian Brooks
 
500,000

 
1,180,000

 
360,000

 
360,000

 
2,400,000

Executive Vice President, General Counsel and Corporate Secretary
 
 
 
 
 
 
 
 
 
 
Jeffery Hayward
 
475,000

 
960,000

 
307,500

 
307,500

 
2,050,000

Executive Vice President and Head of Multifamily
 
 
 
 
 
 
 
 
 
 
__________
(1) 
Amounts shown for Mr. Bon Salle reflect that, in light of his increased responsibilities, in February 2016 the annual rate of Mr. Bon Salle’s fixed deferred salary was increased from $1,110,000 to $1,320,000 and the annual target for his at-risk deferred salary was increased from $690,000 to $780,000.
Assessment of Corporate Performance on 2016 Conservatorship Scorecard
Overview
In December 2015, FHFA issued the 2016 conservatorship scorecard, a set of corporate performance objectives and related targets for 2016. The elements of the 2016 conservatorship scorecard are shown below under “FHFA Assessment.” The 2016 conservatorship scorecard provides the implementation roadmap for that year for FHFA’s strategic plan for Fannie Mae and Freddie Mac. See “Business—Legislation and Regulation—Housing Finance Reform—Conservator Developments and Strategic Goals” for information about FHFA’s strategic goals for Fannie Mae and Freddie Mac. FHFA developed these objectives and related targets with input from management. Half of 2016 at-risk deferred salary, or 15% of overall 2016 total target direct compensation for each named executive other than Mr. Mayopoulos, was subject to reduction based on FHFA’s assessment of our performance against the 2016 conservatorship scorecard and related objectives.
As part of the 2016 conservatorship scorecard, FHFA determined that, for all scorecard items, our performance would be assessed based on the following criteria:
•
The extent to which we conduct initiatives in a safe and sound manner consistent with FHFA’s expectations for all activities;
•
The extent to which the outcomes of our activities support a competitive and resilient secondary mortgage market to support homeowners and renters;
•
The extent to which we conduct initiatives with the consideration for diversity and inclusion consistent with FHFA’s expectations for all activities;

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•
Cooperation and collaboration with FHFA, Common Securitization Solutions, LLC, Freddie Mac, the industry, and other stakeholders; and
•
The quality, thoroughness, creativity, effectiveness, and timeliness of our work products.
FHFA Assessment
We provided updates to and maintained a dialogue with FHFA throughout 2016 on our performance against the 2016 conservatorship scorecard, including our performance against FHFA’s expectations for diversity and inclusion. In early 2017, FHFA reviewed and assessed our performance against the 2016 conservatorship scorecard, with input from management and the Compensation Committee. FHFA determined that we completed or substantially completed all of the 2016 conservatorship scorecard objectives. FHFA determined that the portion of 2016 at-risk deferred salary based on corporate-performance would be paid at 98% of target.

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The table below sets forth the 2016 conservatorship scorecard and a summary of FHFA’s assessment of our achievement of the scorecard objectives and targets.
Objectives and Weighting
Summary of Performance
Maintain, in a safe and sound manner, credit availability and foreclosure prevention activities for new and refinanced mortgages to foster liquid, efficient, competitive, and resilient national housing finance markets—40% weight
The Enterprises are to:
Work to increase access to single-family mortgage credit for creditworthy borrowers, consistent with the full extent of applicable credit requirements and risk management practices:
•
Continue to assess impediments to credit access and develop recommendations to address barriers, including work to:
◦
Continue to evaluate practices, including underwriting criteria, to improve access to single-family credit in a manner consistent with safety and soundness and implement improvements as appropriate.
◦
Consider options to use automated underwriting systems for loans that are currently manually underwritten.
◦
Evaluate options that would enable greater liquidity for Enterprise financing of energy or water efficiency investments in single-family and multifamily properties.
•
Complete work to enhance the Representation and Warranty Framework and continue work on related efforts to:
◦
Complete the independent dispute resolution process in support of the Representation and Warranty Framework.
◦
Work with lenders to improve the quality and efficiency of the loan origination process, including providing lenders with feedback soon after delivery.
◦
Continue to assess policies and tools to review collateral valuations in the Representation and Warranty Framework context.
•
Update mortgage insurer master policy rescission relief principles to address early rescission relief offerings.
•
Assess improvements identified in 2015 to increase the effectiveness of pre-purchase and early delinquency counseling as well as homeownership education and begin implementation of initiatives as appropriate.
•
Informed by the analysis conducted in 2015, conclude assessment of leveraging alternate or updated credit scores for underwriting, pricing, and investor disclosures and, as appropriate, plan for implementation.
The objective was completed. Our work in this area during 2016 included the following:
•
We conducted industry outreach to revisit policies, and identify opportunities and enhancements to address barriers. Among the resulting enhancements to our policies and products, we
◦
updated eligibility criteria and streamlined our homeownership education requirements for HomeReady, our affordable lending product,
◦
added the ability in Desktop Underwriter to underwrite loans where the borrower does not have a credit score, automating what was previously a manual process for lenders, and
◦
provided greater clarity and certainty to lenders underwriting properties with leased or purchased solar panels and introduced a loan product designed to help lenders offer financing for homeowners to increase home energy efficiency and reduce utility costs.
•
We conducted extensive outreach and training relating to improving loan origination quality.
•
We introduced our new Day 1 Certainty initiative, under which we began offering third-party validation of borrower income, asset and employment data through Desktop Underwriter. We also leveraged these new verification tools to expand the representation and warranty relief we provide to lenders. We began providing lenders with additional representation and warranty relief with respect to borrower income, asset and employment data that has been validated by Desktop Underwriter and with respect to property value where the appraisal has received a qualifying risk score in our Collateral Underwriter appraisal review tool. These enhancements will provide increased certainty to lenders and processing efficiencies that will save borrowers and lenders time.
•
We updated Desktop Underwriter and our Selling Guide to offer a property inspection waiver for certain refinance transactions that meet specified eligibility criteria.

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Objectives and Weighting
Summary of Performance
Develop post-crisis loss mitigation activities and prepare for the expiration of HAMP and HARP:
•
Complete assessment and, as appropriate, begin development of a high loan-to-value ratio refinance program to ensure a January 2017 implementation.
•
Develop and implement final strategy to promote HARP prior to expiration.
•
Finalize post-crisis loss mitigation options for borrowers, including loan modifications, and develop an implementation plan and timeline.
•
Enhance the Uniform Borrower Assistance Form.
•
Update and enhance the Enterprises’ servicer scorecard methodology.
The objective was completed. Our 2016 post-crisis loss mitigation activities included the following:
•
Coordinating with Freddie Mac, we announced the intention to launch a high LTV refinance option scheduled for late 2017.
•
We continued to promote HARP and increase awareness of its expiration through a variety of outreach efforts.
•
We announced a new modification program, Flex Modification, in December 2016. We developed the new program in alignment with Freddie Mac at the direction of FHFA, and the program incorporates input from a wide range of industry participants as well as lessons learned from earlier modification programs.
Continue to responsibly reduce the number of severely-aged delinquent loans and real estate owned properties:
•
Provide a plan for continuing non-performing loan (NPL) sales to FHFA for approval. The plan should address: 1) the Enterprises’ broad NPL sales strategy; 2) potential expansion to multi-servicer pools; 3) efforts to continue offering small pools and strengthening nonprofit access and purchase opportunities; 4) consideration for improving borrower outcomes and, where appropriate, impacts on neighborhood stabilization; and 5) public reporting of loan performance post sale.
•
Continue to responsibly reduce the number of severely-aged delinquent loans held by the Enterprises at the national and local level.
•
Continue to responsibly reduce the number of real estate owned properties held by the Enterprises, including through the Neighborhood Stabilization Initiative.
The objective was completed. We accomplished the following in 2016:
•
We sold approximately 29,600 nonperforming loans with an aggregate unpaid principal balance of $5.5 billion.
•
We reduced the number of single-family REO properties we hold by over 30% during 2016. We discuss our objectives in disposing of properties and our commitment to neighborhood stabilization in “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—REO Management.”
Maintain the dollar volume of new multifamily business for each enterprise at $36.5* billion or below:
•
Loans in affordable and underserved market segments, as defined in the Appendix, are to be excluded from the $36.5 billion cap
*The $31 billion cap in the initial version of the conservatorship scorecard was revised upward on two occasions, consistent with FHFA’s scorecard commitment to review the estimates for the size of the multifamily finance market each quarter and increase the caps, if warranted.
The objective was completed. Fannie Mae’s multifamily new business volume totaled $55.3 billion in 2016, of which approximately 66% counted towards FHFA’s 2016 multifamily volume cap of $36.5 billion.

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Objectives and Weighting
Summary of Performance
Reduce taxpayer risk through increasing the role of private capital in the mortgage market—30% weight
The Enterprises are to:
Single-Family Credit Risk Transfers:
Because the Enterprises’ single-family credit risk transfers have evolved into a core business practice, it is FHFA’s current expectation that single-family credit risk transfers will continue to be an ongoing conservatorship requirement. FHFA will adjust targets as necessary to reflect market conditions and economic considerations.
•
Meet the following credit risk transfer objectives:
◦
Transfer credit risk on at least 90 percent of the unpaid principal balance of newly acquired single-family mortgages in loan categories targeted for risk transfer.
▪
For 2016, target single-family loan categories include: non-HARP, fixed-rate terms greater than 20 years, and loan-to-value ratios above 60%.
◦
Transfer a substantial portion of the credit risk on the targeted loan categories covering most of the credit losses projected to occur during stressful economic scenarios.
◦
Continue efforts to evaluate, and implement if economically feasible, ways to transfer credit risk on other types of newly acquired single-family mortgages that are not included in the targeted loan categories.
◦
Continue to evaluate obstacles to expanding the investor base, propose ways to overcome these challenges, and work with FHFA to address them where possible.
•
Work with FHFA to conduct an analysis and assessment of front-end credit risk transfer transactions, including work to support a forthcoming FHFA Request for Input.
◦
Work with FHFA to engage key stakeholders and solicit their feedback.
◦
After conducting the necessary analysis and assessment, work with FHFA to take appropriate steps to continue front-end credit risk transfer transactions.
The objective was completed. In 2016, we transferred a portion of the mortgage credit risk on single-family mortgages with an unpaid principal balance of over $330 billion at the time of the transactions.
Of the loans we acquired in the twelve months ended December 2015 that were in the categories we target for inclusion in CAS or CIRT transactions, over 95% were included in a subsequent credit risk transfer transaction.
We completed a CIRT transaction that covered 15-year and 20-year fixed rate mortgages, which are not included in the loan categories we target for transfer.
We also announced a new pilot front-end CIRT transaction, in which the insurance coverage was committed prior to our acquisition of the covered loans and therefore was effective as soon as the loans were acquired.
For further discussion of our credit risk transfer transactions, see “MD&A—Business Segment Results—Single-Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk—Credit Risk-Sharing Transactions.”
Multifamily Credit Risk Transfers:
•
Continue current multifamily credit risk transfer initiatives and explore additional risk transfer opportunities.
The objective was completed.
Retained Portfolio:
•
Execute FHFA-approved retained portfolio plans to meet, even under adverse conditions, the annual PSPA requirements and the $250 billion PSPA cap by December 31, 2018:
◦
Any sales should be commercially reasonable transactions that consider impacts to the market, borrowers, and neighborhood stability.
The objective was completed. In 2016 we continued to reduce our retained mortgage portfolio in accordance with requirements under our senior preferred stock purchase agreement with Treasury and FHFA’s additional cap, which we describe in “Business—Conservatorship and Treasury Agreements—Treasury Agreements.” During 2016, we reduced our retained mortgage portfolio to $272.4 billion as of December 31, 2016, below the $305.4 billion cap requested by FHFA for our retained mortgage portfolio as of December 31, 2016.
Risk Measurement Framework:
•
Support FHFA’s development of its risk measurement framework for evaluating Enterprise business decisions during conservatorship.
The objective was completed. We provided data and analysis and developed reporting in support of FHFA’s development of its risk measurement framework.

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Objectives and Weighting
Summary of Performance
Build a new single-family infrastructure for use by the Enterprises and adaptable for use by other participants in the secondary market in the future—30% weight
The Enterprises are to:
Common Securitization Platform and Single Security:
The Common Securitization Platform (CSP) and Single Security are significant, multiyear initiatives, and FHFA expects these inter-related projects to remain ongoing conservatorship priorities. FHFA expects the Enterprises and Common Securitization Solutions, LLC (CSS) to implement these initiatives on the following timeline:
i.
Release 1: In 2016, implement the CSP for Freddie Mac’s existing single-class securities; and
ii.
Release 2: In 2018, implement the Single Security on the CSP for both Fannie Mae and Freddie Mac.
•
Continue working with FHFA, each other, and CSS to meet the Release 1 and Release 2 timelines, which includes work to: 1) build and test the CSP; 2) implement the changes necessary to integrate the Enterprises’ related systems and operations with the CSP; and 3) implement the Single Security on the CSP for both Enterprises.
•
Incorporate the following design principles in developing the CSP:
◦
Focus on the functions necessary for current Enterprise single-family securitization activities.
◦
Include the development of operational and system capabilities necessary for CSP to facilitate the issuance and administration of a Single Security for the Enterprises.
◦
Allow for the integration of additional market participants in the future.
•
In 2016, publish an aligned timeline for implementing the Single Security on the CSP for both Enterprises in 2018. The timeline must provide stakeholders with at least 12 months notice prior to implementing the Single Security.
•
Work with FHFA to develop and implement a process at each Enterprise to:
◦
Assess new or revised Enterprise programs, policies, and practices for their effects on the cash flows of TBA mortgage-backed securities (e.g., prepayments and loan buy-outs).
◦
Provide on-going monitoring of purchases, security issuances, and prepayments.
◦
Provide all relevant information on a timely basis to support FHFA’s review process.
•
Continue to work with CSS to obtain and utilize input from the Single Security/CSP Industry Advisory Group.
The objective was substantially completed. We achieved all but one of the objectives relating to the common securitization platform and single security.
Although the publication of a timeline for the single security implementation was not completed in 2016, significant work was done and many objectives were achieved. FHFA acknowledged Fannie Mae’s proactive support of CSS and close work with Freddie Mac.
See “Business—Legislation and Regulation—Housing Finance Reform—Conservator Developments and Strategic Goals” for more information on the common securitization platform and single security.






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Objectives and Weighting
Summary of Performance
Provide Active Support for Mortgage Data Standardization Initiatives:
•
Continue the development and implementation of the Uniform Closing Disclosure Dataset.
•
Continue the development and implementation of the Uniform Loan Application Dataset.
•
Assess and, as appropriate, implement strategies to improve the lending industry’s ability to originate and deliver e-mortgages to the Enterprises.
The objective was completed. We continued to support these mortgage data standardization initiatives in 2016, which are designed to improve the accuracy and quality of loan data through the mortgage lifecycle. Our activities included:
•
extensive industry outreach to assist lenders and technology solution providers with implementing the Uniform Closing Dataset; and designing, building and launching an easy to use solution for collecting Uniform Closing Dataset data;
•
usability testing and outreach in support of the redesign of the Uniform Residential Loan Application (“URLA”) in connection with implementation of the Uniform Loan Application Dataset (“ULAD”); continued collaboration with government agencies to finalize the redesigned URLA; with Freddie Mac, publication of the redesigned URLA, a ULAD mapping document and a Desktop Underwriter data specification to help lenders, technology solution providers, and other industry participants with implementation of ULAD; and
•
identification of key obstacles and barriers to eMortgage adoption; extensive industry outreach with key lenders, technology solution providers and other stakeholders to support the removal of these obstacles and barriers; and analysis of and discussions with Freddie Mac regarding alignment of policies and procedures and implementation of other activities in support of eMortgages.
Assessment by Board of Directors of Company Performance
In January 2016, the Board of Directors established the 2016 Board of Directors’ goals, which are presented in the table below. Performance against these goals was a factor the Board of Directors considered in determining the individual performance of the named executives for purposes of the individual performance-based component of the named executives’ 2016 at-risk deferred salary. The Board of Directors did not assign any relative weight to the goals.
Over the course of 2016, management periodically reviewed the 2016 Board of Directors’ goals and maintained a dialogue with the Board of Directors and appropriate committees of the Board of Directors as to management’s performance against these goals.
In late 2016 and early 2017, the Compensation Committee reviewed performance against the 2016 Board of Directors’ goals. In connection with the Compensation Committee’s review, management provided the Compensation Committee with a report assessing management’s performance against the goals, which was reviewed for accuracy by our Internal Audit group. The Compensation Committee also discussed performance against the goals with the Chair of the Board’s Audit Committee and the Chair of its Risk Policy and Capital Committee, as well as with our Chief Audit Executive, our Chief Compliance Officer, and our Chief Risk Officer. The Compensation Committee considered management’s assessment of its performance against the goals and also discussed with the Chief Executive Officer the performance of the company and of each named executive (other than the Chief Executive Officer).
The Compensation Committee noted in its review that management’s achievements with respect to the 2016 Board of Directors’ goals and the 2016 conservatorship scorecard were accomplished in a complicated and evolving operating environment, at a time when management was continuing to implement large-scale organizational changes. These changes included continued implementation of our Way of Working management system, which is based on lean management principles and techniques; our new integrated, customer-facing teams supporting our single-family customers; and the project to relocate our headquarters, while also running the business at an exceptionally high level. The Committee favorably recognized management’s efforts to address any issues with the 2016 Board of Directors’ goals and the 2016 conservatorship scorecard in a thoughtful,

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Executive Compensation | Compensation Discussion and Analysis

collaborative and unified manner. The Committee noted that management proactively identified and resolved problems throughout the year through enhanced communication with the Committee and the Board, as well as FHFA. The Committee also noted management’s continued emphasis on fostering a culture that values ethical conduct and integrity and its focus on strengthening the company’s risk control environment and promoting safety and soundness. The Committee also indicated its view that management achieved a wider and more aspirational range of activities under the 2016 Board of Directors’ Goals and the 2016 conservatorship scorecard than during any prior years of conservatorship, demonstrating an extraordinary level of collaboration and alignment within the company’s senior leadership team.
In January 2017, following its review of management’s and the company’s performance in 2016, and after discussions among all independent members of the Board of Directors, the Compensation Committee recommended and the Board of Directors determined that the individual component of the 2016 at-risk deferred salary should be funded at the 100% level. The Compensation Committee also provided FHFA with its assessment of management’s performance against the 2016 Board of Directors’ goals and its qualitative assessment of management’s performance against the 2016 conservatorship scorecard objectives.
The table below presents our 2016 Board of Directors’ goals, and the assessment of achievement against these goals.
Board of Directors’ Goals
Assessment of Performance
Sustain and grow partnerships with lenders and other key housing stakeholders.
Completed this goal. We took significant steps in 2016 to achieve this goal, focusing on strengthening relationships with current and new customers and providing customers increased certainty of sale, execution and process through multiple initiatives. These included our expansion of the representation and warranty relief we provide to single-family lenders, which we discuss in “MD&A—Business Segment Results—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards—Representation and Warranty Relief,” and enhancements to our Multifamily delegation model aimed at making the origination process more efficient for our lender partners.
Serve the market by providing products and services that help people own, rent, or stay in their homes.
Completed this goal in all material respects. We served as a stable source of liquidity for purchases of homes and financing of multifamily rental housing, as well as for refinancing existing mortgages, providing approximately $637 billion in liquidity to the mortgage market in 2016 through our purchases of loans and guarantees of loans and securities. This liquidity enabled borrowers to complete approximately 1,401,000 single-family mortgage refinancings and approximately 1,122,000 single-family home purchases, and provided financing for approximately 724,000 units of multifamily housing.
While we fell slightly short of our target for multifamily units affordable to families earning at or below 120% of the median income in their area, the Compensation Committee recognized that this shortfall was primarily due to two large transactions early in 2016, including one in Manhattan, where workforce housing is considered to include housing affordable at income levels higher than 120% of the median income in the area.
We also worked to increase access to mortgage credit for creditworthy borrowers consistent with the full extent of our applicable credit requirements and risk management practices. Our acquisitions of loans through our suite of affordable product offerings significantly exceeded our goals. Finally, we provided approximately 103,500 loan workouts in 2016 to help homeowners stay in their homes or otherwise avoid foreclosure.
For more information on these activities, see “Business—Executive Summary—Our Strategy and Business Objectives” and “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring.”

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Board of Directors’ Goals
Assessment of Performance
Establish a more sustainable and reliable business model with lower risk to the housing finance system and to taxpayers.
Completed this goal. We acquired single-family loans with strong credit profiles in 2016. See “MD&A—Business Segments—Single-Family Business—Single-Family Business Metrics” for information on the average charged guaranty fee on our 2016 single-family acquisitions and “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring” for information on the credit profile of our 2016 single-family acquisitions. Our multifamily new business volume also reflected loans with a solid credit profile.
With our transition from being a portfolio-focused business to a guaranty-focused business, guaranty fees continued to account for an increasing portion of our net interest income in 2016. In addition, we transferred a greater portion of the credit risk on our guaranty book of business than in previous years.
We also continued our effort to improve our business efficiency and agility through simplification of our business processes.
Maintain a disciplined risk, control, and compliance environment.
Completed this goal. In 2016, we managed our business within Board-established risk limits, with timely remediation of instances where limits were exceeded and with the Board of Directors’ approval for exceptions. We also resolved all medium and high priority internal audit issues and risk and control matters identified by FHFA within established timeframes or mutually acceptable extensions.
Develop an effective, adaptive, and agile organization.
Completed this goal. Our efforts in 2016 to improve Fannie Mae’s capabilities, infrastructure and efficiency included the following:
•
We accomplished significant progress toward successfully completing a number of top-tier, enterprise-level strategic projects to enhance our infrastructure or efficiency, with safety and soundness in mind. These efforts are aimed at, among other goals, improving our technology infrastructure and simplifying the customer experience.
•
We continued to implement our human capital plan, which is an integrated human resources approach that supports our business and financial priorities from a human capital perspective and focuses on risk mitigation, workforce and talent planning, compensation and benefits, and employee engagement.
•
We continued to implement our Way of Working management system as part of our plan to become America’s most valued housing partner.
•
We also made substantial progress on our workplace strategy initiative in anticipation of our upcoming move to new headquarters in Washington, DC.
Assessment of 2016 Individual Performance
Overview. The Board of Directors assessed the performance of our Chief Executive Officer, who does not receive at-risk deferred salary, with input from the Compensation Committee and from the Chief Executive Officer regarding his accomplishments. The Compensation Committee and the Board of Directors assessed the performance and approved compensation for our other named executives taking into account the Chief Executive Officer’s recommendation and assessment. Half of each named executive’s 2016 at-risk deferred salary was subject to reduction based on individual performance in 2016. Each of our named executives with at-risk deferred salary for 2016 will be paid 100% of his individual performance-based at-risk deferred salary target for 2016 presented in the table above in “Summary of 2016 Compensation Actions.”
Timothy Mayopoulos, President and Chief Executive Officer. In evaluating Mr. Mayopoulos’s 2016 performance, the Board of Directors acknowledged Mr. Mayopoulos’s strong leadership and his significant contributions to Fannie Mae’s numerous 2016 accomplishments, including management’s achievements with respect to the 2016 Board of Directors’ goals and the 2016 conservatorship scorecard discussed in “Assessment by Board of Directors of Company Performance.” As part of its assessment of the company’s 2016 performance, the Compensation Committee credited management for its ability to focus the efforts of the company’s leadership, as well as employees at all levels, on the achievement of the 2016 goals at a time of significant organizational

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change. Fannie Mae was profitable in 2016, with net income of $12.3 billion, while continuing to acquire loans with a strong credit profile and increasing access to affordable mortgage credit for creditworthy borrowers. Fannie Mae continued to make substantial progress on initiatives to prepare its business and infrastructure for changes in the U.S. housing finance system and to help ensure its safety and soundness during conservatorship. Fannie Mae’s 2016 achievements extend beyond its achievements with respect to the 2016 Board of Directors’ goals and the 2016 conservatorship scorecard. In 2016, Fannie Mae established new integrated, customer-facing teams supporting our single-family customers; improved customer satisfaction; developed a process and program to promote innovation on an enterprise-wide level; updated its branding; implemented an employee rewards program that uses peer recognition to promote the company’s core cultural values; maintained strong levels of employee engagement; closed two large scale workforce housing transactions; simplified the company’s segment reporting; earned three significant distinctions for the Multifamily business from rating agencies for the second year in a row; and, working with a lender partner, developed a cash-out mortgage refinance pilot that offers homeowners the flexibility to address high interest rate student debt. The Board of Directors recognized Mr. Mayopoulos’s critical role in the company’s many achievements in 2016.
David Benson, Executive Vice President and Chief Financial Officer. Mr. Benson’s many achievements in 2016 provided critical support to Fannie Mae’s achievement of the 2016 conservatorship scorecard and 2016 Board of Directors’ goals. In 2016, Mr. Benson developed a vision and strategy for the company’s Finance division; significantly improved employee engagement; provided key leadership in the Finance division and to the rest of the company by becoming an early adopter of our Way of Working management system; delivered an updated detailed strategic plan; completed our initiative to consolidate our single-family performing loan accounting, without disruption to our financial reporting; managed our budget process and met our corporate objectives for administrative expenses; and managed the reduction of our retained mortgage portfolio. In addition, Mr. Benson continued to provide leadership in Fannie Mae’s interactions with customers, others in the industry, and FHFA.
Andrew Bon Salle, Executive Vice President-Single-Family Mortgage Business. Mr. Bon Salle’s 2016 performance contributed to the company’s achievement of the 2016 conservatorship scorecard and 2016 Board of Directors’ goals in significant ways. He successfully reorganized three single-family divisions into a single integrated business unit; hired strong additions to his team; deployed our Way of Working management system to key parts of the single-family business, including our new single-family customer-facing teams; delivered strong business results; delivered on our goals to improve Fannie Mae’s front-end business capabilities, including introducing our Day 1 Certainty initiative; improved customer engagement scores; improved single-family employee engagement scores; and simplified certain single-family business processes.
Brian Brooks, Executive Vice President, General Counsel and Corporate Secretary. Mr. Brooks’ achievements in 2016 contributed significantly to our accomplishments. In 2016, Mr. Brooks led improvements in our Board and management governance; successfully resolved significant litigation and legal matters; supported key aspects of our strategic plan; drove collaborative, cross-functional efforts to address key risks and issues; established and strengthened key external relationships; led our Diversity Advisory Council; and improved employee engagement.
Jeffery Hayward, Executive Vice President and Head of Multifamily. Mr. Hayward’s 2016 achievements include his delivery of strong multifamily business results and significant contribution to the achievement of the 2016 scorecard and 2016 Board of Directors’ goals relating to our multifamily business. In particular, he led our Multifamily business’s strong business results; closed two significant, large scale workforce housing transactions; made substantial progress on our initiative to prepare our multifamily business and infrastructure for the future; increased multifamily lender and internal delegation; simplified certain multifamily business processes; and coordinated our efforts to increase access to mortgage credit for creditworthy borrowers.
Other Executive Compensation Considerations
Role of Compensation Consultants
The Compensation Committee’s independent compensation consultant is Frederic W. Cook & Co., Inc. (“FW Cook”). Management’s outside compensation consultant is McLagan.
For 2016, McLagan advised management and the Compensation Committee on various compensation and human resources matters, including:
•
providing guidance and feedback on the company’s 2016 executive compensation program;

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•
defining the protocol regarding market peer group development and benchmarking for executives;
•
advising on market trends, competitive pay levels and various compensation proposals for new hires and promotions;
•
providing market compensation data for senior management positions, including the named executives’ positions; and
•
as needed, attended Compensation Committee meetings to review market data and trends and provide Committee members with an opportunity to ask questions and discuss implications of trends on Fannie Mae.
For 2016, FW Cook advised the Compensation Committee and the Board of Directors on various executive compensation matters, including:
•
preparing an analysis of compensation for executives in positions comparable to Fannie Mae executive positions at companies in our primary comparator group, based on information in proxy statements and other reports filed by those companies with the SEC;
•
reviewing McLagan’s analysis of market compensation data for select senior management positions;
•
reviewing various management proposals relating to compensation structures and levels, and for new hires and promotions;
•
reviewing the company’s risk assessment of its 2016 compensation program;
•
assisting the Compensation Committee in its evaluation of the company’s performance against the 2016 conservatorship scorecard and communicating its views to FHFA;
•
assisting the Compensation Committee in its evaluation of the company’s performance against the 2016 Board of Directors’ goals;
•
facilitating the Compensation Committee’s evaluation of the Company’s Chief Executive Officer’s performance in 2016;
•
informing the Compensation Committee of regulatory updates and market trends in compensation and benefits;
•
assisting with the preparation of executive compensation disclosure in this Annual Report on Form 10-K; and
•
attended Compensation Committee meetings in connection with these executive compensation matters.
Compensation Consultant Independence Assessment
The Compensation Committee assessed the independence of FW Cook and McLagan. Based on its assessments, the Compensation Committee determined that FW Cook is independent from management. FW Cook’s work for the Compensation Committee raises no conflicts of interest.
Because McLagan was retained by, and provides services to management, it is not an independent adviser. McLagan’s work raises no material conflicts of interest, and any conflict of interest raised by the fact that McLagan is retained by and provides services to management as well as to the Compensation Committee is addressed by the fact that the Compensation Committee also receives the advice of, and has access to, FW Cook as its independent compensation consultant.
Comparator Group and Role of Benchmark Data
Our Compensation Committee typically requests benchmark compensation data for our senior executives on an annual basis to assess the compensation of the company’s senior executives as compared to a group of similar firms. Finding comparable firms for purposes of benchmarking executive compensation is challenging due to our unique business, structure and mission, and the large size of our book of business compared to other financial services firms. The only directly comparable firm to us is Freddie Mac. At FHFA’s request, we and Freddie Mac use the same comparator group of companies for benchmarking executive compensation to provide consistency in the market data used for compensation decisions. Factors relevant to the selection of companies for our comparator group included their status as U.S. public companies, the industry in which they operate (each is a commercial bank, insurance company, finance lessor or government-sponsored enterprise) and their size (in

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terms of total revenues) relative to the size of Fannie Mae. Our primary comparator group, which was established by the Compensation Committee in 2012, consists of the following 17 companies:
•
Allstate Corporation
•
Fifth Third Bancorp
•
Prudential Financial, Inc.
•
Ally Financial Inc.
•
Freddie Mac
•
Regions Financial Corporation
•
American International Group Inc.
•
Hartford Financial Services Group, Inc.
•
State Street Corporation
•
Bank of New York Mellon Corporation
•
MetLife, Inc.
•
SunTrust Banks, Inc.
•
BB&T Corporation
•
Northern Trust Corporation
•
U.S. Bancorp  
•
Capital One Financial Corporation
•
PNC Financial Services Group, Inc.
 
 
The Compensation Committee follows a bifurcated approach to benchmarking senior executive positions. Under this approach, while the comparator group noted above is the primary group of companies used for benchmarking senior management pay levels, for certain senior management roles that are more comparable in function and/or scope to roles at firms outside this comparator group, the Compensation Committee considers pay levels against a broader group of companies. The company believes this more comprehensive approach results in more reliable market data.
The named executives’ compensation was compared to compensation at other companies as follows:
•
The compensation of our Chief Executive Officer (Mr. Mayopoulos), our Chief Financial Officer (Mr. Benson) and our Executive Vice President, General Counsel and Corporate Secretary (Mr. Brooks) was benchmarked against our primary comparator group identified above;
•
The compensation of our Executive Vice President—Single-Family Mortgage Business (Mr. Bon Salle) was benchmarked against our primary comparator group as well as a group of large banks consisting of Bank of America Corporation, Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Company and other specialty mortgage lending organizations, to the extent those firms have executives in comparable positions; and
•
The compensation of our Executive Vice President—Multifamily (Mr. Hayward) was benchmarked against our primary comparator group as well as large banks consisting of Bank of America Corporation, Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Company and other specialty commercial real estate organizations, to the extent those firms have executives in comparable positions.
In late 2016, FW Cook provided the Compensation Committee with a comparison of 2016 total target direct compensation for our Chief Executive Officer and our Chief Financial officer with compensation for comparable positions at companies in our primary comparator group, based on FW Cook’s analysis of proxy statements and other SEC filings. McLagan also provided the Compensation Committee with updated benchmarking data for our named executives (and other senior leadership roles) other than our Chief Executive Officer and our Chief Financial Officer. The McLagan data compared the named executives’ total direct compensation for 2016 with market ranges of 2015 direct compensation for comparable positions in the applicable comparator group of companies based on McLagan’s proprietary database. Members of the Compensation Committee reviewed and discussed this data in late 2016. Our Chief Executive Officer’s compensation in 2016 was more than 90% below the market median for comparable firms, and our other named executives’ total target direct compensation under the 2016 executive compensation program was, in aggregate, substantially below the market median.
Compensation Recoupment Policy
Our executive officers’ compensation (other than executive officers serving on an interim basis) is subject to the following forfeiture and repayment provisions, also known as “clawback” provisions:
•
Materially Inaccurate Information. If an executive officer has been granted deferred salary or incentive payments (including performance-based compensation) based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria, he or she will forfeit or must repay amounts granted in excess of the amounts the Board of Directors determines would likely have been granted using accurate metrics.

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•
Termination for Cause. If we terminate an executive officer’s employment for cause, he or she will immediately forfeit all deferred salary and any incentive payments that have not yet been paid. We may terminate an executive officer’s employment for cause if we determine that the officer has: (a) materially harmed the company by, in connection with the officer’s performance of his or her duties for the company, engaging in gross misconduct or performing his or her duties in a grossly negligent manner, or (b) been convicted of, or pleaded nolo contendere with respect to, a felony.
•
Subsequent Determination of Cause. If an executive officer’s employment was not terminated for cause, but the Board of Directors later determines, within a specified period of time, that he or she could have been terminated for cause and that the officer’s actions materially harmed the business or reputation of the company, the officer will forfeit or must repay, as the case may be, deferred salary and any incentive payments received by the officer to the extent the Board of Directors deems appropriate under the circumstances. The Board of Directors may require the forfeiture or repayment of all deferred salary and any incentive payments so that the officer is in the same economic position as if he or she had been terminated for cause as of the date of termination of his or her employment.
•
Effect of Willful Misconduct. If an executive officer’s employment: (a) is terminated for cause (or the Board of Directors later determines that cause for termination existed) due to either (i) willful misconduct by the officer in connection with his or her performance of his or her duties for the company or (ii) the officer has been convicted of, or pleaded nolo contendere with respect to, a felony consisting of an act of willful misconduct in the performance of his or her duties for the company and (b) in the determination of the Board of Directors, this has materially harmed the business or reputation of the company, then, to the extent the Board of Directors deems it appropriate under the circumstances, in addition to the forfeiture or repayment of deferred salary and any incentive payments described above, the executive officer will also forfeit or must repay, as the case may be, deferred salary and annual incentives or long-term awards paid to him or her in the two-year period prior to the date of termination of his or her employment or payable to him or her in the future. Misconduct is not considered willful unless it is done or omitted to be done by the officer in bad faith or without reasonable belief that his or her action or omission was in the best interest of the company.
In addition, under Section 304 of the Sarbanes-Oxley Act of 2002, certain of the incentive-based compensation for our Chief Executive Officer and Chief Financial Officer, including compensation received for prior years, could become subject to reimbursement.
Stock Ownership and Hedging Policies
We ceased paying new stock-based compensation to our executives after entering into conservatorship in September 2008. In 2009, our Board of Directors eliminated our stock ownership requirements. All employees, including our named executives, are prohibited from transacting in derivative securities related to our securities, including options, puts and calls, other than pursuant to our stock-based benefit plans.
Tax Deductibility of our Compensation Expenses
Subject to certain exceptions, Section 162(m) of the Internal Revenue Code imposes a $1 million limit on the amount that a company may annually deduct for compensation to its Chief Executive Officer and certain other named executives, unless, among other things, the compensation is “performance-based,” as defined in Section 162(m), and provided under a plan that has been approved by the shareholders. Compensation the company pays the named executives does not qualify as performance-based compensation under Section 162(m). We have not adopted a policy requiring all compensation to be deductible under Section 162(m). This approach allows us flexibility in light of the conservatorship.

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Compensation Committee Report
The Compensation Committee of the Board of Directors of Fannie Mae has reviewed and discussed the Compensation Discussion and Analysis included in this Form 10-K with management. Based on such review and discussions, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Form 10-K.
                            
Compensation Committee:
 
Diane C. Nordin, Chair
George Haywood
Michael J. Heid
Robert H. Herz
Jonathan Plutzik
Compensation Risk Assessment
Our Enterprise Risk Management division conducted a risk assessment of our 2016 employee compensation policies and practices. In conducting this risk assessment, the division reviewed, among other things, our performance goals, pay mix and compensation structure, the $600,000 limit on annual direct compensation for our Chief Executive Officer under the Equity in Government Compensation Act of 2015, our severance arrangements, including a voluntary exit program offered in 2015 to certain employees meeting age and service requirements with termination dates through 2017, our compensation recoupment policy, oversight of aspects of our compensation by FHFA, the Compensation Committee and the Board of Directors, our corporate culture with regard to risk, and our performance appraisal management process. The division also assessed whether policies, procedures or other mitigating controls existed that would reduce the opportunity for excessive or inappropriate risk-taking within our compensation policies and practices. Our Chief Risk Officer discussed the risk assessment of the company’s 2016 compensation policies and practices with the Compensation Committee of the Board of Directors.
Based on the risk assessment, management concluded that our 2016 employee compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on the company. Several factors contributed to this conclusion, including:
•
In general, the 2016 conservatorship scorecard objectives and the 2016 Board of Directors’ goals promote behavior that would reduce our risk.
•
Our Board and management risk limits inhibit excessive risk taking.
•
Our extensive performance appraisal process is designed to ensure achievement of goals without encouraging executives or employees to take excessive risks.
•
Deferred salary for our SEC executive officers is subject to the terms of the recoupment policy.
However, management noted in its risk assessment that the $600,000 cap on our Chief Executive Officer compensation significantly elevates our risk that we will not be able to retain our Chief Executive Officer and negatively affects our succession planning and our ability to attract qualified candidates for this critical role.
As discussed in “Risk Factors,” the conservatorship, the uncertainty of our future, limitations on our compensation and negative publicity concerning the GSEs materially increase the human capital risk to the company.

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Compensation Tables
 
Summary Compensation Table for 2016, 2015 and 2014
The following table shows summary compensation information for 2016, 2015 and 2014 for the named executives. For more information on the compensation reflected in this table, see the footnotes following the table.
 
 
 
 
Salary
 
 
 
 
 
 
 
 
 
 
Name and
Principal Position 
 
Year 
 
Base
Salary
($)(1) 
 
Fixed Deferred
Salary
(Service-
Based)
($)(2)
 
Bonus
($)(3)
 
Non-Equity
Incentive
Plan
Compensation
($)(4)
 
Change in
Pension
Value and
Nonqualified
Deferred
Compensation  
Earnings
($)(5)
 
All Other
Compensation  
($)(6)
 
Total
($)
Timothy Mayopoulos
 
2016
 
600,000

 
—

 
—

 
—

 
—

 
100,846

 
700,846

President and Chief
 
2015
 
660,577

 
825,616

 
—

 
476,634

 
—

 
53,878

 
2,016,705

Executive Officer
 
2014
 
600,000

 
—

 
—

 
—

 
—

 
48,000

 
648,000

David Benson
 
2016
 
600,000

 
1,500,000

 
—

 
893,896

 
—

 
151,125

 
3,145,021

Executive Vice President
 
2015
 
600,000

 
1,500,000

 
—

 
887,608

 
20,219

 
147,875

 
3,155,702

and Chief Financial
 
2014
 
600,000

 
1,500,000

 
—

 
900,585

 
210,000

 
143,164

 
3,353,749

Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Andrew Bon Salle
 
2016
 
500,000

 
1,287,692

 
—

 
760,957

 
—

 
86,762

 
2,635,411

Executive Vice President
 
2015
 
500,000

 
1,110,000

 
—

 
680,500

 
—

 
79,450

 
2,369,950

—Single-Family Mortgage
 
2014
 
475,769

 
860,385

 
—

 
572,680

 
209,000

 
74,982

 
2,192,816

Business
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brian Brooks
 
2016
 
500,000

 
1,180,000

 
—

 
715,117

 
—

 
83,835

 
2,478,952

Executive Vice President
 
2015
 
500,000

 
1,180,000

 
625,000

 
710,087

 
—

 
41,475

 
3,056,562

General Counsel and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate Secretary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jeffery Hayward
 
2016
 
475,000

 
960,000

 
—

 
610,829

 
—

 
117,505

 
2,163,334

Executive Vice President
 
2015
 
475,000

 
960,000

 
—

 
606,532

 
119,932

 
105,969

 
2,267,433

and Head of Multifamily
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
________
(1) 
Amounts shown in this sub-column consist of base salary paid during the year on a bi-weekly basis.
(2) 
Amounts shown in this sub-column consist of the fixed, service-based portion of deferred salary. Deferred salary shown for 2016 generally will be paid in four equal installments in March, June, September and December 2017. Deferred salary accrues interest at one-half of the one-year Treasury Bill rate in effect on the last business day preceding the year in which the deferred salary is earned. For deferred salary earned in 2016, this rate is 0.325% per year. Interest on the named executives’ fixed deferred salary is shown in the “All Other Compensation” column. Deferred salary shown for 2015 was paid to our named executives during 2016.
(3) 
Amounts shown in this column consist of the final installments of a sign-on award paid to Mr. Brooks in connection with his joining Fannie Mae in 2014.
(4) 
Amounts shown in this column consist of the at-risk, performance-based portion of deferred salary earned during the year and interest payable on that deferred salary. The table below provides more detail on the 2016 at-risk deferred salary awarded to our named executives.
Name
 
2016 Corporate Performance-Based At-Risk Deferred Salary
($)
 
2016 Individual Performance-Based At-Risk Deferred Salary
($)
 
Interest Payable on 2016 At-Risk Deferred Salary
($)
 
Total
($)
Timothy Mayopoulos
 
—

 
—

 
—

 
—

David Benson
 
441,000

 
450,000

 
2,896

 
893,896

Andrew Bon Salle
 
375,415

 
383,077

 
2,465

 
760,957

Brian Brooks
 
352,800

 
360,000

 
2,317

 
715,117

Jeffery Hayward
 
301,350

 
307,500

 
1,979

 
610,829

(5) 
None of our named executives received above-market or preferential earnings on nonqualified deferred compensation.

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Pursuant to a directive from FHFA, we terminated our defined benefit pension plans for employees in 2013, and we distributed all benefits remaining in the plans in 2015.
(6) 
The table below shows more information about the amounts reported for 2016 in the “All Other Compensation” column, which consist of (1) company contributions under our Retirement Savings Plan (401(k) Plan); (2) company credits to our Supplemental Retirement Savings Plan; (3) matching charitable contributions under our matching charitable gifts program; and (4) interest payable on 2016 fixed deferred salary.
Name
 
Company
Contributions
to
Retirement
Savings
(401(k)) Plan
($)
 
Company
Credits to
Supplemental
Retirement
Savings
Plan
($)
 
Charitable
Award
Programs ($)
 
Interest Payable on 2016 Fixed Deferred Salary
($)
 
Total
($)
Timothy Mayopoulos
 
21,200

 
79,646

 
—

 
—

 
100,846

David Benson
 
31,800

 
112,200

 
2,250

 
4,875

 
151,125

Andrew Bon Salle
 
21,200

 
58,877

 
2,500

 
4,185

 
86,762

Brian Brooks
 
21,200

 
58,800

 
—

 
3,835

 
83,835

Jeffery Hayward
 
31,800

 
82,585

 
—

 
3,120

 
117,505

 
In accordance with SEC rules, amounts shown under “All Other Compensation” for 2016 do not include perquisites or personal benefits for a named executive that, in the aggregate, amount to less than $10,000. In aggregate, the perquisites we provided to all of our named executives in 2016 did not exceed $1,000.
    
See “Pension Benefits” for the vesting provisions for company contributions to the Retirement Savings Plan and “Nonqualified Deferred Compensation” for the vesting provisions for company credits to the Supplemental Retirement Savings Plan. Contributions to these plans shown for Mr. Benson and Mr. Hayward reflect additional amounts we are paying through June 2018 in connection with the 2013 termination of our defined benefit pension plan to employees close to retirement who satisfied a rule of 65.
    
Amounts shown in the “Charitable Award Programs” column reflect gifts we made on behalf of our named executives under our matching charitable gifts program, under which gifts made by our employees and directors to Section 501(c)(3) charities were matched, up to an aggregate total of $2,500 for the 2016 calendar year.

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Grants of Plan-Based Awards in 2016
The following table shows the at-risk grants of deferred salary made to the named executives during 2016. The terms of 2016 deferred salary are described in “Compensation Discussion and Analysis—Chief Executive Officer Compensation and 2016 Executive Compensation Program—Elements of 2016 Executive Compensation Program—Direct Compensation.” Deferred salary amounts shown represent only the at-risk, performance-based portion of the named executives’ 2016 deferred salary.
 
