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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from        to
Commission file number: 0-50231
Federal National Mortgage Association
(Exact name of registrant as specified in its charter)
Fannie Mae
Federally chartered corporation52-08831071100 15th Street, NW800232-6643
Washington,DC20005
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: 
Title of each classTrading Symbol(s)Name of each exchange on which registered
NoneN/AN/A
Securities registered pursuant to Section 12(g) of the Act: 
Common Stock, without par value
8.25% Non-Cumulative Preferred Stock, Series T, stated value $25 per share
Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series S, stated value $25 per share
7.625% Non-Cumulative Preferred Stock, Series R, stated value $25 per share
6.75% Non-Cumulative Preferred Stock, Series Q, stated value $25 per share
Variable Rate Non-Cumulative Preferred Stock, Series P, stated value $25 per share
Variable Rate Non-Cumulative Preferred Stock, Series O, stated value $50 per share
5.375% Non-Cumulative Convertible Series 2004-1 Preferred Stock, stated value $100,000 per share
5.50% Non-Cumulative Preferred Stock, Series N, stated value $50 per share
4.75% Non-Cumulative Preferred Stock, Series M, stated value $50 per share
5.125% Non-Cumulative Preferred Stock, Series L, stated value $50 per share
5.375% Non-Cumulative Preferred Stock, Series I, stated value $50 per share
5.81% Non-Cumulative Preferred Stock, Series H, stated value $50 per share
Variable Rate Non-Cumulative Preferred Stock, Series G, stated value $50 per share
Variable Rate Non-Cumulative Preferred Stock, Series F, stated value $50 per share
5.10% Non-Cumulative Preferred Stock, Series E, stated value $50 per share
5.25% Non-Cumulative Preferred Stock, Series D, stated value $50 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨      No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨        No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes þ     No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer  
Non-accelerated filer Smaller reporting company  
Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐  No ☑
The aggregate market value of the common stock held by non-affiliates computed by reference to the closing price of the common stock quoted on the OTCQB on June 30, 2022 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $498 million.
As of February 1, 2023, there were 1,158,087,567 shares of common stock of the registrant outstanding.




Table of Contents
Page
PART I
Item 1.Business
Introduction
Executive Summary
Summary of Our Financial Performance
Liquidity Provided in 2022
Our Mission, Strategy and Charter
Mortgage Securitizations
Managing Mortgage Credit Risk
Conservatorship and Treasury Agreements
Legislation and Regulation
Human Capital
Where You Can Find Additional Information
Forward-Looking Statements
Item 1A.Risk Factors
Risk Factors Summary
GSE and Conservatorship Risk
Credit Risk
Operational Risk
Liquidity and Funding Risk
Market and Industry Risk
Legal and Regulatory Risk
General Risk
Item 1B.Unresolved Staff Comments
Item 2.Properties
Item 3.Legal Proceedings
Item 4.Mine Safety Disclosures
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. [Reserved]
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Key Market Economic Indicators
Consolidated Results of Operations
Consolidated Balance Sheet Analysis
Retained Mortgage Portfolio
Guaranty Book of Business
Business Segments
Single-Family Business
Single-Family Mortgage Market
Single-Family Mortgage-Related Securities Issuances Share
Single-Family Business Metrics
Single-Family Business Financial Results
Single-Family Mortgage Credit Risk Management
Multifamily Business
Fannie Mae 2022 Form 10-K
i


Multifamily Mortgage Market
Multifamily Market Activity
Multifamily Business Metrics
Multifamily Business Financial Results
Multifamily Mortgage Credit Risk Management
Consolidated Credit Ratios and Select Credit Information
Liquidity and Capital Management
Risk Management
Mortgage Credit Risk Management Overview
Climate and Natural Disaster Risk Management
Institutional Counterparty Credit Risk Management
Market Risk Management, including Interest-Rate Risk Management
Liquidity and Funding Risk Management
Operational Risk Management
Critical Accounting Estimates
Impact of Future Adoption of New Accounting Guidance
Glossary of Terms Used in This Report
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
Item 8.Financial Statements and Supplementary Data
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.Controls and Procedures
Item 9B.Other Information
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 10.Directors, Executive Officers and Corporate Governance
Directors
Corporate Governance
ESG Matters
Report of the Audit Committee of the Board of Directors
Executive Officers
Item 11.Executive Compensation
Compensation Discussion and Analysis
Compensation Committee Report
Compensation Risk Assessment
Compensation Tables and Other Information
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.Certain Relationships and Related Transactions, and Director Independence
Policies and Procedures Relating to Transactions with Related Persons
Transactions with Related Persons
Director Independence
Item 14.Principal Accounting Fees and Services
PART IV
Item 15.Exhibits, Financial Statement Schedules
Item 16.Form 10-K Summary
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Fannie Mae 2022 Form 10-K
ii

Business | Introduction


PART I
We have been under conservatorship, with the Federal Housing Finance Agency (“FHFA”) acting as conservator, since September 6, 2008. As conservator, FHFA succeeded to all rights, titles, powers and privileges of the company, and of any shareholder, officer or director of the company with respect to the company and its assets. The conservator has since provided for the exercise of certain functions and authorities by our Board of Directors. Our directors owe their fiduciary duties of care and loyalty solely to the conservator. Thus, while we are in conservatorship, the Board has no fiduciary duties to the company or its stockholders.
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.
We are not currently permitted to pay dividends or other distributions to stockholders. Our agreements with the U.S. Department of the Treasury (“Treasury”) include a commitment from Treasury to provide us with funds to maintain a positive net worth under specified conditions; however, the U.S. government does not guarantee our securities or other obligations. Our agreements with Treasury also include covenants that significantly restrict our business activities. For additional information on the conservatorship, the uncertainty of our future, and our agreements with Treasury, see “Business—Conservatorship and Treasury Agreements” and “Risk Factors—GSE and Conservatorship Risk.”
Forward-looking statements in this report are based on management’s current expectations and are subject to significant uncertainties and changes in circumstances, as we describe in “Business—Forward-Looking Statements.” Future events and our future results may differ materially from those reflected in our forward-looking statements due to a variety of factors, including those discussed in “Risk Factors” and elsewhere in this report.
You can find a “Glossary of Terms Used in This Report” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (‘MD&A’).”
Item 1.  Business
Introduction
Fannie Mae is a leading source of financing for mortgages in the United States. Organized as a government-sponsored entity, Fannie Mae is a shareholder-owned corporation. We were chartered by Congress to provide liquidity and stability to the residential mortgage market and to promote access to mortgage credit. Our revenues are primarily driven by guaranty fees we receive for assuming the credit risk on loans underlying the mortgage-backed securities we issue. We do not originate loans or lend money directly to borrowers. Rather, we work primarily with lenders who originate loans to borrowers. We acquire and securitize those loans into mortgage-backed securities that we guarantee (which we refer to as Fannie Mae MBS or our MBS).
Fannie Mae 2022 Form 10-K
1

Business | Executive Summary
Executive Summary
Please read this summary together with our MD&A, our consolidated financial statements as of December 31, 2022 and the accompanying notes.
Summary of Our Financial Performance
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2022 vs. 2021
Net revenues remained relatively flat in 2022 compared with 2021, as lower amortization income was offset by higher income from portfolios and higher base guaranty fee income.
Lower amortization income was driven by a higher interest rate environment in 2022, which slowed refinancing activity driving lower prepayment volumes compared with 2021.
Higher income from portfolios was primarily driven by higher yields on assets in our other investments portfolio as a result of increases in interest rates, as well as a decrease in interest expense on our long-term funding debt due to a decrease in the average outstanding balance; and
Higher base guaranty fee income was due to an increase in the size of our guaranty book of business and higher average charged guaranty fees.
Net income decreased $9.3 billion in 2022 compared with 2021, primarily driven by a $11.4 billion shift to provision for credit losses in 2022 from a benefit for credit losses in 2021. Also contributing to the decline in net income was a $1.6 billion shift to investment losses in 2022 from investment gains in 2021. These decreases were partially offset by higher fair value gains.
Provision for credit losses in 2022 was due to:
A single-family provision primarily driven by decreases in forecasted home prices, the overall credit risk profile of our newly acquired loans, and rising interest rates.
A multifamily provision primarily driven by an increase in expected credit losses on our seniors housing portfolio, which has been disproportionately impacted by recent market conditions, as well as higher actual and projected interest rates.
Net investment losses in 2022 were primarily driven by a significant decrease in the market value of single-family loans, which resulted in valuation losses on loans held-for-sale as of December 31, 2022, as well as lower prices on loans sold during the year. Net investment gains in 2021 were driven by strong loan pricing coupled with a high volume of single-family loan sales during the year.
Fannie Mae 2022 Form 10-K
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Business | Executive Summary
Fair value gains in 2022 were primarily driven by the impact of rising interest rates and widening of the secondary spread, which led to price declines. As a result of the price declines, we recognized gains on our commitments to sell mortgage-related securities and long-term debt of consolidated trusts held at fair value. These gains were partially offset by fair value losses on fixed-rate trading securities.
Net worth increased by $12.9 billion in 2022 to $60.3 billion as of December 31, 2022. The increase is attributed to $12.9 billion of comprehensive income for the year ended December 31, 2022.
2021 vs. 2020
Net revenues increased $4.6 billion in 2021 compared with 2020, driven by higher base guaranty fee income and higher amortization income partially offset by lower income from portfolios.
Higher base guaranty fee income was driven by the growth of our guaranty book of business along with higher average guaranty fees related to the loans in our book of business in 2021.
Higher amortization income was due to high prepayment volumes from loan refinancings as a result of the continued low interest-rate environment. The loans and associated debt of consolidated trusts that liquidated in 2021 also had larger unamortized deferred fees than those that liquidated in 2020.
Lower net interest income from our portfolios compared with 2020 was due to lower average balances and lower yields on our mortgage loans and securities partially offset by lower borrowing costs on our long-term funding debt.
Net income increased $10.4 billion in 2021 compared with 2020, mainly due to higher net revenues as discussed above plus a shift from provision for credit losses in 2020 to a benefit for credit losses in 2021. Benefit for credit losses in 2021 was primarily driven by strong actual and forecasted home price growth, a benefit from the redesignation of certain nonperforming and reperforming loans and a reduction in our estimate of losses we expected to incur as a result of the COVID-19 pandemic, partially offset by a provision for higher actual and projected interest rates.
Net worth increased by $22.1 billion in 2021 to $47.4 billion as of December 31, 2021. The increase is attributed to $22.1 billion of comprehensive income for the year ended December 31, 2021.
Liquidity Provided in 2022
Through our single-family and multifamily business segments, we provided $684 billion in liquidity to the mortgage market in 2022, which enabled the financing of approximately 2.6 million home purchases, refinancings and rental units.
Fannie Mae Provided $684 billion in Liquidity in 2022
Unpaid Principal BalanceUnits
$378B
1,151K
Single-Family Home Purchases
$237B
 886K
Single-Family Refinancings
$69B
598K
Multifamily Rental Units
We continued our commitment to green financing in 2022, issuing a total of $9.1 billion in multifamily green MBS, $1.4 billion in single-family green MBS, and $781 million in multifamily green resecuritizations. We also issued $11.8 billion in multifamily social MBS and $773 million in multifamily social resecuritizations in 2022. These green and social bonds were issued in alignment with our Sustainable Bond Framework, which guides our issuances of green and social bonds that support energy and water efficiency and housing affordability. A portion of these bonds meet both program criteria and are included in each respective category.
Fannie Mae 2022 Form 10-K
3

Business | Our Mission, Strategy and Charter
Our Mission, Strategy and Charter
Our Mission and Strategy
Our mission is to facilitate equitable and sustainable access to homeownership and quality affordable rental housing across America.
We have developed a new strategic plan for 2023 to 2025 representing how we intend to achieve our mission and chartered purposes in a safe and sound manner. Our strategic plan includes the following foundational objectives and related priorities.
ObjectivesRelated Priorities
Improve Access to Equitable and Sustainable Housing: Build on our mission-first culture to deliver positive community outcomes that serve renters and homeowners.
Advance greater equity in the housing finance system by removing significant barriers to quality affordable housing, particularly for historically underserved consumers.
Increase and preserve access to sustainable housing by maintaining inclusive credit standards, helping consumers navigate hardships, and supporting the housing ecosystem’s adaptation to climate change.
Increase efficiency, reduce frictions, and benefit borrowers and renters through lender, fintech, and other stakeholder engagements.
Enhance our Financial and Risk Positions: Ensure that we are financially secure, can earn investable returns, and manage risk to the firm and the housing finance system.
Improve our capabilities to price and manage our business to balance mission, housing goals, duties to serve, risk profile, returns, and securities performance.
Manage risk dynamically through changing market conditions, evolving risks, and the growing impacts of climate change.
Generate strong financial results and continue to build net worth.
This strategic plan remains subject to FHFA review and approval.
In addition, since 2012, FHFA has released annual corporate performance objectives for us, referred to as the conservatorship scorecard. For information on FHFA’s 2023 conservatorship scorecard objectives, see our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on January 10, 2023. For information on FHFA’s 2022 conservatorship scorecard objectives and our performance against these objectives, see “Executive Compensation—Determination of 2022 Compensation—Assessment of Corporate Performance against 2022 Scorecard.”
Our Charter
The Federal National Mortgage Association Charter Act (the “Charter Act”) establishes the parameters under which we operate and our purposes, which are to:
provide stability in the secondary market for residential mortgages;
respond appropriately to the private capital market;
provide ongoing assistance to the secondary market for residential mortgages (including activities relating to mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and
promote access to mortgage credit throughout the nation (including central cities, rural areas and underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing.
The Charter Act specifies that our operations are to be financed by private capital to the maximum extent feasible. We are expected to earn reasonable economic returns on all our activities. However, we may accept lower returns on certain activities relating to mortgages on housing for low- and moderate-income families in order to support those segments of the market.
Fannie Mae 2022 Form 10-K
4

Business | Our Mission, Strategy and Charter
Principal balance limitations. To meet our purposes, the Charter Act authorizes us to purchase and securitize mortgage loans secured by single-family and multifamily properties. Our acquisitions of single-family conventional mortgage loans are subject to maximum original principal balance limits, known as “conforming loan limits.” The conforming loan limits are adjusted each year based on FHFA’s housing price index. In most of the U.S., the conforming loan limit for mortgages secured by one-family residences was set at $647,200 for 2022, and will increase to $726,200 for 2023. Higher limits apply for mortgages secured by two- to four-family residences and in four statutorily-designated states and territories (Alaska, Hawaii, Guam and the U.S. Virgin Islands). In addition, higher loan limits of up to 150% of the otherwise applicable loan limit apply in certain high-cost areas. The Charter Act does not impose maximum original principal balance limits on loans we purchase or securitize that are insured by the Federal Housing Administration (“FHA”) or guaranteed by the Department of Veterans Affairs (“VA”).
The Charter Act also includes the following provisions:
Credit enhancement requirements. The Charter Act generally requires credit enhancement on any single-family conventional mortgage loan that we purchase or securitize that has a loan-to-value (“LTV”) ratio over 80% at the time of purchase. The credit enhancement may take the form of one or more of the following: (1) insurance or a guaranty by a qualified insurer on the portion of the unpaid principal balance of a mortgage loan that exceeds 80% of the property value; (2) a seller’s agreement to repurchase or replace the loan in the event of default; or (3) retention by the seller of at least a 10% participation interest in the loan. Regardless of LTV ratio, the Charter Act does not require us to obtain credit enhancement to purchase or securitize loans insured by FHA or guaranteed by the VA.
Issuances of our securities. We are authorized, upon the approval of the Secretary of the Treasury, to issue debt obligations and mortgage-related securities. Neither the U.S. government nor any of its agencies guarantees, directly or indirectly, our debt or mortgage-related securities.
Authority of Treasury to purchase our debt obligations. At the discretion of the Secretary of the Treasury, Treasury may purchase our debt obligations up to a maximum of $2.25 billion outstanding at any one time.
Exemption for our securities offerings. Our securities offerings are exempt from registration requirements under the federal securities laws. As a result, we do not file registration statements or prospectuses with the SEC with respect to our securities offerings. However, our equity securities are not treated as exempt securities for purposes of Sections 12, 13, 14 or 16 of the Securities Exchange Act of 1934 (the “Exchange Act”). Consequently, we are required to file periodic and current reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Our non-equity securities are exempt securities under the Exchange Act.
Exemption from specified taxes. Fannie Mae is exempt from taxation by states, territories, counties, municipalities and local taxing authorities, except for taxation by those authorities on our real property. We are not exempt from the payment of federal corporate income taxes.
Limitations. We may not originate mortgage loans or advance funds to a mortgage seller on an interim basis, using mortgage loans as collateral, pending the sale of the mortgages in the secondary market. We may purchase or securitize mortgage loans only on properties located in the United States and its territories.
Mortgage Securitizations
We support market liquidity by issuing Fannie Mae MBS that are readily traded in the capital markets. We create Fannie Mae MBS by placing mortgage loans in a trust and issuing securities that are backed by those mortgage loans. Monthly payments received on the loans are the primary source of payments passed through to Fannie Mae MBS holders. We guarantee to the MBS trust that we will supplement amounts received by the MBS trust as required to permit timely payment of principal and interest on the trust certificates. In return for this guaranty, we receive guaranty fees.
Below we discuss the three broad categories of our securitization transactions and the uniform mortgage-backed securities we issue.
Securitization Transactions
We currently securitize a substantial majority of the single-family and multifamily mortgage loans we acquire. Our securitization transactions primarily fall within three broad categories: lender swap transactions, portfolio securitizations, and structured securitizations.
Fannie Mae 2022 Form 10-K
5

Business | Mortgage Securitizations
Lender Swap Transactions
In a single-family “lender swap transaction,” a mortgage lender that operates in the primary mortgage market generally delivers a pool of mortgage loans to us in exchange for Fannie Mae MBS backed by these mortgage loans. Lenders may hold the Fannie Mae MBS they receive from us or sell them to investors. A pool of mortgage loans is a group of mortgage loans with similar characteristics. After receiving the mortgage loans in a lender swap transaction, we place them in a trust for which we serve as trustee. This trust is established for the sole purpose of holding the mortgage loans separate and apart from our corporate assets. We guarantee to each MBS trust that we will supplement amounts received by the MBS trust as required to permit timely payment of principal and interest on the related Fannie Mae MBS. We are entitled to a portion of the interest payment as a fee for providing our guaranty. The mortgage servicer also retains a portion of the interest payment as a fee for servicing the loan. Then, on behalf of the trust, we make monthly distributions to the Fannie Mae MBS certificateholders from the principal and interest payments and other collections on the underlying mortgage loans.
Lender Swap Transaction
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Our Multifamily business generally creates multifamily Fannie Mae MBS in lender swap transactions in a manner similar to our Single-Family business. Multifamily lenders typically deliver only one mortgage loan to back each multifamily Fannie Mae MBS. The characteristics of each mortgage loan are used to establish guaranty fees on a risk-adjusted basis. Securitizing a multifamily mortgage loan into a Fannie Mae MBS facilitates its sale into the secondary market.
Fannie Mae 2022 Form 10-K
6

Business | Mortgage Securitizations
Portfolio Securitization Transactions
We also purchase mortgage loans and mortgage-related securities for securitization and sale at a later date through our “portfolio securitization transactions.” Most of our portfolio securitization transactions are driven by our single-family whole loan conduit activities, pursuant to which we purchase single-family whole loans from a large group of typically small to mid-sized lenders principally for the purpose of securitizing the loans into Fannie Mae MBS, which may then be sold to dealers and investors.
Portfolio Securitization Transaction
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Structured Securitization Transactions
In a “structured securitization transaction,” we create structured Fannie Mae MBS, typically for lenders or securities dealers, in exchange for a transaction fee. In these transactions, the lender or dealer “swaps” a mortgage-related asset that it owns (typically a mortgage security) in exchange for a structured Fannie Mae MBS we issue. The process for issuing Fannie Mae MBS in a structured securitization is similar to the process involved in our lender swap securitizations described above.
We also issue structured transactions backed by multifamily Fannie Mae MBS through the Fannie Mae Guaranteed Multifamily Structures (“Fannie Mae GeMSTM”) program, which provides additional liquidity and stability to the multifamily market, while expanding the investor base for multifamily Fannie Mae MBS.
Uniform Mortgage-Backed Securities, or UMBS
Overview
Since 2019, we and Freddie Mac have each been issuing UMBS®, a uniform mortgage-backed security intended to maximize liquidity for both Fannie Mae and Freddie Mac mortgage-backed securities in the to-be-announced (“TBA”) market.
UMBS and Structured Securities
Each of Fannie Mae and Freddie Mac (the “GSEs”) issues and guarantees UMBS and structured securities backed by UMBS and other securities, as described below.
UMBS. Each of Fannie Mae and Freddie Mac issues and guarantees UMBS that are directly backed by the mortgage loans it has acquired, referred to as “first-level securities.” UMBS issued by Fannie Mae are backed only by mortgage loans that Fannie Mae has acquired, and similarly UMBS issued by Freddie Mac are backed only by mortgage loans that Freddie Mac has acquired. There is no commingling of Fannie Mae- and Freddie Mac-acquired loans within UMBS.
Mortgage loans backing UMBS are limited to fixed-rate mortgage loans eligible for financing through the TBA market. We continue to issue some types of Fannie Mae MBS that are not TBA-eligible and therefore are not issued as UMBS, such as single-family Fannie Mae MBS backed by adjustable-rate mortgages and all multifamily Fannie Mae MBS.
Fannie Mae 2022 Form 10-K
7

Business | Mortgage Securitizations
Structured Securities. Each of Fannie Mae and Freddie Mac also issues and guarantees structured mortgage-backed securities, referred to as “second-level securities,” that are resecuritizations of UMBS or previously-issued structured securities. In contrast to UMBS, second-level securities can be commingled—that is, they can include both Fannie Mae securities and Freddie Mac securities as the underlying collateral for the security. These structured securities include Supers®, which are single-class resecuritizations, and Real Estate Mortgage Investment Conduits (“REMICs”), which are multi-class resecuritizations. While Supers are backed only by TBA-eligible securities, REMICs can be backed by TBA-eligible or non-TBA-eligible securities.
In July 2022, we implemented a new upfront fee to create structured securities that include Freddie Mac securities, calculated as 50 basis points on the portion of the securities made up of Freddie Mac-issued collateral. Previously, there had been no fee to create these commingled securities. We implemented the fee to partially address the cost of capital we are required to hold to guarantee Freddie Mac’s securities. Freddie Mac implemented a similar fee.
On January 19, 2023, we, Freddie Mac and the Director of FHFA announced a reduction in this upfront fee for commingled securities to 9.375 basis points, effective April 1, 2023. In announcing the reduced fee, the Director of FHFA stated that FHFA is dedicated to preserving the strength and resilience of the UMBS market and committed to maintaining a durable framework that will enable commingling activity to resume in a way that addresses the concerns of all stakeholders to the greatest extent possible. She also stated that FHFA continues its review of the enterprise regulatory capital framework to ensure the framework appropriately reflects the risks of Fannie Mae’s and Freddie Mac’s business activities, including commingled securities.
The key features of UMBS are the same as those of legacy single-family Fannie Mae MBS. Accordingly, all single-family Fannie Mae MBS that are directly backed by fixed-rate loans and generally eligible for trading in the TBA market are considered UMBS, whether issued before or after the introduction of UMBS. In this report, we use the term “Fannie Mae-issued UMBS” to refer to single-family Fannie Mae MBS that are directly backed by fixed-rate mortgage loans and generally eligible for trading in the TBA market. We use the term “Fannie Mae MBS” or “our MBS” to refer to any type of mortgage-backed security that we issue, including UMBS, Supers, REMICs and other types of single-family or multifamily mortgage-backed securities. References to our single-family guaranty book of business in this report exclude Freddie Mac-acquired mortgage loans underlying Freddie Mac mortgage-related securities that we have resecuritized.
Common Securitization Platform
Certain aspects of the securitization process for our single-family Fannie Mae MBS issuances are performed by Common Securitization Solutions, LLC (“CSS”), which is a limited liability company we own jointly with Freddie Mac. CSS operates a common securitization platform, which was designed to allow for the potential integration of additional market participants in the future. In October 2021, FHFA announced its determination that CSS should focus on maintaining the resiliency of Fannie Mae’s and Freddie Mac’s mortgage-backed securities platform instead of expanding its role to serve a broader market.
We rely on the common securitization platform operated by CSS to securitize the single-family MBS we issue and for ongoing administrative functions for our single-family MBS. We do not use the common securitization platform for multifamily Fannie Mae MBS. See “Risk Factors—GSE and Conservatorship Risk” for a discussion of risks posed by our reliance on CSS.
Managing Mortgage Credit Risk
Effectively pricing and managing mortgage credit risk is key to our business. Below we discuss key elements of how we are compensated for and manage the risk of credit losses through the life cycle of our loans.
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Loan Acquisition Policies
Loans we acquire must be underwritten in accordance with our guidelines and standards.
In Single-Family, the substantial majority of loans we acquire are assessed by Desktop Underwriter® (DU®), our proprietary single-family automated underwriting system. DU performs a comprehensive evaluation of the primary risk factors of a mortgage. We regularly review DU’s underlying models to determine whether its risk analysis and eligibility assessment appropriately reflect current market conditions and loan performance data to ensure the loans we acquire are consistent with our risk appetite and FHFA guidance.
Fannie Mae 2022 Form 10-K
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Business | Managing Mortgage Credit Risk
In Multifamily, we acquire the vast majority of our loans through our Delegated Underwriting and Servicing (DUS®) Program. DUS lenders, who must be pre-approved by us, are delegated the authority to underwrite and service loans for delivery to us in accordance with our standards and requirements. Based on a given loan’s unique characteristics and our established delegation criteria, lenders assess whether a loan must be reviewed by us. If review is required, our internal credit team will assess the loan’s risk profile to determine if it meets our risk tolerances. DUS lenders also share with us the risk of loss on our multifamily loans, thereby aligning our interests throughout the life of the loan. We closely monitor our multifamily loan acquisitions and market conditions and, as appropriate, make changes to our standards and requirements to ensure the amount and characteristics of the multifamily loans we acquire are consistent with our risk appetite and FHFA guidance, such as FHFA’s annual volume cap.
For more information about our mortgage acquisition policies and underwriting standards, see “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management” and “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management.”
In exchange for managing credit risk on the loans we acquire, we receive guaranty fees that take into account, among other factors, the credit risk characteristics of the loans we acquire. We provide information about our guaranty fees in “MD&A—Single-Family Business—Single-Family Business Metrics” and in “MD&A—Multifamily Business—Multifamily Business Metrics.”
Loan Performance Management
We closely monitor the performance of loans in our guaranty book of business and we work to reduce defaults and mitigate the severity of credit losses through our servicing policies and practices.
Single-Family Loans
For single-family loans, the most important loan performance criteria we monitor are (1) serious delinquency rates, which are typically strong indicators of loans that are at a heightened risk of default, and (2) mark-to-market LTV ratios, which affect both the likelihood of losses and the potential severity of any losses we may ultimately realize. While mark-to-market LTV ratios are significantly impacted by changes in home prices, which are outside our control, we have an array of loss mitigation tools to try to reduce defaults on delinquent loans and to minimize the severity of the losses we do incur.
We consider single-family loans to be seriously delinquent when they are 90 days or more past due or in the foreclosure process. Once a single-family loan becomes 36 days past due, the servicer is required to make weekly attempts, for the next six months, to contact the borrower to try to engage in steps to resolve the delinquency. Our loss mitigation tools include payment forbearance, repayment plans, payment deferrals and loan modifications. We describe these tools and discuss them further in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management.” Successful loan reperformance is heavily influenced by the effective use of these tools and the amount of equity the borrower has in their home.
For delinquent loans that are unable to reperform, we use alternatives to foreclosure where possible, such as short sales, which generally reduce our credit losses while helping borrowers avoid foreclosure. We provide more information on short sales and our other foreclosure alternatives in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management—Loan Workout Metrics—Foreclosure Alternatives.” When we acquire properties, including through foreclosure, our primary objectives are to facilitate equitable and sustainable access to homeownership, quality affordable rental housing, and housing for owner occupant and community-minded purchasers, while obtaining the highest price possible. The value of the underlying property relative to the loan’s unpaid principal balance has a significant impact on the severity of loss we incur as a result of loan default. We provide information on the mark-to-market LTV ratio of loans in our single-family conventional book of business in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring.”
We present additional information on the credit characteristics and performance of our single-family loans in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management” and “Note 13, Concentrations of Credit Risk—Risk Characteristics of our Guaranty Book of Business.”
Multifamily Loans
For multifamily loans, key indicators of credit risk are debt service coverage ratios (“DSCRs”) and delinquency rates. Loans with lower DSCRs, particularly loans with an estimated current DSCR below 1.0, and seriously
Fannie Mae 2022 Form 10-K
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Business | Managing Mortgage Credit Risk
delinquent loans indicate a heightened risk of default. We consider a multifamily loan seriously delinquent when it is 60 days or more past due.
For loans with indicators of heightened default risk, our DUS lenders work with us to help maintain the credit quality of the multifamily guaranty book of business and prevent foreclosures through loss mitigation strategies such as payment forbearance or loan modification.
For loans that ultimately default, we work to minimize the severity of loss in several ways, including pursuing contractual remedies through our DUS loss-sharing arrangements and with providers of additional credit enhancements where available.
We may offer forbearance for borrowers experiencing temporary challenges, like natural disasters and financial hardship.
We present information on the credit characteristics and performance of our multifamily loans in “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management” and “Note 13, Concentrations of Credit Risk—Risk Characteristics of our Guaranty Book of Business.”
