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 delegated specified authorities to our Board of Directors and has delegated to management the authority to conduct our day-to-day operations. 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 describe the rights and powers of the conservator, key provisions of our agreements with the U.S. Department of the Treasury (“Treasury”), and their impact on shareholders in our Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”) in “Business—Conservatorship and Treasury Agreements.”

You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in conjunction with our unaudited condensed consolidated financial statements and related notes and the more detailed information in our 2012 Form 10-K.

This report contains forward-looking statements that are based on management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “Forward-Looking Statements” for more information on the forward-looking statements in this report. Our actual results may differ materially from those reflected in our forward-looking statements due to a variety of factors including, but not limited to, those discussed in “Risk Factors” and elsewhere in this report and in “Risk Factors” in our 2012 Form 10-K.

You can find a “Glossary of Terms Used in This Report” in the “MD&A” of our 2012 Form 10-K.

Fannie Mae is a government-sponsored enterprise (“GSE”) that was chartered by Congress in 1938. Our public mission is to support liquidity and stability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold, and increase the supply of affordable housing. Our charter does not permit us to originate loans or lend money directly to consumers in the primary mortgage market. However, as the leading source of residential mortgage credit in the secondary market, we indirectly enable families to buy, refinance or rent a home. We securitize mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee, which we refer to as Fannie Mae MBS. We also purchase mortgage loans and mortgage-related securities. We use the term “acquire” in this report to refer to both our securitizations and our purchases of mortgage-related assets. We obtain funds to support our business activities by issuing a variety of debt securities in the domestic and international capital markets.

Like the mortgage finance industry we serve, Fannie Mae is undergoing significant transformation. Since entering into conservatorship in September 2008, our senior management, constituencies and priorities have changed. More than 85% of our current senior management team, and every member of our management committee, has been hired or promoted into their current role since we entered into conservatorship. More than half of our employees were hired after conservatorship began. Moreover, instead of being run for the benefit of shareholders, our company is managed in the overall interest of taxpayers, which is consistent with the substantial public investment in us. Ultimately, we help fill the role of enabling families to buy, refinance or rent a home.

Our conservatorship has no specified termination date, and we do not know when or how the conservatorship will be terminated, whether we will continue to exist following conservatorship, or what changes to our business structure will be made during or following the conservatorship. Our agreements with Treasury that provide for financial support also include covenants that significantly restrict our business activities. We provide additional information on the conservatorship, the provisions of our agreements with Treasury, and their impact on our business in our 2012 Form 10-K in “Business—Conservatorship and Treasury Agreements” and “Risk Factors.” We discuss the uncertainty of our future and its impact on us in “Executive Summary—Outlook” in this report and in “Risk Factors” in our 2012 Form 10-K. We describe recent proposals for GSE reform that could materially affect our business in “Legislative and Regulatory Developments—GSE Reform” in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (“Second Quarter 2013 Form 10-Q”) and in “Business—Legislative and Regulatory Developments” in our 2012 Form 10-K.

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

Our common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol “FNMA.” Our debt securities are actively traded in the over-the-counter market.

We are focused on paying Treasury for taxpayers’ investment in Fannie Mae, which can be accomplished by supporting the housing recovery, helping struggling homeowners and laying the foundation for a better housing finance system going forward.

Our actions to accomplish these objectives are having a positive impact:

We also continued our efforts to help build a new housing finance system, including pursuing the strategic goals identified by our conservator: build a new infrastructure for the secondary mortgage market; gradually contract our dominant presence in the marketplace while simplifying and shrinking our operations; and maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. We discuss these goals in our 2012 Form 10-K in “Business—Executive Summary—Helping to Build a New Housing Finance System.” In March 2013, the Acting Director of FHFA released 2013 corporate performance goals and related targets for Fannie Mae and Freddie Mac, referred to as the 2013 conservatorship scorecard, that build upon these strategic goals. See our current report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2013 for a description of the 2013 conservatorship scorecard.

In addition to working on FHFA’s conservatorship scorecard objectives, we are also working on additional related projects to help prepare our business and infrastructure for potential future changes in the structure of the U.S. housing finance system.

For example, one of our priorities is to modernize our technological infrastructure to give us the flexibility that may be required as the housing system undergoes transition. These projects will likely take several years to implement. We are devoting significant resources to and incurring significant expenses in implementing FHFA’s objectives and these additional related projects.

Summary of Our Financial Performance

Our financial results for the third quarter and first nine months of 2013 reflected continued improvements in the housing and mortgage markets, resulting in a further reduction in our loss reserves, and continued stable revenues. In addition, the increase in interest rates during the first nine months of 2013 resulted in improvements in the fair value of financial instruments that we mark to market in our earnings, resulting in fair value gains primarily related to derivatives. Although the increase in interest rates had a positive impact on the fair value of our financial instruments, the increase in interest rates had a negative impact on our loss reserves.

We expect our revenues to continue to be stable; however, as we discuss more fully in “Strengthening Our Book of Business—Expectations Regarding Future Revenues,” we expect the source of our revenue to shift in the future. Additionally, we expect volatility from period to period in our financial results due to changes in market conditions that result in periodic fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings. These instruments include trading securities and derivatives. The estimated fair value of our trading securities and derivatives may fluctuate substantially from period to period because of changes in interest rates, credit spreads and interest rate volatility, as well as activity related to these financial instruments. While the estimated fair value of our derivatives that serve to mitigate certain risk exposures may fluctuate, some of the financial instruments that generate these exposures are not recorded at fair value in our condensed consolidated financial statements. In addition, our credit-related income or expense can vary substantially from period to period primarily due to changes in home prices, borrower payment behavior and economic conditions.