 
 
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards ($)(1)
Name
Award Type
 
Threshold
 
Target
 
Maximum
Timothy Mayopoulos
At-risk deferred salary—Corporate
 
—

 
—

 
—

 
At-risk deferred salary—Individual
 
—

 
—

 
—

 
Total at-risk deferred salary
 
—

 
—

 
—

David Benson
At-risk deferred salary—Corporate
 
—

 
450,000

 
450,000

 
At-risk deferred salary—Individual
 
—

 
450,000

 
450,000

 
Total at-risk deferred salary
 
—

 
900,000

 
900,000

Andrew Bon Salle
At-risk deferred salary—Corporate
 
—

 
383,077

 
383,077

 
At-risk deferred salary—Individual
 
—

 
383,077

 
383,077

 
Total at-risk deferred salary
 
—

 
766,154

 
766,154

Brian Brooks
At-risk deferred salary—Corporate
 
—

 
360,000

 
360,000

 
At-risk deferred salary—Individual
 
—

 
360,000

 
360,000

 
Total at-risk deferred salary
 
—

 
720,000

 
720,000

Jeffery Hayward
At-risk deferred salary—Corporate
 
—

 
307,500

 
307,500

 
At-risk deferred salary—Individual
 
—

 
307,500

 
307,500

 
Total at-risk deferred salary
 
—

 
615,000

 
615,000

__________
(1) 
Amounts shown are the target amounts of the at-risk, performance-based portion of the named executives’ 2016 deferred salary. Half of 2016 at-risk deferred salary was subject to reduction based on corporate performance against the 2016 conservatorship scorecard, as determined by FHFA, and half was subject to reduction based on individual performance in 2016, taking into account corporate performance against the 2016 Board of Directors’ goals, as determined by the Board of Directors with FHFA’s review. No amounts are shown in the “Threshold” column because deferred salary does not specify a threshold payout amount. The amounts shown in the “Maximum” column are the same as the amounts shown in the “Target” column because 2016 deferred salary is only subject to reduction; amounts higher than the target amount cannot be awarded. The actual amounts of the at-risk portion of 2016 deferred salary that will be paid to the named executives for 2016 performance are included in the “Non-Equity Incentive Plan Compensation” column of the “Summary Compensation Table for 2016, 2015 and 2014.”
Pension Benefits
Retirement Savings Plan
The Retirement Savings Plan is a tax-qualified defined contribution plan for which all of our employees are generally eligible that includes a 401(k) before-tax feature, a regular after-tax feature and a Roth after-tax feature. Under the plan, eligible employees may allocate investment balances to a variety of investment options. Subject to IRS limits for 401(k) plans, we make a contribution to the Retirement Savings Plan for our employees equal to 2% of salary and eligible incentive compensation, which includes the deferred salary element of our executive compensation program. Participants are fully vested in this 2% contribution after three years of service. In addition, we match in cash employee contributions up to 6% of base salary and eligible incentive compensation. Employees are 100% vested in our matching contributions.
For a limited time, we are making additional contributions to the Retirement Savings Plan and to the Supplemental Retirement Savings Plan discussed under “Nonqualified Deferred Compensation” for employees who previously participated in a qualified defined benefit pension plan that we terminated in 2013 and who were close to retirement and satisfied a rule of 65 at the time we terminated the plan. Mr. Benson and Mr. Hayward

Fannie Mae 2016 Form 10-K
 
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Executive Compensation | Compensation Tables

receive these additional contributions. These contributions consist of fully vested contributions to the Retirement Savings Plan equal to 4% of eligible earnings (subject to applicable IRS limits on contributions) and to the Supplemental Retirement Savings Plan for earnings in excess of the applicable IRS limits (subject to an overall limit of two times base salary), during the period from July 1, 2013 through June 2018. To satisfy the rule of 65, as of June 30, 2013 an employee must have been at least age 50 and the sum of the employee’s age plus years of vesting service under the Retirement Plan must have equaled at least 65.
Nonqualified Deferred Compensation
We provide nonqualified deferred compensation to the named executives pursuant to our Supplemental Retirement Savings Plan. Our Supplemental Retirement Savings Plan is an unfunded, non-tax-qualified defined contribution plan. The Supplemental Retirement Savings Plan is intended to supplement our Retirement Savings Plan, or 401(k) plan, by providing benefits to participants whose eligible earnings exceed the IRS annual limit on eligible compensation for 401(k) plans (for 2016, the annual limit was $265,000). All of our named executives participate in the Supplemental Retirement Savings Plan.
We credit 8% of the eligible compensation for our named executives that exceeds the applicable IRS annual limit. Eligible compensation in any year consists of base salary plus any eligible incentive compensation (which includes deferred salary) earned for that year, up to a combined maximum of two times base salary. The 8% credit consists of two parts: (1) a 2% credit that will vest after the participant has completed three years of service with us; and (2) a 6% credit that is immediately vested.
As described above in “Pension Benefits,” for a limited time, we are making additional contributions to the Supplemental Retirement Savings Plan for employees who previously participated in the qualified defined benefit pension plan we terminated in 2013 and who were close to retirement and satisfied a rule of 65 at the time we terminated the plan. Mr. Benson and Mr. Hayward receive these additional contributions.
While the Supplemental Retirement Savings Plan is not funded, amounts credited on behalf of a participant under the Supplemental Retirement Savings Plan are deemed to be invested in mutual fund investments selected by the participant that are similar to the investments offered under our Retirement Savings Plan.
Amounts deferred under the Supplemental Retirement Savings Plan are payable to participants in the January or July following separation from service with us, subject to a six month delay in payment for our 50 most highly-compensated officers. Participants may not withdraw amounts from the Supplemental Retirement Savings Plan while they are employees.
The table below provides information on the nonqualified deferred compensation of the named executives in 2016, all of which was provided pursuant to our Supplemental Retirement Savings Plan.
Nonqualified Deferred Compensation for 2016
Name
Executive
Contributions
in 2016 ($)
 
Company
Contributions 
in 2016 ($)(1)
 
Aggregate
Earnings in
2016 ($)(2)
 
Aggregate
Withdrawals/
Distributions ($)
 
Aggregate
Balance at
December 31, 2016 ($)(3)
 
(Dollars in whole numbers)
Timothy Mayopoulos
—

 
79,646

 
29,614

 
—

 
497,761

David Benson
—

 
112,200

 
6,840

 
—

 
389,333

Andrew Bon Salle
—

 
58,877

 
12,700

 
—

 
192,428

Brian Brooks
—

 
58,800

 
4,865

 
—

 
82,433

Jeffery Hayward
—

 
82,585

 
12,187

 
—

 
236,861

__________
(1) 
All amounts reported in this column as company contributions in the last fiscal year are also reported as 2016 compensation in the “All Other Compensation” column of the “Summary Compensation Table for 2016, 2015 and 2014.”
(2) 
None of the earnings reported in this column are reported as 2016 compensation in the “Summary Compensation Table for 2016, 2015 and 2014” because the earnings are neither above-market nor preferential.
(3) 
Amounts reported in the Aggregate Balance at December 31, 2016 column of the table above reflect company contributions to the Supplemental Retirement Savings Plan that are also reported in the “All Other Compensation” column of the “Summary Compensation Table for 2016, 2015 and 2014,” as follows:

Fannie Mae 2016 Form 10-K
 
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Executive Compensation | Compensation Tables

Name
Amounts in Aggregate Balance Column that Represent Company Contributions Reported as Compensation for 2015 in the Summary Compensation Table ($)
 
Amounts in Aggregate Balance Column that Represent Company Contributions Reported as Compensation for 2014 in the Summary Compensation Table ($)
Timothy Mayopoulos
31,646

 
27,200

David Benson
112,200

 
110,739

Andrew Bon Salle
56,862

 
51,123

Brian Brooks
18,800

 
—

Jeffery Hayward
72,969

 
—

Potential Payments Upon Termination or Change-in-Control
The information below describes and quantifies certain compensation and benefits that would have become payable to each of our named executives under our existing plans and arrangements if the named executive’s employment had terminated on December 31, 2016 under each of the circumstances described below, taking into account the named executive’s compensation and service levels as of that date. The discussion below does not reflect retirement or deferred compensation plan benefits to which our named executives may be entitled, as these benefits are described above under “Pension Benefits” and “Nonqualified Deferred Compensation.” The information below also does not generally reflect compensation and benefits available to all salaried employees upon termination of employment with us under similar circumstances. We are not obligated to provide any additional compensation to our named executives in connection with a change-in-control.
Potential Payments to Named Executives
We have not entered into agreements with any of our named executives that would entitle the executive to severance benefits. Under the 2016 executive compensation program, a named executive would be entitled to receive a specified portion of his earned but unpaid 2016 deferred salary if his employment was terminated for any reason, other than for cause.
Below we discuss various elements of the named executives’ compensation that would become payable in the event a named executive dies, resigns, retires, or his employment is terminated by the company. We then quantify the amounts that would be paid to our named executives in these circumstances, in each case assuming the triggering event occurred on December 31, 2016.
•
Deferred Salary. If a named executive is separated from employment with the company for any reason other than termination for cause (including his death, resignation, retirement or the termination of his employment by the company without cause), he would receive:
•
the earned but unpaid portion of his fixed deferred salary, reduced by 2% for each full or partial month by which the named executive’s termination precedes January 31 of the second year following the performance year (or, if later, the end of the twenty-fourth month following the month in which the named executive first earned deferred salary), except that the reduction will not apply if at the time of separation the named executive has reached age 62, or age 55 with 10 years of service with Fannie Mae;
•
the earned but unpaid portion of his at-risk deferred salary, subject to reduction from the target level for corporate and individual performance for the applicable performance year; and
•
interest on the earned but unpaid portion of his 2016 deferred salary, which accrues at an annual rate of 0.325%.
Installment payments of deferred salary would be made on the original payment schedule.
If a named executive’s employment is terminated by the company for cause, he would not receive any of the earned but unpaid portion of his deferred salary. The company may terminate an executive for cause if it determines that the executive has: (a) materially harmed the company by, in connection with the performance of his duties for the company, engaging in gross misconduct or performing his duties in a grossly negligent manner; or (b) been convicted of, or pleaded nolo contendere with respect to, a felony.
•
Retiree Medical Benefits. We currently make certain retiree medical benefits available to our full-time employees who meet certain age and service requirements at the time of retirement.

Fannie Mae 2016 Form 10-K
 
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Executive Compensation | Compensation Tables

The table below shows the amounts that would have become payable to each of our named executives if his employment had terminated on December 31, 2016.
Potential Payments Upon Termination as of December 31, 2016
Name
2016 Fixed
Deferred Salary
($)(1)
 
2016 At-Risk
Deferred Salary
($)(2)
 
Total ($)
Timothy Mayopoulos
 
 
 
 
 
 
 
 
 
 
 
Resignation, retirement, death or termination without cause
 
—

 
 
 
—

 
 
 
—

 
Termination for cause
 
—

 
 
 
—

 
 
 
—

 
David Benson
 
 
 
 
 
 
 
 
 
 
 
Resignation, retirement, death or termination without cause
 
1,504,875

 
 
 
893,896

 
 
 
2,398,771

 
Termination for cause
 
—

 
 
 
—

 
 
 
—

 
Andrew Bon Salle
 
 
 
 
 
 
 
 
 
 
 
Resignation, retirement, death or termination without cause
 
955,989

 
 
 
760,957

 
 
 
1,716,946

 
Termination for cause
 
—

 
 
 
—

 
 
 
—

 
Brian Brooks
 
 
 
 
 
 
 
 
 
 
 
Resignation, retirement, death or termination without cause
 
876,038

 
 
 
715,117

 
 
 
1,591,155

 
Termination for cause
 
—

 
 
 
—

 
 
 
—

 
Jeffery Hayward
 
 
 
 
 
 
 
 
 
 
 
Resignation, retirement, death or termination without cause
 
963,120

 
 
 
610,829

 
 
 
1,573,949

 
Termination for cause
 
—

 
 
 
—

 
 
 
—

 
__________
(1) 
Mr. Bon Salle and Mr. Brooks would have each received 74% of his 2016 fixed deferred salary, which is the earned but unpaid portion of his 2016 fixed deferred salary as of December 31, 2016, reduced by 2% for each full or partial month by which the named executive’s separation from employment preceded January 31, 2018. Mr. Benson and Mr. Hayward would have each received 100% of his 2016 fixed deferred salary, with no reduction, because each would have reached age 55 with 10 years of service with Fannie Mae at the time of termination. Amounts shown in the table include interest payable on the fixed deferred salary.
(2) 
In the event of resignation, retirement, death or termination without cause, each named executive would have received all of his earned but unpaid 2016 at-risk deferred salary, as determined by FHFA and the Board of Directors in early 2017 (that is, his earned but unpaid 2016 at-risk deferred salary target, reduced by the amounts determined by FHFA and the Board of Directors in early 2017 as a result of corporate and individual performance). See the “Non-Equity Incentive Plan Compensation” column of the “Summary Compensation Table for 2016, 2015 and 2014” above for the amount of 2016 at-risk deferred salary that was awarded to each named executive. Amounts shown in the table include interest payable on the at-risk deferred salary.
Director Compensation
Our Corporate Governance Guidelines provide that compensation for members of the Board will be reasonable, appropriate, and commensurate with the duties and responsibilities of their Board service. Our non-management directors receive cash compensation pursuant to a program authorized by FHFA in November 2008. Mr. Mayopoulos, our only director who is also as an employee of Fannie Mae, does not receive any additional compensation for his service as a director.
Our non-management directors receive a retainer at an annual rate of $160,000, with no meeting fees. Committee chairs and Audit Committee members receive an additional retainer at an annual rate of $25,000 for the Audit Committee chair, $15,000 for the Risk Policy and Capital Committee chair and $10,000 for all other committee chairs and each member of the Audit Committee. In recognition of the substantial amount of time and effort necessary to fulfill the duties of non-executive Chairman of the Board, the annual retainer for our non-executive Chairman, Mr. Perry, is $290,000. Our directors receive no equity compensation. The total 2016 compensation for our non-management directors is shown in the table below.


Fannie Mae 2016 Form 10-K
 
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Executive Compensation | Compensation Tables

2016 Non-Employee Director Compensation Table
Name
 
Fees Earned
or Paid
in Cash ($)
Amy E. Alving
 
162,500

Hugh R. Frater
 
162,339

Renee L. Glover
 
154,839

Frederick B. “Bart” Harvey III
 
170,000

George W. Haywood
 
17,778

Michael J. Heid
 
102,796

Robert H. Herz
 
182,097

Diane C. Nordin
 
178,065

Egbert L. J. Perry
 
290,000

Jonathan Plutzik
 
171,250

Ryan A. Zanin
 
50,222

 
 
 
Directors who resigned from the Board during 2016
 
 
William Thomas Forrester
 
73,737

Brenda J. Gaines
 
115,269

David H. Sidwell
 
131,250

Additional Arrangements with our Non-Management Directors
Matching Charitable Gifts Program. To further our support for charitable giving, non-employee directors are able to participate in our corporate matching gifts program on the same terms as our employees. No non-employee directors participated in our matching gifts program in 2016.
Stock Ownership Guidelines for Directors. In 2009, our Board of Directors eliminated our stock ownership requirements for directors.
Other Expenses. We pay for or reimburse directors for out-of-pocket expenses incurred in connection with their service on the Board of Directors, including travel to and from our meetings, accommodations, meals and education.

Fannie Mae 2016 Form 10-K
 
180
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | Equity Compensation Plan Information

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table provides information about shares of common stock that may be issued under our equity compensation plans. However, we are prohibited from issuing new stock without the prior written consent of Treasury other than as required by the terms of any binding agreement in effect on the date of the senior preferred stock purchase agreement.
Equity Compensation Plan Information
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
Plan Category
Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options,
Warrants
and Rights
 
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
 
Number of
Securities
Remaining Available
for Future Issuance
under Equity
Compensation Plans
(Excluding
Securities
Reflected in First
Column)
Equity compensation plans approved by stockholders
 
4,817

(1) 
 
 
N/A
(2) 
 
 
11,960,258

(3) 
Equity compensation plans not approved by stockholders
 
N/A

 
 
 
N/A
 
 
 
N/A

 
Total
 
4,817

 
 
 
N/A
 
 
 
11,960,258

 
__________
(1) 
These shares of common stock underlie deferred shares that were issued under the Fannie Mae Stock Compensation Plan of 2003. These shares will become payable to the holder of the deferred shares in accordance with the terms of that plan.
(2) 
There is no exercise price associated with the payout of deferred shares.
(3) 
Our only plan under which shares remain available for issuance is the 1985 Employee Stock Purchase Plan.

Fannie Mae 2016 Form 10-K
 
181
 
Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters | Beneficial Ownership

Beneficial Ownership
The following table shows the beneficial ownership of our common stock by each of our current directors and the named executives, and all current directors and executive officers as a group, as of February 15, 2017. As of that date, no director or named executive, nor all directors and current executive officers as a group, owned as much as 1% of our outstanding common stock or preferred stock.
 
Number of Shares
Beneficially Owned(1)
Name and Position
8.25% Non-Cumulative Series T Preferred Stock
 
Common Stock
Amy E. Alving
0

 
0

Director
 
 
 
David C. Benson
0

 
0

Executive Vice President—Chief Financial Officer
 
 
 
Andrew J. Bon Salle
1,000

 
0

Executive Vice President—Single-Family Mortgage Business
 
 
 
Brian P. Brooks
0

 
0

Executive Vice President, General Counsel and Corporate Secretary
 
 
 
Hugh R. Frater
0

 
0

Director
 
 
 
Renee L. Glover
0

 
0

Director
 
 
 
Frederick B. Harvey, III
0

 
0

Director
 
 
 
George Haywood
0

 
0

Director
 
 
 
Jeffery R. Hayward
0

 
14,868

Executive Vice President and Head of Multifamily
 
 
 
Michael J. Heid
0

 
0

Director
 
 
 
Robert H. Herz
0

 
0

Director
 
 
 
Timothy J. Mayopoulos
0

 
0

President and Chief Executive Officer
 
 
 
Diane C. Nordin
0

 
0

Director
 
 
 
Egbert L. J. Perry
0

 
0

Chairman of the Board
 
 
 
Jonathan Plutzik
0

 
0

Director
 
 
 
Ryan A. Zanin
0

 
0

Director
 
 
 
All directors and current executive officers as a group (19 persons)
1,000

 
27,727

__________
(1) 
Beneficial ownership is determined in accordance with the rules of the SEC for computing the number of shares of common stock beneficially owned by each person and the percentage owned. Each holder has sole investment and voting power over the shares referenced in this table.

Fannie Mae 2016 Form 10-K
 
182
 
Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters | Beneficial Ownership

The following table shows the beneficial ownership of our common stock by each holder of more than 5% of our common stock as of February 15, 2017.
5% Holders
Common Stock
Beneficially Owned
 
Percent
of Class
Department of the Treasury
Variable(1)
 
79.9
%
1500 Pennsylvania Avenue, NW., Room 3000 Washington, DC 20220
 
 
 
Pershing Square Capital Management, L.P.
PS Management GP, LLC
William A. Ackman
115,569,796(2)
 
9.98
%
888 Seventh Avenue, 42nd Floor
New York, New York 10019
 
 
 
__________
(1) 
In September 2008, we issued to Treasury a warrant to purchase, for one one-thousandth of a cent ($0.00001) per share, shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis at the time the warrant is exercised. The warrant may be exercised in whole or in part at any time until September 7, 2028. As of February 17, 2017, Treasury has not exercised the warrant. The information above assumes Treasury beneficially owns no other shares of our common stock.
(2) 
Information regarding these shares and their holders is based solely on information contained in a Schedule 13D filed with the SEC on November 15, 2013, as amended by an amendment to the Schedule 13D filed on March 31, 2014. The Schedule 13D and its amendment were filed by these holders as well as by Pershing Square GP, LLC. According to the original Schedule 13D Pershing Square Capital Management, L.P., as investment adviser for a number of funds for which it purchased the shares reported in the table above, and PS Management GP, LLC, its general partner, may be deemed to share voting and dispositive power for the shares. Pershing Square GP, LLC, as general partner of two of the funds, may be deemed to share voting and dispositive power for 40,114,044 of the shares reported in the table above, which are held by the two funds. As the Chief Executive Officer of Pershing Square Capital Management, L.P. and managing member of each of PS Management GP, LLC and Pershing Square GP, LLC, William A. Ackman may be deemed to share voting and dispositive power for all of the shares reported in the table above. In the amendment, the parties further reported that certain of them had entered into swap transactions resulting in their having additional economic exposure to approximately 15,434,715 notional shares of common stock under certain cash-settled total return swaps, bringing their total aggregate economic exposure to 131,004,511 shares of common stock (approximately 11.31% of the outstanding common stock).
In the amendment to the Schedule 13D, these parties indicated that they would forgo future reporting on Schedule 13D based on their determination that shares of the common stock are not voting securities as such term is used in Rule 13d-1(i) under the Securities Exchange Act. As a result, the information in the table above does not reflect any acquisitions or dispositions by these holders of Fannie Mae common stock that occurred after March 31, 2014.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Policies and Procedures Relating to Transactions With Related Persons
We review transactions in which Fannie Mae is a participant and in which any of our directors or executive officers or their immediate family members may have a material interest to determine whether any of those persons has a material interest in the transaction. Our current written policies and procedures for the review, approval or ratification of transactions with related persons that are required to be reported under Item 404(a) of Regulation S-K are set forth in our:
•
Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors;
•
Nominating and Corporate Governance Committee Charter;
•
Board of Directors’ delegation of authorities and reservation of powers;
•
Code of Conduct for employees; and
•
Conflict of Interest Policy and Conflict of Interest Procedure for employees.
In addition, depending on the circumstances, relationships and transactions with related persons may require approval of the conservator pursuant to the 2012 instructions issued to the Board of Directors by the conservator or may require the approval of Treasury pursuant to the senior preferred stock purchase agreement.

Fannie Mae 2016 Form 10-K
 
183
 
Certain Relationships and Related Transactions, and Director Independence | Policies and Procedures Relating to Transactions with Related Persons

Our Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors prohibits our directors from engaging in any conduct or activity that is inconsistent with our best interests, as defined by the conservator’s express directions, its policies and applicable federal law. The Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors requires each of our directors to excuse himself or herself from voting on any issue before the Board that could result in a conflict, self-dealing or other circumstance where the director’s position as a director would be detrimental to us or result in a noncompetitive, favored or unfair advantage to either the director or the director’s associates. In addition, our directors must disclose to the Chair of the Nominating and Corporate Governance Committee, or another member of the committee, any situation that involves or appears to involve a conflict of interest. This includes, for example, any financial interest of a director, an immediate family member of a director or a business associate of a director in any transaction being considered by the Board, as well as any financial interest a director may have in an organization doing business with us. Each of our directors also must annually certify compliance with the Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors.
The Nominating and Corporate Governance Committee Charter and our Board’s delegation of authorities and reservation of powers require the Nominating and Corporate Governance Committee to approve any transaction that Fannie Mae engages in with any director, nominee for director or executive officer, or any immediate family member of a director, nominee for director or executive officer, that is required to be disclosed pursuant to Item 404 of Regulation S-K. In addition, the Board’s delegation of authorities and reservation of powers requires the Board and the conservator to approve any action that in the reasonable business judgment of management at the time the action is taken is likely to cause significant reputational risk to the company or result in substantial negative publicity. Depending on management’s business judgment, this requirement might include a related party transaction.
Our Code of Conduct for employees requires that we and our employees seek to avoid any actual or apparent conflict between our business interests and the personal interests of our employees or their family members. An employee who knows or suspects a violation of our Code of Conduct must raise the issue with the employee’s manager, another appropriate member of management, a member of our Human Resources division or our Compliance and Ethics division.
Our Conflict of Interest Policy and Conflict of Interest Procedure for employees requires that our executive officers report to the Compliance and Ethics division any existing or currently proposed transaction with us, whether or not in the ordinary course of business, in which the executive officer or any immediate family member of the executive officer has a direct or indirect interest. Our Conflict of Interest Procedure for employees provides that the Compliance and Ethics division will refer any such report to the Legal department for review to determine whether the Nominating and Corporate Governance Committee or FHFA is required to review and approve the transaction pursuant to the Nominating and Corporate Governance Committee Charter and/or the Board’s delegation of authorities and reservation of powers.
We are required by the conservator to obtain its approval for various matters, some of which may involve relationships or transactions with related persons. These matters include actions involving the senior preferred stock purchase agreement, the creation of any subsidiary or affiliate, any substantial non-ordinary course transaction with a subsidiary or affiliate, the compensation or benefits of directors and officers at the senior vice president level and above and other executives FHFA may designate, and actions that in the reasonable business judgment of management at the time that the action is to be taken are likely to cause significant reputational risk or result in substantial negative publicity. The senior preferred stock purchase agreement requires us to obtain written Treasury approval of transactions with affiliates unless, among other things, the transaction is upon terms no less favorable to us than would be obtained in a comparable arm’s-length transaction with a non-affiliate or the transaction is undertaken in the ordinary course or pursuant to a contractual obligation or customary employment arrangement in existence at the time the senior preferred stock purchase agreement was entered into.
We also require our directors and executive officers, not less than annually, to describe to us any situation involving a transaction with us in which a director or executive officer could potentially have a personal interest that would require disclosure under Item 404 of Regulation S-K.

Fannie Mae 2016 Form 10-K
 
184
 
Certain Relationships and Related Transactions, and Director Independence | Transactions With Related Persons


Transactions With Related Persons
Transactions with Treasury
Treasury beneficially owns more than 5% of the outstanding shares of our common stock by virtue of the warrant we issued to Treasury on September 7, 2008. The warrant entitles Treasury to purchase shares of our common stock equal to 79.9% of our outstanding common stock on a fully diluted basis on the date of exercise, for an exercise price of $0.00001 per share, and is exercisable in whole or in part at any time on or before September 7, 2028. We describe below our current agreements with Treasury, as well as payments we are making to Treasury pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011 and the GSE Act.
FHFA, as conservator, approved the senior preferred stock purchase agreement and the amendments to the agreement and our role as program administrator for the Home Affordable Modification Program and other initiatives under the Making Home Affordable Program.
Treasury Senior Preferred Stock Purchase Agreement
We issued the warrant to Treasury pursuant to the terms of the senior preferred stock purchase agreement we entered into with Treasury on September 7, 2008. Under the senior preferred stock purchase agreement, we also issued to Treasury one million shares of senior preferred stock. We issued the warrant and the senior preferred stock as an initial commitment fee in consideration of Treasury’s commitment to provide funds to us under the terms and conditions set forth in the senior preferred stock purchase agreement. The senior preferred stock purchase agreement was subsequently amended on September 26, 2008, May 6, 2009, December 24, 2009 and August 17, 2012. See “Business—Conservatorship and Treasury Agreements—Treasury Agreements” for a description of the terms of the senior preferred stock purchase agreement, the senior preferred stock and the warrant, including the revisions to the agreement and the senior preferred stock set forth in the August 2012 amendment to the agreement.
As of December 31, 2016, we had received an aggregate of $116.1 billion from Treasury under the senior preferred stock purchase agreement, and the remaining amount of funding available to us under the agreement was $117.6 billion. Through December 31, 2016, we had paid an aggregate of $154.4 billion to Treasury in dividends on the senior preferred stock. We expect to pay Treasury additional senior preferred stock dividends of $5.5 billion for the first quarter of 2017.
Treasury Making Home Affordable Program
In March 2009, the Obama Administration announced the details of its Making Home Affordable Program to provide assistance to homeowners and prevent foreclosures. One of the primary initiatives under the Making Home Affordable Program was the Home Affordable Modification Program, or HAMP, which was aimed at helping borrowers by modifying their mortgage loan to make their monthly payments more affordable. In addition to our participation in the Administration’s initiatives under the Making Home Affordable Program, in February 2009 Treasury engaged us to serve as program administrator for loans modified under HAMP and other initiatives under the Making Home Affordable Program. Our principal activities as program administrator have included:     
•
implementing the guidelines and policies of the Treasury program;
•
preparing the requisite forms, tools and training to facilitate efficient loan modifications by servicers;
•
creating, making available and managing the process for servicers to report modification activity and program performance;
•
calculating incentive compensation consistent with program guidelines;
•
acting as record-keeper for executed loan modifications and program administration;
•
coordinating with Treasury and other parties toward achievement of the program’s goals, including assisting with development and implementation of updates to the program and initiatives expanding the program’s reach;
•
helping servicers implement the program; and
•
performing other tasks as directed by Treasury from time to time.

Fannie Mae 2016 Form 10-K
 
185
 
Certain Relationships and Related Transactions, and Director Independence | Transactions With Related Persons


The Making Home Affordable Program terminated on December 31, 2016, except with respect to certain loan modification applications made before that date. However, we expect our role as program administrator will continue for several years in order to administer remaining incentives payable under the program and to continue record-keeping for completed modification activity and performance.
Under our arrangement, Treasury has compensated us for a significant portion of the work we have performed in our role as program administrator for HAMP and other initiatives under the Making Home Affordable Program. We expect we will have received an aggregate of approximately $463 million from Treasury for our work as program administrator from 2009 through 2016, as well as an additional amount of approximately $130 million for this period to be passed through to third-party vendors engaged by us for HAMP and other initiatives under the Making Home Affordable Program. We expect to continue to receive reimbursements from Treasury for our work as program administrator for HAMP and other initiatives under the Making Home Affordable Program through the completion of our role as program administrator.
In January 2015, we announced an additional borrower “pay for performance” incentive of $5,000 for Fannie Mae borrowers whose loans have been modified under HAMP and who remain in good standing in year six of the modification. Treasury funded certain of these borrower “pay for performance” incentives from the Troubled Asset Relief Program.
Temporary Payroll Tax Cut Continuation Act of 2011
In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 which, among other provisions, required that we increase our single-family guaranty fees by at least 10 basis points and remit this increase to Treasury. To meet our obligations under the TCCA and at the direction of FHFA, we increased the guaranty fee on all single-family residential mortgages delivered to us by 10 basis points effective April 1, 2012. FHFA and Treasury advised us to remit this fee increase to Treasury with respect to all loans acquired by us on or after April 1, 2012 and before January 1, 2022, and to continue to remit these amounts to Treasury on and after January 1, 2022 with respect to loans we acquired before this date until those loans are paid off or otherwise liquidated. We paid $1.8 billion to Treasury in 2016 for our obligations under the TCCA, and as of December 31, 2016 our liability to Treasury for TCCA-related guaranty fees for the fourth quarter of 2016 was $487 million.
Treasury Interest in Affordable Housing Allocations
The GSE Act requires us to set aside each fiscal year an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of our total new business purchases and to pay this amount to specified HUD and Treasury funds. In November 2008, FHFA suspended this requirement and directed us to not set aside or allocate funds until further notice. In December 2014, FHFA terminated this suspension and directed us to begin making contributions to the funds. Based on FHFA’s directive and the amount of our new business purchases in 2015, we made our first payment of $217 million to the funds in February 2016. Pursuant to the GSE Act and directions from FHFA, we paid $54 million of this amount to Treasury’s HOPE Reserve Fund, $57 million to Treasury’s Capital Magnet Fund and $106 million to HUD’s Housing Trust Fund. Our new business purchases were $637.4 billion for the year ended December 31, 2016. Accordingly, we expect to pay $268 million to the funds on or before March 1, 2017 as follows: $67 million to Treasury’s HOPE Reserve Fund, $70 million to Treasury’s Capital Magnet Fund and $131 million to HUD’s Housing Trust Fund. See “Business—Legislation and Regulation—GSE Act and Other Regulation of Our Business—Affordable Housing Allocations” for more information regarding the GSE Act’s affordable housing allocation requirements.
Transactions Involving The Integral Group LLC
Egbert L. J. Perry, who is the Chairman of our Board and who has been a member of our Board since December 2008, is the Chairman, Chief Executive Officer and controlling member of The Integral Group LLC, referred to as Integral. Prior to Mr. Perry joining our Board, our Multifamily business made indirect investments over a number of years in certain limited partnerships or limited liability companies that are controlled and managed by entities affiliated with Integral, in the capacity of general partner or managing member, as the case may be. These limited partnerships or limited liability companies are referred to as the Integral Property Partnerships. The Integral Property Partnerships own and manage LIHTC properties. We also hold multifamily mortgage loans made to borrowing entities sponsored by Integral. We believe that Mr. Perry has no material direct or indirect interest in these transactions. In addition, as described in “Director Independence—Our Board of Directors” below, the Board of Directors has concluded that these business relationships are not material to Mr. Perry’s independence.

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Certain Relationships and Related Transactions, and Director Independence | Transactions With Related Persons


Mr. Perry has informed us that Integral accepted no further equity investments from us relating to Integral Property Partnerships beginning in December 2008, when he joined our Board. As a secondary market participant, in the ordinary course of our business we may purchase multifamily mortgage loans made to borrowing entities sponsored by Integral.
Director Independence
Our Board of Directors, with the assistance of the Nominating and Corporate Governance Committee, has reviewed the independence of all current Board members under the requirements set forth in FHFA’s corporate governance regulations (which requires the standard of independence adopted by the NYSE) and under the standards of independence adopted by the Board, as set forth in our Corporate Governance Guidelines and outlined below. It is the policy of our Board of Directors that a substantial majority of our seated directors will be independent in accordance with these standards. Our Board is currently structured so that all but one of our directors, our Chief Executive Officer, is independent. Based on its review, the Board has determined that all of our non-employee directors meet the director independence requirements set forth in FHFA’s corporate governance regulations and in our Corporate Governance Guidelines.
Independence Standards
Under the standards of independence adopted by our Board, which meet the independence requirements set forth in FHFA’s corporate governance regulations (which requires the standard of independence adopted by the NYSE), an “independent director” must be determined to have no material relationship with us, either directly or through an organization that has a material relationship with us. A relationship is “material” if, in the judgment of the Board, it would interfere with the director’s independent judgment. The Board did not consider the Board’s duties to the conservator, together with the federal government’s controlling beneficial ownership of Fannie Mae, in determining independence of the Board members.
In addition, under FHFA’s corporate governance regulations, both our Audit Committee and our Compensation Committee are required to be in compliance with the NYSE’s listing requirements for these committees, under which committee members must meet additional, heightened independence criteria. Our own independence standards require all independent directors to meet the criteria for Audit Committee members.
To assist it in determining whether a director is independent, our Board has adopted the standards set forth below, which are posted on our website, www.fanniemae.com, under “Governance” in the “About Us” section of our website:
•
A director will not be considered independent if, within the preceding three years:
•
the director was our employee; or
•
an immediate family member of the director was employed by us as an executive officer.
•
A director will not be considered independent if:
•
the director is a current partner or employee of our external auditor, or within the preceding three years, was (but is no longer) a partner or employee of our external auditor and personally worked on our audit within that time; or
•
an immediate family member of the director is a current partner of our external auditor, or is a current employee of our external auditor and personally works on Fannie Mae’s audit, or, within the preceding three years, was (but is no longer) a partner or employee of our external auditor and personally worked on our audit within that time.
•
A director will not be considered independent if, within the preceding three years:
•
the director was employed by a company at a time when one of our current executive officers sat on that company’s compensation committee; or
•
an immediate family member of the director was employed as an officer by a company at a time when one of our current executive officers sat on that company’s compensation committee.

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•
A director will not be considered independent if, within the preceding three years:
•
the director received any compensation from us, directly or indirectly, other than fees for service as a director; or
•
an immediate family member of the director received any compensation from us, directly or indirectly, other than compensation received for service as our employee (other than an executive officer).
•
A director will not be considered independent if:
•
the director is a current executive officer, employee, controlling stockholder or partner of a company or other entity that does or did business with us and to which we made, or from which we received, payments within the preceding three years that, in any single fiscal year, were in excess of $1 million or 2% of the entity’s consolidated gross annual revenues, whichever is greater; or
•
an immediate family member of the director is a current executive officer of a company or other entity that does or did business with us and to which we made, or from which we received, payments within the preceding three years that, in any single fiscal year, were in excess of $1 million or 2% of the entity’s consolidated gross annual revenues, whichever is greater.
•
A director will not be considered independent if the director or the director’s spouse is an executive officer, employee, director or trustee of a nonprofit organization to which we make or have made contributions within the preceding three years that, in a single year, were in excess of the greater of 2% of the organization’s consolidated gross annual revenues or $1 million.
After considering all the facts and circumstances, our Board may determine in its judgment that a director is independent (in other words, the director has no relationship with us that would interfere with the director’s independent judgment), even though the director does not meet the standards listed above, so long as the determination of independence is consistent with the NYSE definition of “independence.” Where the standards above do not address a particular relationship, the determination of whether the relationship is material, and whether a director is independent, will be made by our Board, based upon the recommendation of the Nominating and Corporate Governance Committee.
Our Board of Directors
Our Board of Directors, with the assistance of the Nominating and Corporate Governance Committee, reviewed the independence of all Board members under the requirements set forth in FHFA’s corporate governance regulations (which requires the standard of independence adopted by the NYSE) and under the standards of independence adopted by the Board contained in our Corporate Governance Guidelines, as outlined above. Based on its review, the Board has affirmatively determined that all of our non-employee directors meet the director independence standards of our Guidelines and the NYSE, and that each of our directors other than Mr. Mayopoulos, our Chief Executive Officer, is independent. Our Board of Directors also determined that the three former directors who served as members of our Board during part of 2016, William Thomas Forrester, Brenda J. Gaines, and David H. Sidwell, met our director independence standards.
In determining the independence of each of these Board members, the Board of Directors considered the following relationships in addition to those addressed by the standards contained in our Guidelines as set forth above:
•
Certain of these Board members and an immediate family member of another Board member have relationships with other entities that engage in or have engaged in business with Fannie Mae. In all but one of these cases, the Board members and the immediate family member are currently only directors of, advisory Board members of, or consultants to these other entities. In one case the Board member is also an employee of the entity. In most instances, including the case where the Board member is an employee of the entity, the payments made by or to Fannie Mae pursuant to these relationships during the past three years were determined to fall below our Guidelines’ thresholds of materiality for a Board member who is a current executive officer, employee, controlling shareholder or partner of a company engaged in business with Fannie Mae. In light of these facts, the Board of Directors has concluded that these business relationships are not material to the independence of these Board members.
•
Certain of these Board members serve as Board or working group members of charitable or non-profit organizations that have received fees from Fannie Mae. The amount of these fees fell substantially below our Guidelines’ thresholds of materiality for a Board member who is a current trustee or board member of a

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Certain Relationships and Related Transactions, and Director Independence | Director Independence


charitable or non-profit organization that receives donations or payments from Fannie Mae. In light of this fact, the Board of Directors has concluded that these relationships with the charitable or non-profit organizations are not material to the independence of these Board members.
•
Certain of these Board members serve as directors of other companies that hold Fannie Mae fixed income securities or control entities that direct investments in such securities. It is not possible for Fannie Mae to determine the extent of the holdings of these companies in Fannie Mae fixed income securities as all payments to holders are made through the Federal Reserve, and most of these securities are held in turn by financial intermediaries. Each director has confirmed that the transactions by these other companies in Fannie Mae fixed income securities are entered into in the ordinary course of business of these companies and are not entered into at the direction of, or upon approval by, the director in his capacity as a director of these companies. In light of these facts, the Board of Directors has concluded that these business relationships are not material to the independence of these Board members.
•
Mr. Perry is an executive officer and majority member of The Integral Group LLC, which has had multiple indirect business relationships with Fannie Mae during the past three years. These business relationships include the following:
•
Since 2006, Fannie Mae has held six multifamily mortgage loans made to six borrowing entities sponsored by Integral. During 2014, Integral paid off four of these loans, and only two remain. In each case, Integral participates in the borrowing entity as a general partner of the limited partnership, or as a managing member of the limited liability company, as the case may be, and holds a 0.01% economic interest in such entity. The aggregate unpaid principal balance of the remaining loans as of December 31, 2016 constituted approximately 1.4% of Integral’s total debt outstanding. The borrowing entities have made interest payments on these loans. The total amount of these interest payments did not exceed $1 million in any of the last three years.
•
Fannie Mae has invested as a limited partner or member in certain LIHTC funds that in turn have invested as a limited partner or member in various Integral Property Partnerships, which are lower-tier project partnerships or limited liability companies that own LIHTC properties. Integral participates indirectly as a member or the general partner of the Integral Property Partnerships (each a “Project General Partner”). The Integral Property Partnerships construct, develop and manage housing projects, a portion of which includes affordable housing units. Each Project General Partner and its affiliates earn certain fees each year in connection with those project activities, and such fees are paid from income generated by the project (other than certain developer fees paid from development sources). Fannie Mae’s indirect investments in the Integral Property Partnerships, through the LIHTC funds, have not resulted in any direct payments by Fannie Mae to any Project General Partner or its affiliates, including Integral. Fannie Mae’s indirect equity investment in the Integral Property Partnerships as of December 31, 2016 constituted approximately 1% of the total capitalization and approximately 3% of the total equity in all of the Integral Property Partnerships.
The aggregate debt service and other required payments made, directly and indirectly, to or on behalf of Fannie Mae pursuant to these relationships with Integral for each of the past three years fall below our Guidelines’ thresholds of materiality for a Board member who is a current executive officer, employee, controlling shareholder or partner of a company that engages in business with Fannie Mae. In addition, as a limited partner or member in the LIHTC funds, which in turn are limited partners in the Integral Property Partnerships, Fannie Mae has no direct dealings with Integral or Mr. Perry and has not been involved in the management of the Integral Property Partnerships. Mr. Perry also was not generally aware of the identity of the limited partners or members of the LIHTC funds, as Integral sells the partnership or LLC interests to syndicators who, in turn, syndicate these interests to limited partners or members of their choosing. Further, Integral has not accepted additional equity investments from Fannie Mae since Mr. Perry joined the Board. Based on the foregoing, the Board of Directors has concluded that these business relationships are not material to Mr. Perry’s independence.
•
Mr. Heid is a former employee of Wells Fargo, with which we regularly enter into a variety of transactions in the ordinary course of business. For example, Wells Fargo was our largest single-family lender customer in 2016, accounting for approximately 14% of our single-family business volume. Mr. Heid continues to hold Wells Fargo & Company stock, restricted stock units and performance share awards that will vest in amounts that partly depend on Wells Fargo’s corporate performance over a multi-year period. Based on its

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review of the relevant facts and circumstances, the Board of Directors has concluded that Mr. Heid’s former employment with and equity holdings in Wells Fargo are not material to his independence.
The Board determined that none of these relationships would interfere with the director’s independent judgment.
Mr. Mayopoulos is not considered an independent director under the Guidelines because of his position as Chief Executive Officer.
Item 14. Principal Accounting Fees and Services
The Audit Committee of our Board of Directors is directly responsible for the appointment, oversight and evaluation of our independent registered public accounting firm, subject to conservator approval of matters relating to retention and termination. In accordance with the Audit Committee’s charter, it must approve, in advance of the service, all audit and permissible non-audit services to be provided by our independent registered public accounting firm and establish policies and procedures for the engagement of the external auditor to provide audit and permissible non-audit services. Our independent registered public accounting firm may not be retained to perform non-audit services specified in Section 10A(g) of the Exchange Act.
Deloitte & Touche LLP was our independent registered public accounting firm for the years ended December 31, 2016 and 2015. Deloitte & Touche LLP has advised the Audit Committee that they are independent accountants with respect to the company, within the meaning of standards established by the PCAOB and federal securities laws administered by the SEC.
The following table displays the aggregate estimated or actual fees for professional services provided by Deloitte & Touche LLP, including audit fees.
 
For the Year Ended
December 31,
 
2016
 
2015
Description of fees:
 
 
 
Audit fees
$
34,713,000

 
$
34,624,000

Audit-related fees(1) 
222,000

 
249,000

Tax fees
5,000

 
35,000

Total fees
$
34,940,000

 
$
34,908,000

__________
(1) 
Consists of fees billed for attest-related services on debt offerings and compliance with the covenants in the senior preferred stock purchase agreement with Treasury.
Pre-Approval Policy
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services to be provided by the independent registered public accounting firm. The independent registered public accounting firm and management are required to present reports on the nature of the services provided by the independent registered public accounting firm for the past year and the fees for such services, categorized into audit services, audit-related services, tax services and other services.
In connection with its approval of Deloitte & Touche as Fannie Mae’s independent registered public accounting firm for Fannie Mae’s 2016 integrated audit, the Audit Committee delegated the authority to pre-approve any additional audit and audit-related services to its Chair, who was required to report any such pre-approvals at the next scheduled meeting of the Audit Committee. Additionally, any services provided by Deloitte & Touche outside of the scope of the integrated audit must be approved by the conservator.
In 2016, we paid no fees to the independent registered public accounting firm pursuant to the de minimis exception established by the SEC, and all services were pre-approved.

Fannie Mae 2016 Form 10-K
 
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Exhibits, Financial Statement Schedules

PART IV
Item 15.  Exhibits, Financial Statement Schedules
(a)    Documents filed as part of this report
1.    Consolidated Financial Statements
An index to financial statements has been filed as part of this report beginning on page F-1 and is incorporated herein by reference.
2.    Financial Statement Schedules
None.
3.    Exhibits
An index to exhibits has been filed as part of this report beginning on page E-1 and is incorporated herein by reference.

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Signatures


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Federal National Mortgage Association
 
 /s/ Timothy J. Mayopoulos
Timothy J. Mayopoulos
President and Chief Executive Officer
Date: February 17, 2017

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Timothy J. Mayopoulos and David C. Benson and each of them severally, his or her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with the Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
 
Title
 
Date
 
 
 
 
 
/s/ Egbert L. J. Perry
 
Chairman of the Board of Directors
 
February 17, 2017
Egbert L. J. Perry


 
 
 
 
 
 
 
 
 
/s/ Timothy J. Mayopoulos
 
President and Chief Executive Officer and Director
 
February 17, 2017


Timothy J. Mayopoulos
 
 
 
 
 
 
 
 
 
/s/ David C. Benson
 
Executive Vice President and
Chief Financial Officer

 
February 17, 2017

David C. Benson
 
 
 
 
 
 
 
 
 
/s/ Gregory A. Fink
 
Senior Vice President and Controller
 
February 17, 2017


Gregory A. Fink
 
 
 
 
 
 
 
 
 
/s/ Amy E. Alving
 
Director
 
February 17, 2017


Amy E. Alving

 
 
 
 

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Signatures


Signature
 
Title
 
Date
 
 
 
 
 
/s/ Hugh R. Frater
 
Director
 
February 17, 2017


Hugh R. Frater

 
 
 
 
 
 
 
 
 
 /s/ Renee L. Glover
 
Director
 
February 17, 2017


Renee L. Glover

 
 
 
 
 
 
 
 
 
 /s/ Frederick B. Harvey III
 
Director
 
February 17, 2017


Frederick B. Harvey III

 
 
 
 
 
 
 
 
 
 /s/ George W. Haywood
 
Director
 
February 17, 2017


George W. Haywood

 
 
 
 
 
 
 
 
 
 /s/ Michael J. Heid
 
Director
 
February 17, 2017


Michael J. Heid

 
 
 
 
 
 
 
 
 
 /s/ Robert H. Herz
 
Director
 
February 17, 2017


Robert H. Herz

 
 
 
 
 
 
 
 
 
/s/ Diane C. Nordin
 
Director
 
February 17, 2017


Diane C. Nordin

 
 
 
 
 
 
 
 
 
 /s/ Jonathan Plutzik
 
Director
 
February 17, 2017


Jonathan Plutzik

 
 
 
 
 
 
 
 
 
 /s/ Ryan A. Zanin
 
Director
 
February 17, 2017


Ryan A. Zanin

 
 
 
 


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Index to Exhibits


INDEX TO EXHIBITS

Item
Description
3.1
Fannie Mae Charter Act (12 U.S.C. § 1716 et seq.) as amended through July 21, 2010 (Incorporated by reference to Exhibit 3.1 to Fannie Mae’s Quarterly Report on Form 10-Q (Commission file number 000-50231) for the quarter ended June 30, 2015, filed August 6, 2015.)
3.2
Fannie Mae Bylaws, as amended through July 21, 2016 (Incorporated by reference to Exhibit 3.2 to Fannie Mae’s Quarterly Report on Form 10-Q (Commission file number 000-50231) for the quarter ended June 30, 2016, filed August 4, 2016.)
4.1
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series D (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s registration statement on Form 10 (Commission file number 000-50231), filed March 31, 2003.)
4.2
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series E (Incorporated by reference to Exhibit 4.2 to Fannie Mae’s registration statement on Form 10 (Commission file number 000-50231), filed March 31, 2003.)
4.3
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series F (Incorporated by reference to Exhibit 4.3 to Fannie Mae’s registration statement on Form 10 (Commission file number 000-50231), filed March 31, 2003.)
4.4
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series G (Incorporated by reference to Exhibit 4.4 to Fannie Mae’s registration statement on Form 10 (Commission file number 000-50231), filed March 31, 2003.)
4.5
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series H (Incorporated by reference to Exhibit 4.5 to Fannie Mae’s registration statement on Form 10 (Commission file number 000-50231), filed March 31, 2003.)
4.6
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series I (Incorporated by reference to Exhibit 4.6 to Fannie Mae’s registration statement on Form 10 (Commission file number 000-50231), filed March 31, 2003.)
4.7
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series L (Incorporated by reference to Exhibit 4.7 to Fannie Mae’s Quarterly Report on Form 10-Q (Commission file number 001-34140), filed August 8, 2008.)
4.8
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series M (Incorporated by reference to Exhibit 4.8 to Fannie Mae’s Quarterly Report on Form 10-Q (Commission file number 001-34140), filed August 8, 2008.)
4.9
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series N (Incorporated by reference to Exhibit 4.9 to Fannie Mae’s Quarterly Report on Form 10-Q (Commission file number 001-34140), filed August 8, 2008.)
4.10
Certificate of Designation of Terms of Fannie Mae Non-Cumulative Convertible Preferred Stock, Series 2004-1 (Incorporated by reference to Exhibit 4.10 to Fannie Mae’s Annual Report on Form 10-K (Commission file number 001-34140) for the year ended December 31, 2009, filed February 26, 2010.)
4.11
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series O (Incorporated by reference to Exhibit 4.11 to Fannie Mae’s Annual Report on Form 10-K (Commission file number 001-34140) for the year ended December 31, 2009, filed February 26, 2010.)
4.12
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series P (Incorporated by reference to Exhibit 4.12 to Fannie Mae’s Annual Report on Form 10-K (Commission file number 000-50231) for the year ended December 31, 2012, filed April 2, 2013.)
4.13
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series Q (Incorporated by reference to Exhibit 4.13 to Fannie Mae’s Annual Report on Form 10-K (Commission file number 000-50231) for the year ended December 31, 2012, filed April 2, 2013.)
4.14
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series R (Incorporated by reference to Exhibit 4.14 to Fannie Mae’s Annual Report on Form 10-K (Commission file number 000-50231) for the year ended December 31, 2012, filed April 2, 2013.)
4.15
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series S (Incorporated by reference to Exhibit 4.15 to Fannie Mae’s Annual Report on Form 10-K (Commission file number 000-50231) for the year ended December 31, 2012, filed April 2, 2013.)

Fannie Mae 2016 Form 10-K
 
E-1
 
Index to Exhibits


Item
Description
4.16
Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series T (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K (Commission file number 000-50231), filed May 19, 2008.)
4.17
Amended and Restated Certificate of Designation of Terms of Variable Liquidation Preference Senior Preferred Stock, Series 2008-2, amended and restated as of September 27, 2012 (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Quarterly Report on Form 10-Q (Commission file number 000-50231) for the quarter ended September 30, 2012, filed November 7, 2012.)
4.18
Warrant to Purchase Common Stock, dated September 7, 2008 (Incorporated by reference to Exhibit 4.3 to Fannie Mae’s Current Report on Form 8-K (Commission file number 001-34140), filed September 11, 2008.)
4.19
Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of September 26, 2008, between the United States Department of the Treasury and Federal National Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed conservator (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K (Commission file number 001-34140), filed October 2, 2008.)
4.20
Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of May 6, 2009, between the United States Department of the Treasury and Federal National Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed conservator (Incorporated by reference to Exhibit 4.21 to Fannie Mae’s Quarterly Report on Form 10-Q (Commission file number 001-34140) for the quarter ended March 31, 2009, filed May 8, 2009.)
4.21
Second Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of December 24, 2009, between the United States Department of the Treasury and Federal National Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed conservator (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K (Commission file number 001-34140), filed December 30, 2009.)
4.22
Third Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of August 17, 2012, between the United States Department of the Treasury and Federal National Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed conservator (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K (Commission file number 000-50231), filed August 17, 2012.)
10.1
Repayment Provisions for SEC Executive Officers, amended and restated as of March 8, 2012† (Incorporated by reference to Exhibit 10.44 to Fannie Mae’s Quarterly Report on Form 10-Q (Commission file number 000-50231) for the quarter ended March 31, 2012, filed May 9, 2012.)
10.2
Fannie Mae Form of Indemnification Agreement for directors and officers of Fannie Mae
10.3
Fannie Mae Supplemental Retirement Savings Plan, as amended through April 29, 2008† (Incorporated by reference to Exhibit 10.2 to Fannie Mae’s Quarterly Report on Form 10-Q (Commission file number 001-34140) for the quarter ended June 30, 2008, filed August 8, 2008.)
10.4
Amendment to Fannie Mae Supplemental Retirement Savings Plan, effective October 8, 2008† (Incorporated by reference to Exhibit 10.32 to Fannie Mae’s Annual Report on Form 10-K (Commission file number 001-34140) for the year ended December 31, 2008, filed February 26, 2009.)
10.5
Amendment to Fannie Mae Supplemental Retirement Savings Plan, effective May 14, 2010† (Incorporated by reference to Exhibit 10.2 to Fannie Mae’s Quarterly Report on Form 10-Q (Commission file number 001-34140) for the quarter ended June 30, 2010, filed August 5, 2010.)
10.6
Amendment to Fannie Mae Supplemental Retirement Savings plan for 2012 Executive Compensation Program, adopted May 18, 2012† (Incorporated by reference to Exhibit 10.3 to Fannie Mae’s Quarterly Report on Form 10-Q (Commission file number 000-50231) for the quarter ended June 30, 2012, filed August 8, 2012.)
10.7
Amendment, effective July 1, 2013, to Fannie Mae Supplemental Retirement Savings Plan† (Incorporated by reference to Exhibit 10.4 to Fannie Mae’s Quarterly Report on Form 10-Q (Commission file number 000-50231) for the quarter ended September 30, 2013, filed November 7, 2013.)