Sharing and Selling Credit Risk
In addition to managing credit risk through our selling and servicing practices, we also share and transfer credit risk to third parties through a variety of credit enhancement products and programs.
For single-family loans we acquire with an LTV ratio over 80% our charter generally requires credit enhancement, which we typically meet through third-party primary mortgage insurance.
Our Multifamily business uses a shared-risk business model that distributes credit risk to the private markets, primarily through our DUS program. Under DUS, our multifamily lenders typically share with us approximately one-third of the credit risk on these loans, aligning the interests of lenders and Fannie Mae. DUS lenders receive credit-risk-related compensation in exchange for sharing risk. The lender risk-sharing we obtain through our DUS program accompanies our multifamily loans at the time we acquire them.
We use other types of credit enhancements, including pool mortgage insurance and credit risk transfer transactions. In our credit risk transfer transactions, we use risk-sharing capabilities we have developed to obtain credit enhancement by transferring portions of our single-family and multifamily mortgage credit risk on reference pools of mortgage loans to the private market. Our credit risk transfer transactions effectively reduce the guaranty fee income we retain on the loans covered by the transactions, as a portion of the guaranty fee on the loans is paid to investors as compensation for taking a share of the credit risk. Our credit risk transfer transactions are designed to transfer to the investors, in exchange for these payments, a portion of the losses we expect would be incurred in an economic downturn or a stressed credit environment.
For more information about our loans with credit enhancement, see “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk” and “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management.” See “Risk Factors—Credit Risk” for discussion of the mortgage credit risks we face.
Conservatorship and Treasury Agreements
Conservatorship
On September 6, 2008, the Director of FHFA appointed FHFA as our conservator, pursuant to authority provided by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended, including by the Housing and Economic Recovery Act of 2008 (together, the “GSE Act”). The conservatorship is a statutory process designed to preserve and conserve our assets and property and put the company in a sound and solvent condition.
The conservatorship has no specified termination date. For more information on the risks to our business relating to the conservatorship and uncertainties regarding the future of our company and business, as well as the adverse effects of the conservatorship on the rights of holders of our common and preferred stock, see “Risk Factors—GSE and Conservatorship Risk.”
Our conservatorship could terminate through a receivership. For information on the circumstances under which FHFA is required or permitted to place us into receivership and the potential consequences of receivership, see “Legislation and Regulation—GSE-Focused Matters—Receivership” and “Risk Factors—GSE and Conservatorship Risk.”
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Management of the Company during Conservatorship
Upon its appointment, the conservator immediately succeeded to (1) all rights, titles, powers and privileges of Fannie Mae, and of any shareholder, officer or director of Fannie Mae with respect to Fannie Mae and its assets, and (2) title to the books, records and assets of any other legal custodian of Fannie Mae. The conservator subsequently issued an order that provided for our Board of Directors to exercise specified functions and authorities. The conservator also provided instructions regarding matters for which conservator decision or notification is required. The conservator retains the authority to amend or withdraw its order and instructions at any time. For more information on the functions and authorities of our Board of Directors during conservatorship, see “Directors, Executive Officers and Corporate Governance—Corporate Governance—Conservatorship and Board Authorities.”
Our directors serve on behalf of the conservator and exercise their authority as directed by and with the approval, where required, of the conservator. Our directors owe their fiduciary duties of care and loyalty solely to the conservator. Thus, while we are in conservatorship, the Board has no fiduciary duties to the company or its stockholders.
Because we are in conservatorship, our common stockholders currently do not have the ability to elect directors or to vote on other matters. The conservator eliminated common and preferred stock dividends (other than dividends on the senior preferred stock issued to Treasury) during the conservatorship.
Powers of the Conservator under the GSE Act
FHFA has broad powers when acting as our conservator. As conservator, FHFA can direct us to enter into contracts or enter into contracts on our behalf. Further, FHFA may transfer or sell any of our assets or liabilities (subject to limitations and post-transfer notice provisions for transfers of certain types of financial contracts), without any approval, assignment of rights or consent of any party. However, mortgage loans and mortgage-related assets that have been transferred to a Fannie Mae MBS trust must be held by the conservator for the beneficial owners of the Fannie Mae MBS and cannot be used to satisfy the general creditors of the company. Neither the conservatorship nor the terms of our agreements with Treasury change our obligation to make required payments on our debt securities or perform under our mortgage guaranty obligations.
A Supreme Court decision in June 2021, in Collins et al. v. Yellen, Secretary of the Treasury, et al., held that the President has the power to remove the Director of FHFA for any reason, not just for cause. The Supreme Court’s opinion in Collins v. Yellen also included an expansive interpretation of FHFA’s authority as conservator under the Housing and Economic Recovery Act of 2008, noting that “when the FHFA acts as a conservator, it may aim to rehabilitate the regulated entity in a way that, while not in the best interests of the regulated entity, is beneficial to the Agency and, by extension, the public it serves.” See “Risk Factors—GSE and Conservatorship Risk” for a discussion of the risks relating to conservatorship.
Treasury Agreements
On September 7, 2008, Fannie Mae, through FHFA in its capacity as conservator, entered into a senior preferred stock purchase agreement with Treasury, pursuant to which we issued to Treasury one million shares of Variable Liquidation Preference Senior Preferred Stock, Series 2008-2, which we refer to as the “senior preferred stock,” and a warrant to purchase shares of common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis at the time the warrant is exercised for a nominal price. The senior preferred stock purchase agreement and the dividend and liquidation provisions of the senior preferred stock have been amended multiple times, most recently in January 2021, pursuant to a letter agreement between us, through FHFA in its capacity as conservator, and Treasury. Some provisions added to the agreement in January 2021 were subsequently temporarily suspended pursuant to a September 2021 letter agreement. Below we discuss the terms of the senior preferred stock purchase agreement and the senior preferred stock as they are currently in effect. See “Risk Factors—GSE and Conservatorship Risk” for a description of the risks to our business relating to the senior preferred stock purchase agreement, as well as the adverse effects of the senior preferred stock and the warrant on the rights of holders of our common stock and other series of preferred stock.
Senior Preferred Stock Purchase Agreement
Funds Available for Draw
The senior preferred stock purchase agreement provides that, on a quarterly basis, we may draw funds up to the amount, if any, by which our total liabilities exceed our total assets, as reflected in our consolidated balance sheet, prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), for the applicable fiscal quarter (referred to as the “deficiency amount”), up to the maximum amount of remaining funding under the agreement. As of the date of this filing, the maximum amount of remaining funding under the agreement is $113.9 billion. If we were to draw additional funds from Treasury under the agreement with respect to a future period, the
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amount of remaining funding under the agreement would be reduced by the amount of our draw. The senior preferred stock purchase agreement provides that the deficiency amount will be calculated differently if we become subject to receivership or other liquidation process.
Commitment Fee and Capital Reserve End Date
The senior preferred stock purchase agreement provides for the payment of an unspecified quarterly commitment fee to Treasury to compensate Treasury for its ongoing support under the senior preferred stock purchase agreement. The amount of this fee, as well as a number of the agreement’s other terms and the terms of the senior preferred stock, depend on whether we have reached the “capital reserve end date,” which is defined as the last day of the second consecutive fiscal quarter during which we have had and maintained capital equal to, or in excess of, all of the capital requirements and buffers under the enterprise regulatory capital framework, which is discussed in “Legislation and Regulation—GSE-Focused Matters—Capital Requirements.” Under the agreement, (1) through and continuing until the capital reserve end date, the periodic commitment fee will not be set, accrue, or be payable, and (2) not later than the capital reserve end date, we and Treasury, in consultation with the Chair of the Federal Reserve, will agree to set the periodic commitment fee. Treasury’s funding commitment under the senior preferred stock purchase agreement has no expiration date. The agreement provides that Treasury’s funding commitment will terminate under any of the following circumstances: (1) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding commitment at that time; (2) the payment in full of, or reasonable provision for, all of our liabilities (whether or not contingent, including mortgage guaranty obligations); or (3) the funding by Treasury of the maximum amount that may be funded under the agreement. In addition, Treasury may terminate its funding commitment and declare the agreement null and void if a court vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of the conservator or otherwise curtails the conservator’s powers.
Debt and MBS Holders
If we default on payments with respect to our debt securities or guaranteed Fannie Mae MBS and Treasury fails to perform its obligations under its funding commitment, and if we and/or the conservator are not diligently pursuing remedies in respect of that failure, the senior preferred stock purchase agreement provides that any holder of such defaulted debt securities or Fannie Mae MBS may file a claim in the United States Court of Federal Claims for relief requiring Treasury to fund us up to (1) the amount necessary to cure the payment defaults on our debt and Fannie Mae MBS, (2) the deficiency amount, or (3) the amount of remaining funding under the senior preferred stock purchase agreement, whichever is the least. Any payment that Treasury makes under those circumstances would be treated for all purposes as a draw under the senior preferred stock purchase agreement that would increase the liquidation preference of the senior preferred stock.
Most provisions of the senior preferred stock purchase agreement may be waived or amended by mutual agreement of the parties; however, no waiver or amendment of the agreement is permitted that would decrease Treasury’s aggregate funding commitment or add conditions to Treasury’s funding commitment if the waiver or amendment would adversely affect in any material respect the holders of our debt securities or guaranteed Fannie Mae MBS.
Senior Preferred Stock
Dividend Provisions
Treasury, as the holder of the senior preferred stock, is entitled to receive, when, as and if declared, out of legally available funds, cumulative quarterly cash dividends. The dividends we have paid to Treasury on the senior preferred stock during conservatorship have been declared by, and paid at the direction of, our conservator, acting as successor to the rights, titles, powers and privileges of the Board of Directors. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the senior preferred stock purchase agreement.
The dividend provisions of the senior preferred stock were amended pursuant to the January 2021 letter agreement to permit us to retain increases in our net worth until our net worth exceeds the amount of adjusted total capital necessary for us to meet the capital requirements and buffers under the enterprise regulatory capital framework. As described more fully below, after the capital reserve end date, the amount of quarterly dividends to Treasury will be equal to the lesser of any quarterly increase in our net worth and a 10% annual rate on the then-current liquidation preference of the senior preferred stock. As a result of these provisions, our ability to retain earnings in excess of the capital requirements and buffers set forth in the enterprise regulatory capital framework will be limited.
Dividend Amount Prior to Capital Reserve End Date
The terms of the senior preferred stock provide for dividends each quarter in 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. The January 2021 letter agreement increased the applicable capital reserve amount, starting with the quarterly dividend period
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ending on December 31, 2020, from $25 billion to the amount of adjusted total capital necessary for us to meet the capital requirements and buffers set forth in the enterprise regulatory capital framework. If our net worth does not exceed this amount as of the end of the immediately preceding fiscal quarter, then dividends will neither accumulate nor be payable for such period. Our net worth is defined as the amount, if any, by which our total assets (excluding Treasury’s funding commitment and any unfunded amounts related to the commitment) exceed our total liabilities (excluding any obligation with respect to capital stock), in each case as reflected on our balance sheet prepared in accordance with GAAP.
Dividend Amount Following Capital Reserve End Date
Beginning on the first dividend period following the capital reserve end date, the applicable quarterly dividend amount on the senior preferred stock will be the lesser of:
(1)     a 10% annual rate on the then-current liquidation preference of the senior preferred stock; and
(2)     an amount equal to the incremental increase in our net worth during the immediately prior fiscal quarter.
However, the applicable quarterly dividend amount will immediately increase to a 12% annual rate on the then-current liquidation preference of the senior preferred stock if we fail to timely pay dividends in cash to Treasury. This increased dividend amount will continue until the dividend period following the date we have paid, in cash, full cumulative dividends to Treasury (including any unpaid dividends), at which point the applicable quarterly dividend amount will revert to the prior calculation method.
Liquidation Preference
Shares of the senior preferred stock have no par value and have a stated value and initial liquidation preference equal to $1,000 per share, for an aggregate initial liquidation preference of $1 billion.
Under the terms that currently govern the senior preferred stock, the aggregate liquidation preference will be increased by the following:
any amounts Treasury pays to us pursuant to its funding commitment under the senior preferred stock purchase agreement (as of the date of this filing, the cumulative amount Treasury has paid to us under its funding commitment is $119.8 billion);
any quarterly commitment fees that are payable but not paid in cash (no such fees have become payable, nor will such fees be set until the capital reserve end date);
any dividends that are payable but not paid in cash to Treasury, regardless of whether or not they are declared; and
at the end of each fiscal quarter through and including the capital reserve end date, an amount equal to the increase in our net worth, if any, during the immediately prior fiscal quarter.
The aggregate liquidation preference of the senior preferred stock was $180.3 billion as of December 31, 2022. It will increase to $181.8 billion as of March 31, 2023 due to the $1.4 billion increase in our net worth during the fourth quarter of 2022.
The senior preferred stock ranks ahead of our common stock and all other outstanding series of our preferred stock, as well as any capital stock we issue in the future, as to both dividends and rights upon liquidation. As a result, if we are liquidated, the holder of the senior preferred stock is entitled to its then current liquidation preference before any distribution is made to the holders of our common stock or other preferred stock.
Limitations on Redemption and Paydown of Liquidation Preference; Requirement to Pay Net Proceeds of Capital Stock Issuances to Reduce Liquidation Preference
We are not permitted to redeem the senior preferred stock prior to the termination of Treasury’s funding commitment under the senior preferred stock purchase agreement. Moreover, we are not permitted to pay down the liquidation preference of the outstanding shares of senior preferred stock except to the extent of (1) accumulated and unpaid dividends previously added to the liquidation preference and not previously paid down; and (2) quarterly commitment fees previously added to the liquidation preference and not previously paid down. In addition to these exceptions, if we issue any shares of capital stock for cash while the senior preferred stock is outstanding, the net proceeds of the issuance, with the exception of up to $70 billion in aggregate gross cash proceeds from the issuance of common stock, must be used to pay down the liquidation preference of the senior preferred stock. As described below under “Covenants under Treasury Agreements,” we may issue common stock ranking pari passu or junior to the common stock issued to Treasury in connection with the exercise of its warrant provided that (i) Treasury has already exercised its warrant in full, and (ii) all currently pending significant litigation relating to the conservatorship and the August 2012 amendment to the senior preferred stock purchase agreement has been resolved. The liquidation preference of each
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share of senior preferred stock may not be paid down below $1,000 per share prior to the termination of Treasury’s funding commitment. Following the termination of Treasury’s funding commitment, we may pay down the liquidation preference of all outstanding shares of senior preferred stock at any time, in whole or in part.
Additional Senior Preferred Stock Provisions
The senior preferred stock provides that we may not, at any time, declare or pay dividends on, make distributions with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any common stock or other securities ranking junior to the senior preferred stock unless (1) full cumulative dividends on the outstanding senior preferred stock (including any unpaid dividends added to the liquidation preference) have been declared and paid in cash, and (2) all amounts required to be paid with the net proceeds of any issuance of capital stock for cash (as described in the preceding paragraph) have been paid in cash. Shares of the senior preferred stock are not convertible. Shares of the senior preferred stock have no general or special voting rights, other than those set forth in the certificate of designation for the senior preferred stock or otherwise required by law. The consent of holders of at least two-thirds of all outstanding shares of senior preferred stock is generally required to amend the terms of the senior preferred stock or to create any class or series of stock that ranks prior to or on parity with the senior preferred stock.
Common Stock Warrant
Pursuant to the senior preferred stock purchase agreement, on September 7, 2008, we, through FHFA in its capacity as conservator, issued to Treasury a warrant to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis on the date the warrant is exercised, for an exercise price of $0.00001 per share. The warrant may be exercised in whole or in part at any time on or before September 7, 2028.
Covenants under Treasury Agreements
The senior preferred stock purchase agreement contains covenants that prohibit us from taking a number of actions without the prior written consent of Treasury, including:
paying dividends or other distributions on or repurchasing our equity securities (other than the senior preferred stock or warrant);
issuing equity securities, except for stock issuances made (1) to Treasury, (2) pursuant to obligations that existed at the time we entered conservatorship, and (3) as amended by the January 2021 letter agreement, for common stock ranking pari passu or junior to the common stock issued to Treasury in connection with the exercise of its warrant, provided that (i) Treasury has already exercised its warrant in full, and (ii) all currently pending significant litigation relating to the conservatorship and the August 2012 amendment to the senior preferred stock purchase agreement has been resolved, which may require Treasury’s assent. Net proceeds of the issuance of any shares of capital stock for cash while the senior preferred stock is outstanding, except for up to $70 billion in aggregate gross cash proceeds from the issuance of common stock, must be used to pay down the liquidation preference of the senior preferred stock;
terminating or seeking to terminate our conservatorship, other than through a receivership, except that, as revised by the January 2021 letter agreement, FHFA can terminate our conservatorship without the prior consent of Treasury if several conditions are met, including (1) all currently pending significant litigation relating to the conservatorship and the August 2012 amendment to the senior preferred stock purchase agreement has been resolved, and (2) for two or more consecutive quarters, our common equity tier 1 capital (as defined in the enterprise regulatory capital framework), together with any stockholder equity that would result from a firm commitment public underwritten offering of common stock which is fully consummated concurrent with the termination of conservatorship, equals or exceeds at least 3% of our adjusted total assets (as defined in the enterprise regulatory capital framework);
selling, transferring, leasing or otherwise disposing of any assets, except for dispositions for fair market value in limited circumstances including if (a) the transaction is in the ordinary course of business and consistent with past practice or (b) the assets have a fair market value individually or in the aggregate of less than $250 million; and
issuing subordinated debt.
Covenants in the senior preferred stock purchase agreement also subject us to limits on the amount of mortgage assets that we may own and the total amount of our indebtedness.
Mortgage Asset Limit. The senior preferred stock purchase agreement limits the amount of mortgage assets we are permitted to own to $225 billion. We are currently managing our business to a $202.5 billion mortgage asset cap pursuant to instructions from FHFA. Our mortgage assets as of December 31, 2022 were
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$79.5 billion, which includes 10% of the notional value of interest-only securities we hold. We disclose the amount of our mortgage assets each month in the “Endnotes” to our Monthly Summaries, which are available on our website and announced in a press release.
Debt Limit. Our debt limit under the senior preferred stock purchase agreement is set at 120% of the amount of mortgage assets we were allowed to own under the agreement on December 31 of the immediately preceding calendar year. This debt limit is currently $270 billion. As calculated for this purpose, our indebtedness as of December 31, 2022 was $139.3 billion. We disclose the amount of our indebtedness on a monthly basis under the caption “Total Debt Outstanding” in our Monthly Summaries.
Compensation. Another covenant prohibits us from entering into any new compensation arrangements or increasing amounts or benefits payable under existing compensation arrangements with any of our executive officers (as defined by SEC rules) without the consent of the Director of FHFA, in consultation with the Secretary of the Treasury.
Annual Risk Management Plan Covenant. Each year we remain in conservatorship we are required to provide Treasury a risk management plan that sets out our strategy for reducing our risk profile, describes the actions we will take to reduce the financial and operational risk associated with each of our business segments, and includes an assessment of our performance against the planned actions described in the prior year’s plan. We submitted our most recent risk management plan to Treasury in December 2022.
Covenants Added in January 2021 and Currently in Effect
In addition to the changes described above to covenants already in the senior preferred stock purchase agreement, the January 2021 letter agreement added the following additional covenants that are currently in effect:
Enterprise Regulatory Capital Framework. We are required to comply with the enterprise regulatory capital framework rule published by FHFA in the Federal Register on December 17, 2020, disregarding any subsequent amendments or modifications to the rule.
As described in “Legislation and Regulation—GSE-Focused Matters—Capital Requirements” below, FHFA published additional final rules amending the enterprise regulatory capital framework in 2022. FHFA has instructed us to report our capital requirements under the amended enterprise regulatory capital framework, not under the original requirements of the framework published in December 2020. Accordingly, we are not in compliance with this covenant. Although our compliance with the covenants in the senior preferred stock purchase agreement is not a condition of Treasury’s funding commitment under that agreement, FHFA, as our conservator and regulator, has the authority to direct compliance or impose consequences for any non-compliance with that agreement.
New Business Restrictions. The following additional restrictive covenants that relate to our single-family business activities:
Requirement to Provide Equitable Access for Single-Family Acquisitions. We:
may not vary our pricing or acquisition terms for single-family loans based on the business characteristics of the seller, including the seller’s size, charter type, or volume of business with us; and
must offer to purchase at all times, for equivalent cash consideration and on substantially the same terms, any single-family mortgage loan that (1) is of a class of loans that we then offer to acquire for inclusion in our mortgage-backed securities or for other non-cash consideration, (2) is offered by a seller that has been approved to do business with us, and (3) has been originated and sold in compliance with our underwriting standards.
Single-Family Loan Eligibility Requirements Program. We are required to maintain a program reasonably designed to ensure that the single-family loans we acquire are limited to:
qualified mortgages, except government-backed loans;
loans exempt from the Consumer Financial Protection Bureau’s (the “CFPB’s”) ability-to-repay and qualified mortgage rule, except timeshares and home equity lines of credit;
loans secured by an investment property;
refinancing loans with streamlined underwriting originated in accordance with our eligibility criteria for high loan-to-value refinancings;
loans originated with temporary underwriting flexibilities during times of exigent circumstances, as determined in consultation with FHFA;
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loans secured by manufactured housing; and
such other loans that FHFA may designate that were eligible for purchase by us as of the date of the January 2021 letter agreement.
Covenants Added in January 2021 and Temporarily Suspended in September 2021
The business restrictions described below were added to the senior preferred stock purchase agreement as a result of the January 2021 letter agreement and subsequently temporarily suspended pursuant to a letter agreement dated September 14, 2021. Under the terms of the September 2021 letter agreement, the suspension of these provisions will terminate six months after Treasury so notifies us. As of the date of this filing, we have not received a notification from Treasury regarding the termination of these suspensions. Although the restrictions on these activities under the senior preferred stock purchase agreement are temporarily suspended, in the ordinary course of business these and other business activities are subject to constraints from a variety of sources, including board- and management-approved risk limits, capital considerations and FHFA instructions. These suspended restrictions are as follows:
Single Counterparty Volume Cap on Single-Family Acquisitions for Cash. This suspended provision would require that we not acquire more than $1.5 billion in single-family loans for cash consideration from any single seller (including its affiliates) during any period comprising four calendar quarters. Loan acquisitions through lender swap securitization transactions would not be subject to this limitation.
Limit on Multifamily Volume. This suspended provision would require that we not acquire more than $80 billion in multifamily mortgage assets in any 52-week period, with this multifamily volume cap to be adjusted up or down by FHFA at the end of each calendar year based on changes to the consumer price index. Additionally, at least 50% of our multifamily acquisitions in any calendar year must, at the time of acquisition, be classified as mission-driven, consistent with FHFA guidelines. Although this provision has been suspended, FHFA has established a cap on our new multifamily business volume and required that a minimum portion of our multifamily business volume be mission-driven, focused on certain affordable and underserved market segments. For more information on our multifamily volume cap, see “Legislation and Regulation—GSE-Focused Matters—Multifamily Business Volume Cap” and “MD&A—Multifamily Business—Multifamily Business Metrics.”
Limit on Specified Higher-Risk Single-Family Acquisitions. This suspended provision would prohibit our acquisition of a single-family mortgage loan if, following the acquisition, more than 3% of our single-family loans that result from a refinancing or 6% of our single-family loans that do not result from a refinancing would have two or more of the higher-risk characteristics listed below at origination. The 3% and 6% measurements would each be based on loans we acquired during the preceding 52-week period. The higher-risk characteristics are:
a combined loan-to-value ratio greater than 90%;
a debt-to-income ratio greater than 45%; and
a FICO credit score (or equivalent credit score) less than 680.
Limit on Acquisitions of Single-Family Mortgage Loans Backed by Second Homes and Investment Properties. This suspended provision would require that we limit our acquisitions of single-family mortgage loans secured by either second homes or investment properties to not more than 7% of the single-family mortgage loans we have acquired during the preceding 52-week period.
Equitable Housing Finance Plan
In September 2021, FHFA instructed Fannie Mae and Freddie Mac to submit Equitable Housing Finance Plans to FHFA by the end of 2021. We publicly released our first Equitable Housing Finance Plan in June 2022. Consistent with the GSE Act, the plan provides a three-year roadmap for our actions to advance equity in housing finance by working to remove barriers to affordable rental housing and homeownership experienced by members of underserved populations, particularly racial and ethnic groups with a significant homeownership rate disparity. Fannie Mae’s Equitable Housing Finance Plan focuses on empowering Black renters and homeowners in three key areas:
Housing Preparation: Helping Black consumers prepare early for sustainable homeownership and access to quality rental housing through credit building and financial education.
Buying or Renting: Removing unnecessary obstacles Black people face in shopping for, acquiring, renting, or mortgaging a home.
Moving in and Maintaining: Enhancing sustainable homeownership so that renters and homeowners can withstand disruptions or temporary hardships and remain stably housed.
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FHFA is also requiring Fannie Mae and Freddie Mac to submit annual progress reports on the actions undertaken during the prior year to implement their plans.
We are focusing in this initial plan on the needs of Black homeowners and renters, a population for whom inequities caused by past discriminatory housing practices are particularly profound. Based on data from the Census Bureau’s 2019 American Community Survey, the Black homeownership rate is estimated to be approximately 30 percentage points lower than the white homeownership rate. While our solutions seek to address key obstacles that Black homeowners and renters face as they secure housing, we expect they will benefit borrowers and renters in all populations. In the future, we expect to expand the focus of our equitable housing efforts to address challenges faced by other populations who have been historically underserved by the housing finance system, including Latino homeowners and renters.
In connection with our Equitable Housing Finance Plan and in support of other efforts we may undertake to support equitable housing, we anticipate establishing and supporting special purpose credit programs. We launched a special purpose credit program pilot with a number of lenders in 2022 and anticipate expanding this pilot with additional lenders in 2023. Under the Equal Credit Opportunity Act, creditors can create special purpose credit programs for groups that have been historically disadvantaged in obtaining credit. Special purpose credit programs benefit applicants who would otherwise be denied credit or receive it on less favorable terms.
Legislation and Regulation
As a federally chartered corporation and as a financial institution, we are subject to government regulation and oversight. FHFA, our primary regulator, regulates our safety and soundness and our mission, and also acts as our conservator. FHFA is an independent agency of the federal government with general supervisory and regulatory authority over Fannie Mae, Freddie Mac and the Federal Home Loan Banks (“FHLBs”). The U.S. Department of Housing and Urban Development (“HUD”) and FHFA regulate us with respect to fair lending matters. Our regulators also include the SEC and Treasury. In addition, even if we are not directly subject to an agency’s regulation or oversight, regulations by that agency that affect mortgage lenders and servicers, debt investors, or the markets for our MBS or debt securities could have a significant impact on us.
Housing Finance Reform
The Administration and Congress may consider housing finance reforms or legislation that could result in significant changes in our structure and role in the future, including proposals that would result in Fannie Mae’s liquidation or dissolution. There continues to be significant uncertainty regarding the timing, content and impact of future legislative and regulatory actions affecting us. See “Risk Factors—GSE and Conservatorship Risk” for a description of risks associated with our future and potential housing finance reform.
GSE-Focused Matters
We describe below matters applicable specifically to Fannie Mae. These matters relate to legislation, regulation or, in some cases, conservatorship. In the following section, we describe matters that are applicable more broadly or to other mortgage or capital market participants and that may directly or indirectly affect us.
Capital Requirements
In December 2020, FHFA published a final rule establishing a new enterprise regulatory capital framework for Fannie Mae and Freddie Mac. FHFA published three additional final rules amending the enterprise regulatory capital framework in March 2022 and June 2022. The March 2022 amendment refined the prescribed leverage buffer amount and the risk-based capital treatment of credit risk transfer transactions, as well as implemented technical corrections. The June 2022 amendments introduced new public disclosure requirements and a requirement to submit annual capital plans to FHFA and provide prior notice to FHFA for certain capital actions. We refer to the rule’s requirements, as amended, as the “enterprise regulatory capital framework.”
The enterprise regulatory capital framework establishes leverage and risk-based capital requirements beyond what is expressly required by the GSE Act. The framework provides a granular assessment of credit risk specific to different mortgage loan categories, as well as components for market risk and operational risk. The enterprise regulatory capital framework includes the following requirements relating to the amount and form of capital we must hold:
Supplemental leverage and risk-based capital requirements based largely on definitions of capital used in U.S. banking regulators’ regulatory capital framework. Under the leverage capital requirements, we must maintain a tier 1 capital ratio of 2.5% of adjusted total assets. Under the risk-based capital requirements, we must maintain
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minimum common equity tier 1 capital, tier 1 capital, and adjusted total capital ratios of 4.5%, 6%, and 8%, respectively, of risk-weighted assets;
A requirement that we hold prescribed capital buffers that can be drawn down in periods of financial stress and then rebuilt over time as economic conditions improve. If we fall below the prescribed buffer amounts, we must restrict capital distributions such as stock repurchases and dividends, as well as discretionary bonus payments to executives, until the buffer amounts are restored. The prescribed capital buffers represent the amount of capital we are required to hold above the minimum leverage and risk-based capital requirements.
The prescribed leverage buffer amount, or PLBA, represents the amount of tier 1 capital we are required to hold above the minimum tier 1 leverage capital requirement;
The risk-based capital buffers consist of three separate components: a stability capital buffer, a stress capital buffer, and a countercyclical capital buffer. Taken together, these risk-based buffers comprise the prescribed capital conservation buffer amount, or PCCBA. The PCCBA must be comprised entirely of common equity tier 1 capital;
Specific minimum percentages, or “floors,” on the risk-weights applicable to single-family and multifamily exposures, which has the effect of increasing the capital required to be held for loans otherwise subject to lower risk weights;
Specific floors on the risk-weights applicable to retained portions of credit risk transfer transactions, which has the effect of decreasing the capital relief obtained from these transactions; and
Additional elements based on U.S. banking regulators’ regulatory capital framework, including the planned eventual introduction of an advanced approach to complement the standardized approach for measuring risk-weighted assets.