Comprehensive Income

Quarterly Results

We recognized comprehensive income of $8.6 billion in the third quarter of 2013, consisting of net income of $8.7 billion and other comprehensive loss of $134 million . In comparison, we recognized comprehensive income of $2.6 billion in the third quarter of 2012, consisting of net income of $1.8 billion and other comprehensive income of $746 million . The increase in our net income in the third quarter of 2013 compared with the third quarter of 2012 was primarily due to credit-related income and fair value gains.

We recognized credit-related income of $3.8 billion in the third quarter of 2013 compared with credit-related expense of $2.0 billion in the third quarter of 2012. Our credit results for the third quarters of 2013 and 2012 were positively impacted by increases in home prices which resulted in reductions in our loss reserves. The improvement in our credit results was due to a decline in the number of delinquent loans in our single-family guaranty book of business. In addition, in the third quarter of 2013, we recognized foreclosed property income of $1.2 billion , primarily due to the recognition of compensatory fees received in connection with our compensatory fee agreement with Bank of America. We had previously deferred this income until we substantially completed the loan review process related to the agreement. See “Note 20, Subsequent Events” in our 2012 Form 10-K for additional information on the Bank of America compensatory fee agreement.

In the third quarter of 2012, our provision for credit losses was primarily driven by a change in the assumptions and data used in calculating our loss reserves and a change in our accounting for loans to certain borrowers who have received bankruptcy relief. See “Critical Accounting Policies and Estimates—Total Loss Reserves” and “Consolidated Results of Operations—Benefit (Provision) for Credit Losses” in our 2012 Form 10-K for additional information on these changes.

Fair value gains of $335 million in the third quarter of 2013 were primarily driven by derivatives fair value gains as longer-term swap rates increased in the third quarter of 2013. Fair value losses of $1.0 billion in the third quarter of 2012 were primarily driven by derivatives fair value losses as swap rates declined in the third quarter of 2012.

Investment gains of $648 million in the third quarter of 2013 compared with $134 million in the third quarter of 2012 were primarily due to sales of non-agency mortgage-related securities. See “Business Segment Results—Capital Markets Group Results—The Capital Markets Group’s Mortgage Portfolio” and “Consolidated Balance Sheet Analysis—Investments in Mortgage-Related Securities” for additional information on our mortgage-related securities portfolio and requirements that we reduce our retained mortgage portfolio. Our “retained mortgage portfolio” refers to the mortgage-related assets we own (which excludes the portion of assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties).

We recognized a provision for federal income taxes of $1.4 billion in the third quarter of 2013 as our current estimate of pre-tax income for 2013 was greater than our estimate as of March 31, 2013. We did not recognize a provision for federal income taxes in the third quarter of 2012. See “ Note 10, Income Taxes ” for additional information.

Our other comprehensive loss of $134 million in the third quarter of 2013 was driven by the reversal of previously unrealized gains reflected in accumulated other comprehensive income that were realized as investment gains as a result of sales of non-agency securities.

Year-to-Date Results

We recognized comprehensive income of $78.2 billion in the first nine months of 2013, consisting of net income of $77.5 billion and other comprehensive income of $686 million . In comparison, we recognized comprehensive income of $11.1 billion in the first nine months of 2012, consisting of net income of $9.7 billion and other comprehensive income of $1.4 billion .

Our comprehensive income in the first nine months of 2013 was primarily driven by the release of the substantial majority of our valuation allowance against our deferred tax assets in the first quarter of 2013, which resulted in a benefit for federal income taxes of $47.2 billion in our condensed consolidated statements of operations and comprehensive income for the first nine months of 2013. We discuss the factors that led to our conclusion to release the valuation allowance against our deferred tax assets in “Critical Accounting Policies and Estimates—Deferred Tax Assets” and “ Note 10, Income Taxes .”

Our pre-tax income, which excludes the benefit for federal income taxes, was $30.3 billion in the first nine months of 2013 compared with $9.7 billion in the first nine months of 2012. The increase in our pre-tax income was primarily due to credit-related income of $10.7 billion in the first nine months of 2013 compared with credit-related expense of $1.3 billion in the first nine months of 2012. In addition to the factors that led to our increased credit-related income in the third quarter of 2013, in the second quarter of 2013 we updated the assumptions and data used to estimate our allowance for loan losses for individually impaired single-family loans to reflect faster prepayment and lower default expectations for these loans. These updates resulted in a decrease to our allowance for loan losses and an incremental benefit for credit losses of approximately $2.2 billion . See “Critical Accounting Policies and Estimates—Total Loss Reserves” for additional information. The positive impact of these factors on our credit-related income for the first nine months of 2013 was partially offset by lower cash flow projections on our individually impaired loans due to increasing mortgage interest rates in the first nine months of 2013. Higher mortgage interest rates lengthen the expected lives of modified loans, thus increasing the impairment related to concessions on these loans and resulting in an increase to the provision for credit losses. Conversely, in the first nine months of 2012, mortgage interest rates decreased, resulting in higher cash flow projections on our individually impaired loans, which resulted from shortened expected lives on modified loans and lower impairment related to concessions on these loans.

The factors that led to fair value gains of $2.0 billion in the first nine months of 2013 compared with fair value losses of $3.2 billion in the first nine months of 2012 are the same factors that led to fair value gains in the third quarter of 2013.

Our other comprehensive income of $686 million in the first nine months of 2013 compared with $1.4 billion in the first nine months of 2012. The other comprehensive income recognized in the first nine months of 2013 and 2012 was driven by increases in net unrealized gains on available-for-sale securities primarily due to the narrowing of credit spreads. Other comprehensive income in the first nine months of 2013 was partially offset by other comprehensive loss driven by the reversal of previously unrealized gains reflected in accumulated other comprehensive income that were realized as investment gains as a result of sales of non-agency securities.

See “Consolidated Results of Operations” for more information on our results.