Fannie Mae 2016 Form 10-K
 
E-2
 
Index to Exhibits


Item
Description
10.8
Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of September 26, 2008, between the United States Department of the Treasury and Federal National Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed conservator (Incorporated by reference Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K (Commission file number 001-34140), filed October 2, 2008.)
10.9
Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of May 6, 2009, between the United States Department of the Treasury and Federal National Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed conservator (Incorporated by reference to Exhibit 4.21 to Fannie Mae’s Quarterly Report on Form 10-Q (Commission file number 001-34140), filed May 8, 2009.)
10.10
Second Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of December 24, 2009, between the United States Department of the Treasury and Federal National Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed conservator (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K (Commission file number 001-34140), filed December 30, 2009.)
10.11
Third Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of August 17, 2012, between the United States Department of the Treasury and Federal National Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed conservator (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K (Commission file number 000-50231), filed August 17, 2012.)
10.12
Letter Agreement between Fannie Mae and Timothy J. Mayopoulos, dated March 9, 2009† (Incorporated by reference to Exhibit 10.44 to Fannie Mae’s Annual Report on Form 10-K (Commission file number 001-34140) for the year ended December 31, 2009, filed February 26, 2010.)
12.1
Statement re: computation of ratio of earnings to fixed charges
12.2
Statement re: computation of ratio of earnings to combined fixed charges and preferred stock dividends and issuance cost at redemption
31.1
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)
31.2
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101. INS
XBRL Instance Document*
101. SCH
XBRL Taxonomy Extension Schema*
101. CAL
XBRL Taxonomy Extension Calculation*
101. DEF
XBRL Taxonomy Extension Definition*
101. LAB
XBRL Taxonomy Extension Label*
101. PRE
XBRL Taxonomy Extension Presentation*
__________
†
This Exhibit is a management contract or compensatory plan or arrangement.
*
The financial information contained in these XBRL documents is unaudited.


Fannie Mae 2016 Form 10-K
 
E-3
 
Index to Consolidated Financial Statements


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
Note 10—Income Taxes
 
 
 
 
 
 
Note 16—Netting Arrangements
 
 
 


Fannie Mae 2016 Form 10-K
F-1

 
Report of Independent Registered Public Accounting Firm


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Fannie Mae:
We have audited the accompanying consolidated balance sheets of Fannie Mae and consolidated entities (in conservatorship) (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income, cash flows, and changes in equity for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fannie Mae and consolidated entities (in conservatorship) as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company is currently under the control of its conservator and regulator, the Federal Housing Finance Agency (“FHFA”). Further, the Company directly and indirectly received substantial support from various agencies of the United States Government, including the United States Department of Treasury and FHFA. The Company is dependent upon continued support of the United States Government, various United States Government agencies and the Company’s conservator and regulator, FHFA.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 17, 2017, expressed an adverse opinion on the Company’s internal control over financial reporting because of a material weakness.

/s/ Deloitte & Touche LLP

McLean, Virginia
February 17, 2017

Fannie Mae 2016 Form 10-K
F-2

 
 Financial Statements | Consolidated Balance Sheets

FANNIE MAE
(In conservatorship)
Consolidated Balance Sheets
(Dollars in millions, except share amounts)
 
As of December 31,
 
2016
 
2015
ASSETS
Cash and cash equivalents
 
$
25,224

 
 
 
$
14,674

 
Restricted cash (includes $31,536 and $25,865, respectively, related to consolidated trusts)
 
36,953

 
 
 
30,879

 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
 
30,415

 
 
 
27,350

 
Investments in securities:
 
 
 
 
 
 
 
Trading, at fair value (includes $1,277 and $135, respectively, pledged as collateral)
 
40,562

 
 
 
39,908

 
Available-for-sale, at fair value (includes $107 and $285, respectively, related to consolidated trusts)
 
8,363

 
 
 
20,230

 
Total investments in securities
 
48,925

 
 
 
60,138

 
Mortgage loans:
 
 
 
 
 
 
 
Loans held for sale, at lower of cost or fair value
 
2,899

 
 
 
5,361

 
Loans held for investment, at amortized cost:
 
 
 
 
 
 
 
Of Fannie Mae
 
204,318

 
 
 
233,054

 
Of consolidated trusts
 
2,896,001

 
 
 
2,809,180

 
Total loans held for investment (includes $12,057 and $14,075, respectively, at fair value)
 
3,100,319

 
 
 
3,042,234

 
Allowance for loan losses
 
(23,465
)
 
 
 
(27,951
)
 
Total loans held for investment, net of allowance
 
3,076,854

 
 
 
3,014,283

 
Total mortgage loans
 
3,079,753

 
 
 
3,019,644

 
Deferred tax assets, net
 
33,530

 
 
 
37,187

 
Accrued interest receivable, net (includes $7,064 and $6,974, respectively, related to consolidated trusts)
 
7,737

 
 
 
7,726

 
Acquired property, net
 
4,489

 
 
 
6,766

 
Other assets
 
20,942

 
 
 
17,553

 
Total assets
 
$
3,287,968

 
 
 
$
3,221,917

 
LIABILITIES AND EQUITY
Liabilities:
 
 
 
 
 
 
 
Accrued interest payable (includes $8,285 and $8,194, respectively, related to consolidated trusts)
 
$
9,431

 
 
 
$
9,794

 
Debt:
 
 
 
 
 
 
 
Of Fannie Mae (includes $9,582 and $11,133, respectively, at fair value)
 
327,097

 
 
 
386,135

 
Of consolidated trusts (includes $36,524 and $23,609, respectively, at fair value)
 
2,935,219

 
 
 
2,811,536

 
Other liabilities (includes $390 and $448, respectively, related to consolidated trusts)
 
10,150

 
 
 
10,393

 
Total liabilities
 
3,281,897

 
 
 
3,217,858

 
Commitments and contingencies (Note 18)
 
—

 
 
 
—

 
Fannie Mae stockholders’ equity:
 
 
 
 
 
 
 
Senior preferred stock, 1,000,000 shares issued and outstanding
 
117,149

 
 
 
117,149

 
Preferred stock, 700,000,000 shares are authorized— 555,374,922 shares issued and outstanding
 
19,130

 
 
 
19,130

 
Common stock, no par value, no maximum authorization—1,308,762,703 shares issued and 1,158,082,750 shares outstanding
 
687

 
 
 
687

 
Accumulated deficit
 
(124,253
)
 
 
 
(126,942
)
 
Accumulated other comprehensive income
 
759

 
 
 
1,407

 
Treasury stock, at cost, 150,679,953 shares
 
(7,401
)
 
 
 
(7,401
)
 
Total Fannie Mae stockholders’ equity
 
6,071

 
 
 
4,030

 
Noncontrolling interest
 
—

 
 
 
29

 
Total equity (See Note 1: Senior Preferred Stock and Warrant Issued to Treasury and Earnings (Loss) per Share for information on our dividend obligation to Treasury)
 
6,071

 
 
 
4,059

 
Total liabilities and equity
 
$
3,287,968

 
 
 
$
3,221,917

 





See Notes to Consolidated Financial Statements

Fannie Mae (In conservatorship) 2016 Form 10-K
F-3

 
Financial Statements | Consolidated Statements of Operations and Comprehensive Income


FANNIE MAE
(In conservatorship)
Consolidated Statements of Operations and Comprehensive Income
(Dollars in millions, except share amounts)
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Trading securities
 
$
516

 
 
 
$
444

 
 
 
$
553

 
Available-for-sale securities
 
620

 
 
 
1,156

 
 
 
1,622

 
Mortgage loans (includes $95,266, $97,971 and $101,835, respectively, related to consolidated trusts)
 
104,642

 
 
 
107,699

 
 
 
112,120

 
Other
 
243

 
 
 
143

 
 
 
110

 
Total interest income
 
106,021

 
 
 
109,442

 
 
 
114,405

 
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
 
206

 
 
 
146

 
 
 
94

 
Long-term debt (includes $77,575, $80,326 and $85,835, respectively, related to consolidated trusts)
 
84,520

 
 
 
87,887

 
 
 
94,343

 
Total interest expense
 
84,726

 
 
 
88,033

 
 
 
94,437

 
Net interest income
 
21,295

 
 
 
21,409

 
 
 
19,968

 
Benefit for credit losses
 
2,155

 
 
 
795

 
 
 
3,964

 
Net interest income after benefit for credit losses
 
23,450

 
 
 
22,204

 
 
 
23,932

 
Investment gains, net
 
1,256

 
 
 
1,336

 
 
 
936

 
Fair value losses, net
 
(1,081
)
 
 
 
(1,767
)
 
 
 
(4,833
)
 
Fee and other income
 
966

 
 
 
1,348

 
 
 
5,887

 
Non-interest income
 
1,141

 
 
 
917

 
 
 
1,990

 
Administrative expenses:
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
1,336

 
 
 
1,319

 
 
 
1,321

 
Professional services
 
955

 
 
 
984

 
 
 
1,076

 
Occupancy expenses
 
186

 
 
 
182

 
 
 
203

 
Other administrative expenses
 
264

 
 
 
565

 
 
 
177

 
Total administrative expenses
 
2,741

 
 
 
3,050

 
 
 
2,777

 
Foreclosed property expense
 
644

 
 
 
1,629

 
 
 
142

 
Temporary Payroll Cut Continuation Act of 2011 (“TCCA”) fees
 
1,845

 
 
 
1,621

 
 
 
1,375

 
Other expenses, net
 
1,028

 
 
 
613

 
 
 
478

 
Total expenses
 
6,258

 
 
 
6,913

 
 
 
4,772

 
Income before federal income taxes
 
18,333

 
 
 
16,208

 
 
 
21,150

 
Provision for federal income taxes
 
(6,020
)
 
 
 
(5,253
)
 
 
 
(6,941
)
 
Net income
 
12,313

 
 
 
10,955

 
 
 
14,209

 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Changes in unrealized gains on available-for-sale securities, net of reclassification adjustments and taxes
 
(642
)
 
 
 
(763
)
 
 
 
494

 
Other
 
(6
)
 
 
 
437

 
 
 
36

 
Total other comprehensive income (loss)
 
(648
)
 
 
 
(326
)
 
 
 
530

 
Total comprehensive income
 
11,665

 
 
 
10,629

 
 
 
14,739

 
Less: Comprehensive income attributable to noncontrolling interest
 
—

 
 
 
(1
)
 
 
 
(1
)
 
Total comprehensive income attributable to Fannie Mae
 
$
11,665

 
 
 
$
10,628

 
 
 
$
14,738

 
Net income
 
$
12,313

 
 
 
$
10,955

 
 
 
$
14,209

 
Less: Net income attributable to noncontrolling interest
 
—

 
 
 
(1
)
 
 
 
(1
)
 
Net income attributable to Fannie Mae
 
$
12,313

 
 
 
$
10,954

 
 
 
$
14,208

 
Dividends distributed or available for distribution to senior preferred stockholder (Note 11)
 
(12,236
)
 
 
 
(11,216
)
 
 
 
(15,323
)
 
Net income (loss) attributable to common stockholders (Note 11)
 
$
77

 
 
 
$
(262
)
 
 
 
$
(1,115
)
 
Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.01

 
 
 
$
(0.05
)
 
 
 
$
(0.19
)
 
Diluted
 
0.01

 
 
 
(0.05
)
 
 
 
(0.19
)
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
5,762

 
 
 
5,762

 
 
 
5,762

 
Diluted
 
5,893

 
 
 
5,762

 
 
 
5,762

 

See Notes to Consolidated Financial Statements

Fannie Mae (In conservatorship) 2016 Form 10-K
F-4

 
Financial Statements | Consolidated Statements of Cash Flows

FANNIE MAE
(In conservatorship)
Consolidated Statements of Cash Flows
(Dollars in millions)
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
Cash flows used in operating activities:
 
 
 
 
 
Net income
$
12,313

 
$
10,955

 
$
14,209

Reconciliation of net income to net cash used in operating activities:
 
 
 
 
 
Amortization of cost basis adjustments
(6,821
)
 
(6,298
)
 
(4,265
)
Benefit for credit losses
(2,155
)
 
(795
)
 
(3,964
)
Valuation gains
(472
)
 
(510
)
 
(2,159
)
Current and deferred federal income taxes
4,309

 
4,083

 
4,126

Net change in trading securities
(3,005
)
 
(10,153
)
 
(2,666
)
Net gains related to the disposition of acquired property and preforeclosure sales, including credit enhancements
(3,124
)
 
(3,055
)
 
(4,510
)
Other, net
(1,778
)
 
(900
)
 
(2,109
)
Net cash used in operating activities
(733
)
 
(6,673
)
 
(1,338
)
Cash flows provided by investing activities:
 
 
 
 
 
Proceeds from maturities and paydowns of trading securities held for investment
1,840

 
768

 
1,358

Proceeds from sales of trading securities held for investment
1,618

 
1,104

 
1,668

Proceeds from maturities and paydowns of available-for-sale securities
2,927

 
4,394

 
5,853

Proceeds from sales of available-for-sale securities
11,378

 
8,249

 
3,265

Purchases of loans held for investment
(233,935
)
 
(187,194
)
 
(132,650
)
Proceeds from repayments of loans acquired as held for investment of Fannie Mae
25,294

 
25,776

 
24,840

Proceeds from sales of loans acquired as held for investment of Fannie Mae
5,222

 
3,196

 
1,879

Proceeds from repayments and sales of loans acquired as held for investment of consolidated trusts
543,690

 
484,230

 
388,348

Net change in restricted cash
(6,074
)
 
1,663

 
(3,547
)
Advances to lenders
(140,147
)
 
(118,746
)
 
(100,045
)
Proceeds from disposition of acquired property and preforeclosure sales
16,115

 
20,757

 
25,476

Net change in federal funds sold and securities purchased under agreements to resell or similar arrangements
(3,065
)
 
3,600

 
8,025

Other, net
116

 
527

 
197

Net cash provided by investing activities
224,979

 
248,324

 
224,667

Cash flows used in financing activities:
 
 
 
 
 
Proceeds from issuance of debt of Fannie Mae
982,272

 
443,371

 
380,282

Payments to redeem debt of Fannie Mae
(1,043,108
)
 
(518,575
)
 
(450,140
)
Proceeds from issuance of debt of consolidated trusts
437,392

 
347,614

 
275,353

Payments to redeem debt of consolidated trusts
(580,642
)
 
(511,158
)
 
(405,505
)
Payments of cash dividends on senior preferred stock to Treasury
(9,624
)
 
(10,278
)
 
(20,594
)
Other, net
14

 
26

 
70

Net cash used in financing activities
(213,696
)
 
(249,000
)
 
(220,534
)
Net increase (decrease) in cash and cash equivalents
10,550

 
(7,349
)
 
2,795

Cash and cash equivalents at beginning of period
14,674

 
22,023

 
19,228

Cash and cash equivalents at end of period
$
25,224

 
$
14,674

 
$
22,023

Cash paid during the period for:
 
 
 
 
 
Interest
$
104,318

 
$
104,928

 
$
108,667

Income taxes
1,711

 
1,170

 
2,815

Non-cash activities:
 
 
 
 
 
Net mortgage loans acquired by assuming debt
$
275,710

 
$
220,168

 
$
190,151

Net transfers from mortgage loans of Fannie Mae to mortgage loans of consolidated trusts
223,705

 
175,104

 
113,611

Transfers from advances to lenders to loans held for investment of consolidated trusts
130,886

 
114,851

 
93,909

Net transfers from mortgage loans to acquired property
13,768

 
17,534

 
24,742

Transfers of mortgage loans from held for investment to held for sale
3,878

 
8,601

 
2,194

See Notes to Consolidated Financial Statements

Fannie Mae (In conservatorship) 2016 Form 10-K
F-5

 
Financial Statements | Consolidated Statements of Changes in Equity


FANNIE MAE
(In conservatorship)
Consolidated Statements of Changes in Equity
(Dollars and shares in millions)
 
 
Fannie Mae Stockholders’ Equity
 
 
 
 
 
 
Shares Outstanding
 
Senior
Preferred Stock
 
Preferred
Stock
 
Common
Stock
 

Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Treasury
Stock
 
Non
Controlling
Interest
 
Total
Equity
 
Senior
Preferred
 
Preferred
 
Common
 
Balance as of December 31, 2013
 
1

 
556

 
1,158

 
$
117,149

 
$
19,130

 
$
687

 
$
(121,227
)
 
$
1,203

 
$
(7,401
)
 
$
50

 
$
9,591

Change in investment in noncontrolling interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(11
)
 
(11
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
—

 
—

 
—

 
—

 
—

 
—

 
14,208

 
—

 
—

 
1

 
14,209

Other comprehensive income, net of tax effect:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in net unrealized gains on available-for-sale securities (net of tax of $389)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
722

 
—

 
—

 
722

Reclassification adjustment for gains included in net income (net of tax of $123)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(228
)
 
—

 
—

 
(228
)
Prior service cost and actuarial gains, net of amortization for defined benefit plans (net of tax of $20)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
36

 
—

 
—

 
36

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14,739

Senior preferred stock dividends
 
—

 
—

 
—

 
—

 
—

 
—

 
(20,594
)
 
—

 
—

 
—

 
(20,594
)
Other
 
—

 
—

 
—

 
—

 
—

 
—

 
(5
)
 
—

 
—

 
—

 
(5
)
Balance as of December 31, 2014
 
1

 
556

 
1,158

 
117,149

 
19,130

 
687

 
(127,618
)
 
1,733

 
(7,401
)
 
40

 
3,720

Change in investment in noncontrolling interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(12
)
 
(12
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
—

 
—

 
—

 
—

 
—

 
—

 
10,954

 
—

 
—

 
1

 
10,955

Other comprehensive income, net of tax effect:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in net unrealized gains on available-for-sale securities (net of tax of $151)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(280
)
 
—

 
—

 
(280
)
Reclassification adjustment for gains included in net income (net of tax of $253)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(483
)
 
—

 
—

 
(483
)
Prior service cost and actuarial gains, net of amortization for defined benefit plans, net of tax
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
437

 
—

 
—

 
437

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10,629

Senior preferred stock dividends
 
—

 
—

 
—

 
—

 
—

 
—

 
(10,278
)
 
—

 
—

 
—

 
(10,278
)
Balance as of December 31, 2015
 
1

 
556

 
1,158

 
117,149

 
19,130

 
687

 
(126,942
)
 
1,407

 
(7,401
)
 
29

 
4,059

Change in investment in noncontrolling interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(29
)
 
(29
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
—

 
—

 
—

 
—

 
—

 
—

 
12,313

 
—

 
—

 
—

 
12,313

Other comprehensive income, net of tax effect:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in net unrealized gains on available-for-sale securities (net of tax of $30)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(55
)
 
—

 
—

 
(55
)
Reclassification adjustment for gains included in net income (net of tax of $316)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(587
)
 
—

 
—

 
(587
)
Other, net of tax
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(6
)
 
—

 
—

 
(6
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11,665

Senior preferred stock dividends
 
—

 
—

 
—

 
—

 
—

 
—

 
(9,624
)
 
—

 
—

 
—

 
(9,624
)
Balance as of December 31, 2016
 
1

 
556

 
1,158

 
$
117,149

 
$
19,130

 
$
687

 
$
(124,253
)
 
$
759

 
$
(7,401
)
 
$
—

 
$
6,071










See Notes to Consolidated Financial Statements

Fannie Mae (In conservatorship) 2016 Form 10-K
F-6

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

FANNIE MAE
(In conservatorship)
Notes to Consolidated Financial Statements
1.  Summary of Significant Accounting Policies
Organization
We are a stockholder-owned corporation organized and existing under the Federal National Mortgage Association Charter Act (the “Charter Act” or our “charter”). We are a government-sponsored enterprise (“GSE”), and we are subject to government oversight and regulation. Our regulators include the Federal Housing Finance Agency (“FHFA”), the U.S. Department of Housing and Urban Development (“HUD”), the U.S. Securities and Exchange Commission (“SEC”), and the U.S. Department of the Treasury (“Treasury”). The U.S. government does not guarantee our securities or other obligations.
We operate in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities, including mortgage-related securities guaranteed by us, from primary mortgage market institutions, such as commercial banks, savings and loan associations, mortgage banking companies, securities dealers and other investors. We do not lend money directly to consumers in the primary mortgage market. We provide additional liquidity in the secondary mortgage market by issuing guaranteed mortgage-related securities.
We have two reportable business segments: Single-Family and Multifamily. The Single-Family business operates in the secondary mortgage market relating to loans secured by properties containing four or fewer residential dwelling units. The Multifamily business operates in the secondary mortgage market relating primarily to loans secured by properties containing five or more residential units. We describe the management reporting and allocation process used to generate our segment results in “Note 12, Segment Reporting.”
Conservatorship
On September 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) placing us in conservatorship and (2) 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.
Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended, including by the Federal Housing Finance Regulatory Reform Act of 2008 (together, the “GSE Act”), the conservator immediately succeeded to (1) 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 (2) title to the books, records and assets of any other legal custodian of Fannie Mae. 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.
We were directed by FHFA to voluntarily delist our common stock and each listed series of our preferred stock from the New York Stock Exchange and the Chicago Stock Exchange. The last trading day for the listed securities on the New York Stock Exchange and the Chicago Stock Exchange was July 7, 2010, and since July 8, 2010, the securities have been traded on the over-the-counter market.
The conservator 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 GSE 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 Fannie Mae. Neither the conservatorship nor the terms of our agreements with Treasury change our obligation to make required payments on our debt securities or perform under our mortgage guaranty obligations.
The conservatorship has no specified termination date and there continues to be significant uncertainty regarding our future, including how long we will continue to exist in our current form, the extent of our role in the market, how long we will be in conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated and whether we will continue to exist following conservatorship. Under the GSE Act, FHFA must place us into receivership if the Director of FHFA makes a written determination that our assets are less than our obligations or if we have not been paying our debts, in either case, for a period of 60 days. In addition, the Director of FHFA may place us into

Fannie Mae (In conservatorship) 2016 Form 10-K
F-7

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

receivership at his discretion at any time for other reasons set forth in the GSE Act, including if we are critically undercapitalized or if we are undercapitalized and have no reasonable prospect of becoming adequately capitalized. Should we be placed into receivership, different assumptions would be required to determine the carrying value of our assets, which could lead to substantially different financial results. We are not aware of any plans of FHFA to fundamentally change our business model or capital structure in the near term.
Senior Preferred Stock and Warrant Issued to Treasury
Senior Preferred Stock
On September 7, 2008, we, through FHFA in its capacity as conservator, entered into a senior preferred stock purchase agreement with Treasury. This agreement was amended and restated on September 26, 2008. The amended and restated agreement was subsequently amended on May 6, 2009, December 24, 2009 and August 17, 2012.
Pursuant to the senior preferred stock purchase agreement, Treasury has committed to provide us with funding as described below to help us maintain a positive net worth thereby avoiding the mandatory receivership trigger described above. As consideration for Treasury’s funding commitment, we issued one million shares of senior preferred stock and a warrant to purchase shares of our common stock to Treasury. As of December 31, 2016 and 2015, we have received a total of $116.1 billion from Treasury pursuant to the senior preferred stock purchase agreement. The aggregate liquidation preference of the senior preferred stock, including the initial aggregate liquidation preference of $1.0 billion, was $117.1 billion as of December 31, 2016. As of December 31, 2016, the amount of remaining funding available to us under the senior preferred stock purchase agreement was $117.6 billion.
In August 2012, we, through FHFA acting on our behalf in its capacity as conservator, entered into an amendment to the senior preferred stock purchase agreement with Treasury. The amendment included, among other things, the following revisions:
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Dividends. The method for calculating the amount of dividends we are required to pay Treasury on the senior preferred stock changed as of January 1, 2013. Effective January 1, 2013, when, as and if declared, the amount of dividends payable on the senior preferred stock for a dividend period is determined based on our net worth as of the end of the immediately preceding fiscal quarter. Our net worth as defined by the agreement is the amount, if any, by which our total assets (excluding Treasury’s funding commitment and any unfunded amounts related to the commitment) exceed our total liabilities (excluding any obligation in respect of capital stock), in each case as reflected on our balance sheet prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). For each dividend period from January 1, 2013 through and including December 31, 2017, the dividend amount will be the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. If our net worth does not exceed the applicable capital reserve amount as of the end of a fiscal quarter, then no dividend amount will accrue or be payable for the applicable dividend period. The capital reserve amount was $1.8 billion and $1.2 billion for dividend periods in 2015 and 2016, respectively, and decreased to $600 million for dividend periods in 2017. For each dividend period beginning in 2018, the dividend amount will be the entire amount of our net worth, if any, as of the end of the immediately preceding fiscal quarter.
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Periodic Commitment Fee. Effective January 1, 2013, the periodic commitment fee provided for under the agreement will not be set, accrue or be payable, as long as the dividend payment provisions described above remain in effect.
This amendment to the senior preferred stock purchase agreement was not accounted for as an extinguishment of the existing senior preferred stock purchase agreement. As a result, we did not recognize a gain or loss upon modification of the senior preferred stock purchase agreement. Consistent with our accounting policy, dividends on the senior preferred stock are accrued upon declaration, which occurs each quarter when FHFA directs us to pay the quarterly dividend to Treasury.
On December 30, 2016, we paid Treasury a dividend of $3.0 billion based on our net worth of $4.2 billion as of September 30, 2016, less the applicable capital reserve of $1.2 billion. Based on the terms of the senior preferred stock, we expect to pay Treasury a dividend of $5.5 billion by March 31, 2017 based on our net worth of $6.1 billion as of December 31, 2016, less the applicable capital reserve of $600 million.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-8

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

Warrant Issued to Treasury
On September 7, 2008, we issued a warrant to Treasury giving it the right to purchase, at a nominal price, shares of our common stock equal to 79.9% of the total common stock outstanding on a fully diluted basis on the date Treasury exercises the warrant. Treasury has the right to exercise the warrant, in whole or in part, at any time on or before September 7, 2028. We recorded the warrant at fair value in our stockholders’ equity as a component of additional paid-in-capital. The fair value of the warrant was calculated using the Black-Scholes Option Pricing Model. Since the warrant has an exercise price of $0.00001 per share, the model is insensitive to the risk-free rate and volatility assumptions used in the calculation and the share value of the warrant is equal to the price of the underlying common stock. We estimated that the fair value of the warrant at issuance was $3.5 billion based on the price of our common stock on September 8, 2008, which was after the dilutive effect of the warrant had been reflected in the market price. Subsequent changes in the fair value of the warrant are not recognized in our financial statements. If the warrant is exercised, the stated value of the common stock issued will be reclassified as “Common stock” in our consolidated balance sheets. Because the warrant’s exercise price per share is considered non-substantive (compared to the market price of our common stock), the warrant was determined to have characteristics of non-voting common stock, and thus is included in the computation of basic and diluted loss per share. The weighted-average shares of common stock outstanding for 2016, 2015 and 2014 included shares of common stock that would be issuable upon full exercise of the warrant issued to Treasury.
Impact of U.S. Government Support
We continue to rely on support from Treasury to eliminate any net worth deficits we may experience in the future, which would otherwise trigger our being placed into receivership. Based on consideration of all the relevant conditions and events affecting our operations, including our reliance on the U.S. government, we continue to operate as a going concern and in accordance with our delegation of authority from FHFA.
We fund our business primarily through the issuance of short-term and long-term debt securities in the domestic and international capital markets. Because debt issuance is our primary funding source, we are subject to “roll-over,” or refinancing, risk on our outstanding debt. Our ability to issue long-term debt has been strong primarily due to actions taken by the federal government to support us.
We believe that continued federal government support of our business, as well as our status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in federal government support of our business or our status as a GSE could materially and adversely affect our liquidity, financial condition and results of operations. In addition, due to our reliance on the U.S. government’s support, our access to debt funding or the cost of debt funding also could be materially adversely affected by a change or perceived change in the creditworthiness of the U.S. government. A downgrade in our credit ratings could reduce demand for our debt securities and increase our borrowing costs. Future changes or disruptions in the financial markets could significantly change the amount, mix and cost of funds we obtain, which also could increase our liquidity and roll-over risk and have a material adverse impact on our liquidity, financial condition and results of operations.
The previous Administration endorsed the wind down of Fannie Mae and Freddie Mac through a responsible transition and the enactment of comprehensive housing finance reform legislation. The current Administration has not articulated a formal position on housing finance reform or the future of the GSEs; however, the Treasury Secretary indicated in his confirmation hearing that he is focused on housing finance reform and a solution to the current status of Fannie Mae and Freddie Mac.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with GAAP. To conform to our current period presentation, we have reclassified certain amounts reported in our prior periods’ consolidated financial statements.
Related Parties
As a result of our issuance to Treasury of the warrant to purchase shares of Fannie Mae common stock equal to 79.9% of the total number of shares of Fannie Mae common stock, we and Treasury are deemed related parties. As of December 31, 2016, Treasury held an investment in our senior preferred stock with an aggregate liquidation preference of $117.1 billion. FHFA’s control of both us and Freddie Mac has caused us, FHFA and Freddie Mac to be deemed related parties. In October 2013, Fannie Mae and Freddie Mac established Common Securitization

Fannie Mae (In conservatorship) 2016 Form 10-K
F-9

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

Solutions, LLC (“CSS”), a jointly owned limited liability company to operate a common securitization platform; therefore, CSS is deemed a related party.
Transactions with Treasury
Our administrative expenses were reduced by $57 million, $68 million and $71 million for the years ended December 31, 2016, 2015 and 2014, respectively, due to reimbursements from Treasury and Freddie Mac for expenses incurred as program administrator for Treasury’s Home Affordable Modification Program (“HAMP”) and other initiatives under Treasury’s Making Home Affordable Program.
During the years ended December 31, 2016, 2015 and 2014, we made tax payments of $1.7 billion, $1.2 billion and $2.8 billion, respectively, to the Internal Revenue Service (“IRS”), a bureau of Treasury. We received $7 million in interest from the IRS during the year ended December 31, 2016 related to income tax periods from 2007 and prior. We received a refund of $277 million from the IRS during the year ended December 31, 2015 for income tax adjustments related to tax years 2004 through 2010.
In 2009, we entered into a memorandum of understanding with Treasury, FHFA and Freddie Mac pursuant to which we agreed to provide assistance to state and local housing finance agencies (“HFAs”) through certain programs, including a new issue bond (“NIB”) program. As of December 31, 2016, under the NIB program, Fannie Mae and Freddie Mac had $5.7 billion outstanding of pass-through securities backed by single-family and multifamily housing bonds issued by HFAs, which is less than 35% of the total original principal under the program, the amount of losses that Treasury would bear. Accordingly, we do not have a potential risk of loss under the NIB program.
In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) which, among other provisions, requires that we increase our single-family guaranty fees by at least 10 basis points and remit this increase to Treasury. Effective April 1, 2012, the guaranty fee on all single-family residential mortgages delivered to Fannie Mae on or after that date was increased by 10 basis points. FHFA and Treasury have advised us to remit this fee increase to Treasury with respect to all loans acquired by us on or after April 1, 2012 and before January 1, 2022, and to continue to remit these amounts to Treasury on and after January 1, 2022 with respect to loans we acquired before this date until those loans are paid off or otherwise liquidated.
The resulting fee revenue and expense are recorded in “Mortgage loans interest income” and “TCCA fees,” respectively, in our consolidated statements of operations and comprehensive income. We recognized $1.8 billion, $1.6 billion and $1.4 billion as TCCA fees for the years ended December 31, 2016, 2015 and 2014, respectively, of which $487 million and $429 million had not been remitted as of December 31, 2016 and 2015, respectively.
We incurred expenses in connection with certain funding obligations under the GSE Act, a portion of which is attributable to Treasury’s Capital Magnet and HOPE Reserve Funds. These expenses, recognized in “Other expenses, net” in our consolidated statements of operations and comprehensive income, were measured as the product of 4.2 basis points and the unpaid principal balance of our total new business purchases for the respective period. We recognized $137 million and $111 million in “Other expenses, net” in connection with Treasury’s Capital Magnet and HOPE Reserve Funds for the years ended December 31, 2016 and 2015, respectively. These amounts had not been remitted as of the end of the respective periods.
In addition to the transactions with Treasury mentioned above, we purchase and sell Treasury securities in the normal course of business. As of December 31, 2016 and 2015, we held Treasury securities with a fair value of $32.3 billion and $29.5 billion, respectively, and accrued interest receivable of $39 million and $15 million, respectively. We recognized interest income on these securities held by us of $157 million, $35 million and $18 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Transactions with Freddie Mac
As of December 31, 2016 and 2015, we held Freddie Mac mortgage-related securities with a fair value of $1.4 billion and $5.6 billion, respectively, and accrued interest receivable of $5 million and $22 million, respectively. We recognized interest income on these securities held by us of $112 million, $226 million and $283 million for the years ended December 31, 2016, 2015 and 2014, respectively. Freddie Mac may be an investor in variable interest entities (“VIEs”) that we have consolidated, and we may be an investor in VIEs that Freddie Mac has consolidated. Freddie Mac may also be an investor in our debt securities.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-10

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

Transactions with FHFA
The GSE Act authorizes FHFA to establish an annual assessment for regulated entities, including Fannie Mae, which is payable on a semi-annual basis (April and October), for FHFA’s costs and expenses, as well as to maintain FHFA’s working capital. We recognized FHFA assessment fees, which are recorded in “Administrative expenses” in our consolidated statements of operations and comprehensive income, of $114 million, $112 million and $108 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Transactions with CSS
In connection with our jointly owned company with Freddie Mac, for the years ended December 31, 2016, 2015 and 2014, we contributed $118 million, $66 million and $43 million of capital into CSS, respectively. In November 2016, Fannie Mae, Freddie Mac and CSS entered into a Customer Services Agreement that sets forth the terms under which CSS will provide securitization services to us and Freddie Mac. No other transactions outside of normal business activities have occurred between us and Freddie Mac during the years ended December 31, 2016, 2015 or 2014.
Use of Estimates
Preparing consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect our reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities as of the dates of our consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting periods. 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 and allowance for loan losses. Actual results could be different from these estimates.
In April 2012, FHFA issued Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” (the “Advisory Bulletin”), which prescribes, among other things, guidance on when a loan should be charged off. This change in estimate resulted in the recognition on January 1, 2015 of (1) $1.8 billion in charge-offs of held for investment loans, (2) $724 million in charge-offs of preforeclosure property taxes and insurance receivable and (3) a reduction to our allowance for loan losses and our allowance for preforeclosure property taxes and insurance receivable in amounts equal to charge-offs recognized in connection with held for investment loans and preforeclosure property taxes and insurance receivable.
For the majority of our delinquent single-family loans, we charge off the loan at the date of foreclosure or other liquidation event (such as a deed-in-lieu of foreclosure or a short sale). For a subset of delinquent single-family loans, we charge off the portion of the loans that is deemed uncollectible prior to foreclosure when the loans have been delinquent for a specified length of time and meet specified mark-to-market loan-to-value (“LTV”) ratios. We continue to enhance our data collection and analysis efforts to further refine our loss estimates as we obtain incremental information on the performance of our loans.
In 2014, we updated the assumptions used to estimate cash flows for individually impaired single-family loans within our allowance for loan losses. This update resulted in a decrease to our allowance for loan losses and an incremental benefit for credit losses of approximately $600 million.
Principles of Consolidation
Our consolidated financial statements include our accounts as well as the accounts of the other entities in which we have a controlling financial interest. All intercompany balances and transactions have been eliminated. The typical condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. A controlling financial interest may also exist in entities through arrangements that do not involve voting interests, such as a VIE.
VIE Assessment
We have interests in various entities that are considered VIEs. A VIE is an entity (1) that has total equity at risk that is not sufficient to finance its activities without additional subordinated financial support from other entities, (2) where the group of equity holders does not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance, or the obligation to absorb the entity’s expected losses or the right to receive the entity’s expected residual returns, or both, or (3) where the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the

Fannie Mae (In conservatorship) 2016 Form 10-K
F-11

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

expected residual returns of the entity, or both, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.
We determine if an entity is a VIE by performing a qualitative analysis, which requires certain subjective decisions including, but not limited to, the design of the entity, the variability that the entity was designed to create and pass along to its interest holders, the rights of the parties and the purpose of the arrangement. If we cannot conclude after a qualitative analysis whether an entity is a VIE, we perform a quantitative analysis.
The primary types of VIE entities with which we are involved are securitization trusts guaranteed by us via lender swap and portfolio securitization transactions, limited partnership investments in low-income housing tax credit (“LIHTC”) and other housing partnerships, as well as mortgage and asset-backed trusts that were not created by us.
Primary Beneficiary Determination
If an entity is a VIE, we consider whether our variable interest in that entity causes us to be the primary beneficiary. We are deemed to be the primary beneficiary of a VIE when we have both (1) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and (2) exposure to benefits and/or losses that could potentially be significant to the entity. The primary beneficiary of the VIE is required to consolidate and account for the assets, liabilities, and noncontrolling interests of the VIE in its consolidated financial statements. The assessment of which party has the power to direct the activities of the VIE may require significant management judgment when (1) more than one party has power or (2) more than one party is involved in the design of the VIE but no party has the power to direct the ongoing activities that could be significant.
We continually assess whether we are the primary beneficiary of the VIEs with which we are involved and therefore may consolidate or deconsolidate a VIE through the duration of our involvement. Examples of certain events that may change whether or not we consolidate the VIE include a change in the design of the entity or a change in our ownership in the entity such that we no longer hold substantially all of the certificates issued by a multi-class resecuritization trust.  
Measurement of Consolidated Assets and Liabilities
When we are the transferor of assets into a VIE that we consolidate at the time of the transfer, we continue to recognize the assets and liabilities of the VIE at the amounts that they would have been recognized if we had not transferred them, and no gain or loss is recognized. For all other VIEs that we consolidate (that is, those for which we are not the transferor), we recognize the assets and liabilities of the VIE in our consolidated financial statements at fair value, and we recognize a gain or loss for the difference between (1) the fair value of the consideration paid, fair value of noncontrolling interests and the reported amount of any previously held interests, and (2) the net amount of the fair value of the assets and liabilities consolidated. However, for the securitization trusts established under our lender swap program, no gain or loss is recognized if the trust is consolidated at formation as there is no difference in the respective fair value of (1) and (2) above. We record gains or losses that are associated with the consolidation of VIEs as a component of “Investment gains, net” in our consolidated statements of operations and comprehensive income.
If we cease to be deemed the primary beneficiary of a VIE, we deconsolidate the VIE. We use fair value to measure the initial cost basis for any retained interests that are recorded upon the deconsolidation of a VIE. Any difference between the fair value and the previous carrying amount of our investment in the VIE is recorded as “Investment gains, net” in our consolidated statements of operations and comprehensive income.
Purchase/Sale of Fannie Mae Securities
We actively purchase and may subsequently sell guaranteed MBS that have been issued through our lender swap and portfolio securitization transaction programs. The accounting for the purchase and sale of our guaranteed MBS issued by the trusts differs based on the characteristics of the securitization trusts and whether the trusts are consolidated.
Single-Class Securitization Trusts
We create single-class securitization trusts to issue single-class Fannie Mae MBS that evidence an undivided interest in the mortgage loans held in the trust. Investors in single-class Fannie Mae MBS receive principal and interest payments in proportion to their percentage ownership of the MBS issuance. We guarantee to each single-class securitization trust that we will supplement amounts received by the single-class securitization trust as

Fannie Mae (In conservatorship) 2016 Form 10-K
F-12

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

required to permit timely payments of principal and interest on the related Fannie Mae MBS. This guaranty exposes us to credit losses on the loans underlying Fannie Mae MBS.
Single-class securitization trusts are used for our lender swap and portfolio securitization transaction programs. A lender swap transaction occurs when a mortgage lender delivers a pool of single-family mortgage loans to us, which we immediately deposit into an MBS trust. The MBS are then issued to the lender in exchange for the mortgage loans. A portfolio securitization transaction occurs when we purchase mortgage loans from third-party sellers for cash and later deposit these loans into an MBS trust. The securities issued through a portfolio securitization are then sold to investors for cash. We consolidate single-class securitization trusts that are issued under these programs when our role as guarantor and master servicer provides us with the power to direct matters, such as the servicing of the mortgage loans, that impact the credit risk to which we are exposed. In contrast, we do not consolidate single-class securitization trusts when other organizations have the power to direct these activities (e.g., when the loan collateral is subject to a Federal Housing Administration guaranty and related Servicing Guide).
When we purchase single-class Fannie Mae MBS issued from a consolidated trust, we account for the transaction as an extinguishment of the related debt in our consolidated financial statements. We record a gain or loss on the extinguishment of such debt to the extent that the purchase price of the MBS does not equal the carrying value of the related consolidated debt reported in our consolidated balance sheets (including unamortized premiums, discounts or the other cost basis adjustments) at the time of purchase. We account for the sale of an MBS from Fannie Mae’s portfolio that was issued from a consolidated trust as the issuance of debt in our consolidated financial statements. We amortize the related premiums, discounts and other cost basis adjustments into income over time.
To determine the order in which consolidated debt is extinguished, we have elected to use a daily convention in the application of the last-issued first-extinguished method. Under this method, we record the net daily change in each MBS holding as either the issuance of debt if there has been an increase in the position that is held by third parties, or the extinguishment of the most recently issued related debt if there has been a decrease in the position held by third parties. The impact of this method is that we record the net daily activity for an MBS as if it were a single buy or sell trade, which results in a change in our beginning debt balance if the total unpaid principal balance purchased does not match the total unpaid principal balance sold.
If a single-class securitization trust is not consolidated, we account for the purchase and subsequent sale of such securities as the transfer of an investment security in accordance with the accounting guidance for transfers of financial assets.
Single-Class Resecuritization Trusts
Single-class resecuritization trusts (Fannie Megas®) are created by depositing Fannie Mae MBS into a new securitization trust for the purpose of aggregating multiple MBS into a single larger security. The cash flows from the new security represent an aggregation of the cash flows from the underlying MBS. We guarantee to each single-class resecuritization trust that we will supplement amounts received by the trust as required to permit timely payments of principal and interest on the related Fannie Mae securities. However, we assume no additional credit risk in such a resecuritization transaction, because the underlying assets are MBS for which we have already provided a guaranty. Additionally, our involvement with these trusts does not provide any incremental rights or power that would enable Fannie Mae to direct any activities of the trusts. As a result, we have concluded that we are not the primary beneficiaries of, and therefore do not consolidate, our single-class resecuritization trusts.
As our single-class resecuritization securities pass through all of the cash flows of the underlying MBS directly to the holders of the securities, they are deemed to be substantially the same as the underlying MBS. Therefore, we account for purchases of our single-class resecuritization securities as an extinguishment of the underlying MBS debt and the sale of these securities as an issuance of the underlying MBS debt.
Multi-Class Resecuritization Trusts
Multi-class resecuritization trusts are trusts we create to issue multi-class Fannie Mae securities, including Real Estate Mortgage Investment Conduit (“REMIC”) and interest-only and principal-only strip securities, in which the cash flows of the underlying mortgage assets are divided, creating several classes of securities, each of which represents a beneficial ownership interest in a separate portion of cash flows. We guarantee to each multi-class resecuritization trust that we will supplement amounts received by the trusts as required to permit timely

Fannie Mae (In conservatorship) 2016 Form 10-K
F-13

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

payments of principal and interest, as applicable, on the related Fannie Mae securities. However, we assume no additional credit risk in such a resecuritization transaction because the underlying assets are Fannie Mae MBS for which we have already provided a guaranty. Although we may be exposed to prepayment risk via our ownership of the securities issued by these trusts, we do not have the ability via our involvement with a multi-class resecuritization trust to impact the economic risk to which we are exposed. Therefore, we do not consolidate such a multi-class resecuritization trust until we hold a substantial portion of the outstanding beneficial interests that have been issued by the trust and are therefore considered the primary beneficiary of the trust.
In contrast to our single-class resecuritization trust, the cash flows from the underlying MBS are divided between the debt securities issued by the multi-class resecuritization trust, and therefore, the debt issued by a multi-class resecuritization trust is not substantially the same as the consolidated MBS debt. As a result, if a multi-class resecuritization trust is not consolidated, we account for the purchase and sale of such securities as the transfer of an investment security in accordance with the accounting guidance for the transfers of financial assets rather than the issuance or extinguishment of the related multi-class debt. However, if a multi-class resecuritization trust is consolidated, we account for the purchase of the securities issued by consolidated multi-class resecuritization trusts as an extinguishment of the debt issued by these trusts and the subsequent sale of such securities as the issuance of multi-class debt.
When we do not consolidate a multi-class resecuritization trust, we recognize in our consolidated financial statements both our investment in the trust and the mortgage loans of the Fannie Mae MBS trusts that we consolidate that underlie the multi-class resecuritization trust. Additionally, we recognize the unsecured corporate debt issued to third parties to fund the purchase of our investments in the multi-class resecuritization trusts and the debt issued to third parties of the MBS trusts we consolidate that underlie the multi-class resecuritization trusts. This results in the recognition of interest income from investments in multi-class resecuritization trusts and interest expense from the unsecured debt issued to third parties to fund the purchase of the investments in multi-class resecuritization trusts, as well as interest income from the mortgage loans and interest expense from the debt issued to third parties from the MBS trusts we consolidate that underlie the multi-class resecuritization trusts.
Transfers of Financial Assets
We evaluate a transfer of financial assets to determine whether the transfer qualifies as a sale. If the transfer does not meet the criteria for sale treatment, the transferred assets remain in our consolidated balance sheets and we record a liability to the extent of any proceeds received in connection with such a transfer. Transfers of financial assets for which we surrender control of the transferred assets are recorded as sales.
When a transfer that qualifies as a sale is completed, we derecognize all assets transferred and recognize all assets obtained and liabilities incurred at fair value. The difference between the carrying basis of the assets transferred and the fair value of the proceeds from the sale is recorded as a component of “Investment gains, net” in our consolidated statements of operations and comprehensive income. Retained interests are primarily derived from transfers associated with our portfolio securitizations in the form of Fannie Mae MBS, REMIC certificates, guaranty assets and master servicing assets (“MSAs”). We separately describe the subsequent accounting, as well as how we determine fair value, for our retained interests in the Fannie Mae MBS included in the “Investments in Securities” section of this note.
We enter into repurchase agreements that involve contemporaneous trades to purchase and sell securities. These transactions are accounted for as secured financings since the transferor has not relinquished control over the transferred assets. These transactions are reported as securities purchased under agreements to resell and securities sold under agreements to repurchase in our consolidated balance sheets except for securities purchased under agreements to resell on an overnight basis, which are included in cash and cash equivalents in our consolidated balance sheets.
Cash and Cash Equivalents and Statements of Cash Flows
Short-term investments that have a maturity at the date of acquisition of three months or less and are readily convertible to known amounts of cash are generally considered cash equivalents. We also include securities purchased under agreements to resell on an overnight basis in cash and cash equivalents in our consolidated balance sheets. We may pledge as collateral certain short-term investments classified as cash equivalents.
In the presentation of our consolidated statements of cash flows, we present cash flows from derivatives that do not contain financing elements and mortgage loans held for sale at acquisition as operating activities. We present cash flows from federal funds sold and securities purchased under agreements to resell or similar arrangements

Fannie Mae (In conservatorship) 2016 Form 10-K
F-14

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

as investing activities and cash flows from federal funds purchased and securities sold under agreements to repurchase as financing activities. We classify cash flows from trading securities based on their nature and purpose. We classify all cash flows from trading securities (U.S. Treasury securities and mortgage-related securities purchased subsequent to December 31, 2013) as operating activities as we do not intend to hold the securities for investment. We classify cash flows from mortgage-related trading securities purchased prior to January 1, 2014 that we intend to hold for investment as investing activities.
For consolidated trusts, we classify cash flows related to mortgage loans held by our consolidated trusts as either investing activities (for principal repayments) or operating activities (for interest received from borrowers included as a component of our net income). Cash flows related to debt securities issued by consolidated trusts are classified as either financing activities (for repayments of principal to certificateholders) or operating activities (for interest payments to certificateholders included as a component of our net income). We distinguish between the payments and proceeds related to the debt of Fannie Mae and the debt of consolidated trusts, as applicable. We present our non-cash activities in the consolidated statements of cash flows at the associated unpaid principal balance.
Restricted Cash
We and our servicers advance payments on delinquent loans to consolidated Fannie Mae MBS trusts. We recognize the cash advanced as “Restricted cash” in our consolidated balance sheets to the extent such amounts are due to, but have not yet been remitted to, the MBS certificateholders. In addition, when we or our servicers collect and hold cash that is due to certain Fannie Mae MBS trusts in advance of our requirement to remit these amounts to the trusts, we recognize the collected cash amounts as “Restricted cash.”
We also recognize “Restricted cash” as a result of restrictions related to certain consolidated partnership funds as well as for certain collateral arrangements for which we do not have the right to use the cash.
Investments in Securities
Securities Classified as Available-for-Sale or Trading
We classify and account for our securities as either available-for-sale (“AFS”) or trading. We measure AFS securities at fair value in our consolidated balance sheets, with unrealized gains and losses included in “Accumulated other comprehensive income” (“AOCI”), net of income taxes. We recognize realized gains and losses on AFS securities when securities are sold. We calculate the gains and losses using the specific identification method and record them in “Investment gains, net” in our consolidated statements of operations and comprehensive income. We measure trading securities at fair value in our consolidated balance sheets with unrealized and realized gains and losses included as a component of “Fair value losses, net” in our consolidated statements of operations and comprehensive income. We include interest and dividends on securities in our consolidated statements of operations and comprehensive income. Interest income includes the amortization of cost basis adjustments, including premiums and discounts, recognized as a yield adjustment using the interest method over the contractual term of the security. When we receive multiple deliveries of securities on the same day that are backed by the same pools of loans, we calculate the specific cost of each security as the average price of the trades that delivered those securities. As of December 31, 2016, we did not have any securities classified as held-to-maturity, although we may elect to do so in the future.
Fannie Mae MBS included in “Investments in securities”
When we own Fannie Mae MBS issued by unconsolidated trusts, we do not derecognize any components of the guaranty assets, guaranty obligations, or any other outstanding recorded amounts associated with the guaranty transaction because our contractual obligation to the MBS trust remains in force until the trust is liquidated. We determine the fair value of Fannie Mae MBS based on observable market prices because most Fannie Mae MBS are actively traded. Fannie Mae MBS receive high credit quality ratings primarily because of our guaranty. The fair value of the guaranty obligation, net of deferred profit, associated with Fannie Mae MBS included in “Investments in securities” approximates the fair value of the credit risk that exists on these Fannie Mae MBS absent our guaranty. We disclose the aggregate amount of Fannie Mae MBS held as “Investments in securities” in our consolidated balance sheets. The unamortized obligation to stand ready to perform over the term of our guaranty and any incurred credit losses that relate to Fannie Mae MBS held as “Investments in securities” is included in “Other liabilities.” Upon subsequent sale of a Fannie Mae MBS, we continue to account for any outstanding recorded amounts associated with the guaranty transaction on the same basis of accounting as prior to the sale

Fannie Mae (In conservatorship) 2016 Form 10-K
F-15

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

of Fannie Mae MBS, as no new assets were retained and no new liabilities have been assumed upon the subsequent sale. The fair value of our guaranty obligations associated with the Fannie Mae MBS included in “Investments in securities” was $446 million and $488 million as of December 31, 2016 and 2015, respectively. These Fannie Mae MBS consist primarily of private-label wraps where our guaranty arrangement is with an unconsolidated MBS trust.
Other-Than-Temporary Impairment of Debt Securities
We evaluate AFS securities for other-than-temporary impairment (“OTTI”) on a quarterly basis. OTTI 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 such cases, we recognize in “Investment gains, net” in our consolidated statements of operations and comprehensive income the entire difference between the amortized cost basis of the security and its fair value. OTTI 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 to sell the security or it is not more likely than not we will be required to sell the security before recovery. We separate the difference between the amortized cost basis of the security and its fair value into the amount representing the credit loss, which we recognize in “Investment gains, net” in our consolidated statements of operations and comprehensive income, and the amount related to all other factors, which we recognize in “Other comprehensive income (loss),” net of taxes.
We consider guarantees, insurance contracts or other credit enhancements (such as collateral) in determining our best estimate of cash flows expected to be collected only if (1) such guarantees, insurance contracts or other credit enhancements provide for payments to be made solely to reimburse us for failure of the issuer to satisfy its required payment obligations; (2) such guarantees, insurance contracts or other credit enhancements are contractually attached to the security; and (3) collection of the amounts receivable under these agreements is deemed probable. Guarantees, insurance contracts or other credit enhancements are considered contractually attached if they are part of and trade with the security upon transfer of the security to a third party.
In periods after we recognize OTTI of debt securities, we use the prospective interest method to recognize interest income. Under the prospective interest method, we calculate a new effective yield for subsequent recognition of interest income and measurement of impairment when we determine that there has been a significant increase in expected or actual cash flows. We consider a significant increase in cash flows to be at least a 10% increase over two consecutive quarters of the expected or actual cash flows. We calculate the new effective yield by using the new cost basis and the significantly increased actual or expected cash flows.
Mortgage Loans
Loans Held for Sale
When we acquire mortgage loans that we intend to sell or securitize via trusts that will not be consolidated, we classify the loans as held for sale (“HFS”). We report HFS loans at the lower of cost or fair value. Any excess of an HFS loan’s cost over its fair value is recognized as a valuation allowance, with changes in the valuation allowance recognized as “Investment gains, net” in our consolidated statements of operations and comprehensive income. We recognize interest income on HFS loans on an accrual basis, unless we determine that the ultimate collection of contractual principal or interest payments in full is not reasonably assured. Purchased premiums, discounts and other cost basis adjustments on HFS loans are deferred upon loan acquisition, included in the cost basis of the loan, and not amortized. We determine any lower of cost or fair value adjustment on HFS loans at an individual loan level.
In the event that we reclassify held for investment (“HFI”) loans to HFS loans, based upon a change in our intent, we record the loans at lower of cost or fair value on the date of reclassification. We recognize any lower of cost or fair value adjustment recognized upon reclassification through the provision for credit losses.
Loans Held for Investment
When we acquire mortgage loans that we have the ability and the intent to hold for the foreseeable future or until maturity, we classify the loans as HFI. When we consolidate a trust, we recognize the loans underlying the trust in our consolidated balance sheets. The trusts do not have the ability to sell mortgage loans and the use of such loans is limited exclusively to the settlement of obligations of the trusts. Therefore, mortgages acquired when we have the intent to securitize via trusts that are consolidated will generally be classified as HFI in our consolidated balance sheets both prior to and subsequent to their securitization.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-16

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

We report HFI loans at the unpaid principal balance, net of unamortized premiums and discounts, other cost basis adjustments, and allowance for loan losses. We recognize interest income on HFI loans on an accrual basis using the interest method over the contractual life of the loan, including the amortization of any deferred cost basis adjustments, such as the premium or discount at acquisition, unless we determine that the ultimate collection of contractual principal or interest payments in full is not reasonably assured.
Nonaccrual Loans
We discontinue accruing interest on loans when we believe collectibility of principal or interest is not reasonably assured, which for a single-family loan we have determined, based on our historical experience, to be when the loan becomes two months or more past due according to its contractual terms. Interest previously accrued but not collected is reversed through interest income at the date a loan is placed on nonaccrual status. We return a non-modified single-family loan to accrual status at the point that the borrower brings the loan current. We return a modified single-family loan to accrual status at the point that the borrower successfully makes all required payments during the trial period (generally three to four months) and the modification is made permanent. We place a multifamily loan on nonaccrual status when the loan becomes three months or more past due according to its contractual terms or is deemed to be individually impaired, unless the loan is well secured such that collectibility of principal and accrued interest is reasonably assured. We return a multifamily loan to accrual status when the borrower cures the delinquency of the loan or we otherwise determine that the loan is well secured such that collectibility is reasonably assured.
Restructured Loans
A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial difficulties is considered a troubled debt restructuring (“TDR”). Our loss mitigation programs primarily include modifications that result in the capitalization of past due amounts in combination with interest rate reductions and/or the extension of the loan’s maturity date. Such restructurings are granted to borrowers in financial difficulty on either a permanent or contingent basis, as in the case of modifications with a trial period. We consider these types of loan restructurings to be TDRs.
We generally do not include principal or past due interest forgiveness as part of our loss mitigation programs, and, as a result, we generally do not charge off any outstanding principal or accrued interest amounts at the time of loan modification. We believe that the loan underwriting activities we perform as a part of our loan modification process coupled with the borrower’s successful performance during any required trial period provide us reasonable assurance regarding the collectibility of the principal and interest due in accordance with the loan’s modified terms, which include any past due interest amounts that are capitalized as principal at the time of modification. As such, the loan is returned to accrual status when the loan modification is completed (i.e., at the end of the trial period), and we accrue interest thereafter in accordance with our interest accrual policy. If the loan was on nonaccrual status prior to entering the trial period, it remains on nonaccrual status until the borrower demonstrates performance via the trial period and the modification is finalized.
In addition to these loan modifications, we also engage in other loss mitigation activities with troubled borrowers, which include repayment plans, forbearance arrangements, and the capitalization only of past due amounts. Repayment plans and forbearance arrangements are informal agreements with the borrower that do not result in the legal modification of the loan. For all of these activities, we consider the deferral or capitalization of three or fewer missed payments to represent only an insignificant delay, and thus not a TDR. If we defer or capitalize more than three missed payments, the delay is no longer considered insignificant, and the restructuring is accounted for as a TDR.
We measure impairment of a loan restructured in a TDR individually based on the excess of the recorded investment in the loan over the present value of the expected future cash inflows discounted at the loan’s original effective interest rate. Costs incurred to complete a TDR are expensed as incurred. However, when foreclosure is probable on an individually impaired loan, we measure impairment based on the difference between our recorded investment in the loan and the fair value of the underlying property, adjusted for the estimated costs to sell the property and estimated insurance or other proceeds we expect to receive.
Allowance for Loan Losses and Reserve for Guaranty Losses
Our allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related to our recorded investment in both single-family and multifamily HFI loans. This population includes both HFI loans

Fannie Mae (In conservatorship) 2016 Form 10-K
F-17

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

held by Fannie Mae and by consolidated Fannie Mae MBS trusts. When calculating our allowance for loan losses, we consider only our net recorded investment in the loan at the balance sheet date, which includes the loan’s unpaid principal balance and any applicable cost basis adjustments. We record charge-offs as a reduction to the allowance for loan losses when losses are confirmed through the receipt of assets in satisfaction of a loan, such as the underlying collateral upon foreclosure or cash upon completion of a short sale. Additionally, we record charge-offs as a reduction to our allowance for loan losses when a loan is determined to be uncollectible, upon the redesignation of loans from HFI to HFS and pursuant to the charge-off provisions of the Advisory Bulletin.
The reserve for guaranty losses is a liability account which is a component of “Other liabilities” in our consolidated balance sheets that reflects an estimate of incurred credit losses related to our guaranty to each unconsolidated Fannie Mae MBS trust that we will supplement amounts received by the Fannie Mae MBS trust as required to permit timely payments of principal and interest on the related Fannie Mae MBS and our agreements to purchase credit-impaired loans from lenders under the terms of our long-term standby commitments. As a result, the reserve for guaranty losses considers not only the principal and interest due on the loan at the current balance sheet date, but also any additional interest payments due to the trust from the current balance sheet date until the point of loan acquisition or foreclosure. The reserve for guaranty losses was $370 million and $639 million as of December 31, 2016 and 2015, respectively.
We recognize incurred losses by recording a charge to the provision for guaranty losses, which is a component of “Benefit for credit losses,” in our consolidated statements of operations and comprehensive income.
Single-Family Loans
We recognize credit losses related to groups of similar single-family HFI loans that are not individually impaired when (1) available information as of each balance sheet date indicates that it is probable a loss has occurred and (2) the amount of the loss can be reasonably estimated. We aggregate such loans, based on similar risk characteristics, for purposes of estimating incurred credit losses and establish a collective single-family loss reserve using an econometric model that derives an overall loss reserve estimate. The estimate takes into account multiple factors which include but are not limited to origination year, loan product type, mark-to-market LTV ratio, and delinquency status. Once loans are aggregated, there typically is not a single, distinct event that would result in an individual loan or pool of loans being impaired. In determining our collective reserve, we base our allowance methodology on historical events and trends, such as loss severity (in event of default), default rates, and recoveries from mortgage insurance contracts and other credit enhancements that provide loan level loss coverage and are either contractually attached to a loan or that were entered into contemporaneously with and in contemplation of a guaranty or loan purchase transaction. We use recent regional historical sales and appraisal information, including the sales of our own foreclosed properties, to develop our loss severity estimates for all loan categories. Our allowance calculation also incorporates a loss confirmation period (the anticipated time lag between a credit loss event and the confirmation of the credit loss resulting from that event) to ensure our allowance estimate captures credit losses that have been incurred as of the balance sheet date but have not been confirmed. In addition, management performs a review of the observable data used in its estimate to ensure it is representative of prevailing economic conditions and other events existing as of the balance sheet date.
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 in full satisfaction of a loan, such as the underlying collateral upon foreclosure or cash upon completion of a short sale. Additionally, we record charge-offs as a reduction to our allowance for loan losses when a loan is determined to be uncollectible, upon the redesignation of loans from HFI to HFS and pursuant to the charge-off provisions of the Advisory Bulletin. The excess of a loan’s unpaid principal balance, accrued interest, and any applicable cost basis adjustments (“our total exposure”) over the fair value of the assets is treated as a charge-off loss that is deducted from the allowance for loan losses or reserve for guaranty losses. The amount charged off also considers estimated proceeds from primary mortgage insurance or other credit enhancements that are either contractually attached to a loan or that were entered into contemporaneously with and in contemplation of a guaranty or loan purchase transaction as a recovery of our total exposure, up to the amount of loss recognized as a charge-off. We record additional proceeds from primary mortgage insurance and credit enhancements in excess of our total exposure as a recovery of any forgone contractually past due interest, and then as an offset to the expenses recorded in “Foreclosed property expense” in our consolidated statements of operations and comprehensive income when received.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-18

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

Individually Impaired Single-Family Loans
Individually impaired single-family loans currently include those restructured in a TDR and acquired credit-impaired loans. We consider a loan to be impaired when, based on current information, it is probable that we will not receive all amounts due, including interest, in accordance with the contractual terms of the loan agreement. When making our assessment as to whether a loan is impaired, we also take into account more than insignificant delays in payment and shortfalls in amounts received. Determination of whether a delay in payment or shortfall in amount is more than insignificant requires management’s judgment as to the facts and circumstances surrounding the loan.
Our measurement of impairment on an individually impaired loan follows the method that is most consistent with our expectations of recovery of our recorded investment in the loan. When a loan has been restructured, we measure impairment using a cash flow analysis discounted at the loan’s original effective interest rate. If we expect to recover our recorded investment in an individually impaired loan through probable foreclosure of the underlying collateral, we measure impairment based on the fair value of the collateral, reduced by estimated disposal costs on a discounted basis and adjusted for estimated proceeds from mortgage, flood, or hazard insurance or similar sources. For individually impaired loans that we believe are probable of foreclosure, we take into consideration the sales prices of foreclosed properties in determining the value of the underlying real estate collateral.
We use internal models to project cash flows used to assess impairment of individually impaired loans, and generally update the market and loan characteristic inputs we use in these models monthly, using month-end data. Market inputs include information such as interest rates, volatility and spreads, while loan characteristic inputs include information such as mark-to-market LTV ratios and delinquency status. The loan characteristic inputs are key factors that affect the predicted rate of default for loans evaluated for impairment through our internal cash flow models. For example, loans with an unsuccessful trial modification, which are often accompanied by high delinquency rates, have much higher predicted default rates compared to performing loans with completed modifications, particularly those with a significant payment reduction in the borrower’s required monthly payment. We evaluate the reasonableness of our models by comparing the results with actual performance and our assessment of current market conditions. In addition, we review our models at least annually for reasonableness and predictive ability in accordance with our corporate model review policy. Accordingly, we believe the projected cash flows generated by our models that we use to assess impairment appropriately reflect the expected future performance of the loans.
Multifamily Loans
We identify multifamily loans for evaluation for impairment through a credit risk assessment process. If we determine that a multifamily loan is individually impaired, we generally measure impairment on that loan based on the fair value of the underlying collateral less estimated costs to sell the property. For groups of smaller-balance homogeneous multifamily loans, we evaluate collectively for impairment. We establish a collective multifamily loss reserve for all loans in our multifamily guaranty book of business that are not individually impaired using an internal model that applies loss factors to loans in similar risk categories.
We categorize loan credit risk based on relevant observable data about a borrower’s ability to pay, including multifamily market economic fundamentals, review of available current borrower financial information, operating statements on the underlying collateral, current debt service coverage ratios (“DSCRs”), historical payment experience, estimates of the current collateral values and other related credit documentation. For each risk category, certain observed default probability and loss severity (in event of default) factors, based on historical performance of loans in the same risk category, are applied against our recorded investment in the loans to determine an appropriate allowance. Such performance data reflect historical delinquencies and charge-offs, as well as loan size. In addition, we consider any credit enhancements such as letters of credit or loss sharing arrangements with our lenders.
Advances to Lenders
Advances to lenders represent our payments of cash in exchange for the receipt of mortgage loans from lenders in a transfer that is accounted for as a secured lending arrangement. These transfers primarily occur when we provide early funding to lenders for loans that they will subsequently either sell to us or securitize into a Fannie Mae MBS that they will deliver to us. We individually negotiate early lender funding advances with our lender customers. Early lender funding advances have terms up to 60 days and earn a short-term market rate of interest.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-19

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

We report cash outflows from advances to lenders as an investing activity in our consolidated statements of cash flows. Settlements of the advances to lenders, other than through lender repurchases of loans, are not collected in cash, but rather in the receipt of either loans or Fannie Mae MBS. Accordingly, this activity is reflected as a non-cash transfer in our consolidated statements of cash flows in the line item entitled “Transfers from advances to lenders to loans held for investment of consolidated trusts.”
Acquired Property, Net
We recognize foreclosed property (i.e., “Acquired property, net”) upon the earlier of the loan foreclosure event or when we take physical possession of the property (i.e., through a deed-in-lieu of foreclosure transaction). We initially measure foreclosed property at its fair value less its estimated costs to sell. We treat any excess of our recorded investment in the loan over the fair value less estimated costs to sell the property as a charge-off to the “Allowance for loan losses.” Any excess of the fair value less estimated costs to sell the property over our recorded investment in the loan is recognized first to recover any forgone, contractually due interest, then to “Foreclosed property expense” in our consolidated statements of operations and comprehensive income.
We classify foreclosed properties as HFS when we intend to sell the property and the following conditions are met at either acquisition or within a relatively short period thereafter: we are actively marketing the property and it is available for immediate sale in its current condition such that the sale is reasonably expected to take place within one year. We report these properties at the lower of their carrying amount or fair value less estimated selling costs. We do not depreciate these properties.
We recognize a loss for any subsequent write-down of the property to its fair value less its estimated costs to sell through a valuation allowance with an offsetting charge to “Foreclosed property expense” in our consolidated statements of operations and comprehensive income. We recognize a recovery for any subsequent increase in fair value less estimated costs to sell up to the cumulative loss previously recognized through the valuation allowance. We recognize gains or losses on sales of foreclosed property through “Foreclosed property expense” in our consolidated statements of operations and comprehensive income.
Properties that do not meet the criteria to be classified as HFS are classified as held for use and are recorded in “Other assets” in our consolidated balance sheets. These properties are depreciated and are evaluated for impairment when circumstances indicate that the carrying amount of the property is no longer recoverable.
Commitments to Purchase and Sell Mortgage Loans and Securities
We enter into commitments to purchase and sell mortgage-backed securities and to purchase single-family and multifamily mortgage loans. Certain commitments to purchase or sell mortgage-backed securities and to purchase single-family mortgage loans are generally accounted for as derivatives. Our commitments to purchase multifamily loans are not accounted for as derivatives because they do not meet the criteria for net settlement.
When derivative purchase commitments settle, we include the fair value on the settlement date in the cost basis of the loan or unconsolidated security we purchase. When derivative commitments to sell securities settle, we include the fair value of the commitment on the settlement date in the cost basis of the security we sell. Purchases and sales of securities issued by our consolidated MBS trusts are treated as extinguishment or issuance of debt, respectively. For commitments to purchase and sell securities issued by our consolidated MBS trusts, we recognize the fair value of the commitment on the settlement date as a component of debt extinguishment gains and losses or in the cost basis of the debt issued, respectively.
Regular-way securities trades provide for delivery of securities within the time generally established by regulations or conventions in the market in which the trade occurs and are exempt from application of derivative accounting. Commitments to purchase or sell securities that we account for on a trade-date basis are also exempt from the derivative accounting requirements. We record the purchase and sale of an existing security on its trade date when the commitment to purchase or sell the existing security settles within the period of time that is customary in the market in which those trades take place.
Additionally, contracts for the forward purchase or sale of when-issued and to-be-announced (“TBA”) securities are exempt from the derivative accounting requirements if there is no other way to purchase or sell that security, delivery of that security and settlement will occur within the shortest period possible for that type of security, and it is probable at inception and throughout the term of the individual contract that physical delivery of the security will occur. Since our commitments for the purchase of when-issued and TBA securities can be net settled and we do not document that physical settlement is probable, we account for all such commitments as derivatives.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-20

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

Derivative Instruments
We recognize all derivatives as either assets or liabilities in our consolidated balance sheets at their fair value on a trade date basis. We report derivatives in a gain position after offsetting by counterparty in “Other assets” and derivatives in a loss position after offsetting by counterparty in “Other liabilities” in our consolidated balance sheets.
We offset the carrying amounts of certain derivatives that are in gain positions and loss positions with the same counterparty as well as cash collateral receivables and payables associated with derivative positions under master netting arrangements. We offset these amounts only when we have the legal right to offset under the contract and we have met all of the offsetting conditions.
We evaluate financial instruments that we purchase or issue and other financial and non-financial contracts for embedded derivatives. To identify embedded derivatives that we must account for separately, we determine if: (1) the economic characteristics of the embedded derivative are not clearly and closely related to the economic characteristics of the financial instrument or other contract (i.e., the host contract); (2) the financial instrument or other contract itself is not already measured at fair value with changes in fair value included in earnings; and (3) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. If the embedded derivative meets all three of these conditions we elect to carry the hybrid contract in its entirety at fair value with changes in fair value recorded in earnings.
Collateral
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. We monitor the fair value of the collateral received from our counterparties, and we may require additional collateral from those counterparties, as we deem appropriate.
Cash Collateral
We record cash collateral accepted from a counterparty that we have the right to use as “Cash and cash equivalents” and cash collateral accepted from a counterparty that we do not have the right to use as “Restricted cash” in our consolidated balance sheets. We net our obligation to return cash collateral pledged to us against the fair value of derivatives in a gain position recorded in “Other assets” in our consolidated balance sheets as part of our counterparty netting calculation.
For derivative positions with the same counterparty under master netting arrangements where we pledge cash collateral, we remove it from “Cash and cash equivalents” and net the right to receive it against the fair value of derivatives in a loss position recorded in “Other liabilities” in our consolidated balance sheets as a part of our counterparty netting calculation.
Non-Cash Collateral
We classify securities pledged to counterparties as either “Investments in securities” or “Cash and cash equivalents” in our consolidated balance sheets. Securities pledged to counterparties that have been consolidated with the underlying assets recognized as loans are included as “Mortgage loans” in our consolidated balance sheets.
Our liability to third party holders of Fannie Mae MBS that arises as the result of a consolidation of a securitization trust is collateralized by the underlying loans and/or mortgage-related securities.
Debt
Our consolidated balance sheets contain debt of Fannie Mae as well as debt of consolidated trusts. We report debt issued by us as “Debt of Fannie Mae” and by consolidated trusts as “Debt of consolidated trusts.” Debt issued by us represents debt that we issue to third parties to fund our general business activities and our credit risk-sharing securities. The debt of consolidated trusts represents the amount of Fannie Mae MBS issued from such trusts which is held by third-party certificateholders and prepayable without penalty at any time. We report deferred items, including premiums, discounts and other cost basis adjustments, as adjustments to the related debt balances in our consolidated balance sheets. We remeasure the carrying amount, accrued interest and basis adjustments of debt denominated in a foreign currency into U.S. dollars using foreign exchange spot rates as of

Fannie Mae (In conservatorship) 2016 Form 10-K
F-21

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

the balance sheet dates and report any associated gains or losses as a component of “Fair value losses, net” in our consolidated statements of operations and comprehensive income.
We classify interest expense as either short-term or long-term based on the contractual maturity of the related debt. We recognize the amortization of premiums, discounts and other cost basis adjustments through interest expense using the effective interest method usually over the contractual term of the debt. Amortization of premiums, discounts and other cost basis adjustments begins at the time of debt issuance. We remeasure interest expense for debt denominated in a foreign currency into U.S. dollars using the daily spot rates. The difference in rates arising from the month-end spot exchange rate used to calculate the interest accruals and the daily spot rates used to record the interest expense is a foreign currency transaction gain or loss for the period and is recognized as a component of “Fair value losses, net” in our consolidated statements of operations and comprehensive income.
When we purchase a Fannie Mae MBS issued from a consolidated single-class securitization trust, we extinguish the related debt of the consolidated trust as the MBS debt is no longer owed to a third-party. We record debt extinguishment gains or losses related to debt of consolidated trusts to the extent that the purchase price of the MBS does not equal the carrying value of the related consolidated MBS debt reported in our consolidated balance sheets (including unamortized premiums, discounts and other cost basis adjustments) at the time of purchase as a component of “Other expenses, net” in our consolidated statements of operations and comprehensive income.
Income Taxes
We recognize deferred tax assets and liabilities based on the differences in the book and tax bases of assets and liabilities. We measure deferred tax assets and liabilities using enacted tax rates that are applicable to the period(s) that the differences are expected to reverse. We adjust deferred tax assets and liabilities for the effects of changes in tax laws and rates in the period of enactment. We recognize investment and other tax credits through our effective tax rate calculation assuming that we will be able to realize the full benefit of the credits. We reduce our deferred tax assets by an allowance if, based on the weight of available positive and negative evidence, it is more likely than not (a probability of greater than 50%) that we will not realize some portion, or all, of the deferred tax asset.
We account for uncertain tax positions using a two-step approach whereby we recognize an income tax benefit if, based on the technical merits of a tax position, it is more likely than not that the tax position would be sustained upon examination by the taxing authority, which includes all related appeals and litigation. We then measure the recognized tax benefit based on the largest amount of tax benefit that is greater than 50% likely to be realized upon settlement with the taxing authority, considering all information available at the reporting date. We recognize interest expense and penalties on unrecognized tax benefits as “Other expenses, net” in our consolidated statements of operations and comprehensive income.
Earnings (Loss) per Share
Earnings (loss) per share (“EPS”) is presented for both basic EPS and diluted EPS. We compute basic EPS by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. In addition to common shares outstanding, the computation of basic EPS includes instruments for which the holder has (or is deemed to have) the present rights as of the end of the reporting period to share in current period earnings (loss) with common stockholders (i.e., participating securities and common shares that are currently issuable for little or no cost to the holder). We include in the denominator of our basic EPS computation the weighted-average number of shares of common stock that would be issued upon the full exercise of the warrant issued to Treasury. Diluted EPS includes all the components of basic EPS, plus the dilutive effect of common stock equivalents such as convertible securities and stock options, but excludes those common stock equivalents from the calculation of diluted EPS when the effect of inclusion, assessed individually, would be anti-dilutive. The calculation of income available to common stockholders and EPS is based on the underlying premise that all income after payment of dividends on preferred shares is available to and will be distributed to the common stockholders. However, as a result of our conservatorship status and the terms of the senior preferred stock purchase agreement with Treasury, no amounts are available to distribute as dividends to common or preferred stockholders (other than to Treasury as holder of the senior preferred stock).

Fannie Mae (In conservatorship) 2016 Form 10-K
F-22

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

Compensatory Fees
We charge our primary servicers a compensatory fee for servicing delays within their control when they fail to comply with our established loss mitigation and foreclosure timelines. Compensatory fees are intended to compensate us for damages attributed to such servicing delays and to emphasize the importance of servicer performance.
We recognize a compensatory fee receivable when the amounts are chargeable per our guidelines and are considered reasonably assured of collection. We subsequently establish a valuation allowance for any amounts we estimate to be uncollectible. If such fees are not reasonably assured of collection, we recognize them on a cash basis when received. The income associated with these fees is recognized as a component of “Foreclosed property expense” in our consolidated statements of operations and comprehensive income.
Fee and Other Income
Fee and other income includes transaction fees, multifamily fees, technology fees and other miscellaneous income. During the years ended December 31, 2016, 2015 and 2014, we recognized $245 million, $21 million and $4.8 billion, respectively, in “Fee and other income” in our consolidated statements of operations and comprehensive income resulting from settlement agreements resolving certain claims relating to private-label securities (“PLS”) sold to us or that we have guaranteed.
Employee Retirement Benefits
Our defined benefit pension plans were amended in 2013 to cease the accrual of benefits for all employees and the plans were subsequently terminated, effective December 31, 2013. In 2015, we settled our defined pension benefit obligations and transferred plan assets to an annuity provider and distributed lump sum payments to participants based on their elections. The actuarial losses of $305 million, previously recorded in “Accumulated other comprehensive income,” were recognized in “Administrative expenses” and the associated tax amounts were recognized in “Provision for federal income taxes” in our consolidated statements of operations and comprehensive income for the year ended December 31, 2015.
New Accounting Guidance
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on revenue from contracts with customers. The standard outlines a single model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The following contracts with customers are excluded from the scope of the new standard and will continue to be accounted for under existing guidance: leases, insurance, financial instruments (e.g., receivables, investments, liabilities, debt and derivatives) and guarantees. The new guidance is effective for us on January 1, 2018. We have evaluated this guidance and determined it will not have a material impact on our consolidated financial statements.
In January 2016, the FASB issued guidance which makes limited amendments to the accounting related to the classification and measurement of financial instruments. The new guidance revises the accounting requirements related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. The new guidance is effective for us on January 1, 2018. We have evaluated this guidance and determined it will not have a material impact on our consolidated financial statements.
Effective January 1, 2016, we adopted guidance issued by the FASB regarding consolidation of legal entities such as limited partnerships, limited liability corporations and securitization structures. The impact of the adoption was not material to our consolidated financial statements.
In February 2016, the FASB issued guidance on leases. The guidance clarified the definition of a lease and requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a corresponding lease liability for all leases with terms greater than 12 months. This guidance supersedes the existing lease guidance; however, we must continue to classify leases to determine how to recognize lease-related expense in our consolidated statements of operations and comprehensive income. The new guidance is effective for us on January 1, 2019. We have evaluated this guidance and determined it will not have a material impact on our consolidated financial statements.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-23

 
Notes to Consolidated Financial Statements | Summary of Significant Accounting Policies

In June 2016, the FASB issued guidance that changes the impairment model for most financial assets and certain other instruments. For loans, held-to-maturity debt securities and other financial assets recorded at amortized cost, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowance for loan losses. The guidance is effective on January 1, 2020 with early adoption permitted on January 1, 2019. We will recognize the impact of the new guidance through a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. We are continuing to evaluate the impact of this guidance on our consolidated financial statements, including the timing of the adoption. The adoption of this guidance will decrease, perhaps substantially, our retained earnings and increase our allowance for loan losses.
In August 2016, the FASB issued guidance regarding classification of certain items within the statement of cash flows in order to reduce diversity in practice with respect to cash flow classifications. The guidance is effective for us on January 1, 2018 and will be applied retrospectively for each period presented. We have evaluated this guidance and determined it will not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued guidance regarding the presentation of restricted cash in the statement of cash flows. The new guidance reduces diversity in how entities present changes in restricted cash and restricted cash equivalents with respect to the statements of cash flow. The guidance is effective for us on January 1, 2018 and will be applied retrospectively for each period presented. We have evaluated this guidance and determined it will not have a material impact on our consolidated financial statements.
2. Consolidations and Transfers of Financial Assets
We have interests in various entities that are considered to be VIEs. The primary types of entities are securitization trusts guaranteed by us via lender swap and portfolio securitization transactions and mortgage-backed trusts that were not created by us, as well as housing partnerships that are established to finance the acquisition, construction, development or rehabilitation of affordable multifamily and single-family housing. These interests include investments in securities issued by VIEs, such as Fannie Mae MBS created pursuant to our securitization transactions and our guaranty to the entity. We consolidate the substantial majority of our single-class securitization trusts because our role as guarantor and master servicer provides us with the power to direct matters (primarily the servicing of mortgage loans) that impact the credit risk to which we are exposed. In contrast, we do not consolidate single-class securitization trusts when other organizations have the power to direct these activities.
Types of VIEs
Securitization Trusts
Under our lender swap and portfolio securitization transactions, mortgage loans are transferred to a trust specifically for the purpose of issuing a single class of guaranteed securities that are collateralized by the underlying mortgage loans. The trust’s permitted activities include receiving the transferred assets, issuing beneficial interests, establishing the guaranty and servicing the underlying mortgage loans. In our capacity as issuer, master servicer, trustee and guarantor, we earn fees for our obligations to each trust. Additionally, we may retain or purchase a portion of the securities issued by each trust. We have securitized mortgage loans since 1981.
In our structured securitization transactions, we earn fees for assisting lenders and dealers with the design and issuance of structured mortgage-related securities. The trusts created in these transactions have permitted activities that are similar to those for our lender swap and portfolio securitization transactions. The assets of these trusts may include mortgage-related securities and/or mortgage loans. The trusts created for Fannie Megas issue single-class securities while the trusts created for REMIC, grantor trust and stripped mortgage-backed securities (“SMBS”) issue single-class and multi-class securities, the latter of which separate the cash flows from underlying assets into separately tradable interests. Our obligations and continued involvement in these trusts are similar to those described for lender swap and portfolio securitization transactions. We have securitized mortgage assets in structured transactions since 1986.
We also invest in mortgage-backed securities that have been issued via private-label trusts. These trusts are structured to provide investors with a beneficial interest in a pool of receivables or other financial assets, typically mortgage loans. The trusts act as vehicles to allow loan originators to securitize assets. Securities are structured from the underlying pool of assets to provide for varying degrees of risk. The originators of the financial assets or

Fannie Mae (In conservatorship) 2016 Form 10-K
F-24

 
Notes to Consolidated Financial Statements | Consolidations and Transfers of Financial Assets

the underwriters of the transaction create the trusts and typically own the residual interest in the trusts’ assets. Our involvement in these entities is typically limited to our recorded investment in the beneficial interests that we have purchased. We have invested in these vehicles since 1987.
Limited Partnerships
We have historically made equity investments in various limited partnerships that sponsor affordable housing projects utilizing the low-income housing tax credit pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to increase the supply of affordable housing in the United States and to serve communities in need. In addition, our investments in LIHTC partnerships generate both tax credits and net operating losses that may reduce our federal income tax liability. Our LIHTC investments primarily represent limited partnership interests in entities that have been organized by a fund manager who acts as the general partner. These fund investments seek out equity investments in LIHTC operating partnerships that have been established to identify, develop and operate multifamily housing that is leased to qualifying residential tenants.
We no longer recognize net operating losses or impairment on our LIHTC partnership investments as the carrying value is zero. We did not make any LIHTC investments in 2016, 2015 or 2014, other than pursuant to existing prior commitments.
Consolidated VIEs
If an entity is a VIE, we consider whether our variable interest in that entity causes us to be the primary beneficiary. The primary beneficiary of the VIE is required to consolidate and account for the assets, liabilities and noncontrolling interests of the VIE in its consolidated financial statements. An enterprise is deemed to be the primary beneficiary when the enterprise has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and exposure to benefits and/or losses could potentially be significant to the entity. In general, the investors in the obligations of consolidated VIEs have recourse only to the assets of those VIEs and do not have recourse to us, except where we provide a guaranty to the VIE.
We continually assess whether we are the primary beneficiary of the VIEs with which we are involved and therefore may consolidate or deconsolidate a VIE through the duration of our involvement. As of December 31, 2016, we consolidated certain VIEs that were not consolidated as of December 31, 2015. As a result of consolidating these entities, which had combined total assets of $145 million in unpaid principal balance as of December 31, 2016, we derecognized our investment in these entities and recognized the assets and liabilities of the consolidated entities at fair value. As of December 31, 2016, we also deconsolidated certain VIEs that were consolidated and had combined total assets of $5.3 billion in unpaid principal balance as of December 31, 2015. The majority of this activity related to the deconsolidation of multi-class resecuritization trusts containing consolidated Fannie Mae MBS, which resulted in the recognition of the debt issued to third parties of the MBS trusts we consolidated and the fair value of our retained interests as securities in our consolidated balance sheets.
Unconsolidated VIEs
We do not consolidate VIEs when we are not deemed to be the primary beneficiary. Our unconsolidated VIEs include securitization trusts and limited partnerships. The following table displays the carrying amount and classification of our assets and liabilities that relate to our involvement with unconsolidated mortgage-backed trusts.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-25

 
Notes to Consolidated Financial Statements | Consolidations and Transfers of Financial Assets

 
As of December 31,
 
2016
 
2015
 
(Dollars in millions)
Assets and liabilities recorded in our consolidated balance sheets related to mortgage-backed trusts:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
Fannie Mae
 
$
4,642

 
 
 
$
4,704

 
Non-Fannie Mae
 
3,473

 
 
 
5,596

 
Total trading securities
 
8,115

 
 
 
10,300

 
Available-for-sale securities:
 
 
 
 
 
 
 
Fannie Mae
 
2,447

 
 
 
3,936

 
Non-Fannie Mae
 
4,879

 
 
 
14,644

 
Total available-for-sale securities
 
7,326

 
 
 
18,580

 
Other assets
 
77

 
 
 
100

 
Other liabilities
 
(528
)
 
 
 
(827
)
 
Net carrying amount
 
$
14,990

 
 
 
$
28,153

 
Our maximum exposure to loss generally represents the greater of our recorded investment in the entity or the unpaid principal balance of the assets covered by our guaranty. However, our securities issued by Fannie Mae multi-class resecuritization trusts that are not consolidated do not give rise to any additional exposure to loss as we already consolidate the underlying collateral. The maximum exposure to loss related to unconsolidated mortgage-backed trusts was approximately $21 billion and $34 billion as of December 31, 2016 and 2015, respectively. The total assets of our unconsolidated mortgage-backed trusts were approximately $150 billion and $220 billion as of December 31, 2016 and 2015, respectively.
The maximum exposure to loss for our unconsolidated limited partnerships and similar legal entities, which consist of low-income housing tax credit investments, community investments and other entities, was $118 million and the related carrying value was $92 million as of December 31, 2016. As of December 31, 2015, the maximum exposure to loss was $12 million and the related carrying value was a deficit of $24 million. The total assets of these limited partnership investments were $3.9 billion and $4.9 billion as of December 31, 2016 and 2015, respectively.
The unpaid principal balance of our multifamily loan portfolio was $229.9 billion as of December 31, 2016. As our lending relationship does not provide us with a controlling financial interest in the borrower entity, we do not consolidate these borrowers regardless of their status as either a VIE or a voting interest entity. We have excluded these entities from our VIE disclosures. However, the disclosures we have provided in “Note 3, Mortgage Loans,” “Note 4, Allowance for Loan Losses” and “Note 6, Financial Guarantees” with respect to this population are consistent with the FASB’s stated objectives for the disclosures related to unconsolidated VIEs.
Transfers of Financial Assets
We issue Fannie Mae MBS through portfolio securitization transactions by transferring pools of mortgage loans or mortgage-related securities to one or more trusts or special purpose entities. We are considered to be the transferor when we transfer assets from our own retained mortgage portfolio in a portfolio securitization transaction. For the years ended December 31, 2016, 2015 and 2014, the unpaid principal balance of portfolio securitizations was $264.7 billion, $212.0 billion and $160.4 billion, respectively.
We retain interests from the transfer and sale of mortgage-related securities to unconsolidated single-class and multi-class portfolio securitization trusts. As of December 31, 2016, the unpaid principal balance of retained interests was $4.4 billion and its related fair value was $5.8 billion. The unpaid principal balance of retained interests was $5.5 billion and its related fair value was $6.8 billion as of December 31, 2015. For the years ended December 31, 2016, 2015 and 2014, the principal and interest received on retained interests was $1.2 billion, $1.2 billion and $1.5 billion, respectively.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-26

 
Notes to Consolidated Financial Statements | Consolidations and Transfers of Financial Assets

Managed Loans
Managed loans are on-balance sheet mortgage loans, as well as mortgage loans that we have securitized in unconsolidated portfolio securitization trusts. The unpaid principal balance of securitized loans in unconsolidated portfolio securitization trusts, which are primarily loans that are guaranteed or insured, in whole or in part, by the U.S. government, was $1.4 billion and $1.6 billion as of December 31, 2016 and 2015, respectively. For information on our on-balance sheet mortgage loans, see “Note 3, Mortgage Loans.”
3.  Mortgage Loans
We own single-family mortgage loans, which are secured by four or fewer residential dwelling units, and multifamily mortgage loans, which are secured by five or more residential dwelling units. We classify these loans as either HFI or HFS. We report the carrying value of HFI loans at the unpaid principal balance, net of unamortized premiums and discounts, other cost basis adjustments, and an allowance for loan losses. We report the carrying value of HFS loans at the lower of cost or fair value and record valuation changes in “Investment gains, net” in our consolidated statements of operations and comprehensive income. We define the recorded investment of HFI loans as unpaid principal balance, net of unamortized premiums and discounts, other cost basis adjustments, and accrued interest receivable.
For purposes of the single-family mortgage loan disclosures below, we define “primary” class as mortgage loans that are not included in other loan classes; “government” class as mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies, that are not Alt-A; and “other” class as loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans, that are neither government nor Alt-A.
The following table displays the carrying value of our mortgage loans.
 
As of December 31,
 
2016
 
2015
 
Of Fannie Mae
 
Of Consolidated Trusts
 
Total
 
Of Fannie Mae
 
Of Consolidated Trusts
 
Total
 
(Dollars in millions)
Single-family
$
209,168

 
$
2,624,582

 
$
2,833,750

 
$
238,237

 
$
2,574,174

 
$
2,812,411

Multifamily
9,379

 
220,517

 
229,896

 
13,099

 
185,243

 
198,342

Total unpaid principal balance of mortgage loans
218,547

 
2,845,099

 
3,063,646

 
251,336

 
2,759,417

 
3,010,753

Cost basis and fair value adjustments, net
(11,357
)
 
50,929

 
39,572

 
(12,939
)
 
49,781

 
36,842

Allowance for loan losses for loans held for investment
(22,579
)
 
(886
)
 
(23,465
)
 
(26,510
)
 
(1,441
)
 
(27,951
)
Total mortgage loans
$
184,611

 
$
2,895,142

 
$
3,079,753

 
$
211,887

 
$
2,807,757

 
$
3,019,644

For the years ended December 31, 2016, 2015 and 2014, we redesignated loans with a carrying value of $3.9 billion, $8.6 billion and $2.2 billion, respectively, from HFI to HFS. For the year ended December 31, 2014, we redesignated loans with a carrying value of $285 million from HFS to HFI. We sold loans with an unpaid principal balance of $6.7 billion, $3.6 billion and $1.9 billion, respectively, during the years ended December 31, 2016, 2015 and 2014.
The recorded investment of single-family mortgage loans for which formal foreclosure proceedings are in process was $18.3 billion and $25.6 billion as of December 31, 2016 and 2015, respectively. As a result of our various loss mitigation and foreclosure prevention efforts, we expect that a portion of the loans in the process of formal foreclosure proceedings will not ultimately foreclose.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-27


 
Notes to Consolidated Financial Statements | Mortgage Loans



Aging Analysis
The following tables display an aging analysis of the total recorded investment in our HFI mortgage loans by portfolio segment and class, excluding loans for which we have elected the fair value option.
  
As of December 31, 2016
 
30 - 59 Days
Delinquent
 
60 - 89 Days Delinquent
 
Seriously Delinquent(1)
 
Total Delinquent
 
Current
 
Total
 
Recorded Investment in Loans 90 Days or More Delinquent and Accruing Interest
 
Recorded Investment in Nonaccrual Loans 
  
(Dollars in millions)
Single-family: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
$
31,631

 
 
 
$
7,910

 
 
 
$
21,761

 
 
 
$
61,302

 
 
$
2,654,195

 
$
2,715,497

 
 
$
22

 
 
$
33,448

Government(2)
 
56

 
 
 
22

 
 
 
256

 
 
 
334

 
 
36,814

 
37,148

 
 
256

 
 
—

Alt-A
 
3,629

 
 
 
1,194

 
 
 
4,221

 
 
 
9,044

 
 
72,903

 
81,947

 
 
2

 
 
6,019

Other
 
1,349

 
 
 
438

 
 
 
1,582

 
 
 
3,369

 
 
25,974

 
29,343

 
 
5

 
 
2,238

Total single-family
 
36,665

 
 
 
9,564

 
 
 
27,820

 
 
 
74,049

 
 
2,789,886

 
2,863,935

 
 
285

 
 
41,705

Multifamily(3)
 
44

 
 
 
N/A

 
 
 
129

 
 
 
173

 
 
231,708

 
231,881

 
 
—

 
 
403

Total
 
$
36,709

 
 
 
$
9,564

 
 
 
$
27,949

 
 
 
$
74,222

 
 
$
3,021,594

 
$
3,095,816

 
 
$
285

 
 
$
42,108

 
As of December 31, 2015
 
30 - 59 Days
Delinquent
 
60 - 89 Days Delinquent
 
Seriously Delinquent(1)
 
Total Delinquent
 
Current
 
Total
 
Recorded Investment in Loans 90 Days or More Delinquent and Accruing Interest
 
Recorded Investment in Nonaccrual Loans 
 
(Dollars in millions)
Single-family: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
$
29,154

 
 
 
$
7,937

 
 
 
$
26,346

 
 
 
$
63,437

 
 
$
2,598,756

 
$
2,662,193

 
 
$
46

 
 
$
34,216

Government(2)
 
58

 
 
 
24

 
 
 
291

 
 
 
373

 
 
40,461

 
40,834

 
 
291

 
 
—

Alt-A
 
4,085

 
 
 
1,272

 
 
 
6,141

 
 
 
11,498

 
 
84,603

 
96,101

 
 
6

 
 
7,407

Other
 
1,494

 
 
 
484

 
 
 
2,160

 
 
 
4,138

 
 
32,272

 
36,410

 
 
6

 
 
2,632

Total single-family
 
34,791

 
 
 
9,717

 
 
 
34,938

 
 
 
79,446

 
 
2,756,092

 
2,835,538

 
 
349

 
 
44,255

Multifamily(3)
 
23

 
 
 
N/A

 
 
 
123

 
 
 
146

 
 
200,028

 
200,174

 
 
—

 
 
591

Total
 
$
34,814

 
 
 
$
9,717

 
 
 
$
35,061

 
 
 
$
79,592

 
 
$
2,956,120

 
$
3,035,712

 
 
$
349

 
 
$
44,846

__________
(1) 
Single-family seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process. Multifamily seriously delinquent loans are loans that are 60 days or more past due.
(2) 
Primarily consists of reverse mortgages, which due to their nature, are not aged and are included in the current column.
(3) 
Multifamily loans 60-89 days delinquent are included in the seriously delinquent column.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-28


 
Notes to Consolidated Financial Statements | Mortgage Loans



Credit Quality Indicators
The following table displays the total recorded investment in our single-family HFI loans by class and credit quality indicator, excluding loans for which we have elected the fair value option.
  
As of December 31, 
 
2016(1)
 
2015(1)
 
Primary
 
Alt-A
 
Other 
 
Primary
 
Alt-A
 
Other 
 
(Dollars in millions) 
Estimated mark-to-market LTV ratio:(2)
 
 
 
 
 
 
 
 
 
 
 
Less than or equal to 80%
$
2,321,201

 
$
56,250

 
$
19,382
 
 
$
2,228,533

 
$
59,000

 
$
21,274
 
Greater than 80% and less than or equal to 90%
244,231

 
9,787

 
3,657
 
 
250,373

 
12,588

 
4,936
 
Greater than 90% and less than or equal to 100%
114,412

 
6,731

 
2,627
 
 
122,939

 
9,345

 
3,861
 
Greater than 100%
35,653

 
9,179

 
3,677
 
 
60,348

 
15,168

 
6,339
 
Total
$
2,715,497

 
$
81,947

 
$
29,343
 
 
$
2,662,193

 
$
96,101

 
$
36,410
 
__________
(1) 
Excludes $37.1 billion and $40.8 billion as of December 31, 2016 and 2015, respectively, of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies, that are not Alt-A loans. The segment class is primarily reverse mortgages for which we do not calculate an estimated mark-to-market LTV ratio.
(2) 
The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of each reported period divided by the estimated current value of the property, which we calculate using an internal valuation model that estimates periodic changes in home value.
The following table displays the total recorded investment in our multifamily HFI loans by credit quality indicator, excluding loans for which we have elected the fair value option.
 
As of December 31,
  
2016
 
 
2015
 
(Dollars in millions) 
Credit risk profile by internally assigned grade:
 
  
 
 
 
Non-classified
 
$
228,749
 
 
 
$
197,334
 
Classified:(1)
 
 
 
 
 
Substandard
 
3,129
 
 
 
2,833
 
Doubtful
 
3
 
 
 
7
 
Total classified
 
3,132
 
 
 
2,840
 
Total
 
$
231,881
 
 
 
$
200,174
 
__________
(1) 
A loan classified as “Substandard” has a well-defined weakness that jeopardizes the timely full repayment. “Doubtful” refers to a loan with a weakness that makes collection or liquidation in full highly questionable and improbable based on existing conditions and values.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-29


 
Notes to Consolidated Financial Statements | Mortgage Loans



Individually Impaired Loans
Individually impaired loans include TDRs, acquired credit-impaired loans and multifamily loans that we have assessed as probable that we will not collect all contractual amounts due, regardless of whether we are currently accruing interest, excluding loans classified as HFS. The following tables display the total unpaid principal balance, recorded investment, related allowance, average recorded investment and interest income recognized for individually impaired loans.
 
As of December 31,
 
2016
 
2015
 
Unpaid Principal Balance
 
Total Recorded Investment 
 
Related Allowance for Loan Losses
 
Unpaid Principal Balance
 
Total Recorded Investment 
 
Related Allowance for Loan Losses
 
 
(Dollars in millions)
Individually impaired loans: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
With related allowance recorded: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
$
105,113

 
 
 
$
99,825

 
 
$
14,462

 
 
$
116,477

 
 
 
$
110,502

 
 
$
16,745

 
Government 
 
302

 
 
 
305

 
 
59

 
 
322

 
 
 
327

 
 
59

 
Alt-A 
 
28,599

 
 
 
26,059

 
 
5,365

 
 
31,888

 
 
 
29,103

 
 
6,217

 
Other 
 
11,087

 
 
 
10,465

 
 
2,034

 
 
12,893

 
 
 
12,179

 
 
2,416

 
Total single-family 
 
145,101

 
 
 
136,654

 
 
21,920

 
 
161,580

 
 
 
152,111

 
 
25,437

 
Multifamily
 
320

 
 
 
323

 
 
33

 
 
650

 
 
 
654

 
 
80

 
Total individually impaired loans with related allowance recorded
 
145,421

 
 
 
136,977

 
 
21,953

 
 
162,230

 
 
 
152,765

 
 
25,517

 
With no related allowance recorded:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
15,733

 
 
 
14,758

 
 
—

 
 
15,891

 
 
 
14,725

 
 
—

 
Government
 
63

 
 
 
59

 
 
—

 
 
58

 
 
 
54

 
 
—

 
Alt-A
 
3,511

 
 
 
3,062

 
 
—

 
 
3,721

 
 
 
3,169

 
 
—

 
Other
 
1,159

 
 
 
1,065

 
 
—

 
 
1,222

 
 
 
1,102

 
 
—

 
Total single-family
 
20,466

 
 
 
18,944

 
 
—

 
 
20,892

 
 
 
19,050

 
 
—

 
Multifamily
 
266

 
 
 
266

 
 
—

 
 
353

 
 
 
354

 
 
—

 
Total individually impaired loans with no related allowance recorded
 
20,732

 
 
 
19,210

 
 
—

 
 
21,245

 
 
 
19,404

 
 
—

 
Total individually impaired loans(2)
 
$
166,153

 
 
 
$
156,187

 
 
$
21,953

 
 
$
183,475

 
 
 
$
172,169

 
 
$
25,517

 

Fannie Mae (In conservatorship) 2016 Form 10-K
F-30


 
Notes to Consolidated Financial Statements | Mortgage Loans



 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
Average Recorded Investment
 
Total Interest Income Recognized(3)
 
Interest Income Recognized on a Cash Basis
 
Average Recorded Investment
 
Total Interest Income Recognized(3)
 
Interest Income Recognized on a Cash Basis
 
Average Recorded Investment
 
Total Interest Income Recognized(3)
 
Interest Income Recognized on a Cash Basis
 
(Dollars in millions)
Individually impaired loans: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
With related allowance recorded: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
$
105,076

 
 
 
$
4,004

 
 
 
$
325

 
 
 
$
114,737

 
 
 
$
4,190

 
 
 
$
318

 
 
 
$
121,926

 
 
 
$
4,321

 
 
 
$
494

 
Government
 
314

 
 
 
12

 
 
 
—

 
 
 
299

 
 
 
12

 
 
 
—

 
 
 
270

 
 
 
13

 
 
 
—

 
Alt-A
 
27,512

 
 
 
1,010

 
 
 
54

 
 
 
30,453

 
 
 
1,034

 
 
 
54

 
 
 
33,676

 
 
 
1,066

 
 
 
100

 
Other
 
11,382

 
 
 
365

 
 
 
20

 
 
 
12,863

 
 
 
376

 
 
 
21

 
 
 
14,490

 
 
 
402

 
 
 
36

 
Total single-family
 
144,284

 
 
 
5,391

 
 
 
399

 
 
 
158,352

 
 
 
5,612

 
 
 
393

 
 
 
170,362

 
 
 
5,802

 
 
 
630

 
Multifamily
 
508

 
 
 
29

 
 
 
—

 
 
 
973

 
 
 
16

 
 
 
—

 
 
 
1,699

 
 
 
80

 
 
 
1

 
Total individually impaired loans with related allowance recorded
 
144,792

 
 
 
5,420

 
 
 
399

 
 
 
159,325

 
 
 
5,628

 
 
 
393

 
 
 
172,061

 
 
 
5,882

 
 
 
631

 
With no related allowance recorded:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
15,293

 
 
 
1,236

 
 
 
91

 
 
 
15,796

 
 
 
1,039

 
 
 
91

 
 
 
13,852

 
 
 
864

 
 
 
215

 
Government
 
59

 
 
 
4

 
 
 
—

 
 
 
55

 
 
 
4

 
 
 
—

 
 
 
67

 
 
 
5

 
 
 
—

 
Alt-A
 
3,293

 
 
 
309

 
 
 
9

 
 
 
3,647

 
 
 
218

 
 
 
11

 
 
 
2,799

 
 
 
189

 
 
 
47

 
Other
 
1,116

 
 
 
108

 
 
 
3

 
 
 
1,259

 
 
 
75

 
 
 
3

 
 
 
974

 
 
 
56

 
 
 
12

 
Total single-family
 
19,761

 
 
 
1,657

 
 
 
103

 
 
 
20,757

 
 
 
1,336

 
 
 
105

 
 
 
17,692

 
 
 
1,114

 
 
 
274

 
Multifamily
 
317

 
 
 
13

 
 
 
—

 
 
 
442

 
 
 
10

 
 
 
—

 
 
 
1,472

 
 
 
64

 
 
 
—

 
Total individually impaired loans with no related allowance recorded
 
20,078

 
 
 
1,670

 
 
 
103

 
 
 
21,199

 
 
 
1,346

 
 
 
105

 
 
 
19,164

 
 
 
1,178

 
 
 
274

 
Total individually impaired loans
 
$
164,870

 
 
 
$
7,090

 
 
 
$
502

 
 
 
$
180,524

 
 
 
$
6,974

 
 
 
$
498

 
 
 
$
191,225

 
 
 
$
7,060

 
 
 
$
905

 
__________
(1) 
The discounted cash flows or collateral value equals or exceeds the carrying value of the loan and, as such, no valuation allowance is required.
(2) 
Includes single-family loans restructured in a TDR with a recorded investment of $155.0 billion and $170.3 billion as of December 31, 2016 and 2015, respectively. Includes multifamily loans restructured in a TDR with a recorded investment of $248 million and $451 million as of December 31, 2016 and 2015, respectively.
(3) 
Total single-family interest income recognized of $7.0 billion for the year ended December 31, 2016 consists of $5.7 billion of contractual interest and $1.3 billion of effective yield adjustments. Total single-family interest income recognized of $6.9 billion for the year ended December 31, 2015 consists of $5.7 billion of contractual interest and $1.2 billion of effective yield adjustments. Total single-family interest income recognized of $6.9 billion for the year ended December 31, 2014 consists of $5.8 billion of contractual interest and $1.1 billion of effective yield adjustments.
Troubled Debt Restructurings
A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial difficulties is considered a TDR. In addition to formal loan modifications, we also engage in other loss mitigation activities with troubled borrowers, which include repayment plans and forbearance arrangements, both of which represent informal agreements with the borrower that do not result in the legal modification of the loan’s contractual terms. We account for these informal restructurings as a TDR if we defer more than three missed payments. We also classify loans to certain borrowers who have received bankruptcy relief as TDRs.
The substantial majority of the loan modifications we complete result in term extensions, interest rate reductions or a combination of both. The average term extension of a single-family modified loan was 157 months for the year ended December 31, 2016 and 161 months for the years ended December 31, 2015 and 2014. The average

Fannie Mae (In conservatorship) 2016 Form 10-K
F-31


 
Notes to Consolidated Financial Statements | Mortgage Loans



interest rate reduction was 0.79, 0.74 and 0.99 percentage points for the years ended December 31, 2016, 2015 and 2014, respectively.
The following table displays the number of loans and recorded investment in loans restructured in a TDR.
 
For the Year Ended December 31,
 
 
2016
 
 
2015
 
 
2014
 
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
(Dollars in millions)
 
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
61,586

 
 
 
$
8,405

 
 
 
71,293

 
 
 
$
9,713

 
 
 
100,956

 
 
 
$
14,301

 
Government
 
186

 
 
 
20

 
 
 
241

 
 
 
27

 
 
 
365

 
 
 
47

 
Alt-A 
 
6,647

 
 
 
946

 
 
 
9,037

 
 
 
1,374

 
 
 
14,715

 
 
 
2,441

 
Other
 
1,381

 
 
 
244

 
 
 
1,835

 
 
 
333

 
 
 
3,357

 
 
 
686

 
Total single-family 
 
69,800

 
 
 
9,615

 
 
 
82,406

 
 
 
11,447

 
 
 
119,393

 
 
 
17,475

 
Multifamily 
 
11

 
 
 
66

 
 
 
12

 
 
 
40

 
 
 
19

 
 
 
853

 
Total TDRs
 
69,811

 
 
 
$
9,681

 
 
 
82,418

 
 
 
$
11,487

 
 
 
119,412

 
 
 
$
18,328

 
The following table displays the number of loans and our recorded investment in these loans at the time of payment default for loans that were restructured in a TDR in the twelve months prior to the payment default. For purposes of this disclosure, we define loans that had a payment default as: single-family and multifamily loans with completed TDRs that liquidated during the period, either through foreclosure, deed-in-lieu of foreclosure or a short sale; single-family loans with completed modifications that are two or more months delinquent during the period; or multifamily loans with completed modifications that are one or more months delinquent during the period.
 
For the Year Ended December 31,
 
 
2016
 
 
2015
 
 
2014
 
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
(Dollars in millions)
 
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
20,810

 
 
 
$
2,938

 
 
 
26,206
 
 
 
$
3,808

 
 
 
33,853
 
 
 
$
5,095

 
Government
 
95

 
 
 
11

 
 
 
118

 
 
 
16

 
 
 
124

 
 
 
15

 
Alt-A 
 
3,131

 
 
 
500

 
 
 
4,128

 
 
 
706

 
 
 
5,392

 
 
 
960

 
Other
 
1,002

 
 
 
172

 
 
 
1,229

 
 
 
247

 
 
 
1,738

 
 
 
387

 
Total single-family 
 
25,038

 
 
 
3,621

 
 
 
31,681

 
 
 
4,777

 
 
 
41,107

 
 
 
6,457

 
Multifamily
 
5

 
 
 
46

 
 
 
3

 
 
 
6

 
 
 
9

 
 
 
42

 
Total TDRs that subsequently defaulted 
 
25,043

 
 
 
$
3,667

 
 
 
31,684

 
 
 
$
4,783

 
 
 
41,116

 
 
 
$
6,499

 
4. Allowance for Loan Losses
We maintain an allowance for loan losses for HFI loans held by Fannie Mae and loans backing Fannie Mae MBS issued from consolidated trusts. When calculating our allowance for loan losses, we consider our net recorded investment in the loan at the balance sheet date, which includes unpaid principal balance, net of amortized premiums and discounts, and other cost basis adjustments.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-32

 
Notes to Consolidated Financial Statements | Allowance for Loan Losses


The following table displays changes in single-family, multifamily and total allowance for loan losses.
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
Of Fannie Mae
 
Of Consolidated
Trusts
 
Total
 
Of Fannie Mae
 
Of Consolidated Trusts
 
Total
 
Of Fannie Mae
 
Of Consolidated Trusts
 
Total
 
(Dollars in millions)
Single-family allowance for loan losses: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance 
$
26,439

 
 
$
1,270

 
 
$
27,709

 
$
32,956

 
 
$
2,221

 
 
$
35,177

 
$
40,202

 
 
$
3,105

 
 
$
43,307

Provision (benefit) for loan losses(1)
(1,692
)
 
 
(12
)
 
 
(1,704
)
 
(258
)
 
 
190

 
 
(68
)
 
(4,334
)
 
 
553

 
 
(3,781
)
Charge-offs(2)(3)
(3,163
)
 
 
(91
)
 
 
(3,254
)
 
(9,647
)
 
 
(84
)
 
 
(9,731
)
 
(6,168
)
 
 
(225
)
 
 
(6,393
)
Recoveries  
412

 
 
30

 
 
442

 
1,120

 
 
16

 
 
1,136

 
1,190

 
 
250

 
 
1,440

Transfers(4)
470

 
 
(470
)
 
 
—

 
1,123

 
 
(1,123
)
 
 
—

 
1,513

 
 
(1,513
)
 
 
—

Other(5)
90

 
 
—

 
 
90

 
1,145

 
 
50

 
 
1,195

 
553

 
 
51

 
 
604

Ending balance 
$
22,556

 
 
$
727

 
 
$
23,283

 
$
26,439

 
 
$
1,270

 
 
$
27,709

 
$
32,956

 
 
$
2,221

 
 
$
35,177

Multifamily allowance for loan losses: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance 
$
71

 
 
$
171

 
 
$
242

 
$
161

 
 
$
203

 
 
$
364

 
$
319

 
 
$
220

 
 
$
539

Benefit for loan losses(1)
(49
)
 
 
(6
)
 
 
(55
)
 
(63
)
 
 
(27
)
 
 
(90
)
 
(91
)
 
 
(13
)
 
 
(104
)
Charge-offs(2)(3)
(11
)
 
 
(1
)
 
 
(12
)
 
(40
)
 
 
(3
)
 
 
(43
)
 
(76
)
 
 
—

 
 
(76
)
Recoveries
7

 
 
—

 
 
7

 
4

 
 
—

 
 
4

 
—

 
 
—

 
 
—

Transfers(4)
5

 
 
(5
)
 
 
—

 
4

 
 
(4
)
 
 
—

 
4

 
 
(4
)
 
 
—

Other(5)
—

 
 
—

 
 
—

 
5

 
 
2

 
 
7

 
5

 
 
—

 
 
5

Ending balance 
$
23

 
 
$
159

 
 
$
182

 
$
71

 
 
$
171

 
 
$
242

 
$
161

 
 
$
203

 
 
$
364

Total allowance for loan losses: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance 
$
26,510

 
 
$
1,441

 
 
$
27,951

 
$
33,117

 
 
$
2,424

 
 
$
35,541

 
$
40,521

 
 
$
3,325

 
 
$
43,846

Provision (benefit) for loan losses(1)
(1,741
)
 
 
(18
)
 
 
(1,759
)
 
(321
)
 
 
163

 
 
(158
)
 
(4,425
)
 
 
540

 
 
(3,885
)
Charge-offs(2)(3)
(3,174
)
 
 
(92
)
 
 
(3,266
)
 
(9,687
)
 
 
(87
)
 
 
(9,774
)
 
(6,244
)
 
 
(225
)
 
 
(6,469
)
Recoveries  
419

 
 
30

 
 
449

 
1,124

 
 
16

 
 
1,140

 
1,190

 
 
250

 
 
1,440

Transfers(4)
475

 
 
(475
)
 
 
—

 
1,127

 
 
(1,127
)
 
 
—

 
1,517

 
 
(1,517
)
 
 
—

Other(5)
90

 
 
—

 
 
90

 
1,150

 
 
52

 
 
1,202

 
558

 
 
51

 
 
609

Ending balance 
$
22,579

 
 
$
886

 
 
$
23,465

 
$
26,510

 
 
$
1,441

 
 
$
27,951

 
$
33,117

 
 
$
2,424

 
 
$
35,541

__________
(1) 
Provision (benefit) for loan losses is included in “Benefit for credit losses” in our consolidated statements of operations and comprehensive income.
(2) 
While we purchase the substantial majority of loans that are four or more months delinquent from our MBS trusts, we do not exercise this option to purchase loans during a forbearance period. Charge-offs of consolidated trusts generally represent loans that remained in our consolidated trusts at the time of default.
(3) 
Includes, for the year ended December 31, 2015, charge-offs of (1) $1.8 billion in loans held for investment and $724 million in preforeclosure property taxes and insurance receivable in connection with our adoption of the Advisory Bulletin on January 1, 2015 and (2) $1.1 billion in accrued interest receivable in connection with our adoption of a change in accounting policy on January 1, 2015 related to the treatment of interest previously accrued, but not collected, at the date that loans are placed on nonaccrual status.
(4) 
Includes transfers from trusts for delinquent loan purchases.
(5) 
Amounts represent changes in other loss reserves which are reflected in provision (benefit) for loan losses, charge-offs, and recoveries.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-33

 
Notes to Consolidated Financial Statements | Allowance for Loan Losses


The following table displays the allowance for loan losses and recorded investment in our HFI loans, excluding loans for which we have elected the fair value option, by impairment or reserve methodology and portfolio segment.
 
As of December 31,
 
2016
 
2015
 
Single-Family
 
Multifamily
 
Total
 
Single-Family
 
Multifamily
 
Total
 
(Dollars in millions)
Allowance for loan losses by segment: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually impaired loans(1)
$
21,920

 
 
$
33

 
 
$
21,953

 
$
25,437

 
 
$
80

 
 
$
25,517

Collectively reserved loans 
1,363

 
 
149

 
 
1,512

 
2,272

 
 
162

 
 
2,434

Total allowance for loan losses 
$
23,283

 
 
$
182

 
 
$
23,465

 
$
27,709

 
 
$
242

 
 
$
27,951

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans by segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually impaired loans(1)
$
155,598

 
 
$
589

 
 
$
156,187

 
$
171,161

 
 
$
1,008

 
 
$
172,169

Collectively reserved loans 
2,708,337

 
 
231,292

 
 
2,939,629

 
2,664,377

 
 
199,166

 
 
2,863,543

Total recorded investment in loans 
$
2,863,935

 
 
$
231,881

 
 
$
3,095,816

 
$
2,835,538

 
 
$
200,174

 
 
$
3,035,712

__________
(1) 
Includes acquired credit-impaired loans.
5. Investments in Securities
Trading Securities
Trading securities are recorded at fair value with subsequent changes in fair value recorded as “Fair value losses, net” in our consolidated statements of operations and comprehensive income. The following table displays our investments in trading securities.
 
As of December 31,
 
2016
 
2015
 
(Dollars in millions)
Mortgage-related securities:
 
 
 
Fannie Mae
$
4,769

 
$
4,813

Freddie Mac
936

 
1,314

Ginnie Mae
1,122

 
426

Alt-A private-label securities
317

 
436

Subprime private-label securities
319

 
644

Commercial mortgage-backed securities (“CMBS”)
761

 
2,341

Mortgage revenue bonds
21

 
449

Total mortgage-related securities
8,245

 
10,423

U.S. Treasury securities
32,317

 
29,485

Total trading securities
$
40,562

 
$
39,908

The following table displays information about our net trading gains and losses.
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
(Dollars in millions)
Net trading gains (losses)
 
$
28

 
 
$
(368
)
 
 
$
485

Net trading gains (losses) recognized in the period related to securities still held at period end
 
(19
)
 
 
(453
)
 
 
420


Fannie Mae (In conservatorship) 2016 Form 10-K
F-34

 
Notes to Consolidated Financial Statements | Investments in Securities


Available-for-Sale Securities
We record AFS securities at fair value with unrealized gains and losses, recorded net of tax, as a component of “Other comprehensive income (loss)” and we recognize realized gains and losses from the sale of AFS securities in “Investment gains, net” in our consolidated statements of operations and comprehensive income.
The following table displays the gross realized gains, losses and proceeds on sales of AFS securities.
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
(Dollars in millions)
Gross realized gains
$
1,043

 
$
1,066

 
$
569

Gross realized losses
17

 
70

 
5

Total proceeds (excludes initial sale of securities from new portfolio securitizations)
10,993

 
8,023

 
3,265

The following tables display the amortized cost, gross unrealized gains and losses, and fair value by major security type for AFS securities in our retained mortgage portfolio.
 
As of December 31, 2016
 
Total Amortized Cost(1)
 
Gross Unrealized Gains
 
Gross Unrealized Losses(2)
 
Total Fair Value
 
(Dollars in millions)
Fannie Mae
 
$
2,445

 
 
 
$
137

 
 
 
$
(28
)
 
 
$
2,554

Freddie Mac
 
474

 
 
 
35

 
 
 
—

 
 
509

Ginnie Mae
 
34

 
 
 
4

 
 
 
—

 
 
38

Alt-A private-label securities
 
747

 
 
 
544

 
 
 
—

 
 
1,291

Subprime private-label securities
 
1,070

 
 
 
351

 
 
 
(3
)
 
 
1,418

CMBS
 
815

 
 
 
4

 
 
 
—

 
 
819

Mortgage revenue bonds
 
1,245

 
 
 
36

 
 
 
(9
)
 
 
1,272

Other mortgage-related securities
 
431

 
 
 
31

 
 
 
—

 
 
462

Total
 
$
7,261

 
 
 
$
1,142

 
 
 
$
(40
)
 
 
$
8,363

 
As of December 31, 2015
 
Total Amortized Cost(1)
 
Gross Unrealized Gains
 
Gross Unrealized Losses(2)
 
Total Fair Value
 
(Dollars in millions)
Fannie Mae
 
$
4,008

 
 
 
$
243

 
 
 
$
(30
)
 
 
$
4,221

Freddie Mac
 
4,000

 
 
 
299

 
 
 
—

 
 
4,299

Ginnie Mae
 
343

 
 
 
48

 
 
 
—

 
 
391

Alt-A private-label securities
 
2,029

 
 
 
653

 
 
 
(4
)
 
 
2,678

Subprime private-label securities
 
2,526

 
 
 
759

 
 
 
(4
)
 
 
3,281

CMBS
 
1,235

 
 
 
20

 
 
 
—

 
 
1,255

Mortgage revenue bonds
 
2,639

 
 
 
99

 
 
 
(37
)
 
 
2,701

Other mortgage-related securities
 
1,361

 
 
 
49

 
 
 
(6
)
 
 
1,404

Total
 
$
18,141

 
 
 
$
2,170

 
 
 
$
(81
)
 
 
$
20,230

s
__________
(1) 
Amortized cost consists of unpaid principal balance, unamortized premiums, discounts and other cost basis adjustments, as well as net other-than-temporary impairments (“OTTI”) recognized in “Investment gains, net” in our consolidated statements of operations and comprehensive income.
(2) 
Represents the gross unrealized losses on securities for which we have not recognized OTTI, as well as the noncredit component of OTTI and cumulative changes in fair value of securities for which we previously recognized the credit component of OTTI in “Accumulated other comprehensive income” in our consolidated balance sheets.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-35

 
Notes to Consolidated Financial Statements | Investments in Securities


The following tables display additional information regarding gross unrealized losses and fair value by major security type for AFS securities in an unrealized loss position.
 
As of December 31, 2016
 
Less Than 12 Consecutive Months
 
12 Consecutive Months or Longer
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
(Dollars in millions)
Fannie Mae
 
$
(2
)
 
 
$
139

 
 
$
(26
)
 
 
$
477

Subprime private-label securities
 
—

 
 
—

 
 
(3
)
 
 
73

Mortgage revenue bonds
 
(7
)
 
 
78

 
 
(2
)
 
 
6

   Total
 
$
(9
)
 
 
$
217

 
 
$
(31
)
 
 
$
556

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
Less Than 12 Consecutive Months
 
12 Consecutive Months or Longer
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
(Dollars in millions)
Fannie Mae
 
$
(8
)
 
 
$
659

 
 
$
(22
)
 
 
$
491

Alt-A private-label securities
 
(1
)
 
 
26

 
 
(3
)
 
 
54

Subprime private-label securities
 
—

 
 
12

 
 
(4
)
 
 
91

Mortgage revenue bonds
 
(35
)
 
 
631

 
 
(2
)
 
 
22

Other mortgage-related securities
 
(6
)
 
 
224

 
 
—

 
 
—

   Total
 
$
(50
)
 
 
$
1,552

 
 
$
(31
)
 
 
$
658

Other-Than-Temporary Impairments
For AFS securities, OTTI 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. Additionally, OTTI is 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 to sell the security or it is not more likely than not we will be required to sell the security before recovery.
We recognized $35 million, $196 million and $90 million of OTTI for the years ended December 31, 2016, 2015 and 2014, respectively, which are included in “Investment gains, net” in our consolidated statements of operations and comprehensive income. OTTI recognized for the year ended December 31, 2015 was higher than OTTI recognized for the years ended December 31, 2016 and 2014 primarily due to a change in our intent to sell certain securities during 2015. As a result, we recognized the entire difference between the amortized cost basis of these securities and their fair value as OTTI.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-36

 
Notes to Consolidated Financial Statements | Investments in Securities


The following table displays the modeled attributes, including default rates and severities, which were used to determine whether our senior interests in certain non-agency mortgage-related securities (including those we intend to sell) will experience a cash shortfall. An estimate of voluntary prepayment rates is also an input to the present value of expected losses.
 
As of December 31, 2016
 
 
 
Alt-A
 
Subprime
 
Option ARM
 
Fixed Rate
 
Variable Rate
 
Hybrid Rate
 
(Dollars in millions)
 
Unpaid principal balance
$
2,026

 
 
$
317

 
 
 
$
214

 
 
 
$
524

 
 
 
$
530

 
Weighted average collateral default(1)
36.8
%
 
 
25.3
%
 
 
 
16.5
%
 
 
 
19.2
%
 
 
 
7.1
%
 
Weighted average collateral severities(2)
45.8

 
 
25.7

 
 
 
59.2

 
 
 
36.5

 
 
 
33.5

 
Weighted average voluntary prepayment rates(3)
2.8

 
 
8.3

 
 
 
7.2

 
 
 
8.3

 
 
 
13.1

 
Average credit enhancement(4)
12.7

 
 
1.1

 
 
 
0.2

 
 
 
2.1

 
 
 
1.6

 
__________

(1) 
The expected remaining cumulative default rate of the collateral pool backing the securities, as a percentage of the current collateral unpaid principal balance, weighted by security unpaid principal balance.
(2) 
The expected remaining loss given default of the collateral pool backing the securities, calculated as the ratio of remaining cumulative loss divided by cumulative defaults, weighted by security unpaid principal balance.
(3) 
The average monthly voluntary prepayment rate, weighted by security unpaid principal balance.
(4) 
The average percent current credit enhancement provided by subordination of other securities. Excludes excess interest projections and monoline bond insurance.
The following table displays activity related to the unrealized credit loss component on debt securities held by us and recognized in our consolidated statements of operations and comprehensive income.
 
For the Year Ended
 
December 31,
 
2016
 
2015
 
(Dollars in millions)
Beginning balance
$
2,421

 
$
5,260

Additions for the credit component on debt securities for which OTTI was not previously recognized
1

 
—

Additions for the credit component on debt securities for which OTTI was previously recognized
7

 
8

Reductions for securities no longer in portfolio at period end
(175
)
 
(1,171
)
Reductions for securities which we intend to sell or it is more likely than not that we will be required to sell before recovery of amortized cost basis
(254
)
 
(1,492
)
Reductions for amortization resulting from changes in cash flows expected to be collected over the remaining life of the securities
(133
)
 
(184
)
Ending balance
$
1,867

 
$
2,421

Maturity Information
The following table displays the amortized cost and fair value of our AFS securities by major security type and remaining contractual maturity, assuming no principal prepayments. The contractual maturity of mortgage-backed securities is not a reliable indicator of their expected life because borrowers generally have the right to prepay their obligations at any time.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-37

 
Notes to Consolidated Financial Statements | Investments in Securities


 
As of December 31, 2016
 
Total Amortized Cost
 
Total
Fair
Value
 
One Year or Less
 
After One Year
Through Five Years
 
After Five Years Through Ten Years
 
After Ten Years
 
 
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
  
(Dollars in millions)
Fannie Mae
 
$
2,445

 
 
$
2,554

 
 
$
—

 
 
$
—

 
 
$
26

 
 
$
26

 
 
$
62

 
 
$
67

 
 
$
2,357

 
 
$
2,461

Freddie Mac
 
474

 
 
509

 
 
2

 
 
2

 
 
53

 
 
54

 
 
78

 
 
83

 
 
341

 
 
370

Ginnie Mae
 
34

 
 
38

 
 
—

 
 
—

 
 
1

 
 
1

 
 
2

 
 
2

 
 
31

 
 
35

Alt-A private-label securities
 
747

 
 
1,291

 
 
—

 
 
—

 
 
—

 
 
—

 
 
—

 
 
—

 
 
747

 
 
1,291

Subprime private-label securities
 
1,070

 
 
1,418

 
 
—

 
 
—

 
 
—

 
 
—

 
 
—

 
 
—

 
 
1,070

 
 
1,418

CMBS
 
815

 
 
819

 
 
766

 
 
770

 
 
29

 
 
30

 
 
—

 
 
—

 
 
20

 
 
19

Mortgage revenue bonds
 
1,245

 
 
1,272

 
 
14

 
 
15

 
 
82

 
 
82

 
 
138

 
 
139

 
 
1,011

 
 
1,036

Other mortgage-related securities
 
431

 
 
462

 
 
—

 
 
—

 
 
—

 
 
—

 
 
2

 
 
3

 
 
429

 
 
459

Total
 
$
7,261

 
 
$
8,363

 
 
$
782

 
 
$
787

 
 
$
191

 
 
$
193

 
 
$
282

 
 
$
294

 
 
$
6,006

 
 
$
7,089

Weighted average yield(1)
 
6.78%
 
 
 
 
4.03
%
 
 
 
 
5.18%
 
 
 
 
6.92%
 
 
 
 
7.18%
 
 
__________

(1) 
Yields are determined by dividing interest income (including amortization and accretion of premiums, discounts and other cost basis adjustments) by amortized cost balances as of year-end. Yields on tax-exempt obligations have been computed on a tax equivalent basis.
6.  Financial Guarantees
We generate revenue by absorbing the credit risk of mortgage loans in unconsolidated trusts in exchange for a guaranty fee. 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 generally require us to purchase loans from lenders if the loans meet certain delinquency criteria.
We recognize a guaranty obligation for our obligation to stand ready to perform on our guarantees to unconsolidated trusts and other guaranty arrangements. These guarantees expose us to credit losses on the mortgage loans or, in the case of mortgage-related securities, the underlying mortgage loans of the related securities. The remaining contractual terms of our guarantees range from 1 day to 36 years; however, the actual term of each guaranty may be significantly less than the contractual term based on the prepayment characteristics of the related mortgage loans.
The following table displays our maximum exposure, guaranty obligation recognized in our consolidated balance sheets and the maximum potential recovery from third parties through available credit enhancements and recourse related to our financial guarantees.
 
As of December 31,
 
2016
 
 
2015
 
Maximum Exposure(1)
 
Guaranty Obligation
 
Maximum Recovery(2)
 
Maximum Exposure(1)
 
Guaranty Obligation
 
Maximum Recovery(2)
 
(Dollars in millions)
Unconsolidated Fannie Mae MBS
$
12,607

 
 
$
143

 
 
$
8,048

 
 
$
15,069

 
 
$
194

 
 
$
8,857

Other guaranty arrangements(3)
15,335

 
 
137

 
 
2,663

 
 
16,504

 
 
135

 
 
2,869

    Total
$
27,942

 
 
$
280

 
 
$
10,711

 
 
$
31,573

 
 
$
329

 
 
$
11,726

__________
(1) 
Primarily consists of the unpaid principal balance of the underlying mortgage loans.
(2) 
Recoverability of such credit enhancements and recourse is subject to, among other factors, our mortgage insurers’ and financial guarantors’ ability to meet their obligations to us. For information on our mortgage insurers and financial guarantors, see “Note 15, Concentrations of Credit Risk.”
(3) 
Primarily consists of credit enhancements and long-term standby commitments.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-38

 
Notes to Consolidated Financial Statements | Acquired Property, Net


7. Acquired Property, Net
Acquired property, net consists of held for sale foreclosed property received in satisfaction of a loan, net of a valuation allowance for declines in the fair value of the properties after initial acquisition. We classify properties as held for sale when we intend to sell the property, are actively marketing it and it is ready for immediate sale in its current condition. The following table displays the activity in acquired property, and related valuation allowance.
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
 
(Dollars in millions)
Beginning balance — Acquired property
 
$
7,481

 
 
 
$
11,442

 
 
 
$
12,307

Additions
 
6,076

 
 
 
9,382

 
 
 
13,100

Disposals
 
(8,724
)
 
 
 
(13,343
)
 
 
 
(13,965
)
Ending balance — Acquired property
 
4,833

 
 
 
7,481

 
 
 
11,442

Valuation allowance
 
(344
)
 
 
 
(715
)
 
 
 
(824
)
Ending balance — Acquired property, net
 
$
4,489

 
 
 
$
6,766

 
 
 
$
10,618

We classify as held for use those properties that we do not intend to sell or that are not ready for immediate sale in their current condition, which are included in “Other assets” in our consolidated balance sheets. For the years ended December 31, 2016, 2015 and 2014, the carrying amount of acquired property held for use was $55 million, $85 million and $135 million, respectively.
8.  Short-Term Borrowings and Long-Term Debt
Short-Term Borrowings
The following table displays our outstanding short-term borrowings (borrowings with an original contractual maturity of one year or less) and weighted-average interest rates of these borrowings.
 
As of December 31,
  
2016
 
2015
 
Outstanding
 
Weighted- Average Interest Rate(1)
 
Outstanding
 
Weighted- Average Interest Rate(1)
 
(Dollars in millions)
Federal funds purchased and securities sold under agreements to repurchase(2)
$
—

 
—
%
 
$
62

 
—
%
 
 
 
 
 
 
 
 
Short-term debt of Fannie Mae
$
34,995

 
0.49
%
 
$
71,007

 
0.26
%
Debt of consolidated trusts
584

 
0.48

 
943

 
0.19

Total short-term debt
$
35,579

 
0.49
%
 
$
71,950

 
0.26
%
__________
(1) 
Includes the effects of discounts, premiums and other cost basis adjustments.
(2) 
Represents agreements to repurchase securities for a specified price, with repayment generally occurring on the following day.
Intraday Line of Credit
We use a secured intraday funding line of credit provided by a large financial institution. We post collateral which, in some circumstances, the secured party has the right to repledge to third parties. As this line of credit is an uncommitted intraday loan facility, we may be unable to draw on it if and when needed. The line of credit under this facility was $15.0 billion as of December 31, 2016 and 2015. We had no borrowings outstanding under this line of credit as of December 31, 2016.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-39

 
Notes to Consolidated Financial Statements | Short-Term Borrowings and Long-Term Debt


Long-Term Debt
Long-term debt represents borrowings with an original contractual maturity of greater than one year. The following table displays our outstanding long-term debt.
 
As of December 31,
 
2016
 
2015
 
Maturities
 
Outstanding
 
Weighted- Average Interest Rate(1)
 
Maturities
 
Outstanding
 
Weighted- Average Interest Rate(1)
 
(Dollars in millions)
Senior fixed:
 
 
 
 
 
 
 
 
 
 
 
Benchmark notes and bonds
2017 - 2030
 
$
153,983

 
2.16
%
 
2016 - 2030
 
$
154,057

 
2.49
%
Medium-term notes(2)
2017 - 2026
 
82,230

 
1.40

 
2016 - 2025
 
96,997

 
1.53

Other(3)
2017 - 2038
 
12,800

 
6.74

 
2016 - 2038
 
27,772

 
4.88

Total senior fixed 
 
 
249,013

 
2.14

 
 
 
278,826

 
2.39

Senior floating:
 
 
 
 
 
 
 
 
 
 
 
Medium-term notes(2)
2017 - 2019
 
21,476

 
0.71

 
2016 - 2019
 
20,791

 
0.27

Connecticut Avenue Securities(4)
2023 - 2029
 
16,511

 
4.77

 
2023 - 2028
 
10,764

 
3.84

Other(5)
2020 - 2037
 
346

 
6.75

 
2020 - 2037
 
368

 
10.46

Total senior floating 
 
 
38,333

 
2.48

 
 
 
31,923

 
1.58

Subordinated debentures
2019
 
4,645

 
9.93

 
2019
 
4,227

 
9.93

Secured borrowings(6)
2021 - 2022
 
111

 
1.44

 
2021 - 2022
 
152

 
1.47

Total long-term debt of Fannie Mae(7)
 
 
292,102

 
2.31

 
 
 
315,128

 
2.41

Debt of consolidated trusts
2017 - 2056
 
2,934,635

 
2.57

 
2016 - 2054
 
2,810,593

 
2.94

Total long-term debt
 
 
$
3,226,737

 
2.54
%
 
 
 
$
3,125,721

 
2.88
%
__________
(1) 
Includes the effects of discounts, premiums and other cost basis adjustments.
(2) 
Includes long-term debt with an original contractual maturity of greater than 1 year and up to 10 years, excluding zero-coupon debt.
(3) 
Includes other long-term debt with an original contractual maturity of greater than 10 years and foreign exchange bonds.
(4) 
Credit risk-sharing securities that transfer a portion of the credit risk on specified pools of single-family mortgage loans to the investors in these securities, a portion of which is reported at fair value.
(5) 
Consists of structured debt instruments that are reported at fair value.
(6) 
Represents our remaining liability resulting from the transfer of financial assets from our consolidated balance sheets that did not qualify as a sale under the accounting guidance for the transfer of financial instruments.
(7) 
Includes unamortized discounts and premiums, other cost basis adjustments and fair value adjustments of $1.8 billion and $3.2 billion as of December 31, 2016 and 2015, respectively.
Our long-term debt includes a variety of debt types. We issue fixed and floating-rate medium-term notes with maturities greater than one year that are issued through dealer banks. We also offer Benchmark Notes in regularly-scheduled issuances that provide increased efficiency, liquidity and tradability to the market. Additionally, we have issued notes and bonds denominated in several foreign currencies. We effectively convert all foreign currency-denominated transactions into U.S. dollars through the use of foreign currency swaps for the purpose of funding our mortgage assets. Our long-term debt also includes Connecticut Avenue Securities (“CAS”), which are credit risk-sharing securities that transfer a portion of the credit risk on specified pools of mortgage loans to investors in these securities.
Our other long-term debt includes callable and non-callable securities, which include all long-term non-Benchmark securities, such as zero-coupon bonds, fixed rate and other long-term securities, and are generally negotiated underwritings with one or more dealers or dealer banks.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-40

 
Notes to Consolidated Financial Statements | Short-Term Borrowings and Long-Term Debt


Characteristics of Debt
As of December 31, 2016 and 2015, the face amount of our debt securities of Fannie Mae was $328.9 billion and $389.4 billion, respectively. As of December 31, 2016 and 2015, we had zero-coupon debt with a face amount of $45.9 billion and $82.1 billion, respectively, which had an effective interest rate of 2.43% and 1.26%, respectively.
We issue callable debt instruments to manage the duration and prepayment risk of expected cash flows of the mortgage assets we own. Our outstanding debt as of December 31, 2016 and 2015 included $77.3 billion and $96.2 billion, respectively, of callable debt that could be redeemed in whole or in part at our option any time on or after a specified date.
The following table displays the amount of our long-term debt as of December 31, 2016 by year of maturity for each of the years 2017 through 2021 and thereafter. The first column assumes that we pay off this debt at maturity or on the call date if the call has been announced, while the second column assumes that we redeem our callable debt at the next available call date.
 
Long-Term Debt by
Year of Maturity
 
Assuming Callable Debt
Redeemed at Next
Available Call Date
 
(Dollars in millions)
2017
 
$
68,016

 
 
 
$
135,025

 
2018
 
55,086

 
 
 
43,451

 
2019
 
63,948

 
 
 
38,348

 
2020
 
29,414

 
 
 
16,734

 
2021
 
24,745

 
 
 
13,357

 
Thereafter
 
50,893

 
 
 
45,187

 
Total debt of Fannie Mae(1)
 
292,102

 
 
 
292,102

 
Debt of consolidated trusts(2)
 
2,934,635

 
 
 
2,934,635

 
Total long-term debt
 
$
3,226,737

 
 
 
$
3,226,737

 
__________
(1) 
Includes unamortized discounts and premiums, other cost basis adjustments and fair value adjustments of $1.8 billion.
(2) 
Contractual maturity of debt of consolidated trusts is not a reliable indicator of expected maturity because borrowers of the underlying loans generally have the right to prepay their obligations at any time.
9.  Derivative Instruments
Derivative instruments are an integral part of our strategy in managing interest rate risk. Derivative instruments may be privately-negotiated, bilateral contracts, or they may be listed and traded on an exchange. We refer to our derivative transactions made pursuant to bilateral contracts as our over-the-counter (“OTC”) derivative transactions and our derivative transactions accepted for clearing by a derivatives clearing organization as our cleared derivative transactions. We typically do not settle the notional amount of our risk management derivatives; rather, notional amounts provide the basis for calculating actual payments or settlement amounts. The derivative contracts we use for interest rate risk management purposes fall into these broad categories:
•
Interest rate swap contracts. An interest rate swap is a transaction between two parties in which each party 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.
•
Interest rate option contracts. These contracts primarily include pay-fixed swaptions, receive-fixed swaptions, cancelable swaps and interest rate caps. A swaption is an option contract that allows us or a counterparty to enter into a pay-fixed or receive-fixed swap at some point in the future.
•
Foreign currency swaps. These swaps convert debt that we issue in foreign denominated currencies into U.S. dollars. We enter into foreign currency swaps only to the extent that we hold foreign currency debt.
•
Futures. These are standardized exchange-traded contracts that either obligate a buyer to buy an asset at a predetermined date and price or a seller to sell an asset at a predetermined date and price. The types of futures contracts we enter into include Eurodollar, U.S. Treasury and swaps.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-41

 
Notes to Consolidated Financial Statements | Derivative Instruments


We enter into various forms of credit risk-sharing agreements, including credit risk transfer transactions, swap credit enhancements and mortgage insurance contracts, that we account for as derivatives. The majority of our credit-related derivatives are credit risk transfer transactions, whereby a portion of the credit risk associated with losses on a reference pool of mortgage loans is transferred to a third party.
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. We typically settle the notional amount of our mortgage commitments that are accounted for as derivatives.
We recognize all derivatives as either assets or liabilities in our consolidated balance sheets at their fair value. See “Note 17, Fair Value” for additional information on derivatives recorded at fair value.
Notional and Fair Value Position of our Derivatives
The following table displays the notional amount and estimated fair value of our asset and liability derivative instruments.
 
As of December 31, 2016
 
As of December 31, 2015
 
Asset Derivatives
 
Liability Derivatives
 
Asset Derivatives
 
Liability Derivatives
 
Notional Amount
 
Estimated Fair Value
 
Notional Amount
 
Estimated Fair Value
 
Notional Amount
 
Estimated Fair Value
 
Notional Amount
 
Estimated Fair Value
 
(Dollars in millions)
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
$
29,540

 
$
660

 
$
94,584

 
$
(4,396
)
 
$
33,154

 
$
267

 
$
123,106

 
$
(6,920
)
Receive-fixed
30,207

 
2,696

 
135,470

 
(1,552
)
 
59,796

 
3,436

 
143,209

 
(753
)
Basis
1,624

 
115

 
15,600

 
(11
)
 
1,864

 
141

 
17,100

 
(15
)
Foreign currency
214

 
40

 
216

 
(85
)
 
295

 
95

 
258

 
(52
)
Swaptions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
9,600

 
241

 
4,850

 
(82
)
 
7,050

 
45

 
14,950

 
(26
)
Receive-fixed
—

 
—

 
10,100

 
(257
)
 
2,000

 
8

 
13,950

 
(171
)
Other(1)
15,087

 
33

 
655

 
(2
)
 
9,196

 
28

 
—

 
(2
)
Total gross risk management derivatives
86,272

 
3,785

 
261,475

 
(6,385
)
 
113,355

 
4,020

 
312,573

 
(7,939
)
Accrued interest receivable (payable)
—

 
785

 
—

 
(937
)
 
—

 
758

 
—

 
(977
)
Netting adjustment(2)
—

 
(4,514
)
 
—

 
6,844

 
—

 
(4,024
)
 
—

 
8,650

Total net risk management derivatives
$
86,272

 
$
56

 
$
261,475

 
$
(478
)
 
$
113,355

 
$
754

 
$
312,573

 
$
(266
)
Mortgage commitment derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage commitments to purchase whole loans
$
4,753

 
$
28

 
$
3,039

 
$
(49
)
 
$
4,815

 
$
9

 
$
2,960

 
$
(9
)
Forward contracts to purchase mortgage-related securities
31,635

 
198

 
27,297

 
(388
)
 
31,273

 
66

 
19,418

 
(57
)
Forward contracts to sell mortgage-related securities
34,103

 
405

 
47,645

 
(300
)
 
26,224

 
65

 
40,753

 
(92
)
Total mortgage commitment derivatives
70,491

 
631

 
77,981

 
(737
)
 
62,312

 
140

 
63,131

 
(158
)
Derivatives at fair value
$
156,763

 
$
687

 
$
339,456

 
$
(1,215
)
 
$
175,667

 
$
894

 
$
375,704

 
$
(424
)
__________
(1) 
Includes futures and swap credit enhancements, as well as credit risk transfer transactions and mortgage insurance contracts that we account for as derivatives.
(2) 
The netting adjustment represents the effect of the legal right to offset under legally enforceable master netting arrangements to settle with the same counterparty on a net basis, including cash collateral posted and received. Cash collateral posted was $2.9 billion and $4.9 billion as of December 31, 2016 and 2015, respectively. Cash collateral received was $535 million and $314 million as of December 31, 2016 and 2015, respectively.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-42

 
Notes to Consolidated Financial Statements | Derivative Instruments


A majority of our OTC derivative contracts contain provisions that require our senior unsecured debt to maintain a minimum credit rating from S&P and Moody’s. If our senior unsecured debt credit ratings were downgraded to established thresholds in these derivative contracts, which range from A+ to BBB+, we could be required to provide additional collateral to or terminate transactions with certain counterparties. The aggregate fair value of all OTC derivatives with credit-risk-related contingent features that were in a net liability position as of December 31, 2016 and 2015, respectively, was $1.6 billion and $2.4 billion, for which we posted collateral of $1.4 billion and $2.2 billion in the normal course of business. Had all of the credit-risk-related contingency features underlying these agreements been triggered, an additional $258 million and $257 million would have been required to be posted as collateral or to immediately settle our positions based on the individual agreements and our fair value position as of December 31, 2016 and 2015, respectively. A reduction in our credit ratings may also cause derivatives clearing organizations or their members to demand that we post additional collateral for our cleared derivatives contracts.
We record all derivative gains and losses, including accrued interest, in “Fair value losses, net” in our consolidated statements of operations and comprehensive income. The following table displays, by type of derivative instrument, the fair value gains and losses, net on our derivatives.
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
(Dollars in millions)
Risk management derivatives:
 
 
 
 
 
Swaps:
 
 
 
 
 
Pay-fixed
$
757

 
$
(746
)
 
$
(7,703
)
Receive-fixed
(751
)
 
625

 
4,229

Basis
(21
)
 
4

 
85

Foreign currency
(76
)
 
(60
)
 
27

Swaptions:
 
 
 
 
 
Pay-fixed
163

 
135

 
(4
)
Receive-fixed
(230
)
 
(93
)
 
(197
)
Other
160

 
(25
)
 
1

Net accrual of periodic settlements
(1,125
)
 
(960
)
 
(1,062
)
Total risk management derivatives fair value losses, net
(1,123
)
 
(1,120
)
 
(4,624
)
Mortgage commitment derivatives fair value gains (losses), net
288

 
(393
)
 
(1,140
)
Total derivatives fair value losses, net
$
(835
)
 
$
(1,513
)
 
$
(5,764
)
Derivative Counterparty Credit Exposure
Our derivative counterparty credit exposure relates principally to interest rate derivative contracts. We are exposed to the risk that a counterparty in a derivative transaction will default on payments due to us, which may require us to seek a replacement derivative from a different counterparty. This replacement may be at a higher cost, or we may be unable to find a suitable replacement. We manage our derivative counterparty credit exposure relating to our risk management derivative transactions mainly through enforceable master netting arrangements, which allow us to net derivative assets and liabilities with the same counterparty or clearing organization and clearing member. For our OTC derivative transactions, we require counterparties to post collateral, which may include cash, U.S. Treasury securities, agency debt and agency mortgage-related securities.
See “Note 16, Netting Arrangements” for information on our rights to offset assets and liabilities as of December 31, 2016 and 2015.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-43

 
Notes to Consolidated Financial Statements | Income Taxes


10. Income Taxes
Provision for Federal Income Taxes
We are subject to federal income tax, but we are exempt from state and local income taxes. The following table displays the components of our provision for federal income taxes.
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
(Dollars in millions)
Current income tax provision (benefit)
 
$
2,014

 
 
 
$
(271
)
 
 
 
$
1,879

 
Deferred income tax provision(1)
 
4,006

 
 
 
5,524

 
 
 
5,062

 
Provision for federal income taxes
 
$
6,020

 
 
 
$
5,253

 
 
 
$
6,941

 
__________
(1) 
Amount excludes the income tax effect of items recognized directly in “Fannie Mae stockholders’ equity.”
The following table displays the difference between our effective tax rate and the statutory federal tax rate.
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
Statutory corporate tax rate
 
35.0

%
 
 
35.0

%
 
 
35.0

%
Equity investments in affordable housing projects
 
(1.9
)
 
 
 
(2.6
)
 
 
 
(1.8
)
 
Other
 
(0.3
)
 
 
 
0.9

 
 
 
1.4

 
Valuation allowance
 
—

 
 
 
(0.9
)
 
 
 
(1.8
)
 
Effective tax rate
 
32.8

%
 
 
32.4

%
 
 
32.8

%
Our effective tax rate is the provision 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 years ended December 31, 2016, 2015 and 2014 primarily due to the benefits of our investments in housing projects eligible for low-income housing tax credits. The decrease in our deferred tax valuation allowance in 2015 reflects the utilization of our capital loss carryforwards due to recognition of net capital gains, which allowed us to release the corresponding valuation allowance against our capital loss carryforwards. The decrease in our deferred tax valuation allowance in 2014 reflects the expiration of certain capital loss carryforwards that are included as a component of “Other” in the table above.
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.
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.
As of December 31, 2016, we continued to conclude that the positive evidence in favor of the recoverability of our deferred tax asset outweighed the negative evidence and that it is more likely than not that our deferred tax assets will be realized. 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 income or losses in our consolidated statements of operations and comprehensive income in recent years; unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years; the funding available to us under the senior preferred stock purchase agreement; and the carryforward periods for any carryforwards of net operating losses, capital losses and tax credits.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-44

 
Notes to Consolidated Financial Statements | Income Taxes


The following table displays our deferred tax assets and deferred tax liabilities.
 
