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 guidance defines fair value, establishes a framework for measuring fair value and expands disclosures around fair value measurements. This guidance applies whenever other accounting standards require or permit 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.

The following tables display our assets and liabilities measured in our condensed 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 as of June 30, 2011 and December 31, 2010. Specifically, total assets measured at fair value on a recurring basis and classified as Level 3 were $37.0 billion, or 1% of “Total assets,” and $39.0 billion, or 1% of “Total assets,” in our condensed consolidated balance sheets as of June 30, 2011 and December 31, 2010, respectively.

			Fair Value Measurements as of June 30, 2011
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs		Netting		Estimated
			(Level 1)		(Level 2)		(Level 3)		Adjustment⁽¹⁾		Fair Value
				(Dollars in millions)
Assets:
Cash equivalents⁽²⁾			$	2,000	$	-	$	-	$	-	$	2,000
Trading securities:
	Mortgage-related securities:
		Fannie Mae		-		5,664		1,679		-		7,343
		Freddie Mac		-		1,392		-		-		1,392
		Ginnie Mae		-		301		-		-		301
		Alt-A private-label securities		-		1,442		126		-		1,568
		Subprime private-label securities		-		-		1,459		-		1,459
		CMBS		-		10,976		-		-		10,976
		Mortgage revenue bonds		-		-		616		-		616
		Other		-		-		154		-		154
	Non-mortgage-related securities:
		U.S. Treasury securities		34,856		-		-		-		34,856
		Asset-backed securities		-		3,242		-		-		3,242
Total trading securities				34,856		23,017		4,034		-		61,907
Available-for-sale securities:
	Mortgage-related securities:
		Fannie Mae		-		19,430		635		-		20,065
		Freddie Mac		-		14,523		12		-		14,535
		Ginnie Mae		-		966		-		-		966
		Alt-A private-label securities		-		6,450		6,652		-		13,102
		Subprime private-label securities		-		-		8,909		-		8,909
		CMBS		-		14,845		-		-		14,845
		Mortgage revenue bonds		-		9		10,464		-		10,473
		Other		-		14		3,707		-		3,721
Total available-for-sale securities				-		56,237		30,379		-		86,616
Mortgage loans of consolidated trusts				-		719		2,365		-		3,084
Other assets:
	Risk management derivatives:
		Swaps		-		6,752		148		-		6,900
		Swaptions		-		4,128		-		-		4,128
		Interest rate caps		-		6		-		-		6
		Other		-		-		56		-		56
		Netting adjustment		-		-		-		(10,586)		(10,586)
	Mortgage commitment derivatives			-		158		6		-		164
Total other assets				-		11,044		210		(10,586)		668
		Total assets at fair value	$	36,856	$	91,017	$	36,988	$	(10,586)	$	154,275

			Fair Value Measurements as of June 30, 2011
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs		Netting		Estimated
			(Level 1)		(Level 2)		(Level 3)		Adjustment⁽¹⁾		Fair Value

				(Dollars in millions)

Liabilities:
Long-term debt:
	Of Fannie Mae:
		Senior fixed	$	-	$	460	$	-	$	-	$	460
		Senior floating		-		-		402		-		402
	Total of Fannie Mae			-		460		402		-		862
	Of consolidated trusts			-		2,627		646		-		3,273
Total long-term debt				-		3,087		1,048		-		4,135
Other liabilities:
	Risk management derivatives:
		Swaps		-		11,146		101		-		11,247
		Swaptions		-		2,440		-		-		2,440
		Other		3		-		-		-		3
		Netting adjustment		-		-		-		(13,345)		(13,345)
	Mortgage commitment derivatives			-		217		30		-		247
Total other liabilities				3		13,803		131		(13,345)		592
		Total liabilities at fair value	$	3	$	16,890	$	1,179	$	(13,345)	$	4,727

			Fair Value Measurements as of December 31, 2010
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs		Netting		Estimated
			(Level 1)		(Level 2)		(Level 3)		Adjustment⁽¹⁾		Fair Value
				(Dollars in millions)
Assets:
Cash equivalents⁽²⁾			$	4,049	$	2,300	$	-	$	-	$	6,349
Trading securities:
	Mortgage-related securities:
		Fannie Mae		-		5,196		2,202		-		7,398
		Freddie Mac		-		1,326		-		-		1,326
		Ginnie Mae		-		590		-		-		590
		Alt-A private-label securities		-		1,663		20		-		1,683
		Subprime private-label securities		-		-		1,581		-		1,581
		CMBS		-		10,764		-		-		10,764
		Mortgage revenue bonds		-		-		609		-		609
		Other		-		-		152		-		152
	Non-mortgage-related securities:
		U.S. Treasury securities		27,432		-		-		-		27,432
		Asset-backed securities		-		5,309		12		-		5,321
Total trading securities				27,432		24,848		4,576		-		56,856
Available-for-sale securities:
	Mortgage-related securities:
		Fannie Mae		-		22,714		114		-		22,828
		Freddie Mac		-		16,993		3		-		16,996
		Ginnie Mae		-		1,039		-		-		1,039
		Alt-A private-label securities		-		6,841		7,049		-		13,890
		Subprime private-label securities		-		-		9,932		-		9,932
		CMBS		-		14,844		-		-		14,844
		Mortgage revenue bonds		-		11		11,030		-		11,041
		Other		-		16		3,806		-		3,822
Total available-for-sale securities				-		62,458		31,934		-		94,392
Mortgage loans of consolidated trusts				-		755		2,207		-		2,962
Other assets:
	Risk management derivatives:
		Swaps		-		9,623		163		-		9,786
		Swaptions		-		5,474		-		-		5,474
		Interest rate caps		-		24		-		-		24
		Other		3		-		72		-		75
		Netting adjustment		-		-		-		(15,175)		(15,175)
	Mortgage commitment derivatives			-		941		12		-		953
Total other assets				3		16,062		247		(15,175)		1,137
		Total assets at fair value	$	31,484	$	106,423	$	38,964	$	(15,175)	$	161,696