Net Worth

Our net worth increased to $11.6 billion as of September 30, 2013 from $7.2 billion as of December 31, 2012 , primarily due to our comprehensive income of $78.2 billion , partially offset by our payments to Treasury of $73.8 billion in senior preferred stock dividends during the first nine months of 2013.

As a result of our positive net worth as of September 30, 2013 , we are not requesting a draw from Treasury under the senior preferred stock purchase agreement. Our dividend payment for the fourth quarter of 2013 will be $8.6 billion , which is calculated based on our net worth of $11.6 billion as of September 30, 2013 less the applicable capital reserve amount of $3.0 billion . As of December 31, 2013, we will have paid a total of $113.9 billion in dividends to Treasury on the senior preferred stock.

Total Loss Reserves

Our total loss reserves consist of (1) our allowance for loan losses, (2) our allowance for accrued interest receivable, (3) our allowance for preforeclosure property taxes and insurance receivables, and (4) our reserve for guaranty losses. Our total loss reserves, which reflect our estimate of the probable losses we have incurred in our guaranty book of business, including concessions we granted borrowers upon modification of their loans, decreased to $48.4 billion as of September 30, 2013 from $62.6 billion as of December 31, 2012. Our total loss reserve coverage to total nonperforming loans was 21% as of September 30, 2013 compared with 25% as of December 31, 2012.

Strengthening Our Book of Business

Credit Risk Profile

While making it possible for families to purchase, refinance or rent a home, we have established responsible credit standards to protect homeowners as well as taxpayers. Since 2009, we have seen the effect of actions we took, beginning in 2008, to significantly strengthen our underwriting and eligibility standards and change our pricing to promote sustainable homeownership and stability in the housing market. While we do not yet know how the single-family loans we have acquired since January 1, 2009 will ultimately perform, given their strong credit risk profile and based on their performance so far, we expect that in the aggregate these loans will be profitable over their lifetime, by which we mean that we expect our fee income on these loans to exceed our credit losses and administrative costs for them. In contrast, we expect that the single-family loans we acquired from 2005 through 2008, in the aggregate, will not be profitable over their lifetime.

Our expectations regarding the ultimate performance of our loans are based on numerous assumptions, including those relating to changes in home prices, borrower behavior, public policy and other macroeconomic factors. If future conditions are less favorable than our expectations, our new single-family book of business could become unprofitable. See “Outlook—Home Prices” for our current expectations regarding changes in home prices. Also see “Outlook—Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations” in this report and “Risk Factors” in both this report and our 2012 Form 10-K for a discussion of factors that could cause our expectations regarding the performance of the loans in our new single-family book of business to change.

Table 1 below displays information regarding the credit characteristics of the loans in our single-family conventional guaranty book of business as of September 30, 2013 by acquisition period, which illustrates the improvement in the credit risk profile of loans we acquired beginning in 2009 compared with loans we acquired in 2005 through 2008.

Table 1 : Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition Period

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Whether the loans we acquire in the future will exhibit an overall credit profile and performance similar to our more recent acquisitions will depend on a number of factors, including our future pricing and eligibility standards and those of mortgage insurers and the Federal Housing Administration (“FHA”), the percentage of loan originations representing refinancings, our

future objectives, government policy, market and competitive conditions, and the volume and characteristics of loans we acquire under the Home Affordable Refinance Program (“HARP ^SM ”).

More detailed information on the risk characteristics of loans in our single-family book of business appears in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring” and in “ Table 30 : Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business ” in that section. Information about the impact of HARP on the credit characteristics of our new single-family book of business appears in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring—HARP and Refi Plus Loans” and in “ Table 31 : Selected Credit Characteristics of Single-Family Conventional Loans Acquired under HARP and Refi Plus ” in that section.

Guaranty Fees on Recently Acquired Single-Family Loans

Table 2 below displays information regarding our average charged guaranty fee on single-family loans we acquired in the third quarter and first nine months of 2013 and 2012, as well as the volume of our single-family Fannie Mae MBS issuances for these periods, which is indicative of the volume of single-family loans we acquired.

Table 2 : Single-Family Acquisitions Statistics

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The revenue we receive from guaranty fees depends on the volume of our single-family acquisitions, the charged guaranty fee at acquisition and the life of the loans. Because we increased our guaranty fees in 2012 on loans acquired after the increase, we expect to benefit from receiving significantly more revenue from guaranty fees in future periods than we have in prior periods, even after we remit some of this revenue to Treasury as we are required to do under the Temporary Payroll Tax Cut Continuation Act of 2011 (the “TCCA”). The increase in our average charged guaranty fee on newly acquired single-family loans from the first nine months of 2012 to the first nine months of 2013 was primarily attributable to an average increase of 10 basis points implemented during the fourth quarter of 2012. The increase was also partially the result of the 10 basis point increase on April 1, 2012 mandated by the TCCA, from which the incremental revenue is remitted to Treasury.

Although we do not know the specific timing, form or extent of future changes in our guaranty fee pricing, we believe that we will increase our guaranty fees in the future. These increases in guaranty fee pricing support FHFA’s strategic plan to gradually contract our dominant presence in the marketplace and attract private capital. See “Business—Legislative and Regulatory Developments—Changes to Our Single-Family Guaranty Fee Pricing and Revenue” in our 2012 Form 10-K for more information on changes to our guaranty fee pricing.

Expectations Regarding Future Revenues

We currently have two primary sources of revenues: (1) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets; and (2) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties. Historically, we have generated the majority of our revenues from the difference between the interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets. As we discuss in our 2012 Form 10-K in “Conservatorship and Treasury Agreements—Treasury Agreements—Covenants under Treasury Agreements,” we are required to reduce the size of our retained mortgage portfolio each year until we hold no more than $250 billion in mortgage assets by the end of 2018. As we reduce the size of our retained mortgage portfolio, our revenues generated by our

retained mortgage portfolio assets will also decrease. As a result of both the shrinking of our retained mortgage portfolio and the impact of guaranty fee increases, we expect that, in a number of years, guaranty fees will become the primary source of our revenues.

