Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2023

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Summary of Significant Accounting PoliciesOrganization

Fannie Mae is a leading source of financing for residential mortgages in the United States. We are a government-

sponsored, stockholder-owned corporation, chartered by Congress to provide liquidity and stability to the U.S. housing

market and to promote access to mortgage credit. We primarily do this by buying residential mortgage loans that are

originated by lenders. We place these loans into trusts and issue guaranteed mortgage-backed securities (“MBS”) that

global investors buy from us. We do not originate mortgage loans or lend money directly to borrowers.

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 11, Segment Reporting.”

We have been under conservatorship with the Federal Housing Finance Agency (“FHFA”) acting as conservator since

September 2008. See “Note 2, Conservatorship, Senior Preferred Stock Purchase Agreement and Related Matters,” for

information on our conservatorship, the senior preferred stock purchase agreement, the impact of U.S. government

support on our business, and related party relationships.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles

generally accepted in the United States of America (“GAAP”). To conform to our current-period presentation, we have

reclassified certain amounts reported in our prior period consolidated financial statements.

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, the allowance for loan losses. Actual results could be different from these estimates.

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 an entity such as a variable interest entity (“VIE”) through arrangements that do not

involve voting interests, such as control over the servicing of the collateral held by the VIE. Fannie Mae’s controlling

interest generally arises from arrangements with VIEs.

We consolidate VIEs when we have a controlling financial interest in the VIE and are therefore considered the primary

beneficiary of the VIE. We are the primary beneficiary of a VIE when we have both the power to direct the activities of

the VIE that most significantly impact its economic performance and exposure to losses or benefits of the VIE that could

potentially be significant to the VIE. The primary beneficiary determination may change over time as our interest in the

VIE changes. Therefore, we evaluate whether we are the primary beneficiary of VIEs in which we have variable

interests at both inception and on an ongoing basis. Generally, the assets of our consolidated VIEs can be used only to

settle obligations of the VIE, and the creditors of our consolidated VIEs do not have recourse to Fannie Mae, except

when we provide a guarantee to the VIE.

The measurement of assets and liabilities of VIEs that we consolidate depends on whether we are the transferor of

assets into a VIE. 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 the assets and no gain or loss is recognized. We are the transferor to the VIEs created during our

portfolio securitizations; this execution occurs when we purchase 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.

When we are not the transferor of assets into a VIE that we consolidate, we recognize the assets and liabilities of the

VIE in our consolidated financial statements at fair value and 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 recognized upon consolidation. However, for the

VIEs established under our lender swap program, we do not recognize a gain or loss if the VIEs are 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 (losses), net” in our consolidated

statements of operations and comprehensive income. A lender swap transaction occurs when a mortgage lender

delivers a pool of loans to us, which we immediately deposit into an MBS trust.

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 in “Investment gains (losses),

net” in our consolidated statements of operations and comprehensive income.

Transfers of Financial Assets

We evaluate each transfer of financial assets to determine whether we have surrendered control and the transfer

qualifies as a sale. If a 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 the

transfer.

When a transfer that qualifies as a sale is completed, we derecognize all assets transferred and recognize all assets

received and liabilities incurred at fair value. The difference between the carrying basis of the assets transferred and the

fair value of the net proceeds from the sale is recorded as a component of “Investment gains (losses), net” in our

consolidated statements of operations and comprehensive income. We retain interests from the transfer and sale of

mortgage-related securities to unconsolidated single-class and multi-class portfolio securitization trusts. Retained

interests are primarily derived from transfers associated with our portfolio securitizations in the form of Fannie Mae

securities. We separately describe the subsequent accounting, as well as how we determine fair value, for our retained

interests in the “Investments in Securities” section of this note.

Cash Equivalents and Restricted Cash

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.

“Restricted cash and cash equivalents” in our consolidated balance sheets primarily represents cash held in accounts

that are for the benefit of MBS certificateholders (inclusive of amounts that have been advanced by us under the terms

of our guaranty) that will be distributed to the MBS certificateholders on a future date in accordance with the terms of the

MBS trust agreements. Fannie Mae, in its role as trustee, invests funds held by consolidated trusts directly in eligible

short-term third-party investments, which may include investments in cash equivalents that are composed of overnight

repurchase agreements and U.S. Treasuries that have a maturity at the date of acquisition of three months or less. The

funds underlying these short-term investments are restricted per the MBS trust agreements. Cash may also be

recognized as restricted cash for certain collateral arrangements for which we do not have the right to use the cash.