			Fair Value Measurements as of December 31, 2010
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs		Netting		Estimated
			(Level 1)		(Level 2)		(Level 3)		Adjustment⁽¹⁾		Fair Value

				(Dollars in millions)

Liabilities:
Long-term debt:
	Of Fannie Mae:
		Senior fixed	$	-	$	472	$	-	$	-	$	472
		Senior floating		-		-		421		-		421
	Total of Fannie Mae			-		472		421		-		893
	Of consolidated trusts			-		1,644		627		-		2,271
Total long-term debt				-		2,116		1,048		-		3,164
Other liabilities:
	Risk management derivatives:
		Swaps		-		16,436		113		-		16,549
		Swaptions		-		2,446		-		-		2,446
		Other		1		-		-		-		1
		Netting adjustment		-		-		-		(18,023)		(18,023)
	Mortgage commitment derivatives			-		712		30		-		742
Total other liabilities				1		19,594		143		(18,023)		1,715
		Total liabilities at fair value	$	1	$	21,710	$	1,191	$	(18,023)	$	4,879

__________

⁽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 agreements to settle with the same counterparty on a net basis, as well as cash collateral.
⁽²⁾	Cash equivalents is comprised of U.S. Treasuries that are classified as Level 1 and money market funds that are classified as Level 2.

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) for the three and six months ended June 30, 2011 and 2010. The tables also display gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recognized in our condensed consolidated statements of operations and comprehensive loss for Level 3 assets and liabilities for the three and six months ended June 30, 2011 and 2010. 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 Three Months Ended June 30, 2011
																								Net Unrealized Gains (Losses) Included in Net Loss Related to Assets and Liabilities Still Held as of June 30, 2011⁽⁴⁾
						Total Gains or (Losses) (Realized/Unrealized)
				Balance, April 1, 2011		Included in Net Loss		Included in Other Comprehensive Income		Purchases⁽¹⁾			Sales⁽¹⁾	Issuances⁽²⁾		Settlements⁽²⁾		Transfers out of Level 3⁽³⁾		Transfers into Level 3⁽³⁾		Balance, June 30, 2011
				(Dollars in millions)
Trading securities:
	Mortgage-related:
		Fannie Mae		$	1,651	$	1	$	-	$	124	$	-	$	-	$	(97)	$	-	$	-	$	1,679	$	2
		Alt-A private-label
			securities		20		1		-		-		-		-		(1)		-		106		126		2
		Subprime private-label
			securities		1,547		(41)		-		-		-		-		(47)		-		-		1,459		(41)
		Mortgage revenue bonds			606		21		-		-		-		-		(11)		-		-		616		21
		Other			155		1		-		-		-		-		(2)		-		-		154		1
	Non-mortgage-related:
		Asset-backed securities			2		-		-		-		-		-		(2)		-		-		-		-
Total trading securities					3,981		(17)		-		124		-		-		(160)		-		106		4,034		(15)

Available-for-sale securities:
	Mortgage-related:
		Fannie Mae			546		-		8		473		(24)		-		-		(368)		-		635		-
		Freddie Mac			12		-		-		-		-		-		-		-		-		12		-
		Alt-A private-label
			securities		7,236		3		(26)		-		-		-		(217)		(747)		403		6,652		-
		Subprime private-label
			securities		9,660		130		(547)		-		-		-		(334)		-		-		8,909		-
		Mortgage revenue bonds			10,532		(1)		273		-		(64)		-		(276)		-		-		10,464		-
		Other			3,776		2		40		-		-		-		(111)		-		-		3,707		-
Total available-for-sale
	securities				31,762		134		(252)		473		(88)		-		(938)		(1,115)		403		30,379		-

Mortgage loans of
	consolidated trusts				2,221		19		-		42		-		-		(71)		(31)		185		2,365		19
Net derivatives					118		(9)		-		-		-		(1)		(29)		-		-		79		(26)
Long-term debt:
	Of Fannie Mae:
		Senior floating			(423)		8		-		-		-		-		13		-		-		(402)		8
	Of consolidated trusts				(667)		6		-		-		-		(40)		26		55		(26)		(646)		6
Total long-term debt				$	(1,090)	$	14	$	-	$	-	$	-	$	(40)	$	39	$	55	$	(26)	$	(1,048)	$	14

				Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
				For the Six Months Ended June 30, 2011
																								Net Unrealized Gains (Losses) Included in Net Loss Related to Assets and Liabilities Still Held as of June 30, 2011⁽⁴⁾
						Total Gains or (Losses) (Realized/Unrealized)
				Balance, December 31, 2010		Included in Net Loss		Included in Other Comprehensive Income		Purchases⁽¹⁾			Sales⁽¹⁾	Issuances⁽²⁾		Settlements⁽²⁾		Transfers out of Level 3⁽³⁾		Transfers into Level 3⁽³⁾		Balance, June 30, 2011
				(Dollars in millions)
Trading securities:
	Mortgage-related:
		Fannie Mae		$	2,202	$	(12)	$	-	$	124	$	(15)	$	-	$	(229)	$	(391)	$	-	$	1,679	$	(6)
		Alt-A private-label
			securities		20		1		-		-		-		-		(1)		-		106		126		1
		Subprime private-label
			securities		1,581		(30)		-		-		-		-		(92)		-		-		1,459		(30)
		Mortgage revenue bonds			609		21		-		-		-		-		(14)		-		-		616		24
		Other			152		5		-		-		-		-		(3)		-		-		154		5
	Non-mortgage-related:
		Asset-backed securities			12		-		-		-		-		-		(5)		(9)		2		-		-
Total trading securities					4,576		(15)		-		124		(15)		-		(344)		(400)		108		4,034		(6)

Available-for-sale securities:
	Mortgage-related:
		Fannie Mae			114		-		12		889		(39)		-		(2)		(469)		130		635		-
		Freddie Mac			3		-		-		-		-		-		-		-		9		12		-
		Alt-A private-label
			securities		7,049		1		78		-		-		-		(475)		(1,064)		1,063		6,652		-
		Subprime private-label
			securities		9,932		260		(605)		-		-		-		(678)		-		-		8,909		-
		Mortgage revenue bonds			11,030		(3)		294		-		(106)		-		(751)		-		-		10,464		-
		Other			3,806		3		111		-		-		-		(213)		-		-		3,707		-
Total available-for-sale
	securities				31,934		261		(110)		889		(145)		-		(2,119)		(1,533)		1,202		30,379		-

Mortgage loans of
	consolidated trusts				2,207		30		-		57		-		-		(150)		(37)		258		2,365		30
Net derivatives					104		5		-		-		-		(1)		(29)		-		-		79		(16)
Long-term debt:
	Of Fannie Mae:
		Senior floating			(421)		(14)		-		-		-		-		33		-		-		(402)		(14)
	Of consolidated trusts				(627)		(29)		-		-		-		(40)		48		77		(75)		(646)		(28)
Total long-term debt				$	(1,048)	$	(43)	$	-	$	-	$	-	$	(40)	$	81	$	77	$	(75)	$	(1,048)	$	(42)

				Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
				For the Three Months Ended June 30, 2010
																		Net Unrealized Gains (Losses) Included in Net Loss Related to Assets and Liabilities Still Held as of June 30, 2010⁽⁴⁾
						Total Gains or (Losses) (Realized/Unrealized)				Purchases, Sales, Issuances, and Settlements, Net
				Balance, April 1, 2010		Included in Net Loss		Included in Other Comprehensive Income		Purchases, Sales, Issuances, and Settlements, Net			Transfers out of Level 3⁽³⁾		Transfers into Level 3⁽³⁾		Balance, June 30, 2010
				(Dollars in millions)
Trading securities:
	Mortgage-related:
		Fannie Mae		$	4,076	$	(34)	$	-	$	(111)	$	(3,873)	$	-	$	58	$	(2)
		Freddie Mac			-		-		-		-		-		4		4		-
		Alt-A private-label
			securities		153		9		-		(12)		(99)		68		119		4
		Subprime private-label
			securities		1,683		26		-		(64)		-		-		1,645		25
		Mortgage revenue bonds			611		49		-		(10)		-		-		650		49
		Other			158		3		-		(1)		-		-		160		3
	Non-mortgage-related:
		Asset-backed securities			43		1		-		(13)		(7)		-		24		1
Total trading securities					6,724		54		-		(211)		(3,979)		72		2,660		80

Available-for-sale securities:
	Mortgage-related:
		Fannie Mae			217		1		3		(85)		(119)		36		53		-
		Freddie Mac			30		-		(1)		(8)		-		-		21		-
		Ginnie Mae			123		-		3		(1)		-		-		125		-
		Alt-A private-label
			securities		8,517		23		467		(363)		(1,245)		378		7,777		-
		Subprime private-label
			securities		10,511		78		122		(456)		-		-		10,255		-
		Mortgage revenue bonds			12,559		-		270		(401)		-		-		12,428		-
		Other			3,873		(1)		144		(126)		-		-		3,890		-
Total available-for-sale
	securities				35,830		101		1,008		(1,440)		(1,364)		414		34,549		-