We recognize almost all of our guaranty fee revenue in net interest income in our condensed consolidated statements of operations and comprehensive income. The percentage of our net interest income derived from guaranty fees on loans underlying our Fannie Mae MBS has increased over the past year. We estimate that approximately 35% of our net interest income for the nine months ended September 30, 2013 was derived from guaranty fees on loans underlying our Fannie Mae MBS, compared with approximately 30% for the nine months ended September 30, 2012 .

We expect that, if current housing market conditions continue and if we are not required to sell more of our retained mortgage portfolio assets than we currently anticipate selling, increases in our revenues from guaranty fees will generally offset the expected declines in our revenues generated by our retained mortgage portfolio assets. Any future increases in guaranty fees will likely further increase our guaranty fee revenue. The amount of our guaranty fee revenue in future periods will be impacted by many factors, including adjustments to guaranty fee pricing we may make in the future, the life of the loans in our guaranty book of business and the size of our guaranty book of business.

Because loans remain in our book of business for a number of years, the credit quality of and guaranty fees we charge on the loans we acquire in a particular year affects our results for a period of years after we acquire them. Accordingly, we expect the improvements in the credit quality of our loan acquisitions since 2009 and the increases in our charged guaranty fees on recently acquired loans to contribute significantly to our revenues for years to come, especially because these loans have relatively low interest rates, making them less likely to be refinanced than loans with higher interest rates.

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We provide information on the credit performance of mortgage loans in our single-family book of business, our loan workouts, our strategies and the actions we are taking to minimize our credit losses in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management” in both this report and our 2012 Form 10-K.

Contributions to the Housing and Mortgage Markets Since Entering Conservatorship

Liquidity and Support Activities

We have provided approximately $3.9 trillion in liquidity to the housing market since 2009, enabling families to buy, refinance or rent a home. Since we entered into conservatorship in September 2008, we have provided critical liquidity and support to the U.S. mortgage market in a number of important ways:

a variety of mortgage products, including long-term, fixed-rate mortgages, such as the prepayable 30-year fixed-rate mortgage, which protects homeowners from interest rate swings.

2013 Acquisitions and Market Share

As the leading provider of residential mortgage credit, we enable families to buy, refinance or rent a home. In the first nine months of 2013, we purchased or guaranteed approximately $666 billion in single-family and multifamily loans, measured by unpaid principal balance, which includes $22.3 billion in delinquent loans we purchased from our single-family MBS trusts. Our activities enabled our lender customers to finance approximately 3.0 million single-family conventional loans and loans for approximately 386,000 units in multifamily properties during the first nine months of 2013.

One of FHFA’s strategic goals for our conservatorship involves gradually contracting our dominant presence in the marketplace. Despite this goal, our market share remained large in the first nine months of 2013 as we have continued to meet the needs of the single-family mortgage market in the absence of substantial private capital. We remained the largest single issuer of mortgage-related securities in the secondary market during the third quarter of 2013, with an estimated market share of new single-family mortgage-related securities issuances of 48% in the third quarter of 2013, compared with 45% in the second quarter of 2013 and 52% in the third quarter of 2012.

We remain a constant source of liquidity in the multifamily market. We owned or guaranteed approximately 21% of the outstanding debt on multifamily properties as of June 30, 2013 (the latest date for which information is available), according to the Federal Reserve’s June 2013 mortgage debt outstanding release.

Housing and Mortgage Market and Economic Conditions

According to the U.S. Bureau of Economic Analysis, in the second quarter of 2013 the inflation-adjusted U.S. gross domestic product, or GDP rose by 2.5% on an annualized basis. The Bureau of Economic Analysis advance estimate of GDP for the third quarter was not yet available at the time this report was prepared. In the third quarter of 2013, the overall economy gained an estimated 430,000 jobs. According to the U.S. Bureau of Labor Statistics, over the last 12 months ending in September 2013, the economy created 2.2 million non-farm jobs. The unemployment rate was 7.2% in September 2013, down from 7.6% in June 2013. We expect that the housing market will benefit if employment continues to improve.

Housing activity was mixed during the third quarter of 2013 . Total existing home sales averaged 5.4 million units annualized in the third quarter of 2013 , a 5.9% increase from the second quarter of 2013, according to data from the National Association of REALTORS ^® . Sales of foreclosed homes and preforeclosure, or “short,” sales (together, “distressed sales”) accounted for 14% of existing home sales in September 2013, compared with 15% in June 2013 and 24% in September 2012. New single-family home sales weakened during the first two months of the third quarter of 2013 (the latest period for which information is available), averaging an annualized rate of 405,500 units in July and August, an 8.5% decrease from the second quarter of 2013, according to the Bureau of the Census.

During the third quarter of 2013 , the number of months’ supply, or the inventory/sales ratio, of available existing homes fell to 5.0 months while the number of months’ supply of new homes rose to an average of 5.1 months through the first two months of the third quarter of 2013 (the latest period for which information is available). The inventory/sales ratio for both existing and new homes remained below their historical average.

The overall mortgage market serious delinquency rate, which has trended down since peaking in the fourth quarter of 2009, remained historically high at 5.9% as of June 30, 2013 (the latest date for which information is available), according to the Mortgage Bankers Association National Delinquency Survey. We provide information about Fannie Mae’s serious delinquency rate, which also decreased, in “Credit Performance.”

