Fannie Mae Earnings 2020-06-30

Balance Sheet	Income Statement	Cash Flow

fnm-20200630

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-50231

Federal National Mortgage Association

(Exact name of registrant as specified in its charter)

Fannie Mae

Federally chartered corporation

52-0883107

1100 15th Street, NW

800

232-6643

Washington,

20005

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

(Address of principal executive offices, including zip code)

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of June 30, 2020, there were 1,158,087,567 shares of common stock of the registrant outstanding.


TABLE OF CONTENTS
		Page
PART I—Financial Information			1
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	70
	Condensed Consolidated Statements of Operations and Comprehensive Income	71
	Condensed Consolidated Statements of Cash Flows	72
	Condensed Consolidated Statements of Changes in Equity (Deficit)	73
	Note 1—Summary of Significant Accounting Policies	75
	Note 2—Consolidations and Transfers of Financial Assets	83
	Note 3—Mortgage Loans	85
	Note 4—Allowance for Loan Losses	96
	Note 5—Investments in Securities	99
	Note 6—Financial Guarantees	102
	Note 7—Short-Term and Long-Term Debt	103
	Note 8—Derivative Instruments	104
	Note 9—Segment Reporting	107
	Note 10—Concentrations of Credit Risk	109
	Note 11—Netting Arrangements	113
	Note 12—Fair Value	114
	Note 13—Commitments and Contingencies	126
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
	Introduction	1
	Executive Summary	2
	Legislation and Regulation	6
	Key Market Economic Indicators	9
	Consolidated Results of Operations	13
	Consolidated Balance Sheet Analysis	24
	Retained Mortgage Portfolio	25
	Guaranty Book of Business	27
	Business Segments	28
	Single-Family Business	28
	Multifamily Business	48
	Liquidity and Capital Management	57
	Off-Balance Sheet Arrangements	62
	Risk Management	63
	Critical Accounting Policies and Estimates	65
	Impact of Future Adoption of New Accounting Guidance	66
	Forward-Looking Statements	66
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	128
Item 4.	Controls and Procedures	128
PART II—Other Information			130
Item 1.	Legal Proceedings	130
Item 1A.	Risk Factors	131
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	135
Item 3.	Defaults Upon Senior Securities	136
Item 4.	Mine Safety Disclosures	136
Item 5.	Other Information	136
Item 6.	Exhibits	137


Fannie Mae Second Quarter 2020 Form 10-Q									i


						MD&A \| Introduction

PART I—FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



			We have been under conservatorship, with the Federal Housing Finance Agency (“FHFA”) acting as conservator, since September 6, 2008. As conservator, FHFA succeeded to all rights, titles, powers and privileges of the company, and of any shareholder, officer or director of the company with respect to the company and its assets. The conservator has since provided for the exercise of certain authorities by our Board of Directors. Our directors do not have any fiduciary duties to any person or entity except to the conservator and, accordingly, are not obligated to consider the interests of the company, the holders of our equity or debt securities, or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator.
			We do not know when or how the conservatorship will terminate, what further changes to our business will be made during or following conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated or whether we will continue to exist following conservatorship. The U.S. Department of the Treasury (“Treasury”) released a plan in September 2019 for housing finance reform (the “Treasury plan”) that includes recommendations related to ending our conservatorship. Congress and the Administration continue to consider options for reform of the housing finance system, including Fannie Mae. We are not permitted to retain more than $25 billion in capital reserves or to pay dividends or other distributions to stockholders other than Treasury. Our agreements with Treasury include covenants that significantly restrict our business activities. For additional information on the conservatorship, the uncertainty of our future, our agreements with Treasury, and recent developments relating to housing finance reform, see “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” in our Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”), “Risk Factors” in our 2019 Form 10-K and in this report, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations (‘MD&A’)—Legislation and Regulation” in this report.

You should read this MD&A in conjunction with our unaudited condensed consolidated financial statements and related notes in this report and the more detailed information in our 2019 Form 10-K. You can find a “Glossary of Terms Used in This Report” in our 2019 Form 10-K.

Forward-looking statements in this report are based on management’s current expectations and are subject to significant uncertainties and changes in circumstances, as we describe in “Forward-Looking Statements.” Future events and our future results may differ materially from those reflected in our forward-looking statements due to a variety of factors, including those discussed in “Risk Factors” and elsewhere in this report and in our 2019 Form 10-K.

Introduction

Fannie Mae is a leading source of financing for mortgages in the United States. Our revenues are primarily driven by guaranty fees we receive for managing the credit risk on loans underlying the mortgage-backed securities we issue. Our mission is to provide a stable source of liquidity to support housing in the U.S. for low- and moderate-income borrowers and renters. We operate in the secondary mortgage market, primarily working with lenders, who originate loans to borrowers. We do not originate loans or lend money directly to borrowers in the primary mortgage market. Instead, we securitize mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee (which we refer to as Fannie Mae MBS or our MBS); purchase mortgage loans and mortgage-related securities, primarily for securitization and sale at a later date; manage mortgage credit risk; and engage in other activities that support access to credit and the supply of affordable housing.

Through our single-family and multifamily business segments, we provided $575.4 billion in liquidity to the mortgage market in the first half of 2020, which enabled the financing of approximately 2.3 million home purchases, refinancings or rental units.

