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 September 30, 2011 and December 31, 2010. Specifically, total assets measured at fair value on a recurring basis and classified as Level 3 were $36.2 billion, or 1% of “Total assets,” and $39.0 billion, or 1% of “Total assets,” in our condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010, respectively.

			Fair Value Measurements as of September 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⁾			$	1,150	$	5,000	$	-	$	-	$	6,150
Trading securities:
	Mortgage-related securities:
		Fannie Mae		-		5,668		1,861		-		7,529
		Freddie Mac		-		2,866		-		-		2,866
		Ginnie Mae		-		261		36		-		297
		Alt-A private-label securities		-		1,242		212		-		1,454
		Subprime private-label securities		-		-		1,318		-		1,318
		CMBS		-		10,600		-		-		10,600
		Mortgage revenue bonds		-		-		718		-		718
		Other		-		147		-		-		147
	Non-mortgage-related securities:
		U.S. Treasury securities		40,755		-		-		-		40,755
		Asset-backed securities		-		2,465		-		-		2,465
Total trading securities				40,755		23,249		4,145		-		68,149
Available-for-sale securities:
	Mortgage-related securities:
		Fannie Mae		-		18,441		797		-		19,238
		Freddie Mac		-		13,737		12		-		13,749
		Ginnie Mae		-		939		-		-		939
		Alt-A private-label securities		-		5,662		6,625		-		12,287
		Subprime private-label securities		-		-		7,887		-		7,887
		CMBS		-		14,390		-		-		14,390
		Mortgage revenue bonds		-		8		10,599		-		10,607
		Other		-		14		3,599		-		3,613
Total available-for-sale securities				-		53,191		29,519		-		82,710
Mortgage loans of consolidated trusts				-		1,077		2,284		-		3,361
Other assets:
	Risk management derivatives:
		Swaps		-		8,657		156		-		8,813
		Swaptions		-		6,898		-		-		6,898
		Interest rate caps		-		2		-		-		2
		Other		2		-		50		-		52
		Netting adjustment		-		-		-		(15,539)		(15,539)
	Mortgage commitment derivatives			-		476		21		-		497
Total other assets				2		16,033		227		(15,539)		723
		Total assets at fair value	$	41,907	$	98,550	$	36,175	$	(15,539)	$	161,093

			Fair Value Measurements as of September 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	$	-	$	439	$	-	$	-	$	439
		Senior floating		-		-		406		-		406
	Total of Fannie Mae			-		439		406		-		845
	Of consolidated trusts			-		3,112		728		-		3,840
Total long-term debt				-		3,551		1,134		-		4,685
Other liabilities:
	Risk management derivatives:
		Swaps		-		18,476		160		-		18,636
		Swaptions		-		3,311		-		-		3,311
		Other		4		-		-		-		4
		Netting adjustment		-		-		-		(18,372)		(18,372)
	Mortgage commitment derivatives			-		681		13		-		694
Total other liabilities				4		22,468		173		(18,372)		4,273
		Total liabilities at fair value	$	4	$	26,019	$	1,307	$	(18,372)	$	8,958

			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 as well as money market funds and certificate of deposits 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 nine months ended September 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 nine months ended September 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 September 30, 2011
																								Net Unrealized Gains (Losses) Included in Net Loss Related to Assets and Liabilities Still Held as of September 30, 2011⁽⁴⁾
						Total Gains or (Losses) (Realized/Unrealized)
				Balance, July 1, 2011		Included in Net Loss		Included in Other Comprehensive (Loss) Income		Purchases⁽¹⁾			Sales⁽¹⁾	Issuances⁽²⁾		Settlements⁽²⁾		Transfers out of Level 3⁽³⁾		Transfers into Level 3⁽³⁾		Balance, September 30, 2011
				(Dollars in millions)
Trading securities:
	Mortgage-related:
		Fannie Mae		$	1,679	$	19	$	-	$	322	$	(3)	$	-	$	(115)	$	(41)	$	-	$	1,861	$	41
		Ginnie Mae			-		-		-		-		-		-		-		-		36		36		-
		Alt-A private-label
			securities		126		7		-		-		-		-		(13)		(73)		165		212		10
		Subprime private-label
			securities		1,459		(96)		-		-		-		-		(45)		-		-		1,318		(95)
		Mortgage revenue bonds			616		105		-		-		-		-		(3)		-		-		718		106
		Other			154		(4)		-		-		-		-		(3)		(147)		-		-		-
Total trading securities				$	4,034	$	31	$	-	$	322	$	(3)	$	-	$	(179)	$	(261)	$	201	$	4,145	$	62