The dates by which we must comply with the requirements of the enterprise regulatory capital framework are staggered and largely dependent on whether we remain in conservatorship. Our compliance with the capital buffers will be required upon exit from conservatorship, and our compliance with the minimum regulatory capital requirements will be required by the later of our exit from conservatorship or such later date as may be ordered by FHFA. The compliance date for advanced approaches of the rule will be January 1, 2025, or such later date as may be specified by FHFA.
The enterprise regulatory capital framework requires substantially higher levels of capital than the previously applicable statutory minimum capital requirement. To be fully capitalized under the enterprise regulatory capital framework, we must meet all applicable leverage capital requirements and risk-based capital requirements, including applicable buffers, under the standardized approach of the rule. As of December 31, 2022, our risk-based adjusted total capital requirement (including buffers) represented the amount of capital needed to be fully capitalized under the standardized approach to the rule, and we had a $258 billion shortfall of our available capital (deficit) to this requirement. See “MD&A—Liquidity and Capital Management—Capital Management—Capital Requirements” and “Note 12, Regulatory Capital Requirements” for more information about our capital metrics under the enterprise regulatory capital framework as of December 31, 2022.
The enterprise regulatory capital framework also contains a number of requirements relating to capital reporting and capital planning, which are either already effective or will become effective in 2023, including:
A requirement to submit capital reports to FHFA each quarter;
A requirement to disclose on a quarterly basis in an appropriate publicly available filing or other document our regulatory capital levels, buffers, adjusted total assets and total risk-weighted assets under the standardized approach of the enterprise regulatory capital framework;
A requirement to provide specified additional public capital disclosures on a quarterly basis; and
A requirement to submit annual capital plans to FHFA containing specified information and related requirements to obtain FHFA’s approval or provide notice to FHFA for certain capital actions.
Before the enterprise regulatory capital framework went into effect, we followed the requirements of FHFA’s conservatorship capital framework, which was a risk management framework for evaluating business decisions and performance during conservatorship. We have completed our transition from using the conservatorship capital framework to make business and risk decisions to using the enterprise regulatory capital framework and certain other risk measures to make these decisions. We currently operate at a significant shortfall to the enterprise regulatory capital framework’s requirements. Actions we may take to address this shortfall may have a significant impact on our business. Because the timing of when we will be required to hold capital in compliance with the enterprise regulatory capital framework is uncertain and depends on factors outside our control, the impact of these capital requirements on our business remains uncertain.
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Stress Testing
The Dodd-Frank Wall Street Reform and Consumer Protection Act (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. Under FHFA regulations implementing this requirement, each year we are required to conduct a stress test using two different scenarios of financial conditions provided by FHFA—baseline and severely adverse—and to publish a summary of our stress test results for the severely adverse scenario by August 15. We publish our stress test results on our website. We and FHFA published our most recent stress test results for the severely adverse scenario on August 11, 2022.
Following our publication of our 2022 stress test results, we discovered errors in a model we use to prepare our annual stress test results that affected these results for 2022 and prior years. Once our evaluation of these errors is complete, we will post updated 2022 stress test results for the severely adverse scenario on our website.
Portfolio Standards
The GSE Act requires FHFA to establish standards governing our portfolio holdings, to ensure that they are backed by sufficient capital and consistent with our mission and safe and sound operations. FHFA is also required to monitor our portfolio and, in some circumstances, may require us to dispose of or acquire assets. In 2010, FHFA adopted, as the standard for our portfolio holdings, the portfolio limits specified in the senior preferred stock purchase agreement described under “Conservatorship and Treasury Agreements—Treasury Agreements—Covenants under Treasury Agreements,” as it may be amended from time to time. The rule is effective for as long as we remain subject to the terms and obligations of the senior preferred stock purchase agreement.
FHFA Proposed Liquidity Requirements
In June 2020, FHFA instructed us to meet prescriptive liquidity requirements. In December 2020, those requirements became effective and FHFA issued a proposed rule in line with the updated requirements. Liquidity requirements affect the amount of liquid assets we are required to hold, and to meet FHFA’s instructions and proposed rule, we hold more liquid assets than we were required to hold under our previous framework. For information about our liquidity requirements, see “MD&A—Liquidity and Capital Management—Liquidity Management—Liquidity and Funding Risk Management Practices and Contingency Planning.”
Receivership
Under the GSE Act, the Director of FHFA must place us into receivership if they make a written determination that our assets are less than our obligations (that is, we have a net worth deficit) or if we have not been paying our debts as they become due, in either case, for a period of 60 days. FHFA has notified us that the measurement period for any mandatory receivership determination with respect to our assets and liabilities would commence no earlier than the SEC public filing deadline for our quarterly or annual financial statements and would continue for 60 calendar days thereafter. FHFA has advised us that if, during that 60-day period, we receive funds from Treasury in an amount at least equal to the deficiency amount under the senior preferred stock purchase agreement, the Director of FHFA will not make a mandatory receivership determination.
In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other reasons set forth in the GSE Act. The statutory grounds for discretionary appointment of a receiver include: a substantial dissipation of assets or earnings due to unsafe or unsound practices; the existence of an unsafe or unsound condition to transact business; an inability to meet our obligations in the ordinary course of business; a weakening of our condition due to unsafe or unsound practices or conditions; critical undercapitalization; undercapitalization and no reasonable prospect of becoming adequately capitalized; the likelihood of losses that will deplete substantially all of our capital; or by consent.
The appointment of FHFA as receiver would immediately terminate the conservatorship. In the event of receivership, the GSE Act requires FHFA, as the receiver, to organize a limited-life regulated entity with respect to Fannie Mae. Among other requirements, the GSE Act provides that this limited-life regulated entity:
would succeed to Fannie Mae’s charter and thereafter operate in accordance with and subject to such charter;
would assume, acquire or succeed to our assets and liabilities to the extent that such assets and liabilities are transferred by FHFA to the entity; and
would not be permitted to assume, acquire or succeed to any of our obligations to shareholders.
Placement into receivership would likely have a material adverse effect on holders of our common stock and preferred stock, and could have a material adverse effect on holders of our debt securities and Fannie Mae MBS. Should we be placed into receivership, different assumptions would be required to determine the carrying value of our assets, which
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would likely lead to substantially different financial results. For more information on the risks to our business relating to receivership and uncertainties regarding the future of our business, see “Risk Factors—GSE and Conservatorship Risk.”
Resolution Planning
In May 2021, FHFA issued a final rule requiring us to develop a plan for submission to FHFA that would assist FHFA in planning for the rapid and orderly resolution of the company if FHFA is appointed as our receiver. The stated goals in the rule for our resolution plan are to:
minimize disruption in the national housing finance markets by providing for the continued operation of our core business lines in receivership by a newly constituted limited-life regulated entity;
preserve the value of our franchise and assets;
facilitate the division of assets and liabilities between the limited-life regulated entity and the receivership estate;
ensure that investors in our guaranteed mortgage-backed securities and our unsecured debt bear losses in the order of their priority established under the GSE Act, while minimizing unnecessary losses and costs to these investors; and
foster market discipline by making clear that no extraordinary government support will be available to indemnify investors against losses or fund the resolution of the company.
The rule requires that we submit our initial resolution plan to FHFA by April 6, 2023, and subsequent resolution plans not later than every two years thereafter unless otherwise notified by FHFA. The rule provides that, in developing our resolution plan, we must assume that receivership may occur under severely adverse economic conditions, and we may not assume the provision or continuation of extraordinary support by the U.S. government (including support under our senior preferred stock purchase agreement with Treasury).
Affordable Housing Allocations
The GSE Act requires us to set aside in each fiscal year an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of our new business purchases and to pay this amount to specified HUD and Treasury funds in support of affordable housing. New business purchases consist of single-family and multifamily whole mortgage loans purchased during the period and single-family and multifamily mortgage loans underlying Fannie Mae MBS issued during the period pursuant to lender swaps, which we describe in “Mortgage Securitizations.” We are prohibited from passing through the cost of these allocations to the originators of the mortgage loans that we purchase or securitize. For each year’s new business purchases since 2015, we have set aside amounts for these contributions and transferred the funds when directed by FHFA to do so. See “Certain Relationships and Related Transactions, and Director Independence—Transactions with Related Persons—Treasury Interest in Affordable Housing Allocations” for information on our contribution for 2022 new business purchases.
Fair Lending
The GSE Act requires the Secretary of HUD to assure that Fannie Mae and Freddie Mac meet their fair lending obligations. Among other things, HUD periodically reviews and comments on our underwriting and appraisal guidelines to ensure consistency with the Fair Housing Act. In July 2021, FHFA issued a Policy Statement on Fair Lending describing its statutory authority and policies for supervisory oversight and enforcement of fair lending matters with respect to Fannie Mae and Freddie Mac. In August 2021, FHFA and HUD entered into a memorandum of understanding regarding fair housing and fair lending coordination. Among other things, the memorandum of understanding allows HUD and FHFA to coordinate on investigations, compliance reviews, and ongoing monitoring of Fannie Mae and Freddie Mac to ensure compliance with the Fair Housing Act. In December 2021, FHFA released an advisory bulletin to provide FHFA's supervisory expectations and guidance to Fannie Mae and Freddie Mac on fair lending and fair housing compliance.
FHFA Rule on Credit Score Models
Fannie Mae uses credit scores to establish a minimum credit threshold for mortgage lending, provide a foundation for risk-based pricing, and support disclosures to investors. Under an FHFA rule that became effective in October 2019, we are required to validate and approve third-party credit score models and obtain FHFA’s approval of our determination. We must evaluate the models for factors such as accuracy, reliability and integrity, as well as impacts on fair lending and the mortgage industry. For a discussion of our current credit score model and FHFA’s announcement of its validation and approval of two new credit score models for use by Fannie Mae and Freddie Mac, see “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and
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Underwriting and Servicing Standards—New Credit Score Models and Expected Change to Credit Report Requirement.”
Interagency Action Plan to Advance Property Appraisal and Valuation Equity
In March 2022, the Interagency Task Force on Property Appraisal and Valuation Equity (the “PAVE Task Force”) published an Action Plan to Advance Property Appraisal and Valuation Equity (the “PAVE Action Plan”). The PAVE Task Force is composed of thirteen federal agencies and offices, including HUD and FHFA. The PAVE Action Plan outlines the historical role of racism in the valuation of residential property, examines the various forms of bias that can appear in residential property valuation practices, describes affirmative steps that federal agencies will take to advance equity in the residential property valuation process, and outlines further recommendations that government and industry stakeholders can initiate. Some of the proposed actions contained in the PAVE Action Plan, including additional initiatives the PAVE Task Force is considering such as expanded use of alternatives to traditional appraisals, could have a significant impact on our current appraisal and valuation policies and procedures. We expect to work closely with FHFA on any potential future changes to these policies and procedures in support of the PAVE Action Plan and any further recommendations of the PAVE Task Force.
Housing Goals
In this and the following sections, we discuss our housing goals and our duty to serve obligations pursuant to the GSE Act, as well as FHFA’s requirement, as our conservator, that a portion of our new multifamily business be focused on affordable and underserved markets.
Our housing goals, which are established by FHFA in accordance with the GSE Act, require that a specified amount of mortgage loans we acquire meet specified standards relating to affordability or location. For single-family goals, our acquisitions are measured against the lower of benchmarks set by FHFA or the level of goal-eligible originations in the primary mortgage market. The single-family benchmarks are expressed as a percentage of the total number of goal-eligible single-family mortgages acquired each year. Multifamily goals for 2022 and prior years were established as a fixed number of units to be financed; however, as described below, our new multifamily goals for 2023 and 2024 are expressed as a percentage of goal-eligible units in multifamily properties financed by mortgages acquired each year.
2021 Housing Goals
In October 2022, FHFA determined that we met all of our 2021 single-family and multifamily housing goals. The tables below display information about our 2021 housing goals and our performance against these goals.
Single-Family Housing Goals
2021(1)
FHFA BenchmarkSingle-Family
Market Level
Result
Low-income (≤80% of area median income) home purchase goal24%26.7 %28.7 %
Very low-income (≤50% of area median income) home purchase goal6.8 7.4 
Low-income areas home purchase goal(2)
18 22.9 24.5 
Low-income areas home purchase subgoal(3)
14 19.1 20.3 
Low-income refinancing goal21 26.1 26.2 
(1)    The FHFA benchmarks and our results are expressed as a percentage of the total number of goal-eligible single-family mortgages acquired during the year. The single-family market level is the percentage of goal-eligible single-family mortgages originated in the primary mortgage market during the year.
(2)    These mortgage loans must be secured by a property that is (a) in a low-income census tract, (b) in a high-minority census tract and affordable to moderate-income families (those with incomes less than or equal to 100% of area median income), or (c) in a designated disaster area and affordable to moderate-income families.
(3)    These mortgage loans must be secured by a property that is (a) in a low-income census tract or (b) in a high-minority census tract and affordable to moderate-income families.
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Multifamily Housing Goals
2021(1)
GoalResult
Low-income (≤80% of area median income) goal315,000 384,488 
Very low-income (≤50% of area median income) subgoal60,000 83,459 
Small multifamily low-income subgoal(2)
10,000 14,409 
(1)    FHFA goals and our results are expressed as number of units financed during the year.
(2)    Units in small multifamily properties (defined as properties with 5 to 50 units) affordable to low-income families.
2022 to 2024 Housing Goals
In December 2021, FHFA published a final rule establishing new benchmark levels for our single-family housing goals for 2022 through 2024 and new multifamily housing goals for 2022. In December 2022, FHFA published a final rule establishing new multifamily housing goals for 2023 and 2024.
2022 to 2024 Single-Family Housing Goals
FHFA will continue to evaluate our performance against the single-family housing goals using a two-part approach that compares the goal-qualifying share of our single-family mortgage acquisitions against both a benchmark level and a market level. To meet a single-family housing goal or subgoal, the percentage of our single-family mortgage acquisitions that meet each goal or subgoal must equal or exceed either the benchmark level set in advance by FHFA or the market level for that year. The market level is determined retrospectively each year based on actual goal-eligible originations in the primary mortgage market as measured by FHFA based on Home Mortgage Disclosure Act data for that year.
The December 2021 final rule established two new single-family home purchase subgoals to replace the prior low-income areas home purchase subgoal: a new minority census tracts subgoal and a new low-income census tracts subgoal, which are described in the table below. The December 2021 final rule also increased the benchmark levels for the remaining single-family housing goals.
FHFA Benchmark Level
Single-Family Goals
2022-2024
Low-income home purchase goal(1)
28%
Very low-income home purchase goal(2)
7%
Low-income areas home purchase goal(3)
20% (2022)
Minority census tracts subgoal (new)(4)
10%
Low-income census tracts subgoal (new)(5)
4%
Low-income refinancing goal(6)
26%
(1)        Home purchase mortgages on single-family, owner-occupied properties to borrowers with incomes no greater than 80% of area median income.
(2)        Home purchase mortgages on single-family, owner-occupied properties to borrowers with incomes no greater than 50% of area median income.
(3)        Home purchase mortgages on single-family, owner-occupied properties with borrowers in census tracts with median income no greater than 80% of area median income; borrowers with incomes no greater than 100% of area median income in minority census tracts; and borrowers in designated disaster areas. Minority census tracts are those that have a minority population of at least 30% and a median income of less than 100% of area median income. For 2018 to 2021, FHFA set the low-income areas home purchase goal benchmark level on an annual basis by adding a disaster area increment to the low-income areas subgoal benchmark level. For 2022 to 2024, FHFA sets the low-income areas home purchase goal benchmark level on an annual basis by adding a disaster area increment to the sum of the benchmark levels for the minority census tracts subgoal and the low-income census tracts subgoal.
(4)        Home purchase mortgages on single-family, owner-occupied properties to borrowers with incomes no greater than 100% of area median income in minority census tracts.
(5)        (i) Home purchase mortgages on single-family, owner-occupied properties to borrowers (regardless of income) in low-income census tracts that are not minority census tracts, and (ii) home purchase mortgages on single-family, owner-occupied properties to borrowers with incomes greater than 100% of area median income in low-income census tracts that are also minority census tracts. Low income census tracts are those where the median income is no greater than 80% of area median income.
(6)        Refinancing mortgages on single-family, owner-occupied properties to borrowers with incomes no greater than 80% of area median income.
We believe we met all of our 2022 single-family housing goal benchmarks other than the low-income home purchase benchmark and the very low-income home purchase benchmark. As noted above, we are in compliance with the single-
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family housing goals if we meet either the benchmarks or market share measures, so we may still meet our goals. FHFA will make a final determination regarding our 2022 single-family housing goals performance later in the year, after the release of data reported under the Home Mortgage Disclosure Act.
If we do not meet our housing goals, FHFA determines whether the goals were feasible. If FHFA finds that our goals were feasible, we may become subject to a housing plan that could require us to take additional steps that could have an adverse effect on our results of operations and financial condition. The housing plan must describe the actions we would take to meet the goal in the next calendar year and be approved by FHFA. The potential penalties for failure to comply with housing plan requirements include a cease-and-desist order and civil money penalties.
2022 Multifamily Housing Goals
In response to comments on its rule proposal, FHFA’s final rule published in December 2021 established multifamily housing goals for 2022 only, rather than for 2022 through 2024. The December 2021 final rule increased each of the multifamily housing goals. FHFA will evaluate our performance for 2022 against the following multifamily goals.
Goal
Multifamily Goals
2022
Low-income goal(1)
415,000
Very low-income subgoal(2)
88,000
Small multifamily low-income subgoal(3)
17,000
(1)        Affordable to low-income families, defined as families with incomes no greater than 80% of area median income.
(2)        Affordable to very low-income families, defined as families with incomes no greater than 50% of area median income.
(3)        Units in small multifamily properties (defined as properties with 5 to 50 units) affordable to low-income families.
We believe we met all of our 2022 multifamily housing goals, and FHFA will make a final determination regarding this performance later in the year.
2023 and 2024 Multifamily Housing Goals
In December 2022, FHFA published a final rule on our multifamily housing goals for 2023 and 2024. Rather than measuring the multifamily housing goals based on a fixed number of units, our 2023 and 2024 multifamily housing goals are based on the percentage share of the goal-qualifying units in our annual multifamily loan acquisitions that are affordable to each income category. The rule did not change the underlying criteria that determine which multifamily units qualify for credit under the housing goals.
The table below sets forth our multifamily housing goals for 2023 and 2024.
Goal
Multifamily Goals
2023 and 2024
(Percentage share of goal-eligible units)
Low-income goal(1)
61 %
Very low-income subgoal2)
12 
Small multifamily low-income subgoal(3)
2.5 
(1)    Affordable to low-income families, defined as families with incomes less than or equal to 80% of area median income.
(2)    Affordable to very low-income families, defined as families with incomes less than or equal to 50% of area median income.
(3)    Units in small multifamily properties (defined as properties with 5 to 50 units) affordable to low-income families.
The final rule noted that FHFA may adjust these 2023 and 2024 multifamily housing goals following publication in light of market conditions or for other reasons.
As described in “Risk Factors—GSE and Conservatorship Risk,” actions we may take to meet our housing goals and duty to serve requirements described below may materially increase our provision for credit losses and our write-offs.
Multifamily Business Volume Cap
As our conservator, FHFA has established caps on our new multifamily business volume and requirements that a portion of our multifamily volume be focused on affordable and underserved markets. Our multifamily loan purchase cap for 2023 is $75 billion, a reduction from the $78 billion cap applicable for 2022. Consistent with the 2022 cap, a minimum of 50% of our 2023 multifamily loan purchases must be mission-driven, focused on specified affordable and underserved market segments; however, FHFA has revised the multifamily requirements for mission-driven, affordable housing for 2023, including by:
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Removing the requirement that 25% of multifamily loan purchases must be affordable to residents earning 60% or less of area median income to reduce inconsistencies with FHFA’s housing goals; and
Within the mission-driven eligibility criteria, creating a new category focused on preserving affordability in workforce housing to encourage financing of loans on properties with rent or income restrictions affordable at levels that meet market needs.
See “MD&A—Multifamily Business—Multifamily Business Metrics” for more information about our multifamily business volume cap, which is a requirement under the scorecard FHFA issued establishing 2023 corporate performance objectives for us. More information on FHFA’s 2023 scorecard is provided in our current report on Form 8-K filed on January 10, 2023.
Duty to Serve Underserved Markets
The GSE Act requires that we serve very low-, low-, and moderate-income families in three specified underserved markets: manufactured housing, affordable housing preservation and rural housing. Under FHFA’s implementing “duty to serve” rule, we are required to adopt an underserved markets plan for each underserved market covering a three-year period that sets forth the activities and objectives we will undertake to meet our duty to serve that market.
The types of activities that are eligible for duty to serve credit in each underserved market are summarized below:
Manufactured housing market. For the manufactured housing market, duty to serve credit is available for eligible activities relating to manufactured homes (whether titled as real property or personal property (known as chattel)) and loans for specified categories of manufactured housing communities.
Affordable housing preservation market. For the affordable housing preservation market, duty to serve credit is available for eligible activities relating to preserving the affordability of housing for renters and buyers under specified programs enumerated in the GSE Act and other comparable affordable housing programs administered by state and local governments, subject to FHFA approval. Duty to serve credit also is available for activities related to small multifamily rental properties, energy efficiency improvements on existing multifamily rental and single-family first lien properties, certain shared equity homeownership programs, the purchase or rehabilitation of certain distressed properties, and activities under HUD’s Choice Neighborhoods Initiative and Rental Assistance Demonstration programs.
Rural housing market. For the rural housing market, duty to serve credit is available for eligible activities related to housing in rural areas, including activities related to housing in high-needs rural regions and for high-needs rural populations.
FHFA reviews our draft underserved markets plans. In response to comments we received from FHFA on our initially proposed plans for 2022 to 2024, we revised our draft plans for further FHFA consideration. FHFA issued a non-objection to the revised draft plans in April 2022.
FHFA has also established an annual process for evaluating our achievements under the plans, with performance results to be reported to Congress annually. If FHFA determines that we failed to meet the requirements of an underserved markets plan, FHFA may require us to submit a housing plan for FHFA approval that could require us to take additional steps. In October 2022, FHFA reported its determination that we complied with our 2021 duty to serve requirements. We believe we also met our 2022 duty to serve obligations. FHFA will determine our performance with respect to our 2022 duty to serve obligations in 2023.
Guaranty Fees and Pricing
Our guaranty fees and pricing are subject to regulatory, legislative and conservatorship requirements, including FHFA guidance and instruction. These requirements include the following:
Upfront Fees. We use loan-level price adjustments, including various upfront risk-based fees, to price for the credit risk we assume in providing our guaranty on the single-family loans we acquire. FHFA, as conservator, must approve changes to the national loan-level price adjustments (or upfront fees) that we charge for the risk we assume in providing our guaranty and can direct us to make other changes to our guaranty fee pricing for new single-family acquisitions.
Base Fees. We have the ability to change our base single-family contractual guaranty fee pricing, subject to minimum base guaranty fees set by FHFA in its regulatory capacity. These minimum base guaranty fees generally apply to our acquisitions of 30-year and 15-year single-family fixed-rate loans in lender swap transactions.
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Return Targets. For new single-family and multifamily acquisitions, FHFA has instructed us to meet a minimum return on equity target based on our capital requirements. FHFA also has instructed us to establish a long-term target for returns at the enterprise level, which may impact our guaranty fees.
TCCA Fees. In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 (the “TCCA”) which, among other provisions, required that we increase our single-family guaranty fees by at least 10 basis points and remit this increase to Treasury. To meet our obligations under the TCCA and at the direction of FHFA, we increased the guaranty fee on all single-family residential mortgages delivered to us by 10 basis points effective April 1, 2012. The resulting revenue is included in net interest income and the expense is recognized as “TCCA fees.” In November 2021, the Infrastructure Investment and Jobs Act was enacted, which extended to October 1, 2032 our obligation under the TCCA to collect 10 basis points in guaranty fees on single-family residential mortgages delivered to us and pay the associated revenue to Treasury. In January 2022, FHFA advised us to continue to pay these TCCA fees to Treasury with respect to all single-family loans acquired by us before October 1, 2032, and to continue to remit these amounts to Treasury on and after October 1, 2032 with respect to loans we acquired before this date until those loans are paid off or otherwise liquidated. As noted in “Glossary of Terms Used in This Report,” in this report we use the term “TCCA fees” to refer to the expense recognized as a result of the 10 basis point increase in guaranty fees on all single-family residential mortgages delivered to us on or after April 1, 2012 pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011 and as extended by the Infrastructure Investment and Jobs Act, which we remit to Treasury on a quarterly basis.
UMBS. Our ability to change our single-family guaranty fee pricing is limited by the FHFA rule described in “FHFA Rule on Uniform Mortgage-Backed Securities” below, as our single-family guaranty fees is one of the covered items.
See “MD&A—Single-Family Business—Single-Family Business Metrics—Recent and Future Price Changes” for a discussion of changes to our single-family guaranty fee pricing announced in 2022 and 2023. Also see “MD&A—Consolidated Results of Operations—TCCA Fees” and “Certain Relationships and Related Transactions, and Director Independence—Transactions with Related Persons—Transactions with Treasury—Obligation to Pay TCCA Fees to Treasury” for additional discussion of our TCCA fees.
New Products and Activities
The GSE Act requires us to provide advance notice to FHFA before undertaking a new activity and to obtain prior approval from FHFA before offering a new product to the market, subject to certain exclusions. In December 2022, FHFA adopted a final rule implementing these provisions. The final rule will be effective February 27, 2023, and will replace an interim final rule that has been in place since July 2009.
The final rule establishes a process for the review of new activities and products by FHFA, including providing for a 30-day public notice and comment period with respect to new products. The final rule also establishes criteria for determining what constitutes a new activity that requires advance notice to FHFA and what is excluded from being considered a new activity, such as enhancements or modifications to DU or to the mortgage terms and conditions or underwriting criteria relating to the mortgages we purchase or guarantee. The final rule describes a new product as any new activity that FHFA determines merits public notice and comment about whether it is in the public interest. FHFA may approve a new product proposed by us if FHFA determines that the new product is authorized under our charter, in the public interest and consistent with safety and soundness. The final rule provides that FHFA has the authority to place conditions or limitations on a new activity or a new product.
Executive Compensation
The amount and type of compensation we may pay our executives is subject to a number of legal and regulatory restrictions, particularly while we are in conservatorship. For a description of our executive compensation program and legal, regulatory and conservator requirements that affect our executive compensation, see “Executive Compensation.”
FHFA Rule on Uniform Mortgage-Backed Securities
We and Freddie Mac are required to align our programs, policies and practices that affect the prepayment rates of TBA-eligible MBS pursuant to an FHFA rule. The rule is intended to ensure that Fannie Mae and Freddie Mac programs, policies and practices that individually have a material effect on cash flows (including policies that affect prepayment speeds) are and will remain aligned regardless of whether we and Freddie Mac are in conservatorship. The rule provides a non-exhaustive list of covered programs, policies and practices, including management decisions or actions about: single-family guaranty fees; the spread between the note rate on the mortgage and the pass-through coupon on the MBS; eligibility standards for sellers, servicers, and private mortgage insurers; distressed loan servicing requirements; removal of mortgage loans from securities; servicer compensation; and proposals that could materially
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change the credit risk profile of the single-family mortgages securitized by a GSE. We believe that our policies and practices are generally aligned with the requirements specified by FHFA pursuant to the rule. However, FHFA may mandate additional alignment efforts in the future, and the impact of any such efforts on our business or our MBS is uncertain. See “Mortgage Securitizations—Uniform Mortgage-Backed Securities, or UMBS—UMBS and Structured Securities” for a discussion of a new upfront fee for commingled securities that we announced in January 2023 and a statement issued by the Director of FHFA relating to this fee and FHFA’s review of the enterprise regulatory capital framework.
Industry and General Matters
COVID-19 Response
In response to the COVID-19 pandemic, a number of legislative and executive actions were taken by the federal government and state and local governments to assist affected borrowers and renters and to slow the spread of the pandemic, including actions that applied to the loans we guarantee. While most of these actions are no longer in effect, the COVID-19 national emergency remains in place. In January 2023, the Administration announced it intends to extend the COVID-19 national emergency to May 11, 2023, and end the emergency on that date. We continue to offer forbearance relief and other home retention solutions to borrowers affected by the COVID-19 pandemic, as described in “MD&A—Single-Family Business—Single-Family Problem Loan Management.”
Risk Retention
Under a rule implementing the Dodd-Frank Act’s credit risk retention requirement, sponsors of securitization transactions are generally required to retain a 5% economic interest in the credit risk of the securitized assets. The rule offers several compliance options, one of which is to have either Fannie Mae or Freddie Mac (so long as they remain in conservatorship or receivership with capital support from the United States) securitize and fully guarantee the assets, in which case no further retention of credit risk is required. A potential exit from conservatorship, or changes we make in our business upon any potential exit from conservatorship to comply with the rule, could reduce our market share or adversely impact our business. Securities backed solely by mortgage loans meeting the definition of a “qualified residential mortgage” are exempt from the risk retention requirements of the rule. The rule currently defines “qualified residential mortgage” to have the same meaning as the term “qualified mortgage” as defined by the CFPB in connection with its ability-to-repay rule discussed below.
