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, 2015 (“ 2015 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 2015 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 our 2015 Form 10-K.

You can find a “Glossary of Terms Used in This Report” in the “MD&A” of our 2015 Form 10-K.

Fannie Mae is a government-sponsored enterprise (“GSE”) that was chartered by Congress in 1938. We serve an essential role in the functioning of the U.S. housing market and are investing in improvements to the U.S. housing finance system. Our public mission is to support liquidity and stability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold, and to 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.

Fannie Mae provides reliable, large-scale access to affordable mortgage credit and indirectly enables families to buy, refinance or rent homes. We securitize mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee, which we refer to as Fannie Mae MBS. One of our key functions is to evaluate, price and manage the credit risk on the loans and securities that we guarantee. We also purchase mortgage loans and mortgage-related securities, primarily for securitization and sale at a later date. 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, which attracts global capital to the United States housing market.

We remain in conservatorship and our conservatorship has no specified termination date. 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. In addition, as a result of our agreements with Treasury and dividend directives from our conservator, we are not permitted to retain our net worth (other than a limited amount that will decrease to zero by 2018), rebuild our capital position or pay dividends or other distributions to stockholders other than Treasury. Our senior preferred stock purchase agreement with Treasury also includes covenants that significantly restrict our business activities. Congress and the Obama Administration continue to consider options for reform of the housing finance system, including the GSEs. We cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation or actions the Administration or FHFA may take with respect to housing finance reform. The conservatorship, the uncertainty of our future, limitations on executive and employee compensation, and negative publicity concerning the GSEs have had and are likely to continue to have an adverse effect on our ability to retain and recruit well-qualified executives and other employees. We provide additional information on the conservatorship, the provisions of our agreements with Treasury, and their impact on our business in our 2015  Form 10-K in “Business—Conservatorship and Treasury Agreements” and “Risk Factors.” We discuss the uncertainty of our future in

“Executive Summary—Outlook” and “Risk Factors” in this report. We discuss proposals for housing finance reform that could materially affect our business in our 2015 Form 10-K in “Business—Housing Finance Reform.”

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.

Overview

We reported net income of $2.9 billion for the second quarter of 2016 , compared with net income of $4.6 billion for the second quarter of 2015 . See “Summary of Our Financial Performance” below for an overview of our financial performance for the second quarter and first half of 2016 , compared with the second quarter and first half of 2015 . We expect to remain profitable on an annual basis for the foreseeable future; however, certain factors, such as changes in interest rates or home prices, could result in significant volatility in our financial results from quarter to quarter or year to year. For more information regarding our expectations for our future financial performance, see “Outlook” below.

With our expected September 2016 dividend payment to Treasury, we will have paid a total of $151.4 billion in dividends to Treasury on our senior preferred stock. The aggregate amount of draws we have received from Treasury to date under the senior preferred stock purchase agreement is $116.1 billion . Under the terms of the senior preferred stock purchase agreement, dividend payments do not offset prior Treasury draws. For more information regarding our dividend payments to Treasury, see “Treasury Senior Preferred Stock Purchase Agreement” below.

Our Strategy and Business Objectives

Our vision is to be America’s most valued housing partner and to provide liquidity, access to credit and affordability in all U.S. housing markets at all times, while effectively managing and reducing risk to our business, taxpayers and the housing finance system. In support of this vision, we are focused on:

Advancing a sustainable and reliable business model that reduces risk to the housing finance system and taxpayers

We have significantly changed our business model since we entered conservatorship in 2008 and our business continues to evolve. We have strengthened our underwriting and eligibility standards, we are moving from a portfolio-focused business to a guaranty-focused business and we are transferring an increasing portion of the credit risk on our guaranty book of business. These changes are transforming our business model and reducing certain risks of our business as compared with our business prior to entering conservatorship.

Stronger Underwriting and Eligibility Standards. Beginning in 2008, we made changes to strengthen our underwriting and eligibility standards that have improved the credit quality of our single-family guaranty book of business and contributed to improvement in our credit performance. See “Single-Family Guaranty Book of Business” below for information on the credit performance of the mortgage loans in our single-family guaranty book of business and on our recent single-family acquisitions.

Moving from a portfolio-focused business to a guaranty-focused business. In recent years, an increasing portion of our net interest income has been derived from the guaranty fees we receive for managing the credit risk on loans underlying our Fannie Mae MBS, rather than from interest income on our retained mortgage portfolio assets. This shift has been driven by both the impact of guaranty fee increases implemented in 2012 and the reduction of our retained mortgage portfolio in accordance with the requirements of our senior preferred stock purchase agreement with Treasury and direction from FHFA. 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). In the first half of 2016 , approximately two-thirds of our net interest income was derived from our guaranty business. As described in more detail in

“Outlook—Revenues” below, we expect that guaranty fees will continue to account for an increasing portion of our net interest income.