Available-for-sale securities:
	Mortgage-related:
		Fannie Mae		$	635	$	(1)	$	16	$	853	$	(344)	$	-	$	(9)	$	(374)	$	21	$	797	$	-
		Freddie Mac			12		-		-		-		-		-		(1)		-		1		12		-
		Alt-A private-label
			securities		6,652		(20)		(15)		-		-		-		(250)		(431)		689		6,625		-
		Subprime private-label
			securities		8,909		148		(484)		-		(363)		-		(323)		-		-		7,887		-
		Mortgage revenue bonds			10,464		(5)		429		-		(1)		-		(288)		-		-		10,599		-
		Other			3,707		(10)		9		-		-		-		(107)		-		-		3,599		-
Total available-for-sale
	securities			$	30,379	$	112	$	(45)	$	853	$	(708)	$	-	$	(978)	$	(805)	$	711	$	29,519	$	-

Mortgage loans of
	consolidated trusts			$	2,365	$	8	$	-	$	45	$	-	$	-	$	(101)	$	(56)	$	23	$	2,284	$	6
Net derivatives					79		118		-		-		-		(1)		(72)		(70)		-		54		33

Long-term debt:
	Of Fannie Mae:
		Senior floating		$	(402)	$	(74)	$	-	$	-	$	-	$	-	$	70	$	-	$	-	$	(406)	$	(74)
	Of consolidated trusts				(646)		1		-		-		4		(4)		18		35		(136)		(728)		6
Total long-term debt				$	(1,048)	$	(73)	$	-	$	-	$	4	$	(4)	$	88	$	35	$	(136)	$	(1,134)	$	(68)

				Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
				For the Nine Months Ended September 30, 2011
																								Net Unrealized Gains (Losses) Included in Net Loss Related to Assets and Liabilities Still Held as of September 30, 2011⁽⁴⁾
						Total Gains or (Losses) (Realized/Unrealized)
				Balance, December 31, 2010		Included in Net Loss		Included in Other Comprehensive (Loss) Income		Purchases⁽¹⁾			Sales⁽¹⁾	Issuances⁽²⁾		Settlements⁽²⁾		Transfers out of Level 3⁽³⁾		Transfers into Level 3⁽³⁾		Balance, September 30, 2011
				(Dollars in millions)
Trading securities:
	Mortgage-related:
		Fannie Mae		$	2,202	$	7	$	-	$	446	$	(18)	$	-	$	(344)	$	(432)	$	-	$	1,861	$	32
		Ginnie Mae			-		-		-		-		-		-		-		-		36		36		-
		Alt-A private-label
			securities		20		8		-		-		-		-		(14)		(73)		271		212		12
		Subprime private-label
			securities		1,581		(126)		-		-		-		-		(137)		-		-		1,318		(126)
		Mortgage revenue bonds			609		126		-		-		-		-		(17)		-		-		718		129
		Other			152		1		-		-		-		-		(6)		(147)		-		-		-
	Non-mortgage-related:
		Asset-backed securities			12		-		-		-		-		-		(5)		(9)		2		-		-
Total trading securities				$	4,576	$	16	$	-	$	446	$	(18)	$	-	$	(523)	$	(661)	$	309	$	4,145	$	47