Ability-to-Repay Rule and the Qualified Mortgage Patch
The Dodd-Frank Act amended the Truth in Lending Act to require creditors to determine that borrowers have a “reasonable ability to repay” most mortgage loans prior to making such loans. In 2013, the CFPB issued a rule that, among other things, requires creditors to determine a borrower’s “ability to repay” a mortgage loan. If a creditor fails to comply, a borrower may be able to offset a portion of the amount owed in a foreclosure proceeding or recoup monetary damages. The rule offers several options for complying with the ability-to-repay requirement, including making loans that meet certain terms and characteristics (referred to as “qualified mortgages”), which may provide creditors and their assignees with special protection from liability. A loan will be a standard qualified mortgage under the rule if, among other things, (1) the points and fees paid in connection with the loan do not exceed 3% of the total loan amount, (2) the loan term does not exceed 30 years, (3) the loan is fully amortizing with no negative amortization, interest-only or balloon features and (4) the debt-to-income (“DTI”) ratio on the loan does not exceed 43% at origination and is underwritten according to Appendix Q in the rule. The CFPB also created the qualified mortgage “patch,” pursuant to which a special class of conventional mortgage loans are considered qualified mortgages if they (1) meet the points and fees, term and amortization requirements of qualified mortgages generally and (2) are eligible for sale to Fannie Mae or Freddie Mac. In 2013, FHFA directed Fannie Mae and Freddie Mac to limit our acquisition of single-family loans to those loans that meet the points and fees, term and amortization requirements for qualified mortgages, or to loans that are exempt from the ability-to-repay rule, such as loans made to investors.
In December 2020, the CFPB published a rule amendment that eliminated the qualified mortgage patch and replaced the 43% DTI ratio limit and certain other requirements for a standard qualified mortgage with a pricing and underwriting framework. The final qualified mortgage rule went into effect in March 2021, with lenders initially required to comply beginning in July 2021. In April 2021, the CFPB published a final rule extending the mandatory compliance date to October 2022 and thereby also extending the qualified mortgage patch. The qualified mortgage patch was allowed to expire on October 1, 2022. We do not expect the final qualified mortgage rule to impact our business significantly. See “Risk Factors—GSE and Conservatorship Risk” and “Risk Factors—Legal and Regulatory Risk” for more information on risks presented by regulatory changes in the financial services industry.
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Single-Counterparty Credit Limit
The Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) has adopted rules to restrict the counterparty credit exposures of U.S.-based global systemically important banks (“U.S. G-SIBs”) and certain large bank holding companies, large savings and loan holding companies, and U.S. intermediate holding companies that are subsidiaries of foreign banking organizations. These rules generally limit the exposure of a covered organization to any counterparty and its affiliates to no more than 25% of the covered organization’s tier 1 capital. U.S. G-SIBs must adhere to a stricter limit of 15% of their tier 1 capital for exposures to any other U.S. G-SIB or non-bank entity supervised by the Federal Reserve. 
While Fannie Mae is in conservatorship, a covered organization’s exposures involving claims on or directly and fully guaranteed by Fannie Mae are exempt from these restrictions and Fannie Mae MBS and debt can be used as collateral to reduce a banking organization’s counterparty exposure. We do not know what impact, if any, these rules may have on our lenders’ or counterparties’ business practices, or whether and to what extent this rule may adversely affect demand for or the liquidity of securities we issue. The Federal Reserve Board has indicated that a change in the conservatorship status of the GSEs could affect aspects of the Federal Reserve Board’s regulatory framework, and that it “will continue to monitor and take into consideration any future changes to the conservatorship status of the GSEs, including the extent and type of support received by the GSEs.”
Transition from LIBOR and Alternative Reference Rates
In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the London Inter-bank Offered Rate (“LIBOR”), announced its intention to stop persuading or compelling the group of major banks that sustains LIBOR to submit rate quotations. ICE Benchmark Administration (“IBA”), the administrator of LIBOR, ceased publication of one-week and two-month U.S. dollar LIBOR after December 2021. In November 2022, the FCA issued a consultation paper stating that overnight, one-month, three-month, six-month and twelve-month LIBOR will continue to be published in their representative, bank panel quotation-based form until June 30, 2023. In the same consultation paper, the FCA proposed to require publication of the one-month, three-month and six-month LIBOR on a non-representative, synthetic basis (that is, calculated based on the use of a term rate using the Secured Overnight Financing Rate) until the end of September 2024.
We are exposed to LIBOR-based financial instruments, primarily relating to our acquisitions of loans and securities, sales of securities, and derivative transactions, that have been entered into previously and mature after June 2023. However, we no longer acquire LIBOR loans or securities, issue LIBOR securities or enter into LIBOR derivatives transactions that increase our LIBOR risk exposure, so our exposure to LIBOR continues to diminish.
We have been actively seeking to facilitate an orderly transition from LIBOR to emerging alternative rates. We established an internal office focused on LIBOR transition issues that is overseen by our LIBOR Enterprise Steering Council, which includes members of senior management. We also coordinate with FHFA on our LIBOR transition efforts. In addition to the work we are doing on an enterprise level to facilitate an orderly transition from LIBOR, we also are a voting member of the Alternative Reference Rates Committee (the “ARRC”) and participate in its working groups. The ARRC is a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York to identify a set of alternative U.S. dollar reference interest rates and an adoption plan for those alternative rates. Banking and financial regulators, including FHFA, also participate in the ARRC as ex-officio members. In 2017, the ARRC recommended an alternative reference rate, referred to as the Secured Overnight Financing Rate (“SOFR”). The Federal Reserve Bank of New York began publishing SOFR in 2018.
In support of the ARRC’s efforts to develop SOFR as a key market index, we issued the market’s first SOFR securities in 2018. We also have taken numerous steps to transition our financial instruments away from LIBOR; including using SOFR-indexed adjustable-rate mortgage products for new originations for our single-family business and our multifamily business, ceasing our purchase of any LIBOR adjustable-rate mortgage loans, issuing SOFR-indexed REMIC securities, and ceasing the issuance of new LIBOR REMIC securities. We supported the initial development of SOFR-indexed interest rate swaps and futures transactions and continue to execute these SOFR trades on a frequent basis. We have not issued LIBOR debt securities since 2017, and we no longer enter into new LIBOR derivatives trades that increase our LIBOR risk exposure.
Our LIBOR-indexed derivative contracts historically represented the largest category (measured by notional amount) of our LIBOR exposure. During 2021, we terminated the vast majority of our LIBOR derivatives transactions (and, where appropriate, entered into new SOFR derivatives trades). While we have a small amount of remaining legacy LIBOR derivatives trades that will mature after June 2023, the related contracts provide that LIBOR will be replaced with SOFR once LIBOR ceases to be published.
Given that our derivatives LIBOR exposure has been significantly decreased and the transition to SOFR has been addressed, our three principal sources of continued exposure to LIBOR arise from (1) single-family and multifamily
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LIBOR-based adjustable-rate mortgage loans that we have securitized or own; (2) LIBOR-indexed REMIC structured securities that we have issued; and (3) LIBOR-indexed credit risk transfer securities. Each of those products allow us to select a replacement index if LIBOR ceases to be published or, for products issued in 2020 or after, uses fallback language based predominantly on the recommendations of the ARRC.
In December 2022, the Federal Reserve Board published Regulation ZZ, a final regulation that provides default rules for certain contracts that use LIBOR as the benchmark reference interest rate index. Regulation ZZ implements the “Adjustable Interest Rate (LIBOR) Act” (the “LIBOR Act”), which was enacted in March 2022 and establishes a clear and uniform process for replacing LIBOR as the benchmark reference interest rate index in existing contracts that do not contain a clearly defined or practicable replacement benchmark for when LIBOR is discontinued. Under Regulation ZZ, references to the most common tenors of LIBOR in these contracts will be replaced as a matter of law, without the need to be amended, to instead reference the benchmark interest rate indices identified by the Federal Reserve Board in the regulation.
The replacement benchmark interest rate indices identified by the Federal Reserve Board in Regulation ZZ are based on SOFR and include appropriate “tenor spread adjustments” to reflect historical spreads between LIBOR and SOFR. In December 2022, FHFA, as our conservator, directed us to adopt the Federal Reserve-selected benchmark replacement indices, including applicable tenor spread adjustments, in the case of all legacy contracts and financial instruments in which we will exercise discretion in selecting a LIBOR replacement index. On December 22, 2022, we announced the following replacement indices for the legacy LIBOR loans and securities for which we are responsible for selecting the replacement index, which are the benchmark replacements provided in Regulation ZZ and are based on SOFR:
Single-family adjustable-rate mortgages (“ARMs”) and related MBS: Relevant tenor of term SOFR published by CME Group Benchmark Administration, Ltd. plus the applicable tenor spread adjustment specified in Regulation ZZ; and
Multifamily ARMs and related MBS, credit risk transfer securities, and collateralized mortgage obligations: 30-day average SOFR plus the applicable tenor spread adjustment specified in Regulation ZZ.
Our transition to these replacement indices will occur the day after June 30, 2023, the last date on which all remaining tenors of USD LIBOR will be published.
The LIBOR Act and Regulation ZZ establish a safe harbor for market participants that act in accordance with such legislation and regulation, shielding them from litigation for selecting and implementing the Federal Reserve-selected replacement indices and related conforming changes. As a result, the LIBOR Act and Regulation ZZ reduce the risks to us associated with the approaching cessation of LIBOR. See “Risk Factors—Market and Industry Risk” for a discussion of the risks to our results of operations, financial condition, liquidity and net worth posed by the discontinuance of LIBOR.
SEC Proposed Rule Prohibiting Conflicts of Interest in Certain Securitizations
In January 2023, the SEC issued a proposed rule prohibiting conflicts of interest in certain securitization transactions. The proposed rule would restrict securitization participants from engaging in certain transactions with respect to an asset-backed security for a period ending one year after the initial sale of that security and also specifies certain prohibited transaction types. The proposed rule provides an exception for our asset-backed securities so long as those securities are fully guaranteed by us and we are operating under the conservatorship of FHFA with capital support from the United States.
As a result, if adopted as proposed, the rule could affect or prohibit our ability to enter into credit risk transfer transactions following our exit from conservatorship. Further, while the SEC indicated in the proposing release its intent to exempt us from the rule while we are in conservatorship, questions remain regarding the proposed rule and we are still assessing the potential impact of the rule on our credit risk transfer transactions during conservatorship. In addition, there can be no assurance that the final rule will not reflect important modifications, including with respect to the exception for our asset-backed securities prior to our exit from conservatorship.
Human Capital
Overview
Our employees are key to ensuring our long-term success and meeting our strategic objectives. We had approximately 8,000 employees as of December 31, 2022, our final pay-period end date in 2022. Because we design, build and maintain complex systems to support our specialized role in the secondary mortgage market, 41% of our employees work in technology-related jobs. A tight labor market and remote work opportunities increased the competition we faced from other companies in hiring new employees, as well as in retaining our employees. Competition was especially high
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for employees with technology skills. While voluntary attrition steadily declined to a near pre-pandemic level throughout 2022, we remain focused on attracting, engaging, retaining and developing a highly skilled workforce in this competitive market. During 2022, an average of 8% of total positions in the company and 10% of our technology-related positions were vacant. Our vacancy rate at any given point in time can be affected by factors such as hiring priorities, labor market conditions, and headcount growth rates. We discuss how restrictions on our compensation and uncertainty with respect to our future can affect our ability to retain and recruit employees in “Risk Factors—GSE and Conservatorship Risk.” Despite conservatorship, an uncertain future, and limitations on the compensation we are able to offer, we believe many employees and potential recruits are attracted by our mission and the compelling nature of our work.
See “Directors, Executive Officers and Corporate Governance—Corporate Governance—Human Capital Management Oversight” for information on oversight of human capital management by our Board of Directors’ Compensation and Human Capital Committee.
Employee Engagement
We are committed to maintaining an engaged workforce as we believe engagement is critical to the ongoing achievement of the company’s and the conservator’s goals. We monitor employee engagement through regular surveys. In 2022, the vast majority of our employees agreed with statements such as that they would recommend Fannie Mae as a great place to work, which we consider to be strong indicators of their engagement. We believe our ability to recruit and retain employees and keep them engaged is influenced by the opportunity to do interesting work that supports our mission. We also offer employee benefits to encourage involvement in socially positive efforts, including those that echo our mission. Specifically, we offer employees up to $5,000 per year in matching charitable gifts (subject to overall available funding) and 10 hours of paid leave each month to engage in volunteer activities. We have also established a relief fund to which our employees can make charitable donations to assist employees who have suffered losses as a result of a natural disaster or other catastrophic event. In January 2023, we introduced new benefits to support our employees’ mental, physical and financial well-being, including expanded paid parental, caretaker and vacation leave and a new leave for employees experiencing a home catastrophe.
Employee Development
We invest in our employees’ development to support the success of the company as well as our employees. We seek to provide training and opportunities that enable employees to develop digital, leadership and other critical skills we need to achieve our strategic objectives and fulfill our mission. Through Fannie Mae University, our platform for employee development, our employees can build knowledge and skills with the help of online courses, videos and other resources. We have worked on instilling lean management techniques, practices and behaviors throughout our workforce and Agile development principles for employees engaged in product development. We also emphasize to our employees their responsibility for and role in managing risk through our risk-assessment and monitoring activities, training and corporate messaging.
Safety and Resiliency
In 2022, we continued to prioritize the safety and resiliency of our workforce. Recognizing that our employees are balancing a number of competing obligations, we seek to provide an environment that supports our business needs while helping employees better meet their personal obligations. We embrace hybrid ways of working and operate in a hybrid work model, with office space where teams can come together and flexibility regarding when employees will be in the office. A significant majority of our employees are primarily working remotely and we currently expect they will continue to work primarily remotely for the foreseeable future. To date, our business resiliency plans and technology systems have effectively supported this remote work arrangement. To support our employees in their remote work environment, we have offered office supply stipends. We have also taken a number of steps to support employee resiliency, including extending our practice of half-day flexible Fridays through 2023.
Diversity and Inclusion
We seek to foster an environment in which all employees are treated with dignity and respect, have the opportunity to contribute to meaningful work and grow their careers in an inclusive environment free from discrimination, harassment, and retaliation. We believe this commitment helps us attract and retain a skilled, diverse workforce at all levels of our organization. As of December 31, 2022, racial or ethnic minorities constituted 58% of our overall workforce and 28% of our officer-level employees, and women constituted 44% of our overall workforce and 39% of our officer-level employees.
In 2022, to ensure a strong leadership focus on diversity and inclusion, we appointed a Chief Diversity & Inclusion Officer to the management committee reporting to our President. The Chief Diversity & Inclusion Officer leads our Office of Minority and Women Inclusion, which is responsible for driving the development of our diversity and inclusion
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strategic plan in partnership with leaders across the company, and reporting on our progress against the plan. We also sponsor programs and activities to cultivate a diverse and inclusive work environment by focusing on inclusive leadership principles, talent development, enterprise accessibility, team and group dynamics, and a consistent communications strategy that reinforces the practice of driving inclusion to achieve innovative solutions. We supported ten voluntary, grassroots employee resource groups in 2022 that are open to all employees, support diversity and inclusion, and provide a forum for members to come together for professional growth and development, cultural awareness, education, community service, and networking across the organization. Our officer-led Diversity Advisory Council supports the integration of our diversity and inclusion strategy throughout the company.
Our commitment to diversity extends to our Board of Directors. Over half of Fannie Mae’s Board members are women and/or racial or ethnic minorities. See “Directors, Executive Officers and Corporate Governance—Corporate Governance—Composition of Board of Directors” for additional information on the diversity of our Board of Directors.
Where You Can Find Additional Information
We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10‑Q, current reports on Form 8-K and all other SEC reports and amendments to those reports as soon as reasonably practicable after we electronically file the material with, or furnish it to, the SEC. Our website address is www.fanniemae.com. Materials that we file with the SEC are also available from the SEC’s website, www.sec.gov. You may also request copies of any filing from us, at no cost, by calling the Fannie Mae Investor Relations & Marketing Helpline at 1-800-2FANNIE (1-800-232-6643).
References in this report to our website or to the SEC’s website do not incorporate information appearing on those websites unless we explicitly state that we are incorporating the information.
Forward-Looking Statements
This report includes statements that constitute forward-looking statements within the meaning of Section 21E of the Exchange Act. In addition, we and our senior management may from time to time make forward-looking statements in our other filings with the SEC, our other publicly available written statements and orally to analysts, investors, the news media and others. Forward-looking statements often include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “forecast,” “project,” “would,” “should,” “could,” “likely,” “may,” “will” or similar words. Examples of forward-looking statements in this report include, among others, statements relating to our expectations regarding the following matters:
our future financial performance and the factors that will affect such performance;
our future aggregate liquidation preference and net worth;
economic, mortgage market and housing market conditions (including expectations regarding economic recession, home price declines, unemployment rates, refinance volumes and interest rates), the factors that will affect those conditions, and the impact of those conditions on our business and financial results;
our business plans and strategies, and their impact;
climate change and its impact;
the impact of changes in our guaranty fee pricing;
the impact of future changes to our credit score model requirements and our credit report requirements;
the effects of our credit risk transfer transactions, as well as the factors that will affect our engagement in future credit risk transfer transactions;
volatility in our financial results and the impact of hedge accounting on such volatility;
the size and composition of our retained mortgage portfolio, and the factors that will affect them;
the impact of the adoption of new accounting guidance;
the impact of the transition from LIBOR to SOFR on our measurement of interest-rate risk and financial results;
the impact of legislation and regulation on our business or financial results;
our payments to HUD and Treasury funds under the GSE Act;
the risks to our business;
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the future credit performance of the loans in our guaranty book of business (including future loan delinquencies and foreclosures) and the factors that will affect such performance;
our expectations relating to cyber attacks and other information security threats;
the factors that will affect the competition we face;
how we intend to meet our debt obligations and the factors that will affect our access to debt funding; and
our expectations relating to legal and regulatory actions and proceedings.
Forward-looking statements reflect our management’s current expectations, forecasts or predictions of future conditions, events or results based on various assumptions and management’s estimates of trends and economic conditions in the markets in which we are active and that otherwise impact our business plans. Forward-looking statements are not guarantees of future performance. By their nature, forward-looking statements are subject to significant risks and uncertainties and changes in circumstances. Our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.
There are a number of factors that could cause actual conditions, events or results to differ materially from those described in our forward-looking statements, including, among others, the following:
uncertainty regarding our future, our exit from conservatorship and our ability to raise or earn the capital needed to meet our capital requirements;
significant challenges we face in retaining and hiring qualified executives and other employees;
the prevalence and severity of future COVID-19 outbreaks; the actions taken to contain the virus, or treat its impact, including government actions to mitigate the economic impact of the pandemic; borrower and renter behavior in response to the pandemic and its economic impact; the short-term and long-term impact of COVID-19 infections on the U.S. workforce; and future economic and operating conditions, including the economic impact of outbreaks or increases in the number or severity of COVID-19 cases;
the impact of the senior preferred stock purchase agreement and the enterprise regulatory capital framework, as well as future legislative and regulatory requirements or changes, governmental initiatives, or executive orders affecting us, such as the enactment of housing finance reform legislation, including changes that limit our business activities or our footprint or impose new mandates on us;
actions by FHFA, Treasury, HUD, the CFPB, the SEC or other regulators, Congress, the Executive Branch, or state or local governments that affect our business;
a default by the United States government on its obligations;
changes in the structure and regulation of the financial services industry;
the potential impact of a change in the corporate income tax rate, which we expect would affect our net income in the quarter of enactment as a result of a change in our measurement of our deferred tax assets and our net income in subsequent quarters as a result of the change in our effective federal income tax rate;
the timing and level of, as well as regional variation in, home price changes;
future interest rates and credit spreads;
developments that may be difficult to predict, including: market conditions that result in changes in our amortization income from our guaranty book of business or changes in net interest income from our portfolios, fluctuations in the estimated fair value of our derivatives and other financial instruments that we mark to market through our earnings; and developments that affect our loss reserves, such as changes in interest rates, home prices or accounting standards, or events such as natural or other disasters, the emergence of widespread health emergencies or pandemics, or other disruptive or catastrophic events;
uncertainties relating to the discontinuance of LIBOR, or other market changes that could impact the loans we own or guarantee or our MBS;
disruptions or instability in the housing and credit markets;
the size and our share of the U.S. mortgage market and the factors that affect them, including population growth and household formation;
growth, deterioration and the overall health and stability of the U.S. economy, including U.S. gross domestic product (“GDP”), unemployment rates, personal income, inflation and other indicators thereof;
changes in fiscal or monetary policy of the U.S. or other countries, and the impact of such changes on domestic and international financial markets;
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our and our competitors’ future guaranty fee pricing and the impact of that pricing on our competitive environment and guaranty fee revenues;
the volume of mortgage originations;
the size, composition, quality and performance of our guaranty book of business and retained mortgage portfolio;
the competitive environment in which we operate, including the impact of legislative, regulatory or other developments on levels of competition in our industry and other factors affecting our market share;
how long loans in our guaranty book of business remain outstanding;
the effectiveness of our business resiliency plans and systems;
changes in the demand for Fannie Mae MBS, in general or from one or more major groups of investors;
our conservatorship, including any changes to or termination (by receivership or otherwise) of the conservatorship and its effect on our business;
the investment by Treasury, including the impact of past or potential future changes to the terms of the senior preferred stock purchase agreement, and their effect on our business, including restrictions imposed on us by the terms of the senior preferred stock purchase agreement, the senior preferred stock, and the warrant, as well as the extent that these or other restrictions on our business and activities are applied to us through other mechanisms even if we cease to be subject to these agreements and instruments;
adverse effects from activities we undertake to support the mortgage market and help borrowers, renters, lenders and servicers;
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 actions relating to UMBS or our resecuritization of Freddie Mac-issued securities;
limitations on our business imposed by FHFA, in its role as our conservator or as our regulator;
our current and future objectives and activities in support of those objectives, including actions we may take to reach additional underserved borrowers or address barriers to sustainable housing opportunities and advance equity in housing finance;
the possibility that changes in leadership at FHFA or the Administration may result in changes that affect our company or our business;
our reliance on CSS and the common securitization platform CSS operates for a majority of our single-family securitization activities; provisions in the CSS limited liability company agreement that permit FHFA to add members to the CSS Board of Managers, which may limit the ability of Fannie Mae and Freddie Mac to control decisions of the Board; and changes FHFA may require in our relationship with or in our support of CSS;
a decrease in our credit ratings;
limitations on our ability to access the debt capital markets;
constraints on our entry into new credit risk transfer transactions;
significant changes in forbearance, modification and foreclosure activity;
the volume and pace of any future nonperforming and reperforming loan sales and their impact on our results and serious delinquency rates;
changes in borrower behavior;
actions we may take to mitigate losses, and the effectiveness of our loss mitigation strategies, management of our real estate owned (“REO”) inventory and pursuit of contractual remedies;
defaults by one or more institutional counterparties;
resolution or settlement agreements we may enter into with our counterparties;
our need to rely on third parties to fully achieve some of our corporate objectives;
our reliance on mortgage servicers;
changes in GAAP, guidance by the Financial Accounting Standards Board (“FASB”) and changes to our accounting policies;
changes in the fair value of our assets and liabilities;
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the stability and adequacy of the systems and infrastructure that impact our operations, including ours and those of CSS, our other counterparties and other third parties;
the impact of interdependence between the single-family mortgage securitization programs of Fannie Mae and Freddie Mac in connection with UMBS;
operational control weaknesses;
our reliance on models and future updates we make to our models, including the data and assumptions used by these models;
the effectiveness of our risk management processes and related controls, including those relating to climate risk and model risk;
domestic and global political risks and uncertainties, including the impact of the Russian war in Ukraine and escalating tensions between China and Taiwan;
natural disasters, environmental disasters, terrorist attacks, widespread health emergencies or pandemics, infrastructure failures, or other disruptive or catastrophic events;
severe weather events, fires, floods or other climate change events or impacts, including those for which we may be uninsured or under-insured or that may affect our counterparties, and other risks resulting from climate change and efforts to address climate change and related risks;
cyber attacks or other information security breaches or threats; and
the other factors described in “Risk Factors.”
Readers are cautioned not to unduly rely on the forward-looking statements we make and to place these forward-looking statements into proper context by carefully considering the factors discussed in “Risk Factors” in this report. These forward-looking statements are representative only as of the date they are made, and we undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under the federal securities laws.
Item 1A.  Risk Factors
Risk Factors Summary
The summary of risks below provides an overview of the principal risks we are exposed to in the normal course of our business activities. This summary does not contain all of the information that may be important to you, and you should read the more detailed discussion of risks that follows this summary.
GSE and Conservatorship Risk
The future of our company is uncertain.
FHFA, as our conservator, controls our business activities. We may be required to take actions that are difficult to implement, reduce our profitability or expose us to additional risk.
Our business activities are significantly affected by the senior preferred stock purchase agreement.
Our regulator is authorized or required to place us into receivership under specified conditions, which would result in our liquidation. Amounts recovered by our receiver may not be sufficient to pay claims outstanding against us, repay the liquidation preference of our preferred stock or to provide any proceeds to common shareholders.
Our business and results of operations may be materially adversely affected if we are unable to retain and recruit well-qualified executives and other employees. The conservatorship, the uncertainty of our future, and limitations on our executive and employee compensation put us at a disadvantage compared to many other companies with which we compete for talent.
Pursuing our housing goals, duty to serve obligations, and Equitable Housing Finance Plan may materially adversely affect our business, results of operations and financial condition.
The conservatorship and agreements with Treasury adversely affect our common and preferred shareholders.
The liquidity and market value of our MBS could be adversely affected by negative developments in the UMBS market or from the loss of support from certain regulatory bodies for UMBS.
Our issuance of UMBS and structured securities backed by Freddie Mac-issued securities exposes us to significant operational and counterparty credit risk.
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Our reliance on CSS and the common securitization platform exposes us to significant third-party risk.
We are limited in our ability to diversify our business and undertake activities that management believes would benefit our business.
An active trading market in our equity securities may cease to exist, which would adversely affect the market price and liquidity of our common and preferred stock.
Credit Risk
We may incur significant provisions for credit losses and write-offs on the loans in our book of business.
The credit enhancements we use provide only limited protection against potential future credit losses. These transactions also increase our expenses.
One or more of our institutional counterparties may fail to fulfill their contractual obligations to us, resulting in financial losses, business disruption and decreased ability to manage risk.
Our financial condition or results of operations may be adversely affected if mortgage servicers fail to perform their obligations to us.
We may incur losses as a result of claims under our mortgage insurance policies not being paid in full or at all.
Mortgage fraud could result in significant financial losses and harm to our reputation.
We may suffer losses if borrowers suffer property damage as a result of a hazard for which the borrower has no or insufficient insurance.
The occurrence of major natural or other disasters in the United States or its territories and the impact of climate change could materially increase our provision for credit losses and our write-offs.
Operational Risk
A failure in our operational systems or infrastructure, or those of third parties, could materially adversely affect our business, impair our liquidity, cause financial losses and harm our reputation.
A breach of the security of our systems or facilities, or those of third parties with which we do business, including as a result of cyber attacks, could damage or disrupt our business or result in the disclosure or misuse of confidential or other information (including personal information), which could damage our reputation, result in regulatory sanctions and/or increase our costs and cause losses that have a material adverse impact on our business, financial results and financial condition.
Our concurrent implementation of multiple new initiatives may increase our operational risk and result in one or more material weaknesses in our internal control over financial reporting.
Material weaknesses in our internal control over financial reporting could result in errors in our reported results or disclosures that are not complete or accurate.
Failure of our models to produce reliable results may adversely affect our ability to manage risk and make effective business decisions, as well as create regulatory and reputational risk.
Liquidity and Funding Risk
Limitations on our ability to access the debt capital markets could have a material adverse effect on our ability to fund our operations, and our liquidity contingency plans may be difficult or impossible to execute during a sustained liquidity crisis.
A decrease in the credit ratings on our senior unsecured debt could have an adverse effect on our ability to issue debt on reasonable terms, particularly if such a decrease were not based on a similar action on the credit ratings of the U.S. government. A decrease in our credit ratings also could require that we post additional collateral for our derivatives contracts.
Market and Industry Risk
Changes in interest rates or our loss of the ability to manage interest-rate risk successfully could adversely affect our financial results and condition, and increase our interest-rate risk.
Changes in spreads could materially impact our results of operations, net worth and the fair value of our net assets.
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Uncertainty relating to the discontinuance of LIBOR may adversely affect our results of operations, financial condition, liquidity and net worth.
Our business and financial results are affected by general economic conditions, including home prices and employment trends, and changes in economic conditions or financial markets may materially adversely affect our business and financial condition.
Actions by the Federal Reserve can materially affect our business and financial condition, including our business volumes and demand for our mortgage-backed securities.
Legal and Regulatory Risk
Regulatory changes in the financial services industry may negatively impact our business.
Legislative, regulatory or judicial actions could negatively impact our business, results of operations, financial condition or net worth.
Our business and financial results could be materially adversely affected by legal or regulatory proceedings.
General Risk
The COVID-19 pandemic may continue to adversely affect our business and financial results.
Changes in accounting standards and policies can be difficult to predict and can materially impact how we record and report our financial results.
In many cases, our accounting policies and methods, which are fundamental to how we report our financial condition and results of operations, require management to make judgments and estimates about matters that are inherently uncertain. Management also relies on models in making these estimates.
Risk Factors
Refer to “MD&A—Key Market Economic Indicators,” “MD&A—Risk Management,” “MD&A—Single-Family Business” and “MD&A—Multifamily Business” for more detailed descriptions of the primary risks to our business and how we seek to manage those risks.