Fannie Mae Provided $575.4 Billion in Liquidity in the First Half of 2020

Unpaid Principal Balance

Units

$161.0B

593K

Single-Family Home Purchases

$380.7B

1.3M

Single-Family Refinancings

$33.7B

373K

Multifamily Rental Units


Fannie Mae Second Quarter 2020 Form 10-Q									1


						MD&A \| Executive Summary

Executive Summary

Summary of Our Financial Performance

The decrease in our net income in the second quarter of 2020, compared with the second quarter of 2019, was primarily driven by a shift from credit-related income to credit-related expense due to the economic dislocation caused by the COVID-19 pandemic, partially offset by an increase in net interest income due to higher loan prepayments as a result of the historically low interest rate environment. Our net interest income for the second quarter of 2020 was also impacted by an update to our application of our accounting policy for nonaccrual loans that allowed us to continue accruing interest income on delinquent loans that were current at March 1, 2020 and have been negatively impacted by the COVID-19 pandemic. As a result of this update, we recognized $1.5 billion in net interest income related to these loans in the second quarter. See “Consolidated Results of Operations” for more information on our financial results and “Note 1, Summary of Significant Accounting Policies—New Accounting Guidance” for more information about our policy for nonaccrual loans.

The decrease in our net income in the first half of 2020, compared with the first half of 2019, was primarily driven by a shift from credit-related income to credit-related expense driven by the economic dislocation caused by the COVID-19 pandemic, partially offset by an increase in net interest income due to higher loan prepayments as a result of the historically low interest rate environment. Our net interest income in the first half of 2020 was also impacted by our recognition in the second quarter of $1.5 billion in net interest income as a result of the update in our application of our policy for nonaccrual loans.


Fannie Mae Second Quarter 2020 Form 10-Q									2


						MD&A \| Executive Summary

Net worth. Our net worth was $16.5 billion as of June 30, 2020. This amount reflects:

•our net worth of $14.6 billion as of December 31, 2019;

•a reduction in our net worth of $663 million in the first quarter of 2020 driven by a charge of $1.1 billion to retained earnings due to our implementation of Accounting Standards Update 2016-13, Financial Instruments—Credit Losses, Measurement of Credit Losses on Financial Instruments and related amendments (the “CECL standard”) on January 1, 2020, partially offset by comprehensive income of $476 million in the first quarter of 2020; and

•our comprehensive income of $2.5 billion in the second quarter of 2020.

See “Note 1, Summary of Significant Accounting Policies—New Accounting Guidance—The Current Expected Credit Loss Standard” for further details.

Changes in our net worth can be significantly impacted by market conditions that affect our net interest income; fluctuations in the estimated fair value of our derivatives and other financial instruments that we mark to market through our earnings; developments that affect our loss reserves, such as changes in interest rates, home prices or accounting standards, or events such as natural disasters or pandemics; and other factors, as we discuss in “Risk Factors” and “Consolidated Results of Operations” in our 2019 Form 10-K and in this report.

Financial performance. Our long-term financial performance will depend on many factors, including:

•the size of and our share of the U.S. mortgage market, which in turn will depend upon macroeconomic factors such as population growth, household formation and housing supply;

•borrower performance and changes in macroeconomic factors, including home prices and interest rates; and

•actions by FHFA, the Administration and Congress relating to our business and housing finance reform, including the capital requirements that will be applicable to us, our ongoing financial obligations to Treasury, potential restrictions on our activities and our business footprint, our competitive environment, and actions we are required to take to support borrowers or the mortgage market.

Quarterly fluctuations in acquisition volumes, market share, guaranty fees, or acquisition credit characteristics in any one period typically have limited impact on the size and stability of our conventional guaranty book of business and the associated revenue, profitability, and credit quality. Only a portion of our guaranty book of business turns over each year. In eight of the past ten years, less than 20% of loans in our single-family conventional guaranty book of business held at year end had been originated during the year. Low mortgage rates have contributed to a significant amount of refinancing activity in the first six months of 2020. As a result, we acquired a higher-than-usual portion of our book of business during the first half of the year, with approximately 15% of the loans in our single-family conventional guaranty book of business as of June 30, 2020 originated in the first half of 2020. Because we expect mortgage rates to remain low through 2021, we anticipate a large and growing portion of our book of business, originated in a historically-low-interest-rate environment, will have less incentive to refinance, slowing the pace at which loans in our book of business turn over in future years. A slower turnover rate in our book of business would reduce our ability to increase our revenues by increasing guaranty fees, as any such change would take longer to meaningfully increase the average charged guaranty fee on our total book of business. See “Legislation and Regulation—Developments Relating to Exiting Conservatorship” for a discussion of how this may impact our efforts to generate capital and “Consolidated Results of Operations—Net Interest Income” for information on how this may affect amortization income we receive in future periods.

As described further in “COVID-19 Impact” and “Risk Factors,” the COVID-19 pandemic has significantly affected our financial performance and we expect that it will continue to do so. Given the unprecedented nature of the COVID-19 pandemic and the fast pace at which new developments relating to the pandemic are occurring, it is difficult to assess or predict the short-term or long-term effects of the pandemic on our financial performance.


Fannie Mae Second Quarter 2020 Form 10-Q									3


						MD&A \| Executive Summary

Net Worth, Treasury Funding and Senior Preferred Stock Dividends

Treasury has made a commitment under a senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. Pursuant to the senior preferred stock purchase agreement, we issued shares of senior preferred stock to Treasury in 2008.