Available-for-sale securities:
	Mortgage-related:
		Fannie Mae		$	114	$	(1)	$	28	$	1,742	$	(383)	$	-	$	(11)	$	(843)	$	151	$	797	$	-
		Freddie Mac			3		-		-		-		-		-		(1)		-		10		12		-
		Alt-A private-label
			securities		7,049		(19)		63		-		-		-		(725)		(1,495)		1,752		6,625		-
		Subprime private-label
			securities		9,932		408		(1,089)		-		(363)		-		(1,001)		-		-		7,887		-
		Mortgage revenue bonds			11,030		(8)		723		-		(107)		-		(1,039)		-		-		10,599		-
		Other			3,806		(7)		120		-		-		-		(320)		-		-		3,599		-
Total available-for-sale
	securities			$	31,934	$	373	$	(155)	$	1,742	$	(853)	$	-	$	(3,097)	$	(2,338)	$	1,913	$	29,519	$	-

Mortgage loans of
	consolidated trusts			$	2,207	$	38	$	-	$	102	$	-	$	-	$	(251)	$	(93)	$	281	$	2,284	$	28
Net derivatives					104		123		-		-		-		(2)		(101)		(70)		-		54		49

Long-term debt:
	Of Fannie Mae:
		Senior floating		$	(421)	$	(88)	$	-	$	-	$	-	$	-	$	103	$	-	$	-	$	(406)	$	(89)
	Of consolidated trusts				(627)		(28)		-		-		4		(44)		66		112		(211)		(728)		(11)
Total long-term debt				$	(1,048)	$	(116)	$	-	$	-	$	4	$	(44)	$	169	$	112	$	(211)	$	(1,134)	$	(100)

				Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
				For the Three Months Ended September 30, 2010
																		Net Unrealized Gains (Losses) Included in Net Loss Related to Assets and Liabilities Still Held as of September 30, 2010⁽⁴⁾
						Total Gains or (Losses) (Realized/Unrealized)				Purchases, Sales, Issuances, and Settlements, Net
				Balance, July 1, 2010		Included in Net Loss		Included in Other Comprehensive (Loss) Income		Purchases, Sales, Issuances, and Settlements, Net			Transfers out of Level 3⁽³⁾		Transfers into Level 3⁽³⁾		Balance, September 30, 2010
				(Dollars in millions)
Trading securities:
	Mortgage-related:
		Fannie Mae		$	58	$	(7)	$	-	$	80	$	(12)	$	1,925	$	2,044	$	(1)
		Freddie Mac			4		-		-		-		-		-		4		-
		Ginnie Mae			-		-		-		1		-		-		1		-
		Alt-A private-label
			securities		119		174		-		(11)		(24)		216		474		176
		Subprime private-label
			securities		1,645		(1)		-		(53)		-		-		1,591		(1)
		Mortgage revenue bonds			650		28		-		-		-		-		678		30
		Other			160		(2)		-		(3)		-		-		155		(2)
	Non-mortgage-related:
		Asset-backed securities			24		1		-		(10)		-		-		15		-
Total trading securities				$	2,660	$	193	$	-	$	4	$	(36)	$	2,141	$	4,962	$	202

Available-for-sale securities:
	Mortgage-related:
		Fannie Mae		$	53	$	-	$	-	$	65	$	(51)	$	11	$	78	$	-
		Freddie Mac			21		-		-		(14)		-		-		7		-
		Ginnie Mae			125		-		(1)		-		-		-		124		-
		Alt-A private-label
			securities		7,777		(59)		264		(259)		(490)		1,878		9,111		-
		Subprime private-label
			securities		10,255		(96)		183		(402)		-		-		9,940		-
		Mortgage revenue bonds			12,428		3		172		(369)		(2)		-		12,232		-
		Other			3,890		2		103		(119)		-		-		3,876		-
Total available-for-sale
	securities			$	34,549	$	(150)	$	721	$	(1,098)	$	(543)	$	1,889	$	35,368	$	-