Net derivatives					140		132		-		(41)		-		(5)		226		97
Guaranty assets and buy-ups					11		3		1		-		-		-		15		2
Long-term debt:
	Of Fannie Mae:
		Senior floating			(582)		(3)		-		-		-		-		(585)		(3)
	Of consolidated trusts				(71)		8		-		(38)		2		(6)		(105)		8
Total long-term debt				$	(653)	$	5	$	-	$	(38)	$	2	$	(6)	$	(690)	$	5

				Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
				For the Six Months Ended June 30, 2010
																				Net Unrealized Gains (Losses) Included in Net Loss Related to Assets and Liabilities Still Held as of June 30, 2010⁽⁴⁾
								Total Gains or (Losses) (Realized/Unrealized)				Purchases, Sales, Issuances, and Settlements, Net
				Balance, December 31, 2009		Impact of New Accounting Standards		Included in Net Loss		Included in Other Comprehensive Income		Purchases, Sales, Issuances, and Settlements, Net			Transfers out of Level 3⁽³⁾		Transfers into Level 3⁽³⁾		Balance, June 30, 2010
				(Dollars in millions)
Trading securities:
	Mortgage-related:
		Fannie Mae		$	5,656	$	(2)	$	4	$	-	$	(242)	$	(5,363)	$	5	$	58	$	(2)
		Freddie Mac			-		-		-		-		-		-		4		4		-
		Alt-A private-label
			securities		564		62		32		-		(48)		(589)		98		119		10
		Subprime private-label
			securities		1,780		-		-		-		(135)		-		-		1,645		-
		Mortgage revenue bonds			600		-		99		-		(49)		-		-		650		96
		Other			154		-		8		-		(2)		-		-		160		8
	Non-mortgage-related:
		Asset-backed securities			107		-		-		-		(49)		(47)		13		24		2
Total trading securities					8,861		60		143		-		(525)		(5,999)		120		2,660		114

Available-for-sale securities:
	Mortgage-related:
		Fannie Mae			596		(203)		(1)		4		82		(463)		38		53		-
		Freddie Mac			27		-		-		(1)		(11)		-		6		21		-
		Ginnie Mae			123		-		-		3		(1)		-		-		125		-
		Alt-A private-label
			securities		8,312		471		19		734		(675)		(2,256)		1,172		7,777		-
		Subprime private-label
			securities		10,746		(118)		(10)		585		(948)		-		-		10,255		-
		Mortgage revenue bonds			12,820		21		(1)		503		(915)		-		-		12,428		-
		Other			3,530		366		(6)		254		(254)		-		-		3,890		-
Total available-for-sale
	securities				36,154		537		1		2,082		(2,722)		(2,719)		1,216		34,549		-
Net derivatives					123		-		167		-		(59)		-		(5)		226		89
Guaranty assets and buy-ups					2,577		(2,568)		3		1		2		-		-		15		4
Long-term debt:
	Of Fannie Mae:
		Senior floating			(601)		-		11		-		5		-		-		(585)		12
	Of consolidated trusts				-		(77)		7		-		(38)		11		(8)		(105)		6
Total long-term debt				$	(601)	$	(77)	$	18	$	-	$	(33)	$	11	$	(8)	$	(690)	$	18

__________

⁽¹⁾	Purchases and sales include activity related to the consolidation and deconsolidation of assets of securitized trusts.
⁽²⁾	Issuances and settlements include activity related to the consolidation and deconsolidation of liabilities of securitized trusts.
⁽³⁾	Transfers out of Level 3 consisted primarily of Fannie Mae guaranteed mortgage-related securities and private-label mortgage-related securities backed by Alt-A loans. Prices for these securities were obtained from multiple third-party vendors supported by market observable inputs. Transfers into Level 3 consisted primarily of private-label mortgage-related 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.
⁽⁴⁾	Amount represents temporary changes in fair value. Amortization, accretion and other-than-temporary impairments are not considered unrealized and are not included in this amount.

The following tables display realized and unrealized gains and losses included in our condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2011 and 2010, for our Level 3 assets and liabilities measured in our condensed consolidated balance sheets at fair value on a recurring basis.

		For the Three Months Ended June 30, 2011
						Net
				Fair Value		Other-than-
		Interest		Gains		Temporary
		Income		(Losses), net		Impairments			Other		Total

		(Dollars in millions)
Total realized and unrealized gains (losses) included
	in net loss	$	135	$	8	$	(6)	$	4	$	141
Net unrealized losses related to Level 3 assets
	and liabilities still held as of June 30, 2011	$	(1)	$	(7)	$	-	$	-	$	(8)

		For the Six Months Ended June 30, 2011
						Net
				Fair Value		Other-than-
		Interest		Gains		Temporary
		Income		(Losses), net		Impairments			Other		Total

		(Dollars in millions)

Total realized and unrealized gains (losses) included
	in net loss	$	270	$	(16)	$	(23)	$	7	$	238
Net unrealized losses related to Level 3 assets
	and liabilities still held as of June 30, 2011	$	(1)	$	(33)	$	-	$	-	$	(34)

		For the Three Months Ended June 30, 2010
						Net
				Fair Value		Other-than-
		Interest		Gains		Temporary-
		Income		(Losses), net		Impairments		Other		Total
		(Dollars in millions)
Total realized and unrealized gains (losses) included
	in net loss	$	101	$	192	$	(7)	$	9	$	295
Net unrealized gains related to Level 3 assets and
	liabilities still held as of June 30, 2010	$	-	$	182	$	-	$	2	$	184