Under the terms of the senior preferred stock, we will not owe senior preferred stock dividends to Treasury until we have accumulated over $25 billion in net worth as of the end of a quarter. Accordingly, no dividends were payable to Treasury for the second quarter of 2020, and none are payable for the third quarter of 2020.

The charts below show information about our net worth, the remaining amount of Treasury’s funding commitment to us, senior preferred stock dividends we have paid Treasury and funds we have drawn from Treasury pursuant to its funding commitment.

⁽¹⁾Aggregate amount of dividends we have paid to Treasury on the senior preferred stock from 2008 through June 30, 2020. Under the terms of the senior preferred stock purchase agreement, dividend payments we make to Treasury do not offset our draws of funds from Treasury.

⁽²⁾Aggregate amount of funds we have drawn from Treasury pursuant to the senior preferred stock purchase agreement from 2008 through June 30, 2020.

The aggregate liquidation preference of the senior preferred stock was $135.4 billion as of June 30, 2020, unchanged from March 31, 2020 as a result of the decrease in our net worth during the first quarter of 2020. The aggregate liquidation preference of the senior preferred stock will increase to $138.0 billion as of September 30, 2020 due to the $2.5 billion increase in our net worth during the second quarter of 2020.

If we were to draw additional funds from Treasury under the senior preferred stock purchase agreement with respect to a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw, and the aggregate liquidation preference of the senior preferred stock would increase by the amount of our draw. For a description of the terms of the senior preferred stock purchase agreement and the senior preferred stock, see “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” in our 2019 Form 10-K.

Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock. Treasury has also made a commitment under the senior preferred stock purchase agreement to provide us with funds to maintain a positive net worth under specified conditions. However, the U.S. government does not guarantee our securities or other obligations.

COVID-19 Impact

In March 2020, President Trump declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic in the United States has resulted in stay-at-home orders, school closures and widespread business shutdowns across the country. Although business activity has begun to resume to varying degrees, the speed and nature of the resumption of economic activity remains highly uncertain.

The pandemic continues to have a significant impact on our business and on our financial results. We provide a brief overview below of the economic impact of the pandemic, our response to it, and the pandemic’s impact on our business and financial results, with references to where these items are discussed in more detail in this report. We also highlight below the many uncertainties relating to the impact of the COVID-19 pandemic on Fannie Mae and the housing market.


Fannie Mae Second Quarter 2020 Form 10-Q									4


						MD&A \| Executive Summary

Economic Impact

The COVID-19 pandemic caused substantial financial market volatility and has significantly adversely affected both the U.S. and global economies. While state and local governments throughout the country have taken steps to re-open their economies, lifting shut-down and stay-at-home orders to varying degrees, a number of states and local governments are slowing or pausing their re-openings, or imposing new shut-down orders, as the daily number of new cases of COVID-19 has continued to reach new highs. The extensive shutdowns and other reductions in business activity across the country and globally, including those resulting from individuals and households seeking to avoid infection, have substantially increased unemployment from pre-pandemic levels. The federal government has taken many actions to reduce the negative economic impact of the COVID-19 pandemic. For example, the Federal Reserve lowered the federal funds rate and increased its purchases of Treasury and mortgage-backed securities, is purchasing corporate debt securities, and established and expanded liquidity facilities to support the flow of credit to consumers and businesses. In addition, the federal government passed legislation increasing and expanding unemployment benefits, providing direct cash payments to eligible taxpayers, and allocating funds to assist businesses, states, and municipalities.

The disruption caused by the pandemic differs from previous economic downturns because of the high level of uncertainty related to the health and safety of consumers and workers. We expect the path and timing of economic recovery will be impacted by the rate of new COVID-19 cases and the associated mortality rates. We believe that economic recovery depends on the stable return of consumer spending, increased business activity, and a reduction in unemployment, all of which impact the ability of borrowers and renters to make their monthly payments. Government support, as described above, has played a role in helping to reduce the negative economic impact of the pandemic with direct funding provided to affected households and businesses. Absent additional government action, some of these programs are ending, including the $600 weekly addition to unemployment benefits, which expires at the end of July. The ultimate impact of these programs expiring and the extent to which existing and future government actions will mitigate the negative impacts of COVID-19 on the U.S. economy and our business is unclear. The pandemic resulted in a contraction in U.S. gross domestic product (“GDP”) for the first half of 2020 and could result in future declines in or a sustained drop in the level of U.S. economic activity. See “Key Market Economic Indicators” for information on macroeconomic conditions during the first half of 2020 and our current forecasts regarding future macroeconomic conditions.

Fannie Mae Response

We are taking a number of actions to help borrowers, renters, lenders and servicers manage the negative impact of the COVID-19 pandemic, including providing payment forbearance (that is, a temporary suspension of the borrower’s monthly mortgage payments) to single-family and multifamily borrowers with COVID-19-related financial hardships, suspending foreclosure-related activities, providing lenders and servicers temporary flexibilities for certain of our Selling Guide and Servicing Guide requirements, and providing liquidity to lenders by purchasing a higher-than-usual volume of loans through our whole loan conduit. We have also taken steps to mitigate the risk to Fannie Mae from the impacts of the pandemic. See “Single-Family Business—Single-Family Mortgage Credit Risk Management” and “Multifamily Business—Multifamily Mortgage Credit Risk Management” for more information on the actions we are taking in response to the COVID-19 pandemic.