The risks we face could materially adversely affect our business, results of operations, financial condition, liquidity and net worth, and could cause our actual results to differ materially from our past results or the results contemplated by any forward-looking statements we make. We believe the risks described below and in the other sections of this report referenced above are the most significant we face; however, these are not the only risks we face. We face additional risks and uncertainties not currently known to us or that we currently believe are immaterial.
GSE and Conservatorship Risk
The future of our company is uncertain.
The company faces an uncertain future, including how long we will continue to exist in our current form, the extent of our role in the market, the level of government support of our business, how long we will be in conservatorship, 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. The conservatorship has been in place since 2008, is indefinite in duration, and the timing, conditions and likelihood of our emerging from conservatorship are uncertain. Our conservatorship could terminate through a receivership. Termination of the conservatorship, other than in connection with a receivership, requires Treasury’s consent under the senior preferred stock purchase agreement; unless (1) all currently pending significant litigation relating to the conservatorship and the August 2012 amendment to the senior preferred stock purchase agreement has been resolved, and (2) for two or more consecutive quarters, our common equity tier 1 capital, together with any other stockholder equity that we may issue in a public offering, equals or exceeds 3% of our adjusted total assets (as defined in the enterprise regulatory capital framework). See “Legal Proceedings” and “Note 16, Commitments and Contingencies” for a discussion of the pending significant litigation relating to the amendment of the senior preferred stock purchase agreement and/or conservatorship.
Our current capital levels are significantly below the levels required under the enterprise regulatory capital framework. Our efforts to build capital to meet our requirements can be significantly affected by the amount and type of our new loan acquisitions, which can drive increases in our required capital that offset or even outpace increases in our available capital. We believe that the returns on our current book of business are not sufficient to attract private investors in our equity securities, which we believe would limit our options for exiting conservatorship. Increasing our returns may require substantial increases in our pricing or changes in other aspects of our business that could significantly affect our competitive position, our loan acquisition volumes, or the type of business we do, including the level of support we
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provide to low- and moderate-income borrowers and renters. We currently have higher capital requirements than our primary competitor, Freddie Mac, driven primarily by the larger size of our guaranty book of business. These higher capital requirements could negatively affect our ability to compete with Freddie Mac for the acquisition of mortgage loans, reduce our market share, change the mix of loans we acquire, and negatively affect the profitability of the loans we acquire. For more information on the enterprise regulatory capital framework, see “Business—Legislation and Regulation—GSE-Focused Matters—Capital Requirements.” In addition, we believe that Treasury’s potential additional substantial equity ownership in our company, along with restrictions imposed on our business and future dividends and fees we will be required to pay to Treasury under the current terms of the senior preferred stock purchase agreement will reduce our attractiveness to potential equity investors.
The Administration and Congress may consider housing finance reforms or legislation that could result in significant changes in our structure and role in the future, including proposals that would result in Fannie Mae’s liquidation or dissolution. Congress may consider legislation, or federal agencies such as FHFA may consider regulations or administrative actions, to increase the competition we face, reduce our market share, further expand our obligations to provide funds to Treasury, further constrain our business operations, or subject us to other obligations that may adversely affect our business. We cannot predict the timing or content of housing finance reform legislation or other legislation, regulations or administrative actions that will impact our activities, nor can we predict the extent of such impact.
FHFA, as our conservator, controls our business activities. We may be required to take actions that are difficult to implement, reduce our profitability or expose us to additional risk.
In conservatorship, our business is not managed with a strategy to maximize shareholder returns. Our directors owe their fiduciary duties of care and loyalty solely to the conservator. Thus, while we are in conservatorship, the Board has no fiduciary duties to the company or its stockholders. The Supreme Court’s opinion in Collins v. Yellen in June 2021 included an expansive interpretation of FHFA’s authority as conservator under the Housing and Economic Recovery Act of 2008, noting that “when the FHFA acts as a conservator, it may aim to rehabilitate the regulated entity in a way that, while not in the best interests of the regulated entity, is beneficial to the Agency and, by extension, the public it serves.” As conservator, FHFA can direct us to enter into contracts or enter into contracts on our behalf, and generally has the power to transfer or sell any of our assets or liabilities.
Our strategic direction is subject to FHFA review and approval. FHFA also requires us to meet specified annual corporate performance objectives referred to as the conservatorship scorecard. We face a variety of different, and sometimes competing, business objectives and FHFA-mandated activities, such as the initiatives we have been pursuing under the conservatorship scorecards. FHFA has and may require us to undertake activities that are costly or difficult to implement. FHFA also has required us to make changes to our business that have adversely affected our financial results and could require us to make additional changes at any time. For example, FHFA may require us to undertake some activities that: reduce our profitability; expose us to additional credit, market, funding, operational, and other risks; or provide additional support for the mortgage market that serves our mission, but adversely affects our financial results.
FHFA can prevent us from engaging in business activities or transactions that we believe would benefit our business and financial results, and from time to time has done so. For example, because FHFA can direct us to make changes to our guaranty fee pricing and can prevent us from making changes to our guaranty fee pricing, our ability to address changing market conditions, pursue certain strategic objectives, or manage the mix of loans we acquire is constrained.
With FHFA’s broad powers as conservator, changes in leadership at FHFA, including those resulting from a change in the Administration, could result in significant changes to the goals FHFA establishes for us and could have a material impact on our business and financial results. The President has the power to remove the Director of FHFA for any reason.
Our business activities are significantly affected by the senior preferred stock purchase agreement.
Even if we are released from conservatorship, we remain subject to the terms of the senior preferred stock purchase agreement with Treasury, under which we issued the senior preferred stock and warrant. The senior preferred stock purchase agreement can only be canceled or modified with the consent of Treasury. The agreement includes a number of covenants that significantly restrict our business activities. These restrictions under the senior preferred stock purchase agreement could adversely affect our ability to attract capital from the private sector in the future. For more information about the covenants in the senior preferred stock purchase agreement and their potential impact on our business, see “Business—Conservatorship and Treasury Agreements—Treasury Agreements—Covenants under Treasury Agreements.”
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Our regulator is authorized or required to place us into receivership under specified conditions, which would result in our liquidation. Amounts recovered by our receiver may not be sufficient to pay claims outstanding against us, repay the liquidation preference of our preferred stock or to provide any proceeds to common shareholders.
The Director of FHFA is required to place us into receivership if they make a written determination that our assets are less than our obligations or if we have not been paying our debts as they become due, in either case, for a period of 60 days after the SEC filing deadline for any of our Form 10-Ks or Form 10-Qs. Although Treasury committed to providing us funds in accordance with the terms of the senior preferred stock purchase agreement, if we need funding from Treasury to avoid triggering FHFA’s obligation to place us into receivership, Treasury may not be able to provide sufficient funds to us within the required 60 days if it has exhausted its borrowing authority, if there is a government shutdown, or if the funding we need exceeds the amount available to us under the agreement. In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for the reasons set forth in the GSE Act, including if our Board or shareholders consent to the appointment of a receiver or, if under the definitions in the GSE Act, we are undercapitalized with no reasonable prospect of becoming adequately capitalized or we are critically undercapitalized. Under the GSE Act, FHFA succeeded to all of the rights, titles, powers and privileges of our board of directors and shareholders.
A receivership would terminate our conservatorship. In addition to the powers FHFA has as our conservator, the appointment of FHFA as our receiver would terminate all rights and claims that our shareholders and creditors may have against our assets or under our charter arising from their status as shareholders or creditors, except for their right to payment, resolution or other satisfaction of their claims as permitted under the GSE Act. If we are placed into receivership and do not or cannot fulfill our MBS guaranty obligations, there may be significant delays of any payments to our MBS holders, and the MBS holders could become unsecured creditors of ours with respect to claims made under our guaranty to the extent the mortgage collateral underlying the Fannie Mae MBS is insufficient to satisfy the claims of the MBS holders.
In the event of a liquidation of our assets, only after payment of secured claims, administrative expenses of the receiver and the immediately preceding conservator, other obligations of the company (other than obligations to shareholders), and the liquidation preference of the senior preferred stock, would any liquidation proceeds be available to repay the liquidation preference on any other series of preferred stock. Finally, only after the liquidation preference on all series of preferred stock is repaid would any liquidation proceeds be available for distribution to the holders of our common stock. In the event of such a liquidation, we can make no assurances that there would be sufficient proceeds to make any distribution to holders of our preferred stock or common stock, other than to Treasury as the holder of our senior preferred stock. As described in “Business—Conservatorship and Treasury Agreements—Treasury Agreements—Senior Preferred Stock—Liquidation Preference,” under the current terms of the senior preferred stock, until the capital reserve end date, the liquidation preference of the senior preferred stock increases each quarter by the amount of the increase in our net worth, if any, during the immediately prior fiscal quarter. The aggregate liquidation preference of the senior preferred stock was $180.3 billion as of December 31, 2022 and we expect it will continue to increase as we increase our net worth, leaving less available for holders of our preferred stock or common stock in the event of a liquidation of our assets.
Our business and results of operations may be materially adversely affected if we are unable to retain and recruit well-qualified executives and other employees. The conservatorship, the uncertainty of our future, and limitations on our executive and employee compensation put us at a disadvantage compared to many other companies with which we compete for talent.
Our business is highly dependent on the talents and efforts of our executives and other employees. The conservatorship, the uncertainty of our future, and limitations on executive and employee compensation have had, and are likely to continue to have, an adverse effect on our ability to retain and recruit talent. Several of our senior executives departed in the first half of 2022, including our Chief Executive Officer, our Chief Operating Officer, and our Chief Risk Officer. Future attrition in key management positions and challenges in finding replacements could harm our ability to manage our business effectively, to successfully implement strategic initiatives, and ultimately could adversely affect our financial performance.
Actions taken by Congress, FHFA and Treasury to date, or that may be taken by them or other government agencies in the future, have had, and may continue to have, an adverse effect on our retention and recruitment of executives and other employees. We are subject to significant restrictions on the amount and type of compensation we may pay while under conservatorship. For example:
The Equity in Government Compensation Act of 2015 limits the compensation and benefits for our Chief Executive Officer to the same level in effect as of January 1, 2015 while we are in conservatorship or
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receivership. Accordingly, annual direct compensation for our Chief Executive Officer is limited to base salary at an annual rate of $600,000.
The Stop Trading on Congressional Knowledge Act of 2012, known as the STOCK Act, and related FHFA regulations prohibit our senior executives from receiving bonuses during conservatorship.
As our conservator, FHFA has the authority to approve the terms and amounts of our executive compensation. FHFA also has the authority to require changes to our executive compensation program, which could affect our ability to retain and recruit executive officers.
FHFA has advised us that, given our conservatorship status, our executive compensation program is designed generally to provide for lower pay levels relative to large financial services firms that are not in conservatorship. FHFA has directed that we may target between the 25th and 50th percentiles of appropriate market data for new executive hires and compensation increase requests for existing executives, which limits the level of market-competitive compensation we are able to offer our executives if FHFA does not grant an exception. See “Executive Compensation—Compensation Discussion and Analysis—2022 Executive Compensation Program; Chief Executive Officer Compensation” for a description of FHFA’s primary objectives for our executive compensation program, as well as directives and guidance FHFA has provided relating to our executive compensation during conservatorship.
The terms of our senior preferred stock purchase agreement with Treasury contain specified restrictions relating to compensation, including a prohibition on selling or issuing equity securities without Treasury’s prior written consent except under limited circumstances, which effectively eliminates our ability to offer equity-based compensation to our employees.
As a result of the restrictions on our compensation, we have not been able to incent and reward excellent performance with compensation structures that provide upside potential to our executives, which places us at a disadvantage compared to many other companies in attracting and retaining executives. In addition, the restrictions on our compensation and the uncertainty of potential action by Congress or the Administration with respect to our future— including whether we will exit conservatorship, how long it may take before we exit conservatorship, or whether housing finance reform will result in a significant restructuring of the company or the company no longer continuing to exist—also may adversely affect our ability to retain and recruit executives and other employees.
The cap on our Chief Executive Officer compensation continues to make retention and succession planning for this position difficult, and it may make it difficult to attract qualified candidates for this critical role in the future.
We face competition from the financial services and technology industries, and from businesses outside of these industries, for qualified executives and other employees. A tight labor market and remote work opportunities increased the competition we faced from other companies in 2022 in hiring new executives and other employees, as well as in retaining our executives and employees. If future competition for executive and employee talent is strong and if we are unable to retain, promote and attract executives and other employees with the necessary skills and talent, we would face increased risks for operational failures. In the future, if there are several high-level departures at approximately the same time, our ability to conduct our business could be materially adversely affected, which could have a material adverse effect on our results of operations and financial condition.
Pursuing our housing goals, duty to serve obligations, and Equitable Housing Finance Plan may materially adversely affect our business, results of operations and financial condition.
We are required by the GSE Act to support the housing market in ways that could materially adversely affect our financial results and condition. For example, we are subject to housing goals that require a portion of the mortgage loans we acquire to meet specified standards relating to affordability or location. We also have a duty to serve very low-, low- and moderate-income families in three specified underserved markets: manufactured housing, affordable housing preservation and rural housing. In September 2021, FHFA instructed us to prepare and implement a three-year Equitable Housing Finance Plan. This plan, which we published in June 2022, is intended to advance equity in housing finance by working to remove barriers to affordable rental housing and homeownership experienced by members of underserved populations, particularly racial and ethnic groups with a significant homeownership rate disparity. We are taking actions to support the housing market, including to meet our housing goals, duty to serve obligations and Equitable Housing Finance Plan, that could materially adversely affect our profitability. For example, we are acquiring loans that offer lower expected returns or could materially increase our provision for credit losses and our write-offs. Also see “MD&A—Single-Family Business—Single-Family Business Metrics—Recent and Future Price Changes” for a discussion of price changes we recently implemented for certain first-time homebuyers, low-income borrowers, and underserved communities that could negatively impact the credit risk profile of our new single-family acquisitions and investor interest in our future single-family credit risk transfer transactions.
If we do not meet our housing goals or duty to serve requirements, and FHFA finds that the goals or requirements were feasible, we may become subject to a housing plan with additional requirements that could have a material adverse
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effect on our results of operations and financial condition. The potential penalties for failure to comply with housing plan requirements include a cease-and-desist order and civil money penalties. See “Business—Legislation and Regulation—GSE-Focused Matters” for more information on our housing goals and duty to serve underserved markets and “Business—Conservatorship and Treasury Agreements—Equitable Housing Finance Plan” for more information on our Equitable Housing Finance Plan.
The conservatorship and agreements with Treasury adversely affect our common and preferred shareholders.
The material adverse effects of the conservatorship on our shareholders under our agreements with Treasury include the following:
No voting rights during conservatorship. During conservatorship, our common shareholders do not have the ability to elect directors or to vote on other matters unless the conservator delegates this authority to them.
No dividends to common or preferred shareholders, other than to Treasury. Our conservator announced in September 2008 that we would not pay any dividends on the common stock or on any series of preferred stock, other than the senior preferred stock, while we are in conservatorship. In addition, under the terms of the senior preferred stock purchase agreement, dividends may not be paid to common or preferred shareholders (other than on the senior preferred stock) without the prior written consent of Treasury, regardless of whether we are in conservatorship.
Our profits directly increase the liquidation preference of Treasury’s senior preferred stock and, after the capital reserve end date, we will be required to pay dividends on the senior preferred stock. The senior preferred stock ranks senior to our common stock and all other series of our preferred stock, as well as any capital stock we issue in the future, as to both dividends and distributions upon liquidation. Accordingly, if we are liquidated, the senior preferred stock is entitled to its then-current liquidation preference, before any distribution is made to the holders of our common stock or other preferred stock. Under the current terms of the senior preferred stock, until the capital reserve end date, the liquidation preference of the senior preferred stock increases each quarter by the amount of the increase in our net worth, if any, during the immediately prior fiscal quarter. We expect the aggregate liquidation preference of the senior preferred stock will continue to increase as we increase our net worth, leaving less available for holders of our preferred stock or common stock in the event of a liquidation of our assets. In addition, the current terms of the senior preferred stock provide that, following the capital reserve end date, we will be required to pay dividends on the senior preferred stock of the lesser of (1) a 10% annual rate on the then-current liquidation preference of the senior preferred stock and (2) an amount equal to the incremental increase in our net worth during the immediately prior fiscal quarter. See “Business—Conservatorship and Treasury Agreements—Treasury Agreements—Senior Preferred Stock” for more information on the dividend provisions and aggregate liquidation preference of the senior preferred stock.
Exercise of the Treasury warrant would substantially dilute the investment of current shareholders. If Treasury exercises its warrant to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis, the ownership interest in the company of our then-existing common shareholders will be substantially diluted.
We are not managed for the benefit of shareholders. Because we are in conservatorship, we are not managed with a strategy to maximize shareholder returns.
The senior preferred stock purchase agreement, senior preferred stock and warrant can only be canceled or modified with the consent of Treasury. For additional description of the conservatorship and our agreements with Treasury, see “Business—Conservatorship and Treasury Agreements.”
The liquidity and market value of our MBS could be adversely affected by negative developments in the UMBS market or from the loss of support from certain regulatory bodies for UMBS.
The success of UMBS is largely predicated on the fungibility of UMBS issued by Fannie Mae and Freddie Mac. If investors stop viewing Fannie Mae-issued UMBS and Freddie Mac-issued UMBS as fungible, or if investors prefer Freddie Mac-issued UMBS over Fannie Mae-issued UMBS, it could adversely affect the liquidity and market value of Fannie Mae MBS, the volume of our UMBS issuances and our guaranty fee revenues. FHFA adopted a rule to align Fannie Mae and Freddie Mac programs, policies and practices that affect the prepayment rates of TBA-eligible mortgage-backed securities to support the fungibility of Fannie Mae-issued UMBS and Freddie Mac-issued UMBS. However, these alignment efforts may not be successful over the long term and the prepayment rates on Fannie Mae-issued UMBS and Freddie Mac-issued UMBS could diverge in a manner that is disadvantageous for us.
We may experience price differences with Freddie Mac on individual new production pools of TBA-eligible mortgages, particularly with respect to specified pools and our multi-lender securities. From time to time, we may need to adjust our pricing for a particular new production pool category or introduce new initiatives to maintain alignment and competitiveness with Freddie Mac with respect to the acquisition of such pools. Depending on the amount of pricing
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adjustments in any period, it is possible that those adjustments could adversely affect our guaranty fee revenues for that period.
The continued support of FHFA, Treasury, the Securities Industry and Financial Markets Association, and certain other regulatory bodies is critical to the success of UMBS. If any of these entities were to cease its support, the liquidity and market value of Fannie Mae-issued UMBS could be adversely affected. Furthermore, if either we or Freddie Mac exits conservatorship, it is unclear whether our and Freddie Mac’s programs, policies and practices in support of UMBS and resecuritizations of each other’s securities would be sustained.
Our issuance of UMBS and structured securities backed by Freddie Mac-issued securities exposes us to significant operational and counterparty credit risk.
When we resecuritize Freddie Mac-issued UMBS or other Freddie Mac securities, our guaranty of principal and interest extends to the underlying Freddie Mac security. Although we have an indemnification agreement with Freddie Mac, in the event Freddie Mac were to fail (for credit or operational reasons) to make a payment due on its securities underlying a Fannie Mae-issued structured security, we would be obligated under our guaranty to fund any shortfall and make the entire payment on the related Fannie Mae-issued structured security on that payment date. A failure by Freddie Mac to meet its obligations under the terms of its securities that back structured securities we issue could have a material adverse effect on our earnings and financial condition, and we could be dependent on Freddie Mac and on the senior preferred stock purchase agreements that we and Freddie Mac each have with Treasury to avoid a liquidity event or a default under our guaranty. Our current risk exposure to Freddie Mac-issued securities is provided in “MD&A—Guaranty Book of Business.”
In addition, UMBS have created significant interdependence between the single-family mortgage securitization programs of Fannie Mae and Freddie Mac. Accordingly, the market value and liquidity profile of single-family Fannie Mae MBS could be affected by financial and operational incidents relating to Freddie Mac, even if those incidents do not directly relate to Fannie Mae or Fannie Mae MBS. Similarly, any disruption in Freddie Mac’s securitization activities or any adverse events affecting Freddie Mac’s significant mortgage sellers and servicers also could adversely affect the market value of single-family Fannie Mae MBS.
Our reliance on CSS and the common securitization platform exposes us to significant third-party risk.
We rely on CSS and its common securitization platform for the operation of a majority of our single-family securitization activities. Although we jointly own CSS with Freddie Mac, there are limitations on our ability to control CSS.
The CSS Board of Managers has two members designated by each GSE, as well as a Board Chair, the CSS CEO, and up to three additional Board members. Board actions must be approved by a majority vote and, while we and Freddie Mac both remain in conservatorship, FHFA has the right to designate the Board members not designated by the GSEs, and the Board may not take any actions absent the Chair’s consent. Once either GSE has exited conservatorship and is not in receivership, the Board Chair and the three additional Board members may be removed or designated by the Board. Although the limited liability company agreement would require our approval for certain “material decisions” if either we or Freddie Mac have exited conservatorship, the Board may approve a number of actions even after conservatorship over the objection of the members we and Freddie Mac designate, including: approval of the annual budget and strategic plan for CSS (so long as it does not involve a material business change); withdrawal of capital by a member; and requiring capital contributions necessary to support CSS’s ordinary business operations. It is possible that FHFA may require us to make additional changes to the CSS limited liability company agreement, or may otherwise impose restrictions or provisions relating to CSS or UMBS, that may adversely affect us.
We do not currently pay service fees to CSS under our customer services agreement; its operations are funded entirely through capital contributions from Fannie Mae and Freddie Mac pursuant to the limited liability company agreement. During conservatorship, FHFA can direct us to enter into an amendment of the customer services agreement, or enter such an amendment on our behalf, that could provide for a fee structure that would survive an exit from conservatorship absent a further amendment to the customer services agreement, which a majority of the Board would have to approve. Although implementation of any fee changes could require a further amendment to the customer services agreement, we might not have significant leverage to negotiate that amendment and the associated fee changes given our dependence on CSS.
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Our securitization activities are complex and present significant operational and technological challenges and risks. Any measures we take to mitigate these challenges and risks might not be sufficient to prevent a disruption to our securitization activities. Our business activities could be adversely affected and the market for single-family Fannie Mae MBS could be disrupted if the common securitization platform were to fail or otherwise become unavailable to us or if CSS were unable to perform its obligations to us. Any such failure or unavailability could have a significant adverse impact on our business and could adversely affect the liquidity or market value of our single-family MBS. In addition, a failure by CSS to maintain effective controls and procedures could result in material errors in our reported results or disclosures that are not complete or accurate.
We are limited in our ability to diversify our business and undertake activities that management believes would benefit our business.
As a federally chartered corporation, we are subject to the limitations imposed by the Charter Act, extensive regulation, supervision and examination by FHFA, and regulation by other federal agencies, including Treasury, HUD and the SEC. The Charter Act defines our permissible business activities. For example, we may not originate mortgage loans or purchase single-family loans in excess of the conforming loan limits, and our business is limited to the U.S. housing finance sector. FHFA, as our regulator, may impose and has imposed additional limitations on our business. For example, the GSE Act requires us to obtain prior approval from FHFA for new products and to provide advance notice to FHFA of new activities. In December 2022, FHFA published a final rule implementing these requirements that permits FHFA to establish conditions or limitations on any new product or new activity. In addition, as described in previous risk factors, our business activities are subject to significant restrictions as a result of the conservatorship and the senior preferred stock purchase agreement, as well as under FHFA’s UMBS rule.
The limitations on our business have and are expected to continue to delay or prevent us from undertaking some new business activities management believes would benefit our business. Further, as a result of the limitations on our ability to diversify our operations, our financial condition and results of operations depend almost entirely on conditions in a single sector of the U.S. economy, specifically, the U.S. housing market. Weak or unstable conditions in the U.S. housing market can therefore have a significant adverse effect on our business that we cannot mitigate through diversification. For a discussion of current U.S. housing market conditions, see “MD&A—Key Market Economic Indicators.”
An active trading market in our equity securities may cease to exist, which would adversely affect the market price and liquidity of our common and preferred stock.
Our common stock and preferred stock are now traded exclusively in the over-the-counter market, and are not currently listed on any securities exchanges. We cannot predict the actions of market makers, investors or other market participants, and can offer no assurances that the market for our securities will be stable. If there is no active trading market in our equity securities, the market price and liquidity of the securities will be adversely affected. In addition, the market price of our common stock and preferred stock is subject to significant volatility, which may be due to other factors described in these “Risk Factors,” as well as speculation regarding our future, economic and political conditions generally, liquidity in the over-the-counter market in which our stock trades, and other factors, many of which are beyond our control. Such factors could cause the market price of our common stock and preferred stock to decline significantly from their current levels, which may result in significant losses to holders of our common stock and preferred stock. For example, the market price of our common stock declined from a closing stock price of 82 cents per share as of December 31, 2021 to a closing stock price of 35 cents per share as of December 30, 2022.
Credit Risk
We may incur significant provisions for credit losses and write-offs on the loans in our book of business.
We are exposed to a significant amount of mortgage credit risk on our $4.1 trillion guaranty book of business. Borrowers may fail to make required payments on mortgage loans we own or guaranty. This exposes us to the risk of credit losses.
In general, significant home price or multifamily property value declines or increased loan delinquencies could materially increase our provision for credit losses and our write-offs. Loan delinquencies, among other factors, are influenced by income growth rates and unemployment levels, which affect borrowers’ ability to repay their mortgage loans. Changes in home prices or multifamily property values affect the amount of equity that borrowers have in their properties. As home prices and multifamily property values increase, the severity of losses we incur on defaulted loans that we hold or guarantee decreases because the amount we can recover from the properties securing the loans increases. Conversely, declines in home prices and multifamily property values increase the losses we incur on defaulted loans. As described in “MD&A—Key Market Economic Indicators,” home prices declined on a national basis in the second half of 2022, and we expect they will decline further. If home prices or multifamily property values decline rapidly and a large number of borrowers default on their loans, we could experience significant credit losses on our book of business. Many borrowers who experienced COVID-19-related financial difficulties in recent years resolved their forbearance through a
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loan modification. Some of these borrowers may not continue to perform under the modified terms of the loan, which could increase our credit losses. We may ultimately experience greater losses than we currently expect and may have high provisions for credit losses in future periods.
Changes in interest rates can also affect our credit losses, as we describe in a risk factor below in “Market and Industry Risk.” Also see “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management—Multifamily Portfolio Diversification and Monitoring” for a discussion of factors that are negatively affecting the credit risk profile of our multifamily seniors housing portfolio.
Given our expectation of home price declines, an economic recession and higher unemployment rates in 2023, we expect the credit performance of the loans in our guaranty book of business will likely decline compared to recent performance, which is reflected in our allowance for credit losses as of December 31, 2022. If home price declines, multifamily property values, economic conditions or unemployment rates are worse than we currently expect, we could experience materially higher provisions for credit losses and write-offs. See “MD&A—Key Market Economic Indicators” for a discussion of our expectations for home prices, economic growth and unemployment rates.
We present detailed information about the risk characteristics of our single-family conventional guaranty book of business in “MD&A—Single-Family Business” and our multifamily guaranty book of business in “MD&A—Multifamily Business.”
The credit enhancements we use provide only limited protection against potential future credit losses. These transactions also increase our expenses.
While we use certain credit enhancements to mitigate some of our potential future credit losses, we may not be able to obtain as much protection from our credit enhancements as we would like, for a number of reasons:
Some of the credit enhancements we use, such as mortgage insurance, Credit Insurance Risk TransferTM (“CIRTTM”) transactions and DUS lender loss-sharing arrangements, are subject to the risk that the counterparties may not meet their obligations to us, which we discuss in a risk factor below.
Our credit risk transfer transactions have limited terms, after which they provide limited or no further credit protection on the covered loans.
Our credit risk transfer transactions are not designed to shield us from all losses because we retain a portion of the risk of future losses on loans covered by these transactions, including all or a portion of the first loss position in most transactions.
In the event of a sufficiently severe economic downturn or other adverse market conditions, we may not be able to enter into new back-end credit risk transfer transactions for our recent acquisitions on economically advantageous terms.
Mortgage insurance does not protect us from all losses on covered loans. For example, mortgage insurance does not cover property damage that is not already covered by the hazard or flood insurance we require, and such damage may result in a reduction to, or a denial of mortgage insurance benefits. A property damaged by a flood that was outside a Federal Emergency Management Agency (“FEMA”)-designated Special Flood Hazard Area, where we require coverage, or a property damaged by an earthquake are the most likely scenarios where property damage may result in a default not covered by hazard insurance.
In addition, the costs associated with credit risk transfer transactions are significant and may increase. Changes in regulatory guidance, such as requirements under the enterprise regulatory capital framework, may cause us to modify our credit risk transfer activities.
In January 2023, the SEC issued a proposed rule that, if adopted as proposed, could affect or prohibit our ability to enter into credit risk transfer transactions following our exit from conservatorship. Further, while the SEC indicated in the proposing release its intent to exempt us from the rule while we are in conservatorship, questions remain regarding the proposed rule and we are still assessing the potential impact of the rule on our credit risk transfer transactions during conservatorship. In addition, there can be no assurance that the final rule will not reflect important modifications, including with respect to the exception for our asset-backed securities prior to our exit from conservatorship.
One or more of our institutional counterparties may fail to fulfill their contractual obligations to us, resulting in financial losses, business disruption and decreased ability to manage risk.
We rely on our institutional counterparties to provide services and credit enhancements that are critical to our business. We face the risk that one or more of our institutional counterparties may fail to fulfill their contractual obligations to us. If an institutional counterparty defaults on its obligations to us, it could also negatively impact our ability to operate our business, as we outsource some of our critical functions to third parties, such as mortgage servicing, single-family Fannie Mae MBS issuance and administration, and certain technology functions.