Mortgage loans of consolidated
	trusts			$	-	$	(9)	$	-	$	62	$	-	$	-	$	53	$	(9)
Net derivatives					226		65		-		(69)		-		-		222		21
Guaranty assets and buy-ups					15		(1)		-		3		-		-		17		(2)
Long-term debt:
	Of Fannie Mae:
		Senior floating		$	(585)	$	(37)	$	-	$	155	$	-	$	-	$	(467)	$	(38)
	Of consolidated trusts				(105)		8		-		2		48		(22)		(69)		4
Total long-term debt				$	(690)	$	(29)	$	-	$	157	$	48	$	(22)	$	(536)	$	(34)

				Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
				For the Nine Months Ended September 30, 2010
																				Net Unrealized Gains (Losses) Included in Net Loss Related to Assets and Liabilities Still Held as of September 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 (Loss) Income		Purchases, Sales, Issuances, and Settlements, Net			Transfers out of Level 3⁽³⁾		Transfers into Level 3⁽³⁾		Balance, September 30, 2010
				(Dollars in millions)
Trading securities:
	Mortgage-related:
		Fannie Mae		$	5,656	$	(2)	$	(3)	$	-	$	(162)	$	(5,375)	$	1,930	$	2,044	$	(3)
		Freddie Mac			-		-		-		-		-		-		4		4		-
		Ginnie Mae			-		-		-		-		1		-		-		1		-
		Alt-A private-label
			securities		564		62		206		-		(59)		(613)		314		474		186
		Subprime private-label
			securities		1,780		-		(1)		-		(188)		-		-		1,591		(1)
		Mortgage revenue bonds			600		-		127		-		(49)		-		-		678		126
		Other			154		-		6		-		(5)		-		-		155		6
	Non-mortgage-related:
		Asset-backed securities			107		-		1		-		(59)		(47)		13		15		2
Total trading securities				$	8,861	$	60	$	336	$	-	$	(521)	$	(6,035)	$	2,261	$	4,962	$	316

Available-for-sale securities:
	Mortgage-related:
		Fannie Mae		$	596	$	(203)	$	(1)	$	4	$	147	$	(514)	$	49	$	78	$	-
		Freddie Mac			27		-		-		(1)		(25)		-		6		7		-
		Ginnie Mae			123		-		-		2		(1)		-		-		124		-
		Alt-A private-label
			securities		8,312		471		(40)		998		(934)		(2,746)		3,050		9,111		-
		Subprime private-label
			securities		10,746		(118)		(106)		768		(1,350)		-		-		9,940		-
		Mortgage revenue bonds			12,820		21		2		675		(1,284)		(2)		-		12,232		-
		Other			3,530		366		(4)		357		(373)		-		-		3,876		-
Total available-for-sale
	securities			$	36,154	$	537	$	(149)	$	2,803	$	(3,820)	$	(3,262)	$	3,105	$	35,368	$	-
Mortgage loans of
	consolidated trusts			$	-	$	-	$	(9)	$	-	$	62	$	-	$	-	$	53	$	(9)
Net derivatives					123		-		232		-		(128)		-		(5)		222		85
Guaranty assets and buy-ups					2,577		(2,568)		2		1		5		-		-		17		2
Long-term debt:
	Of Fannie Mae:
		Senior floating		$	(601)	$	-	$	(26)	$	-	$	160	$	-	$	-	$	(467)	$	(21)
	Of consolidated trusts				-		(77)		15		-		(36)		59		(30)		(69)		11
Total long-term debt				$	(601)	$	(77)	$	(11)	$	-	$	124	$	59	$	(30)	$	(536)	$	(10)