We have also taken steps to protect the safety and resiliency of our workforce. We have required nearly all of our workforce to work remotely since mid-March and continue to assess when it will be safe for employees to return to the office. To date, our business resiliency plans and technology systems have effectively supported this company-wide telework arrangement.

Impact on our Business and Financial Results

The economic dislocation caused by the COVID-19 pandemic was the primary driver of the decline in our net income in the first half of 2020, as compared with the first half of 2019. We significantly increased our allowance for loan losses in the first quarter of 2020 to reflect our expected loan losses as a result of the pandemic, which resulted in substantial credit-related expenses. We expect the impact of the pandemic to continue to negatively affect our financial results, contributing to lower net income in 2020 than in 2019. We could also have net losses in future periods. In addition, we expect the pandemic to negatively affect our returns on capital under FHFA’s conservatorship capital requirements. See “Consolidated Results of Operations,” “Single-Family Business” and “Multifamily Business” for more information on our financial results for the second quarter and first half of 2020.

We did not enter into credit risk transfer transactions in the second quarter of 2020 due to continuing adverse market conditions as a result of the COVID-19 pandemic. Although market conditions have improved, we currently do not have plans to engage in additional credit risk transfer transactions as we evaluate FHFA’s recently re-proposed capital rule, which would reduce the amount of capital relief we obtain from these transactions. We will continue to review our plans, which may be affected by our evaluation of the proposed capital rule and changes in the rule as it is finalized, our progress in meeting FHFA’s 2020 conservatorship scorecard, the strength of future market conditions, and our review of our overall business and capital plan to enable us to exit conservatorship. See “Legislation and Regulation” for more information on FHFA’s proposed capital rule. See “Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk” and “Multifamily Business—Multifamily Mortgage Credit Risk Management—Transfer of Multifamily Mortgage Credit Risk” for more information about our credit-risk transfer activity.


Fannie Mae Second Quarter 2020 Form 10-Q									5


						MD&A \| Executive Summary

Also see “Retained Mortgage Portfolio,” “Liquidity and Capital Management” and “Risk Management” for discussions of the impact of the COVID-19 pandemic on our business.

Risks and Uncertainties

Our current forecasts and expectations relating to the impact of the COVID-19 pandemic are subject to many uncertainties and may change, perhaps substantially. It is difficult to assess or predict the impact of this unprecedented event on our business, financial results or financial condition. Factors that will impact the extent to which the COVID-19 pandemic affects our business, financial results and financial condition include: the duration, spread and severity of COVID-19 outbreaks; the actions taken to contain the virus or treat its impact, including government actions to mitigate the economic impact of the pandemic; the extent to which consumers, workers and families feel safe resuming business activities and school; the nature and extent of the forbearance, modification, and other loss mitigation options borrowers affected by the pandemic obtain from us; accounting elections and estimates relating to the impact of the COVID-19 pandemic; borrower and renter behavior in response to the pandemic and its economic impact; how quickly and to what extent normal economic and operating conditions can resume, including whether any future outbreaks interrupt economic recovery; and how quickly and to what extent affected borrowers, renters and counterparties can recover from the negative economic impact of the pandemic. See “Risk Factors” for a discussion of the risks to our business, financial results and financial condition relating to the COVID-19 pandemic. See “Forward-Looking Statements” for a discussion of factors that could cause actual conditions, events or results to differ materially from those described in our forecasts, expectations and other forward-looking statements in this report.

Legislation and Regulation

The information in this section updates and supplements information regarding legislative and regulatory developments affecting our business set forth in “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” and “Business—Charter Act and Regulation” in our 2019 Form 10-K, as well as in “MD&A—Legislation and Regulation” in our Form 10-Q for the quarter ended March 31, 2020 (“First Quarter 2020 Form 10-Q”). Also see “Risk Factors” in this report and in our 2019 Form 10-K for discussions of risks relating to legislative and regulatory matters.

Developments Relating to Exiting Conservatorship

In September 2019, Treasury released a plan recommending reforms to the housing finance system, including recommendations relating to ending our conservatorship. The Treasury plan contemplates FHFA ending the conservatorships of each of Fannie Mae and Freddie Mac (the “GSEs”) when the GSE has met specified preconditions. As described below, FHFA and we took key steps during the second quarter of 2020 in connection with these preconditions through FHFA’s proposal of a new regulatory capital framework for the GSEs and our hiring of a financial advisor to assist us in planning the company’s recapitalization and exit from conservatorship.

Proposed Capital Framework

On May 20, 2020, FHFA released a proposed new regulatory capital framework for the GSEs. The proposed framework is expected to require us to hold significantly more capital than the rule FHFA first proposed in June 2018. The proposed rule includes a mortgage-risk-sensitive framework, similar to the 2018 proposal, but differs from the 2018 proposal in a number of ways, including the following:

•The proposed rule includes supplemental capital requirements relating to the amount and form of the capital we hold, based on definitions of capital used in U.S. banking regulators’ regulatory capital framework. The proposal specifies complementary leverage-based and risk-based requirements, which together determine the requirements for each tier of capital;

•The proposed rule requires us to hold capital buffers that can be drawn down in periods of financial stress and then rebuilt over time as economic conditions improve. If we fall below the prescribed buffer amounts, we must restrict capital distributions such as stock repurchases and dividends, as well as discretionary bonus payments to executives, until the buffer amounts are restored;

•The proposed rule provides less capital relief for credit risk transfer activities than the 2018 proposal;

•The proposed rule imposes specific minimum percentages, or “floors,” on the risk-weight applicable to single-family and multifamily exposures, as well as to retained portions of credit risk transfer transactions; and

•The proposed rule incorporates additional elements based on U.S. banking regulators’ regulatory capital framework, including the introduction of the advanced approach to complement the standardized approach for measuring risk-weighted assets.