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Our primary exposures to institutional counterparties are with:
credit guarantors that provide credit enhancements on the mortgage assets in our guaranty book of business, including mortgage insurers and reinsurers, including those that participate in our CIRT transactions, and multifamily lenders with risk-sharing arrangements;
mortgage servicers that service the loans in our guaranty book of business;
mortgage sellers and servicers that are obligated to repurchase loans from us or reimburse us for losses in certain circumstances; and
the financial institutions that issue the investments held in our other investments portfolio.
We also have counterparty exposure to: derivatives counterparties; custodial depository institutions; mortgage originators, investors and dealers; debt security dealers; central counterparty clearing institutions; and document custodians.
The concentration of our counterparties in similar or related businesses heightens our counterparty risk exposure. We routinely enter into a high volume of transactions with counterparties in the financial services industry, including brokers and dealers, mortgage lenders and commercial banks, and mortgage insurers, resulting in a significant credit concentration with respect to this industry. We may also have multiple exposures to particular counterparties, as many of our counterparties perform several types of services for us. For example, our lenders or their affiliates may also act as derivatives counterparties, mortgage servicers, custodial depository institutions or document custodians. Accordingly, if one of these counterparties were to become insolvent or otherwise default on its obligations to us, it could harm our business and financial results in a variety of ways.
An institutional counterparty may default on its obligations to us for a number of reasons, such as changes in financial condition that affect its credit rating, changes in its servicer rating, a reduction in liquidity, operational failures or insolvency. In the event of a bankruptcy or receivership of one of our counterparties, we may be required to establish our ownership rights to the assets these counterparties hold on our behalf to the satisfaction of the bankruptcy court or receiver, which could result in a delay in accessing these assets causing a decline in their value. Counterparty defaults or limitations on their ability to do business with us could result in significant financial losses or hamper our ability to do business or manage the risks to our business. In addition, if we are unable to replace a defaulting counterparty that performs services critical to our business, it could adversely affect our ability to conduct our operations and manage risk. The expected shift in market conditions in 2023, including an expected lower volume of mortgage originations and an expected economic recession, could materially adversely affect the financial results and condition of some of our institutional counterparties, particularly non-depository mortgage sellers and servicers.
We have significant exposure to institutions in the financial services industry relating to derivatives, funding, short-term lending, securities, and other transactions. We depend on our ability to enter into derivatives transactions with our derivatives counterparties in order to manage the duration and prepayment risk of our retained mortgage portfolio. If we lose access to our derivatives counterparties, it could adversely affect our ability to manage these risks.
We use clearinghouses to facilitate many of our derivative trades. If the clearinghouse or the clearing member we use to access the clearinghouse defaults, we could lose margin that we have posted with the clearing member or clearinghouse. We are also a clearing member of two divisions of Fixed Income Clearing Corporation (“FICC”), a central counterparty (“CCP”). One FICC division clears our trades involving securities purchased under agreements to resell, securities sold under agreements to repurchase, and other non-mortgage related securities. The other division clears our forward purchase and sale commitments of mortgage-related securities, including dollar roll transactions. As a clearing member of FICC, we are exposed to the risk of losses if the CCP or one or more of the CCP’s clearing members fails to perform its obligations, because each FICC clearing member is required to absorb a portion of the losses incurred by other clearing members if they fail to meet their obligations to the clearinghouse. We could also incur losses associated with replacing contracts cleared through FICC in the event of a default by or the financial or operational failure of FICC. For more information, see “MD&A—Risk Management—Institutional Counterparty Credit Risk Management—Other Counterparties—Central Counterparty Clearing Institutions.”
Our financial condition or results of operations may be adversely affected if mortgage servicers fail to perform their obligations to us.
We delegate the servicing of the mortgage loans in our guaranty book of business to mortgage servicers; we do not have our own servicing function. Functions performed by mortgage servicers on our behalf include collecting and delivering principal and interest payments, administering escrow accounts, monitoring and reporting delinquencies, performing default prevention activities and other functions. A servicer’s inability or other failure to perform these functions or to follow our requirements could negatively impact our ability to, among other things:
manage our book of business;
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collect amounts due to us;
actively manage troubled loans; and
implement our homeownership assistance, foreclosure prevention and other loss mitigation efforts.
A decline in a servicer’s performance, such as delayed or missed opportunities for loan workouts, foreclosure alternatives or foreclosures, could significantly affect our ability to mitigate credit losses and could affect the overall credit performance of the loans in our guaranty book of business. Servicers may experience financial and other difficulties due to the advances they are required to make to us on delinquent mortgages, including mortgages subject to forbearance plans. We could be adversely affected if our servicers lack appropriate controls, experience a failure in their controls, or experience a disruption in their ability to service loans, including as a result of legal or regulatory actions or ratings downgrades.
A large portion of our single-family guaranty book is serviced by non-depository servicers, particularly our delinquent single-family loans. Non-depository servicers also service a large portion of our multifamily guaranty book. The potentially lower financial strength and liquidity of non-depository mortgage servicers compared with depository mortgage servicers may negatively affect their ability to fully satisfy their financial obligations or to properly service the loans on our behalf. Non-depository servicers also are generally not subject to the same level of regulatory oversight as our mortgage servicer counterparties that are depository institutions. In January 2023, our largest single-family mortgage servicer, Wells Fargo Bank, announced its plan to reduce the size of its servicing portfolio. We anticipate that this may increase the concentration of our single-family conventional guaranty book serviced by non-depository servicers.
If we replace a mortgage servicer, we could incur costs and potential increases in servicing fees and could also face operational risks. If a mortgage servicer fails, it could result in a temporary disruption in servicing and loss mitigation activities relating to the loans serviced by that mortgage servicer, particularly if there is a loss of experienced servicing personnel. We may also face challenges in transferring a large servicing portfolio. Although we have contingency plans in the event of a failure of one or more of our top mortgage servicers, there can be no assurance that we will be able to successfully execute against those plans in times of severe economic stress in the mortgage servicing industry.
Multifamily mortgage servicing is typically performed by the lenders who sell the mortgages to us, including non-depository servicers. We are exposed to the risk that multifamily servicers could come under financial pressure, which could potentially result in a decline in the quality of the servicing they provide us or a default by the servicer. A decline in servicing quality or a default by a multifamily servicer could increase our losses on multifamily loans.
The actions we have taken to mitigate our credit risk exposure to mortgage servicers may not be sufficient to prevent us from experiencing significant financial losses or business interruptions in the event they cannot fulfill their obligations to us.
We may incur losses as a result of claims under our mortgage insurance policies not being paid in full or at all.
We rely heavily on mortgage insurers to provide insurance against borrower defaults on single-family conventional mortgage loans with LTV ratios over 80% at the time of acquisition. Although our primary mortgage insurer counterparties currently approved to write new business must meet risk-based asset requirements, there is still a risk that these counterparties may fail to fulfill their obligations to pay our claims under insurance policies. If a mortgage insurer fails to meet its obligations to reimburse us for claims, our credit losses could increase. In addition, if a regulator determines that a mortgage insurer lacks sufficient capital to pay all claims when due, the regulator could take action that might affect the timing and amount of claim payments made to us by our approved mortgage insurer counterparties. We face similar risks with respect to our credit insurance risk transfer counterparties.
With respect to primary mortgage insurers that we have approved to write coverage on loans sold to us, we currently do not differentiate pricing based on counterparty strength or operational performance. Additionally, we would not revoke a primary mortgage insurer’s status as an eligible insurer unless there was a material violation of our private mortgage insurer eligibility requirements. Further, we do not generally select the provider of primary mortgage insurance on a specific loan, because the selection is usually made by the lender at the time the loan is originated. Accordingly, we have limited ability to manage our concentration risk with respect to primary mortgage insurers.
On at least a quarterly basis, we assess our mortgage insurer counterparties’ respective abilities to fulfill their obligations to us, and our loss reserves take into account this assessment. If our assessment indicates their ability to pay claims has deteriorated significantly or if our projected claim amounts have increased, we could experience a material increase in our provision for credit losses and write-offs.
Mortgage fraud could result in significant financial losses and harm to our reputation.
We use a process of delegated underwriting in which lenders make specific representations and warranties about the characteristics of the mortgage loans we purchase and securitize. As a result, we do not independently verify most
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borrower information that is provided to us. This exposes us to the risk that one or more of the parties involved in a transaction (the borrower, seller, broker, appraiser, title agent, lender or servicer) will engage in fraud by misrepresenting facts about a mortgage loan. Similarly, we rely on delegated servicing of loans and use of a variety of external resources to manage our REO inventory. We have experienced financial losses resulting from mortgage fraud, including institutional fraud perpetrated by counterparties. In the future, we may experience additional financial losses or reputational damage as a result of mortgage fraud.
We may suffer losses if borrowers suffer property damage as a result of a hazard for which the borrower has no or insufficient insurance.
In general, we require borrowers to obtain and maintain property insurance to cover the risk of damage to their homes or properties resulting from hazards such as fire, wind and, for properties in a FEMA-designated Special Flood Hazard Area, flooding. To the extent that borrowers suffer property damage as a result of a hazard for which we do not generally require insurance, such as earthquake damage or flood damage on a property located outside a Special Flood Hazard Area, borrowers’ claims under insurance policies are not paid, borrowers’ insurance is insufficient to cover their losses or borrowers fail to maintain insurance and suffer property damage, they may not pay their mortgage loans, which would negatively impact our provision for credit losses and our write-offs. Hazard insurers may experience financial strain and be unable to make payments on related claims during a period in which significant numbers of mortgaged properties are damaged by natural or other disasters.
Only a small portion of loans in our guaranty book of business as of December 31, 2022 was located in a Special Flood Hazard Area, for which we require flood insurance: 3.3% of loans in our single-family guaranty book of business and 6.8% of loans in our multifamily guaranty book of business. We believe that only a small portion of borrowers in most places outside of a Special Flood Hazard Area obtain flood insurance. The risk of significant flooding in places outside of a Special Flood Hazard Area (that is, in places where we do not require flood insurance) is expected to increase in the coming years as a result of climate change. Single-family borrowers who obtain flood insurance generally rely on the National Flood Insurance Program (“NFIP”), which was recently extended through September 30, 2023. If Congress fails to extend or re-authorize the program upon future expirations, FEMA may not have sufficient funds to pay claims for flood damage, and borrowers may not be able to renew their flood insurance coverage or obtain new policies through the NFIP. In addition, NFIP insurance does not cover temporary living expenses, and the maximum limit of coverage available under NFIP for a single-family residential property is $250,000, which may not be sufficient to cover all losses.
Increases in the intensity or frequency of floods or other weather-related disasters as a result of climate change are expected to increase the foregoing risks. In some areas, some insurers have ceased writing new coverage or have significantly increased insurance premiums for certain perils. As coverage becomes unavailable or prohibitively expensive in an area, home prices or multifamily property values may be negatively impacted, and fewer loans in the area may be eligible for acquisition by Fannie Mae. Ultimately, the desirability of areas that frequently experience hurricanes, wildfires or other natural disasters may diminish over time, which can depress home prices and multifamily property values or adversely affect the region’s economy, which may negatively impact our financial results. In addition, investors may place greater weight on climate change risks when making investment decisions, which could increase our cost or ability to transfer credit risk.
The occurrence of major natural or other disasters in the United States or its territories and the impact of climate change could materially increase our provision for credit losses and our write-offs.
We conduct our business in the single-family and multifamily residential mortgage markets and own or guarantee the performance of mortgage loans throughout the United States and its territories. The occurrence of a major natural or environmental disaster, terrorist attack, cyber attack, pandemic, or similar event (a “major disruptive event”) in the United States or its territories could negatively impact our provision for credit losses and our write-offs on loans in the affected geographic area or, depending on the magnitude, scope and nature of the event, nationally, in a number of ways.
A major disruptive event that either damages or destroys single-family or multifamily real estate securing mortgage loans in our book of business or negatively impacts the ability of borrowers to make principal and interest payments on mortgage loans in our book of business could increase our delinquency rates, default rates and average loan loss severity of our book of business in the affected region or regions. Further, a major disruptive event or a long-lasting increase in the vulnerability of an area to disasters that affects borrowers’ ability to make payments on their mortgages, discourages housing activity, including homebuilding or home buying, or causes a deterioration in housing conditions or the general economy in the affected region could lower the volume of originations in the mortgage market, influence
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home prices and property values in the affected region or in adjacent regions and increase delinquency rates and default rates. Any of these outcomes could generate significant provisions for credit losses and write-offs.
Recent years have seen frequent and severe natural disasters in the U.S., including wildfires, hurricanes, high winds, severe flooding, mudslides, and environmental contamination. We believe the frequency and intensity of major weather-related events in recent years are indicative of the impact of climate change, the impacts of which are expected to persist and worsen in the future. Population growth and an increase in people living in high-risk areas, such as coastal areas vulnerable to severe storms and flooding, have also increased the impact of these events. Although our financial exposure from these events is mitigated to the extent our book of business is geographically diverse, we remain exposed to risk, particularly in connection with the risk of geographically widespread weather events and changes in weather patterns, as well as geographic areas where our book of business is more heavily concentrated. For a description of the geographic concentration of our single-family guaranty book of business, see “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring.” As a result, any continuation or increase in recent weather trends or their unpredictability, or any single natural disaster of significant scope or intensity, could have a material impact on our results of operations and financial condition. In addition, the unpredictability of natural disasters and the complexity of forecasting long-term climate change negatively affect our ability to predict the potential impacts from such events, particularly over the long term.
In addition to the impact of natural disasters, longer-term shifts in climate patterns could result in chronic risks such as sustained higher temperatures, sea level rise, water scarcity and increased wildfires that negatively affect certain regions, which could negatively affect home prices and multifamily property values in those regions, as well as the ability of borrowers in those regions to pay their mortgage loans. Further, legal or regulatory responses to concerns about global climate change may impact the housing markets and, as a result, our business. Steps to address the risks of climate change could result in a potentially disruptive transition away from carbon-intense industries. Such a transition could negatively impact certain industries and regional economies, affecting the ability of borrowers in those industries or regions to pay their mortgage loans. Transition risks also could include a change in borrower and renter preferences for certain areas of the country or certain types of housing. The migration of communities and individuals due to climate-related risk and economic factors could lead to changes in home prices and multifamily property values in affected regions or an increase in lower income households living in high-risk areas. Transition risks of climate change also include potential additional regulatory and legislative requirements that could increase our expenses or the cost of housing.
The timing and severity of climate change events or societal changes in reaction to them are difficult to predict. As a result, while we are taking steps to integrate climate risk considerations into our Enterprise Risk Management framework, our risk management strategies may not be effective in mitigating our climate risk exposure. As regulators begin to mandate additional disclosure of climate-related information by companies across sectors, there may continue to be a lack of information needed for more robust climate-related risk analyses. Third-party exposures to climate-related risks and other data generally are limited in availability and variable in quality. Modeling capabilities to analyze climate-related risks and interconnections are improving but remain incomplete. We believe these limitations will affect our ability to manage climate-related risks.
Operational Risk
A failure in our operational systems or infrastructure, or those of third parties, could materially adversely affect our business, impair our liquidity, cause financial losses and harm our reputation.
Shortcomings or failures in our internal processes, people, or systems, or external events, could disrupt our business or have a material adverse effect on our risk management, liquidity, financial statement reliability, financial condition and results of operations. Such a failure could result in legislative or regulatory intervention or sanctions, liability to counterparties, financial losses, business disruptions and damage to our reputation. For example, our business is highly dependent on our ability to manage and process, on a daily basis, an extremely large number of transactions, many of which are highly complex, across numerous and diverse markets that continuously and rapidly change and evolve. These transactions are subject to various legal, accounting and regulatory standards. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control, adversely affecting our ability to process these transactions or manage associated data with reliability and integrity. In addition, we rely on information provided by third parties in processing many of our transactions; that information may be incorrect or we may fail to properly manage or analyze it or properly monitor its data quality.
We rely upon business processes that are highly dependent on people, technology, data and the use of numerous complex systems and models to manage our business and produce information upon which our financial statements and risk reporting are prepared. This reliance increases the risk that we may be exposed to financial, reputational or other losses as a result of inadequately designed internal processes or data management architecture, inflexible
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technology or the failure of our systems. In addition, our use of third-party service providers for some of our business and technology functions increases the risk that an operational failure by a third party will adversely affect us. For example, we use third-party service providers for cloud infrastructure services. We have experienced interruptions in access to our platforms as a result of connectivity issues with third-party cloud-based platforms and related data centers and could experience disruptions again if there is a lapse of service, interruption of internet service provider connectivity or damage to third-party cloud-based platforms or any related data centers. The risk of these disruptions is exacerbated by key fourth-party relationships, in which some of our third-party service providers have engaged subcontractors to provide key services and our ability to assess the fourth party’s operational controls is limited. While we continue to enhance our technology, infrastructure, operational controls and organizational structure in order to reduce our operational risk, these actions may not be effective to manage these risks.
Our ability to manage and aggregate data may be limited by the effectiveness of our policies, programs, processes, systems and practices that govern how data is acquired, validated, stored, protected, processed and shared. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs. The increasing use of new third-party and open source artificial intelligence tools poses additional risks relating to the protection of data, including the potential exposure of our proprietary confidential information to unauthorized recipients and the misuse of our intellectual property.
We have begun to use artificial intelligence and machine learning technology to help manage some of the operational risks we face, including with respect to business resiliency. Our use of this new technology may present new risks, including the potential for outages, inefficiencies, and bias or errors in the technology’s analysis and conclusions while the technology and our use of the technology matures.
We also face the risk of operational failure, termination or capacity constraints of any of the clearing agents, paying agents, exchanges, clearinghouses or other financial intermediaries, including the Federal Reserve, we use to facilitate our securities and derivatives transactions. Moreover, the consolidation and interconnectivity among clearing agents, exchanges and clearing houses increases the risk of operational failure, on both an individual basis and an industry-wide basis. Any such failure, termination or constraint could adversely affect our ability to effect transactions or manage our exposure to risk.
Most of our employees and business operations functions are consolidated in two metropolitan areas: Washington, DC and Dallas, Texas. While we have reduced the risk posed by this concentration of our employees and facilities in recent years through our business continuity strategies and our transition to a hybrid work environment, a major disruptive event at either location could impact our ability to operate. Moreover, because of the concentration of our employees in the Washington, DC and Dallas metropolitan areas, a regional disruption, particularly a disruption with a sustained impact, in one of these areas could prevent our employees from accessing our facilities, working remotely, or communicating with or traveling to other locations. Accordingly, the occurrence of one or more major disruptive events could materially adversely affect our ability to conduct our business and lead to financial losses.
A breach of the security of our systems or facilities, or those of third parties with which we do business, including as a result of cyber attacks, could damage or disrupt our business or result in the disclosure or misuse of confidential or other information (including personal information), which could damage our reputation, result in regulatory sanctions and/or increase our costs and cause losses that have a material adverse impact on our business, financial results and financial condition.
Our operations rely on the secure receipt, processing, storage and transmission of confidential and other information in our computer systems and networks and with our business partners, including proprietary, confidential or personal information that is subject to privacy laws, regulations or contractual obligations. Information security risks for large institutions like us have significantly increased in recent years in part because of the proliferation of new technologies and the use of the Internet, telecommunications and cloud technologies to conduct or automate financial transactions. A number of financial services companies, consumer-based companies and other organizations have reported the unauthorized disclosure of client, customer or other confidential information (including personal information), as well as cyber attacks involving the dissemination, theft and destruction of corporate information, intellectual property, cash or other valuable assets. There have also been several highly publicized ransomware cyber attacks where hackers have requested “ransom” payments in exchange for not disclosing stolen customer information (including personal information) or for unlocking or not disabling the target company’s computer or other systems.
We have been, and expect to continue to be, the target of cyber attacks, computer viruses, malicious code, social engineering attacks, including phishing attacks, denial of service attacks and other information security threats. To date, cyber attacks have not had a material impact on our financial condition, financial results or business. However, we could suffer material financial or other losses, as well as significant reputational damage, as a result of cyber attacks, and
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these attacks and their impacts are hard to predict. Our risk and exposure to these matters remains heightened because of, among other things:
the evolving nature of these threats, including the increased capability of the technology, artificial intelligence and service offerings that can be used maliciously;
our prominent size and scale and our role in the financial services industry;
the outsourcing of some of our business operations;
the ongoing shortage of qualified cybersecurity professionals;
our migration to cloud-based systems;
our use of employee-owned devices for business communication;
the interconnectivity and interdependence of third parties to our systems; and
the current global economic and political environment.
For example, the current tensions between the United States and Russia due to the Russian invasion of Ukraine that began in February 2022 and the resulting actions by the United States and a number of other countries in response (including economic sanctions imposed on Russia and the provision of military supplies to Ukraine) could result in retaliatory cyber attacks by Russian threat actors on our business or on third parties with which we do business that have a material impact on our business.
Despite our efforts to ensure the integrity of our software, computers, systems and information, we may not be able to anticipate, detect or recognize threats to our systems and assets, or to implement effective preventive measures against all cyber threats, especially because the techniques used are increasingly sophisticated, change frequently, are complex, and are often not recognized until launched. In addition, large-scale cyber attacks in recent years suggest that the risk of damaging cyber attacks impacting us and/or third parties with which we do business is increasing. We expect cyber attack and breach incidents to continue, and we are unable to predict the direct or indirect impact of future attacks or breaches on our business operations.
We routinely identify cyber threats as well as vulnerabilities in our systems and work to address them. Some cyber vulnerabilities take a substantial amount of time to resolve. In addition, efforts to resolve them may be unsuccessful. Further, these efforts involve costs that can be significant as cyber attack methods continue to rapidly evolve. Cyber attacks can originate from a variety of sources, including external parties who are affiliated with foreign governments or are involved with organized crime or terrorist organizations. Cybersecurity risks also derive from human error, fraud or malice on the part of our employees or third parties. Third parties have, and we expect will continue to, attempt to induce employees, lenders, servicers or other users of our systems to disclose sensitive information or provide access to our systems or network, or to our data or that of our counterparties or borrowers, and these types of risks may be difficult to detect or prevent.
The occurrence of a cyber attack, breach, unauthorized access, misuse, computer virus or other malicious code or other cybersecurity event could jeopardize or result in the unauthorized disclosure, gathering, monitoring, misuse, corruption, loss or destruction of confidential and other information (including personal information) that belongs to us, our lenders, our servicers, our counterparties, third-party service providers or borrowers that is processed and stored in, and transmitted through, our computer systems and networks. The occurrence of such an event could also result in damage to our software, computers or systems, or otherwise cause interruptions or malfunctions in our, our lenders’, our counterparties’ or third parties’ operations. This could result in significant financial losses, loss of customers and business opportunities, reputational damage, litigation, regulatory fines, penalties or intervention, reimbursement or other compensatory costs that have a material adverse impact on our business, financial results and financial condition.
Cyber attacks can occur and persist for an extended period of time without detection. Investigations of cyber attacks are inherently unpredictable, and it takes time to complete an investigation and have full and reliable information. While we are investigating a cyber attack, we do not necessarily know the extent of the harm or how best to remediate it, and we can repeat or compound certain errors or actions before we discover and remediate them. In addition, announcing that a cyber attack has occurred increases the risk of additional cyber attacks, and preparing for this elevated risk can delay the announcement of a cyber attack. All or any of these challenges could further increase the costs and consequences of a cyber attack. These factors may also inhibit our ability to provide rapid, complete and reliable information about a cyber attack to our lenders, servicers, counterparties and regulators, as well as the public.
In addition, we may be required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. Although we maintain insurance coverage relating to cybersecurity risks, our insurance may not be sufficient to provide adequate loss coverage in all circumstances (including if the insurer denies future claims) and may not continue to be available to
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us on economically reasonable terms, or at all. Further, we cannot ensure that any limitations of liability provisions in our agreements with lenders, servicers, vendors and other third parties with which we do business would be enforceable or adequate or would otherwise protect us from liabilities or damages with respect to a particular claim in connection with a cyber attack or other information security incident.
Because we are interconnected with and dependent on third-party vendors, exchanges, clearing houses, fiscal and paying agents, and other financial intermediaries, including CSS, we could be materially adversely impacted if any of them is subject to a successful cyber attack or other information security event. Third parties with which we do business may also be sources of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the external storage and processing of our information, as well as lender, servicer, counterparty and borrower information, including on cloud-based systems. We also share this type of information with regulatory agencies and their vendors. While we engage in actions to mitigate our exposure resulting from our information-sharing activities, ongoing threats may result in unauthorized access, loss or destruction of data or other cybersecurity incidents that could materially adversely affect our business and result in legal liabilities, fines, regulatory action and reputational harm that have a material adverse impact on our business, financial results and financial condition.
We routinely transmit and receive personal, confidential and proprietary information by electronic means. In addition, our lenders and servicers maintain personal, confidential and proprietary information, including personal borrower information. We have discussed and worked with lenders, servicers, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and protect against cyber attacks, but we do not have, and may be unable to put in place, secure capabilities with all of our lenders, servicers, vendors, service providers, counterparties and other third parties, and we may not be able to ensure that these third parties have appropriate controls in place to protect the confidentiality of the information. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to, received from, or maintained by a lender, servicer, vendor, service provider, counterparty or other third party could result in legal liability, fines, regulatory action and reputational harm that have a material adverse impact on our business, financial results or financial condition. From time to time, our lenders and servicers have experienced data breaches or other cybersecurity incidents relating to our borrower information. While such breaches and incidents have not been material to our business to date, they could result in legal liabilities, fines, regulatory action and reputational harm that have a material adverse impact on our business, financial results and financial condition.
The legal and regulatory environment related to data privacy and cybersecurity is constantly changing. Privacy and cybersecurity are currently areas of considerable legislative and regulatory attention, with new or modified laws, regulations, rules and standards being frequently adopted and potentially subject to divergent interpretation or application in different states in a manner that may create inconsistent or conflicting requirements for businesses. The uncertainty and compliance risks created by these legislative and regulatory developments are compounded by the rapid pace of technology development, such as artificial intelligence and advances in data science, that may affect the use or security of data, including personal information. Privacy and cybersecurity laws and regulations often impose strict requirements on the collection, storage, handling, use, disclosure, transfer, security, and other processing of personal information. These laws and regulations, combined with our evolving data footprint, are expected to increase our compliance costs and require changes to our business and operations. An actual or perceived failure by us, lenders, servicers, vendors, service providers, counterparties or other third parties to comply with privacy, data protection and information security laws, regulations, standards, policies and contractual obligations could result in legal liabilities, fines, regulatory action and reputational harm that have a material adverse impact on our business, financial results and financial condition.
Our concurrent implementation of multiple new initiatives may increase our operational risk and result in one or more material weaknesses in our internal control over financial reporting.
We are currently implementing a number of initiatives in furtherance of both our and our conservator’s strategic objectives. The magnitude of the many new initiatives we are undertaking may increase our operational risk. Many of these initiatives involve significant changes to our business processes, controls, systems and infrastructure, require substantial attention from management, and present significant operational challenges for us. Some business initiatives that we are currently developing or executing against include our environmental, social and governance initiatives, enhancements and efficiencies to our operational processes, and enhancements to our existing and development of new information technology and other systems. For example, for the past several years we have been transitioning our core information technology systems to third-party cloud-based platforms. If completing this initiative is delayed or we fail to complete it in a well-managed, secure and effective manner, we may experience unplanned service disruptions or unforeseen costs, which could result in material harm to our business and results of operations. In addition, FHFA as our conservator is requiring that we undertake a number of initiatives, including those set forth in their 2023 scorecard. While implementation of each individual initiative creates operational challenges, implementing multiple initiatives during the same time period significantly increases these challenges. Due to the operational complexity associated with these
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changes and the limited time periods for implementing them, we believe there is a risk that implementing these changes could result in one or more material weaknesses in our internal control over financial reporting in a future period. If this were to occur, we could experience material errors in our reported financial results. In addition, FHFA, Treasury, other agencies of the U.S. government or Congress may require us to implement additional initiatives in the future that could further increase our operational risk.
Material weaknesses in our internal control over financial reporting could result in errors in our reported results or disclosures that are not complete or accurate.
Management has determined that, as of the date of this filing, we have ineffective disclosure controls and procedures that result in a material weakness in our internal control over financial reporting. In addition, our independent registered public accounting firm, Deloitte & Touche LLP, has expressed an adverse opinion on our internal control over financial reporting because of the material weakness. Our ineffective disclosure controls and procedures and material weakness could result in errors in our reported results or disclosures that are not complete or accurate, which could have a material adverse effect on our business and operations.
Our material weakness relates specifically to the impact of the conservatorship on our disclosure controls and procedures. Because we are under the control of FHFA, some of the information that we may need to meet our disclosure obligations may be solely within the knowledge of FHFA. As our conservator, FHFA has the power to take actions without our knowledge that could be material to our shareholders and other stakeholders, and could significantly affect our financial performance or our continued existence as an ongoing business. Because FHFA currently functions as both our regulator and our conservator, there are inherent structural limitations on our ability to design, implement, operate and test effective disclosure controls and procedures relating to information known to FHFA. As a result, we have not been able to update our disclosure controls and procedures in a manner that adequately ensures the accumulation and communication to management of information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws, including disclosures affecting our financial statements. Given the structural nature of this material weakness, we do not expect to remediate this weakness while we are under conservatorship. See “Controls and Procedures” for further discussion of management’s conclusions on our disclosure controls and procedures and internal control over financial reporting.
Failure of our models to produce reliable results may adversely affect our ability to manage risk and make effective business decisions, as well as create regulatory and reputational risk.