__________
⁽¹⁾	Purchases and sales include activity related to the consolidation and deconsolidation of assets of securitization trusts.
⁽²⁾	Issuances and settlements include activity related to the consolidation and deconsolidation of liabilities of securitization 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 Fannie Mae guaranteed mortgage-related securities and 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 nine months ended September 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 September 30, 2011
						Net
				Fair Value		Other-than-
		Interest		(Losses)		Temporary
		Income		Gains, net		Impairments			Other		Total

		(Dollars in millions)
Total realized and unrealized gains (losses) included
	in net loss	$	158	$	98	$	(62)	$	2	$	196
Net unrealized (losses) gains related to Level 3 assets
	and liabilities still held as of September 30, 2011	$	(1)	$	34	$	-	$	-	$	33

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

		(Dollars in millions)
Total realized and unrealized gains (losses) included
	in net loss	$	428	$	82	$	(85)	$	9	$	434
Net unrealized (losses) gains related to Level 3 assets
	and liabilities still held as of September 30, 2011	$	(2)	$	26	$	-	$	-	$	24

		For the Three Months Ended September 30, 2010
						Net
				Fair Value		Other-than-
		Interest		(Losses)		Temporary-
		Income		Gains, net		Impairments		Other		Total
		(Dollars in millions)
Total realized and unrealized gains (losses) included
	in net loss	$	70	$	222	$	(235)	$	12	$	69
Net unrealized gains (losses) related to Level 3 assets and
	liabilities still held as of September 30, 2010	$	-	$	180	$	-	$	(2)	$	178

		For the Nine Months Ended September 30, 2010
						Net
				Fair Value		Other-than-
		Interest		(Losses)		Temporary-
		Income		Gains, net		Impairments		Other		Total
		(Dollars in millions)
Total realized and unrealized gains (losses) included
	in net loss	$	282	$	547	$	(454)	$	26	$	401
Net unrealized gains related to Level 3 assets and
	liabilities still held as of September 30, 2010	$	-	$	382	$	-	$	2	$	384

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 nine months ended September 30, 2011 and 2010 as a result of fair value measurements.

												For the		For the
			Fair Value Measurements									Three Months Ended		Nine Months Ended
			For the Nine Months Ended September 30, 2011									September 30, 2011		September 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⁾	$	(3)	$	(16)
Single-family mortgage loans held for
	investment, at amortized cost:
		Of Fannie Mae		-		-		40,280		40,280	⁽²⁾		(1,045)		(2,125)
		Of consolidated trusts		-		-		885		885	⁽²⁾		(33)		(131)
Multifamily mortgage loans held for
	investment, at amortized cost:
		Of Fannie Mae		-		-		1,708		1,708	⁽²⁾		(183)		(291)
Acquired property, net:
	Single-family			-		-		17,642		17,642	⁽³⁾		(635)		(2,147)
	Multifamily			-		-		315		315	⁽³⁾		(32)		(81)
Other assets				-		-		1,138		1,138	⁽⁴⁾		(29)		(94)
	Total assets at fair value		$	-	$	2	$	62,172	$	62,174		$	(1,960)	$	(4,885)

												For the		For the
			Fair Value Measurements									Three Months Ended		Nine Months Ended
			For the Nine Months Ended September 30, 2010									September 30, 2010		September 30, 2010
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable		Estimated
			Assets		Inputs		Inputs		Fair			Total (Losses)		Total
			(Level 1)		(Level 2)		(Level 3)		Value			Gains		Losses
			(Dollars in millions)
Assets:
Mortgage loans held for sale, at
	lower of cost or fair value		$	-	$	6,884	$	550	$	7,434	⁽¹⁾⁽⁵⁾	$	(1)	$	(91)	⁽⁵⁾
Single-family mortgage loans held for
	investment, at amortized cost:
		Of Fannie Mae		-		-		27,329		27,329	⁽²⁾		(408)		(1,216)
		Of consolidated trusts		-		-		1,039		1,039	⁽²⁾		(79)		(182)
Multifamily mortgage loans held for
	investment, at amortized cost:
		Of Fannie Mae		-		-		1,132		1,132	⁽²⁾		95		(142)
Acquired property, net:
	Single-family			-		-		15,546		15,546	⁽³⁾		(768)		(1,772)
	Multifamily			-		-		196		196	⁽³⁾		(5)		(37)
Other Assets:
	Guaranty assets			-		-		28		28			(2)		(6)
	Partnership investments			-		-		109		109			(15)		(104)
	Other assets			-		-		51		51	⁽⁴⁾		(8)		(8)
	Total assets at fair value		$	-	$	6,884	$	45,980	$	52,864		$	(1,191)	$	(3,558)