The capital requirements and buffers established by the proposed rule would have a delayed compliance date, unless adjusted by FHFA, of the later of one year from publication of the final rule or the date our conservatorship terminates.


Fannie Mae Second Quarter 2020 Form 10-Q									6


			MD&A \| Legislation and Regulation

We continue to study the proposed capital rule and its potential impact on Fannie Mae and the housing market. Comments on the proposed capital rule are due by August 31, 2020. We do not yet know what changes FHFA may make to the capital rule before it is finalized or when it will be finalized. We expect that the final capital rule will have a significant impact on our business. For example, actions we take to maintain appropriate risk-adjusted returns could adversely affect our competitive position. Approximately 15% of the loans in our single-family conventional guaranty book of business as of June 30, 2020 were originated in the first half of 2020. Once loans have refinanced to current low rates, they are less likely to refinance in the future, which reduces our opportunity to adjust our guaranty fees on these loans in support of our efforts to generate capital.

See “Business—Charter Act and Regulation—GSE Act and Other Legislation—Capital” in our 2019 Form 10-K for information about capital requirements under the current rule and while we are under conservatorship.

Selection of Financial Advisor to Assist with Recapitalization Plan

In June 2020, we hired Morgan Stanley & Co. LLC as underwriting financial advisor to assist us in developing and implementing a plan for recapitalizing the company and responsibly ending our conservatorship. Our advisor is working closely with us, FHFA, and Treasury to consider business and capital structures, market impacts and timing, and available capital-raising alternatives, among other items.

Proposed Replacement for the Qualified Mortgage Patch

The Consumer Financial Protection Bureau’s (the “CFPB’s”) “ability-to-repay” rule under the Truth in Lending Act includes a general “qualified mortgage” definition, and an exception to that definition referred to as the qualified mortgage “patch,” pursuant to which conventional mortgage loans are considered qualified mortgages if they (1) meet certain qualified mortgage requirements generally and (2) are eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac operating under the conservatorship or receivership of FHFA. The qualified mortgage patch is currently scheduled to expire on the earlier of January 10, 2021 or the exit of the GSEs from conservatorship. In June 2020, the CFPB proposed to eliminate the qualified mortgage patch and revise the general qualified mortgage definition. Under the proposal, a loan would no longer need to meet a maximum debt-to-income ratio of 43% and requirements in Appendix Q to the rule to be considered a qualified mortgage. Qualified mortgage status would instead be determined using a priced-based approach along with consideration and verification of the borrower’s income, assets and debts. The CFPB also proposed in June to delay the expiration of the qualified mortgage patch until its replacement becomes effective or when Fannie Mae and Freddie Mac cease to be in conservatorship or receivership, whichever occurs first.

State and Local Government Responses to COVID-19

Many states and localities have issued executive orders and are considering or have enacted legislation requiring mortgage forbearance, foreclosure and eviction moratoriums, and rent flexibilities. The terms of these new and proposed requirements vary significantly in duration and scope, with some providing borrower or renter relief that goes beyond the scope of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), an economic stimulus bill enacted by Congress in March 2020 that contains a number of provisions aimed at providing relief for borrowers and renters experiencing financial hardship caused by the COVID-19 pandemic. Actions taken by federal, state or local lawmakers to provide additional relief to borrowers and renters during the COVID-19 outbreak, depending on their scope and whether and to what extent they apply to our business, could have a material adverse effect on our business and financial results.

Proposed 2021 Housing Goals and Temporary Adjustments to Duty to Serve Program

In July 2020, FHFA published proposed single-family and multifamily housing goals for Fannie Mae and Freddie Mac for 2021. In the past, FHFA has proposed housing goals for a three-year period, but due to the COVID-19 pandemic and associated economic uncertainty, FHFA proposed benchmark levels for only the 2021 calendar year. Under FHFA’s proposed rule, the benchmark levels for our single-family and multifamily housing goals would remain the same as those currently applicable for 2020. Comments on the proposed rule are due in September 2020. FHFA will issue a final rule after considering the comments received on the proposed rule.

Also in response to the disruption and uncertainty caused by the pandemic, in July 2020 FHFA approved temporary adjustments to our duty-to-serve obligations. As a result, the duty-to-serve plan we submit in September 2020 will extend our current plan by one year, so that it covers 2018 to 2021, rather than covering 2021 to 2023 in a new plan. FHFA expects our next proposed three-year plan, which will be due to FHFA in May 2021, will cover 2022 to 2024. In addition, FHFA provided guidance clarifying how FHFA will take into account market conditions when evaluating our 2020 and 2021 achievements under our duty-to-serve plan.