Transferring a portion of the mortgage credit risk on our single-family book of business. In late 2013, we began entering into credit risk transfer transactions with the goal of transferring, to the extent economically sensible, a portion of the mortgage credit risk on some of the recently-acquired loans in our single-family book of business in order to reduce the economic risk to us and to taxpayers of future borrower defaults. In the aggregate, our credit risk transfer transactions completed through June 30, 2016 transferred a significant portion of the mortgage credit risk on single-family mortgages with an unpaid principal balance of over $660 billion . We intend to continue to engage in credit risk transfer transactions on an ongoing basis, subject to market conditions. Approximately 19% of the loans in our single-family conventional guaranty book of business as of June 30, 2016 , measured by unpaid principal balance, were included in a reference pool for a Connecticut Avenue Securities ^TM (“CAS”) or a Credit Insurance Risk Transfer ^TM (“CIRT ^TM ”) transaction. Over time, we expect that a larger portion of our single-family conventional guaranty book of business will be covered by credit risk transfer transactions. For further discussion of our credit risk transfer transactions, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk—Credit Risk-Sharing Transactions.”

Our business also continues to evolve as a result of our many other efforts to build a safer and sustainable housing finance system and to pursue the strategic goals identified by our conservator, and we continue to invest significant resources towards these goals. See “Business—Executive Summary—Helping to Build a Sustainable Housing Finance System” in our 2015 Form 10-K for a discussion of these efforts and FHFA’s strategic goals for our conservatorship, including a description of some of the actions we are taking pursuant to the mandates of FHFA’s conservatorship scorecards in order to build the policies and infrastructure for a sustainable housing finance system. For more information on FHFA’s 2016 conservatorship scorecard objectives, see our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on December 17, 2015.

Providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners

We continued to provide reliable, large-scale access to affordable mortgage credit to the U.S. housing market in the second quarter of 2016 and remained a leading source of liquidity in the single-family and multifamily markets. We also continued to help struggling homeowners. In the second quarter of 2016 , we provided approximately 27,000 loan workouts to help homeowners stay in their homes or otherwise avoid foreclosure. We discuss our activities to support the housing and mortgage markets in “Contributions to the Housing and Mortgage Markets” below.

Serving customer needs and improving our business efficiency

We are continuing our initiatives to better serve our customers’ needs and improve our business efficiency in 2016. These initiatives include continuing to revise and clarify our representation and warranty framework, implementing innovative new and enhanced tools that deliver greater value and certainty to lenders, simplifying our business processes, and updating our infrastructure. We discuss these initiatives in “Serving Customer Needs and Improving Our Business Efficiency” below and in our 2015 Form 10-K in “Business—Executive Summary.”

Summary of Our Financial Performance

Comprehensive Income

Quarterly Results

We recognized comprehensive income of $2.9 billion in the second quarter of 2016 , consisting of net income of $2.9 billion and other comprehensive loss of $77 million . In comparison, we recognized comprehensive income of $4.4 billion in the second quarter of 2015 , consisting of net income of $4.6 billion and other comprehensive loss of $281 million . The decline in our net income in the second quarter of 2016 compared with the second quarter of 2015 was primarily driven by a shift to fair value losses from fair value gains and a decline in net revenues, partially offset by a shift to credit-related income from credit-related expense.

We recognized fair value losses of $1.7 billion in the second quarter of 2016 compared with fair value gains of $2.6 billion in the second quarter of 2015 . Fair value losses in the second quarter of 2016 were driven by declines in longer-term swap rates during the period. Fair value gains in the second quarter of 2015 were driven by increases in longer-term swap rates during the period.

Net revenues, which consist of net interest income and fee and other income, were $5.5 billion in the second quarter of 2016, compared with $6.2 billion in the second quarter of 2015. We recognized net interest income of  $5.3 billion in the second

quarter of 2016 compared with $5.7 billion in the second quarter of 2015. The decline in net interest income was due to a decline in the average balance of our retained mortgage portfolio, partially offset by higher guaranty fee income.

We recognized credit-related income of $1.5 billion in the second quarter of 2016 compared with credit-related expense of $1.2 billion in the second quarter of 2015 . Credit-related income in the second quarter of 2016 was driven by a $1.6 billion benefit for credit losses during the quarter, which was primarily attributable to an increase in home prices. Higher home prices decrease the likelihood that loans will default and reduce the amount of credit loss on loans that do default, which impacts our estimate of losses and ultimately reduces our total loss reserves and provision for credit losses. A decline in actual and projected mortgage interest rates also contributed to the benefit for credit losses during the second quarter of 2016. As mortgage interest rates decline, we expect an increase in future prepayments on single-family individually impaired loans, including modified loans. Higher expected prepayments shorten the expected lives of modified loans, which decreases the impairment relating to concessions provided on these loans and results in a decrease in our provision for credit losses. Credit-related expense in the second quarter of 2015 was primarily attributable to an increase in mortgage interest rates during the period. As mortgage interest rates increase, we expect a decline in future prepayments on single-family individually impaired loans, including modified loans. Lower expected prepayments lengthen the expected lives of modified loans, which increases the impairment relating to concessions provided on these loans and results in an increase in our provision for credit losses. In addition, we redesignated certain nonperforming single-family loans from held for investment (“HFI”) to held for sale (“HFS”) in the second quarter of 2015. Those loans were adjusted to the lower of cost or fair value, which increased credit-related expense for the quarter. Credit-related expense was partially offset by a positive impact from an increase in home prices during the second quarter of 2015.