We make significant use of quantitative models to measure and monitor our risk exposures and to manage our business. For example, we use models to measure and monitor our exposures to interest rate, credit and market risks, and to forecast credit losses. We use this information in making business decisions relating to strategies, initiatives, transactions, pricing and products.
Models are inherently imperfect predictors of actual results because they are based on historical data and assumptions regarding factors such as future loan demand, borrower behavior, creditworthiness and home price trends. Other potential sources of inaccurate or inappropriate model results include errors in computer code, inaccurate or incomplete data, misuse of data, or use of a model for a purpose outside the scope of the model’s design. Modeling often assumes that historical data or experience can be relied upon as a basis for forecasting future events, an assumption that may be especially tenuous in the face of unprecedented events, such as the COVID-19 pandemic and long-term climate change.
Given the challenges of predicting future behavior, management judgment is used throughout the modeling process, from model design decisions regarding core underlying assumptions, to interpreting and applying final model output. When market conditions change quickly and in unforeseen ways, there is an increased risk that the model assumptions and data inputs for our models are not representative of the most recent market conditions, which requires management to apply its judgment to make adjustments or overrides to our models. In a rapidly changing environment, it may not be possible to update existing models quickly enough to properly account for the most recently available data and events.
In addition to internally-developed models, we also use select third-party models. While the use of such models may reduce our risk where no internal model is available, it exposes us to additional risk, as we often have limited visibility into the third party’s model methodology and change management process. In addition, in some instances we rely on third-party data providers to develop and provide estimates for our models. This reliance on third-party data providers exposes us to risk should the data provider cease to provide the data going forward or change its methodology, which would require that we find a suitable replacement for the data and could result in the need to re-estimate our models with the new data.
We also expect to gradually increase the use of artificial intelligence and machine learning in our models. The use of new artificial intelligence and machine learning technology in our models may present new risks, such as the
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risk of undetected bias in the model and the limited ability to understand and challenge the model due to a limited ability to observe the internal workings of many machine learning models.
To the extent our internal models or the third-party models that we use fail to produce reliable results on an ongoing basis, we may not make appropriate business and risk management decisions, including decisions affecting loan purchases, guaranty fee pricing, management of credit losses, and asset and liability management. While we employ strategies to manage and govern the risks associated with our use of models, they have not always been fully effective. Errors have been discovered in some of the models we use, as well as deficiencies in our current processes for managing model risk. As noted in “MD&A—Risk ManagementOperational Risk Management—Model Risk Management,” we are currently working on a number of remediation activities relating to our models, including improving our processes for model governance, development, implementation and testing. Until these remediation activities are completed, we face a higher risk that we may make inappropriate business or risk management decisions based on unreliable model results, which could negatively affect our financial results and condition.
Errors in our models can also result in errors in our external disclosures. As described in “Business—Legislation and Regulation—GSE-Focused Matters—Stress Testing,” we discovered errors in a model used to prepare our annual stress test results that affected our stress test results for 2022 and prior years. We could discover additional errors in our models in the future that result in further errors in our external disclosures that create regulatory and reputational risk.
Also see a risk factor below in “General Risk” for a discussion of the risks associated with the use of models in our accounting methods.
Liquidity and Funding Risk
Limitations on our ability to access the debt capital markets could have a material adverse effect on our ability to fund our operations, and our liquidity contingency plans may be difficult or impossible to execute during a sustained liquidity crisis.
Our ability to fund our business depends in part on our ongoing access to the debt capital markets. Market concerns about matters such as the extent of government support for our business and debt securities, the future of our business (including future profitability, future structure, regulatory actions and our status as a government-sponsored enterprise) and the creditworthiness of the U.S. government could cause a severe negative effect on our access to the unsecured debt markets, particularly for long-term debt. We believe that our ability in recent years to issue debt of varying maturities at attractive pricing resulted from federal government support of our business. As a result, we believe that our status as a government-sponsored enterprise and continued federal government support are essential to maintaining our access to debt funding. Changes or perceived changes in federal government support of our business, our debt securities or our status as a government-sponsored enterprise could materially and adversely affect our ability to fund our business. There can be no assurance that the government will continue to support our business or our debt securities, or that our current level of access to debt funding will continue. If our senior preferred stock purchase agreement with Treasury is amended in the future to reduce its support for our debt securities issued after such amendment, it could materially increase our borrowing costs or materially adversely affect our access to the debt capital markets.
Future changes or disruptions in the financial markets could significantly change the amount, mix and cost of funds we obtain, as well as our liquidity position. If we are unable to issue a sufficient amount of short- and long-term debt securities at attractive rates, it could interfere with the operation of our business and have a material adverse effect on our liquidity, results of operations, financial condition and net worth.
Our liquidity contingency plans may be difficult or impossible to execute during a sustained market liquidity crisis. If the financial markets experience substantial volatility in the future similar to or more intensely than in 2020, it could significantly adversely affect the amount, mix and cost of funds we obtain, as well as our liquidity position. If we cannot access the unsecured debt markets, our ability to repay maturing indebtedness and fund our operations could be significantly impaired. In this event, our alternative source of liquidity, our other investments portfolio, may not be sufficient to meet our liquidity needs. In addition, as noted in a risk factor below in “Market and Industry Risk,” in January 2023, the outstanding debt of the United States reached the statutory debt limit and Treasury has been taking extraordinary measures to prevent the United States from defaulting on its obligations. If the United States government were to default on its obligations, or if the market anticipates such a default is likely, it could materially adversely affect the value of our other investments portfolio, as a large portion of this portfolio consists of U.S. Treasury securities.
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A decrease in the credit ratings on our senior unsecured debt could have an adverse effect on our ability to issue debt on reasonable terms, particularly if such a decrease were not based on a similar action on the credit ratings of the U.S. government. A decrease in our credit ratings also could require that we post additional collateral for our derivatives contracts.
A reduction in our credit ratings could materially adversely affect our liquidity, our ability to conduct our normal business operations, our financial condition and our results of operations. Credit ratings on our senior unsecured debt, as well as the credit ratings of the U.S. government, are primary factors that could affect our borrowing costs and our access to the debt capital markets. Credit ratings on our debt are subject to revision or withdrawal at any time by the rating agencies. Actions by governmental entities impacting the support our business or our debt securities receive from Treasury could adversely affect the credit ratings on our senior unsecured debt. If our senior preferred stock purchase agreement with Treasury is amended to reduce its support for our debt securities issued after such amendment, it could result in a downgrade in the credit ratings on our senior unsecured debt.
Because we rely on the U.S. government for capital support, in recent years, when a rating agency has taken an action relating to the U.S. government’s credit rating, they have taken a similar action relating to our ratings at approximately the same time. Standard & Poor’s Global Ratings (“S&P”), Moody’s Investors Service (“Moody’s”) and Fitch Ratings Limited (“Fitch”) have all indicated that they would likely lower their ratings on the debt of Fannie Mae and certain other government-related entities if they were to lower their ratings on the U.S. government. As a result, if a future government shutdown, a default by the United States government on its obligations, or other event results in downgrades of the government’s credit rating, our credit ratings may be similarly downgraded. As noted in a risk factor below in “Market and Industry Risk,” in January 2023, the outstanding debt of the United States reached the statutory debt limit and Treasury has been taking extraordinary measures to prevent the United States from defaulting on its obligations. We currently cannot predict the potential impact of a credit ratings downgrade on demand for our securities or on our business.
A reduction in our credit ratings also could cause derivatives clearing organizations or their members to demand that we post additional collateral for our derivative contracts. Our credit ratings and ratings outlook are included in “MD&A—Liquidity and Capital Management—Liquidity Management—Credit Ratings.”
Market and Industry Risk
Changes in interest rates or our loss of the ability to manage interest-rate risk successfully could adversely affect our financial results and condition, and increase our interest-rate risk.
We are subject to interest-rate risk, which is the risk that movements in interest rates will adversely affect the value of our assets or liabilities or our future earnings or capital. Our exposure to interest-rate risk primarily arises from two sources: (1) our “net portfolio,” which we define as: our retained mortgage portfolio assets, our other investments portfolio, outstanding debt of Fannie Mae used to fund the retained mortgage portfolio assets and other investments portfolio, mortgage commitments and risk management derivatives; and (2) our consolidated MBS trusts. We describe these risks in more detail in “MD&A—Risk Management—Market Risk Management, including Interest-Rate Risk Management.” Changes in interest rates affect both the value of our mortgage and other assets and prepayment rates on our mortgage loans, which could have a material adverse effect on our financial results and condition, as well as our liquidity.
Our ability to manage interest-rate risk depends on our ability to issue debt instruments with a range of maturities and other features, including call provisions, at attractive rates and to engage in derivatives transactions. We must exercise judgment in selecting the amount, type and mix of debt and derivative instruments that will most effectively manage our interest-rate risk. The amount, type and mix of financial instruments that are available to us may not offset possible future changes in the spread between our borrowing costs and the interest we earn on our mortgage assets. We mark to market changes in the estimated fair value of our derivatives through our earnings on a quarterly basis, but we do not similarly mark to market changes in some of the financial instruments that generate our interest-rate risk exposures. As a result, changes in interest rates, particularly significant changes, can have an adverse effect on our earnings and net worth, depending on the nature of the changes and the derivatives and short-term investments we hold at that time.
We have experienced significant fair value losses in some periods due to changes in interest rates. Our hedge accounting program is specifically designed to address the volatility of our financial results associated with changes in fair value related to changes in the benchmark interest rates. As such, earnings variability driven by other factors, such as spreads or changes in cost basis amortization recognized in net interest income, remains. We describe how changes in amortization affect net interest income in “MD&A—Consolidated Results of Operations—Net Interest Income.” In addition, our ability to effectively reduce earnings volatility is dependent on having the right mix and volume of interest-rate swaps available. As our portfolio of interest-rate swaps varies over time, our ability to reduce earnings volatility through hedge accounting may vary as well.
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Changes in interest rates also can affect our credit losses. Interest rates increased significantly during 2022 and may increase further. When interest rates increase, our credit losses from loans with adjustable payment terms may increase as borrower payments increase at their reset dates, which increases the borrower’s risk of default. Rising interest rates may also reduce the opportunity for these borrowers to refinance into a fixed-rate loan. Similarly, many borrowers may have additional debt obligations, such as home equity lines of credit and second liens, that also have adjustable payment terms. If a borrower’s payment on his or her other debt obligations increases due to rising interest rates or a change in amortization, it increases the risk that the borrower may default on a loan we own or guarantee. Rising interest rates also typically reduce expected future loan prepayments, which tends to lengthen the expected life of our loans and therefore generally increases the probability of default on the loans and therefore our loss reserves.
Increases in interest rates may also reduce the ability of multifamily borrowers to refinance their loans, which often have balloon balances at maturity. In addition, in a rising interest rate environment, multifamily borrowers with adjustable-rate mortgages may have difficulty paying higher monthly payments if property operating income is not increasing at a similar pace. While we generally require multifamily borrowers with adjustable-rate mortgages to purchase an interest rate cap to protect against large movements in interest rates, purchasing or replacing these required interest rate caps, especially those with longer terms and/or lower strike rates, becomes more expensive as interest rates rise. As a result, the cost of interest rate caps has increased substantially in recent months.
Changes in interest rates also typically affect our business volume. A higher interest rate environment generally results in lower business volumes, as fewer loans may benefit from refinancing. Higher interest rates also generally result in lower housing sales activity, as the higher cost of borrowing reduces affordability, driving lower purchase mortgage volumes.
Changes in spreads could materially impact our results of operations, net worth and the fair value of our net assets.
Spread risk is the risk from changes in an instrument’s value that relate to factors other than changes in interest rates. We can experience losses from changes in the spreads between our mortgage assets, including mortgage purchase and sale commitments, and the debt and derivatives we use to hedge our position. Changes in market conditions, including changes in interest rates, liquidity, prepayment and default expectations, and the level of uncertainty in the market for a particular asset class may cause fluctuations in spreads. Changes in mortgage spreads have contributed to significant volatility in our financial results in certain periods, due to fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings, and this could occur again in a future period. Changes in mortgage spreads could cause significant fair value losses, and could adversely affect our near-term financial results and net worth. We do not actively manage or hedge our spread risk after we purchase mortgage assets, other than through asset monitoring and disposition.
Uncertainty relating to the discontinuance of LIBOR may adversely affect our results of operations, financial condition, liquidity and net worth.
ICE Benchmark Administration, the administrator of LIBOR, ceased publication of one-week and two-month U.S. dollar LIBOR after December 2021, and has stated its intention to cease publication of overnight, one-month, three-month, six-month and one-year U.S. dollar LIBOR tenors after June 2023. We have exposure to one-month, three-month, six-month and one-year LIBOR, including in financial instruments that mature after June 2023.
While many of our LIBOR-indexed financial instruments allow us to take discretionary action to select an alternative reference rate if LIBOR is discontinued, our use of an alternative reference rate may be subject to legal challenges. As described in “Business—Legislation and Regulation—Industry and General Matters—Transition from LIBOR and Alternative Reference Rates,” in March 2022, the LIBOR Act was signed into law. The LIBOR Act establishes a safe harbor for market participants that act in accordance with such legislation, shielding them from litigation for selecting and implementing the Federal Reserve-identified replacement rate and related conforming changes. While the LIBOR Act has reduced the risks to us associated with the approaching cessation of LIBOR, we believe there is still the potential for disputes and litigation with counterparties, investors, and borrowers in connection with our selection and implementation of alternative reference rates. Divergent industry or market participant actions could result after LIBOR is no longer available, representative, or viable. It is uncertain what effect any divergent industry practices will have on the performance of financial instruments, including those that we own, have issued or will issue. Alternative reference rates that replace LIBOR may not yield the same or similar economic results over the lives of the financial instruments, which could adversely affect the value of and return on these instruments.
These developments could have a material impact on us, adjustable-rate mortgage borrowers, investors, and our lenders and counterparties. This could result in losses, reputational damage, litigation or costs, or otherwise adversely affect our business.
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Our business and financial results are affected by general economic conditions, including home prices and employment trends, and changes in economic conditions or financial markets may materially adversely affect our business and financial condition.
In general, a prolonged period of slow growth in the U.S. economy or any deterioration in general economic conditions or financial markets could materially adversely affect our results of operations, net worth and financial condition. Our business is significantly affected by the status of the U.S. economy, including home prices and employment trends, as well as economic output levels, interest rates and inflation rates. For example, see a risk factor above in “Credit Risk” for a discussion of how home price declines, an economic recession and higher unemployment can negatively affect the performance of loans in our guaranty book of business and result in higher provisions for credit losses and write-offs. Deterioration in economic conditions also typically results in reduced housing market activity, which reduces our business volume. A reduction in our business volume can reduce our net interest income and adversely affect our financial results. As described in “MD&A—Key Market Economic Indicators,” we currently expect that a modest recession is likely to occur beginning in the first half of 2023, resulting in an increase in the unemployment rate. In addition, home prices declined on a national basis in the second half of 2022, and we expect they will decline further.
Global economic conditions can also adversely affect our business and financial results. Changes or volatility in market conditions resulting from deterioration in or uncertainty regarding global economic conditions can adversely affect the value of our assets, which could materially adversely affect our results of operations, net worth and financial condition. To the extent global economic conditions negatively affect the U.S. economy, they also could negatively affect the credit performance of the loans in our book of business.
Volatility or uncertainty in global or domestic political conditions also can significantly affect economic conditions and financial markets. Global or domestic political unrest also could affect growth and financial markets. For example, the Russian war in Ukraine and related economic sanctions imposed on Russia, as well as any further actions by Russia, the United States or others relating to this conflict, may further impact the global economy and financial markets, which could further increase inflationary pressure and interest rates, as well as negatively affect economic growth and result in disruptions in the financial markets.
In January 2023, the outstanding debt of the United States reached the statutory debt limit and, since that time, Treasury has been taking extraordinary measures to prevent the United States from defaulting on its obligations. In January 2023, the Treasury Secretary notified Congress that, while Treasury is not currently able to provide an estimate of how long extraordinary measures will enable it to continue to pay the government’s obligations, it is unlikely that cash and extraordinary measures will be exhausted before early June 2023. If Congress does not increase or suspend the debt limit before the government’s cash and extraordinary measures are exhausted, it could cause significant harm to the U.S. economy and global financial stability.
We describe above the risks to our business posed by changes in interest rates and changes in spreads. In addition, future changes or disruptions in financial markets could significantly change the amount, mix and cost of funds we obtain, as well as our liquidity position.
Actions by the Federal Reserve can materially affect our business and financial condition, including our business volumes and demand for our mortgage-backed securities.
Our business is significantly affected by shifts in fiscal and monetary policies, particularly actions taken by the Federal Reserve. In recent years, the Federal Reserve has purchased a significant amount of mortgage-backed securities issued by us, Freddie Mac and Ginnie Mae. The Federal Reserve began to taper these purchases in November 2021 and concluded its asset purchase program in March 2022. In June 2022, the Federal Reserve began the process of reducing its holdings of agency mortgage-backed securities by reinvesting principal payments from agency debt and agency mortgage-backed securities into agency mortgage-backed securities only to the extent those payments exceed monthly caps; the cap was initially set at $17.5 billion per month beginning on June 1, 2022, and increased to $35 billion per month in September 2022. We believe the Federal Reserve’s reduction in its purchases of agency mortgage-backed securities has reduced demand for our mortgage-backed securities. At the time of this filing, the Federal Reserve has not announced any plans to begin selling the mortgage-backed securities in its portfolio. If the Federal Reserve announces such a plan or changes its announced strategy to reduce its MBS holdings, it could further reduce demand for our mortgage-backed securities, which could adversely affect our results of operations, net worth and financial condition.
In addition, the Federal Reserve has raised the target range for the federal funds rate several times over the past year to address inflation, and in February 2023 stated that it anticipates that ongoing increases in the target range will be appropriate. The strength in inflation also contributed to the sharp rise in mortgage rates in 2022, and mortgage rates may rise further in 2023. The increase in mortgage interest rates has already led to a slowdown in housing demand and a reduction in our business volume. Due to higher interest rates and increases in mortgage spreads, we have been issuing MBS with higher coupon yields in recent periods compared with 2021. While the demand for and liquidity of our
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higher coupon MBS has improved in recent months, the demand for and liquidity of some of our higher MBS coupon yields remains lower than typical demand and liquidity for our MBS. Further interest rate increases or higher levels of interest rate volatility could reduce our business volume and the demand for and the liquidity of our MBS, which could adversely affect our results of operations, net worth and financial condition. Further interest rate increases also could result in greater home price declines or declines in multifamily property values, which also could adversely affect our results of operations, net worth and financial condition.
Legal and Regulatory Risk
Regulatory changes in the financial services industry may negatively impact our business.
Changes in the regulation of the financial services industry are affecting and are expected to continue to affect many aspects of our business. Changes to financial regulations could affect our business directly or indirectly if they affect our lenders and counterparties. Examples of regulatory changes that have affected us or may affect us in the future include the Dodd-Frank Act risk retention and single-counterparty credit limit requirements.
Additional changes in regulations applicable to U.S. banks could affect the volume and characteristics of mortgage loans available in the market and could also affect demand for our debt securities and MBS, as U.S. banks purchase a large amount of our debt securities and MBS. New or revised liquidity or capital requirements applicable to U.S. banks could materially affect banks’ willingness to deliver loans to us and demand by those banks for our debt securities and MBS. Developments in connection with the single-counterparty credit limit regulations, including those taken in anticipation of our eventual exit from conservatorship, could also cause our lenders and investors to change their business practices.
The actions of Treasury, the Commodity Futures Trading Commission, the CFPB, the SEC, the Federal Deposit Insurance Corporation, the Federal Reserve and international central banking authorities directly or indirectly impact financial institutions’ cost of funds for lending, capital-raising and investment activities, which could increase our borrowing costs or make borrowing more difficult for us. Changes in monetary policy are beyond our control and can be difficult to anticipate.
Overall, these legislative and regulatory changes could affect us in substantial and unforeseeable ways and could have a material adverse effect on our business, results of operations, financial condition, liquidity and net worth.
Legislative, regulatory or judicial actions could negatively impact our business, results of operations, financial condition or net worth.
Legislative, regulatory or judicial actions at the federal, state or local level could negatively impact our business, results of operations, financial condition, liquidity or net worth. Legislative, regulatory or judicial actions could affect us in a number of ways, including by imposing significant additional costs on us and diverting management attention or other resources from other matters. We could also be affected by:
Further actions taken by the U.S. Congress, Treasury, the Federal Reserve, FHFA or other national, state or local government agencies or legislatures in response to the COVID-19 pandemic or other emergencies, such as expanding or extending our obligations to help borrowers, renters or counterparties.
Legislative or regulatory changes that expand our, or our servicers’, responsibility and liability for securing, maintaining or otherwise overseeing properties prior to foreclosure, which could increase our costs.
Court decisions concluding that we or our affiliates are governmental actors, which could impose additional burdens and requirements on us.
Designation as a systemically important financial institution by the Financial Stability Oversight Council (the “FSOC”). We have not been designated as a systemically important financial institution; however, the FSOC announced in 2020 that it will continue to monitor the secondary mortgage market activities of the GSEs to ensure potential risks to financial stability are adequately addressed. Designation as a systemically important financial institution would result in our becoming subject to additional regulation and oversight by the Federal Reserve Board.
Other agencies of the U.S. government or Congress asking us to take actions to support the housing and mortgage markets or in support of other goals. For example, in December 2011, Congress enacted the TCCA under which we increased our guaranty fee on all single-family mortgages delivered to us by 10 basis points. The revenue generated by this fee increase is paid to Treasury. In November 2021, the Infrastructure Investment and Jobs Act was enacted, which extended to October 1, 2032 our obligation under the TCCA to collect 10 basis points in guaranty fees on single-family residential mortgages delivered to us and pay the associated revenue to Treasury.
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Our business and financial results could be materially adversely affected by legal or regulatory proceedings.
We are a party to various claims and other legal proceedings. We are periodically involved in government investigations. We may be required to establish accruals and to make substantial payments in the event of adverse judgments or settlements of any such claims, investigations or proceedings, which could have a material adverse effect on our business, results of operations, financial condition, liquidity and net worth. Any legal proceeding or governmental investigation, even if resolved in our favor, could result in negative publicity, reputational harm or cause us to incur significant legal and other expenses. In addition, responding to these matters could divert significant internal resources away from managing our business.
In addition, a number of lawsuits have been filed against the U.S. government relating to the senior preferred stock purchase agreement and the conservatorship. See “Note 16, Commitments and Contingencies” and “Legal Proceedings” for a description of these lawsuits. These lawsuits, and actions Treasury or FHFA may take in response to these lawsuits, could have a material impact on our business.
General Risk
The COVID-19 pandemic may continue to adversely affect our business and financial results.
The COVID-19 pandemic had a significant adverse effect on the U.S. economy, particularly in the second quarter of 2020. Although certain economic conditions in the United States improved after the initial impact of the pandemic in 2020, the pandemic continues to evolve and risks to the U.S. and global economy from the COVID-19 pandemic remain that could negatively affect our business and financial results. If the pandemic’s impact on the U.S. and global economy worsens, it could impact the ability of borrowers and renters to make their monthly payments, which could negatively affect our business and financial results.
Factors that may impact the extent to which the COVID-19 pandemic affects our business, financial results and financial condition include: the prevalence and severity of future outbreaks; the actions taken to contain the virus, or treat its impact, including government actions to mitigate the economic impact of the pandemic; borrower and renter behavior in response to the pandemic and its economic impact; the short-term and long-term impact of COVID-19 infections on the U.S. workforce; and future economic and operating conditions, including the economic impact of outbreaks or increases in the number or severity of COVID-19 cases. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in these risk factors.
Changes in accounting standards and policies can be difficult to predict and can materially impact how we record and report our financial results.
Our accounting policies and methods are fundamental to how we record and report our financial condition, results of operations and cash flows. From time to time, the FASB or the SEC changes the financial accounting and reporting standards or the policies that govern the preparation of our financial statements. In addition, FHFA provides guidance that affects our adoption or implementation of financial accounting or reporting standards. These changes can be difficult to predict and expensive to implement, and can materially impact how we record and report our financial condition, results of operations and cash flows. We could be required to apply new or revised guidance retrospectively, which may result in the revision of prior-period financial statements by material amounts. The implementation of new or revised accounting guidance could have a material adverse effect on our financial results or net worth.
In many cases, our accounting policies and methods, which are fundamental to how we report our financial condition and results of operations, require management to make judgments and estimates about matters that are inherently uncertain. Management also relies on models in making these estimates.
Our management must exercise judgment in applying many of our accounting policies and methods so that they comply with GAAP and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the appropriate accounting policy or method from two or more acceptable alternatives, any of which might be reasonable under the circumstances but might affect the amounts of assets, liabilities, revenues and expenses that we report. See “Note 1, Summary of Significant Accounting Policies” for a description of our significant accounting policies.
We have identified one of our accounting estimates, allowance for loan losses, as critical to the presentation of our financial condition and results of operations, as described in “MD&A—Critical Accounting Estimates.” We believe this estimate is critical because it involves significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different judgments and assumptions could have a material impact on our reported results of operations or financial condition.
Because our financial statements involve estimates for amounts that are very large, even a small change in the estimate can have a significant impact for the reporting period. For example, because our allowance for loan losses is so large,
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Risk Factors | General Risk
even a change that has a small impact relative to the size of this allowance can have a meaningful impact on our results for the quarter in which we make the change.
Many of our accounting methods involve substantial use of models, which are inherently imperfect predictors of actual results because they are based on assumptions, including about future events. For example, we use models to determine expected lifetime losses on loans and other financial instruments subject to Accounting Standards Update 2016-13, Financial Instruments—Credit Losses, Measurement of Credit Losses on Financial Instruments and related amendments (referred to as the “CECL standard”). Our actual results could differ significantly from those generated by our models. As a result, the estimates that we use to prepare our financial statements, as well as our estimates of our future results of operations, may be inaccurate, perhaps significantly. For more discussion of the risks associated with our use of models, see a risk factor in “Operational Risk” above.
Item 1B.  Unresolved Staff Comments
None.
Item 2.  Properties
There are no physical properties that are material to us.
Item 3.  Legal Proceedings
This item describes our material legal proceedings. We describe additional material legal proceedings in “Note 16, Commitments and Contingencies,” which is incorporated herein by reference. In addition to the matters specifically described or incorporated by reference in this item, we are involved in legal and regulatory proceedings that arise in the ordinary course of business that we do not expect will have a material impact on our business or financial condition. However, litigation claims and proceedings of all types are subject to many factors and their outcome and effect on our business and financial condition generally cannot be predicted accurately.
We establish an accrual for legal claims only when a loss is probable and we can reasonably estimate the amount of such loss. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims. If certain of these matters are determined against us, FHFA or Treasury, it could have a material adverse effect on our results of operations, liquidity and financial condition, including our net worth.
Senior Preferred Stock Purchase Agreements Litigation
Since June 2013, preferred and common stockholders of Fannie Mae and Freddie Mac filed lawsuits in multiple federal courts against one or more of the United States, Treasury and FHFA, challenging actions taken by the defendants relating to the Fannie Mae and Freddie Mac senior preferred stock purchase agreements and the conservatorships of Fannie Mae and Freddie Mac. Some of these lawsuits also contain claims against Fannie Mae and Freddie Mac. The legal claims being advanced by one or more of these lawsuits include challenges to the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to August 2012 amendments to the agreements, the payment of dividends to Treasury under the net worth sweep dividend provisions, and FHFA’s decision to require Fannie Mae and Freddie Mac to draw funds from Treasury to pay dividends to Treasury prior to the August 2012 amendments. The plaintiffs seek various forms of equitable and injunctive relief as well as damages. The cases that remain pending or were terminated after September 30, 2022 are as follows:
District of Columbia (In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations and Fairholme Funds v. FHFA). Fannie Mae is a defendant in two cases in the U.S. District Court for the District of Columbia, including a consolidated class action. The cases were consolidated for trial and a trial was conducted from October 17, 2022 to November 1, 2022. The jury was not able to reach a verdict and the judge declared a mistrial on November 7, 2022. A new trial is scheduled to begin on July 24, 2023. See “Note 16, Commitments and Contingencies” for additional information.
Southern District of Texas (Collins, et al. v. Yellen, et al.). On October 20, 2016, preferred and common stockholders filed a complaint against FHFA and Treasury in the U.S. District Court for the Southern District of Texas. On May 22, 2017, the court dismissed the case. On September 6, 2019, the U.S. Court of Appeals for the Fifth Circuit, sitting en banc, affirmed the district court’s dismissal of claims against Treasury, but reversed the dismissal of claims against FHFA.
On June 23, 2021, the U.S. Supreme Court held that FHFA did not exceed its statutory powers as conservator when it agreed to the net worth sweep dividend provisions of the third amendment to the senior preferred stock purchase agreements in August 2012. The court also held that the provision of the Housing and Economic Recovery Act of 2008
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that restricts the President’s power to remove the FHFA Director without cause violates the Constitution’s separation of powers and, thus, the FHFA Director may be removed by the President for any reason. The court rejected plaintiffs’ request to rescind the third amendment to the senior preferred stock purchase agreements. However, the Supreme Court remanded the case to the Fifth Circuit for further proceedings on the sole issue of whether the stockholders suffered compensable harm related to the constitutional claim during the limited time-period when a Senate-confirmed FHFA Director was in office. On March 4, 2022, the Fifth Circuit remanded the case to the district court for further proceedings on the compensable harm issue. On June 3, 2022, the stockholders filed an amended complaint and on July 18, 2022, FHFA and Treasury moved to dismiss that complaint. On November 21, 2022, the district court dismissed the case and on December 5, 2022, plaintiffs filed a notice of appeal.