Based on our home price index, we estimate that home prices on a national basis increased by 9.2% in the first nine months of 2013 and by 9.4% from the third quarter of 2012 to the third quarter of 2013 . Despite the recent increases in home prices, we estimate that, through the third quarter of 2013 , home prices on a national basis remained 13.2% below their peak in the third quarter of 2006. Our home price estimates are based on preliminary data and are subject to change as additional data become available. The decline in home prices that began in 2006 left many homeowners with “negative equity” in their homes, which means their principal mortgage balance exceeds the current market value of their home. This increases the likelihood that borrowers will abandon their mortgage obligations and that the loans will become delinquent and proceed to foreclosure. According to CoreLogic, Inc. the number of residential properties with mortgages in a negative equity position in the second quarter of 2013 was approximately 7.1 million , down from 9.6 million , in the first quarter of 2013. The percentage of properties with mortgages in a negative equity position in the second quarter of 2013 was 14.5% , down from 19.7% in the first quarter of 2013 and its peak of 25.7% reached in the fourth quarter of 2009.

Thirty-year mortgage rates, which were as low as 3.35% for the week of May 2nd, have increased substantially since early May and were 4.10% for the week of October 31st, according to Freddie Mac. See “Outlook—Overall Market Conditions” below for a description of our expectations regarding the impact of this increase in rates on mortgage originations.

During the third quarter of 2013, multifamily fundamentals remained stable, according to preliminary third-party data. Although the national multifamily vacancy rate for institutional investment-type apartment properties remained at an estimated 5.10% as of September 30, 2013 , unchanged from June 30, 2013 and down from an estimated 5.50% as of December 31, 2012, there was an increase in both effective rents and net absorption.

National asking rents increased by an estimated 1.0% during the third quarter of 2013 , compared with an increase of 0.5% during the second quarter of 2013. Continued demand for multifamily rental units is reflected in the estimated positive net absorption (that is, the net change in the number of occupied rental units during the time period) of more than 41,000 units during the third quarter of 2013 , according to preliminary data from Reis, Inc., compared with 34,000 units during the second quarter of 2013.

As a result of the continued demand for multifamily rental units over the past few years, there has been an increase in the amount of new multifamily construction development nationally. It is expected that there will be nearly 200,000 new multifamily units completed this year, according to the most recent data from McGraw Hill Construction, with another 227,000 units expected in 2014. The bulk of this new supply is concentrated in about 10 metropolitan areas. As a result, multifamily fundamentals could be impacted in certain localized areas, producing a temporary slowdown in net absorption rates, occupancy levels, and effective rents starting in 2014.

Outlook

Financial Results and Dividend Payments to Treasury. Our pre-tax income was $10.1 billion for the third quarter of 2013 and $30.3 billion for the first nine months of 2013. We expect to remain profitable for the foreseeable future. While we expect our annual earnings to remain strong over the next few years, our earnings may vary significantly from quarter to quarter and year to year due to many different factors, such as changes in interest rates or home prices. The estimated 9.2% increase in home prices on a national basis in the first nine months of the year contributed significantly to the record pre-tax income we reported for the first nine months of 2013. As noted in “Home Prices” below, we expect minimal home price growth in the fourth quarter of the year. In addition to future changes in home prices and interest rates, our future earnings will be affected by a number of other factors, including the volume of single-family mortgage originations in the future and the size, composition and quality of our retained mortgage portfolio. For a discussion of our expectations regarding our future revenues, see “Strengthening Our Book of Business.”

In compliance with our dividend obligation to Treasury, we will retain only a limited amount of any future earnings because we must pay Treasury each quarter the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. This capital reserve amount is $3.0 billion for each quarter of 2013 and then decreases annually until it reaches zero in 2018.

One of our objectives is to pay taxpayers for their investment in our company. Through September 30, 2013 , we have received a total of $116.1 billion under the senior preferred stock purchase agreement. This funding has provided us with the capital and liquidity needed to fulfill our mission of providing liquidity and support to the nation’s housing finance markets and to avoid a trigger of mandatory receivership under the Federal Housing Finance Regulatory Reform Act of 2008 (the

“2008 Reform Act”). We have not received funds from Treasury under the agreement since the first quarter of 2012. Under the terms of the senior preferred stock purchase agreement, dividend payments cannot be used to offset prior Treasury draws, and we are not permitted to pay down draws we have made under the agreement except in limited circumstances. Accordingly, Treasury still maintains a liquidation preference of $117.1 billion on the senior preferred stock, even though we have paid $105.3 billion in dividends through September 30, 2013 and, with our dividend payment of $8.6 billion in the fourth quarter of 2013, we will have paid $113.9 billion in dividends. We expect that the amount of dividends we pay Treasury will exceed the amounts we have drawn.

Because we expect our annual earnings to remain strong over the next few years, in addition to dividend payments, we expect to make substantial federal income tax payments to Treasury going forward.

Overall Market Conditions. We expect that single-family mortgage loan delinquency and severity rates will continue their downward trend, but that single-family serious delinquency, default and severity rates will remain high compared with pre-housing crisis levels. Despite steady demand and stable fundamentals at the national level, the multifamily sector may continue to exhibit below average fundamentals in certain local markets and with certain properties. We expect the level of multifamily foreclosures for 2013 overall will generally remain commensurate with 2012 levels. Conditions may worsen if the unemployment rate increases on either a national or regional basis.

We believe that the recent increase in mortgage rates will result in a decline in overall single-family mortgage originations in 2013 as compared with 2012, driven by a decline in refinancings. We currently forecast that total originations in the U.S. single-family mortgage market in 2013 will decrease from 2012 levels by approximately 15% , from an estimated $2.15 trillion in 2012 to $1.83 trillion in 2013, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will decrease from an estimated $1.54 trillion in 2012 to $1.13 trillion in 2013. In the third quarter of 2013, refinancings comprised approximately 62% of our single-family conventional business volume, compared with approximately 75% in the second quarter of 2013 and approximately 79% for all of 2012.