Fannie Mae Second Quarter 2020 Form 10-Q									7


			MD&A \| Legislation and Regulation

Possible Designation of Secondary Mortgage Market Activities as Systemically Important

In December 2019, the Financial Stability Oversight Counsel (the “FSOC”) finalized new interpretive guidance on designating nonbank financial companies as systemically important financial institutions. The guidance implemented an “activities-based” approach to identifying and addressing potential risks to financial stability, providing for entity-specific designations only if a potential risk cannot adequately be addressed through an activities-based approach. In July 2020, the FSOC announced that it will begin an activities-based review of the secondary mortgage market to assess both the risk that activities in the secondary mortgage market pose to the stability of the financial system and the efficacy of various risk mitigants. If the FSOC designates us as a systemically important financial institution following this review, we would become subject to additional regulation and oversight by the Federal Reserve Board. See “Risk Factors” in our 2019 Form 10-K for discussions of our uncertain future and how regulatory actions could negatively impact our business, results of operations, financial condition or net worth.

Swap Transactions; Minimum Capital and Margin Requirements

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are required to submit new swap transactions for clearing to a derivatives clearing organization. Additionally, in October 2015, an inter-agency body of regulators issued a final rule under the act governing margin and capital requirements applicable to entities that are subject to their oversight. The rule is effective in two phases and each phase requires that we implement operational changes and changes relating to the collateral we collect and provide for swap transactions. The first phase of the rule became effective in 2017. Effectiveness of the second phase of the rule was scheduled for September 2020, but was delayed in June 2020 to September 2021 in light of exigent circumstances caused by the COVID-19 pandemic. This phase will require additional operational changes and changes to collateral requirements, which may increase the costs associated with hedging our retained mortgage portfolio.

Transition from LIBOR to Alternative Reference Rates

We continue working with the Alternative Reference Rates Committee (the “ARRC”), FHFA, Freddie Mac, and other industry participants on a process to replace LIBOR by the end of 2021. In May 2020, we announced that we will cease issuing LIBOR-indexed Single-Family and Multifamily Connecticut Avenue Securities^® (“CAS”) products by the end of the fourth quarter of 2020. We expect that any CAS products we issue after that time would be based on the Secured Overnight Financing Rate (“SOFR”). We also announced that we expected to begin offering SOFR-indexed Real Estate Mortgage Investment Conduit securities (“REMICs”) and interest-only and principal-only strip securities (“SMBS”) beginning in July 2020, and that we will cease issuing new LIBOR-indexed REMICs and SMBS no later than September 30, 2020.

Working with FHFA, in May 2020 we also jointly published with Freddie Mac a LIBOR transition playbook and issued frequently asked questions (“FAQs”) that provide answers regarding Fannie Mae’s and Freddie Mac’s transition away from LIBOR-indexed products to SOFR-indexed products. Fannie Mae and Freddie Mac also each launched a LIBOR transition web page that serves as a resource for lenders, servicers, investors and vendors to access key updates and information during the shift from LIBOR to alternative reference rates.


Fannie Mae Second Quarter 2020 Form 10-Q									8


			MD&A \| Key Market Economic Indicators

Key Market Economic Indicators

The COVID-19 pandemic has had a significant adverse effect on both the U.S. and global economies. Below we discuss how varying macroeconomic conditions can influence our financial results across different business and economic environments. See “Executive Summary—COVID-19 Impact” for additional information on the effects of the pandemic on the economy and the uncertainty associated with its ultimate impact on our business and financial results.

Our forecasts and expectations relating to the impact of the COVID-19 pandemic are subject to many uncertainties and may change, perhaps substantially, from our current forecasts and expectations.

Selected Benchmark Interest Rates

⁽¹⁾According to Bloomberg.

⁽²⁾Refers to the U.S. weekly average fixed-rate mortgage rate according to Freddie Mac's Primary Mortgage Market Survey^®. These rates are reported using the latest available data for a given period.

How interest rates can affect our financial results

•Net interest income. In a rising interest-rate environment, our mortgage loans tend to prepay more slowly, which typically results in lower net amortization income from cost basis adjustments on mortgage loans and related debt. Conversely, in a declining interest-rate environment, our mortgage loans tend to prepay faster, typically resulting in higher net amortization income from cost basis adjustments on mortgage loans and related debt.

•Fair value gains (losses). We have exposure to fair value gains and losses resulting from changes in interest rates, primarily through our mortgage commitment derivatives and risk management derivatives, which we mark to market through earnings. Fair value gains and losses on our mortgage commitment derivatives fluctuate depending on how interest rates and prices move between the time the commitment is opened and settled. The net position and composition across the yield curve of our risk management derivatives changes over time. As a result, interest rate changes (increases or decreases) and yield curve changes (parallel, steepening or flattening shifts) will generate varying amounts of fair value gains or losses in a given period. We are preparing to implement hedge accounting to reduce the impact of interest-rate volatility on our financial results. For additional information on the expected impact of hedge accounting, see “Consolidated Results of Operations—Fair Value Losses, Net.”

•Credit-related income (expense). Increases in mortgage interest rates tend to lengthen the expected lives of our loans, which generally increases the expected impairment and provision for credit losses on such loans. Decreases in mortgage interest rates tend to shorten the expected lives of our loans, which reduces the impairment and provision for credit losses on such loans.


Fannie Mae Second Quarter 2020 Form 10-Q									9


			MD&A \| Key Market Economic Indicators

Single-Family Quarterly Home Price Growth Rate⁽¹⁾

⁽¹⁾Calculated internally using property data on loans purchased by Fannie Mae, Freddie Mac, and other third-party home sales data. Fannie Mae’s home price index is a weighted repeat transactions index, measuring average price changes in repeat sales on the same properties. Fannie Mae’s home price index excludes prices on properties sold in foreclosure. Fannie Mae’s home price estimates are based on preliminary data and are subject to change as additional data become available.