Western District of Michigan (Rop et al. v. FHFA et al.). On June 1, 2017, preferred and common stockholders of Fannie Mae and Freddie Mac filed a complaint for declaratory and injunctive relief against FHFA and Treasury in the U.S. District Court for the Western District of Michigan. FHFA and Treasury moved to dismiss the case on September 8, 2017, and plaintiffs filed a motion for summary judgment on October 6, 2017. On September 8, 2020, the court denied plaintiffs’ motion for summary judgment and granted defendants’ motion to dismiss. On October 4, 2022, the U.S. Court of Appeals for the Sixth Circuit reversed the dismissal and remanded the case to the district court to determine whether the stockholders suffered compensable harm. On February 2, 2023, plaintiffs filed a petition with the Supreme Court seeking review of the Sixth Circuit’s decision.
District of Minnesota (Bhatti et al. v. FHFA et al.). On June 22, 2017, preferred and common stockholders of Fannie Mae and Freddie Mac filed a complaint for declaratory and injunctive relief against FHFA and Treasury in the U.S. District Court for the District of Minnesota. The court dismissed the case on July 6, 2018. On October 6, 2021, the U.S. Court of Appeals for the Eighth Circuit affirmed in part and reversed in part the district court’s ruling and remanded the case to the district court to determine whether the stockholders suffered compensable harm. On January 26, 2022, plaintiffs filed an amended complaint. On March 11, 2022 and March 14, 2022, Treasury and FHFA each filed motions to dismiss the new complaint. On December 16, 2022, the district court dismissed the case and on January 9, 2023, the plaintiffs filed a notice of appeal.
Eastern District of Pennsylvania (Wazee Street Opportunities Fund IV L.P. et al. v. FHFA et al.). On August 16, 2018, common stockholders of Fannie Mae and Freddie Mac filed a complaint for declaratory and injunctive relief against FHFA and Treasury in the U.S. District Court for the Eastern District of Pennsylvania. FHFA and Treasury moved to dismiss the case on November 16, 2018, and plaintiffs filed a motion for summary judgment on December 21, 2018. This case is currently stayed.
U.S. Court of Federal Claims. Numerous cases were filed against the United States in the U.S. Court of Federal Claims, with four of those cases listing Fannie Mae as a nominal defendant: Fisher v. United States of America, filed on December 2, 2013; Rafter v. United States of America, filed on August 14, 2014; Perry Capital LLC v. United States of America, filed on August 15, 2018; and Fairholme Funds Inc. v. United States, which was originally filed on July 9, 2013, and amended to include Fannie Mae as a nominal defendant on October 2, 2018. Plaintiffs in these cases alleged that the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendment constituted a taking of Fannie Mae’s property without just compensation in violation of the U.S. Constitution; certain plaintiffs alleged other claims, including breach of contract and breach of fiduciary duty. The Fisher plaintiffs are pursuing only derivative claims on behalf of Fannie Mae, while the plaintiffs in Rafter, Perry Capital and Fairholme Funds alleged direct claims against the United States, in addition to derivative claims on behalf of Fannie Mae. The United States filed a motion to dismiss the Fisher, Rafter and Fairholme Funds cases, as well as other cases that did not list Fannie Mae as a nominal defendant, on August 1, 2018. On December 6, 2019, the court entered an order in the Fairholme Funds case that granted the government’s motion to dismiss all the direct claims but denied the motion as to the derivative claims brought on behalf of Fannie Mae. In the Fisher case, the court denied the government’s motion to dismiss on May 8, 2020 and, on August 21, 2020, the Federal Circuit denied the Fisher plaintiffs’ request for interlocutory appeal. The plaintiffs in Fairholme Funds and other cases affected by the court’s December 6, 2019 decision appealed that decision to the Federal Circuit. On February 22, 2022, the Federal Circuit affirmed the dismissal of the plaintiffs’ direct claims but reversed the U.S. Court of Federal Claims’ ruling on plaintiffs’ derivative claims, holding that those claims should also be dismissed. On July 22, 2022, the plaintiffs in Fairholme Funds and in other cases that did not list Fannie Mae as a nominal defendant filed petitions with the Supreme Court seeking review of the Federal Circuit’s decision. On January 9, 2023, the Supreme Court denied these petitions. The Perry Capital case was dismissed on January 30, 2023 and the Fairholme Funds case was dismissed on February 1, 2023.
Item 4.  Mine Safety Disclosures
None.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
Our common stock is traded in the over-the-counter market and quoted on the OTCQB, operated by OTC Markets Group Inc., under the ticker symbol “FNMA.” Over-the-counter market quotations for our common stock reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
The transfer agent and registrar for our common stock is Computershare Trust Company, N.A., and its address is P.O. Box 43006, Providence, RI 02940-3006 or, for overnight correspondence, 150 Royall St., Suite 101, Canton, MA 02021.
Holders
As of February 1, 2023, we had approximately 8,000 registered holders of record of our common stock. In addition, as of February 1, 2023, Treasury held a warrant giving it the right to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis on the date of exercise.
Equity Compensation Plan Information
As of December 31, 2022, we had no outstanding options, warrants or rights under any equity compensation plan. Although we have a legacy equity compensation plan that was previously approved by shareholders, our 1985 Employee Stock Purchase Plan, we do not anticipate issuing additional shares under that plan. Moreover, we are prohibited from issuing any stock or other equity securities as compensation without the approval of FHFA and the prior written consent of Treasury under the senior preferred stock purchase agreement, except under limited circumstances.
Recent Sales of Unregistered Equity Securities
Under the terms of our senior preferred stock purchase agreement with Treasury, we are prohibited from selling or issuing our equity interests, without the prior written consent of Treasury except under limited circumstances described in “Conservatorship and Treasury Agreements—Treasury Agreements—Covenants under Treasury Agreements.”
During the quarter ended December 31, 2022, we did not sell any equity securities.
Information about Certain Securities Issuances by Fannie Mae
Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a material direct financial obligation or become directly or contingently liable for a material obligation under an off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03 or, if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for that offering that are filed with the SEC.
Because the securities we issue are exempted securities under the Securities Act of 1933, we do not file registration statements or prospectuses with the SEC with respect to our securities offerings. To comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial obligations, in accordance with a “no-action” letter we received from the SEC staff in 2004, we report our incurrence of these types of obligations in offering circulars or prospectuses (or supplements thereto) that we post on our website within the same time period that a prospectus for a non-exempt securities offering would be required to be filed with the SEC. To the extent we incur a material financial obligation that is not disclosed in this manner, we would file a Form 8-K if required to do so under applicable Form 8-K requirements.
The website address for disclosure about our debt securities is www.fanniemae.com/debtsearch. From this address, investors can access the offering circular and related supplements for debt securities offerings under Fannie Mae’s universal debt facility, including pricing supplements for individual issuances of debt securities.
Disclosure about our obligations pursuant to the MBS we issue, some of which may be off-balance sheet obligations, can be found at www.fanniemae.com/mbsdisclosure. From this address, investors can access information and documents about our MBS, including prospectuses and related prospectus supplements.
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We are providing our website address solely for your information. Information appearing on our website is not incorporated into this report.
Our Purchases of Equity Securities
We did not repurchase any of our equity securities during the fourth quarter of 2022.
Item 6.  [Reserved]
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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read this MD&A together with our consolidated financial statements as of December 31, 2022 and the accompanying notes. This MD&A does not discuss 2020 performance or a comparison of 2020 versus 2021 performance for select areas where we have determined the omitted information is not necessary to understand our current-period financial condition, changes in our financial condition, or our results. The omitted information may be found in our 2021 Form 10-K, filed with the SEC on February 15, 2022, in MD&A sections titled “Consolidated Results of Operations,” “Single-Family Business,” “Multifamily Business,” and “Liquidity and Capital Management.”
Key Market Economic Indicators
Below we discuss how varying macroeconomic conditions can influence our financial results across different business and economic environments. Our forecasts and expectations are based on many assumptions, subject to many uncertainties and may change, perhaps substantially, from our current forecasts and expectations. See “Forward-Looking Statements” and “Risk Factors” for a discussion of factors that could cause actual results to differ materially from our current forecasts and expectations. For further discussion on housing activity, see “Single-Family Business—Single-Family Mortgage Market” and “Multifamily Business—Multifamily Mortgage Market.”
Selected Benchmark Interest Rates
fnm-20221231_g5.jpg
(1)Refers to the U.S. weekly average fixed-rate mortgage rate according to Freddie Mac's Primary Mortgage Market Survey®. These rates are reported using the latest available data for a given period.
(2)According to Bloomberg.
(3)Refers to the daily rate per the Federal Reserve Bank of New York.
How Interest Rates Can Affect Our Financial Results
Net interest income. In a rising interest-rate environment, our mortgage loans tend to prepay more slowly as borrowers are less likely to refinance. We amortize various cost basis adjustments over the life of the mortgage loan, including those relating to loan-level price adjustments we receive as upfront fees at the time we acquire single-family loans. As a result, any prepayment of a loan results in an accelerated realization of those upfront fees as income. Therefore, as loan prepayments slow, the accelerated realization of amortization income also
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slows. Conversely, in a declining interest-rate environment, our mortgage loans tend to prepay faster as borrowers are more likely to refinance, typically resulting in the opposite trend of higher amortization income from cost basis adjustments on mortgage loans. Interest rates also affect the amount of interest income we earn on our assets. Our other investments portfolio and certain mortgage related assets typically earn more interest income in a higher interest-rate environment and less interest income in a lower interest-rate environment. See “Consolidated Results of Operations—Net Interest Income” for a discussion of how interest rate changes impacted our financial results.
Fair value gains (losses). We have exposure to fair value gains and losses resulting from changes in interest rates, primarily through our mortgage commitment derivatives and risk management derivatives, which we mark to market through earnings. Fair value gains and losses on our mortgage commitment derivatives fluctuate depending on how interest rates and prices move between the time a commitment is opened and when it settles. The net position and composition across the yield curve of our risk management derivatives changes over time. As a result, interest rate changes (increases or decreases) and yield curve changes (parallel, steepening or flattening shifts) will generate varying amounts of fair value gains or losses in a given period.
Benefit (provision) for credit losses. Increases in mortgage interest rates tend to lengthen the expected lives of our loans, as our borrowers are less likely to refinance, which generally increases the expected impairment and provision for credit losses on loans, particularly those modified in troubled debt restructuring (“TDR”) arrangements. Decreases in mortgage interest rates tend to shorten the expected lives of our loans as borrowers are more likely to refinance, which generally reduces the impairment and provision for credit losses on such loans. See “Consolidated Results of Operations—Benefit (Provision) for Credit Losses” and “Note 1, Summary of Significant Accounting Policies” for additional information on our adoption of Accounting Standards Update “ASU”) 2022-02, Financial Instruments – Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2022, which resulted in the prospective discontinuation of TDR accounting, and its impact on our financial results.
Single-Family Annual Home Price Growth Rate(1)
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(1)     Calculated internally using property data on loans purchased by Fannie Mae, Freddie Mac, and other third-party home sales data. Fannie Mae’s home price index is a weighted repeat transactions index, measuring average price changes in repeat sales on the same properties. Fannie Mae’s home price index excludes prices on properties sold in foreclosure. Fannie Mae’s home price estimates are based on non-seasonally adjusted preliminary data and are subject to change as additional data becomes available.
How Home Prices Can Affect Our Financial Results
Actual and forecasted home prices impact our provision or benefit for credit losses as well as the growth and size of our guaranty book of business.
Changes in home prices affect the amount of equity that borrowers have in their homes. Borrowers with less equity typically have higher delinquency and default rates, particularly in times of economic stress.
As home prices increase, the severity of losses we incur on defaulted loans that we hold or guarantee decreases because the amount we can recover from the properties securing the loans increases. Declines in home prices increase the losses we incur on defaulted loans.
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As home prices rise, the principal balance of loans associated with newly acquired purchase money mortgages may increase, causing growth in the size of our guaranty book. Additionally, rising home prices can increase the amount of equity borrowers have in their home, which may lead to an increase in origination volumes for cash-out refinance loans with higher principal balances than the existing loan. Replacing existing loans with newly acquired cash-out refinances can affect the growth and size of our guaranty book.
Home price growth on a national basis decreased from 18.6% in 2021 to 9.2% in 2022. Annual home price growth in 2022 reflected home price increases in the first half of 2022, partially offset by home price declines of 1.4% in the second half of 2022. Home price declines in the second half of 2022 were primarily driven by elevated mortgage interest rates and affordability constraints. We expect these trends to continue and result in estimated home price declines of 4.2% in 2023. We also expect regional variation in the timing and rate of home price changes.
New Housing Starts(1)
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(1)According to U.S. Census Bureau and subject to revision.
How Housing Activity Can Affect Our Financial Results
Housing is among the most interest-rate-sensitive sectors of the economy. In addition to interest rates, two key aspects of economic activity that can impact supply and demand for housing, and thus our business and financial results, are the rates of household formation and housing construction.
Household formation is a key driver of demand for both single-family and multifamily housing as a newly formed household will either rent or purchase a home. Thus, changes in the pace of household formation can affect home prices, multifamily property values and credit performance as well as the degree of loss on defaulted loans.
Growth of household formation stimulates homebuilding. Homebuilding has typically been a cyclical leader, weakening prior to a slowdown in U.S. economic activity and accelerating prior to a recovery, which contributes to the growth of GDP and employment.
A decline in housing starts results in fewer new homes being available for purchase and potentially a lower volume of mortgage originations. Construction activity can also affect credit losses through its impact on home prices. If the growth of demand exceeds the growth of supply, prices will appreciate and impact the risk profile of newly originated home purchase mortgages, depending on where in the housing cycle the market is. A reduced pace of construction is often associated with a broader economic slowdown and may signal expected increases in delinquency and losses on defaulted loans.
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Single-family housing starts fell in 2022 in response to anticipated decreases in demand. In 2023, we expect home sales and single-family and multifamily housing starts to decline compared with 2022 due to elevated mortgage rates, continued low home affordability, and an expected modest recession.
GDP, Unemployment Rate and Personal Consumption
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(1)Real GDP growth (decline) and personal consumption growth (decline) are based on the quarterly series calculated by the Bureau of Economic Analysis and are subject to revision.
(2)According to the U.S. Bureau of Labor Statistics and subject to revision.
How GDP, the Unemployment Rate and Personal Consumption Can Affect Our Financial Results
Changes in GDP, the unemployment rate and personal consumption can affect several mortgage market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies, which impacts credit losses.
Economic growth is a key factor for the performance of mortgage-related assets. In a growing economy, employment and income are typically rising, thus allowing borrowers to meet payment requirements, existing homeowners to consider purchasing and moving to another home, and renters to consider becoming homeowners. Homebuilding typically increases to meet the rise in demand. Mortgage delinquencies typically fall in an expanding economy, thereby decreasing credit losses.
In a slowing economy, income growth and housing activity typically slow as an early indicator of reduced economic activity, followed by slowing employment. Typically, as an economic slowdown intensifies, households reduce their spending. This reduction in consumption then accelerates the slowdown. An economic slowdown can lead to employment losses, impairing the ability of borrowers and renters to meet mortgage and rental payments, thus causing loan delinquencies to rise. Home sales and mortgage originations also typically fall in a slowing economy.
While GDP grew in 2022, we expect that a modest recession is likely to occur beginning in the first half of 2023, resulting in an increase in the unemployment rate. We expect our economic outlook will be influenced by a number of factors that are subject to change, such as the persistence of inflationary pressures, the speed at which expected monetary policy tightening is adjusted and the risk of international financial market disruptions.
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See “Risk Factors—Credit Risk” and “Risk Factors—Market and Industry Risk” for further discussion of risks to our business and financial results associated with interest rates, home prices, housing activity and economic conditions.
Consolidated Results of Operations
This section discusses our consolidated results of operations and should be read together with our consolidated financial statements and the accompanying notes.
Summary of Consolidated Results of Operations
For the Year Ended December 31,Variance
2022202120202022 vs. 20212021 vs. 2020
(Dollars in millions)
Net interest income(1)
$29,423 $29,587 $24,866 $(164)$4,721 
Fee and other income312 361 462 (49)(101)
Net revenues29,735 29,948 25,328 (213)4,620 
Investment gains (losses), net(297)1,352 907 (1,649)445 
Fair value gains (losses), net(1)
1,284 155 (2,501)1,129 2,656 
Administrative expenses(3,329)(3,065)(3,068)(264)
Benefit (provision) for credit losses(6,277)5,130 (678)(11,407)5,808 
TCCA fees(3,369)(3,071)(2,673)(298)(398)
Credit enhancement expense(2)
(1,323)(1,051)(1,361)(272)310 
Change in expected credit enhancement recoveries(3)
727 (194)233 921 (427)
Other expenses, net(4)
(918)(1,255)(1,308)337 53 
Income before federal income taxes16,233 27,949 14,879 (11,716)13,070 
Provision for federal income taxes(3,310)(5,773)(3,074)2,463 (2,699)
Net income$12,923 $22,176 $11,805 $(9,253)$10,371 
Total comprehensive income$12,920 $22,098 $11,790 $(9,178)$10,308 
(1)In January 2021, we began applying fair value hedge accounting. For qualifying hedging relationships, fair value changes attributable to movements in the designated benchmark interest rates for hedged mortgage loans and funding debt and the fair value change of the designated portion of the paired interest-rate swaps are recognized in “Net interest income.” In 2020, all fair value changes for interest-rate swaps were recognized in “Fair value gains (losses), net.” See “Fair Value Gains (Losses), Net” and “Note 1, Summary of Significant Accounting Policies” for more information about our hedge accounting program.
(2)Consists of costs associated with our freestanding credit enhancements, which primarily include our Connecticut Avenue Securities® (“CAS”) and CIRT programs, enterprise-paid mortgage insurance (“EPMI”) and certain lender risk-sharing programs.
(3)Includes estimated changes in benefits, as well as any realized amounts, from our freestanding credit enhancements.
(4)Consists of debt extinguishment gains and losses, foreclosed property income (expense), gains and losses from partnership investments, housing trust fund expenses, loan subservicing costs, and servicer fees paid in connection with certain loss mitigation activities.
Net Interest Income
Our primary source of net interest income is guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties.
Guaranty fees consist of two primary components:
base guaranty fees that we receive over the life of the loan; and
upfront fees that we receive at the time of loan acquisition primarily related to single-family loan-level price adjustments and other fees we receive from lenders, which are amortized into net interest income as cost basis adjustments over the contractual life of the loan. We refer to this as amortization income.
We recognize almost all of our guaranty fee revenue in net interest income because we consolidate the substantial majority of loans underlying our Fannie Mae MBS in consolidated trusts in our consolidated balance sheets. Guaranty fees from these loans account for the difference between the interest income on loans in consolidated trusts and the interest expense on the debt of consolidated trusts.
The timing of when we recognize amortization income can vary based on a number of factors, the most significant of which is a change in mortgage interest rates. In a rising interest-rate environment, our mortgage loans tend to prepay more slowly, which typically results in lower amortization income. Conversely, in a declining interest-rate environment, our mortgage loans tend to prepay faster, typically resulting in higher amortization income.
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We also recognize net interest income on the difference between interest income earned on the assets in our retained mortgage portfolio and our other investments portfolio (collectively, our “portfolios”) and the interest expense associated with the debt that funds those assets. See “Retained Mortgage Portfolio” and “Liquidity and Capital Management—Liquidity Management—Other Investments Portfolio” for more information about our portfolios.
Since January 2021, we have recognized fair value changes attributable to movements in benchmark interest rates for mortgage loans and funding debt, and for related interest-rate swaps in hedging relationships, as a component of net interest income, including the amortization of hedge-related basis adjustments on mortgage loans or funding debt and any related interest accrual on the swaps. The net income or expense associated with this activity is presented in the “Income (expense) from hedge accounting” line item in the table below.
For the years ended December 31, 2022 and 2021, we recognized $3.2 billion and $1.5 billion, respectively, in net fair value gains on our hedged loans and funding debt as cost basis adjustments, which substantially offset net fair value losses on designated interest-rate swaps. These cost basis adjustments on our hedged loans and funding debt will be amortized as net expenses over the remaining contractual life of the respective hedged items as a component of “Net interest income.” See “Note 1, Summary of Significant Accounting Policies” and “Note 8, Derivative Instruments” for more information about our hedge accounting program, as well as “Fair Value Gains (Losses), Net” below.
The table below displays the components of our net interest income from our guaranty book of business, which we discuss in “Guaranty Book of Business,” and from our portfolios, as well as from hedge accounting.
Components of Net Interest Income
For the Year Ended December 31,
Variance
2022202120202022 vs. 20212021 vs. 2020
(Dollars in millions)
Net interest income from guaranty book of business:
Base guaranty fee income(1)
$16,072 $14,159 $11,157 $1,913 $3,002 
Base guaranty fee income related to TCCA(2)
3,369 3,071 2,673 298 398 
Net amortization income(3)
7,099 11,243 9,121 (4,144)2,122 
Total net interest income from guaranty book of business
26,540 28,473 22,951 (1,933)5,522 
Net interest income from portfolios(4)
2,954 941 1,915 2,013 (974)
Income (expense) from hedge accounting(5)
(71)173 — (244)173 
Total net interest income$29,423 $29,587 $24,866 $(164)$4,721 
Income (expense) from hedge accounting included in net interest income:
Fair value gains (losses) on designated risk management derivatives in fair value hedges(5)
$(2,536)$(1,453)$— $(1,083)$(1,453)
Fair value gains (losses) on hedged mortgage loans held for investment and debt of Fannie Mae(6)
3,188 1,510 — 1,678 1,510 
Contractual interest income (expense) accruals related to interest-rate swaps designated as hedging instruments(5)
(227)211 — (438)211 
Discontinued hedge-related basis adjustment amortization(496)(95)— (401)(95)
Total income (expense) from hedge accounting in net interest income$(71)$173 $— $(244)$173 
(1)Excludes revenues generated by the 10 basis point guaranty fee increase we implemented pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us.
(2)Represents revenues generated by the 10 basis point guaranty fee increase we implemented pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us.
(3)Net amortization income refers primarily to the amortization of premiums and discounts on mortgage loans and debt of consolidated trusts. These cost basis adjustments represent the difference between the initial fair value and the carrying value of these instruments as well as upfront fees we receive at the time of loan acquisition. It does not include the amortization of cost basis adjustments resulting from hedge accounting, which is included in income (expense) from hedge accounting.
(4)Includes interest income from assets held in our retained mortgage portfolio and our other investments portfolio, as well as other assets used to support lender liquidity. Also includes interest expense on our funding debt, including outstanding Connecticut Avenue Securities debt.
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(5)Prior to the adoption of hedge accounting in 2021, the corresponding activity was included in “Fair value gains (losses), net.” Upon application of hedge accounting in January 2021, these items are presented in “Net interest income.”
(6)Amounts are recorded as cost basis adjustments on the hedged loans or debt and amortized over the hedged item’s remaining contractual life beginning at the termination of the hedging relationship.
Net interest income remained relatively flat in 2022 compared with 2021. The primary offsetting drivers of net interest income were lower amortization income offset by higher income from portfolios and higher base guaranty fee income. More specifically, our net interest income was impacted in the periods by:
Lower net amortization income. Lower amortization income was driven by a higher interest rate environment in 2022, which slowed refinancing activity driving lower prepayment volumes compared with 2021. For a description of how fewer loan prepayments results in lower amortization income, refer to “Key Market Economic Indicators—How Interest Rates Can Affect Our Financial Results—Net Interest Income.”
Higher income from portfolios. Higher income from portfolios in 2022 compared with 2021 was primarily driven by higher yields on assets in our other investments portfolio as a result of increases in interest rates, as well as a decrease in interest expense on our long-term funding debt due to a decrease in the average outstanding balance compared with 2021.
Higher base guaranty fee income. An increase in the size of our guaranty book of business combined with higher average charged guaranty fees were the primary drivers of the increase in base guaranty fee income in 2022 compared with 2021.
Net interest income increased in 2021 compared with 2020, driven by higher base guaranty fee income and higher net amortization income, partially offset by lower income from portfolios.
Higher base guaranty fee income. An increase in the size of our single-family and multifamily guaranty book of business combined with higher average base guaranty fees on loans that now comprise a larger portion of our book contributed to the increases in base guaranty fee income in 2021 and 2020.
For single-family, higher base guaranty fee income was primarily due to the increase in the size of our guaranty book of business, driven by record home price appreciation in 2020 and 2021 having led to higher average loan balances. In addition, our average charged fees increased as a result of better pricing in the low-interest rate environment.
For multifamily, higher base guaranty fee income in 2021 compared with 2020 was similarly the result of an increase in our multifamily guaranty book of business combined with an increase in average charged guaranty fees. In addition, we realized higher multifamily yield maintenance revenue related to the prepayment of multifamily loans in 2021 compared with 2020.
Higher net amortization income. Throughout all of 2021 and much of 2020 we were in a low interest rate environment, which led to significant prepayment volumes as loans refinanced, resulting in nearly two-thirds of our single-family book of business being originated since the beginning of 2020. As loans refinance, we accelerate the amortization of cost basis adjustments on the mortgage loans and any related debt of consolidated trusts, resulting in elevated amortization income for the periods.
Amortization income was greater in 2021 than in 2020 primarily because the loans that prepaid in 2021, and the related debt of consolidated trusts that liquidated, had a greater amount of net unamortized deferred income associated with them. Generally, the loans that prepaid in 2021 had been outstanding for less time than those that prepaid in 2020, and a greater portion of loans that prepaid in 2021 were issued in a low-interest-rate environment, which resulted in a greater amount of net deferred income associated with them.
Lower income from portfolios. Lower income from portfolios in 2021 was primarily due to the reduced average balance and lower yields on our retained mortgage portfolio, combined with lower yields on assets in our other investments portfolio as a result of the low interest rate environment. This reduction in income was partially offset by a decrease in interest expense on our funding debt due to a decrease in average borrowing costs, primarily as a result of lower average interest rates on our long-term debt.
The decrease in the average balance of our retained mortgage portfolio for 2021 compared with 2020 was primarily due to a decrease in our lender liquidity portfolio, which was driven by lower acquisitions through our whole loan conduit in the second half of 2021 as mortgage refinance activity slowed. In addition, sales of reperforming and nonperforming mortgage loans drove a decrease in our loss mitigation portfolio.
Refinancing activity was significantly lower in 2022 compared with 2021 levels as the rise in interest rates resulted in fewer borrowers who could benefit from refinancing. We expect refinancing activity to remain low in 2023 compared with the levels in 2020 and 2021, as we expect average 30-year fixed rate mortgage interest rates to remain significantly higher than the interest rates of most outstanding single-family loans. As of December 29, 2022, the U.S. weekly
Fannie Mae 2022 Form 10-K
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MD&A | Consolidated Results of Operations
average interest rate for a single-family 30-year fixed-rate mortgage was 6.42%, according to Freddie Mac’s Primary Mortgage Market Survey®. Nearly 95% of our single-family conventional guaranty book of business as of December 31, 2022 had an interest rate below 5.50%, resulting in a low likelihood these loans would refinance at current rates. In addition, approximately 75% of our single-family conventional guaranty book of business as of December 31, 2022 had an interest rate below 4.00%. Accordingly, even if interest rates decline meaningfully from current levels, most of the loans in our single-family conventional guaranty book of business still would not be incentivized to refinance.
We expect significantly lower amortization income in 2023 compared with 2022, driven by our expectation that refinancing activity will remain low as we expect most single-family loans in our guaranty book of business will continue to have interest rates significantly lower than current market rates. However, we expect the decline in our amortization income in 2023 to be partially offset by higher interest income on our other investments portfolio.
Analysis of Net Interest Income
The table below displays an analysis of our net interest income, average balances and related yields earned on assets and incurred on liabilities. For most components of the average balances, we use a daily weighted average of unpaid principal balance net of unamortized cost basis adjustments. When daily average balance information is not available, such as for mortgage loans, we use monthly averages.
Analysis of Net Interest Income and Yield(1)
For the Year Ended December 31,
202220212020
Average
Balance
Interest
Income/
(Expense)
Average
Rates
Earned/Paid
Average
Balance
Interest
Income/
(Expense)
Average
Rates
Earned/Paid
Average
Balance
Interest
Income/
(Expense)
Average
Rates
Earned/Paid
(Dollars in millions)
Interest-earning assets:
Mortgage loans of Fannie Mae
$60,587 $2,835 4.68 %$89,603 $2,953 3.30 %$114,132 $3,917 3.43 %
Mortgage loans of consolidated trusts4,019,332 114,978 2.86 3,746,113 95,977 2.56 3,369,573 102,399 3.04 
Total mortgage loans(2)
4,079,919 117,813 2.89 3,835,716 98,930 2.58 3,483,705 106,316 3.05 
Investments in securities(3)
128,245 1,828 1.41 168,702 582 0.34 133,011 972 0.72 
Securities purchased under agreements to resell25,374 524 2.04 46,165 21 0.04 41,807 146 0.34 
Advances to lenders
5,170 132 2.52 9,086 142 1.54 8,551 135 1.55 
Total interest-earning assets$4,238,708 $120,297 2.84 %$4,059,669 $99,675 2.46 %$3,667,074 $107,569 2.93 %
Interest-bearing liabilities:
Short-term funding debt
$4,429 $(76)1.69 $5,748 $(4)0.07 $33,068 $(182)0.54 
Long-term funding debt
139,098 (2,481)1.78 231,344 (2,707)1.17 204,832 (3,181)1.55 
CAS debt
8,658 (511)5.90 13,896 (581)4.18 17,915 (857)4.78 
Total debt of Fannie Mae
152,185 (3,068)2.02 250,988 (3,292)1.31 255,815