Securities Purchased Under Agreements to Resell

We enter into repurchase agreements that involve contemporaneous trades to purchase and sell securities. As the

transferor has not relinquished control over the securities, these transactions are accounted for as secured financings

and reported as securities purchased under agreements to resell 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. We present cash flows from securities purchased under agreements to resell as

investing activities in our consolidated statements of cash flows.

These repurchase agreements may allow us to repledge all, or a portion, of the transferred collateral, and we may

repledge such collateral periodically, although it is not typically our practice to repledge collateral that has been

transferred to us.

Investments in Securities

Securities Classified as Trading or Available-for-Sale

We classify and account for our investments in securities as either trading or available-for-sale (“AFS”). 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 gains (losses), net” in our consolidated statements of operations and comprehensive

income. We include interest on investments in 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. We

measure AFS securities at fair value in our consolidated balance sheets, with unrealized gains and losses, net of

income taxes, recorded in “Accumulated other comprehensive income,” and changes in expected credit losses recorded

in “Benefit (provision) for credit losses.” We recognize realized gains and losses on AFS securities when securities are

sold. We calculate the gains and losses on AFS securities using the specific identification method and record them in

“Investment gains (losses), net” in our consolidated statements of operations and comprehensive income. As of

December 31, 2023 and 2022, we did not have any investments in securities classified as held-to-maturity.

When we own Fannie Mae MBS issued by unconsolidated trusts, the asset is recorded in “Investments in securities, at

fair value” in our consolidated balance sheets. We determine the fair value of Fannie Mae MBS based on observable

market prices because most Fannie Mae MBS are actively traded. For any subsequent purchase or sale of Fannie Mae

MBS issued by unconsolidated trusts, we continue to account for any outstanding recorded amounts associated with the

guaranty transaction on the same basis of accounting. We do not derecognize any components of the guaranty assets,

guaranty obligations, or any other outstanding recorded amounts associated with the guaranty transaction for the

Fannie Mae MBS because our contractual obligation to the MBS trust remains in force until the trust is liquidated.

Impairment of Available-for-Sale Debt Securities

An AFS debt security is impaired if the fair value of the investment is less than its amortized cost basis. In these

circumstances, we separate the excess of the amortized cost basis of the debt security over its fair value into the

amount representing the credit loss, which we recognize as an allowance for credit losses with the corresponding

amount recorded in “Benefit (provision) for credit losses” in our consolidated statements of operations and

comprehensive income, and the amount related to all other factors, which we recognize in “Other comprehensive loss,”

net of taxes, in our consolidated statements of operations and comprehensive income. Credit losses are evaluated on

an individual security basis and are limited to the excess of the amortized cost basis over the fair value of the debt

security. If we intend to sell a debt security or it is more likely than not that we will be required to sell the debt security

before recovery, any allowance for credit losses on the debt security is reversed and the amortized cost basis of the

debt security is written down to its fair value through “Investment gains (losses), net.”

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 the carrying value of 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 the corresponding amount

and subsequent changes in the valuation allowance recognized as “Investment gains (losses), 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 and discounts 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 presentation of our consolidated statements of cash flows, we present cash flows from loans classified as HFS at

acquisition as operating activities. If a loan is initially classified as HFI and it is transferred to HFS, the principal cash

flows and sales proceeds from such loans continue to be presented as investing activities in the consolidated statement

of cash flows.

Our accounting for transfers to HFS differs based upon the loan’s classification as either nonperforming or performing.

Nonperforming loans include both seriously delinquent and reperforming loans. For both single-family and multifamily

loans, reperforming loans are loans that were previously delinquent but are performing again because payments on the

loan have become current with or without the use of a loan modification plan. 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. All other loans are considered performing.