Year-to-Date Results

We recognized comprehensive income of $3.8 billion in the first half of 2016, consisting of net income of $4.1 billion and other comprehensive loss of $277 million . In comparison, we recognized comprehensive income of $6.2 billion in the first half of 2015 , consisting of net income of $6.5 billion and other comprehensive loss of $373 million . The decline in our net income was driven by a shift to fair value losses from fair value gains and a decline in net revenues, partially offset by a shift to credit-related income from credit-related expense.

Fair value losses of $4.5 billion in the first half of 2016 and fair value gains of $687 million in the first half of 2015 were primarily a result of the same factors that affected our results for the second quarters of 2016 and 2015, as described above.

Net revenues were $10.4 billion in the first half of 2016 and $11.6 billion in the first half of 2015. The decrease in net revenues was primarily a result of the same factors that affected our results for the second quarters of 2016 and 2015, as described above.

We recognized credit-related income of $2.4 billion in the first half of 2016 and credit-related expense of $1.2 billion in the first half of 2015. Credit-related income in the first half of 2016 was primarily attributable to an increase in home prices. Additionally, a decline in actual and projected mortgage interest rates contributed to the credit-related income during the first half of 2016. Credit-related expense in the first half of 2015 was primarily attributable to an increase in mortgage interest rates during the period. In addition, we redesignated certain nonperforming single-family loans from HFI to HFS in the first half of 2015. Those loans were adjusted to the lower of cost or fair value, which increased credit-related expense for the period. Credit-related expense was partially offset by a positive impact from an increase in home prices during the first half of 2015.

We expect volatility from period to period in our financial results from a number of factors, particularly changes in market conditions that result in fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings. These instruments include derivatives and certain securities. The estimated fair value of our derivatives and securities may fluctuate substantially from period to period because of changes in interest rates, the yield curve, mortgage and credit spreads, and implied volatility, as well as activity related to these financial instruments. We use derivatives to manage the interest rate risk exposure of our net portfolio, which consists of our retained mortgage portfolio, cash and other investments portfolio, and outstanding debt of Fannie Mae. Some of these financial instruments in our net portfolio are not recorded at fair value in our condensed consolidated financial statements, and as a result we may experience accounting gains or losses due to changes in interest rates or other market conditions that may not be indicative of the economic interest rate risk exposure of our net portfolio. See “Risk Management—Market Risk Management, Including Interest Rate Risk Management” for more information. In addition, our credit-related income or expense can vary substantially from period to period based on factors such as changes in actual and expected home prices, borrower payment behavior, the types and volume of our loss mitigation activities, the volumes of foreclosures completed, redesignations of loans from HFI to HFS, and fluctuations in mortgage interest rates.

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

Net Worth

Our net worth was $4.1 billion as of June 30, 2016 , unchanged from December 31, 2015 , primarily due to our comprehensive income of $3.8 billion , offset by our payments to Treasury of $3.8 billion in senior preferred stock dividends during the first half of 2016. Our expected dividend payment of $2.9 billion for the third quarter of 2016 is calculated based on our net worth of $4.1 billion as of June 30, 2016 less the applicable capital reserve amount of $1.2 billion .

Single-Family Guaranty Book of Business

Credit Performance

We continued to acquire loans with strong credit profiles and to execute on our strategies for reducing credit losses in the second quarter of 2016 , such as helping eligible Fannie Mae borrowers with high loan-to-value (“LTV”) ratio loans refinance into more sustainable loans through the Administration’s Home Affordable Refinance Program ^® (“HARP ^® ”), offering borrowers loan modifications that can significantly reduce their monthly payments, pursuing foreclosure alternatives and managing our REO inventory to appropriately manage costs and maximize sales proceeds. As we work to reduce credit losses, we also seek to assist struggling homeowners, help stabilize communities and support the housing market.

Table 1 presents information about the credit performance of mortgage loans in our single-family guaranty book of business and our workouts. The term “workouts” refers to both home retention solutions (loan modifications and other solutions that enable a borrower to stay in his or her home) and foreclosure alternatives (short sales and deeds-in-lieu of foreclosure). The workout information in Table 1 does not reflect repayment plans and forbearances that have been initiated but not completed, nor does it reflect trial modifications that have not become permanent.

Table 1 : Credit Statistics, Single-Family Guaranty Book of Business ⁽¹⁾

Beginning in 2008, we took actions to significantly strengthen our underwriting and eligibility standards to promote sustainable homeownership and stability in the housing market. These actions have improved the credit quality of our book of business and contributed to improvement in our credit performance. For information on the credit risk profile of our single-family guaranty book of business, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management,” including “ Table 27 : Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business .”

Our single-family serious delinquency rate has decreased each quarter since the first quarter of 2010, and was 1.32% as of June 30, 2016 , compared with 1.55% as of December 31, 2015. We continue to experience disproportionately higher serious delinquency rates and credit losses from single-family loans originated in 2005 through 2008 than from loans originated in other years. Single-family loans originated in 2005 through 2008 constituted 9% of our single-family book of business as of June 30, 2016 , but constituted 54% of our seriously delinquent single-family loans as of June 30, 2016 and drove 59% of our single-family credit losses in the second quarter of 2016 . For information on the credit performance of our single-family book of business based on loan vintage, see “ Table 11 : Credit Loss Concentration Analysis ” in “Consolidated Results of Operations—Credit-Related Income—Credit Loss Performance Metrics” and “ Table 29 : Single-Family Conventional Seriously Delinquent Loan Concentration Analysis ” in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.” For information on certain credit characteristics of our single-family book of business based on the period in which we acquired the loans, see “ Table 24 : Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period ” in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.”

