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Equity (Deficit)

12 Months Ended

Dec. 31, 2018

Common Stock

Shares of common stock outstanding, net of shares held as treasury stock, totaled 1.2 billion as of December 31, 2018 and 2017.

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, 2018
		2018			2017			Stated Value per Share
Title	Issue Date	Shares	Amount		Shares	Amount		Stated Value per Share					Redeemable on or After
(Dollars and shares in millions, except per share amounts)
Senior Preferred Stock
Series 2008-2	September 8, 2008	1	$	120,836	1	$	117,149	$	120,836	⁽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			2.146	⁽⁴⁾	March 31, 2002	⁽⁵⁾
Series G	August 8, 2000	6	288		6	288		50			2.624	⁽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


⁽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, 2018 was $120,836.


⁽²⁾	Beginning in 2013, dividends on the senior preferred stock are calculated based on our net worth as of the end of the immediately preceding fiscal quarter less an applicable capital reserve amount. For each dividend period beginning in 2018, the applicable capital reserve amount is $3.0 billion.


⁽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 Treasury’s funding commitment under the senior preferred stock purchase agreement.


⁽⁴⁾	Rate effective March 31, 2018. 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, 2018. 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, 2018. 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, 2018 and 2017.


⁽⁹⁾	Rate effective December 31, 2018. 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, 2018. 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, 2018 or 2017.

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, for an aggregate initial liquidation preference of $1.0 billion. Under the terms of the senior preferred stock, the aggregate liquidation preference is increased by the following:


•	amounts Treasury pays to us pursuant to its funding commitment under the senior preferred stock purchase agreement (a total of $119.8 billion as of the date of this filing);


•	any quarterly commitment fees that are payable but not paid in cash (no such fees have become payable, nor will they under the current terms of the agreement and the senior preferred stock); and


•	any dividends that are payable but not paid in cash to Treasury, regardless of whether or not they are declared.

The December 2017 letter agreement increased the aggregate liquidation preference of the senior preferred stock by $3.0 billion as of December 31, 2017. Accordingly, the aggregate liquidation preference of the senior preferred stock was $123.8 billion as of December 31, 2018.

Treasury, as the holder of the senior preferred stock, is entitled to receive, when, as and if declared, out of legally available funds, cumulative quarterly cash dividends. The dividends we have paid to Treasury on the senior preferred stock during conservatorship have been declared by, and paid at the direction of, our conservator, acting as successor to the rights, titles, powers and privileges of the Board of Directors.

Senior Preferred Stock Dividends Declared and Paid

(Dollars in Billions)

The dividend provisions of the senior preferred stock have been amended twice.


•	Original Dividend Rate. As originally issued, the senior preferred stock provided for cumulative quarterly cash dividends at an annual rate of 10% per year on the stock’s then-current liquidation preference. This dividend rate was applicable from the fourth quarter of 2008 through the fourth quarter of 2012.

•

“Net Worth Sweep” Amendment. As amended in August 2012, the senior preferred stock provides for a “net worth sweep” dividend. For each quarterly dividend period, the dividend amount is 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. Our net worth is defined as the amount, if any, by which our total assets (excluding Treasury’s funding commitment and any unfunded amounts related to the commitment) exceed our total liabilities (excluding any obligation with respect to capital stock), in each case as reflected on our balance sheet prepared in accordance with GAAP. The applicable capital reserve amount was initially $3.0 billion for dividend periods in 2013 and decreased by $600 million each year until it reached $600 million for dividend periods in 2017. These provisions became applicable in the first quarter of 2013 and remain in effect as modified by the December 2017 letter agreement.

•

December 2017 Letter Agreement Amendment. As amended in December 2017, the applicable capital reserve amount was increased to $3.0 billion. If we do not declare and pay the dividend amount in full for any dividend period for which dividends are payable, then the applicable capital reserve amount will thereafter be zero. The December 2017 letter agreement also reduced by $2.4 billion the dividend amount otherwise payable for the fourth quarter of 2017.

As a result of these amended dividend provisions, for each quarterly period beginning with the first quarter of 2018, dividends on the senior preferred stock accumulate and are payable based on the amount by which our net worth as of the end of the immediately preceding fiscal quarter exceeds $3.0 billion. If our net worth does not exceed the applicable capital reserve amount of $3.0 billion as of the end of the immediately preceding fiscal quarter, then dividends will neither accumulate nor be payable for such period. We recognize a liability on our balance sheet for senior preferred stock dividends only upon their declaration by our conservator, at which point they become payable to the shareholder.

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. As a result, if we are liquidated, the holder of the senior preferred stock is entitled to its then-current liquidation preference (which includes any accumulated but unpaid dividends) before any distribution is made to the holders of our common stock or other preferred stock.

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:


•	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


•	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.

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:


•	accumulated and unpaid dividends previously added to the liquidation preference and not previously paid down; and


•	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 the warrant is exercised. 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 notice of exercise;


•	payment of the exercise price of $0.00001 per share; and


•	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 14, 2019, 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 $119.8 billion from Treasury pursuant to the senior preferred stock purchase agreement as of December 31, 2018. The aggregate liquidation preference of the senior preferred stock, is $123.8 billion, including the initial aggregate liquidation preference of $1.0 billion as of December 31, 2018.