Home Prices. Based on our home price index, we estimate that home prices on a national basis increased by 9.2% in the first nine months of 2013. We expect home prices will increase only minimally on a national basis in the fourth quarter of 2013. Future home price changes may be very different from our expectations as a result of significant inherent uncertainty in the current market environment, including uncertainty about the effect of recent and future changes in mortgage rates; actions the federal government has taken and may take with respect to tax policies, spending cuts, mortgage finance programs and policies and housing finance reform; the management of the Federal Reserve’s MBS holdings; the impact of those actions on and changes generally in unemployment and the general economic and interest rate environment; and the impact on the U.S. economy of global economic conditions. We also expect significant regional variation in the timing and rate of home price growth.

Credit Losses. Our credit losses, which include our charge-offs, net of recoveries, reflect our realization of losses on our loans. We realize losses on loans, through our charge-offs, when foreclosure sales are completed or when we accept short sales or deeds-in-lieu of foreclosure. We expect our credit losses will decrease in the future as a result of the higher credit quality of our new book of business, the decrease in our legacy book and anticipated positive home price growth, which reduces the level of defaults we expect on our new book of business and our legacy book and lowers severity at the time of charge off. However, we continue to expect our credit losses to remain elevated in 2013 relative to pre-housing crisis levels. In addition, to the extent the slow pace of foreclosures continues in the fourth quarter of 2013, our realization of some credit losses will be delayed.

Loss Reserves. Our total loss reserves were $48.4 billion as of September 30, 2013 , down from $62.6 billion as of December 31, 2012 and their peak of $76.9 billion as of December 31, 2011. If delinquencies continue to trend downward and home prices continue to increase, we expect our loss reserves will continue to decline, but at a slower pace than in recent quarters because the pace of home price growth has slowed. Although our loss reserves have declined substantially from their peak and are expected to decline further, we expect our loss reserves will remain significantly elevated relative to historical levels for an extended period because (1) we expect future defaults on loans that we acquired prior to 2009 and the resulting charge-offs will occur over a period of years and (2) a significant portion of our reserves represents concessions granted to borrowers upon modification of their loans and our reserves will continue to reflect these concessions until the loans are fully repaid or default.

Uncertainty Regarding our Future Status. There is significant uncertainty regarding the future of our company, including how long the company will continue to be in its current form, the extent of our role in the market, what form we will have, what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated and whether we will continue to exist following conservatorship. We expect this uncertainty to continue.

We cannot predict the prospects for the enactment, timing or content of legislative proposals regarding long-term reform of the GSEs. See “Business—Legislative and Regulatory Developments” in our 2012 Form 10-K and “Legislative and Regulatory Developments” in our Second Quarter 2013 Form 10-Q for discussions of proposals for GSE reform that could materially affect our business, including two bills introduced in Congress that, among other things, would require the wind down of Fannie Mae and Freddie Mac. See “Risk Factors” in our 2012 Form 10-K for a discussion of the risks to our business relating to the uncertain future of our company.

Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations. We present a number of estimates and expectations in this executive summary regarding our future performance, including estimates and expectations regarding our future financial results and profitability, our future dividend and income tax payments to Treasury, our future revenues, the profitability and performance of single-family loans we have acquired, our future acquisitions, our future delinquency, default and severity rates, our future credit losses and our future loss reserves. We also present a number of estimates and expectations in this executive summary regarding future housing market conditions, including expectations regarding future mortgage originations and future home prices. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous factors. Our future estimates of our performance and housing market conditions, as well as the actual results, may differ materially from our current estimates and expectations as a result of: the timing and level of, as well as regional variation in, home price changes; changes in interest rates, unemployment rates and other macroeconomic and housing market variables; our future guaranty fee pricing and the impact of that pricing on our competitive environment; our future serious delinquency rates; future legislative or regulatory requirements that have a significant impact on our business, such as a requirement that we implement a principal forgiveness program; future updates to our models relating to our loss reserves, including the assumptions used by these models; future changes to our accounting policies relating to our loss reserves; significant changes in modification and foreclosure activity; changes in borrower behavior, such as an increasing number of underwater borrowers who strategically default on their mortgage loan; the effectiveness of our loss mitigation strategies, management of our real estate owned (“REO”) inventory and pursuit of contractual remedies; whether our counterparties meet their obligations in full; resolution or settlement agreements we may enter into with our counterparties; changes in the fair value of our assets and liabilities; impairments of our assets; changes in generally accepted accounting principles (“GAAP”); credit availability; natural and other disasters; and other factors, including those discussed in “Forward-Looking Statements,” “Risk Factors” and elsewhere in this report and in our 2012 Form 10-K. Due to the large size of our guaranty book of business, even small changes in these factors could have a significant impact on our financial results for a particular period.

The information in this section updates and supplements information regarding legislative and regulatory developments set forth in “Business—Legislative and Regulatory Developments” and “Business—Our Charter and Regulation of Our Activities” in our 2012 Form 10-K and in “MD&A—Legislative and Regulatory Developments” in our Second Quarter 2013 Form 10-Q and in our quarterly report on Form 10-Q for the quarter ended March 31, 2013 (“First Quarter 2013 Form 10‑Q”). Also see “Risk Factors” in our 2012 Form 10-K for a discussion of risks relating to legislative and regulatory matters.