How home prices can affect our financial results

•Actual and forecasted home prices impact our provision or benefit for credit losses.

•Changes in home prices affect the amount of equity that borrowers have in their homes. Borrowers with less equity typically have higher delinquency and default rates.

•As home prices increase, the severity of losses we incur on defaulted loans that we hold or guarantee decreases because the amount we can recover from the properties securing the loans increases. Decreases in home prices increase the losses we incur on defaulted loans.

•Home prices in the second quarter of 2020 remained relatively strong despite the COVID-19 pandemic. We believe home prices benefited from continuing low levels of supply and high levels of demand due to historically low interest rates, particularly from first-time homebuyers, and a greater contraction in supply than in demand since the start of the pandemic. Higher-than-expected increases in supply or decreases in demand could lead to substantial decreases in home prices.

•We currently expect home prices on a national basis to moderate slightly to 4.4% growth in 2020, compared with the 4.8% home price growth rate in 2019. Our current expectations for home price growth in 2020 have increased significantly from our first-quarter estimate of near-zero growth for the year. This improvement in our 2020 home price growth forecast is due to better-than-expected home sales data in the first half of the year. However, we have adjusted downward our longer-term projection of home price growth as we believe there may be a delayed response in home prices due to the ongoing economic and labor market weaknesses caused by the pandemic. We also expect significant regional variation in the timing and rate of home price growth.

•Our forecasts and expectations relating to the impact of the COVID-19 pandemic are subject to many uncertainties and may change, perhaps substantially, from our current forecasts and expectations. For example, home price growth could slow and potentially decline if GDP growth is weaker than we currently expect, unemployment, particularly among existing homeowners and potential new home buyers, is higher than we expect, or if the housing market is more sensitive to economic and labor-market weaknesses than we expect. For further discussion on housing activity, see “Single-Family Business—Single-Family Mortgage Market” and “Multifamily Business—Multifamily Mortgage Market.”


Fannie Mae Second Quarter 2020 Form 10-Q									10


			MD&A \| Key Market Economic Indicators

New Housing Starts⁽¹⁾

⁽¹⁾According to U.S. Census Bureau and subject to revision.

How housing activity can affect our financial results

•Two key aspects of economic activity that can impact supply and demand for housing and thus mortgage lending are the rate of household formation and new housing construction.

•Household formation is a key driver of demand for both single-family and multifamily housing. A newly formed household will either rent or purchase a home. Thus, changes in the pace of household formation can affect prices and credit performance as well as the degree of loss on defaulted loans.

•Growth of household formation stimulates homebuilding. Homebuilding has typically been a cyclical leader of broader economic activity contributing to the growth of GDP and to employment. Residential construction activity has historically been a leading indicator, weakening prior to a slowdown in U.S. economic activity and accelerating prior to a recovery. However, the 2008-2009 recession was significantly impacted by real estate and real estate finance. Therefore, various policy responses were targeted to real estate and real estate finance, potentially altering the cyclical performance of the real estate sector. Due to the adverse nature of the current economic situation, the housing sector’s performance may vary from its historical precedent.

•In light of the uncertainties surrounding the effects of the COVID-19 pandemic and its impact on the economy, home sales fell sharply in the second quarter; however, we expect a partial rebound in the third quarter as purchase demand is supported by the low mortgage-rate environment. This trend is expected to increase single-family housing starts in the third quarter, though we still expect full-year 2020 single-family housing starts to decline.

•A decline in housing starts results in fewer new homes being available for purchase and potentially a lower volume of mortgage originations. Construction activity can also affect credit losses. If the growth of demand exceeds the growth of supply, prices will appreciate and impact the risk profile of newly originated home purchase mortgages, depending on where in the housing cycle the market is. A reduced pace of construction is often associated with a broader economic slowdown and signals expected increases in delinquency and losses on defaulted loans.


Fannie Mae Second Quarter 2020 Form 10-Q									11


			MD&A \| Key Market Economic Indicators

GDP, Unemployment Rate and Personal Consumption

(1)GDP growth (decline) and personal consumption growth (decline) for periods prior to the second quarter of 2020 are based on the quarterly series calculated by the Bureau of Economic Analysis and are subject to revision. GDP growth (decline) and personal consumption growth (decline) for the second quarter of 2020 are based on Fannie Mae’s forecast.

⁽²⁾According to the U.S. Bureau of Labor Statistics and subject to revision.

How GDP, the unemployment rate and personal consumption can affect our financial results

•Changes in GDP, the unemployment rate and personal consumption can affect several mortgage market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies.

•Economic growth is a key factor for the performance of mortgage-related assets. In a growing economy, employment and income are rising, thus allowing existing borrowers to meet payment requirements, existing homeowners to consider purchasing another home, and renters to consider becoming homeowners. Homebuilding typically increases to meet the rise in demand. Mortgage delinquencies typically fall in an expanding economy, thereby decreasing credit losses.

•In a slowing economy, employment and income growth slow and housing activity slows as an early indicator of reduced economic activity. As the slowdown intensifies, households become more conservative and debt repayment takes precedence over consumption, which then falls and accelerates the slowdown. If the slowdown of economic growth turns to recession, employment losses occur impairing the ability of borrowers and renters to meet mortgage and rental payments, and loan delinquencies rise. Home sales and mortgage originations also typically fall in a slowing economy.

•Due to the impact of COVID-19, the unemployment rate rose significantly and GDP declined significantly in the first half of 2020. While we expect GDP to improve in the second half of the year, overall for 2020 we expect a decline in GDP compared with 2019, as well as elevated unemployment levels.

See “Risk Factors—Market and Industry Risk” in our 2019 Form 10-K and “Risk Factors” in this report for further discussion of risks to our business and financial results associated with interest rates, home prices, housing activity and economic conditions.


Fannie Mae Second Quarter 2020 Form 10-Q									12


			MD&A \| Consolidated Results of Operations

Consolidated Results of Operations

This section discusses our condensed consolidated results of operations and should be read together with our condensed consolidated financial statements and the accompanying notes.


Summary of Condensed Consolidated Results of Operations
	For the Three Months Ended June 30,								For the Six Months Ended June 30,

	2020		2019		Variance		2020		2019		Variance
	(Dollars in millions)
Net interest income⁽¹⁾	$	5,777	$	5,227	$	550	$	11,124	$	10,023	$	1,101
Fee and other income	90		113		(23)		210		247		(37)
Net revenues	5,867		5,340		527		11,334		10,270		1,064
Investment gains (losses), net	149		461		(312)		(9)		594		(603)
Fair value losses, net	(1,018)		(754)		(264)		(1,294)		(1,585)		291
Administrative expenses	(754)		(744)		(10)		(1,503)		(1,488)		(15)
Credit-related income (expenses):
Benefit (provision) for credit losses	(12)		1,225		(1,237)		(2,595)

Price	-0.00	EPS	2
Shares	5,762	P/E	-0
MCap	-0	P/FCF	-0
Net Debt	3,361,548	EBIT	119,732
TEV	3,361,548	TEV/EBIT	28
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-06-30	Filed 2020-07-30
10-Q	2020-03-31	Filed 2020-05-01
10-K	2019-12-31	Filed 2020-02-13
10-Q	2019-09-30	Filed 2019-10-31
10-Q	2019-06-30	Filed 2019-08-01
10-Q	2019-03-31	Filed 2019-05-01
10-K	2018-12-31	Filed 2019-02-14
10-Q	2018-09-30	Filed 2018-11-02
10-Q	2018-06-30	Filed 2018-08-02
10-Q	2018-03-31	Filed 2018-05-03
10-K	2017-12-31	Filed 2018-02-14
10-Q	2017-09-30	Filed 2017-11-02
10-Q	2017-06-30	Filed 2017-08-03
10-Q	2017-03-31	Filed 2017-05-05
10-K	2016-12-31	Filed 2017-02-17
10-Q	2016-09-30	Filed 2016-11-03
10-Q	2016-06-30	Filed 2016-08-04
10-Q	2016-03-31	Filed 2016-05-05
10-K	2015-12-31	Filed 2016-02-19
10-Q	2015-09-30	Filed 2015-11-05
10-Q	2015-06-30	Filed 2015-08-06
10-Q	2015-03-31	Filed 2015-05-07
10-K	2014-12-31	Filed 2015-02-20
10-Q	2014-09-30	Filed 2014-11-06
10-Q	2014-06-30	Filed 2014-08-07
10-Q	2014-03-31	Filed 2014-05-08
10-K	2013-12-31	Filed 2014-02-21
10-Q	2013-09-30	Filed 2013-11-07
10-Q	2013-06-30	Filed 2013-08-08
10-Q	2013-03-31	Filed 2013-05-09
10-K	2012-12-31	Filed 2013-04-02
10-Q	2012-09-30	Filed 2012-11-07
10-Q	2012-06-30	Filed 2012-08-08
10-Q	2012-03-31	Filed 2012-05-09
10-K	2011-12-31	Filed 2012-02-29
10-Q	2011-09-30	Filed 2011-11-08
10-Q	2011-06-30	Filed 2011-08-05
10-Q	2011-03-31	Filed 2011-05-06
10-K	2010-12-31	Filed 2011-02-24
10-Q	2010-09-30	Filed 2010-11-05
10-Q	2010-06-30	Filed 2010-08-05
10-Q	2010-03-31	Filed 2010-05-10
10-K	2009-12-31	Filed 2010-02-26

8-K	2020-07-30	Earnings, Exhibits
8-K	2020-05-01
8-K	2020-03-25
8-K	2020-02-13
8-K	2019-10-31
8-K	2019-10-28
8-K	2019-09-27
8-K	2019-08-23
8-K	2019-08-20
8-K	2019-08-01
8-K	2019-05-01
8-K	2019-03-26
8-K	2019-03-19
8-K	2019-02-14
8-K	2019-01-29
8-K	2018-12-20
8-K	2018-12-19
8-K	2018-12-12
8-K	2018-11-02
8-K	2018-10-05
8-K	2018-09-14
8-K	2018-09-12
8-K	2018-08-02
8-K	2018-07-25
8-K	2018-07-23
8-K	2018-07-13
8-K	2018-05-03
8-K	2018-02-14

EX-31.1	fnma06302020ex311.htm
EX-31.2	fnma06302020ex312.htm
EX-32.1	fnma06302020ex321.htm
EX-32.2	fnma06302020ex322.htm

FNM 10Q Quarterly Report

Fannie Mae Earnings 2020-06-30