For nonperforming loans transferred from held for investment (“HFI”) to HFS, based upon a change in our intent, we

record the loans at the lower of cost or fair value on the date of transfer. When the fair value of the nonperforming loan

is less than its amortized cost, we record a write-off against the allowance for loan losses in an amount equal to the

excess of the amortized cost basis over the fair value of the loan. Any difference between the amount written off upon

transfer and the recorded valuation allowance related to the transferred loan is recognized in “Benefit (provision) for

credit losses” in our consolidated statements of operations and comprehensive income.

For performing loans transferred from HFI to HFS, based upon a change in our intent, the allowance for loan losses

previously recorded on the HFI mortgage loan is reversed through “Benefit (provision) for credit losses” at the time of

transfer. The loan is transferred to HFS at its amortized cost basis and a valuation allowance is established to the extent

that the amortized cost basis of the loan exceeds its fair value. The initial recognition of the valuation allowance and any

subsequent changes are recorded as a gain or loss in “Investment gains (losses), net.”

Upon reclassification from HFS to HFI, we reverse the valuation allowance on the loan, if any, and establish an

allowance for loan losses as needed.

Loans Held for Investment

When we acquire 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 securitization trust, we recognize the loans underlying the trust in our

consolidated balance sheets. The trusts do not have the ability to sell loans and the use of such loans is limited

exclusively to the settlement of obligations of the trusts. Therefore, loans acquired when we have the intent to securitize

via consolidated trusts are generally classified as HFI in our consolidated balance sheets both prior to and subsequent

to their securitization.

In the presentation of our consolidated statements of cash flows, we present principal cash flows from loans classified

as HFI as investing activities and interest cash flows as operating activities.

We report the carrying value of HFI loans at the unpaid principal balance, net of unamortized premiums and discounts,

other cost basis adjustments, and allowance for loan losses. We define the amortized cost of HFI loans as unpaid

principal balance and accrued interest receivable, net, including any unamortized premiums, discounts, and other cost

basis adjustments. We present accrued interest receivable separately from the amortized cost of our HFI loans in our

consolidated balance sheets. We recognize interest income on HFI loans on an accrual basis using the effective yield

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 recognize interest income on an accrual basis except when we believe the collection of principal and interest is not

reasonably assured. This generally occurs when a single-family loan is three or more months past due and a multifamily

loan is two or more months past due according to its contractual terms. A loan is reported as past due if a full payment

of principal and interest is not received within one month of its due date. When a loan is placed on nonaccrual status

based on delinquency status, interest previously accrued but not collected on the loan is reversed through interest

income.

Cost basis adjustments on HFI loans are amortized into interest income over the contractual life of the loan using the

effective interest method. Cost basis adjustments on the loan are not amortized into income while a loan is on

nonaccrual status. We have elected not to measure an allowance for credit losses on accrued interest receivable

balances as we have a nonaccrual policy to ensure the timely reversal of unpaid accrued interest.

For single-family loans, we recognize any contractual interest payments received on the loan while on nonaccrual status

as interest income on a cash basis. For multifamily loans, we account for interest income on a cost recovery basis and

we apply any payment received while on nonaccrual status to reduce the amortized cost of the loan. Thus, we do not

recognize any interest income on a multifamily loan placed on nonaccrual status until the amortized cost of the loan has

been reduced to zero.

A nonaccrual loan is returned to accrual status when the full collection of principal and interest is reasonably assured.

We generally determine that the full collection of principal and interest is reasonably assured when the loan returns to

current payment status. If a loan is restructured for a borrower experiencing financial difficulty, we require a performance

period of up to 6 months before we return the loan to accrual status. Upon a loan’s return to accrual status, we resume

the recognition of interest income on an accrual basis and the amortization of cost basis adjustments, if any, into interest

income. If interest is capitalized pursuant to a restructuring, any capitalized interest that had not been previously

recognized as interest income or that had been reversed through interest income when the loan was placed on

nonaccrual status is recorded as a discount to the loan and amortized into interest income over the remaining

contractual life of the loan.