We provide additional information on our credit-related income and credit losses in “Consolidated Results of Operations—Credit-Related Income.” We provide more information on the credit performance of mortgage loans in our single-family book of business and our efforts to reduce our credit losses in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.” See also “Risk Factors” in our 2015 Form 10-K, where we describe factors that may increase our credit-related expense and credit losses, as well as factors that may adversely affect the success of our efforts to reduce our credit losses.

Recently Acquired Single-Family Loans

Table 2 below displays information regarding our average charged guaranty fee on and select risk characteristics of the single-family loans we acquired in each of the last six quarters, including HARP acquisitions. Table 2 also displays 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 in these periods.

Table 2 : Single-Family Acquisitions Statistics

The average charged guaranty fee on our newly-acquired single-family loans may vary from period to period as a result of shifts in the loan level price adjustments we charge or changes we make to our contractual fee rates. Loan level price adjustments refer to one-time cash fees that we charge at the time we acquire a loan based on its credit characteristics. The contractual fee rates we charge vary to the extent we make changes in our pricing strategy in response to the market and competitive environment. See “Legislative and Regulatory Developments—FHFA Developments—Establishment of Minimum Base Guaranty Fees” for a discussion of FHFA’s July 2016 establishment of minimum base guaranty fees we may charge.

The single-family loans we acquired in the second quarter of 2016 continued to have a strong credit profile, with a weighted average original LTV ratio of 75% and a weighted average FICO credit score of 749 . For more information on the credit risk profile of our single-family conventional loan acquisitions in the second quarter and first half of 2016 , see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management,” including “ Table 27 : Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business ” in that section.

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 guaranty fee pricing and any impact of that pricing on the volume and mix of loans we acquire; our future eligibility standards and those of mortgage insurers, the Federal Housing Administration (“FHA”) and the Department of Veterans Affairs (“VA”); the percentage of loan originations representing refinancings; changes in interest rates; our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers; government policy; market and competitive conditions; and the volume and characteristics of HARP loans we acquire in the future. In addition, if our lender customers retain more

of the higher-quality loans they originate, it could negatively affect the credit risk profile of our new single-family acquisitions.

Providing Access to Credit Opportunities for Creditworthy Borrowers

We are continuing our efforts to increase access to mortgage credit for creditworthy borrowers, consistent with the full extent of our applicable credit requirements and risk management practices. As part of these efforts, in 2014 we changed our eligibility requirements to increase our maximum LTV ratio from 95% to 97% for loans meeting certain criteria, and in 2015 we announced an improved affordable lending product, HomeReady ^® , which is designed for creditworthy borrowers with lower and moderate incomes and provides expanded eligibility for financing homes in designated low-income communities. We began acquiring loans under our revised eligibility criteria in December 2014 and under HomeReady in December 2015. See “Business—Executive Summary—Single-Family Guaranty Book of Business—Providing Access to Credit Opportunities for Creditworthy Borrowers” in our 2015 Form 10-K for more information regarding these loans, including a discussion of their eligibility requirements, the number of these loans acquired in 2015 and our expectations regarding our future acquisitions of these loans.

We continue to seek new ways to responsibly expand access to mortgage credit. FHFA’s 2016 conservatorship scorecard specifies that in 2016 we should continue to assess impediments to credit access and develop recommendations to address these barriers. To the extent we are able to encourage lenders to increase access to mortgage credit, we may acquire a greater number of single-family loans with higher risk characteristics than we acquired in recent periods; however, we expect our single-family acquisitions will continue to have a strong overall credit risk profile given our current underwriting and eligibility standards and product design. We actively monitor the credit risk profile and credit performance of our single-family loan acquisitions, in conjunction with housing market and economic conditions, to determine if our pricing, eligibility and underwriting criteria accurately reflect the risks associated with loans we acquire or guarantee.

Contributions to the Housing and Mortgage Markets

Liquidity and Support Activities

As a leading provider of residential mortgage credit in the United States, we indirectly enable families to buy, refinance or rent homes. During the second quarter of 2016 , we continued to provide critical liquidity and support to the U.S. mortgage market in a number of important ways:

2016 Market Share

We were one of the largest issuers of mortgage-related securities in the secondary market during the second quarter of 2016 , with an estimated market share of new single-family mortgage-related securities issuances of 38% , compared with 37% in the first quarter of 2016 and 37% in the second quarter of 2015 .

We remained a continuous source of liquidity in the multifamily market in the second quarter and first half of 2016 . We owned or guaranteed approximately 19% of the outstanding debt on multifamily properties as of March 31, 2016 (the latest date for which information is available).

Serving Customer Needs and Improving Our Business Efficiency

We are engaged in various initiatives to better serve our customers’ needs and improve our business efficiency. We are committed to providing our lender partners with the products, services and tools they need to serve the market more effectively and efficiently. To further this commitment, we are focused on continuing to revise and clarify our representation and warranty framework, implementing innovative new and enhanced tools that deliver greater value and certainty to lenders, and making our customers’ interactions with us simpler and more efficient.

Continuing to revise and clarify our representation and warranty framework . We have taken several actions in recent years to improve our representation and warranty framework. These actions have significantly reduced uncertainty surrounding lenders’ repurchase risk relating to loans they deliver to us, and our intention is that these actions will encourage lenders to safely expand their lending to a wider range of qualified borrowers. As of June 30, 2016 , over 2.4 million loans in our book of business had obtained relief from repurchases for breaches of certain representations and warranties. We continue to work on new ways to reduce or clarify lenders’ repurchase risk. See “Business—Executive Summary—Serving Customer Needs and Improving Our Business Efficiency” in our 2015 Form 10-K and “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management” in both our 2015 Form 10-K and this report for further discussion of changes to our representation and warranty framework and actions we have taken to reduce and clarify lenders’ repurchase risk.

Implementing innovative new and enhanced tools that deliver greater value and certainty to lenders. As described in “Business—Executive Summary—Serving Customer Needs and Improving Our Business Efficiency” in our 2015 Form 10‑K, in 2015 we implemented a number of changes designed to help our customers originate mortgages with increased certainty, efficiency and lower costs, and we continue to focus on improving our business to provide value to customers. For example, we expect to implement additional enhancements to Desktop Underwriter ^® during 2016 to further help our lender customers originate mortgages with increased efficiency and lower costs and to help increase access to credit for creditworthy borrowers, such as incorporating trended credit data and offering third-party validation of specified borrower data.

Making our customers’ interactions with us simpler and more efficient. We are also engaged in a multi-year effort to improve our business efficiency and agility through simplification of our business processes and enhancements to our infrastructure. Many of these improvements are also designed to enhance our customers’ experience when doing business with us, including making our customers’ interactions with us simpler and more efficient. These efforts include replacing some of our systems with simpler, more automated infrastructure that will enable us to more efficiently process transactions and manage our book of business, as well as to better adapt to industry and regulatory changes in the future. We are also implementing infrastructure improvements to support the integration of our business with the common securitization platform and our ability to issue a single security.

Treasury Senior Preferred Stock Purchase Agreement

From 2009 through the first quarter of 2012, we received a total of $ 116.1 billion from Treasury under the senior preferred stock purchase agreement. This funding 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 triggering mandatory receivership under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Federal Housing Finance Regulatory Reform Act of 2008 (together, the “GSE Act”). In addition, a portion of the $ 116.1 billion we received from Treasury was drawn to pay dividends to Treasury because, prior to 2013, our dividend payments on the senior preferred stock accrued at an annual rate of 10%, and we were directed by our conservator to pay these dividends to Treasury each quarter even when we did not have sufficient income to pay the dividend. We have not received funds from Treasury under the agreement since the first quarter of 2012.

From 2008 through the second quarter of 2016 , we paid a total of $148.5 billion in dividends to Treasury on the senior preferred stock. Under the terms of the senior preferred stock purchase agreement, dividend payments do not offset prior Treasury draws, and we are not permitted to pay down draws we have made under the agreement except in limited

circumstances. Accordingly, the current aggregate liquidation preference of the senior preferred stock is $117.1 billion , due to the initial $1.0 billion liquidation preference of the senior preferred stock (for which we did not receive cash proceeds) and the $ 116.1 billion we have drawn from Treasury.

The Director of FHFA has directed us to make dividend payments on the senior preferred stock on a quarterly basis. We expect to pay Treasury a senior preferred stock dividend of $2.9 billion by September 30, 2016 for the third quarter of 2016 .

We expect to retain only a limited amount of any future net worth because we are required by the dividend provisions of the senior preferred stock and quarterly directives from our conservator to pay Treasury each quarter any dividends declared consisting of 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 $1.2 billion for each quarter of 2016 , will decrease to $600 million in 2017 and will decrease to zero in 2018. Those dividend payment provisions are referred to as “net worth sweep” dividend provisions.

Although we expect to remain profitable on an annual basis for the foreseeable future, due to our expectation of continued declining capital and the potential for significant volatility in our financial results, we could experience a net worth deficit in a future quarter, particularly as our capital reserve amount approaches or reaches zero. If that were to occur, we would be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership. As of the date of this filing, the maximum amount of remaining funding under the agreement is $117.6 billion . If we were to draw additional funds from Treasury under the agreement in a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the agreement. See “Risk Factors” in our 2015 Form 10-K for a discussion of the risks associated with our limited and declining capital.

As described in “Legal Proceedings” and “ Note 16, Commitments and Contingencies ,” several lawsuits have been filed by preferred and common stockholders of Fannie Mae and Freddie Mac against one or more of the United States, Treasury and FHFA challenging actions taken by the defendants relating to the senior preferred stock purchase agreements and the conservatorships of Fannie Mae and Freddie Mac, including challenges to the net worth sweep dividend provisions of the senior preferred stock. We are also a party to some of those lawsuits. We cannot predict the course or the outcome of these lawsuits, or the actions the U.S. government (including Treasury or FHFA) may take in response to any ruling or finding in any of these lawsuits.

Housing and Mortgage Market and Economic Conditions

According to the U.S. Bureau of Economic Analysis advance estimate, the inflation-adjusted U.S. gross domestic product, or GDP, rose by 1.2% on an annualized basis in the second quarter of 2016 , compared with an increase of 0.8% in the first quarter of 2016 . The overall economy gained an estimated 442,000 non-farm jobs in the second quarter of 2016 . According to the U.S. Bureau of Labor Statistics, over the 12 months ending in  June 2016 , the economy created an estimated 2.5 million non-farm jobs. The unemployment rate was 4.9% in June 2016 , compared with 5.0% in March 2016.

According to the Federal Reserve, total U.S. residential mortgage debt outstanding, which includes $10.0 trillion of single-family debt outstanding, was estimated to be approximately $11.1 trillion as of March 31, 2016 (the latest date for which information is available) and as of December 31, 2015.

Housing sales increased in the second quarter of 2016 as compared with the first quarter of 2016 . Total existing home sales averaged 5.5 million units annualized in the second quarter of 2016 , a 3.8% increase from the first quarter of 2016 , according to data from the National Association of REALTORS ^® . Sales of foreclosed homes and preforeclosure, or “short,” sales (together, “distressed sales”) accounted for 6% of existing home sales in June 2016 , compared with 8% in both March 2016 and June 2015. According to the U.S. Census Bureau, new single-family home sales increased during the second quarter of 2016 , averaging an annualized rate of 579,000 units, a 9.3% gain from the first quarter of 2016 .

The number of months’ supply, or the inventory/sales ratio, of available existing homes increased in the second quarter of 2016 , while the supply of available new homes decreased during the quarter. According to the National Association of REALTORS, the months’ supply of existing unsold homes was 4.6 months as of June 30, 2016 , compared with a 4.4 months’ supply as of March 31, 2016 . According to the U.S. Census Bureau, the months’ supply of new single-family unsold homes was 4.9 months as of June 30, 2016 , compared with 5.5 months as of March 31, 2016 .

The overall mortgage market serious delinquency rate fell to 3.3%  as of March 31, 2016 (the latest date for which information is available), according to the Mortgage Bankers Association’s National Delinquency Survey, its lowest level since the third quarter of 2007, compared with 4.2% as of March 31, 2015. We provide information about Fannie Mae’s serious delinquency rate, which decreased in the second quarter 2016 , in “Single-Family Guaranty Book of Business—Credit Performance.”

Based on our home price index, we estimate that home prices on a national basis increased by 2.8% in the second quarter of 2016 and by 3.8% in the first half of 2016 , following increases of 4.8% in 2015 , 4.4% in 2014 and 7.8% in 2013. Despite the recent increases in home prices, we estimate that, through June 30, 2016 , home prices on a national basis remained 2.8% 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.

Thirty-year fixed-rate mortgage rates ended the quarter at 3.48% for the week of June 30, 2016 , down from 3.71% for the week of March 31, 2016, according to Freddie Mac’s Primary Mortgage Market Survey ^® . The referendum by voters in the United Kingdom to exit the European Union (“Brexit”) triggered strong safe-haven flows into U.S. Treasuries, driving mortgage rates down to near historic lows. The average 30-year fixed rate mortgage rate of 3.48% for the week of June 30, 2016, just one week after the vote, was eight basis points lower than the prior week’s rate and the lowest rate since May 2013.

During the second quarter of 2016 , the multifamily sector exhibited stable, yet slowing fundamentals, according to preliminary third-party data, with a slightly lower estimated national vacancy level as compared with the first quarter of 2016 , as well as increasing rent growth. The estimated national multifamily vacancy rate for institutional investment-type apartment properties was 5.0% as of June 30, 2016 , down from 5.1% as of March 31, 2016 , but up from 4.8% as of June 30, 2015. National asking rents increased by an estimated 1.0% during the second quarter of 2016 , up from an increase of only 0.5% during the first quarter of 2016 and on a par with an increase of 1.0% during the second quarter of 2015. Because estimated multifamily rent growth has outpaced wage growth over the past few years, multifamily rental housing affordability has declined in recent years.

Slowing but continued demand for multifamily rental units was reflected in the estimated positive net absorption (that is, the net change in the number of occupied rental units during the time period) of approximately 36,000 units during the second quarter of 2016 , according to preliminary data from Reis, Inc. While that is an increase from the approximately 33,000 units absorbed during the first quarter of 2016 , the pace of absorption slowed compared with the approximately 49,000 units absorbed during the second quarter of 2015. 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. Nearly 388,000 new multifamily units are expected to be completed this year. Although the bulk of this new supply is concentrated in a limited number of metropolitan areas, we believe this increase in supply will result in an increase in the national multifamily vacancy rate and a slowdown in rent growth.

Outlook

Uncertainty Regarding our Future Status. We expect continued significant uncertainty regarding the future of our company and the housing finance system, including how long the company will continue to exist in its current form, the extent of our role in the market, how long we will be in 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, and whether we will continue to exist following conservatorship.

We cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation. See “Business—Housing Finance Reform” in our 2015 Form 10-K for a discussion of proposals for reform of the housing finance system, including the GSEs, that could materially affect our business, including proposals to wind down Fannie Mae and Freddie Mac. See “Risk Factors” in both this report and our 2015 Form 10-K for a discussion of the risks to our business relating to the uncertain future of our company.