GSE Reform

Policymakers and others have focused significant attention in recent years on how to reform the nation’s housing finance system, including what role, if any, the GSEs should play. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law in July 2010, calls for enactment of meaningful structural reforms of Fannie Mae and Freddie Mac. See “Business—Legislative and Regulatory Developments” in our 2012 Form 10-K and “MD&A—Legislative and Regulatory Developments” in our First Quarter 2013 Form 10-Q and our Second Quarter 2013 Form 10-Q for a description of activities relating to GSE reform that occurred in 2011, 2012 and earlier in 2013, including a description of:

In March 2013, FHFA announced that a new business entity would be established by Fannie Mae and Freddie Mac that would be separate from the two companies in order to further the goal of building a common securitization platform that would function like a market utility. The new business entity would be designed to operate as a replacement for some of Fannie Mae and Freddie Mac’s securitization infrastructure. On October 7, 2013, FHFA announced that the new joint venture by Fannie Mae and Freddie Mac, Common Securitization Solutions, LLC, has been established and that office space for the new entity has been secured. In connection with the entity’s establishment, we entered into a Limited Liability Company Agreement with Freddie Mac in October 2013 and anticipate entering into additional agreements relating to the new joint venture in the future.

The Chairman and Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs publicly stated in September 2013 that the Committee will begin drafting housing finance reform legislation this fall with the hope that the Committee will consider it prior to the end of the year. As a result, the Committee is holding hearings to review relevant issues related to reform of the housing finance market. We expect Congress to continue to consider housing finance system reform in the current congressional session, including conducting hearings on GSE reform and considering legislation that would alter the housing finance system or the activities or operations of the GSEs. We cannot predict the prospects for the enactment, timing or content of legislative proposals regarding the future status of the GSEs.

Dodd-Frank Act—Risk Retention

The Dodd-Frank Act requires financial regulators to jointly prescribe regulations requiring securitizers to retain a portion of the credit risk in assets transferred, sold or conveyed through the issuance of asset-backed securities, with certain exceptions. On August 28, 2013, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System (the “Federal Reserve System”), the Federal Deposit Insurance Corporation, the SEC, FHFA and the U.S. Department of Housing and Urban Development (“HUD”) issued a joint proposed rule that would implement this risk retention requirement. This proposal replaced an earlier proposed rule that was published in 2011, but never approved. Under the new proposed rule, securitizers would be required to retain at least 5% of the credit risk with respect to the assets they securitize. The new proposed rule offers several options for compliance by parties with assets to securitize, one of which is to have either Fannie Mae or Freddie Mac (so long as they are in conservatorship or receivership) securitize the assets. As long as Fannie Mae or Freddie Mac fully guarantees the assets, no further retention of credit risk is required. Securities backed solely by mortgage loans meeting the definition of a “Qualified Residential Mortgage” would be exempt from the risk retention requirements of the rule. The new proposed rule made significant changes to the definition of a Qualified Residential Mortgage, defining the term to have the same meaning as the term “qualified mortgages” as defined by the Consumer Financial Protection Bureau in connection with its “ability to repay” rule. We discuss the ability-to-repay rule and the definition of qualified mortgages in “MD&A—Legislative and Regulatory Developments” in our First Quarter 2013 Form 10-Q.

Dodd-Frank Act—FHFA Rule Regarding Stress Testing

The Dodd-Frank Act requires certain financial companies to conduct annual stress tests to determine whether the companies have the capital necessary to absorb losses as a result of adverse economic conditions. On September 26, 2013, FHFA issued a final rule implementing the Dodd-Frank Act’s stress test requirements for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Under the rule, each year we are required to conduct a stress test, based on our data as of September 30 of that year, using scenarios of financial conditions that will be provided by FHFA, including a severely adverse scenario. In conducting the stress test, we will be required to calculate the impact of the scenario conditions on our capital levels and other specified measures of financial condition and performance over a period of at least nine quarters. The rule requires us to report the results of our stress test to FHFA and to the Federal Reserve System and to disclose publicly, in April of each year, a summary of the stress test results for the severely adverse scenario.

FHFA Advisory Bulletin Regarding Framework for Adversely Classifying Loans

In April 2012, FHFA issued Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention.” This Advisory Bulletin requires that we classify the portion of an outstanding single-family loan balance in excess of the fair value of the underlying property, less costs to sell and adjusted for any credit enhancements, as a “loss” no later than when the loan becomes 180 days delinquent, except in certain specified circumstances (such as those involving properly secured loans with an LTV ratio equal to or less than 60%). For multifamily loans, the Advisory Bulletin requires that any portion of a loan balance that exceeds the amount secured by the fair value of the collateral, less costs to sell, for which there is no available and reliable source of repayment other than

the sale of the underlying real estate collateral, to be classified as a “loss.” The Advisory Bulletin also requires us to charge off the portion of the loan classified as a “loss.” In May 2013, FHFA issued an additional Advisory Bulletin clarifying the implementation timeline for AB 2012-02, requiring that: (1) the asset classification provisions of AB 2012-02 should be implemented by January 1, 2014; and (2) the charge-off provisions of AB 2012-02 should be implemented no later than January 1, 2015.

The Advisory Bulletin requires us to change our practice for determining when a loan is deemed uncollectible to the date the loan is classified as a “loss” as described above. This is a change from our current practice for determining when a loan is deemed to be uncollectible, which is based on historical data and results in a loan being deemed to be uncollectible at the date of foreclosure or other liquidation event (such as a deed-in-lieu of foreclosure or a pre-foreclosure sale). We will work with FHFA to consider how the Advisory Bulletin may impact our credit risk management practices.

The Advisory Bulletin will not have an impact on the approach we use to estimate the allowance for loan losses for our single-family and multifamily loans that are not classified as a “loss.” We establish an allowance for loan losses against these loans either through our collective loss reserve or through our loss reserve for individually impaired loans. Thus, at the time single-family loans become 180 days delinquent, we have already established an allowance for loan losses against them. However, upon adoption of the Advisory Bulletin, the amount of the charge-off for single-family loans classified as a “loss” is expected to exceed the amount of incurred losses we have recognized for those loans in our allowance for loan losses. The charge-off is expected to exceed the allowance for loan losses because the charge-off will not be reduced by the benefit we expect from borrower re-performance on these loans, which is considered in our current allowance for loan losses methodology. In the period in which we adopt the Advisory Bulletin, our provision for loan losses will be increased by the excess of the charge-off over the incurred losses previously recognized. Additionally, our allowance for loan losses on the impacted loans will be eliminated and the corresponding recorded investment will be reduced by the amounts that are charged off. Going forward, the amount of the charge-off at the time a loan is classified as a “loss” is expected to exceed our best estimate of incurred losses. Additionally, we expect to record larger loss recoveries for loans that become 180 days or more past due and subsequently re-perform.