For single-family loans negatively impacted by the COVID-19 pandemic that were three or more months past due as of

December 31, 2022, we continued to recognize interest income for up to six months of delinquency provided that the

loan was either current as of March 1, 2020, or originated after March 1, 2020. We continued to accrue interest income

beyond six months of delinquency provided that the full collection of principal and interest continued to be reasonably

assured. For multifamily loans that were in a COVID-19 forbearance arrangement on December 31, 2022, we continued

to recognize interest income for up to six months of delinquency and then placed the loans on nonaccrual status when

the borrower was six months past due.

For loans that were subject to the COVID-19-related nonaccrual policy, we established a valuation allowance for

expected credit losses on the accrued interest receivable balance applying the process that we have established for

both single-family and multifamily loans. The credit expense related to this valuation allowance was recorded in “Benefit

(provision) for credit losses” in our consolidated statements of operations and comprehensive income. Accrued interest

receivable was written off when the amount was deemed to be uncollectible. Loans that were in active forbearance

arrangements were not evaluated for write-off.

To the extent that loans that were subject to the COVID-19-related nonaccrual policy were restructured, the accrued

interest that was previously recognized was capitalized into the principal balance of the loan.

Allowance for Loan Losses

Our allowance for loan losses is a valuation account that is deducted from the amortized cost basis of HFI loans to

present the net amount expected to be collected on the loans. The allowance for loan losses reflects an estimate of

expected credit losses on single-family and multifamily HFI loans held by Fannie Mae and by consolidated MBS trusts.

Estimates of credit losses are based on expected cash flows derived from internal models that estimate loan

performance under simulated ranges of economic environments. Our modeled loan performance is based on our

historical experience of loans with similar risk characteristics, adjusted to reflect current conditions and reasonable and

supportable forecasts. Our historical loss experience and our credit loss estimates capture the possibility of remote

events that could result in credit losses on loans that are considered low risk. The allowance for loan losses does not

consider benefits from freestanding credit enhancements, such as our Connecticut Avenue Securities® (“CAS”) and

Credit Insurance Risk Transfer™ (“CIRT™”) programs and multifamily Delegated Underwriting and Servicing (“DUS®”)

lender risk-sharing arrangements, which are recorded in “Other assets” in our consolidated balance sheets.

Changes to our estimate of expected credit losses, including changes due to the passage of time, are recorded through

the “Benefit (provision) for credit losses” in our consolidated statements of operations and comprehensive income.

When calculating our allowance for loan losses, we consider only our amortized cost in the loans at the balance sheet

date. We record write-offs as a reduction to the allowance for loan losses when amounts are deemed uncollectible.

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, we record a write-off in an amount equal to the excess of a loan’s

amortized cost over fair value of assets received. We include expected recoveries of amounts previously written off and

expected to be written off in determining our allowance for loan losses.

We present foreclosed property in “Other assets” in our consolidated balance sheets. We held $1.8 billion and $1.6

billion of acquired property, net as of December 31, 2023 and December 31, 2022, respectively.

Single-Family Loans

We estimate the amount expected to be collected on our single-family loans using a discounted cash flow approach.

Our allowance for loan losses is calculated as the difference between the amortized cost basis of the loan and the

present value of expected cash flows on the loan. Expected cash flows include payments from the borrower, net of fees

retained by a third-party for servicing, contractually attached credit enhancements and proceeds from the sale of the

underlying collateral, net of selling costs.

When foreclosure of a single-family loan is probable, the allowance for loan losses is calculated as the difference

between the amortized cost basis of the loan and the fair value of the collateral as of the reporting date, adjusted for the

estimated costs to sell the property and the amount of expected recoveries from contractually attached credit

enhancements or other proceeds we expect to receive.

Expected cash flows are developed using internal models that capture market and loan characteristic inputs. Market

inputs include information such as actual and forecasted home prices, interest rates, volatility and spreads, while loan

characteristic inputs include information such as mark-to-market loan-to-value (“LTV”) ratios, delinquency status,

geography and borrower FICO credit scores. The model assigns a probability to borrower events including contractual

payment, loan payoff and default under various economic environments based on historical data, current conditions and

reasonable and supportable forecasts.

The two primary drivers of our forecasted economic environments are interest rates and home prices. Our model

projects the range of possible interest rate scenarios over the life of the loan based on actual interest rates and

observed option pricing volatility in the capital markets. For single-family home prices, we develop regional forecasts

based on Metropolitan Statistical Area data using a multi-path simulation that captures home price projections over a

five-year period, the period for which we can develop reasonable and supportable forecasts. After the five-year period,

the home price forecast reverts to a historical long-term growth rate.