		For the Six Months Ended June 30, 2010
						Net
				Fair Value		Other-than-
		Interest		Gains		Temporary-
		Income		(Losses), net		Impairments		Other		Total
		(Dollars in millions)
Total realized and unrealized gains (losses) included
	in net loss	$	212	$	325	$	(219)	$	14	$	332
Net unrealized gains related to Level 3 assets and
	liabilities still held as of June 30, 2010	$	-	$	221	$	-	$	4	$	225

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 assets and liabilities measured at fair value on a recurring basis, as well as our basis for classifying these assets and liabilities as Level 1, Level 2 or Level 3. These valuation techniques are also used to estimate the fair value of financial instruments not carried at fair value but disclosed as part of the fair value of financial instruments.

Cash Equivalents, Trading Securities and Available-for-Sale Securities – These securities are recorded in our condensed consolidated balance sheets at fair value on a recurring basis. Fair value is measured using quoted market prices in active markets for identical assets, when available. Securities, such as U.S. Treasuries, whose value is based on quoted market prices in active markets for identical assets are classified as Level 1. If quoted market prices in active markets for identical assets are not available, we use prices provided by up to four third-party pricing services that are calibrated to the quoted market prices in active markets for similar securities, and assets valued in this manner are classified as Level 2. In the absence of prices provided by third-party pricing services supported by observable market data, fair values are estimated using quoted prices of securities with similar characteristics or discounted cash flow models that use inputs such as spread, prepayment speed, yield, and loss severity based on market assumptions where available. Such instruments are generally classified as Level 2. Where there is limited activity or less transparency around inputs to the valuation, securities are classified as Level 3.

Mortgage Loans Held for Investment – The majority of HFI performing loans and nonperforming loans that are not individually impaired are reported in our condensed consolidated balance sheets at the principal amount outstanding, net of cost basis adjustments and an allowance for loan losses. We elected the fair value option for certain loans containing embedded derivatives that would otherwise require bifurcation and consolidated loans of senior-subordinate trust structures, which are recorded in our condensed consolidated balance sheets at fair value on a recurring basis.

Fair value of performing loans represents an estimate of the prices we would receive if we were to securitize those loans and is determined based on comparisons to Fannie Mae MBS with similar characteristics, either on a pool or loan level. We use the observable market values of our Fannie Mae MBS determined from third-party pricing services and other observable market data as a base value, from which we add or subtract the fair value of the associated guaranty asset, guaranty obligation and master servicing arrangement. We classify these valuations primarily within Level 2 of the valuation hierarchy given that the market values of our Fannie Mae MBS are calibrated to the quoted market prices in active markets for similar securities. To the extent that significant inputs are not observable or determined by extrapolation of observable points, the loans are classified within Level 3. Certain loans that do not qualify for Fannie Mae MBS securitization are valued using market-based data including, for example, credit spreads, severities and prepayment speeds for similar loans, through third-party pricing services or through a model approach incorporating both interest rate and credit risk simulating a loan sale via a synthetic structure.

Fair value of single-family nonperforming loans represents an estimate of the prices we would receive if we were to sell these loans in the nonperforming whole-loan market. We calculate the fair value of nonperforming loans based on assumptions about key factors, including loan performance, collateral value, foreclosure related expenses, disposition timeline, and mortgage insurance repayment. Using these assumptions, along with indicative bids for a representative sample of nonperforming loans, we compute a market calibrated fair value. The bids on sample loans are obtained from multiple active market participants. Fair value for loans that are four or more months delinquent, in an open modification period, or in a closed modification and that have performed for nine or fewer months, is estimated directly from a model calibrated to these indicative bids. Fair value for loans that are one to three months delinquent is estimated by an interpolation method using three inputs: (1) the fair value estimate as a performing loan; (2) the fair value estimate as a nonperforming loan; and (3) the delinquency transition rate corresponding to the loan's current delinquency status.

Fair value of a portion of our single-family nonperforming loans is measured using the value of the underlying collateral. These valuations leverage our proprietary distressed home price model. The model assigns a value using comparable transaction data. In determining what comparables to use in the calculations, the model measures three key characteristics relative to the target property: (1) distance from target property, (2) time of the transaction and (3) comparability of the nondistressed value. A portion of the nonperforming loans that are impaired is measured at fair value in our condensed consolidated balance sheets on a nonrecurring basis. These loans are classified within Level 3 of the valuation hierarchy because significant inputs are unobservable.

Fair value of multifamily nonperforming loans is determined by external third-party valuations when available. If third-party valuations are unavailable, we determine the value of the collateral based on a derived property value estimation method using current net operating income of the property and capitalization rates.

Derivatives Assets and Liabilities (collectively “derivatives”) – Derivatives are recorded in our condensed consolidated balance sheets at fair value on a recurring basis. 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. Interest rate swaps 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 a model that projects the probability of various levels of interest rates by referencing swaption and caplet 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. Exchange-traded futures are valued using market quoted prices, resulting in Level 1 classification. Certain highly complex structured derivatives use only a single external source of price information due to lack of transparency in the market and may be modeled using observable interest rates and volatility levels as well as significant assumptions, resulting in Level 3 classification. Mortgage commitment derivatives use observable market data, quotes and actual transaction price levels adjusted for market movement, and are typically classified as Level 2. Adjustments for market movement based on internal model results that cannot be corroborated by observable market data are classified as Level 3.

Guaranty Assets and Buy-ups – Guaranty assets related to our portfolio securitizations are recorded in our condensed consolidated balance sheets at fair value on a recurring basis and are classified within Level 3 of the valuation hierarchy. Guaranty assets in lender swap transactions are recorded in our condensed consolidated balance sheets at the lower of cost or fair value. These assets, which are measured at fair value on a nonrecurring basis, are classified within Level 3 of the fair value hierarchy.

We estimate the fair value of guaranty assets based on the present value of expected future cash flows of the underlying mortgage assets using management's best estimate of certain key assumptions, which include prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. These cash flows are projected using proprietary prepayment, interest rate and credit risk models. Because guaranty assets are like an interest-only income stream, the projected cash flows from our guaranty assets are discounted using one-month LIBOR plus the option-adjusted spread (“OAS”) for interest-only trust securities. The interest-only OAS is calibrated using prices of a representative sample of interest-only trust securities. We believe the remitted fee income is less liquid than interest-only trust securities and more like an excess servicing strip. We take a further haircut of the present value for liquidity considerations. This discount is based on market quotes from dealers.

The fair value of the guaranty assets includes the fair value of any associated buy-ups, which is estimated in the same manner as guaranty assets but is recorded separately as a component of “Other assets” in our condensed consolidated balance sheets. While the fair value of the guaranty assets reflects all guaranty arrangements, the carrying value primarily reflects only those arrangements entered into subsequent to our adoption of the accounting standard on guarantor's accounting and disclosure requirements for guarantees.

Debt – The majority of debt of Fannie Mae is recorded in our condensed consolidated balance sheets at the principal amount outstanding, net of cost basis adjustments. We elected the fair value option for certain structured debt instruments, which are recorded in our condensed consolidated balance sheets at fair value on a recurring basis.

We use third-party pricing services that reference observable market data such as interest rates and spreads to measure the fair value of debt, and thus classify that debt as Level 2. When third-party pricing is not available, we use a discounted cash flow approach based on a yield curve derived from market prices observed for Fannie Mae Benchmark Notes and adjusted to reflect fair values at the offer side of the market.

For structured debt instruments that are not valued by third-party pricing services, cash flows are evaluated taking into consideration any structured derivatives through which we have swapped out of the structured features of the notes. The resulting cash flows are discounted to present value using a yield curve derived from market prices observed for Fannie Mae Benchmark Notes and adjusted to reflect fair values at the offer side of the market. Market swaption volatilities are also referenced for the valuation of callable structured debt instruments. Given that the derivatives considered in the valuations of these structured debt instruments are classified as Level 3, the valuations of the structured debt instruments result in a Level 3 classification.

Consolidated MBS debt is traded in the market as MBS assets. Accordingly, we estimate the fair value of our consolidated MBS debt using quoted market prices in active markets for similar liabilities when traded as assets. The valuation methodology and inputs used in estimating the fair value of MBS assets are described under “Cash Equivalents, Trading Securities and Available-for-Sale Securities.” Certain consolidated MBS debt with embedded derivatives is recorded in our condensed consolidated balance sheets at fair value on a recurring basis.

The following tables display assets and liabilities measured in our condensed consolidated balance sheets 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 for impairment), and the gains or losses recognized for these assets and liabilities for the three and six months ended June 30, 2011 and 2010 as a result of fair value measurements.

												For the		For the
			Fair Value Measurements									Three Months Ended		Six Months Ended
			For the Six Months Ended June 30, 2011									June 30, 2011		June 30, 2011
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable		Estimated
			Assets		Inputs		Inputs		Fair			Total		Total
			(Level 1)		(Level 2)		(Level 3)		Value			Losses		Losses

			(Dollars in millions)
Assets:
Mortgage loans held for sale, at
	lower of cost or fair value		$	-	$	2	$	204	$	206	⁽¹⁾	$	(8)	$	(13)
Single-family mortgage loans held for
	investment, at amortized cost:
		Of Fannie Mae		-		-		32,970		32,970	⁽²⁾		(66)		(1,080)
		Of consolidated trusts		-		-		749		749	⁽²⁾		(18)		(98)
Multifamily mortgage loans held for
	investment, at amortized cost:
		Of Fannie Mae		-		-		1,365		1,365	⁽²⁾		(28)		(108)
Acquired property, net:
	Single-family			-		-		14,806		14,806	⁽³⁾		(701)		(1,512)
	Multifamily			-		-		227		227	⁽³⁾		(33)		(49)
Other assets				-		-		877		877	⁽⁵⁾		(35)		(65)
	Total assets at fair value		$	-	$	2	$	51,198	$	51,200		$	(889)	$	(2,925)