Under our existing accounting practices and upon adoption of the Advisory Bulletin, the ultimate amount of losses we realize on our loan portfolio will be the same; however, the timing of when we recognize the losses will differ. If we had adopted this guidance on September 30, 2013, we estimate that our net income for the third quarter of 2013 would have been decreased by approximately $1.0 billion for the charge-off amount that would have exceeded the existing allowance on loans we estimate would have been classified as a “loss” pursuant to the Advisory Bulletin classification guidance, and our dividend obligation to Treasury would have been reduced by the same amount. If recent trends continue, we expect the population of loans that will be subject to accelerated charge-off will decline either through liquidation or re-performance. As a result, we believe the impact upon adoption of the guidance on January 1, 2015 will be less than $1.0 billion .

For information on the risks presented by our adoption of the Advisory Bulletin and the risks  presented by the magnitude of the many new initiatives we are undertaking, see “Risk Factors” in our 2012 Form 10-K for our discussion of the risks we face from a potential failure in our operational systems or infrastructure.

Basel III and U.S. Capital and Liquidity Regimes for the Banking Industry

In addition to changes that directly result from the Dodd-Frank Act, the capital and liquidity regimes for the banking industry are also undergoing changes as a result of actions by international bank regulators. The Basel Committee on Banking Supervision issued a set of revisions (known as Basel III) to the international capital requirements in December 2010. Whereas the Basel II standards revised the risk-weighting process for assets, Basel III, which complements Basel II, generally narrowed the definition of capital that can be used to meet risk-based standards and raised the amount of capital that must be held. Basel III also introduced quantitative international liquidity requirements for the first time. The international Basel standards require adoption by the domestic bank regulatory authorities before they become operative in the United States. Typically U.S. bank regulatory authorities adopt Basel standards with adjustments that take into account U.S. banking law and other relevant considerations. On October 24, 2013, U.S. banking regulators issued a proposed regulation setting minimum liquidity standards generally in line with Basel III’s liquidity standards. See “Risk Factors” for a discussion of how capital and liquidity rules could materially and adversely affect demand by banks for our debt and MBS securities in the future and could otherwise affect the future business practices of our customers and counterparties.

Housing Goals

We are subject to meeting housing goals, which require that the mortgage loans we acquire must meet requirements established by FHFA relating to affordability or location. Our single-family performance is measured against the lower of benchmarks established by FHFA or goals-qualifying originations in the primary mortgage market. Multifamily goals are

established as a number of units to be financed. In our 2012 Form 10-K, we reported that we believed we met all of the FHFA-established single-family benchmarks for 2012, as well as our 2012 multifamily goals, but that FHFA would issue the final determination on our 2012 housing goals performance after the release of data reported under Home Mortgage Disclosure Act (“HMDA”) later this year. In October 2013, FHFA determined that we met all of our single-family and multifamily housing goals for 2012. See “Business—Our Charter and Regulation of Our Activities—Regulation and Oversight of Our Activities—Housing Goals and Duty to Serve Underserved Markets” in our 2012 Form 10-K for more a more detailed discussion of our housing goals.

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the condensed consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in “Note 1, Summary of Significant Accounting Policies” in this report and in our 2012 Form 10-K.

We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. Management has discussed any significant changes in judgments and assumptions in applying our critical accounting policies with the Audit Committee of our Board of Directors. See “Risk Factors” in our 2012 Form 10-K for a discussion of the risks associated with the need for management to make judgments and estimates in applying our accounting policies and methods. We have identified four of our accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. These critical accounting policies and estimates are as follows:

•    Fair Value Measurement

•    Total Loss Reserves

•    Other-Than-Temporary Impairment of Investment Securities

•    Deferred Tax Assets

See “MD&A—Critical Accounting Policies and Estimates” in our 2012 Form 10-K for a detailed discussion of these critical accounting policies and estimates. We describe below significant changes in the judgments and assumptions we made during the first nine months of 2013 in applying our critical accounting policies and significant changes to our critical estimates.

Total Loss Reserves

Our total single-family and multifamily loss reserves consist of the following components:

We continually monitor prepayment, default and loss severity trends and periodically make changes in our historically developed assumptions to better reflect present conditions of loan performance. In the second quarter of 2013, we updated the assumptions and data used to estimate our allowance for loan losses for individually impaired single-family loans based on current observable performance trends as well as future expectations of payment behavior. These updates reflect faster prepayment and lower default expectations for these loans primarily as a result of improvements in loan performance, in part due to increases in home prices. Increases in home prices reduce the mark-to-market loan-to-value (“LTV”) ratios on these loans and, as a result, borrowers’ equity increases. Faster prepayment and lower default expectations shortened the expected average life of modified loans which reduced the expected credit losses and lowered concessions on modified loans. This resulted in a decrease to our allowance for loan losses as of June 30, 2013 and an incremental benefit for credit losses of approximately $2.2 billion for the second quarter of 2013.

Deferred Tax Assets

We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We evaluate the recoverability of our deferred tax assets, weighing all positive and negative evidence, and are required to establish or maintain a valuation allowance for these assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary to support a conclusion that a valuation allowance is not needed.

Our framework for assessing the recoverability of deferred tax assets requires us to weigh all available evidence, including: