Derivative Instruments

9 Months Ended

Sep. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

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 consist primarily of interest-rate swaps and interest-rate options. See “Note 8, Derivative Instruments” in our 2021 Form 10-K for additional information on interest-rate risk management.

We account for certain forms of credit risk transfer transactions as derivatives. In our credit risk transfer transactions, 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 derivative transactions that are associated with some of our credit risk transfer transactions, whereby we manage investment risk to guarantee that certain unconsolidated VIEs have sufficient cash flows to pay their contractual obligations.

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 condensed consolidated balance sheets at their fair value on a trade date basis. Fair value amounts, which are (1) netted to the extent a legal right of offset exists and is enforceable by law at the counterparty level and (2) inclusive of the right or obligation associated with the cash collateral posted or received, are recorded in “Other assets” or “Other liabilities” in our condensed consolidated balance sheets. See “Note 12, Fair Value” for additional information on derivatives recorded at fair value. We present cash flows from derivatives as operating activities in our condensed consolidated statements of cash flows.

Fair Value Hedge Accounting

As discussed in “Note 1, Summary of Significant Accounting Policies” in our 2021 Form 10-K, we implemented a fair value hedge accounting program in January 2021. Pursuant to this program, we may designate certain interest-rate swaps as hedging instruments in hedges of the change in fair value attributable to the designated benchmark interest rate for certain closed pools of fixed-rate, single-family mortgage loans or our funding debt. For hedged items in qualifying fair value hedging relationships, changes in fair value attributable to the designated risk are recognized as a basis adjustment to the hedged item. We also report changes in the fair value of the derivative hedging instrument in the same condensed consolidated statements of operations and comprehensive income line item used to recognize the earnings effect of the hedged item’s basis adjustment. The objective of our fair value hedges is to reduce GAAP earnings volatility related to changes in benchmark interest rates.

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, including derivative instruments designated as hedges.

	As of September 30, 2022						As of December 31, 2021
	Notional Amount		Estimated Fair Value				Notional Amount		Estimated Fair Value
			Asset Derivatives		Liability Derivatives				Asset Derivatives		Liability Derivatives
	(Dollars in millions)
Risk management derivatives designated as hedging instruments:
Swaps:(1)
Pay-fixed	$	6,221	$	—	$	—	$	4,347	$	—	$	—
Receive-fixed	35,926		—		—		40,686		—		—
Total risk management derivatives designated as hedging instruments	42,147		—		—		45,033		—		—
Risk management derivatives not designated as hedging instruments:
Swaps:(1)
Pay-fixed	89,832		—		—		56,817		—		—
Receive-fixed	93,469		—		(4,683)		56,874		—		(1,131)
Basis	41,250		31		—		250		152		—
Foreign currency	277		—		(130)		336		25		(34)
Swaptions:(1)
Pay-fixed	5,286		203		(20)		4,341		52		(2)
Receive-fixed	2,136		5		(44)		1,091		10		(21)
Total risk management derivatives not designated as hedging instruments	232,250		239		(4,877)		119,709		239		(1,188)
Netting adjustment(2)	—		(163)		4,833		—		(237)		1,173
Total risk management derivatives portfolio	274,397		76		(44)		164,742		2		(15)
Mortgage commitment derivatives:
Mortgage commitments to purchase whole loans	5,774		4		(78)		13,192		17		(5)
Forward contracts to purchase mortgage-related securities	43,304		5		(732)		58,021		83		(34)
Forward contracts to sell mortgage-related securities	61,444		411		(4)		111,173		69		(158)
Total mortgage commitment derivatives	110,522		420		(814)		182,386		169		(197)
Credit enhancement derivatives	24,456		2		(65)		19,256		—		(21)
Derivatives at fair value	$	409,375	$	498	$	(923)	$	366,384	$	171	$	(233)

(1)Centrally cleared derivatives have no ascribable fair value because the positions are settled daily.

(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 $4.7 billion and $966 million as of September 30, 2022 and December 31, 2021, respectively. Cash collateral received was $8 million and $30 million as of September 30, 2022 and December 31, 2021, respectively.