As of December 31,
 
2016
 
2015
 
(Dollars in millions)
Deferred tax assets:
 
 
 
 
 
 
 
Mortgage and mortgage-related assets
 
$
17,130

 
 
 
$
16,956

 
Allowance for loan losses and basis in acquired property, net
 
9,496

 
 
 
11,760

 
Debt and derivative instruments
 
2,989

 
 
 
3,512

 
Partnership credits
 
1,968

 
 
 
3,402

 
Partnership and other equity investments
 
667

 
 
 
745

 
Other, net
 
1,665

 
 
 
1,543

 
Total deferred tax assets
 
33,915

 
 
 
37,918

 
Deferred tax liabilities:
 
 
 
 
 
 
 
Unrealized gains on AFS securities, net
 
385

 
 
 
731

 
Total deferred tax liabilities
 
385

 
 
 
731

 
Deferred tax assets, net
 
$
33,530

 
 
 
$
37,187

 
As of December 31, 2016, we had no net operating loss carryforwards and no capital loss carryforwards. We had a remaining balance of $2.0 billion of partnership tax credit carryforwards that expire in various years through 2036 and $302 million of alternative minimum tax credit carryforwards that have an indefinite carryforward period.
Unrecognized Tax Benefits
The following table displays the changes in our unrecognized tax benefits.
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
(Dollars in millions)
Unrecognized tax benefits as of January 1
 
$
—

 
 
 
$
213

 
 
 
$
514

 
Gross decreases—tax positions in prior years
 
—

 
 
 
(213
)
 
 
 
(301
)
 
Unrecognized tax benefits as of December 31(1)
 
$
—

 
 
 
$
—

 
 
 
$
213

 
__________
(1) 
Amounts exclude tax credits of $91 million as of December 31, 2014.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-45

 
Notes to Consolidated Financial Statements | Earnings (Loss) Per Share


11. Earnings (Loss) Per Share
The following table displays the computation of basic and diluted earnings (loss) per share of common stock.
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
(Dollars and shares in millions, except per share amounts)
Net income
$
12,313

 
$
10,955

 
$
14,209

Less: Net income attributable to noncontrolling interest
—

 
(1
)
 
(1
)
Net income attributable to Fannie Mae
12,313

 
10,954

 
14,208

Dividends distributed or available for distribution to senior preferred stockholder(1)
(12,236
)
 
(11,216
)
 
(15,323
)
Net income (loss) attributable to common stockholders
$
77

 
$
(262
)
 
$
(1,115
)
Weighted-average common shares outstanding—Basic(2)
5,762

 
5,762

 
5,762

Convertible preferred stock
131

 
—

 
—

Weighted-average common shares outstanding—Diluted(2)
5,893

 
5,762

 
5,762

Earnings (loss) per share:
 
 
 
 
 
Basic
$
0.01

 
$
(0.05
)
 
$
(0.19
)
Diluted
0.01

 
(0.05
)
 
(0.19
)
__________
(1)
Dividends distributed or available for distribution were calculated based on our net worth as of the end of the fiscal quarters for each respective year, less the applicable capital reserve. See “Note 1, Summary of Significant Accounting Policies” for additional information on our senior preferred stock agreement and our payment of dividends to Treasury.
(2) 
Includes 4.6 billion for the years ended December 31, 2016, 2015 and 2014, of weighted-average shares of common stock that would be issued upon the full exercise of the warrant issued to Treasury from the date the warrant was issued through December 31, 2016, 2015 and 2014, respectively.
12. Segment Reporting
We have two reportable business segments: Single-Family and Multifamily. Our CEO is the chief operating decision maker and allocates resources and assesses performance based on these two business segments. In the fourth quarter of 2016, our CEO changed the way he allocates resources and evaluates operating results. This change resulted in realigning the composition of our reportable business segments to incorporate the activities of the Capital Markets group, which was previously a separate reportable business segment, into the Single-Family or Multifamily segments. The Capital Markets group’s activities relating to single-family mortgage assets were incorporated into the Single-Family segment, and its activities relating to multifamily mortgage assets were incorporated into the Multifamily segment. Mortgage assets, debt funding those assets and associated revenues and expenses previously reported in the Capital Markets group segment are now reported in the Single-Family or Multifamily segments based on whether the underlying mortgage asset is a single-family or multifamily mortgage asset. Administrative expenses previously reported in the Capital Markets group segment have been allocated either directly, where applicable, or indirectly, based on the size of each segment’s mortgage credit book of business. Results of our two business segments are intended to reflect each segment as if it were a stand-alone business. Under our new segment reporting, we have no reconciling items; therefore, the sum of the results for our two business segments equals our consolidated results of operations. We have revised the presentation of our segment results for prior years to be consistent with the current year presentation.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-46

 
Notes to Consolidated Financial Statements | Segment Reporting


The section below provides a discussion of our business segments.
Single-Family Business Segment
•
Works with our lender customers to acquire and securitize single-family mortgage loans delivered to us by lenders into Fannie Mae MBS.
•
Issues structured Fannie Mae MBS backed by single-family mortgage assets and provides other services to our lender customers.
•
Prices and manages the credit risk on loans in our single-family guaranty book of business. Also enters into transactions that transfer a portion of the credit risk on some of the loans in our single-family guaranty book of business.
•
Works to reduce costs of defaulted single-family loans through home retention solutions and foreclosure alternatives, management of foreclosures and our REO inventory, selling nonperforming loans and pursuing contractual remedies from lenders, servicers and providers of credit enhancement.
Multifamily Business Segment
•
Works with our lender customers to acquire and securitize multifamily mortgage loans delivered to us by lenders into Fannie Mae MBS.
•
Issues structured Fannie Mae MBS backed by multifamily mortgage assets and provides other services to our lender customers.
•
Prices and manages the credit risk on loans in our multifamily guaranty book of business. Lenders retain a portion of the credit risk in most multifamily transactions.
•
Works to reduce costs of defaulted multifamily loans through foreclosure alternatives, management of foreclosures and our REO inventory, and pursuing contractual remedies from lenders, servicers and providers of credit enhancement.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-47

 
Notes to Consolidated Financial Statements | Segment Reporting


Segment Allocations and Results
Revenues and expenses directly associated with each respective business segment are included in determining its operating results. Other revenues and expenses, including administrative expenses, that are not directly attributable to a particular business segment are allocated based on the size of each segment’s mortgage credit book of business. The substantial majority of our gains and losses associated with our risk management derivatives are allocated to our Single-Family business segment.
 
For the Year Ended December 31, 2016
 
Single-Family
 
 
Multifamily
 
 
Total
 
(Dollars in millions)
Net interest income(1)
$
19,010

 
 
$
2,285

 
 
$
21,295

Fee and other income(2)
521

 
 
445

 
 
966

Net revenues
19,531

 
 
2,730

 
 
22,261

Investment gains, net(3)
944

 
 
312

 
 
1,256

Fair value losses, net(4)
(1,040
)
 
 
(41
)
 
 
(1,081
)
Administrative expenses
(2,418
)
 
 
(323
)
 
 
(2,741
)
Credit-related income:(5)
 
 
 
 
 
 
 
Benefit for credit losses
2,092

 
 
63

 
 
2,155

Foreclosed property income (expense)
(653
)
 
 
9

 
 
(644
)
Total credit-related income
1,439

 
 
72

 
 
1,511

TCCA fees(6)
(1,845
)
 
 
—

 
 
(1,845
)
Other expenses, net
(1,012
)
 
 
(16
)
 
 
(1,028
)
Income before federal income taxes
15,599

 
 
2,734

 
 
18,333

Provision for federal income taxes
(5,417
)
 
 
(603
)
 
 
(6,020
)
Net income attributable to Fannie Mae
$
10,182

 
 
$
2,131

 
 
$
12,313


 
For the Year Ended December 31, 2015
 
Single-Family
 
 
Multifamily
 
 
Total
 
(Dollars in millions)
Net interest income(1)
$
19,301

 
 
$
2,108

 
 
$
21,409

Fee and other income(2)
636

 
 
712

 
 
1,348

Net revenues
19,937

 
 
2,820

 
 
22,757

Investment gains, net(3)
970

 
 
366

 
 
1,336

Fair value losses, net(4)
(1,505
)
 
 
(262
)
 
 
(1,767
)
Administrative expenses
(2,711
)
 
 
(339
)
 
 
(3,050
)
Credit-related income (expense):(5)
 
 
 
 
 
 
 
Benefit for credit losses
688

 
 
107

 
 
795

Foreclosed property income (expense)
(1,723
)
 
 
94

 
 
(1,629
)
Total credit-related income (expense)
(1,035
)
 
 
201

 
 
(834
)
TCCA fees(6)
(1,621
)
 
 
—

 
 
(1,621
)
Other income (expenses), net
(831
)
 
 
218

 
 
(613
)
Income before federal income taxes
13,204

 
 
3,004

 
 
16,208

Provision for federal income taxes
(4,593
)
 
 
(660
)
 
 
(5,253
)
Net income
8,611

 
 
2,344

 
 
10,955

Less: Net income attributable to noncontrolling interest
—

 
 
(1
)
 
 
(1
)
Net income attributable to Fannie Mae
$
8,611

 
 
$
2,343

 
 
$
10,954


Fannie Mae (In conservatorship) 2016 Form 10-K
F-48

 
Notes to Consolidated Financial Statements | Segment Reporting


 
For the Year Ended December 31, 2014
 
Single-Family
 
 
Multifamily
 
 
Total
 
(Dollars in millions)
Net interest income(1)
$
18,204

 
 
$
1,764

 
 
$
19,968

Fee and other income(2)
5,393

 
 
494

 
 
5,887

Net revenues
23,597

 
 
2,258

 
 
25,855

Investment gains, net(3)
675

 
 
261

 
 
936

Fair value losses, net(4)
(4,788
)
 
 
(45
)
 
 
(4,833
)
Administrative expenses
(2,467
)
 
 
(310
)
 
 
(2,777
)
Credit-related income:(5)
 
 
 
 
 
 
 
Benefit for credit losses
3,850

 
 
114

 
 
3,964

Foreclosed property income (expense)
(225
)
 
 
83

 
 
(142
)
Total credit-related income
3,625

 
 
197

 
 
3,822

TCCA fees(6)
(1,375
)
 
 
—

 
 
(1,375
)
Other income (expenses), net
(718
)
 
 
240

 
 
(478
)
Income before federal income taxes
18,549

 
 
2,601

 
 
21,150

Provision for federal income taxes
(6,410
)
 
 
(531
)
 
 
(6,941
)
Net income
12,139

 
 
2,070

 
 
14,209

Less: Net income attributable to noncontrolling interest
—

 
 
(1
)
 
 
(1
)
Net income attributable to Fannie Mae
$
12,139

 
 
$
2,069

 
 
$
14,208

__________
(1) 
Net interest income primarily consists of guaranty fees received as compensation for assuming and managing the credit risk on loans underlying Fannie Mae MBS held by third parties for the respective business segment, and the difference between the interest income earned on the respective business segment’s mortgage assets in our retained mortgage portfolio and the interest expense associated with the debt funding those assets. Revenues from single-family guaranty fees include revenues generated by the 10 basis point increase in guaranty fees we implemented in 2012 pursuant to TCCA.
(2) 
Single-Family fee and other income primarily consists of compensation for engaging in structured transactions and providing other lender services, and income resulting from settlement agreements resolving certain claims relating to PLS sold to us or that we have guaranteed. Multifamily fee and other income consists of fees associated with multifamily business activities, including yield maintenance income.
(3) 
Investment gains and losses primarily consists of gains and losses on the sale of mortgage assets for the respective business segment.
(4) 
Single-Family fair value gains and losses primarily consist of fair value gains and losses on risk management and mortgage commitment derivatives, trading securities and other financial instruments associated with our single-family mortgage credit book of business. Multifamily fair value gains and losses primarily consist of fair value gains and losses on MBS commitment derivatives, trading securities and other financial instruments associated with our multifamily mortgage credit book of business.
(5) 
Credit-related income or expense is based on the guaranty book of business of the respective business segment and consists of the applicable segment’s benefit or provision for credit losses and foreclosed property expense on loans underlying the segment’s guaranty book of business.
(6) 
Consists of the portion of our single-family guaranty fees that is remitted to Treasury pursuant to the TCCA.
The following table displays total assets by segment.
 
As of December 31,
 
2016
 
2015
 
2014
 
(Dollars in millions)
Single-Family
$
3,029,727

 
$
2,993,495

 
$
3,031,019

Multifamily
258,241

 
228,422

 
217,157

Total assets
$
3,287,968

 
$
3,221,917

 
$
3,248,176


Fannie Mae (In conservatorship) 2016 Form 10-K
F-49

 
Notes to Consolidated Financial Statements | Segment Reporting


We operate our business solely in the United States and its territories, and accordingly, we generate no revenue from and have no long-lived assets, other than financial instruments, in geographic locations other than the United States and its territories.
13.  Equity
Common Stock
Shares of common stock outstanding, net of shares held as treasury stock, totaled 1.2 billion as of December 31, 2016 and 2015.
During conservatorship, the rights and powers of shareholders are suspended. Accordingly, our common shareholders have no ability to elect directors or to vote on other matters during the conservatorship unless FHFA elects to delegate this authority to them. The senior preferred stock purchase agreement with Treasury prohibits the payment of dividends on common stock without the prior written consent of Treasury. The conservator also has eliminated common stock dividends. In addition, we issued a warrant to Treasury that provides Treasury with the right to purchase for a nominal price shares of our common stock equal to 79.9% of the total number of shares of common stock outstanding on a fully diluted basis on the date of exercise, which would substantially dilute the ownership in Fannie Mae of our common stockholders at the time of exercise. Refer to the “Senior Preferred Stock and Common Stock Warrant” section of this note for more information.
Preferred Stock
The following table displays our senior preferred stock and preferred stock outstanding.
 
 
 
 
Issued and Outstanding as of December 31,
 
 
 
Annual Dividend Rate as of December 31, 2016
 
 
 
 
 
 
 
2016
 
2015
 
Stated Value per Share
 
 
 
 
Title
 
Issue Date
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Redeemable on or After
 
(Dollars and shares in millions, except per share amounts)
 
Senior Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series 2008-2
 
September 8, 2008
 
1

 
$
117,149

 
1

 
$
117,149

 
$
117,149

(1) 
N/A
(2) 
N/A
(3) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series D
 
September 30, 1998
 
3

 
$
150

 
3

 
$
150

 
$
50

 
5.250
%
September 30, 1999
 
Series E
 
April 15, 1999
 
3

 
150

 
3

 
150

 
50

 
5.100
 
April 15, 2004
 
Series F
 
March 20, 2000
 
14

 
690

 
14

 
690

 
50

 
0.730
(4) 
March 31, 2002
(5) 
Series G
 
August 8, 2000
 
6

 
288

 
6

 
288

 
50

 
0.610
(6) 
September 30, 2002
(5) 
Series H
 
April 6, 2001
 
8

 
400

 
8

 
400

 
50

 
5.810
 
April 6, 2006
 
Series I
 
October 28, 2002
 
6

 
300

 
6

 
300

 
50

 
5.375
 
October 28, 2007
 
Series L
 
April 29, 2003
 
7

 
345

 
7

 
345

 
50

 
5.125
 
April 29, 2008
 
Series M
 
June 10, 2003
 
9

 
460

 
9

 
460

 
50

 
4.750
 
June 10, 2008
 
Series N
 
September 25, 2003
 
5

 
225

 
5

 
225

 
50

 
5.500
 
September 25, 2008
 
Series O
 
December 30, 2004
 
50

 
2,500

 
50

 
2,500

 
50

 
7.000
(7) 
December 31, 2007
 
Convertible Series 2004-I(8)
 
December 30, 2004
 
—

 
2,492

 
—

 
2,492

 
100,000

 
5.375
 
January 5, 2008
 
Series P
 
September 28, 2007
 
40

 
1,000

 
40

 
1,000

 
25

 
4.500
(9) 
September 30, 2012
 
Series Q
 
October 4, 2007
 
15

 
375

 
15

 
375

 
25

 
6.750
 
September 30, 2010
 
Series R(10)
 
November 21, 2007
 
21

 
530

 
21

 
530

 
25

 
7.625
 
November 21, 2012
 
Series S
 
December 11, 2007
 
280

 
7,000

 
280

 
7,000

 
25

 
7.750
(11) 
December 31, 2010
(12) 
Series T(13)
 
May 19, 2008
 
89

 
2,225

 
89

 
2,225

 
25

 
8.250
 
May 20, 2013
 
Total
 
 
 
556

 
$
19,130

 
556

 
$
19,130

 
 
 
 
 
 
 
__________

Fannie Mae (In conservatorship) 2016 Form 10-K
F-50

 
Notes to Consolidated Financial Statements | Equity


(1) 
Initial stated value per share was $1,000. Based on our draws of funds under the senior preferred stock purchase agreement with Treasury, the stated value per share on December 31, 2016 was $117,149.
(2) 
For the dividend period ended December 31, 2016, the dividend is calculated based on our net worth as of September 30, 2016, less the applicable capital reserve amount of $1.2 billion. The capital reserve amount is $600 million for each dividend period in 2017. For each dividend period beginning in 2018, the dividend amount will be the entire amount of our net worth, if any, as of the end of the immediately preceding fiscal quarter.
(3) 
Any liquidation preference of our senior preferred stock in excess of $1.0 billion may be repaid through an issuance of common or preferred stock, which would require the consent of the conservator and Treasury. The initial $1.0 billion liquidation preference may be repaid only in conjunction with termination of the senior preferred stock purchase agreement.
(4) 
Rate effective March 31, 2016. Variable dividend rate resets every two years at a per annum rate equal to the two-year Constant Maturity U.S. Treasury Rate (“CMT”) minus 0.16% with a cap of 11% per year.
(5) 
Represents initial call date. Redeemable every two years thereafter.
(6) 
Rate effective September 30, 2016. Variable dividend rate resets every two years at a per annum rate equal to the two-year CMT rate minus 0.18% with a cap of 11% per year.
(7) 
Rate effective December 31, 2016. Variable dividend rate resets quarterly thereafter at a per annum rate equal to the greater of 7.00% or 10-year CMT rate plus 2.375%.
(8) 
Issued and outstanding shares were 24,922 as of December 31, 2016 and 2015.
(9) 
Rate effective December 31, 2016. Variable dividend rate resets quarterly thereafter at a per annum rate equal to the greater of 4.50% or 3-Month LIBOR plus 0.75%.
(10) 
On November 21, 2007, we issued 20 million shares of preferred stock in the amount of $500 million. Subsequent to the initial issuance, we issued an additional 1.2 million shares in the amount of $30 million on December 14, 2007 under the same terms as the initial issuance.
(11) 
Rate effective December 31, 2016. Variable dividend rate resets quarterly thereafter at a per annum rate equal to the greater of 7.75% or 3-Month LIBOR plus 4.23%.
(12) 
Represents initial call date. Redeemable every five years thereafter.
(13) 
On May 19, 2008, we issued 80 million shares of preferred stock in the amount of $2.0 billion. Subsequent to the initial issuance, we issued an additional 8 million shares in the amount of $200 million on May 22, 2008 and 1 million shares in the amount of $25 million on June 4, 2008 under the same terms as the initial issuance.
As described under “Senior Preferred Stock and Common Stock Warrant,” we issued senior preferred stock that ranks senior to all other series of preferred stock as to both dividends and distributions upon dissolution, liquidation or winding up of the company. The senior preferred stock purchase agreement with Treasury also prohibits the payment of dividends on preferred stock (other than the senior preferred stock) without the prior written consent of Treasury. The conservator also has eliminated preferred stock dividends, other than dividends on the senior preferred stock.
Each series of our preferred stock has no par value, is non-participating, is non-voting and has a liquidation preference equal to the stated value per share. None of our preferred stock is convertible into or exchangeable for any of our other stock or obligations, with the exception of the Convertible Series 2004-1.
Shares of the Convertible Series 2004-1 Preferred Stock are convertible at any time, at the option of the holders, into shares of Fannie Mae common stock at a conversion price of $94.31 per share of common stock (equivalent to a conversion rate of 1,060.3329 shares of common stock for each share of Series 2004-1 Preferred Stock). The conversion price is adjustable, as necessary, to maintain the stated conversion rate into common stock. Events which may trigger an adjustment to the conversion price include certain changes in our common stock dividend rate, subdivisions of our outstanding common stock into a greater number of shares, combinations of our outstanding common stock into a smaller number of shares and issuances of any shares by reclassification of our common stock. No such events have occurred.
Holders of preferred stock (other than the senior preferred stock) are entitled to receive non-cumulative, quarterly dividends when, and if, declared by our Board of Directors, but have no right to require redemption of any shares of preferred stock. Payment of dividends on preferred stock (other than the senior preferred stock) is not mandatory, but has priority over payment of dividends on common stock, which are also declared by the Board of Directors. If dividends on the preferred stock are not paid or set aside for payment for a given dividend period, dividends may not be paid on our common stock for that period. There were no dividends declared or paid on preferred stock (other than the senior preferred stock) for the years ended December 31, 2016 or 2015.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-51

 
Notes to Consolidated Financial Statements | Equity


After a specified period, we have the option to redeem preferred stock (other than the senior preferred stock) at its redemption price plus the dividend (whether or not declared) for the then-current period accrued to, but excluding, the date of redemption. The redemption price is equal to the stated value for all issues of preferred stock except Series O, which has a redemption price of $50 to $52.50 depending on the year of redemption and Convertible Series 2004-1, which has a redemption price of $105,000 per share.
Our preferred stock is traded in the over-the-counter market.
Senior Preferred Stock and Common Stock Warrant
On September 8, 2008, we issued to Treasury one million shares of Variable Liquidation Preference Senior Preferred Stock, Series 2008-2 (“senior preferred stock”), with an aggregate stated value and initial liquidation preference of $1.0 billion. On September 7, 2008, we issued a warrant to purchase common stock to Treasury. The warrant gives Treasury the right to purchase shares of our common stock equal to 79.9% of the total number of shares of common stock outstanding on a fully diluted basis on the date of exercise. The senior preferred stock and the warrant were issued to Treasury as an initial commitment fee in consideration of the commitment from Treasury to provide funds to us under the terms and conditions set forth in the senior preferred stock purchase agreement. We did not receive any cash proceeds as a result of issuing these shares or the warrant. We have assigned a value of $4.5 billion to Treasury’s commitment, which has been recorded as a reduction to additional paid-in-capital and was partially offset by the aggregate fair value of the warrant. There was no impact to the total balance of stockholders’ equity as a result of the issuance.
Variable Liquidation Preference Senior Preferred Stock, Series 2008-2
Shares of the senior preferred stock have no par value and have a stated value and initial liquidation preference equal to $1,000 per share. The liquidation preference of the senior preferred stock is subject to adjustment. To the extent dividends payable in any period are not paid in cash, the dividends will accrue and be added to the liquidation preference of the senior preferred stock. In addition, any amounts Treasury pays to us pursuant to its funding commitment provided in the senior preferred stock purchase agreement and any quarterly commitment fee payable under the senior preferred stock purchase agreement that is not paid in cash to or waived by Treasury will be added to the liquidation preference of the senior preferred stock. As of December 31, 2016, we have received a total of $116.1 billion under Treasury’s funding commitment and the aggregate liquidation preference of the senior preferred stock was $117.1 billion.
Treasury, as holder of the senior preferred stock, is entitled to receive, when, as and if declared, out of legally available funds, cumulative quarterly cash dividends. Dividends declared and paid on our senior preferred stock were $9.6 billion, $10.3 billion and $20.6 billion for the years ended December 31, 2016, 2015 and 2014, respectively. Effective January 1, 2013, the amount of dividends payable on the senior preferred stock for a dividend period is determined based on our net worth as of the end of the immediately preceding fiscal quarter. For each dividend period from January 1, 2013 through and including December 31, 2017, the dividend amount will be the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. The capital reserve amount was $1.8 billion and $1.2 billion for dividend periods in 2015 and 2016, respectively, and decreased to $600 million for dividend periods in 2017. For each dividend period beginning in 2018, the dividend amount will be the entire amount of our net worth, if any, as of the end of the immediately preceding fiscal quarter.
As a result of these dividend payment provisions and quarterly directives from our conservator, when we have quarterly earnings that result in a net worth greater than the applicable capital reserve amount, we will be required to pay dividends to Treasury in the next quarter; but if our net worth does not exceed the applicable capital reserve amount as of the end of a quarter, then we will not be required to accrue or pay any dividends in the next quarter.
The senior preferred stock ranks prior to our common stock and all other outstanding series of our preferred stock, as well as any capital stock we issue in the future, as to both dividends and rights upon liquidation. The senior preferred stock provides that we may not declare or pay dividends on, make distributions with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any common stock or other securities ranking junior to the senior preferred stock unless (1) full cumulative dividends on the outstanding senior preferred stock (including any unpaid dividends added to the liquidation preference) have been declared and paid in cash, and (2) all amounts required to be paid with the net proceeds of any issuance of capital stock for cash (as described in the following paragraph) have been paid in cash. In addition, as described below under

Fannie Mae (In conservatorship) 2016 Form 10-K
F-52

 
Notes to Consolidated Financial Statements | Equity


“Senior Preferred Stock Purchase Agreement with Treasury—Covenants,” the covenants under the senior preferred stock purchase agreement require that we obtain Treasury’s prior written consent before declaring or paying any dividends or other distributions with respect to our equity securities (other than the senior preferred stock or the warrant) and before redeeming, purchasing, retiring or otherwise acquiring any of our equity securities (other than the senior preferred stock or the warrant). Shares of the senior preferred stock are not convertible. Shares of the senior preferred stock have no general or special voting rights, other than those set forth in the certificate of designation for the senior preferred stock or otherwise required by law. The consent of holders of at least two-thirds of all outstanding shares of senior preferred stock is generally required to amend the terms of the senior preferred stock or to create any class or series of stock that ranks prior to or on parity with the senior preferred stock.
We are not permitted to redeem the senior preferred stock prior to the termination of Treasury’s funding commitment under the senior preferred stock purchase agreement. Moreover, we are not permitted to pay down the liquidation preference of the outstanding shares of senior preferred stock except to the extent of (1) accrued and unpaid dividends previously added to the liquidation preference and not previously paid down; and (2) quarterly commitment fees previously added to the liquidation preference and not previously paid down. In addition to these exceptions, if we issue any shares of capital stock for cash while the senior preferred stock is outstanding (which requires Treasury’s approval), we are required to use the net proceeds of the issuance to pay down the liquidation preference of the senior preferred stock; however, the liquidation preference of each share of senior preferred stock may not be paid down below $1,000 per share prior to the termination of Treasury’s funding commitment. Following the termination of Treasury’s funding commitment, we may pay down the liquidation preference of all outstanding shares of senior preferred stock at any time, in whole or in part.
Common Stock Warrant
The warrant gives Treasury the right to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis on the date of exercise. The warrant may be exercised in whole or in part at any time on or before September 7, 2028, by delivery to Fannie Mae of: (a) a notice of exercise; (b) payment of the exercise price of $0.00001 per share; and (c) the warrant. If the market price of one share of common stock is greater than the exercise price, in lieu of exercising the warrant by payment of the exercise price, Treasury may elect to receive shares equal to the value of the warrant (or portion thereof being canceled) pursuant to the formula specified in the warrant. Upon exercise of the warrant, Treasury may assign the right to receive the shares of common stock issuable upon exercise to any other person. If the warrant is exercised, the stated value of the common stock issued will be reclassified as “Common stock” in our consolidated balance sheets. As of February 17, 2017, Treasury has not exercised the warrant.
Senior Preferred Stock Purchase Agreement with Treasury
Funding Commitment
Under the senior preferred stock purchase agreement, Treasury made a commitment to provide funding, under certain conditions, to eliminate deficits in our net worth. We have received a total of $116.1 billion from Treasury pursuant to the senior preferred stock purchase agreement as of December 31, 2016. The aggregate liquidation preference of the senior preferred stock, including the initial aggregate liquidation preference of $1.0 billion, remained at $117.1 billion as of December 31, 2016.
While we had a positive net worth as of December 31, 2016, in some future periods we could have a net worth deficit and, if so, will be required to obtain additional funding from Treasury pursuant to the senior preferred stock purchase agreement. As of December 31, 2016, the remaining amount of funding available to us under the agreement was $117.6 billion.
If we were to draw additional funds from Treasury under the agreement in a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the agreement.
The senior preferred stock purchase agreement provides that the deficiency amount will be calculated differently if we become subject to receivership or other liquidation process. The deficiency amount may be increased above the otherwise applicable amount upon our mutual written agreement with Treasury. In addition, if the Director of FHFA determines that the Director will be mandated by law to appoint a receiver for us unless our capital is increased by receiving funds under the commitment in an amount up to the deficiency amount (subject to the

Fannie Mae (In conservatorship) 2016 Form 10-K
F-53

 
Notes to Consolidated Financial Statements | Equity


maximum amount that may be funded under the agreement), then FHFA, in its capacity as our conservator, may request that Treasury provide funds to us in such amount. The senior preferred stock purchase agreement also provides that, if we have a deficiency amount as of the date of completion of the liquidation of our assets, we may request funds from Treasury in an amount up to the deficiency amount (subject to the maximum amount that may be funded under the agreement). Any amounts that we draw under the senior preferred stock purchase agreement will be added to the liquidation preference of the senior preferred stock. No additional shares of senior preferred stock are required to be issued under the senior preferred stock purchase agreement.
Commitment Fee
Pursuant to the August 2012 amendment to the senior preferred stock purchase agreement described in “Note 1, Summary of Significant Accounting Policies,” effective January 1, 2013, the periodic commitment fee under the agreement will not be set, accrue or be payable, as long as the dividend payment provisions described above remain in effect.
Covenants
The senior preferred stock purchase agreement provides that, until the senior preferred stock is repaid or redeemed in full, we may not, without the prior written consent of Treasury:
•
Declare or pay any dividend (preferred or otherwise) or make any other distribution with respect to any Fannie Mae equity securities (other than with respect to the senior preferred stock or warrant);
•
Redeem, purchase, retire or otherwise acquire any Fannie Mae equity securities (other than the senior preferred stock or warrant);
•
Sell or issue any Fannie Mae equity securities (other than the common stock issuable upon exercise of the warrant or as required by the terms of any binding agreement in effect on the date of the senior preferred stock purchase agreement);
•
Terminate the conservatorship (other than in connection with a receivership);
•
Sell, transfer, lease or otherwise dispose of any assets, other than dispositions for fair market value: (a) to a limited life regulated entity (in the context of receivership); (b) of assets and properties in the ordinary course of business, consistent with past practice; (c) of assets and properties having fair market value individually or in aggregate less than $250 million in one transaction or a series of related transactions; (d) in connection with a liquidation of Fannie Mae by a receiver; (e) of cash or cash equivalents for cash or cash equivalents; or (f) to the extent necessary to comply with the covenant described below relating to the reduction of our mortgage assets;
•
Incur indebtedness that would result in our aggregate indebtedness exceeding $479.0 billion through December 31, 2016. For every year thereafter, our debt cap will equal 120% of the amount of mortgage assets we are allowed to own under the senior preferred stock purchase agreement on December 31 of the immediately preceding calendar year;
•
Issue any subordinated debt;
•
Enter into a corporate reorganization, recapitalization, merger, acquisition or similar event; or
•
Engage in transactions with affiliates unless the transaction is (a) pursuant to the senior preferred stock purchase agreement, the senior preferred stock or the warrant, (b) upon arm’s-length terms or (c) a transaction undertaken in the ordinary course or pursuant to a contractual obligation or customary employment arrangement in existence on the date of the senior preferred stock purchase agreement.
The agreement, as amended, also provides that we may not own mortgage assets in excess of $339.3 billion as of December 31, 2016. On each December 31 thereafter, we are required to reduce our mortgage assets to 85% of the maximum allowable amount that we were permitted to own as of December 31 of the immediately preceding calendar year, until the amount of our mortgage assets reaches $250 billion. In 2014, FHFA requested that we revise our portfolio plan to cap the portfolio each year at 90% of the annual limit under our senior preferred stock purchase agreement with Treasury. FHFA’s request noted that we may seek FHFA permission to increase this cap up to 95% of the annual limit under our senior preferred stock purchase agreement with Treasury upon written request and with a documented basis for exception, such as changed market conditions.
Under the agreement, the effect of changes in generally accepted accounting principles that occurred subsequent to the date of the agreement and that require us to recognize additional mortgage assets in our consolidated

Fannie Mae (In conservatorship) 2016 Form 10-K
F-54

 
Notes to Consolidated Financial Statements | Equity


balance sheets are not considered for purposes of evaluating our compliance with the limitation on the amount of mortgage assets we may own. 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 the FASB guidance on accounting for transfers of financial assets or any similar accounting guidance.
In addition, the agreement provides that we may not enter into any new compensation arrangements with, or increase amounts or benefits payable under existing compensation arrangements of, any named executive officer or other executive officer (each as defined by SEC rules) without the consent of the Director of FHFA, in consultation with the Secretary of the Treasury. As of December 31, 2016, we were in compliance with the senior preferred stock purchase agreement covenants.
We are required to provide an annual risk management plan to Treasury each year we remain in conservatorship. Each plan is required to set out our strategy for reducing our risk profile, describe the actions we will take to reduce the financial and operational risk associated with each of our business segments, and include an assessment of our performance against the planned actions described in the prior year’s plan. We submitted our most recent annual risk management plan to Treasury in December 2016.
Termination Provisions
The senior preferred stock purchase agreement provides that Treasury’s funding commitment will terminate under any the following circumstances: (1) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding commitment at that time, (2) the payment in full of, or reasonable provision for, all of our liabilities (whether or not contingent, including mortgage guaranty obligations), or (3) the funding by Treasury of the maximum amount under the agreement. In addition, Treasury may terminate its funding commitment and declare the senior preferred stock purchase agreement null and void if a court vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of the conservator or otherwise curtails the conservator’s powers. Treasury may not terminate its funding commitment solely by reason of our being in conservatorship, receivership or other insolvency proceeding, or due to our financial condition or any adverse change in our financial condition.
Waivers and Amendments
The senior preferred stock purchase agreement provides that most provisions of the agreement may be waived or amended by mutual written agreement of the parties. No waiver or amendment of the agreement, however, may decrease Treasury’s aggregate funding commitment or add conditions to Treasury’s funding commitment if the waiver or amendment would adversely affect in any material respect the holders of our debt securities or guaranteed Fannie Mae MBS.
Third-party Enforcement Rights
If we default on payments with respect to our debt securities or guaranteed Fannie Mae MBS and Treasury fails to perform its obligations under its funding commitment, and if we and/or the conservator are not diligently pursuing remedies in respect of that failure, the holders of these debt securities or Fannie Mae MBS may file a claim for relief in the United States Court of Federal Claims. The relief, if granted, would require Treasury to fund to us the lesser of (1) the amount necessary to cure the payment defaults on our debt and Fannie Mae MBS and (2) the lesser of (a) the deficiency amount and (b) the maximum amount available under the agreement less the aggregate amount of funding previously provided under the commitment. Any payment that Treasury makes under those circumstances would be treated for all purposes as a draw under the senior preferred stock purchase agreement that would increase the liquidation preference of the senior preferred stock.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-55

 
Notes to Consolidated Financial Statements | Equity


Accumulated Other Comprehensive Income
The following table displays our accumulated other comprehensive income.
 
As of December 31,
 
2016
 
2015
 
2014
 
(Dollars in millions)
Net unrealized gains on AFS securities for which we have not recorded OTTI, net of tax
$
135

 
$
455

 
$
592

Net unrealized gains on AFS securities for which we have recorded OTTI, net of tax
581

 
903

 
1,529

Prior service credit (cost) and actuarial gains (losses), net of amortization, and other, net of tax
43

 
49

 
(388
)
Accumulated other comprehensive income
$
759

 
$
1,407

 
$
1,733

The table below displays changes in accumulated other comprehensive income, net of tax.
 
For the Year Ended December 31,
 
2016
 
2015
 
 AFS Securities(1)
 
Other
 
Total
 
AFS Securities(1)
 
Other(2)
 
Total
 
 
Beginning balance
$
1,358

 
$
49

 
$
1,407

 
$
2,121

 
$
(388
)
 
$
1,733

Other comprehensive income (loss) before reclassifications
(55
)
 
2

 
(53
)
 
(280
)
 
17

 
(263
)
Amounts reclassified from other comprehensive income (loss)
(587
)
 
(8
)
 
(595
)
 
(483
)
 
420

 
(63
)
Net other comprehensive income (loss)
(642
)
 
(6
)
 
(648
)
 
(763
)
 
437

 
(326
)
Ending balance
$
716

 
$
43

 
$
759

 
$
1,358

 
$
49

 
$
1,407

__________
(1) 
The amounts reclassified from accumulated other comprehensive income represent the gain or loss recognized in earnings due to a sale of an AFS security or the recognition of a net impairment recognized in earnings, which are recorded in “Investments gains, net” in our consolidated statements of operations and comprehensive income.
(2) 
The amounts reclassified from accumulated other comprehensive income in 2015 includes a reclassification adjustment related to the termination of the defined benefit pension plans, which is recorded in “Administrative expenses” and “Provision for federal income taxes,” in our consolidated statements of operations and comprehensive income. The defined benefit pension plans were terminated and all remaining benefits were distributed during the third quarter of 2015.
14. Regulatory Capital Requirements
FHFA stated that, during conservatorship, our existing statutory and FHFA-directed regulatory capital requirements will not be binding and FHFA will not issue quarterly capital classifications. We submit capital reports to FHFA and FHFA monitors 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. Our regulatory capital classification measures are determined based on guidance from FHFA, in which FHFA (1) directed us, for loans backing Fannie Mae MBS held by third parties, to continue reporting our minimum capital requirements based on 0.45% of the unpaid principal balance and critical capital based on 0.25% of the unpaid principal balance, regardless of whether these loans have been consolidated pursuant to accounting rules, and (2) issued a regulatory interpretation stating that our minimum capital requirements are not automatically affected by the consolidation accounting guidance. Additionally, our regulatory capital classification measures exclude the funds provided to us by Treasury pursuant to the senior preferred stock purchase agreement, as the senior preferred stock does not qualify as core capital due to its cumulative dividend provisions.
Pursuant to the GSE Act, if the Director of FHFA makes a written determination that our total assets are less than our total obligations (a net worth deficit) for a period of 60 days, FHFA is mandated by law to appoint a receiver for Fannie Mae. Treasury’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. In order to avoid a net worth deficit, our conservator may request funds on our behalf from Treasury under the senior preferred stock purchase agreement.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-56

 
Notes to Consolidated Financial Statements | Regulatory Capital Requirements


FHFA has directed us, during the time we are under conservatorship, to focus on managing to a positive net worth. We had a positive net worth of $6.1 billion and $4.1 billion as of December 31, 2016 and 2015, respectively.
The following table displays our regulatory capital classification measures.
 
As of December 31,
  
2016
 
2015
  
(Dollars in millions)
Core capital(1)
$
(111,836
)
 
$
(114,526
)
Statutory minimum capital requirement(2)
24,351

 
25,144

Deficit of core capital over statutory minimum capital requirement
$
(136,187
)
 
$
(139,670
)
__________
(1) 
The sum of (a) the stated value of our outstanding common stock (common stock less treasury stock); (b) the stated value of our outstanding non-cumulative perpetual preferred stock; (c) our paid-in capital; and (d) our retained earnings (accumulated deficit). Core capital does not include: (a) accumulated other comprehensive income or (b) senior preferred stock.
(2) 
Generally, the sum of (a) 2.50% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third parties; (b) 0.45% of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and (c) up to 0.45% of other off-balance sheet obligations, which may be adjusted by the Director of FHFA under certain circumstances.
Our critical capital requirement is generally equal to the sum of: (1) 1.25% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third parties; (2) 0.25% of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and (3) 0.25% of other off-balance sheet obligations, which may be adjusted by the Director of FHFA under certain circumstances.
As of December 31, 2016 and 2015, we had a minimum capital deficiency of $136.2 billion and $139.7 billion, respectively. Under the terms of the senior preferred stock purchase agreement with Treasury, beginning January 1, 2013, we are required to pay Treasury each quarter dividends when, as and if declared, equal to the excess of our net worth as of the end of the immediately preceding fiscal quarter over an applicable capital reserve amount. As a result, in periods in which we have net worth, our minimum capital deficiency will decline to the extent of our net worth but the deficiency will increase in the subsequent period as we pay Treasury the corresponding senior preferred stock dividend. See “Note 13, Equity” for more information on capital and the terms of our senior preferred stock purchase agreement with Treasury. Set forth below are additional restrictions related to our capital requirements.
Restrictions on Capital Distributions and Dividends
Statutory Restrictions. Under the GSE Act, FHFA has authority to prohibit capital distributions, including payment of dividends, if we fail to meet our capital requirements. If FHFA classifies us as significantly undercapitalized, we must obtain the approval of the Director of FHFA for any dividend payment. Under the Charter Act and the GSE Act, we are not permitted to make a capital distribution if, after making the distribution, we would be undercapitalized. The Director of FHFA, however, may permit us to repurchase shares if the repurchase is made in connection with the issuance of additional shares or obligations in at least an equivalent amount and will reduce our financial obligations or otherwise improve our financial condition.
Restrictions Relating to Conservatorship. Our conservator announced on September 7, 2008 that we would not pay any dividends on the common stock or on any series of preferred stock, other than the senior preferred stock. In addition, FHFA’s regulations relating to conservatorship and receivership operations prohibit us from paying any dividends while in conservatorship unless authorized by the Director of FHFA. The Director of FHFA has directed us to make dividend payments on the senior preferred stock on a quarterly basis.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-57

 
Notes to Consolidated Financial Statements | Regulatory Capital Requirements


Restrictions Under Senior Preferred Stock Purchase Agreement. The senior preferred stock purchase agreement prohibits us from declaring or paying any dividends on Fannie Mae equity securities (other than the senior preferred stock) without the prior written consent of Treasury. In addition, in 2012 the terms of the senior preferred stock purchase agreement and the senior preferred stock were amended to require that we pay Treasury each quarter any dividends declared consisting of the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount, which will decrease to zero in 2018. As a result, our net income is not available to common stockholders. For more information on the terms of the senior preferred stock purchase agreement and senior preferred stock, see “Note 13, Equity.”
Additional Restrictions Relating to Preferred Stock. Payment of dividends on our common stock is also subject to the prior payment of dividends on our preferred stock and our senior preferred stock. Payment of dividends on all outstanding preferred stock, other than the senior preferred stock, is also subject to the prior payment of dividends on the senior preferred stock.
15. Concentrations of Credit Risk
Concentrations of credit risk arise when a number of customers and counterparties engage in similar activities or have similar economic characteristics that make them susceptible to similar changes in industry conditions, which could affect their ability to meet their contractual obligations. Based on our assessment of business conditions that could impact our financial results, we have determined that concentrations of credit risk exist among single-family and multifamily borrowers (including geographic concentrations and loans with certain higher-risk characteristics), mortgage sellers and servicers, mortgage insurers, financial guarantors, multifamily lenders with risk sharing, derivative counterparties and parties associated with our off-balance sheet transactions. Concentrations for each of these groups are discussed below.
Single-Family Loan Borrowers
Regional economic conditions may affect a borrower’s ability to repay his or her mortgage loan and the property value underlying the loan. Geographic concentrations increase the exposure of our portfolio to changes in credit risk. Single-family borrowers are primarily affected by home prices and interest rates.
To manage credit risk and comply with legal requirements, we typically require primary mortgage insurance or other credit enhancements if the current LTV ratio (i.e., the ratio of the unpaid principal balance of a loan to the current value of the property that serves as collateral) of a single-family conventional mortgage loan is greater than 80% when the loan is delivered to us.
Multifamily Loan Borrowers
Numerous factors affect a multifamily borrower’s ability to repay the loan and the value of the property underlying the loan. The most significant factors affecting credit risk are rental income, capitalization rates for the mortgaged property, and general economic conditions. The average unpaid principal balance for multifamily loans is significantly larger than for single-family borrowers and, therefore, individual defaults for multifamily borrowers can result in more significant losses. However, we continually monitor the performance and risk characteristics of our multifamily loans, underlying properties and borrowers on an ongoing basis.
As part of our multifamily risk management activities, we perform detailed loan reviews that evaluate borrower and geographic concentrations, lender qualifications, counterparty risk, property performance and contract compliance. We generally require mortgage servicers to submit periodic property operating information and condition reviews, allowing us to monitor the performance of individual loans. We use this information to evaluate the credit quality of our portfolio, identify potential problem loans and initiate appropriate loss mitigation activities.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-58

 
Notes to Consolidated Financial Statements | Concentrations of Credit Risk


The following table displays the regional geographic concentration of single-family and multifamily loans in our guaranty book of business, measured by the unpaid principal balance of the loans.
 
Geographic Concentration(1)
 
Percentage of Single-Family Conventional Guaranty Book of Business(2)
 
Percentage of Multifamily Guaranty Book of Business(3)
 
As of December 31,
 
As of December 31,
 
2016
 
2015
 
2016
 
2015
Midwest
 
15
%
 
 
15
%
 
 
9
%
 
 
9
%
Northeast
 
18
 
 
 
19
 
 
 
16
 
 
 
17
 
Southeast
 
22
 
 
 
22
 
 
 
25
 
 
 
23
 
Southwest
 
17
 
 
 
16
 
 
 
22
 
 
 
21
 
West
 
28
 
 
 
28
 
 
 
28
 
 
 
30
 
Total
 
100
%
 
 
100
%
 
 
100
%
 
 
100
%
__________
(1) 
Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD, WI; Northeast consists of CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI, VT, VI; Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, WV; Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX, UT; West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.
(2) 
Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan level information, which constituted over 99% of our total single-family conventional guaranty book of business as of December 31, 2016 and 2015.
(3) 
Consists of the portion of our multifamily guaranty book of business for which we have detailed loan level information, which constituted 99% of our total multifamily guaranty book of business as of December 31, 2016 and 2015.
Risk Characteristics of our Guaranty Book of Business
One of the measures by which we gauge our performance risk under our guaranty is the delinquency status of the mortgage loans we hold in our retained mortgage portfolio, or in the case of mortgage-backed securities, the mortgage loans underlying the related securities.
For single-family loans, management monitors the serious delinquency rate, which is the percentage of single-family loans 90 days or more past due or in the foreclosure process, and loans that have higher risk characteristics, such as high mark-to-market LTV ratios.
For multifamily loans, management monitors the serious delinquency rate, which is the percentage of loans, based on unpaid principal balance, that are 60 days or more past due, and other loans that have higher risk characteristics, to determine our overall credit quality indicator. Higher risk characteristics include, but are not limited to, current DSCR below 1.0 and high original LTV ratios. We stratify multifamily loans into different internal risk categories based on the credit risk inherent in each individual loan.
For single-family and multifamily loans, we use this information, in conjunction with housing market and economic conditions, to structure our pricing and our eligibility and underwriting criteria to reflect the current risk of loans with these higher-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.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-59

 
Notes to Consolidated Financial Statements | Concentrations of Credit Risk


The following tables display the delinquency status and serious delinquency rates for specified loan categories of our single-family conventional and total multifamily guaranty book of business.
 
As of December 31,
 
2016(1)
 
2015(1)
 
30 Days Delinquent
 
60 Days Delinquent
 
Seriously Delinquent(2)
 
30 Days Delinquent
 
60 Days Delinquent
 
Seriously Delinquent(2)
Percentage of single-family conventional guaranty book of business(3)
1.30
%
 
0.36
%
 
1.18
%
 
1.27
%
 
0.37
%
 
1.59
%
Percentage of single-family conventional loans(4)
1.51

 
0.41

 
1.20

 
1.46

 
0.41

 
1.55

 
As of December 31,
 
2016(1)
 
2015(1)
 
Percentage of
Single-Family
Conventional
Guaranty Book of Business(3)
 
Seriously Delinquent Rate(2)
 
Percentage of
Single-Family
Conventional
Guaranty Book of Business(3)
 
Seriously Delinquent Rate(2)
Estimated mark-to-market loan-to-value ratio:
 
 
 
 
 
 
 
Greater than 100%
2
%
 
10.44
%
 
3
%
 
10.76
%
Geographical distribution:
 
 
 
 
 
 
 
California
19

 
0.50

 
20

 
0.58

Florida
6

 
1.89

 
6

 
2.86

New Jersey
4

 
3.07

 
4

 
4.87

New York
5

 
2.65

 
5

 
3.55

All other states
66

 
1.11

 
65

 
1.34

Product distribution:
 
 
 
 
 
 
 
Alt-A
3

 
5.00

 
4

 
6.53

Vintages:
 
 
 
 
 
 
 
2004 and prior
5

 
2.82

 
5

 
3.06

2005-2008
8

 
6.39

 
10

 
7.60

2009-2016
87

 
0.36

 
85

 
0.36

__________  
(1) 
Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan level information, which constituted approximately 99% of our total single-family conventional guaranty book of business as of December 31, 2016 and 2015.  
(2) 
Consists of single-family conventional loans that were 90 days or more past due or in the foreclosure process as of December 31, 2016 and 2015.
(3) 
Calculated based on the aggregate unpaid principal balance of single-family conventional loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business.  
(4) 
Calculated based on the number of single-family conventional loans that were delinquent divided by the total number of loans in our single-family conventional guaranty book of business.
 