While we had positive net worth as of December 31, 2018, in some future periods we could have net worth deficit and if so, will be required to obtain additional funding from Treasury pursuant to the senior preferred stock purchase agreement to avoid being placed into receivership. As of December 31, 2018 the remaining amount of funding available to us under the agreement was $113.9 billion. If we were to draw additional funds from Treasury under the agreement with respect to a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw.

Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the agreement. The amount of remaining funding under the agreement also would not change if the full quarterly dividend amount were not declared and paid to Treasury.

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 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

The senior preferred stock purchase agreement provides 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 dividend provisions of the senior preferred stock remain substantially the same in form and content.

Covenants

The senior preferred stock purchase agreement contains covenants that prohibit us from taking a number of actions without the prior written consent of Treasury, including:


•	declaring or paying dividends or making other distributions on or redeeming, purchasing, retiring or otherwise acquiring our equity securities (other than the senior preferred stock or warrant);


•	selling or issuing equity securities (except in limited instances);


•	seeking or permitting the termination of our conservatorship (other than in connection with a receivership);


•	selling, transferring, leasing or otherwise disposing of any assets, except for dispositions for fair market value in limited circumstances including if (a) the transaction is in the ordinary course of business and consistent with past practice or (b) the assets have a fair market value individually or in the aggregate of less than $250 million;


•	incurring indebtedness that would result in our aggregate indebtedness exceeding $300.0 billion;


•	issuing subordinated debt;


•	entering into a corporate reorganization, recapitalization, merger, acquisition or similar event; and


•	engaging in transactions with affiliates other than on arm’s-length terms or in the ordinary course of business.

The senior preferred stock purchase agreement also prohibits us from entering into any new compensation arrangements or increasing amounts or benefits payable under existing compensation arrangements with any of our executive officers (as

defined by Securities and Exchange Commission (“SEC”) rules) without the consent of the Director of FHFA, in consultation with the Secretary of the Treasury.

In addition, the senior preferred stock purchase agreement subjects us to limits on the amount of mortgage assets that we may own and the total amount of our indebtedness.

•

Mortgage Asset Limit. The amount of mortgage assets we are permitted to own decreased by a specified amount each year until it reached a limit of $250.0 billion as of December 31, 2018. In addition, FHFA has directed that we further cap our mortgage assets at $225.0 billion. For purposes of calculating our limit, mortgage asset amounts are based on the unpaid principal balance of such assets and do not reflect market valuation adjustments, allowance for loan losses, impairments, unamortized premiums and discounts and the impact of our consolidation of variable interest entities. Applying this measure, our mortgage assets as of December 31, 2018 were $179.2 billion. We disclose the amount of our mortgage assets on a monthly basis under the caption “Mortgage Portfolio End Balance” in our Monthly Summaries, which are available on our website and announced in a press release.

•

Debt Limit. Our debt limit under the senior preferred stock purchase agreement is set at 120% of the amount of mortgage assets we were allowed to own under the agreement on December 31 of the immediately preceding calendar year. Accordingly, our debt limit in 2018 was $346.1 billion and, beginning in 2019 and for each year thereafter, our debt limit is $300.0 billion. For purposes of this calculation, indebtedness is based on the par value of each applicable loan and does not reflect the impact of consolidation of variable interest entities. Applying this measure, our indebtedness as of December 31, 2018 was $232.5 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. Each year we remain in conservatorship we are required to provide Treasury a risk management plan that sets out our strategy for reducing our risk profile, describes the actions we will take to reduce the financial and operational risk associated with each of our business segments, and includes an assessment of our performance against the planned actions described in the prior year’s plan. We submitted our most recent annual risk management plan to Treasury in December 2018.

Termination Provisions

The senior preferred stock purchase agreement provides that Treasury’s funding commitment will terminate under any the following circumstances:


•	the completion of our liquidation and fulfillment of Treasury’s obligations under its funding commitment at that time,


•	the payment in full of, or reasonable provision for, all of our liabilities (whether or not contingent, including mortgage guaranty obligations), or


•	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.

Accumulated Other Comprehensive Income

The following table displays our accumulated other comprehensive income (“AOCI”), net of tax, by major categories.



	As of December 31,
	2018		2017		2016
	(Dollars in millions)
Net unrealized gains on AFS securities for which we have not recorded OTTI	$	52	$	87	$	135
Net unrealized gains on AFS securities for which we have recorded OTTI	224		423		581
Other	46		43		43
Accumulated other comprehensive income	$	322	$	553	$	759

The following table displays changes in AOCI, net of tax.



	For the Year Ended December 31,
	2018									2017
	AFS⁽¹⁾			Other			Total			AFS⁽¹⁾			Other			Total
	(Dollars in millions)
AOCI beginning balance	$	510		$	43		$	553		$	716		$	43		$	759
Reclassification of accumulated other comprehensive income to retained earnings resulting from the enactment of the Tax Cuts and Jobs Act⁽²⁾	110			7			117			—			—			—
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications	(79		)	7			(72		)	53			8			61
Amounts reclassified from other comprehensive income	(265		)	(11		)	(276		)	(259		)	(8		)	(267		)
Total other comprehensive loss	(344		)	(4		)	(348		)	(206		)	—			(206		)
AOCI ending balance	$	276		$	46		$	322		$	510		$	43		$	553


⁽¹⁾	The amounts reclassified from AOCI 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 “Investment gains, net” in our consolidated statements of operations and comprehensive income.

⁽²⁾

Reclassification from AOCI to retained earnings of the tax effects resulting from the enactment of tax legislation on December 22, 2017 that reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018.