We record all gains and losses, including accrued interest, on derivatives while they are not in a qualifying designated hedging relationship in “Fair value gains (losses), net” in our condensed 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 Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
	(Dollars in millions)
Risk management derivatives:
Swaps:
Pay-fixed	$	2,510	$	343	$	5,809	$	1,855
Receive-fixed	(1,903)		(209)		(5,269)		(1,307)
Basis	5		(12)		(126)		(39)
Foreign currency	(62)		(19)		(122)		(23)
Swaptions:
Pay-fixed	43		6		141		55
Receive-fixed	(6)		(14)		(19)		(223)
Futures	—		—		(1)		1
Net contractual interest expense on interest-rate swaps	(63)		(2)		(102)		(6)
Total risk management derivatives fair value gains, net	524		93		311		313
Mortgage commitment derivatives fair value gains (losses), net	517		(25)		2,933		504
Credit enhancement derivatives fair value losses, net	(32)		(55)		(83)		(163)
Total derivatives fair value gains, net	$	1,009	$	13	$	3,161	$	654

Effect of Fair Value Hedge Accounting

The following table displays the effect of fair value hedge accounting on our condensed consolidated statements of operations and comprehensive income, including gains and losses recognized on fair value hedging relationships.

	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2022				2021				2022				2021
	Interest Income: Mortgage Loans		Interest Expense: Long-Term Debt		Interest Income: Mortgage Loans		Interest Expense: Long-Term Debt		Interest Income: Mortgage Loans		Interest Expense: Long-Term Debt		Interest Income: Mortgage Loans		Interest Expense: Long-Term Debt
	(Dollars in millions)
Total amounts presented in our condensed consolidated statements of operations and comprehensive income	$	30,114	$	(23,709)	$	24,798	$	(18,009)	$	86,338	$	(65,291)	$	73,083	$	(51,646)
Gains (losses) from fair value hedging relationships:
Mortgage loans HFI and related interest-rate contracts:
Hedged items	$	(285)	$	—	$	(1)	$	—	$	(867)	$	—	$	69	$	—
Discontinued hedge related basis adjustment amortization	9		—		(3)		—		14		—		(3)		—
Derivatives designated as hedging instruments	269		—		(1)		—		833		—		(71)		—
Interest accruals on hedging instruments	7		—		(4)		—		(10)		—		(9)		—
Debt of Fannie Mae and related interest-rate contracts:
Hedged items	—		1,477		—		195		—		3,848		—		1,000
Discontinued hedge-related basis adjustment amortization	—		(145)		—		(20)		—		(329)		—		(54)
Derivatives designated as hedging instruments	—		(1,289)		—		(191)		—		(3,381)		—		(982)
Interest accruals on derivative hedging instruments	—		(108)		—		65		—		(54)		—		178
Total effect of fair value hedges	$	—	$	(65)	$	(9)	$	49	$	(30)	$	84	$	(14)	$	142

Hedged Items in Fair Value Hedging Relationships

The following table displays the carrying amounts of the hedged items that have been in qualifying fair value hedges recorded in our condensed consolidated balance sheets, including the hedged item's cumulative basis adjustments and the closed portfolio balances under the last-of-layer method. The hedged item carrying amounts and total basis adjustments include both open and discontinued hedges. The amortized cost and designated UPB consists only of open hedges as of September 30, 2022 and December 31, 2021.

	As of September 30, 2022
	Carrying Amount Assets (Liabilities)		Cumulative Amount of Fair Value Hedging Basis Adjustments Included in the Carrying Amount				Closed Portfolio of Mortgage Loans Under Last-of-Layer Method
			Total Basis Adjustments(1)(2)		Remaining Adjustments - Discontinued Hedge		Total Amortized Cost		Designated UPB
	(Dollars in millions)
Mortgage loans HFI	$	253,002	$	(719)	$	(719)	$	59,031	$	5,595
Debt of Fannie Mae	(73,711)		4,777		4,777		N/A		N/A

	As of December 31, 2021
	Carrying Amount Assets (Liabilities)		Cumulative Amount of Fair Value Hedging Basis Adjustments Included in the Carrying Amount				Closed Portfolio of Mortgage Loans Under Last-of-Layer Method
			Total Basis Adjustments(1)(2)		Remaining Adjustments - Discontinued Hedge		Total Amortized Cost		Designated UPB
	(Dollars in millions)
Mortgage loans HFI	$	174,080	$	134	$	134	$	56,786	$	4,389
Debt of Fannie Mae	(72,174)		1,281		1,281		N/A		N/A

(1)    No basis adjustment associated with open hedges, as all hedges are designated at the close of business with a one-day term.

(2)    Based on the unamortized balance of the hedge-related cost basis.

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 11, Netting Arrangements” for information on our rights to offset assets and liabilities as of September 30, 2022 and December 31, 2021