As of December 31,
 
2016(1)(2)
 
 2015(1)(2)
 
30 Days Delinquent
 
Seriously Delinquent(3)
 
30 Days Delinquent
 
Seriously Delinquent(3)
Percentage of multifamily guaranty book of business
0.02
%
 
0.05
%
 
0.03
%
 
0.07
%

Fannie Mae (In conservatorship) 2016 Form 10-K
F-60

 
Notes to Consolidated Financial Statements | Concentrations of Credit Risk


 
As of December 31,
 
2016(1)
 
2015(1)
 
Percentage of Multifamily Guaranty Book of Business(2)
 
Percentage Seriously Delinquent(3)(4)
 
Percentage of Multifamily Guaranty Book of Business(2)
 
Percentage Seriously Delinquent(3)(4)
Original LTV ratio:
 
 
 
 
 
 
 
Greater than 80%
2
%
 
0.22
%
 
3
%
 
0.40
%
Less than or equal to 80%
98

 
0.05

 
97

 
0.06

Current DSCR less than 1.0(5)
2

 
1.96

 
2

 
1.51

__________  
(1) 
Consists of the portion of our multifamily guaranty book of business for which we have detailed loan level information, which constituted approximately 99% of our total multifamily guaranty book of business as of December 31, 2016 and 2015, excluding loans that have been defeased.
(2) 
Calculated based on the aggregate unpaid principal balance of multifamily loans for each category divided by the aggregate unpaid principal balance of loans in our multifamily guaranty book of business.
(3) 
Consists of multifamily loans that were 60 days or more past due as of the dates indicated.
(4) 
Calculated based on the unpaid principal balance of multifamily loans that were seriously delinquent divided by the aggregate unpaid principal balance of multifamily loans for each category included in our guaranty book of business.
(5) 
Our estimates of current DSCRs are based on the latest available income information for these properties. Although we use the most recently available results of our multifamily borrowers, there is a lag in reporting, which typically can range from 3 to 6 months but in some cases may be longer.
Alt-A Loans and Securities
We own and guarantee Alt-A mortgage loans and mortgage-related securities. An Alt-A mortgage loan generally refers to a mortgage loan that has been 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 and only 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.
We apply our classification criteria in order to discuss our exposure to Alt-A loans. However, there is no universally accepted definition of Alt-A loans. Our single-family conventional guaranty book of business includes loans with some features that are similar to Alt-A loans that we have not classified as Alt-A because they do not meet our classification criteria. We reduce our risk associated with some of these loans through credit enhancements, as described below under “Mortgage Insurers.” We do not rely solely on our classifications of loans as Alt-A to evaluate the credit risk exposure relating to these loans in our single-family conventional guaranty book of business.
The Alt-A mortgage loans and Fannie Mae MBS backed by Alt-A loans of $87.4 billion in unpaid principal balance represented 3% of our single-family mortgage credit book of business as of December 31, 2016, compared with $103.1 billion in unpaid principal balance which represented 4% of our single-family mortgage credit book of business as of December 31, 2015.
Other Concentrations
Mortgage Sellers and Servicers.  Mortgage servicers collect mortgage and escrow payments from borrowers, pay taxes and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required activities on our behalf. Our mortgage sellers and servicers may also be obligated to repurchase loans or foreclosed properties, reimburse us for losses or provide other remedies under certain circumstances, such as if it is determined that the mortgage loan did not meet our underwriting or eligibility requirements, if certain loan representations and warranties are violated or if mortgage insurers rescind coverage. However, under our revised representation and warranty framework, we no longer require repurchase for loans that have breaches of certain selling representations and warranties if they have met specified criteria for relief. Our business with mortgage servicers is concentrated. Our five largest single-family mortgage servicers, including their affiliates, serviced approximately 39% of our single-family guaranty book of business as of December 31, 2016, compared with

Fannie Mae (In conservatorship) 2016 Form 10-K
F-61

 
Notes to Consolidated Financial Statements | Concentrations of Credit Risk


approximately 44% as of December 31, 2015. Our five largest multifamily mortgage servicers, including their affiliates, serviced approximately 47% of our multifamily guaranty book of business as of December 31, 2016, compared with approximately 45% as of December 31, 2015.
If a significant mortgage seller or servicer counterparty, or a number of mortgage sellers or servicers, fails to meet their obligations to us, it could result in an increase in our credit losses and credit-related expense, and have an adverse effect on our results of operations and financial condition.
Mortgage Insurers.  Mortgage insurance “risk in force” generally represents our maximum potential loss recovery under the applicable mortgage insurance policies. We had total mortgage insurance coverage risk in force of $126.2 billion and $117.9 billion on the single-family mortgage loans in our guaranty book of business as of December 31, 2016 and 2015, respectively, which represented 4% of our single-family guaranty book of business as of December 31, 2016 and 2015. Our primary mortgage insurance coverage risk in force was $125.6 billion and $117.2 billion as of December 31, 2016 and 2015, respectively. Our pool mortgage insurance coverage risk in force was $617 million and $736 million as of December 31, 2016 and 2015, respectively. Our top three mortgage insurance companies provided 66% of our mortgage insurance coverage risk in force as of December 31, 2016 and 68% as of December 31, 2015.
Of our largest primary mortgage insurers, PMI Mortgage Insurance Co. (“PMI”), Triad Guaranty Insurance Corporation (“Triad”) and Republic Mortgage Insurance Company (“RMIC”) are under various forms of supervised control by their state regulators and are in run-off. Entering run-off may close off a source of profits and liquidity that may have otherwise assisted a mortgage insurer in paying claims under insurance policies, and could also cause the quality and speed of its claims processing to deteriorate. These three mortgage insurers provided a combined $8.0 billion, or 6%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of December 31, 2016.
PMI and Triad have been paying only a portion of policyholder claims and deferring the remaining portion. PMI is currently paying 71.5% of claims under its mortgage insurance policies in cash and is deferring the remaining 28.5%, and Triad is currently paying 75% of claims in cash and deferring the remaining 25%. It is uncertain whether PMI or Triad will be permitted in the future to pay any remaining deferred policyholder claims and/or increase or decrease the amount of cash they pay on claims. RMIC is no longer deferring payments on policyholder claims and has paid us amounts of its previously outstanding deferred payment obligations to bring payment on our claims to 100%; however, RMIC remains in run-off and under the supervisory control of its state regulator. We were not paid interest to compensate us for the amount of time RMIC’s deferred payment obligations were outstanding.
Although the financial condition of our mortgage insurer counterparties currently approved to write new business has improved in recent years, there is still a risk that these counterparties may fail to fulfill their obligations to pay our 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 our mortgage insurer counterparties, it could result in an increase in our loss reserves, which could adversely affect our results of operations, liquidity, financial condition and net worth.
When we estimate the credit losses that are inherent in our mortgage loans and under the terms of our guaranty obligations we also consider the recoveries that we will receive on primary mortgage insurance, as mortgage insurance recoveries would reduce the severity of the loss associated with defaulted loans. We evaluate the financial condition of our mortgage insurer counterparties and adjust the contractually due recovery amounts to ensure that only probable losses as of the balance sheet date are included in our loss reserve estimate. As a result, if our assessment of one or more of our mortgage insurer counterparties’ ability to fulfill their respective obligations to us worsens, it could result in an increase in our loss reserves. As of December 31, 2016 and 2015, the amount by which our estimated benefit from mortgage insurance reduced our total loss reserves was $1.4 billion and $2.3 billion, respectively.
We had outstanding receivables of $1.0 billion recorded in “Other assets” in our consolidated balance sheets as of December 31, 2016 and $1.2 billion as of December 31, 2015 related to amounts claimed on insured, defaulted loans excluding government insured loans. Of this amount, $141 million as of December 31, 2016 and $241 million as of December 31, 2015 was due from our mortgage sellers or servicers. We assessed the total outstanding receivables for collectibility, and they are recorded net of a valuation allowance of $638 million as of December 31, 2016 and $770 million as of December 31, 2015. The valuation allowance reduces our claim receivable to the amount which is considered probable of collection as of December 31, 2016 and 2015.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-62

 
Notes to Consolidated Financial Statements | Concentrations of Credit Risk


Financial Guarantors. We are the beneficiary of non-governmental financial guarantees on non-agency securities held in our retained mortgage portfolio and on non-agency securities that have been resecuritized to include a Fannie Mae guaranty and sold to third parties. The total unpaid principal balance of guaranteed non-agency securities in our retained mortgage portfolio was $1.4 billion and $3.2 billion as of December 31, 2016 and 2015, respectively.
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 an adverse effect on our earnings, liquidity, financial condition and net worth. With the exception of Ambac Assurance Corporation (“Ambac”), which is operating under a deferred payment obligation and paying 45% on policyholder claims, none of our remaining non-governmental financial guarantor counterparties has failed to repay us for claims under guaranty contracts. Ambac provided coverage on $707 million, or 50%, of our total non-governmental financial guarantees on non-agency securities held in our retained mortgage portfolio as of December 31, 2016. When assessing our securities for impairment, we consider the benefit of non-governmental financial guarantees from those guarantors that we determine are creditworthy, although we continue to seek collection of any amounts due to us from all counterparties.
We are also the beneficiary of financial guarantees included in securities issued by Freddie Mac, the federal government and its agencies that totaled $11.6 billion as of December 31, 2016 and $16.7 billion as of December 31, 2015.
Multifamily Lenders with Risk Sharing.  We enter into risk sharing agreements with lenders pursuant to which the lenders agree to bear all or some portion of the credit losses on the covered loans. Our maximum potential loss recovery from lenders under these risk sharing agreements on both Delegated Underwriting and Servicing (“DUS”) and non-DUS multifamily loans was $54.8 billion as of December 31, 2016, compared with $46.2 billion as of December 31, 2015. As of December 31, 2016, 43% of our maximum potential loss recovery on multifamily loans was from four DUS lenders, compared with 40% as of December 31, 2015.
Parties Associated with Our Off-Balance Sheet Transactions.  We enter into financial instrument transactions that create off-balance sheet credit risk in the normal course of our business. These transactions are designed to meet the financial needs of our customers, and manage our credit, market or liquidity risks.
We have entered into guarantees for which we have not recognized a guaranty obligation in our consolidated balance sheets relating to periods prior to 2003, the effective date of accounting guidance related to guaranty accounting. Our maximum potential exposure under these guarantees was $4.7 billion as of December 31, 2016 and $5.6 billion as of December 31, 2015. If we were required to make payments under these guarantees, we would pursue recovery through our right to the collateral backing the underlying loans, available credit enhancements and recourse with third parties that provided a maximum coverage of $2.0 billion as of December 31, 2016 and $2.4 billion as of December 31, 2015.
Derivatives Counterparties.  For information on credit risk associated with our derivative transactions and repurchase agreements see “Note 9, Derivative Instruments” and “Note 16, Netting Arrangements.”
16. Netting Arrangements
We use master netting arrangements, which allow us to offset certain financial instruments and collateral with the same counterparty, to minimize counterparty credit exposure. The tables below display information related to derivatives, securities purchased under agreements to resell or similar arrangements, and securities sold under agreements to repurchase or similar arrangements, which are subject to an enforceable master netting arrangement or similar agreement that are either offset or not offset in our consolidated balance sheets.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-63

 
Notes to Consolidated Financial Statements | Netting Arrangements


 
As of December 31, 2016
 
 
 
 
 
 
Net Amount Presented in our Consolidated Balance Sheets
 
Amounts Not Offset in our Consolidated Balance Sheets
 
 
 
Gross Amount
 
Gross Amount Offset(1)
 
 
Financial Instruments(2)
 
Collateral(3)
 
Net Amount
 
(Dollars in millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTC risk management derivatives
$
3,688

 
$
(3,667
)
 
 
 
$
21

 
 
 
$
—

 
 
$
—

 
$
21

Cleared risk management derivatives
849

 
(847
)
 
 
 
2

 
 
 
—

 
 
—

 
2

Mortgage commitment derivatives
631

 
—

 
 
 
631

 
 
 
(357
)
 
 
(22
)
 
252

Total derivative assets
5,168

 
(4,514
)
 
 
 
654

(4 
) 
 
 
(357
)
 
 
(22
)
 
275

Securities purchased under agreements to resell or similar arrangements(5)
51,115

 
—

 
 
 
51,115

 
 
 
—

 
 
(51,115
)
 
—

Total assets
$
56,283

 
$
(4,514
)
 
 
 
$
51,769

 
 
 
$
(357
)
 
 
$
(51,137
)
 
$
275

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTC risk management derivatives
$
(4,905
)
 
$
4,520

 
 
 
$
(385
)
 
 
 
$
—

 
 
$
—

 
$
(385
)
Cleared risk management derivatives
(2,415
)
 
2,324

 
 
 
(91
)
 
 
 
—

 
 
91

 
—

Mortgage commitment derivatives
(737
)
 
—

 
 
 
(737
)
 
 
 
357

 
 
16

 
(364
)
Total derivative liabilities
(8,057
)
 
6,844

 
 
 
(1,213
)
(4 
) 
 
 
357

 
 
107

 
(749
)
Total liabilities
$
(8,057
)
 
$
6,844

 
 
 
$
(1,213
)
 
 
 
$
357

 
 
$
107

 
$
(749
)
 
As of December 31, 2015
 
 
 
 
 
 
Net Amount Presented in our Consolidated Balance Sheets
 
Amounts Not Offset in our Consolidated Balance Sheets
 
 
 
Gross Amount
 
Gross Amount Offset(1)
 
 
Financial Instruments(2)
 
Collateral(3)
 
Net Amount
 
(Dollars in millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTC risk management derivatives
$
4,042

 
$
(4,021
)
 
 
 
$
21

 
 
 
$
—

 
 
$
(18
)
 
$
3

Cleared risk management derivatives
708

 
(3
)
 
 
 
705

 
 
 
—

 
 
—

 
705

Mortgage commitment derivatives
140

 
—

 
 
 
140

 
 
 
(119
)
 
 
(3
)
 
18

Total derivative assets
4,890

 
(4,024
)
 
 
 
866

(4 
) 
 
 
(119
)
 
 
(21
)
 
726

Securities purchased under agreements to resell or similar arrangements(5)
37,950

 
—

 
 
 
37,950

 
 
 
—

 
 
(37,950
)
 
—

Total assets
$
42,840

 
$
(4,024
)
 
 
 
$
38,816

 
 
 
$
(119
)
 
 
$
(37,971
)
 
$
726

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTC risk management derivatives
$
(6,118
)
 
$
5,861

 
 
 
$
(257
)
 
 
 
$
—

 
 
$
—

 
$
(257
)
Cleared risk management derivatives
(2,796
)
 
2,789

 
 
 
(7
)
 
 
 
—

 
 
—

 
(7
)
Mortgage commitment derivatives
(158
)
 
—

 
 
 
(158
)
 
 
 
119

 
 
(1
)
 
(40
)
Total derivative liabilities
(9,072
)
 
8,650

 
 
 
(422
)
(4 
) 
 
 
119

 
 
(1
)
 
(304
)
Securities sold under agreements to repurchase or similar arrangements
(62
)
 
—

 
 
 
(62
)
 
 
 
—

 
 
62

 
—

Total liabilities
$
(9,134
)
 
$
8,650

 
 
 
$
(484
)
 
 
 
$
119

 
 
$
61

 
$
(304
)
________
(1) 
Represents the effect of the right to offset under legally enforceable master netting arrangements to settle with the same counterparty on a net basis, including cash collateral posted and received and accrued interest.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-64

 
Notes to Consolidated Financial Statements | Netting Arrangements


(2) 
Mortgage commitment derivative amounts reflect where we have recognized both an asset and a liability with the same counterparty under an enforceable master netting arrangement but we have not elected to offset the related amounts in our consolidated balance sheets.
(3) 
Represents non-cash collateral received that has not been recognized and not offset in our consolidated balance sheets as well as non-cash collateral posted which has been recognized but not offset in our consolidated balance sheets. Does not include collateral held or posted in excess of our exposure. The fair value of non-cash collateral we pledged was $1.3 billion and $197 million as of December 31, 2016 and December 31, 2015, respectively, which the counterparty was permitted to sell or repledge. The fair value of non-cash collateral received was $51.2 billion and $38.0 billion, of which $45.5 billion and $36.2 billion could be sold or repledged as of December 31, 2016 and December 31, 2015, respectively. None of the underlying collateral was sold or repledged as of December 31, 2016 and December 31, 2015.
(4) 
Excludes derivative assets of $33 million and $28 million as of December 31, 2016 and 2015, respectively, and derivative liabilities of $2 million recognized in our consolidated balance sheets as of December 31, 2016 and 2015, that are not subject to enforceable master netting arrangements.
(5) 
Includes $20.7 billion and $10.6 billion of securities purchased under agreements to resell classified as “Cash and cash equivalents” in our consolidated balance sheets as of December 31, 2016 and 2015, respectively.
Derivative instruments are recorded at fair value and securities purchased under agreements to resell or similar arrangements are recorded at amortized cost in our consolidated balance sheets.
We determine our rights to offset the assets and liabilities presented above with the same counterparty, including collateral posted or received, based on the contractual arrangements entered into with our individual counterparties and various rules and regulations that would govern the insolvency of a derivative counterparty. The following is a description, under various agreements, of the nature of those rights and their effect or potential effect on our financial position.
The terms of the majority of our contracts for OTC risk management derivatives are governed under master agreements of the International Swaps and Derivatives Association Inc. (“ISDA”). These agreements provide that all transactions entered into under the agreement with the counterparty constitute a single contractual relationship. An event of default by the counterparty allows the early termination of all outstanding transactions under the same ISDA agreement and we may offset all outstanding amounts related to the terminated transactions including collateral posted or received.
The terms of our contracts for cleared derivatives are governed under the rules of the clearing organization and the agreement between us and the clearing member of that clearing organization. In the event of a clearing organization default, all open positions at the clearing organization are closed and a net position (on a clearing member by clearing member basis) is calculated. Unless otherwise transferred, in the event of a clearing member default, all open positions cleared through that clearing member are closed and a net position is calculated.
The terms of our contracts for mortgage commitment derivatives are primarily governed by the Fannie Mae Single-Family Selling Guide (“Guide”), for Fannie Mae-approved lenders, or Master Securities Forward Transaction Agreements (“MSFTA”), for counterparties that are not Fannie Mae-approved lenders. In the event of default by the counterparty, both the Guide and the MSFTA allow us to terminate all outstanding transactions under the applicable agreement and offset all outstanding amounts related to the terminated transactions including collateral posted or received. Under the Guide, upon a lender event of default, we generally may offset any amounts owed to a lender against any amounts a lender may owe us under any other existing agreement, regardless of whether or not such other agreements are in default or payments are immediately due.
The terms of our contracts for securities purchased under agreements to resell and securities sold under agreements to repurchase are governed by Master Repurchase Agreements, which are based on the guidelines prescribed by the Securities Industry and Financial Markets Association. Master Repurchase Agreements provide that all transactions under the agreement constitute a single contractual relationship. An event of default by the counterparty allows the early termination of all outstanding transactions under the same agreement and we may offset all outstanding amounts related to the terminated transactions including collateral posted or received.
We also have securities purchased under agreements to resell which we transact through the Fixed Income Clearing Corporation (“FICC”). Under the rules of the FICC, all agreements for securities purchased under agreements to resell that are submitted to the FICC for clearing become transactions with the FICC that are subject to FICC clearing rules. In the event of a FICC default, all open positions at the FICC are closed and a net position is calculated.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-65

 
Notes to Consolidated Financial Statements | Fair Value


17.  Fair Value
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain assets and liabilities on a recurring or nonrecurring basis.
Fair Value Measurement
Fair value measurement guidance defines fair value, establishes a framework for measuring fair value and sets forth disclosures around fair value measurements. This guidance applies whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value. The guidance establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority, Level 1, to measurements based on unadjusted quoted prices in active markets for identical assets or liabilities. The next highest priority, Level 2, is given to measurements of assets and liabilities based on limited observable inputs or observable inputs for similar assets and liabilities. The lowest priority, Level 3, is given to measurements based on unobservable inputs.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-66

 
Notes to Consolidated Financial Statements | Fair Value


Recurring Changes in Fair Value
The following tables display our assets and liabilities measured in our 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.
 
Fair Value Measurements as of December 31, 2016
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Netting Adjustment(1)
 
Estimated Fair Value
 
(Dollars in millions)
Recurring fair value measurements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Fannie Mae
 
$
—

 
 
 
$
3,934

 
 
 
$
835

 
 
 
$
—

 
 
 
$
4,769

 
Freddie Mac
 
—

 
 
 
936

 
 
 
—

 
 
 
—

 
 
 
936

 
Ginnie Mae
 
—

 
 
 
1,122

 
 
 
—

 
 
 
—

 
 
 
1,122

 
Alt-A private-label securities
 
—

 
 
 
46

 
 
 
271

 
 
 
—

 
 
 
317

 
Subprime private-label securities
 
—

 
 
 
319

 
 
 
—

 
 
 
—

 
 
 
319

 
CMBS
 
—

 
 
 
761

 
 
 
—

 
 
 
—

 
 
 
761

 
Mortgage revenue bonds
 
—

 
 
 
—

 
 
 
21

 
 
 
—

 
 
 
21

 
Non-mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
U.S. Treasury securities
 
32,317

 
 
 
—

 
 
 
—

 
 
 
—

 
 
 
32,317

 
Total trading securities
 
32,317

 
 
 
7,118

 
 
 
1,127

 
 
 
—

 
 
 
40,562

 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Fannie Mae
 
—

 
 
 
2,324

 
 
 
230

 
 
 
—

 
 
 
2,554

 
Freddie Mac
 
—

 
 
 
504

 
 
 
5

 
 
 
—

 
 
 
509

 
Ginnie Mae
 
—

 
 
 
38

 
 
 
—

 
 
 
—

 
 
 
38

 
Alt-A private-label securities
 
—

 
 
 
1,119

 
 
 
172

 
 
 
—

 
 
 
1,291

 
Subprime private-label securities
 
—

 
 
 
1,373

 
 
 
45

 
 
 
—

 
 
 
1,418

 
CMBS
 
—

 
 
 
819

 
 
 
—

 
 
 
—

 
 
 
819

 
Mortgage revenue bonds
 
—

 
 
 
—

 
 
 
1,272

 
 
 
—

 
 
 
1,272

 
Other
 
—

 
 
 
33

 
 
 
429

 
 
 
—

 
 
 
462

 
Total available-for-sale securities
 
—

 
 
 
6,210

 
 
 
2,153

 
 
 
—

 
 
 
8,363

 
Mortgage loans
 
—

 
 
 
10,860

 
 
 
1,197

 
 
 
—

 
 
 
12,057

 
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
 
—

 
 
 
4,159

 
 
 
137

 
 
 
—

 
 
 
4,296

 
Swaptions
 
—

 
 
 
241

 
 
 
—

 
 
 
—

 
 
 
241

 
Other
 
—

 
 
 
—

 
 
 
33

 
 
 
—

 
 
 
33

 
Netting adjustment
 
—

 
 
 
—

 
 
 
—

 
 
 
(4,514
)
 
 
 
(4,514
)
 
Mortgage commitment derivatives
 
—

 
 
 
619

 
 
 
12

 
 
 
—

 
 
 
631

 
Total other assets
 
—

 
 
 
5,019

 
 
 
182

 
 
 
(4,514
)
 
 
 
687

 
Total assets at fair value
 
$
32,317

 
 
 
$
29,207

 
 
 
$
4,659

 
 
 
$
(4,514
)
 
 
 
$
61,669

 


Fannie Mae (In conservatorship) 2016 Form 10-K
F-67

 
Notes to Consolidated Financial Statements | Fair Value


 
Fair Value Measurements as of December 31, 2016
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Netting Adjustment(1)
 
 
Estimated Fair Value
 
(Dollars in millions)
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
 
$
—

 
 
 
$
9,235

 
 
 
$
347

 
 
 
$
—

 
 
 
$
9,582

 
Total of Fannie Mae
 
—

 
 
 
9,235

 
 
 
347

 
 
 
—

 
 
 
9,582

 
Of consolidated trusts
 
—

 
 
 
36,283

 
 
 
241

 
 
 
—

 
 
 
36,524

 
Total long-term debt
 
—

 
 
 
45,518

 
 
 
588

 
 
 
—

 
 
 
46,106

 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
 
—

 
 
 
6,933

 
 
 
48

 
 
 
—

 
 
 
6,981

 
Swaptions
 
—

 
 
 
339

 
 
 
—

 
 
 
—

 
 
 
339

 
Other
 
—

 
 
 
—

 
 
 
2

 
 
 
—

 
 
 
2

 
Netting adjustment
 
—

 
 
 
—

 
 
 
—

 
 
 
(6,844
)
 
 
 
(6,844
)
 
Mortgage commitment derivatives
 
—

 
 
 
649

 
 
 
88

 
 
 
—

 
 
 
737

 
Total other liabilities
 
—

 
 
 
7,921

 
 
 
138

 
 
 
(6,844
)
 
 
 
1,215

 
Total liabilities at fair value
 
$
—

 
 
 
$
53,439

 
 
 
$
726

 
 
 
$
(6,844
)
 
 
 
$
47,321

 


Fannie Mae (In conservatorship) 2016 Form 10-K
F-68

 
Notes to Consolidated Financial Statements | Fair Value


 
Fair Value Measurements as of December 31, 2015
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Netting Adjustment(1)
 
Estimated Fair Value
 
(Dollars in millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
 
$
—

 
 
 
$
4,813

 
 
 
$
—

 
 
 
$
—

 
 
 
$
4,813

 
Freddie Mac
 
—

 
 
 
1,314

 
 
 
—

 
 
 
—

 
 
 
1,314

 
Ginnie Mae
 
—

 
 
 
426

 
 
 
—

 
 
 
—

 
 
 
426

 
Alt-A private-label securities
 
—

 
 
 
131

 
 
 
305

 
 
 
—

 
 
 
436

 
Subprime private-label securities
 
—

 
 
 
—

 
 
 
644

 
 
 
—

 
 
 
644

 
CMBS
 
—

 
 
 
2,341

 
 
 
—

 
 
 
—

 
 
 
2,341

 
Mortgage revenue bonds
 
—

 
 
 
—

 
 
 
449

 
 
 
—

 
 
 
449

 
Non-mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
29,485

 
 
 
—

 
 
 
—

 
 
 
—

 
 
 
29,485

 
Total trading securities
 
29,485

 
 
 
9,025

 
 
 
1,398

 
 
 
—

 
 
 
39,908

 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
 
—

 
 
 
4,221

 
 
 
—

 
 
 
—

 
 
 
4,221

 
Freddie Mac
 
—

 
 
 
4,295

 
 
 
4

 
 
 
—

 
 
 
4,299

 
Ginnie Mae
 
—

 
 
 
391

 
 
 
—

 
 
 
—

 
 
 
391

 
Alt-A private-label securities
 
—

 
 
 
1,637

 
 
 
1,041

 
 
 
—

 
 
 
2,678

 
Subprime private-label securities
 
—

 
 
 
—

 
 
 
3,281

 
 
 
—

 
 
 
3,281

 
CMBS
 
—

 
 
 
1,255

 
 
 
—

 
 
 
—

 
 
 
1,255

 
Mortgage revenue bonds
 
—

 
 
 
—

 
 
 
2,701

 
 
 
—

 
 
 
2,701

 
Other
 
—

 
 
 
—

 
 
 
1,404

 
 
 
—

 
 
 
1,404

 
Total available-for-sale securities
 
—

 
 
 
11,799

 
 
 
8,431

 
 
 
—

 
 
 
20,230

 
Mortgage loans
 
—

 
 
 
12,598

 
 
 
1,477

 
 
 
—

 
 
 
14,075

 
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
 
—

 
 
 
4,541

 
 
 
156

 
 
 
—

 
 
 
4,697

 
Swaptions
 
—

 
 
 
53

 
 
 
—

 
 
 
—

 
 
 
53

 
Other
 
—

 
 
 
—

 
 
 
28

 
 
 
—

 
 
 
28

 
Netting adjustment
 
—

 
 
 
—

 
 
 
—

 
 
 
(4,024
)
 
 
 
(4,024
)
 
Mortgage commitment derivatives
 
—

 
 
 
135

 
 
 
5

 
 
 
—

 
 
 
140

 
Total other assets
 
—

 
 
 
4,729

 
 
 
189

 
 
 
(4,024
)
 
 
 
894

 
Total assets at fair value
 
$
29,485

 
 
 
$
38,151

 
 
 
$
11,495

 
 
 
$
(4,024
)
 
 
 
$
75,107

 


Fannie Mae (In conservatorship) 2016 Form 10-K
F-69

 
Notes to Consolidated Financial Statements | Fair Value


 
Fair Value Measurements as of December 31, 2015
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Netting Adjustment(1)
 
Estimated Fair Value
 
(Dollars in millions)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
 
$
—

 
 
 
$
10,764

 
 
 
$
369

 
 
 
$
—

 
 
 
$
11,133

 
Total of Fannie Mae
 
—

 
 
 
10,764

 
 
 
369

 
 
 
—

 
 
 
11,133

 
Of consolidated trusts
 
—

 
 
 
23,113

 
 
 
496

 
 
 
—

 
 
 
23,609

 
Total long-term debt
 
—

 
 
 
33,877

 
 
 
865

 
 
 
—

 
 
 
34,742

 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
 
—

 
 
 
8,697

 
 
 
20

 
 
 
—

 
 
 
8,717

 
Swaptions
 
—

 
 
 
197

 
 
 
—

 
 
 
—

 
 
 
197

 
Other
 
—

 
 
 
—

 
 
 
2

 
 
 
—

 
 
 
2

 
Netting adjustment
 
—

 
 
 
—

 
 
 
—

 
 
 
(8,650
)
 
 
 
(8,650
)
 
Mortgage commitment derivatives
 
—

 
 
 
148

 
 
 
10

 
 
 
—

 
 
 
158

 
Total other liabilities
 
—

 
 
 
9,042

 
 
 
32

 
 
 
(8,650
)
 
 
 
424

 
Total liabilities at fair value
 
$
—

 
 
 
$
42,919

 
 
 
$
897

 
 
 
$
(8,650
)
 
 
 
$
35,166

 
__________
(1) 
Derivative contracts are reported on a gross basis by level. The netting adjustment represents the effect of the legal right to offset under legally enforceable master netting arrangements to settle with the same counterparty on a net basis, including cash collateral posted and received.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-70

 
Notes to Consolidated Financial Statements | Fair Value


The following tables display a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The tables also display gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recognized in our consolidated statements of operations and comprehensive income for Level 3 assets and liabilities. When assets and liabilities are transferred between levels, we recognize the transfer as of the end of the period.
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) 
 
For the Year Ended December 31, 2016
 
 
 
Total Gains (Losses) (Realized/Unrealized) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of December 31, 2016(5)(6)
 
Balance, December 31, 2015
 
Included in Net Income
 
Included in Total Other Comprehensive Income (Loss)(1)
 
Purchases(2)
 
Sales(2)
 
Issues(3)
 
Settlements(3)
 
Transfers out of Level 3(4)
 
Transfers into Level 3(4)
 
Balance, December 31, 2016
 
 
(Dollars in millions)
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
—

 
$
—

 
 
$
—

 
 
$
—

 
$
—

 
$
—

 
$
(1
)
 
$
(24
)
 
$
860

 
$
835

 
 
$
—

 
Freddie Mac
—

 
—

 
 
—

 
 
—

 
—

 
—

 
—

 
(1
)
 
1

 
—

 
 
—

 
Alt-A private-label securities
305

 
(1
)
 
 
—

 
 
—

 
—

 
—

 
(33
)
 
—

 
—

 
271

 
 
(1
)
 
Subprime private-label securities
644

 
(32
)
 
 
—

 
 
—

 
(231
)
 
—

 
(18
)
 
(363
)
 
—

 
—

 
 
—

 
Mortgage revenue bonds
449

 
33

 
 
—

 
 
—

 
(448
)
 
—

 
(13
)
 
—

 
—

 
21

 
 
(2
)
 
Total trading securities
$
1,398

 
$
—

(6)(7) 
 
$
—

 
 
$
—

 
$
(679
)
 
$
—

 
$
(65
)
 
$
(388
)
 
$
861

 
$
1,127

 
 
$
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
—

 
$
—

 
 
$
—

 
 
$
—

 
$
—

 
$
—

 
$
—

 
$
(1
)
 
$
231

 
$
230

 
 
$
—

 
Freddie Mac
4

 
—

 
 
—

 
 
—

 
—

 
—

 
—

 
(4
)
 
5

 
5

 
 
—

 
Alt-A private-label securities
1,041

 
14

 
 
(24
)
 
 
—

 
(291
)
 
—

 
(52
)
 
(516
)
 
—

 
172

 
 
—

 
Subprime private-label securities
3,281

 
170

 
 
(209
)
 
 
—

 
(706
)
 
—

 
(168
)
 
(2,323
)
 
—

 
45

 
 
—

 
Mortgage revenue bonds
2,701

 
132

 
 
(34
)
 
 
—

 
(1,129
)
 
—

 
(398
)
 
—

 
—

 
1,272

 
 
—

 
Other
1,404

 
—

 
 
(12
)
 
 
—

 
(605
)
 
—

 
(74
)
 
(284
)
 
—

 
429

 
 
—

 
Total available-for-sale securities
$
8,431

 
$
316

(7)(8) 
 
$
(279
)
 
 
$
—

 
$
(2,731
)
 
$
—

 
$
(692
)
 
$
(3,128
)
 
$
236

 
$
2,153

 
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans
$
1,477

 
$
129

(6)(7) 
 
$
—

 
 
$
36

 
$
(392
)
 
$
—

 
$
(255
)
 
$
(77
)
 
$
279

 
$
1,197

 
 
$
17

 
Net derivatives
157

 
15

(6) 
 
—

 
 
—

 
—

 
(8
)
 
(122
)
 
2

 
—

 
44

 
 
(132
)
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
$
(369
)
 
$
22

 
 
$
—

 
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(347
)
 
 
$
22

 
Of consolidated trusts
(496
)
 
(75
)
 
 
—

 
 
—

 
—

 
(74
)
 
378

 
215

 
(189
)
 
(241
)
 
 
(9
)
 
Total long-term debt
$
(865
)
 
$
(53
)
(6) 
 
$
—

 
 
$
—

 
$
—

 
$
(74
)
 
$
378

 
$
215

 
$
(189
)
 
$
(588
)
 
 
$
13

 


Fannie Mae (In conservatorship) 2016 Form 10-K
F-71

 
Notes to Consolidated Financial Statements | Fair Value


 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) 
 
For the Year Ended December 31, 2015
 
 
 
Total Gains (Losses) (Realized/Unrealized) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of December 31, 2015(5)(6)
 
Balance,
December 31, 2014
 
Included in Net Income
 
Included in Total Other Comprehensive Income (Loss)(1)
 
Purchases(2)
 
Sales(2)
 
Issues(3)
 
Settlements(3)
 
Transfers out of Level 3(4)
 
Transfers into Level 3(4)
 
Balance, December 31, 2015
 
 
(Dollars in millions)
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
305

 
$
(27
)
 
 
$
—

 
 
$
—

 
$
(2
)
 
$
—

 
$
—

 
$
(278
)
 
$
2

 
$
—

 
 
$
—

 
Alt-A private-label securities
597

 
36

 
 
—

 
 
—

 
(267
)
 
—

 
(45
)
 
(44
)
 
28

 
305

 
 
15

 
Subprime private-label securities
1,307

 
36

 
 
—

 
 
—

 
(611
)
 
—

 
(88
)
 
—

 
—

 
644

 
 
10

 
Mortgage revenue bonds
722

 
(41
)
 
 
—

 
 
—

 
(220
)
 
—

 
(12
)
 
—

 
—

 
449

 
 
(33
)
 
Other
99

 
4

 
 
—

 
 
—

 
(100
)
 
—

 
(3
)
 
—

 
—

 
—

 
 
—

 
Total trading securities
$
3,030

 
$
8

(6)(7) 
 
$
—

 
 
$
—

 
$
(1,200
)
 
$
—

 
$
(148
)
 
$
(322
)
 
$
30

 
$
1,398

 
 
$
(8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
—

 
$
—

 
 
$
—

 
 
$
421

 
$
(425
)
 
$
—

 
$
(8
)
 
$
—

 
$
12

 
$
—

 
 
$
—

 
Freddie Mac
6

 
—

 
 
—

 
 
—

 
—

 
—

 
(1
)
 
(2
)
 
1

 
4

 
 
—

 
Alt-A private-label securities
3,140

 
215

 
 
(173
)
 
 
—

 
(1,504
)
 
—

 
(436
)
 
(538
)
 
337

 
1,041

 
 
—

 
Subprime private-label securities
5,240

 
599

 
 
(382
)
 
 
—

 
(1,575
)
 
—

 
(601
)
 
—

 
—

 
3,281

 
 
—

 
Mortgage revenue bonds
4,023

 
51

 
 
(104
)
 
 
—

 
(410
)
 
—

 
(859
)
 
—

 
—

 
2,701

 
 
—

 
Other
2,671

 
(26
)
 
 
(2
)
 
 
—

 
(1,012
)
 
—

 
(227
)
 
—

 
—

 
1,404

 
 
—

 
Total available-for-sale securities
$
15,080

 
$
839

(7)(8) 
 
$
(661
)
 
 
$
421

 
$
(4,926
)
 
$
—

 
$
(2,132
)
 
$
(540
)
 
$
350

 
$
8,431

 
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans
$
1,833

 
$
57

(6)(7) 
 
$
—

 
 
$
5

 
$
—

 
$
—

 
$
(350
)
 
$
(377
)
 
$
309

 
$
1,477

 
 
$
(20
)
 
Net derivatives
45

 
(55
)
(6) 
 
—

 
 
—

 
—

 
(4
)
 
169

 
(7
)
 
9

 
157

 
 
(2
)
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
$
(363
)
 
$
(6
)
 
 
$
—

 
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(369
)
 
 
$
(6
)
 
Of consolidated trusts
(527
)
 
(9
)
 
 
—

 
 
—

 
—

 
(66
)
 
57

 
228

 
(179
)
 
(496
)
 
 
17

 
Total long-term debt
$
(890
)
 
$
(15
)
(6) 
 
$
—

 
 
$
—

 
$
—

 
$
(66
)
 
$
57

 
$
228

 
$
(179
)
 
$
(865
)
 
 
$
11

 


Fannie Mae (In conservatorship) 2016 Form 10-K
F-72

 
Notes to Consolidated Financial Statements | Fair Value


 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) 
 
For the Year Ended December 31, 2014
 
 
 
Total Gains (Losses) (Realized/Unrealized) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of December 31, 2014(5)(6)
 
Balance,
December 31, 2013
 
Included in Net Income
 
Included in Total Other Comprehensive Income (Loss)(1)
 
Purchases(2)
 
 Sales(2)
 
Issues(3)
 
Settlements(3)
 
Transfers out of Level 3(4)
 
Transfers into Level 3(4)
 
Balance, December 31, 2014
 
 
(Dollars in millions)
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
42

 
$
(27
)
 
 
$
—

 
 
$
6

 
$
—

 
$
—

 
$
(2
)
 
$
(39
)
 
$
325

 
$
305

 
 
$
(18
)
 
Freddie Mac
2

 
—

 
 
—

 
 
—

 
—

 
—

 
—

 
(2
)
 
—

 
—

 
 
—

 
Alt-A private-label securities
618

 
88

 
 
—

 
 
—

 
(58
)
 
—

 
(81
)
 
(226
)
 
256

 
597

 
 
97

 
Subprime private-label securities
1,448

 
270

 
 
—

 
 
—

 
(241
)
 
—

 
(170
)
 
—

 
—

 
1,307

 
 
234

 
Mortgage revenue bonds
565

 
168

 
 
—

 
 
—

 
—

 
—

 
(11
)
 
—

 
—

 
722

 
 
160

 
Other
99

 
13

 
 
—

 
 
—

 
—

 
—

 
(13
)
 
—

 
—

 
99

 
 
13

 
Total trading securities
$
2,774

 
$
512

(6)(7) 
 
$
—

 
 
$
6

 
$
(299
)
 
$
—

 
$
(277
)
 
$
(267
)
 
$
581

 
$
3,030

 
 
$
486

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
7

 
$
—

 
 
$
—

 
 
$
—

 
$
—

 
$
—

 
$
(1
)
 
$
(8
)
 
$
2

 
$
—

 
 
$
—

 
Freddie Mac
8

 
—

 
 
—

 
 
—

 
—

 
—

 
(1
)
 
(2
)
 
1

 
6

 
 
—

 
Alt-A private-label securities
3,791

 
172

 
 
(26
)
 
 
—

 
(393
)
 
—

 
(471
)
 
(1,738
)
 
1,805

 
3,140

 
 
—

 
Subprime private-label securities
7,068

 
447

 
 
301

 
 
—

 
(1,730
)
 
—

 
(846
)
 
—

 
—

 
5,240

 
 
—

 
Mortgage revenue bonds
5,253

 
(32
)
 
 
554

 
 
—

 
(70
)
 
—

 
(1,682
)
 
—

 
—

 
4,023

 
 
—

 
Other
2,885

 
19

 
 
103

 
 
—

 
—

 
—

 
(336
)
 
—

 
—

 
2,671

 
 
—

 
Total available-for-sale securities
$
19,012

 
$
606

(7)(8) 
 
$
932

 
 
$
—

 
$
(2,193
)
 
$
—

 
$
(3,337
)
 
$
(1,748
)
 
$
1,808

 
$
15,080

 
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans
$
2,704

 
$
260

(6)(7) 
 
$
—

 
 
$
36

 
$
—

 
$
—

 
$
(344
)
 
$
(1,113
)
 
$
290

 
$
1,833

 
 
$
53

 
Net derivatives
(40
)
 
103

(6) 
 
—

 
 
—

 
—

 
—

 
(21
)
 
(2
)
 
5

 
45

 
 
77

 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
$
(955
)
 
$
(142
)
 
 
$
—

 
 
$
—

 
$
—

 
$
(750
)
 
$
19

 
$
1,465

 
$
—

 
$
(363
)
 
 
$
(97
)
 
Of consolidated trusts
(518
)
 
(53
)
 
 
—

 
 
—

 
—

 
(1
)
 
62

 
111

 
(128
)
 
(527
)
 
 
(49
)
 
Total long-term debt
$
(1,473
)
 
$
(195
)
(6) 
 
$
—

 
 
$
—

 
$
—

 
$
(751
)
 
$
81

 
$
1,576

 
$
(128
)
 
$
(890
)
 
 
$
(146
)
 
__________
(1) 
Gains (losses) included in other comprehensive income are included in “Changes in unrealized gains on available-for-sale securities, net of reclassification adjustments and taxes” in the consolidated statements of operations and comprehensive income.
(2) 
Purchases and sales include activity related to the consolidation and deconsolidation of assets of securitization trusts.
(3) 
Issues and settlements include activity related to the consolidation and deconsolidation of liabilities of securitization trusts.
(4) 
Transfers out of Level 3 consisted primarily of private-label mortgage-related securities and credit risk sharing securities issued under our CAS series. Prices for these securities are obtained from multiple third-party vendors or dealers and have demonstrated an increased and sustained level of observability over time. Transfers out of Level 3 also occurred for mortgage loans for which unobservable inputs used in valuations became less significant. Transfers into Level 3 consisted primarily of Fannie Mae securities backed by private-label mortgage-related securities and private-label mortgage-related

Fannie Mae (In conservatorship) 2016 Form 10-K
F-73

 
Notes to Consolidated Financial Statements | Fair Value


securities backed by Alt-A loans. Prices for these securities are based on inputs from a single source or inputs that were not readily observable.
(5) 
Amount represents temporary changes in fair value. Amortization, accretion and OTTI are not considered unrealized and are not included in this amount.
(6) 
Gains (losses) are included in “Fair value losses, net” in our consolidated statements of operations and comprehensive income.
(7) 
Gains (losses) are included in “Net interest income” in our consolidated statements of operations and comprehensive income.
(8) 
Gains (losses) are included in “Investment gains, net” in our consolidated statements of operations and comprehensive income.
The following tables display valuation techniques and the range and the weighted average of significant unobservable inputs for our Level 3 assets and liabilities measured at fair value on a recurring basis.
 