Expected cash flows on the loan are discounted at the effective interest rate on the loan, adjusted for expected

prepayments. We update the discount rate of the loan each reporting period to reflect changes in expected

prepayments.

We may modify loans to borrowers experiencing financial difficulty as part of our loss mitigation activities. We consider

the effects of both actual and estimated restructurings in our estimate of expected credit losses.

Multifamily Loans

Our allowance for loan losses on multifamily loans is calculated based on estimated probabilities of default and loss

severities to derive expected loss ratios, which are then applied to the amortized cost basis of the loans. Our

probabilities of default and severity are estimated using internal models based on historical loss experience of loans

with similar risk characteristics that affect credit performance, such as debt service coverage ratio (“DSCR”), mark-to-

market LTV ratio, collateral type, age, loan size, geography, prepayment penalty term and note type. Our models

simulate a range of possible future economic scenarios, which are used to estimate probabilities of default and loss

severities. Key inputs to our models include rental income, which drives expected DSCRs for our loans, and property

values. Our reasonable and supportable forecasts for multifamily rental income and property values, which are

projected based on Metropolitan Statistical Area data, extend through the contractual maturity of the loans.

When foreclosure of a multifamily loan is probable, the allowance for loan losses is calculated as the difference between

the amortized cost basis of the loan and the fair value of the collateral as of the reporting date, adjusted for the

estimated costs to sell the property.

Restructured Loans

Effective January 1, 2022, we adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments – Credit

Losses (Topic 326), using the prospective transition method. ASU 2022-02 eliminates the recognition and measurement

of troubled debt restructurings (“TDRs”) and enhances the disclosures for loan restructurings for borrowers experiencing

financial difficulty. Pursuant to this guidance, when a single-family loan is restructured, we continue to measure

impairment on the loan using a discounted cash flow approach that utilizes a prepayment-adjusted discount rate that is

based on the loan’s restructured terms. Using a post-restructuring interest rate does not result in the recognition of an

economic concession in the allowance for loan losses. Additionally, loan modifications to single-family and multifamily

borrowers are evaluated to determine whether they result in a new loan or a continuation of an existing loan.

Modifications made by Fannie Mae for borrowers experiencing financial difficulty are generally accounted for as a

continuation of the existing loan as the terms of the restructured loans are typically not at market rates.

Prior to our adoption of this guidance, most of our restructurings were accounted for as TDRs. Under the TDR

accounting model, we used the discount rate that was in effect prior to the restructuring to measure impairment on each

loan, which resulted in the recognition, in the allowance for loan losses, of the economic concession that we granted to

borrowers as part of the loan restructuring.

As we have elected a prospective transition for the TDR-elimination guidance effective January 1, 2022, the economic

concession on a single-family loan that was previously restructured and accounted for as a TDR will continue to be

measured in our allowance for loan losses using the discount rate that was in effect prior to the restructuring and the

economic concession may increase or decrease as we update our cash flow assumptions related to the loan’s expected

life. Further, the component of the allowance for loan losses representing economic concessions will decrease as the

borrower makes payments in accordance with the restructured terms of the loan and as the loan is sold, liquidated, or

subsequently restructured.

In general, the effect of our current accounting for loan modifications is consistent with the accounting that we applied

under section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to modifications of

loans not previously restructured in a TDR. The CARES Act provided temporary relief from the accounting and reporting

requirements for TDRs regarding certain loan modifications related to COVID-19 beginning March 2020 through

December 31, 2021.

Advances to Lenders

Advances to lenders represent our payments of cash in exchange for the receipt of 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 lenders. Early lender funding advances have terms

up to 60 days and earn a short-term market rate of interest.

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.”

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 periods 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 invest in Low-Income Housing Tax

Credit (“LIHTC”) projects and elect the proportional amortization method for the associated tax credits. We amortize the

cost of a LIHTC investment each reporting period in proportion to the tax credits and other tax benefits received. We

recognize the resulting amortization as a component of the “Provision for federal income taxes” in our consolidated

statements of operations and comprehensive income.