__________

⁽¹⁾	Includes $72 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 September 30, 2011 and 2010, respectively.
⁽²⁾	Includes $5.7 billion and $1.6 billion of mortgage loans held for investment that were liquidated or transferred to foreclosed properties as of September 30, 2011 and 2010, respectively.
⁽³⁾	Includes $11.8 billion and $7.2 billion of acquired properties that were sold or transferred as of September 30, 2011 and 2010, respectively.
⁽⁴⁾	Includes $285 million and $4 million of other assets that were sold or transferred as of September 30, 2011 and 2010, respectively.
⁽⁵⁾	Includes $7.1 billion of estimated fair value and $68 million in losses due to the adoption of the new accounting standards.

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. 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 September 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
			September 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⁾			$	80,268	$	80,268	$	80,975	$	80,975
Federal funds sold and securities purchased
	under agreements to resell or similar arrangements			35,950		35,950		11,751		11,751
Trading securities				68,149		68,149		56,856		56,856
Available-for-sale securities				82,710		82,710		94,392		94,392
Mortgage loans held for sale				309		309		915		915
Mortgage loans held for investment, net of
	allowance for loan losses:
		Of Fannie Mae		329,848		303,953		358,698		319,367
		Of consolidated trusts		2,567,663		2,663,443		2,564,107		2,610,145
Mortgage loans held for investment				2,897,511		2,967,396		2,922,805		2,929,512
Advances to lenders				5,145		5,029		7,215		6,990
Derivative assets at fair value				723		723		1,137		1,137
Guaranty assets and buy-ups				480		858		458		814
Total financial assets			$	3,171,245	$	3,241,392	$	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			193,718		193,759		151,884		151,974
	Of consolidated trusts			5,004		5,004		5,359		5,359
Long-term debt:
	Of Fannie Mae			551,085		580,238		628,160		649,684
	Of consolidated trusts			2,441,969		2,588,550		2,411,597		2,514,929
Derivative liabilities at fair value				4,273		4,273		1,715		1,715
Guaranty obligations				765		3,920		769		3,854
Total financial liabilities			$	3,196,814	$	3,375,744	$	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 September 30, 2011 and December 31, 2010.

__________
⁽¹⁾	Includes nonaccrual loans with a fair value of $211 million and $219 million as of September 30, 2011 and December 31, 2010, respectively. The difference between unpaid principal balance and the fair value of these nonaccrual loans as of September 30, 2011 is $227 million. Includes loans that are 90 days past due with a fair value of $367 million and $369 million as of September 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 September 30, 2011 is $256 million.
⁽²⁾	Includes interest-only debt instruments with no unpaid principal balance and a fair value of $123 million and $151 million as of September 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 (losses) gains, net” in our condensed consolidated statements of operations and comprehensive loss for the periods ended September 30, 2011 and 2010.

		For the Three Months Ended September 30,

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

Changes in instrument-specific credit risk		$	27	$	8	$	35	$	(3)
Other changes in fair value			(30)		(79)		(109)		(44)
	Fair value losses, net	$	(3)	$	(71)	$	(74)	$	(47)

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

Changes in instrument-specific credit risk		$	(184)	$	12	$	(172)	$	5
Other changes in fair value			111		(72)		39		(70)
	Fair value losses, net	$	(73)	$	(60)	$	(133)	$	(65)

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.