												For the		For the
												Three Months Ended		Six Months Ended
			Fair Value Measurements for the Six Months Ended June 30, 2010									June 30, 2010		June 30, 2010
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable		Estimated
			Assets		Inputs		Inputs		Fair			Total		Total
			(Level 1)		(Level 2)		(Level 3)		Value			Losses		Losses
			(Dollars in millions)
Assets:
Mortgage loans held for sale, at
	lower of cost or fair value		$	-	$	6,869	$	540	$	7,409	⁽¹⁾⁽⁴⁾	$	(21)	$	(90)	⁽⁴⁾
Single-family mortgage loans held for
	investment, at amortized cost:
		Of Fannie Mae		-		-		14,733		14,733	⁽²⁾		(917)		(808)
		Of consolidated trusts		-		-		348		348	⁽²⁾		(103)		(103)
Multifamily mortgage loans held for
	investment, at amortized cost:
		Of Fannie Mae		-		-		1,730		1,730	⁽²⁾		(146)		(237)
Acquired property, net:
	Single-family			-		-		9,995		9,995	⁽³⁾		(672)		(1,004)
	Multifamily			-		-		133		133	⁽³⁾		(17)		(32)
Other Assets:
	Guaranty assets			-		-		24		24			(1)		(4)
	Partnership investments			-		-		85		85			(26)		(89)
	Total assets at fair value		$	-	$	6,869	$	27,588	$	34,457		$	(1,903)	$	(2,367)

__________

⁽¹⁾	Includes $56 million and $7.1 billion of mortgage loans held for sale that were sold, deconsolidated, retained as a mortgage-related security or redesignated to mortgage loans held for investment as of June 30, 2011 and 2010, respectively.
⁽²⁾	Includes $3.6 billion and $508 million of mortgage loans held for investment that were liquidated or transferred to foreclosed properties as of June 30, 2011 and 2010, respectively.
⁽³⁾	Includes $8.4 billion and $4.0 billion of acquired properties that were sold or transferred as of June 30, 2011 and 2010, respectively.
⁽⁴⁾	Includes $7.1 billion of estimated fair value and $68 million in losses due to the adoption of the new accounting standards.
⁽⁵⁾	Includes $144 million of other assets that were sold or transferred as of June 30, 2011.

The following is a description of the fair valuation techniques we use for assets and liabilities measured at fair value on a nonrecurring basis under the accounting standard for fair value measurements as well as our basis for classifying these assets and liabilities as Level 1, Level 2 or Level 3. We also use these valuation techniques to estimate the fair value of financial instruments not carried at fair value but disclosed as part of the fair value of financial instruments.

Mortgage Loans Held for Sale – Loans are reported at the lower of cost or fair value in our condensed consolidated balance sheets. The valuation methodology and inputs used in estimating the fair value of HFS loans are described under “Mortgage Loans Held for Investment” and these loans are classified as Level 2 to the extent that significant inputs are observable. To the extent that significant inputs are unobservable or determined by extrapolation of observable points, the loans are classified within Level 3.

Acquired Property, Net and Other Assets – Acquired property, net mainly represents foreclosed property received in full satisfaction of a loan net of a valuation allowance. Acquired property is initially recorded in our condensed consolidated balance sheets at its fair value less its estimated cost to sell. The initial fair value of foreclosed properties is determined using a hierarchy based on the reliability of available information. The fair value estimate is based on the best information available at the time of valuation. The hierarchy includes offers accepted, third-party interior appraisals, independent broker opinions, proprietary home price model values and exterior broker price opinions. Estimated cost to sell is based upon historical sales cost at a geographic level.

Subsequent to initial measurement, the foreclosed properties that we intend to sell are reported at the lower of the carrying amount or fair value less estimated costs to sell. Foreclosed properties classified as held for use, included in other assets, are depreciated and are impaired when circumstances indicate that the carrying amount of the property is no longer recoverable. Acquired property held for use is included in other assets in our condensed consolidated balance sheets. The fair value of our single-family foreclosed properties on an ongoing basis is determined using the same information hierarchy used at the point of initial fair value. The fair value of our multifamily properties is derived using third-party valuations. When third-party valuations are not available, we estimate the fair value using current net operating income of the property and capitalization rates.

Acquired property is classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.

The following table displays the carrying value and estimated fair value of our financial instruments as of June 30, 2011 and December 31, 2010. The fair value of financial instruments we disclose, includes commitments to purchase multifamily and single-family mortgage loans, which are off-balance sheet financial instruments that we do not record in our condensed 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 certain financial instruments, such as plan obligations for pension and postretirement health care benefits, employee stock option and stock purchase plans, and also excludes all non-financial instruments. As a result, 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
			June 30, 2011				December 31, 2010⁽²⁾
			Carrying		Estimated		Carrying		Estimated
			Value		Fair Value		Value		Fair Value
			(Dollars in millions)
Financial assets:
Cash and cash equivalents⁽¹⁾			$	51,853	$	51,853	$	80,975	$	80,975
Federal funds sold and securities purchased
	under agreements to resell or similar arrangements			19,500		19,500		11,751		11,751
Trading securities				61,907		61,907		56,856		56,856
Available-for-sale securities				86,616		86,616		94,392		94,392
Mortgage loans held for sale				439		439		915		915
Mortgage loans held for investment, net of
	allowance for loan losses:
		Of Fannie Mae		330,390		299,543		358,698		319,367
		Of consolidated trusts		2,597,000		2,639,555		2,564,107		2,610,145
Mortgage loans held for investment				2,927,390		2,939,098		2,922,805		2,929,512
Advances to lenders				3,829		3,641		7,215		6,990
Derivative assets at fair value				668		668		1,137		1,137
Guaranty assets and buy-ups				483		929		458		814
Total financial assets			$	3,152,685	$	3,164,651	$	3,176,504	$	3,183,342