Financial Results. We continued to be profitable in the second quarter of 2016 , with net income of $2.9 billion . We expect to remain profitable on an annual basis for the foreseeable future; however, certain factors, such as changes in interest rates or home prices, could result in significant volatility in our financial results from quarter to quarter or year to year. Our future financial results also will be affected by a number of other factors, including: our guaranty fee rates; the volume of single-family mortgage originations in the future; the size, composition and quality of our retained mortgage portfolio and guaranty book of business; and economic and housing market conditions. Although we expect to remain profitable on an annual basis for the foreseeable future, due to our expectation of continued declining capital and the potential for significant volatility in our financial results, we could experience a net worth deficit in a future quarter, particularly as our capital reserve amount approaches or reaches zero. See “Treasury Senior Preferred Stock Purchase Agreement” above and “Risk Factors” in our 2015 Form 10-K for more information on, and the risks associated with, our limited and declining capital. In addition, our expectations for our future financial results do not take into account the impact on our business of potential future legislative or regulatory changes, which could have a material impact on our financial results, particularly the enactment of housing finance reform legislation as noted in “Uncertainty Regarding our Future Status” above.

Revenues. We currently have two primary sources of revenues: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) 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. In recent years, an increasing portion of our net interest income has been derived from guaranty fees rather than from our retained mortgage portfolio assets, due to the impact of guaranty fee increases implemented in 2012 and the reduction of our retained mortgage portfolio. Approximately two-thirds of our net interest income in the first half of 2016 was derived from the loans underlying our Fannie Mae MBS in consolidated trusts, which primarily generate income through guaranty fees. We expect that guaranty fees will continue to account for an increasing portion of our net interest income.

We expect continued decreases in the size of our retained mortgage portfolio, which will continue to negatively impact our net interest income and net revenues; however, we also expect increases in our guaranty fee revenues will partially offset the negative impact of the decline in our retained mortgage portfolio. We expect our guaranty fee revenues to increase over the next several years, as loans with lower guaranty fees liquidate from our book of business and are replaced with new loans with higher guaranty fees. The extent to which the positive impact of increased guaranty fee revenues will offset the negative impact of the decline in the size of our retained mortgage portfolio will depend on many factors, including: changes to guaranty fee pricing we may make in the future and their impact on our competitive environment and guaranty fee revenues; the size, composition and quality of our guaranty book of business; the life of the loans in our guaranty book of business; the size, composition and quality of our retained mortgage portfolio; economic and housing market conditions, including changes in interest rates; our market share; and legislative and regulatory changes.

Overall Market Conditions. While we expect the single-family serious delinquency rate for the overall mortgage market will continue to decline, we believe the rate of decline will be gradual. We expect the national single-family serious delinquency rate will remain high compared with pre-housing crisis levels because it will take some time for the remaining delinquent loans originated prior to 2009 to work their way through the foreclosure process.

We forecast that total originations in the U.S. single-family mortgage market in 2016 will increase from 2015 levels by approximately 2% from an estimated $1.71 trillion in 2015 to $1.75 trillion in 2016, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will decrease from an estimated $795 billion in 2015 to $733 billion in 2016.

Home Prices. Based on our home price index, we estimate that home prices on a national basis increased by 2.8% in the second quarter of 2016 and by 3.8% in the first half of 2016 . We expect the rate of home price appreciation in 2016 to be similar to the rate in 2015 . 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 fiscal policies, mortgage finance programs and policies, and housing finance reform; the Federal Reserve’s purchases and sales of mortgage-backed securities; 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 and political 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. Our credit losses were $2.4 billion in the first half of 2016 , down from $7.5 billion in the first half of 2015 . We expect our credit losses to be lower in 2016 than our 2015 credit losses. See “Consolidated Results of Operations—Credit-Related Income—Credit Loss Performance Metrics” for a discussion of our credit losses for the second quarter and first half of 2016 and 2015, including the impact on our first half 2015 credit losses of our adoption of FHFA’s Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” (the “Advisory Bulletin”) and a change in our accounting policy for nonaccrual loans, which collectively resulted in $3.6 billion in charge-offs in the first half of 2015.

Loss Reserves. Our combined loss reserves were $24.1 billion as of June 30, 2016 , down from $28.6 billion as of December 31, 2015 . Our loss reserves have declined substantially from their peak and are expected to decline further. For a discussion of the factors that contributed to the decline in our loss reserves in the second quarter and first half of 2016 , see “Consolidated Results of Operations—Credit-Related Income” and “Consolidated Balance Sheet Analysis—Mortgage Loans.”