We present deferred taxes net in our consolidated balance sheets. 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.

Derivative Instruments

We recognize derivatives in a gain position in “Other assets” and derivatives in a loss position in “Other liabilities” in our

consolidated balance sheets at their fair value on a trade date basis. Changes in fair value and interest accruals on

derivatives not in qualifying fair value hedging relationships are recorded as “Fair value gains, net” in our consolidated

statements of operations and comprehensive income. We offset the carrying amounts of certain derivatives that are in

gain positions and loss positions as well as cash collateral receivables and payables associated with derivative

positions pursuant to the terms of enforceable master netting arrangements. We offset these amounts only when we

have the legal right to offset under the contract and we have met all the offsetting conditions. For our over-the-counter

(“OTC”) derivative positions, our master netting arrangements allow us to net derivative assets and liabilities with the

same counterparty. For our cleared derivative contracts, our master netting arrangements allow us to net our exposure

by clearing organization and by clearing member.

In the presentation of our consolidated statements of cash flows, we present cash flows from derivatives that do not

contain financing elements as operating activities.

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 whether: (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.

Fair Value Hedge Accounting

To reduce earnings volatility related to changes in benchmark interest rates, we apply fair value hedge accounting to

certain pools of single-family loans and certain issuances of our funding debt by designating such instruments as the

hedged item in hedging relationships with interest-rate swaps. In these relationships, we have designated the change in

the benchmark interest rate, the Secured Overnight Financing Rate (“SOFR”), as the risk being hedged. We have

elected to use the portfolio layer method to hedge certain pools of single-family loans. This election involves

establishing fair value hedging relationships on the portion of each loan pool that is not expected to be affected by

prepayments, defaults and other events that affect the timing and amount of cash flows. The term of each hedging

relationship is generally one business day and we establish hedging relationships each business day to align our hedge

accounting with our risk management practices.

We apply hedge accounting to qualifying hedging relationships. A qualifying hedging relationship exists when changes

in the fair value of a derivative hedging instrument are expected to be highly effective in offsetting changes in the fair

value of the hedged item attributable to the risk being hedged during the term of the hedging relationship. We assess

hedge effectiveness using statistical regression analysis. A hedging relationship is considered highly effective if the total

change in fair value of the hedging instrument and the change in the fair value of the hedged item due to changes in the

benchmark interest rate offset each other within a range of 80% to 125% and certain other statistical tests are met.

If a hedging relationship qualifies for hedge accounting, the change in the fair value of the interest-rate swap and the

change in the fair value of the hedged item for the risk being hedged are recorded through net interest income. A

corresponding basis adjustment is recorded against the hedged item, either the pool of loans or the debt, for the

changes in the fair value attributable to the risk being hedged. For hedging relationships that hedge pools of single-

family loans, basis adjustments are allocated to individual single-family loans based on the relative unpaid principal

balance of each loan at the termination of the hedging relationship. The cumulative basis adjustments on the hedged

item are amortized into earnings using the effective interest method over the contractual life of the hedged item, with

amortization beginning upon termination of the hedging relationship.

All changes in fair value of the designated portion of the derivative hedging instrument (i.e., interest-rate swap),

including interest accruals, are recorded in the same line item in the consolidated statements of operations and

comprehensive income used to record the earnings effect of the hedged item. Therefore, changes in the fair value of the

hedged loans and debt attributable to the risk being hedged are recognized in “Interest income” or “Interest expense,”

respectively, along with the changes in the fair value of the respective derivative hedging instruments.

The recognition of basis adjustments on the hedged item and the subsequent amortization are noncash activities and

are removed from net income to derive the “Net cash provided by operating activities” in our consolidated statements of

cash flows. Cash paid or received on designated derivative instruments during a hedging relationship is reported as

“Net cash provided by operating activities” in the consolidated statements of cash flows.

Commitments to Purchase and Sell Loans and Securities

We enter into commitments to purchase and sell mortgage-backed securities and to purchase single-family and

multifamily loans. Certain of these commitments to purchase or sell mortgage-backed securities and to purchase single-

family loans are accounted for as derivatives, while other commitments are not within the scope of the derivative

accounting criteria or do not meet the definition of a derivative.