Financial liabilities:
Federal funds purchased and securities sold
	under agreements to repurchase		$	-	$	-	$	52	$	51
Short-term debt:
	Of Fannie Mae			162,005		162,041		151,884		151,974
	Of consolidated trusts			5,193		5,194		5,359		5,359
Long-term debt:
	Of Fannie Mae			562,794		585,398		628,160		649,684
	Of consolidated trusts			2,444,853		2,557,891		2,411,597		2,514,929
Derivative liabilities at fair value				592		592		1,715		1,715
Guaranty obligations				778		3,700		769		3,854
Total financial liabilities			$	3,176,215	$	3,314,816	$	3,199,536	$	3,327,566

The following are valuation techniques for items not subject to the fair value hierarchy either because they are not measured at fair value other than for the purpose of the above table or because they are only measured at fair value at inception.

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, federal funds and securities sold/purchased under agreements to repurchase/resell (exclusive of dollar roll repurchase transactions) and the majority of advances to lenders.

Advances to Lenders –The carrying value for the majority of our advances to lenders approximates the fair value due to the short-term nature of the specific instruments. Other instruments include loans for which the carrying value does not approximate fair value. These loans are valued using collateral values of similar loans as a proxy.

Guaranty Obligations – The fair value of all guaranty obligations (“GO”), 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. We estimate the fair value of the GO using our internal GO valuation models, which calculate the present value of expected cash flows based on management's best estimate of certain key assumptions such as current mark-to-market LTV ratios, future house prices, default rates, severity rates and required rate of return. We further adjust the model values based on our current market pricing when such transactions reflect credit characteristics that are similar to our outstanding GO. While the fair value of the GO reflects all guaranty arrangements, the carrying value primarily reflects only those arrangements entered into subsequent to our adoption of the accounting standard on guarantor's accounting and disclosure requirements for guarantees.

We elected the fair value option for certain consolidated loans and debt instruments recorded in our condensed consolidated balance sheets as a result of consolidating VIEs. These instruments 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 the respective loan or debt instrument.

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 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 “Mortgage loans interest income” and interest expense for the debt instruments is recorded in “Long-term debt interest expense” in our condensed consolidated statements of operations and comprehensive loss.

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 June 30, 2011 and December 31, 2010.

	As of
	June 30, 2011						December 31, 2010
					Long-Term						Long-Term
	Loans of		Long-Term		Debt of		Loans of		Long-Term		Debt of
	Consolidated		Debt of		Consolidated		Consolidated		Debt of		Consolidated
	Trusts⁽¹⁾		Fannie Mae		Trusts⁽²⁾		Trusts⁽¹⁾		Fannie Mae		Trusts⁽²⁾
	(Dollars in millions)
Fair value	$	3,084	$	862	$	3,273	$	2,962	$	893	$	2,271
Unpaid principal balance		3,612		796		3,450		3,456		829		2,572

__________
⁽¹⁾	Includes nonaccrual loans with a fair value of $222 million and $219 million as of June 30, 2011 and December 31, 2010, respectively. The difference between unpaid principal balance and the fair value of these nonaccrual loans as of June 30, 2011 is $216 million. Includes loans that are 90 days past due with a fair value of $367 million and $369 million as of June 30, 2011 and December 31, 2010, respectively. The difference between unpaid principal balance and the fair value of these 90 or more days past due loans as of June 30, 2011 is $247 million.
⁽²⁾	Includes interest-only debt instruments with no unpaid principal balance and a fair value of $136 million and $151 million as of June 30, 2011 and December 31, 2010, respectively.

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 gains (losses), net” in our condensed consolidated statements of operations and comprehensive loss for the periods ended June 30, 2011 and 2010.

		For the Three Months Ended June 30,

		2011								2010
				Long-Term				Long-Term
		Loans		Debt		Total Gains		Debt
		(Dollars in millions)

Changes in instrument-specific credit risk		$	6	$	8	$	14	$	5
Other changes in fair value			76		(26)		50		1
	Fair value gains (losses), net	$	82	$	(18)	$	64	$	6

		For the Six Months Ended June 30,
		2011								2010
				Long-Term		Total Gains		Long-Term
		Loans		Debt		(Losses)		Debt
		(Dollars in millions)

Changes in instrument-specific credit risk		$	(211)	$	4	$	(207)	$	8
Other changes in fair value			141		7		148		(26)
	Fair value gains (losses), net	$	(70)	$	11	$	(59)	$	(18)

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 overall 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 overall 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 risk.