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, the level and sources of our future revenues and net interest income, our future dividend payments to Treasury, the credit characteristics of, and the credit risk posed by, our future acquisitions, our future credit risk transfer transactions, 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 single-family loan delinquency rates, future mortgage originations, future refinancings, future

home prices and future conditions in the multifamily market. 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, including negative interest rates; changes in unemployment rates and other macroeconomic and housing market variables; our future guaranty fee pricing and the impact of that pricing on our guaranty fee revenues and competitive environment; our future serious delinquency rates; our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers; future legislative or regulatory requirements or changes that have a significant impact on our business, such as the enactment of housing finance reform legislation; actions we may be required to take by FHFA, in its role as our conservator or as our regulator, such as changes in the type of business we do or implementation of a single security for Fannie Mae and Freddie Mac; limitations on our business imposed by FHFA, in its role as our conservator or as our regulator; future updates to our models relating to our loss reserves, including the assumptions used by these models; future changes to our accounting policies; significant changes in modification and foreclosure activity; the volume and pace of future nonperforming loan sales and their impact on our results and serious delinquency rates; changes in borrower behavior, such as an increasing number of underwater borrowers who strategically default on their mortgage loans; the effectiveness of our loss mitigation strategies, management of our 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 fiscal and monetary policies of the Federal Reserve, including any change in the Federal Reserve’s policy towards the reinvestment of principal payments of mortgage-backed securities or any future sales of such securities; changes in the fair value of our assets and liabilities; changes in generally accepted accounting principles (“GAAP”); credit availability; global political risks; natural disasters, environmental disasters, terrorist attacks, pandemics or other major disruptive events; information security breaches; and other factors, including those discussed in “Forward-Looking Statements,” “Risk Factors” and elsewhere in this report and in our 2015 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—Housing Finance Reform” and “Business—Our Charter and Regulation of Our Activities” in our 2015 Form 10-K and in “MD&A—Legislative and Regulatory Developments” in our Form 10-Q for the quarter ended March 31, 2016 (“First Quarter 2016 Form 10-Q”). Also see “Risk Factors” in this report and in our 2015 Form 10-K for a discussion of risks relating to legislative and regulatory matters.

Housing Finance Reform

Congress continues to consider housing finance reform that could result in significant changes in our structure and role in the future. As described in “Business—Housing Finance Reform—Legislative Developments” in our 2015 Form 10-K, in the first session of the 114th Congress, which convened in January 2015, several bills were introduced and considered in the Senate and the House of Representatives relating to Fannie Mae, Freddie Mac and the housing finance system, two of which were enacted into law.

We expect Congress to continue to consider legislation relating to the GSEs and housing finance reform, including conducting hearings and considering legislation that would alter the housing finance system or the activities or operations of the GSEs. See “Risk Factors” in this report and our 2015 Form 10-K for a discussion of the risks to our business relating to the uncertain future of our company.

FHFA Developments

Establishment of Minimum Base Guaranty Fees. Our guaranty fee pricing for single-family loans consists of two components—guaranty fees that we periodically change according to our pricing strategy in response to the market and competitive environment and loan level pricing adjustments that we charge at the time we acquire a loan based on its credit characteristics. From time to time, FHFA establishes requirements for our guaranty fee pricing. In July 2016, FHFA advised us that, as a result of its recently completed comprehensive review of our guaranty fee levels for new acquisitions of single-family mortgages, FHFA, in its regulatory capacity, determined that it was necessary to set minimum base guaranty fees for us. FHFA’s objective is to ensure that guaranty fee reductions do not result in unsafe and unsound conditions. As a result,

FHFA established minimum base guaranty fees that generally apply to our acquisitions of 30-year and 15-year fixed-rate loans in lender swap transactions.

Common Securitization Platform and Single Security. FHFA’s 2016 conservatorship scorecard includes objectives relating to multi-year initiatives we are working on with FHFA, Freddie Mac and Common Securitization Solutions, LLC (“CSS”), a company we jointly own with Freddie Mac, to develop a common securitization platform and a single mortgage-backed security for Fannie Mae and Freddie Mac. In July 2016, FHFA issued an update on implementation of the single security and the common securitization platform that details the progress made to date and describes the milestones that Fannie Mae, Freddie Mac and CSS are expected to meet. The update describes the various phases of testing required for implementing the common securitization platform for Freddie Mac’s existing single-class securities in 2016 and for implementing the single security on the common securitization platform for both Fannie Mae and Freddie Mac in 2018; announces the planned issuance of final single security features and disclosures to the market; and provides information on the ongoing alignment of Fannie Mae and Freddie Mac programs, policies and practices and the processes that will be followed to further support the single security initiative. Also in July 2016, together with Freddie Mac, we published an update describing the final single security features and disclosures for the single security. Later this year, FHFA expects to announce the intended launch date for the single security in order to provide stakeholders at least 12 months’ advance notice.

See our discussion of how our business activities are significantly affected by the conservatorship in “Risk Factors” in our 2015 Form 10-K for more information on the potential impact of FHFA’s requirements for our guaranty fees on our credit risk profile, revenues, results of operations and business as well as a discussion of the risks to our business associated with a single security for Fannie Mae and Freddie Mac, including the risks that implementation of a single security would likely reduce, and could eliminate, the trading advantage that Fannie Mae MBS have over Freddie Mac mortgage-backed securities and that, if this occurs, it could adversely affect our results of operations.

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 2015 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 2015 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 two 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: fair value measurement and combined loss reserves.

See “MD&A—Critical Accounting Policies and Estimates” in our 2015 Form 10-K for a discussion of these critical accounting policies and estimates.

This section provides a discussion of our condensed consolidated results of operations and should be read together with our condensed consolidated financial statements, including the accompanying notes.

Table 3 : Summary of Condensed Consolidated Results of Operations