Fair Value Measurements as of December 31, 2016
 
Fair Value
 
Significant Valuation Techniques
 
Significant Unobservable Inputs(1)
 
Range(1)
 
Weighted - Average(1)
 
(Dollars in millions)
Recurring fair value measurements:
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
Agency(2)
$
809

 
Consensus
 
 
 
 
 
 
 
 
 
26

 
Other
 
 
 
 
 
 
 
 
Total agency
835

 
 
 
 
 
 
 
 
 
 
Alt-A private-label securities
232

 
Consensus
 
Default Rate (%)
 
0.4
-
10.9
 
8.2
 
 
 
 
 
Prepayment Speed (%)
 
4.3
-
7.4
 
6.6
 
 
 
 
 
Severity (%)
 
71.0
-
95.0
 
88.9
 
 
 
 
 
Spreads (bps)
 
244.6
-
253.9
 
251.5
 
39

 
Consensus
 
 
 
 
 
 
 
 
Total Alt-A private-label securities
271

 
 
 
 
 
 
 
 
 
 
Mortgage revenue bonds
19

 
Discounted Cash Flow
 
Spreads (bps)
 
13.0
-
268.2
 
252.2
 
2

 
Other
 
 
 
 
 
 
 
 
Total mortgage revenue bonds
21

 
 
 
 
 
 
 
 
 
 
Total trading securities
$
1,127

 
 
 
 
 
 
 
 
 
 

Fannie Mae (In conservatorship) 2016 Form 10-K
F-74

 
Notes to Consolidated Financial Statements | Fair Value


 
Fair Value Measurements as of December 31, 2016
 
Fair Value
 
Significant Valuation Techniques
 
Significant Unobservable Inputs(1)
 
Range(1)
 
Weighted - Average(1)
 
(Dollars in millions)
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
Agency(2)
$
129

 
Single Vendor
 
Prepayment Speed (%)
 
124.8

-
165.5
 
142.4
 
 
 
 
 
Spreads (bps)
 
175.0

-
210.0
 
182.5
 
72

 
Consensus
 
 
 
 
 
 
 
 
 
34

 
Other
 
 
 
 
 
 
 
 
Total agency
235

 
 
 
 
 
 
 
 
 
 
Alt-A private-label securities
93

 
Single Vendor
 
Default Rate (%)
 
2.5

-
8.0
 
3.8
 
 
 
 
 
Prepayment Speed (%)
 
3.0

-
11.0
 
4.9
 
 
 
 
 
Severity (%)
 
38.0

-
80.0
 
48.1
 
 
 
 
 
Spreads (bps)
 
266.1

-
306.8
 
297.1
 
45

 
Discounted Cash Flow
 
Spreads (bps)
 
361.0

-
450.0
 
406.0
 
34

 
Other
 
 
 
 
 
 
 
 
Total Alt-A private-label securities
172

 
 
 
 
 
 
 
 
 
 
Subprime private-label securities
45

 
Other
 
 
 
 
 
 
 
 
Mortgage revenue bonds
684

 
Single Vendor
 
Spreads (bps)
 
(16.8
)
-
336.9
 
44.3
 
126

 
Single Vendor
 
 
 
 
 
 
 
 
 
435

 
Discounted Cash Flow
 
Spreads (bps)
 
(16.8
)
-
391.1
 
260.0
 
27

 
Other
 
 
 
 
 
 
 
 
Total mortgage revenue bonds
1,272

 
 
 
 
 
 
 
 
 
 
Other
47

 
Consensus
 
Default Rate (%)
 
0.5

-
3.5
 
3.5
 
 
 
 
 
Prepayment Speed (%)
 
2.5

-
6.0
 
2.5
 
 
 
 
 
Severity (%)
 
20.0

-
88.0
 
87.5
 
 
 
 
 
Spreads (bps)
 
221.6

-
300.2
 
237.7
 
348

 
Discounted Cash Flow
 
Default Rate (%)
 
2.3
 
2.3
 
 
 
 
 
Prepayment Speed (%)
 
0.5
 
0.5
 
 
 
 
 
Severity (%)
 
95.0
 
95.0
 
 
 
 
 
Spreads (bps)
 
190.0

-
450.0
 
449.1
 
34

 
Other
 
 
 
 
 
 
 
 
Total other
429

 
 
 
 
 
 
 
 
 
 
Total available-for-sale securities
$
2,153

 
 
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
Single-family
$
516

 
Build-Up
 
 
 
 
 
 
 
 
 
300

 
Consensus
 
 
 
 
 
 
 
 
 
218

 
Other
 
 
 
 
 
 
 
 
Total single-family
1,034

 
 
 
 
 
 
 
 
 
 
Multifamily
163

 
Build-Up
 
Spreads (bps)
 
55.0

-
305.2
 
140.2
Total mortgage loans
$
1,197

 
 
 
 
 
 
 
 
 
 
Net derivatives
$
10

 
Internal Model
 
 
 
 
 
 
 
 
 
89

 
Dealer Mark
 
 
 
 
 
 
 
 
 
21

 
Discounted Cash Flow
 
 
 
 
 
 
 
 
 
(76
)
 
Other
 
 
 
 
 
 
 
 
Total net derivatives
$
44

 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
Senior floating
$
(347
)
 
Discounted Cash Flow
 
 
 
 
 
 
 
 
Of consolidated trusts
(241
)
 
Other
 
 
 
 
 
 
 
 
Total long-term debt
$
(588
)
 
 
 
 
 
 
 
 
 
 

Fannie Mae (In conservatorship) 2016 Form 10-K
F-75

 
Notes to Consolidated Financial Statements | Fair Value


 
Fair Value Measurements as of December 31, 2015
 
Fair Value
 
Significant Valuation Techniques
 
Significant Unobservable Inputs(1)
 
Range(1)
 
Weighted - Average(1)
 
(Dollars in millions)
Recurring fair value measurements:
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
Alt-A private-label securities
$
305

 
Consensus
 
Default Rate (%)
 
1.3
-
4.9
 
3.6
 
 
 
 
 
Prepayment Speed (%)
 
2.2
-
4.5
 
3.7
 
 
 
 
 
Severity (%)
 
20.5
-
95.0
 
69.3
 
 
 
 
 
Spreads (bps)
 
219.0
-
263.3
 
253.1
Total Alt-A private-label securities
305

 
 
 
 
 
 
 
 
 
 
Subprime private-label securities
526

 
Consensus
 
Default Rate (%)
 
4.2
-
8.4
 
5.9
 
 
 
 
 
Prepayment Speed (%)
 
0.4
-
5.3
 
3.3
 
 
 
 
 
Severity (%)
 
55.9
-
95.0
 
73.7
 
 
 
 
 
Spreads (bps)
 
285.0
 
285.0
 
73

 
Consensus
 
 
 
 
 
 
 
 
 
45

 
Other
 
 
 
 
 
 
 
 
Total subprime private-label securities
644

 
 
 
 
 
 
 
 
 
 
Mortgage revenue bonds
437

 
Discounted Cash Flow
 
Spreads (bps)
 
1.5
-
376.2
 
298.9
 
12

 
Other
 
 
 
 
 
 
 
 
Total mortgage revenue bonds
449

 
 
 
 
 
 
 
 
 
 
Total trading securities
$
1,398

 
 
 
 
 
 
 
 
 
 

Fannie Mae (In conservatorship) 2016 Form 10-K
F-76

 
Notes to Consolidated Financial Statements | Fair Value


 
Fair Value Measurements as of December 31, 2015
 
Fair Value
 
Significant Valuation Techniques
 
Significant Unobservable Inputs(1)
 
Range(1)
 
Weighted - Average(1)
 
(Dollars in millions)
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
Agency(2)
$
4

 
Other
 
 
 
 
 
 
 
 
Alt-A private-label securities
671

 
Consensus
 
Default Rate (%)
 
0.5

-
40.7
 
3.4
 
 
 
 
 
Prepayment Speed (%)
 
1.7

-
72.6
 
13.5
 
 
 
 
 
Severity (%)
 
1.4

-
95.0
 
58.5
 
 
 
 
 
Spreads (bps)
 
225.6

-
280.4
 
260.0
 
201

 
Consensus
 
 
 
 
 
 
 
 
 
169

 
Discounted Cash Flow
 
Default Rate (%)
 
4.0

-
5.0
 
4.8
 
 
 
 
 
Prepayment Speed (%)
 
4.0

-
7.5
 
6.4
 
 
 
 
 
Severity (%)
 
50.0

-
64.0
 
59.2
 
 
 
 
 
Spreads (bps)
 
260.0

-
369.4
 
296.5
Total Alt-A private-label securities
1,041

 
 
 
 
 
 
 
 
 
 
Subprime private-label securities
343

 
Single Vendor
 
Default Rate (%)
 
2.5

-
7.5
 
4.8
 
 
 
 
 
Prepayment Speed (%)
 
1.9

-
5.7
 
3.3
 
 
 
 
 
Severity (%)
 
67.6

-
85.7
 
72.7
 
 
 
 
 
Spreads (bps)
 
285.0

-
340.0
 
299.6
 
1,848

 
Consensus
 
Default Rate (%)
 
0.5

-
11.3
 
5.9
 
 
 
 
 
Prepayment Speed (%)
 
0.5

-
11.2
 
3.8
 
 
 
 
 
Severity (%)
 
20.0

-
95.0
 
79.0
 
 
 
 
 
Spreads (bps)
 
255.0

-
285.0
 
283.3
 
945

 
Consensus
 
 
 
 
 
 
 
 
 
145

 
Other
 
 
 
 
 
 
 
 
Total subprime private-label securities
3,281

 
 
 
 
 
 
 
 
 
 
Mortgage revenue bonds
991

 
Single Vendor
 
Spreads (bps)
 
(33.1
)
-
386.8
 
37.9
 
1,462

 
Discounted Cash Flow
 
Spreads (bps)
 
(15.8
)
-
379.1
 
283.8
 
248

 
Other
 
 
 
 
 
 
 
 
Total mortgage revenue bonds
2,701

 
 
 
 
 
 
 
 
 
 
Other
683

 
Consensus
 
Default Rate (%)
 
0.5

-
4.6
 
3.4
 
 
 
 
 
Prepayment Speed (%)
 
2.5

-
15.5
 
4.7
 
 
 
 
 
Severity (%)
 
6.6

-
95.0
 
65.7
 
 
 
 
 
Spreads (bps)
 
200.0

-
454.4
 
315.6
 
520

 
Discounted Cash Flow
 
Default Rate (%)
 
0.0

-
1.8
 
0.0
 
 
 
 
 
Prepayment Speed (%)
 
0.0

-
0.5
 
0.0
 
 
 
 
 
Severity (%)
 
95.0
 
95.0
 
 
 
 
 
Spreads (bps)
 
260.0
-
350.0
 
323.6
 
201

 
Other
 
 
 
 
 
 
 
 
Total other
1,404

 
 
 
 
 
 
 
 
 
 
Total available-for-sale securities
$
8,431

 
 
 
 
 
 
 
 
 
 

Fannie Mae (In conservatorship) 2016 Form 10-K
F-77

 
Notes to Consolidated Financial Statements | Fair Value


 
Fair Value Measurements as of December 31, 2015
 
Fair Value
 
Significant Valuation Techniques
 
Significant Unobservable Inputs(1)
 
Range(1)
 
Weighted - Average(1)
 
(Dollars in millions)
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
Single-family
$
127

 
Build-Up
 
Default Rate (%)
 
0.0
-
99.2
 
34.8
 
 
 
 
 
Prepayment Speed (%)
 
3.0
-
100.0
 
10.4
 
 
 
 
 
Severity (%)
 
0.0
-
100.0
 
39.9
 
632

 
Build-Up
 
 
 
 
 
 
 
 
 
234

 
Consensus
 
Default Rate (%)
 
0.5
-
5.0
 
3.7
 
 
 
 
 
Prepayment Speed (%)
 
2.5
-
26.0
 
6.4
 
 
 
 
 
Severity (%)
 
20.0
-
89.1
 
69.0
 
 
 
 
 
Spreads (bps)
 
255.0
-
277.6
 
264.6
 
274

 
Consensus
 
 
 
 
 
 
 
 
 
54

 
Other
 
 
 
 
 
 
 
 
Total single-family
1,321

 
 
 
 
 
 
 
 
 
 
Multifamily
156

 
Build-Up
 
Spreads (bps)
 
70.0
-
327.2
 
158.8
Total mortgage loans
$
1,477

 
 
 
 
 
 
 
 
 
 
Net derivatives
$
17

 
Internal Model
 
 
 
 
 
 
 
 
 
136

 
Dealer Mark
 
 
 
 
 
 
 
 
 
4

 
Other
 
 
 
 
 
 
 
 
Total net derivatives
$
157

 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
Senior floating
$
(369
)
 
Discounted Cash Flow
 
 
 
 
 
 
 
 
Of consolidated trusts
(181
)
 
Consensus
 
Default Rate (%)
 
0.5
-
3.8
 
3.4
 
 
 
 
 
Prepayment Speed (%)
 
2.5
-
26.0
 
5.6
 
 
 
 
 
Severity (%)
 
20.0
-
80.6
 
67.8
 
 
 
 
 
Spreads (bps)
 
255.0
-
270.0
 
265.8
 
 
 
 
 
 
 
 
 
 
 
 
 
(149
)
 
Consensus
 
 
 
 
 
 
 
 
 
(166
)
 
Other
 
 
 
 
 
 
 
 
Total of consolidated trusts
(496
)
 
 
 
 
 
 
 
 
 
 
Total long-term debt
$
(865
)
 
 
 
 
 
 
 
 
 
 
_________
(1) 
Valuation techniques for which no unobservable inputs are disclosed generally reflect the use of third-party pricing services or dealers, and the range of unobservable inputs applied by these sources is not readily available or cannot be reasonably estimated. Where we have disclosed unobservable inputs for consensus and single vendor techniques, those inputs are based on our validations performed at the security level using discounted cash flows. The prepayment speed used for available-for-sale agency securities is the Public Securities Association (“PSA”) prepayment speed, which can be greater than 100%. For all other securities, the Conditional Prepayment Rate (“CPR”) is used as the prepayment speed, which can be between 0%-100%.
(2) 
Includes Fannie Mae and Freddie Mac securities.
In our consolidated balance sheets certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when we evaluate loans for impairment). We did not have any Level 1 assets or liabilities that were measured at fair value on a nonrecurring basis as of December 31, 2016 or December 31, 2015. We held $250 million and $17 million in Level 2 assets, comprised of mortgage loans held for sale, and no Level 2 liabilities that were measured at fair value on a nonrecurring basis as of December 31, 2016 and December 31, 2015, respectively.
The following table displays valuation techniques for our Level 3 assets measured at fair value on a nonrecurring basis. The significant unobservable inputs related to these techniques primarily relate to collateral dependent

Fannie Mae (In conservatorship) 2016 Form 10-K
F-78

 
Notes to Consolidated Financial Statements | Fair Value


valuations. The related ranges and weighted averages are not meaningful when aggregated as they vary significantly from property to property.
 
 
 
Fair Value Measurements as of December 31,
 
Valuation Techniques
 
2016
 
2015
 
 
 
(Dollars in millions)
Nonrecurring fair value measurements:
 
 
 
 
 
Mortgage loans held for sale, at lower of cost or fair value
Consensus
 
$
1,025

 
$
3,651

 
Single Vendor

 
54

 
336

 
Other
 
9

 
4

Total mortgage loans held for sale, at lower of cost or fair value
 
 
1,088

 
3,991

Single-family mortgage loans held for investment, at amortized cost
Internal Model
 
2,816

 
6,379

Multifamily mortgage loans held for investment, at amortized cost
Broker Price Opinions
 
25

 
82

 
Asset Manager Estimate
 
170

 
236

 
Other
 
3

 
5

Total multifamily mortgage loans held for investment, at amortized cost
 
 
198

 
323

Acquired property, net:(1)
 
 
 
 
 
Single-family
Accepted Offers
 
340

 
541

 
Appraisals
 
571

 
1,117

 
Walk Forwards
 
306

 
433

 
Internal Model
 
476

 
986

 
Other
 
99

 
134

Total single-family
 
 
1,792

 
3,211

Other assets
Other
 
12

 
30

Total nonrecurring assets at fair value
 
 
$
5,906

 
$
13,934

_________
(1) 
The most commonly used techniques in our valuation of acquired property are proprietary home price model and third-party valuations (both current and walk forward). Based on the number of properties measured as of December 31, 2016, these methodologies comprised approximately 75% of our valuations, while accepted offers comprised approximately 19% of our valuations. Based on the number of properties measured as of December 31, 2015, these methodologies comprised approximately 77% of our valuations, while accepted offers comprised approximately 18% of our valuations.
We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a description of the valuation techniques we use for fair value measurement and disclosure as well as our basis for classifying these measurements as Level 1, Level 2 or Level 3 of the valuation hierarchy in more specific situations.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-79

 
Notes to Consolidated Financial Statements | Fair Value


Instruments
Valuation Techniques
Classification
U.S Treasury Securities

We classify securities whose values are based on quoted market prices in active markets for identical assets as Level 1 of the valuation hierarchy.
Level 1
Trading Securities and Available-for-Sale Securities

We classify securities in active markets as Level 2 of the valuation hierarchy if quoted market prices in active markets for identical assets are not available. For all valuation techniques used for securities where there is limited activity or less transparency around these inputs to the valuation, these securities are classified as Level 3 of the valuation hierarchy.

Single Vendor: Uses one vendor price to estimate fair value. We generally validate these observations of fair value through the use of a discounted cash flow technique whose unobservable inputs (for example, default rates) are disclosed in the table above.

Dealer Mark: Uses one dealer price to estimate fair value. We generally validate these observations of fair value through the use of a discounted cash flow technique whose unobservable inputs (for example, default rates) are disclosed in the table above.

Consensus: Uses an average of two or more vendor prices for similar securities. We generally validate these observations of fair value through the use of a discounted cash flow technique whose unobservable inputs (for example, default rates) are disclosed in the table above.

Level 2 and 3
 
Discounted Cash Flow: In the absence of prices provided by third-party pricing services supported by observable market data, we estimate the fair value of a portion of our securities using a discounted cash flow technique that uses inputs such as default rates, prepayment speeds, loss severity and spreads based on market assumptions where available.

For private-label securities, an increase in unobservable prepayment speeds in isolation would generally result in an increase in fair value, and an increase in unobservable spreads, severity rates or default rates in isolation would generally result in a decrease in fair value. For mortgage revenue bonds classified as Level 3 of the valuation hierarchy, an increase in unobservable spreads would result in a decrease in fair value. Although the sensitivities of the fair value of our recurring Level 3 securities of the valuation hierarchy to various unobservable inputs are discussed above in isolation, interrelationships exist among these inputs such that a change in one unobservable input typically results in a change to one or more of the other inputs.

 
Mortgage Loans Held for Investment

Build-up: We derive the fair value of performing mortgage loans using a build-up valuation technique starting with the base value for our Fannie Mae MBS with similar characteristics and then add or subtract the fair value of the associated guaranty asset, guaranty obligation (“GO”) and master servicing arrangement. We set the GO equal to the estimated fair value we would receive if we were to issue our guaranty to an unrelated party in a stand-alone arm’s length transaction at the measurement date. The fair value of the GO is estimated based on our current guaranty pricing for loans underwritten after 2008 and our internal valuation models considering management’s best estimate of key loan characteristics for loans underwritten before 2008. Our performing loans are generally classified as Level 2 of the valuation hierarchy to the extent that significant inputs are observable. To the extent that unobservable inputs are significant, the loans are classified as Level 3 of the valuation hierarchy.



Level 2 and 3
 
Consensus: Calculated through the extrapolation of indicative sample bids obtained from multiple active market participants plus the estimated value of any applicable mortgage insurance, the estimated fair value using the Consensus method represents an estimate of the prices we would receive if we were to sell these single-family nonperforming and certain reperforming loans in the whole-loan market. The fair value of any mortgage insurance is estimated by taking the loan level coverage and adjusting it by the expected claims paying ability of the associated mortgage insurer. These loans are classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.

We estimate the fair value for a portion of our senior-subordinated trust structures using the average of two or more vendor prices at the security level as a proxy for estimating loan fair value. These loans are classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.

 
 
Single Vendor: We estimate the fair value of our reverse mortgages using the single vendor valuation technique.

Internal Model: The internal model used in this process applies one of following two approaches when valuing the collateral depending on the historical accuracy of the two approaches.

(1)
The comparable foreclosed property sales approach is used in the majority of the internal model valuations. The comparable foreclosed property sales approach uses various factors such as geographic distance, transaction time and the value difference.
 
(2)
The median Metropolitan Statistical Area (“MSA”) approach is based on the median of all the foreclosure sales of REOs in a specific MSA or state when there is not enough REO sales in a specific MSA.

These loans are classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.
 

Fannie Mae (In conservatorship) 2016 Form 10-K
F-80

 
Notes to Consolidated Financial Statements | Fair Value


Instruments
Valuation Techniques
Classification
Mortgage Loans Held for Investment

Appraisals: Uses appraisals to estimate the fair value for a portion of our multifamily loans based on either estimated replacement cost, the present value of future cash flows, or sales of similar properties. Significant unobservable inputs include estimated replacement or construction costs, property net operating income, capitalization rates, and adjustments made to sales of comparable properties based on characteristics such as financing, conditions of sale, and physical characteristics of the property.

Broker Price Opinion (“BPO”): Uses BPO to estimate the fair value for a portion of our multifamily loans. This technique uses both current property value and the property value adjusted for stabilization and market conditions. The unobservable inputs used in this technique are property net operating income and market capitalization rates to estimate property value.

Asset Manager Estimate (“AME”): This technique uses the net operating income and tax assessments of the specific property as well as MSA-specific market capitalization rates and average per unit sales values to estimate property fair value.

Level 2 and 3

 
An increase in prepayment speeds in isolation would generally result in an increase in the fair value of our mortgage loans classified as Level 3 of the valuation hierarchy, and an increase in severity rates, default rates or spreads in isolation would generally result in a decrease in fair value. Although the sensitivities of the fair value of mortgage loans classified as Level 3 of the valuation hierarchy to various unobservable inputs are discussed above in isolation, interrelationships exist among these inputs such that a change in one unobservable input typically results in a change to one or more of the other inputs.


 
Acquired Property, Net and Other Assets
Single-family acquired property valuation techniques

Appraisal: An appraisal is an estimate based on recent historical data of the value of a specific property by a certified or licensed appraiser. Adjustments are made for differences between comparable properties for unobservable inputs such as square footage, location, and condition of the property.

Broker Price Opinion: This technique provides an estimate of what the property is worth based upon a real estate broker’s use of specific market research and a sales comparison approach that is similar to the appraisal process. This information, all of which is unobservable, is used along with recent and pending sales and current listings of similar properties to arrive at an estimate of value.

Level 3
 
Appraisal and Broker Price Opinion Walk Forwards (“Walk Forwards”): We use these techniques to adjust appraisal and broker price opinion valuations for changing market conditions by applying a walk forward factor based on local price movements since the time the third-party value was obtained.

Internal Model: We use an internal model to estimate fair value for distressed properties. The valuation methodology and inputs used are described under “Mortgage Loans Held for Investment.”

 
 
Multifamily acquired property valuation techniques

Appraisals: We use this method to estimate property values for distressed properties. The valuation methodology and inputs used are described under “Mortgage Loans Held for Investment.”
Broker Price Opinions: We use this method to estimate property values for distressed properties. The valuation methodology and inputs used are described under “Mortgage Loans Held for Investment.”
Asset Manager Estimate (“AME”): We use this method to estimate property values for distressed properties. The valuation methodology and inputs used are described under “Mortgage Loans Held for Investment.”

 
Derivatives Assets and Liabilities (collectively “Derivatives”)
The valuation process for the majority of our risk management derivatives uses observable market data provided by third-party sources, resulting in Level 2 classification of the valuation hierarchy.

Internal Model: We use internal models to value interest rate swaps which are valued by referencing yield curves derived from observable interest rates and spreads to project and discount swap cash flows to present value. Option-based derivatives use an internal model that projects the probability of various levels of interest rates by referencing swaption volatilities provided by market makers/dealers. The projected cash flows of the underlying swaps of these option-based derivatives are discounted to present value using yield curves derived from observable interest rates and spreads.

Dealer Mark: Certain highly complex structured swaps primarily use a single dealer mark due to lack of transparency in the market and may be modeled using observable interest rates and volatility levels as well as significant unobservable assumptions, resulting in Level 3 classification of the valuation hierarchy. Mortgage commitment derivatives that use observable market data, quotes and actual transaction price levels adjusted for market movement are typically classified as Level 2 of the valuation hierarchy. To the extent mortgage commitment derivatives include adjustments for market movement that cannot be corroborated by observable market data, we classify them as Level 3 of the valuation hierarchy.
Level 2 and 3

Fannie Mae (In conservatorship) 2016 Form 10-K
F-81

 
Notes to Consolidated Financial Statements | Fair Value


Instruments
Valuation Techniques
Classification
Debt of Fannie Mae and Consolidated Trusts
We classify debt instruments that have quoted market prices in active markets for similar liabilities when traded as assets as Level 2 of the valuation hierarchy. For all valuation techniques used for debt instruments where there is limited activity or less transparency around these inputs to the valuation, these debt instruments are classified as Level 3 of the valuation hierarchy.

Consensus: Uses an average of two or more vendor prices or dealer marks that represents estimated fair value for similar liabilities when traded as assets.

Single Vendor: Uses a single vendor price that represents estimated fair value for these liabilities when traded as assets.

Discounted Cash Flow: Uses spreads based on market assumptions where available.

The valuation methodology and inputs used in estimating the fair value of MBS assets are described under “Trading Securities and Available-for-Sale Securities.”
Level 2 and 3
Valuation Control Processes
We have control processes that are designed to ensure that our fair value measurements are appropriate and reliable, that they are based on observable inputs wherever possible and that our valuation approaches are consistently applied and the assumptions used are reasonable. Our control processes consist of a framework that provides for a segregation of duties and oversight of our fair value methodologies and valuations, as well as validation procedures.
The Pricing and Valuation Group, along with the Credit Valuation team, are responsible for the estimation and verification of the fair value for the majority of our financial assets and financial liabilities. These groups also provide updates to the Finance Committee on relevant market information, pricing trends, significant valuation challenges and the resolution of those challenges. The Pricing and Valuation Group, along with the Credit Valuation team, are independent of any trading or market related activities. Fair value measurements for acquired property and collateral dependent loans are determined by other valuation groups.
Our Finance Committee includes senior representation from our Enterprise Risk Management, Finance and Single-Family Divisions, and is responsible for reviewing and approving the methods used in valuing financial instruments for the purpose of financial reporting. The composition of the Finance Committee is set forth in its charter, which was approved by the Chief Executive Officer. Based on its review of valuation methodologies and fair value results for various financial instruments used for financial reporting, the Finance Committee has the ultimate responsibility over all valuation processes and results.
We use third-party vendor prices and dealer quotes to estimate fair value of some of our financial assets and liabilities. Third-party vendor prices are primarily used to estimate fair value for trading securities, available-for-sale securities, debt of Fannie Mae and consolidated MBS debt. Our Pricing and Valuation Group performs various review and validation procedures prior to utilizing these prices in our fair value estimation process. We validate prices, using a variety of methods, including corroborating the prices by reference to other independent market data, such as non-binding broker or dealer quotations, relevant benchmark indices and prices of similar instruments. We also review prices for reasonableness based on variations from prices provided in previous periods, comparing prices to internally estimated prices, using primarily a discounted cash flow approach, and conducting relative value comparisons based on specific characteristics of securities.
We have discussions with the pricing vendors as part of our due diligence process in order to maintain a current understanding of the valuation processes and related assumptions and inputs that these vendors use in developing prices. The prices provided to us by third-party pricing services reflect the existence of market reliance upon credit enhancements, if any, and the current levels of liquidity in the marketplace. If we determine that a price provided to us is outside established parameters or in certain other circumstances, we will further examine the price, including having follow-up discussions with the pricing service or dealer. If we conclude that a price is not valid, we will adjust the price for various factors, such as liquidity, bid-ask spreads and credit considerations. All of these procedures are executed before we use the prices in preparing our financial statements.
Our Real Estate Property Valuation Group utilizes third-party appraisals and broker price opinions along with internal models and market data to compare the values received on a property and determine the valuation risk based on several factors including the deviation between the various values. The property valuation team reviews the valuations with higher valuation risk for reasonableness. The internal models utilized in the process are subject to oversight from the Model Risk Management Group, which is responsible for establishing risk management controls and for reviewing models used in the determination of fair value measurements for financial

Fannie Mae (In conservatorship) 2016 Form 10-K
F-82

 
Notes to Consolidated Financial Statements | Fair Value


reporting. In addition, our Quality Control Group reviews the work performed and inspects a portion of the properties in major markets, for which the third-party valuations are obtained, in order to assess the quality of the valuations.
For fair value reporting purposes, we mark each property in inventory each month, incorporating the values assigned by the property valuation team along with other information including accepted offers and predictions from our proprietary distressed home price model.
We calibrate the performance of our proprietary distressed home price model using actual offers in recently observed transactions. The model’s performance is reviewed on a monthly basis by the REO valuation team and compared quarterly to specific model performance thresholds. The results of the validation are regularly reviewed with the Finance Committee.
Our Real Estate Property Valuation Group reviews appraisals and broker price opinions to determine the most appropriate value by comparing data within these products with current comparable properties and market data. We conduct regular performance reviews of the counterparties that provide products and services for this process. In addition, valuation results and trend analyses are reviewed regularly by management responsible for valuing and disposing of real estate.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-83

 
Notes to Consolidated Financial Statements | Fair Value


Fair Value of Financial Instruments
The following table displays the carrying value and estimated fair value of our financial instruments. The fair value of financial instruments we disclose includes commitments to purchase multifamily and single-family mortgage loans that we do not record in our consolidated balance sheets. The fair values of these commitments are included as “Mortgage loans held for investment, net of allowance for loan losses.” The disclosure excludes all non-financial instruments; therefore, the fair value of our financial assets and liabilities does not represent the underlying fair value of our total consolidated assets and liabilities.
 
As of December 31, 2016
 
Carrying
Value
 
Quoted Price in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Netting Adjustment
 
Estimated
Fair Value
 
(Dollars in millions)
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents and restricted cash
$
62,177

 
$
41,477

 
$
20,700

 
$
—

 
$
—

 
$
62,177

Federal funds sold and securities purchased under agreements to resell or similar arrangements
30,415

 
—

 
30,415

 
—

 
—

 
30,415

Trading securities
40,562

 
32,317

 
7,118

 
1,127

 
—

 
40,562

Available-for-sale securities
8,363

 
—

 
6,210

 
2,153

 
—

 
8,363

Mortgage loans held for sale
2,899

 
—

 
509

 
2,751

 
—

 
3,260

Mortgage loans held for investment, net of allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae
181,738

 
—

 
36,194

 
157,469

 
—

 
193,663

Of consolidated trusts
2,895,116

 
—

 
2,731,619

 
159,273

 
—

 
2,890,892

Mortgage loans held for investment
3,076,854

 
—

 
2,767,813

 
316,742

 
—

 
3,084,555

Advances to lenders
7,494

 
—

 
7,156

 
352

 
—

 
7,508

Derivative assets at fair value
687

 
—

 
5,019

 
182

 
(4,514
)
 
687

Guaranty assets and buy-ups
158

 
—

 
—

 
432

 
—

 
432

Total financial assets
$
3,229,609

 
$
73,794

 
$
2,844,940

 
$
323,739

 
$
(4,514
)
 
$
3,237,959

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-term debt:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae
$
34,995

 
$
—

 
$
34,998

 
$
—

 
$
—

 
$
34,998

Of consolidated trusts
584

 
—

 
—

 
584

 
—

 
584

Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae
292,102

 
—

 
298,980

 
770

 
—

 
299,750

Of consolidated trusts
2,934,635

 
—

 
2,901,316

 
36,668

 
—

 
2,937,984

Derivative liabilities at fair value
1,215

 
—

 
7,921

 
138

 
(6,844
)
 
1,215

Guaranty obligations
280

 
—

 
—

 
710

 
—

 
710

Total financial liabilities
$
3,263,811

 
$
—

 
$
3,243,215

 
$
38,870

 
$
(6,844
)
 
$
3,275,241


Fannie Mae (In conservatorship) 2016 Form 10-K
F-84

 
Notes to Consolidated Financial Statements | Fair Value


 
As of December 31, 2015
 
Carrying
Value
 
Quoted Price in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Netting Adjustment
 
Estimated
Fair Value
 
(Dollars in millions)
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents and restricted cash
$
45,553

 
$
34,953

 
$
10,600

 
$
—

 
$
—

 
$
45,553

Federal funds sold and securities purchased under agreements to resell or similar arrangements
27,350

 
—

 
27,350

 
—

 
—

 
27,350

Trading securities
39,908

 
29,485

 
9,025

 
1,398

 
—

 
39,908

Available-for-sale securities
20,230

 
—

 
11,799

 
8,431

 
—

 
20,230

Mortgage loans held for sale
5,361

 
—

 
157

 
5,541

 
—

 
5,698

Mortgage loans held for investment, net of allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae
206,544

 
—

 
26,544

 
193,670

 
—

 
220,214

Of consolidated trusts
2,807,739

 
—

 
2,675,982

 
157,685

 
—

 
2,833,667

Mortgage loans held for investment
3,014,283

 
—

 
2,702,526

 
351,355

 
—

 
3,053,881

Advances to lenders
4,308

 
—

 
3,902

 
394

 
—

 
4,296

Derivative assets at fair value
894

 
—

 
4,729

 
189

 
(4,024
)
 
894

Guaranty assets and buy-ups
184

 
—

 
—

 
544

 
—

 
544

Total financial assets
$
3,158,071

 
$
64,438

 
$
2,770,088

 
$
367,852

 
$
(4,024
)
 
$
3,198,354

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
$
62

 
$
—

 
$
62

 
$
—

 
$
—

 
$
62

Short-term debt:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae
71,007

 
—

 
71,006

 
—

 
—

 
71,006

Of consolidated trusts
943

 
—

 
—

 
944

 
—

 
944

Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae
315,128

 
—

 
324,248

 
898

 
—

 
325,146

Of consolidated trusts
2,810,593

 
—

 
2,819,733

 
27,175

 
—

 
2,846,908

Derivative liabilities at fair value
424

 
—

 
9,042

 
32

 
(8,650
)
 
424

Guaranty obligations
329

 
—

 
—

 
1,012

 
—

 
1,012

Total financial liabilities
$
3,198,486

 
$
—

 
$
3,224,091

 
$
30,061

 
$
(8,650
)
 
$
3,245,502


Fannie Mae (In conservatorship) 2016 Form 10-K
F-85

 
Notes to Consolidated Financial Statements | Fair Value


Instruments
Description
Classification
Financial Instruments for which fair value approximates carrying value
We hold certain financial instruments that are not carried at fair value but for which the carrying value approximates fair value due to the short-term nature and negligible credit risk inherent in them. These financial instruments include cash and cash equivalents, the majority of advances to lenders, and federal funds and securities sold/purchased under agreements to repurchase/resell.

Level 1 and 2
Federal funds and securities sold/purchased under agreements to repurchase/resell
The carrying value for the majority of these specific instruments approximates the fair value due to the short-term nature and the negligible inherent credit risk, as they involve the exchange of collateral that is easily traded. Were we to calculate the fair value of these instruments we would use observable inputs.

Level 2
Mortgage Loans Held for Sale
Loans are reported at the lower of cost or fair value in our consolidated balance sheets. The valuation methodology and inputs used in estimating the fair value of HFS loans are the same as for our HFI loans and are described under “Fair Value Measurement—Mortgage Loans Held for Investment.” To the extent that significant inputs are unobservable, the loans are classified within Level 3 of the valuation hierarchy.

Level 2 and 3
Mortgage Loans Held for Investment
For a description of loan valuation techniques, refer to “Fair Value Measurement—Mortgage Loans Held for Investment.” We measure the fair value of certain loans that are delivered under the Home Affordable Refinance Program (“HARP”) using a modified build-up approach while the loan is performing. Under this modified approach, we set the credit component of the consolidated loans (that is, the guaranty obligation) equal to the compensation we would currently receive for a loan delivered to us under the program because the total compensation for these loans is equal to their current exit price in the GSE securitization market. We will continue to use this pricing methodology as long as the HARP program is available to market participants. If, subsequent to delivery, the refinanced loan becomes past due or is modified as a part of a troubled debt restructuring, the fair value of the guaranty obligation is then measured consistent with other loans that have similar characteristics.
Level 2 and 3
Advances to Lenders
The carrying value for the majority of our advances to lenders approximates the fair value due to the short-term nature and the negligible inherent credit risk. If we were to calculate the fair value of these instruments we would use discounted cash flow models that use observable inputs such as spreads based on market assumptions, resulting in Level 2 classification. Advances to lenders also include loans that do not qualify for Fannie Mae MBS securitization and are valued using a discounted cash flow technique that uses estimated credit spreads of similar collateral and prepayment speeds that consider recent prepayment activity. We classify these valuations as Level 3 given that significant inputs are not observable or are determined by extrapolation of observable inputs.


Level 2 and 3
Guaranty Assets and Buy-ups
Guaranty assets related to our portfolio securitizations are recorded in our consolidated balance sheets at fair value on a recurring basis and are classified as Level 3. Guaranty assets in lender swap transactions are recorded in our consolidated balance sheets at the lower of cost or fair value. These assets, which are measured at fair value on a nonrecurring basis, are also classified as Level 3.

We estimate the fair value of guaranty assets by using proprietary models to project cash flows based on management’s best estimate of key assumptions such as prepayment speeds and forward yield curves. Because guaranty assets are similar to an interest-only income stream, the projected cash flows are discounted at rates that consider the current spreads on interest-only swaps that reference Fannie Mae MBS and also liquidity considerations of the guaranty assets. The fair value of guaranty assets includes the fair value of any associated buy-ups.

Level 3
Guaranty Obligations
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 standalone arm’s-length transaction at the measurement date. The valuation methodology and inputs used in estimating the fair value of the guaranty obligations are described under “Fair Value Measurement—Mortgage Loans Held for Investment—Build-up.”

Level 3
Fair Value Option
We elected the fair value option for our credit risk-sharing debt securities issued under our CAS series prior to January 1, 2016 and certain loans that contain embedded derivatives that would otherwise require bifurcation. Under the fair value option, we elected to carry these instruments at fair value instead of bifurcating the embedded derivative from such instruments.
We elected the fair value option for all 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 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 recording these structured debt instruments at cost while recording the related derivatives at fair value.
We elected the fair value option for the financial assets and liabilities of the consolidated senior-subordinate trust structures. By electing the fair value option for these instruments, we are able to eliminate the volatility in our

Fannie Mae (In conservatorship) 2016 Form 10-K
F-86

 
Notes to Consolidated Financial Statements | Fair Value


results of operations that would otherwise result from different accounting treatment between loans at cost and debt at cost.
Interest income for the mortgage loans is recorded in “Interest income—Mortgage loans” and interest expense for the debt instruments is recorded in “Interest expense—Long-term debt” in our consolidated statements of operations and comprehensive income.
The following table displays the fair value and unpaid principal balance of the financial instruments for which we have made fair value elections.
 
 
As of December 31,
 
 
 
2016
 
 
 
2015
 
 
Loans(1)
 
Long-Term Debt of Fannie Mae
 
Long-Term Debt of Consolidated Trusts
 
Loans(1)
 
Long-Term Debt of Fannie Mae
 
Long-Term Debt of Consolidated Trusts
 
 
(Dollars in millions)
 
Fair value
 
$
12,057

 
 
 
$
9,582

 
 
 
$
36,524

 
 
 
$
14,075

 
 
 
$
11,133

 
 
 
$
23,609

 
Unpaid principal balance
 
11,688

 
 
 
9,090

 
 
 
33,055

 
 
 
13,661

 
 
 
11,263

 
 
 
21,604

 
__________
(1) 
Includes nonaccrual loans with a fair value of $200 million and $238 million as of December 31, 2016 and 2015, respectively. The difference between unpaid principal balance and the fair value of these nonaccrual loans as of December 31, 2016 and 2015 is $34 million and $59 million, respectively. Includes loans that are 90 days or more past due with a fair value of $152 million and $256 million as of December 31, 2016 and 2015, respectively. The difference between unpaid principal balance and the fair value of these 90 or more days past due loans as of December 31, 2016 and 2015 is $25 million and $52 million, respectively.
Changes in Fair Value under the Fair Value Option Election
The following table displays fair value gains and losses, net, including changes attributable to instrument-specific credit risk, for loans and debt for which the fair value election was made. Amounts are recorded as a component of “Fair value losses, net” in our consolidated statements of operations and comprehensive income.
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
Loans
 
Long-Term Debt
 
Total Gains (Losses)
 
Loans
 
Long-Term Debt
 
Total Gains (Losses)
 
Loans
 
Long-Term Debt
 
Total Gains (Losses)
 
(Dollars in millions)
Changes in instrument-specific credit risk
$
23

 
 
$
(648
)
 
 
$
(625
)
 
$
86

 
 
$
39

 
 
$
125

 
$
60

 
 
$
216

 
 
$
276

Other changes in fair value
72

 
 
193

 
 
265

 
(191
)
 
 
146

 
 
(45
)
 
670

 
 
(505
)
 
 
165

Fair value gains (losses), net
$
95

 
 
$
(455
)
 
 
$
(360
)
 
$
(105
)
 
 
$
185

 
 
$
80

 
$
730

 
 
$
(289
)
 
 
$
441

In determining the changes in the instrument-specific credit risk for loans, the changes in the associated credit-related components of these loans, primarily the guaranty obligation, were taken into consideration with the change in the fair value of the loans for which we elected the fair value option for financial instruments. In determining the changes in the instrument-specific credit risk for debt, the changes in Fannie Mae debt spreads to LIBOR that occurred during the period were taken into consideration with the change in the fair value of the debt for which we elected the fair value option for financial instruments. 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 credit risk.
18.  Commitments and Contingencies
We are party to various types of legal actions and proceedings, including actions brought on behalf of various classes of claimants. We also are subject to regulatory examinations, inquiries and investigations, and other information gathering requests. In some of the matters, indeterminate amounts are sought. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages or other relief.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-87

 
Notes to Consolidated Financial Statements | Commitments and Contingencies


Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. This variability in pleadings, together with our and our counsel’s actual experience in litigating or settling claims, leads us to conclude that the monetary relief that may be sought by plaintiffs bears little relevance to the merits or disposition value of claims.
On a quarterly basis, we review relevant information about all pending legal actions and proceedings for the purpose of evaluating and revising our contingencies, accruals and disclosures.
We have substantial and valid defenses to the claims in the proceedings described below and intend to defend these matters vigorously. However, legal actions and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. Accordingly, the outcome of any given matter and the amount or range of potential loss at particular points in time is frequently difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how courts will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel may view the evidence and applicable law.
We establish an accrual for matters when a loss is probable and we can reasonably estimate the amount of such loss. For legal actions or proceedings where there is only a reasonable possibility that a loss may be incurred, or where we are not currently able to estimate the reasonably possible loss or range of loss, we do not establish an accrual. We are often unable to estimate the possible losses or ranges of losses, particularly for proceedings that are in their early stages of development, where plaintiffs seek indeterminate or unspecified damages, where there may be novel or unsettled legal questions relevant to the proceedings, or where settlement negotiations have not occurred or progressed.
Given the uncertainties involved in any action or proceeding, regardless of whether we have established an accrual, the ultimate resolution of certain of these matters may be material to our operating results for a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of our net income or loss for that period.
In addition to the matters specifically described below, we are involved in a number of legal and regulatory proceedings that arise in the ordinary course of business that we do not expect will have a material impact on our business or financial condition. We have also advanced fees and expenses of certain current and former officers and directors in connection with various legal proceedings pursuant to our bylaws and indemnification agreements.
Senior Preferred Stock Purchase Agreements Litigation
A number of putative class action lawsuits were filed in the U.S. District Court for the District of Columbia against us, FHFA as our conservator, Treasury and Freddie Mac from July through September 2013 by shareholders of Fannie Mae and/or Freddie Mac challenging the August 2012 amendment to each company’s senior preferred stock purchase agreement with Treasury. These lawsuits were consolidated and, on December 3, 2013, plaintiffs (preferred and common shareholders of Fannie Mae and/or Freddie Mac) filed a consolidated class action complaint in the U.S. District Court for the District of Columbia against us, FHFA as our conservator, Treasury and Freddie Mac (“In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations”). The preferred shareholder plaintiffs allege that the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendments to the senior preferred stock purchase agreements nullified certain of the shareholders’ rights, particularly the right to receive dividends. The common shareholder plaintiffs allege that the August 2012 amendments constituted a taking of their property by requiring that all future profits of Fannie Mae and Freddie Mac be paid to Treasury. Plaintiffs allege claims for breach of contract and breach of the implied covenant of good faith and fair dealing against us, FHFA and Freddie Mac, a takings claim against FHFA and Treasury, and a breach of fiduciary duty claim derivatively on our and Freddie Mac’s behalf against FHFA and Treasury. Plaintiffs seek to represent several classes of preferred and/or common shareholders of Fannie Mae and/or Freddie Mac who held stock as of the public announcement of the August 2012 amendments. Plaintiffs seek unspecified damages, equitable and injunctive relief, and costs and expenses, including attorneys’ fees.
A non-class action suit, Arrowood Indemnity Company v. Fannie Mae, was filed in the U.S. District Court for the District of Columbia on September 20, 2013 by preferred shareholders against us, FHFA as our conservator, the Director of FHFA (in his official capacity), Treasury, the Secretary of the Treasury (in his official capacity) and Freddie Mac. Plaintiffs bring claims for breach of contract and breach of the implied covenant of good faith and fair dealing against us, FHFA and Freddie Mac, and claims for violation of the Administrative Procedure Act

Fannie Mae (In conservatorship) 2016 Form 10-K
F-88

 
Notes to Consolidated Financial Statements | Commitments and Contingencies


against the FHFA and Treasury defendants, alleging that the net worth sweep dividend provisions nullified certain rights of the preferred shareholders, particularly the right to receive dividends. Plaintiffs seek damages, equitable and injunctive relief, and costs and expenses, including attorneys’ fees.
On September 30, 2014, the court dismissed both lawsuits and plaintiffs in both suits filed timely notices of appeal. On October 27, 2014, the U.S. Court of Appeals for the D.C. Circuit consolidated these appeals with appeals in two other cases involving the same subject matter, but to which we are not a party. The D.C. Circuit heard oral argument on these appeals on April 15, 2016.
On June 26, 2016, shareholder David J. Voacolo filed a lawsuit, Voacolo v. Fannie Mae, in the U.S. District Court for the District of Columbia against Fannie Mae, FHFA and Treasury alleging a violation of the Administrative Procedure Act. Plaintiff seeks damages and a holding that the August 2012 amendment to the senior preferred stock purchase agreement was arbitrary, capricious or not otherwise in accordance with the law. The defendants filed motions to dismiss on September 20, 2016, and the court dismissed the case on December 19, 2016.
Given the stage of these lawsuits, the substantial and novel legal questions that remain, and our substantial defenses, we are currently unable to estimate the reasonably possible loss or range of loss arising from this litigation.
Unconditional Purchase and Lease Commitments
We have unconditional commitments related to the purchase of loans and mortgage-related securities. These include both on- and off-balance sheet commitments. A portion of these have been recorded as derivatives in our consolidated balance sheets.
We lease certain premises and equipment under agreements that expire at various dates through 2033. Some of these leases provide for payment by the lessee of property taxes, insurance premiums, cost of maintenance and other costs. Rental expenses for operating leases were $50 million, $47 million and $43 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The following table summarizes by remaining maturity, non-cancelable future commitments related to loan and mortgage purchases, operating leases and other agreements.
 
As of December 31, 2016
 
Loans and Mortgage-Related Securities(1)
 
Operating Leases(2)
 
Other(3)
 
(Dollars in millions)
2017
 
$
67,100

 
 
$
47

 
$
88

2018
 
—

 
 
32

 
36

2019
 
—

 
 
44

 
18

2020
 
—

 
 
50

 
8

2021
 
—

 
 
49

 
3

Thereafter
 
—

 
 
665

 
—

Total
 
$
67,100

 
 
$
887

 
$
153

__________

(1) 
Primarily includes $66.7 billion that has been accounted for as mortgage commitment derivatives.
(2) 
Includes amounts related to office buildings and equipment leases.
(3) 
Includes purchase commitments for certain telecommunications services, computer software and services, and other agreements and commitments.

Fannie Mae (In conservatorship) 2016 Form 10-K
F-89

 
Notes to Consolidated Financial Statements | Selected Quarterly Financial Information (Unaudited)


19.  Selected Quarterly Financial Information (Unaudited)
The consolidated statements of operations for the quarterly periods in 2016 and 2015 are unaudited and in the opinion of management include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our consolidated statements of operations. Certain prior period amounts have been reclassified to conform to the current period presentation. The operating results for the interim periods are not necessarily indicative of the operating results to be expected for a full year or for other interim periods.
 
For the 2016 Quarter Ended
 
March 31
 
June 30
 
September 30
 
December 31
 
(Dollars and shares in millions, except per share amounts)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
 
$
120

 
 
 
$
128

 
 
 
$
140

 
 
 
$
128

 
Available-for-sale securities
 
203

 
 
 
170

 
 
 
134

 
 
 
113

 
Mortgage loans
 
26,961

 
 
 
26,256

 
 
 
25,611

 
 
 
25,814

 
Other
 
48

 
 
 
46

 
 
 
66

 
 
 
83

 
Total interest income
 
27,332

 
 
 
26,600

 
 
 
25,951

 
 
 
26,138

 
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
 
51

 
 
 
57

 
 
 
56

 
 
 
42

 
Long-term debt
 
22,512

 
 
 
21,257

 
 
 
20,460

 
 
 
20,291

 
Total interest expense
 
22,563

 
 
 
21,314

 
 
 
20,516

 
 
 
20,333

 
Net interest income
 
4,769

 
 
 
5,286

 
 
 
5,435

 
 
 
5,805

 
Benefit (provision) for credit losses
 
1,184

 
 
 
1,601

 
 
 
673

 
 
 
(1,303
)
 
Net interest income after benefit (provision) for credit losses
 
5,953

 
 
 
6,887

 
 
 
6,108

 
 
 
4,502

 
Investment gains, net
 
69

 
 
 
398

 
 
 
467

 
 
 
322

 
Fair value gains (losses), net
 
(2,813
)
 
 
 
(1,667
)
 
 
 
(491
)
 
 
 
3,890

 
Fee and other income
 
203

 
 
 
174

 
 
 
175

 
 
 
414

 
Non-interest income (loss)
 
(2,541
)
 
 
 
(1,095
)
 
 
 
151

 
 
 
4,626

 
Administrative expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
364

 
 
 
331

 
 
 
322

 
 
 
319

 
Professional services
 
215

 
 
 
232

 
 
 
237

 
 
 
271

 
Occupancy expenses
 
45

 
 
 
46

 
 
 
45

 
 
 
50

 
Other administrative expenses
 
64

 
 
 
69

 
 
 
57

 
 
 
74

 
Total administrative expenses
 
688

 
 
 
678

 
 
 
661

 
 
 
714

 
Foreclosed property expense
 
334

 
 
 
63

 
 
 
110

 
 
 
137

 
TCCA fees
 
440

 
 
 
453

 
 
 
465

 
 
 
487

 
Other expenses, net
 
264

 
 
 
254

 
 
 
300

 
 
 
210

 
Total expenses
 
1,726

 
 
 
1,448

 
 
 
1,536

 
 
 
1,548

 
Income before federal income taxes
 
1,686

 
 
 
4,344

 
 
 
4,723

 
 
 
7,580

 
Provision for federal income taxes
 
(550
)
 
 
 
(1,398
)
 
 
 
(1,527
)
 
 
 
(2,545
)
 
Net income attributable to Fannie Mae
 
1,136

 
 
 
2,946

 
 
 
3,196

 
 
 
5,035

 
Dividends distributed or available for distribution to senior preferred stockholder
 
(919
)
 
 
 
(2,869
)
 
 
 
(2,977
)
 
 
 
(5,471
)
 
Net income (loss) attributable to common stockholders (Note 11)
 
$
217

 
 
 
$
77

 
 
 
$
219

 
 
 
$
(436
)
 
Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.04

 
 
 
$
0.01

 
 
 
$
0.04

 
 
 
$
(0.08
)
 
Diluted
 
0.04

 
 
 
0.01

 
 
 
0.04

 
 
 
(0.08
)
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
5,762

 
 
 
5,762

 
 
 
5,762

 
 
 
5,762

 
Diluted
 
5,893

 
 
 
5,893

 
 
 
5,893

 
 
 
5,762

 

Fannie Mae (In conservatorship) 2016 Form 10-K
F-90

 
Notes to Consolidated Financial Statements | Selected Quarterly Financial Information (Unaudited)


 
For the 2015 Quarter Ended
 
March 31
 
June 30
 
September 30
 
December 31
 
(Dollars and shares in millions, except per share amounts)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
 
$
115

 
 
 
$
116

 
 
 
$
99

 
 
 
$
114

 
Available-for-sale securities
 
376

 
 
 
294

 
 
 
261

 
 
 
225

 
Mortgage loans
 
27,044

 
 
 
26,682

 
 
 
26,980

 
 
 
26,993

 
Other
 
33

 
 
 
34

 
 
 
37

 
 
 
39

 
Total interest income
 
27,568

 
 
 
27,126

 
 
 
27,377

 
 
 
27,371

 
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
 
29

 
 
 
33

 
 
 
37

 
 
 
47

 
Long-term debt
 
22,472

 
 
 
21,416

 
 
 
21,752

 
 
 
22,247

 
Total interest expense
 
22,501

 
 
 
21,449

 
 
 
21,789

 
 
 
22,294

 
Net interest income
 
5,067

 
 
 
5,677

 
 
 
5,588

 
 
 
5,077

 
Benefit (provision) for credit losses
 
533

 
 
 
(1,033
)
 
 
 
1,550

 
 
 
(255
)
 
Net interest income after benefit (provision) for credit losses
 
5,600

 
 
 
4,644

 
 
 
7,138

 
 
 
4,822

 
Investment gains, net
 
342

 
 
 
514

 
 
 
299

 
 
 
181

 
Fair value gains (losses), net
 
(1,919
)
 
 
 
2,606

 
 
 
(2,589
)
 
 
 
135

 
Fee and other income
 
308

 
 
 
556

 
 
 
259

 
 
 
225

 
Non-interest income (loss)
 
(1,269
)
 
 
 
3,676

 
 
 
(2,031
)
 
 
 
541

 
Administrative expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
351

 
 
 
331

 
 
 
317

 
 
 
320

 
Professional services
 
271

 
 
 
251

 
 
 
219

 
 
 
243

 
Occupancy expenses
 
43

 
 
 
43

 
 
 
43

 
 
 
53

 
Other administrative expenses
 
58

 
 
 
64

 
 
 
373

 
 
 
70

 
Total administrative expenses
 
723

 
 
 
689

 
 
 
952

 
 
 
686

 
Foreclosed property expense
 
473

 
 
 
182

 
 
 
497

 
 
 
477

 
TCCA fees
 
382

 
 
 
397

 
 
 
413

 
 
 
429

 
Other expenses (income), net
 
(5
)
 
 
 
202

 
 
 
215

 
 
 
201

 
Total expenses
 
1,573

 
 
 
1,470

 
 
 
2,077

 
 
 
1,793

 
Income before federal income taxes
 
2,758

 
 
 
6,850

 
 
 
3,030

 
 
 
3,570

 
Provision for federal income taxes
 
(870
)
 
 
 
(2,210
)
 
 
 
(1,070
)
 
 
 
(1,103
)
 
Net income
 
1,888

 
 
 
4,640

 
 
 
1,960

 
 
 
2,467

 
     Less: Net income attributable to noncontrolling interest
 
—

 
 
 
—

 
 
 
—

 
 
 
(1
)
 
Net income attributable to Fannie Mae
 
1,888

 
 
 
4,640

 
 
 
1,960

 
 
 
2,466

 
Dividends distributed or available for distribution to senior preferred stockholder
 
(1,796
)
 
 
 
(4,359
)
 
 
 
(2,202
)
 
 
 
(2,859
)
 
Net income (loss) attributable to common stockholders (Note 11)
 
$
92

 
 
 
$
281

 
 
 
$
(242
)
 
 
 
$
(393
)
 
Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.02

 
 
 
$
0.05

 
 
 
$
(0.04
)
 
 
 
$
(0.07
)
 
Diluted
 
0.02

 
 
 
0.05

 
 
 
(0.04
)
 
 
 
(0.07
)
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
5,762

 
 
 
5,762

 
 
 
5,762

 
 
 
5,762

 
Diluted
 
5,893

 
 
 
5,893

 
 
 
5,762

 
 
 
5,762

 
















Fannie Mae (In conservatorship) 2016 Form 10-K
F-91
























cs16061410q10klogor.jpg

























FR029