Our commitments for the purchase and sale of regular way securities trades are exempt from derivative accounting and

are recorded on their trade date.

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 single-class securitization trusts and certain resecuritization trusts where the

security that has been issued by the trust is substantially the same as the underlying collateral are treated as

extinguishments or issuances of the underlying MBS debt, respectively. For commitments to purchase and sell

securities issued by these 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.

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 counterparties for securities purchased under agreements to resell, 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 and cash

equivalents” 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 when the

offsetting requirements have been met 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 “Investments in securities, at fair value” or “Cash and cash

equivalents” in our consolidated balance sheets. Securities that we own that are pledged to counterparties may include

securities issued by consolidated VIEs. The pledged collateral is classified as “Mortgage loans” when the trust that

issued the security has been consolidated to align with the classification of the underlying asset.

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 certain credit risk-sharing

securities. The debt of consolidated trusts represents the amount of Fannie Mae MBS issued from such trusts that 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. 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.

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 over the contractual term of the debt. Amortization of premiums, discounts and other cost basis

adjustments begins at the time of debt issuance.

We purchase and sell guaranteed MBS that have been issued through lender swap and portfolio securitization

transactions. When we purchase or sell a Fannie Mae MBS issued from a consolidated single-class securitization trust

and certain resecuritization trusts where the security that has been issued by the trust is substantially the same as the

underlying collateral, we extinguish or issue, respectively, the related debt of the consolidated trust to reflect the debt

that is owed to a third-party. For the extinguishment of debt, we record debt extinguishment gains or losses related to

debt of consolidated trusts for any difference between the purchase price of the MBS and 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. When we issue consolidated debt, the debt is recorded at its fair

value with any premiums or discounts amortized over the securities’ contractual life.

New Accounting Guidance

Fair Value Hedging - Portfolio Layer Method

On March 28, 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-01, Fair Value Hedging –

Portfolio Layer Method, which clarifies the guidance on fair value hedge accounting of interest rate risk portfolios of

financial assets. The ASU expands the scope of the last-of-layer method to allow entities to apply this method, renamed

the portfolio layer method, to non-prepayable financial assets and to designate multiple hedge relationships within a

single closed portfolio of financial assets. Additionally, the ASU clarifies that basis adjustments related to existing

portfolio layer hedge relationships should not be considered when measuring credit losses on the financial assets

included in the closed portfolio. Further, the ASU clarifies that any reversal of fair value hedge basis adjustments

associated with an actual breach should be recognized in interest income immediately. We adopted this guidance on

January 1, 2023 and the adoption did not have a material impact on our financial statements.

Investments – Equity Method and Joint Ventures

On March 29, 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323),

Accounting for Investment in Tax Credit Structures Using the Proportional Amortization Method. The ASU expands the

scope of the proportional amortization method that is currently restricted to investments in LIHTC structures by allowing

an entity to elect this method on a program-by-program basis to other qualifying tax equity investments. We adopted

this guidance on January 1, 2024 and the adoption did not have a material impact on our financial statements.

Segment Reporting

On November 27, 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable

Segment Disclosures. The ASU enhances disclosure of an entity’s reportable segments by requiring additional

information about significant segment expenses, interim disclosures of certain segment information that previously were

only required on an annual basis and other detailed segment-related disclosures. The ASU applies to all public entities

that are required to report segment information and is effective starting in annual periods beginning after December 15,

2023. The ASU is required to be adopted retrospectively to all prior periods presented in the financial statements. We

are currently evaluating the impact of this guidance on our consolidated financial statements.

Income Taxes

On December 14, 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax

Disclosures, which enhances the required disclosures primarily related to the income tax rate reconciliation and income

taxes paid. The ASU requires an entity’s income tax rate reconciliation to provide additional information for reconciling

items meeting a quantitative threshold, and to disclose certain selected categories within the income tax rate

reconciliation. The ASU also requires entities to disclose the amount of income taxes paid, disaggregated by federal,

state and foreign taxes. The ASU is effective for annual periods beginning after December 15, 2024, though early

adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.