0000310522 us-gaap:AvailableforsaleSecuritiesMember us-gaap:MortgageBackedSecuritiesOtherMember 2018-07-01 2018-09-30
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172019
OR
| |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No.: file number: 0-50231
Federal National Mortgage Association
(Exact name of registrant as specified in its charter)
Fannie Mae
|
| | | | | | | | | |
| Federally chartered corporation | 52-0883107 | 1100 15th Street, NW
| | 800 | | 232-6643 |
| | | Washington, | DC | 20005 | | | | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
3900 Wisconsin Avenue, NW
Washington, DC
| 20016
(Zip Code)
|
(Address of principal executive offices)offices, including zip code) | | (Registrant’s telephone number, including area code) |
Registrant’s telephone number, including area code: (800) 2FANNIE (800-232-6643)Securities registered pursuant to Section 12(b) of the Act:
|
| | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| None | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ☑ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yesþ☑ No o☐
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 filerþ | ☑ | | Accelerated filero | ☐ |
Non-accelerated filero (Do not check if a smaller reporting company) | ☐ | | Smaller reporting companyo | ☐ |
| | | Emerging growth companyo | ☐ |
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No þ☑
As of September 30, 2017,2019, there were 1,158,087,567 shares of common stock of the registrant outstanding.
TABLE OF CONTENTS
|
| | |
| TABLE OF CONTENTS |
| | | Page |
| PART I—Financial Information | |
| Item 1. | | |
| | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | | |
| | | |
| | |
| | |
| | |
| Note 14—Fair Value | |
| | |
| Item 2. | | |
| | | |
| | | |
| | | |
| Uniform Mortgage-Backed Securities | |
| | | |
| | |
| | | |
| | | |
| | |
| | |
| | Mortgage Credit Book of | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | |
| | | |
| Item 3. | | |
| Item 4. | | |
| PART II—Other Information | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Item 5. | | |
| Item 6. | | |
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | i |
PART I—FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
| | |
| | | |
| | We have been under conservatorship, with the Federal Housing Finance Agency (“FHFA”) acting as conservator, since September 6, 2008. As conservator, FHFA succeeded to all rights, titles, powers and privileges of the company, and of any shareholder, officer or director of the company with respect to the company and its assets. The conservator has since delegated specifiedprovided for the exercise of certain authorities toby our Board of Directors and has delegated to management the authority to conduct our day-to-day operations.Directors. Our directors do not have any fiduciary duties to any person or entity except to the conservator and, accordingly, are not obligated to consider the interests of the company, the holders of our equity or debt securities, or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator. | |
| We describedo not know when or how the rightsconservatorship will terminate, what further changes to our business will be made during or following conservatorship, what form we will have and powerswhat 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. Congress and the Administration continue to consider options for reform of the conservator, key provisions of our agreements withhousing finance system, including Fannie Mae. We are not permitted to retain more than $25 billion in capital reserves or to pay dividends or other distributions to stockholders other than the U.S. Department of the Treasury (“Treasury”),. Our agreements with Treasury include covenants that significantly restrict our business activities. For additional information on the conservatorship, the uncertainty of our future, our agreements with Treasury, and their impact on shareholdersrecent developments relating to housing finance reform, see “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” and “Business—Charter Act and Regulation” in our annual report on Form 10-K for the year ended December 31, 20162018 (“20162018 Form 10-K”), “Legislation and Regulation” in “Business—Conservatorshipthis report, and Treasury Agreements.”“Risk Factors” in both this report and our 2018 Form 10-K. | |
| | | |
You should read this Management’s Discussion and Analysis of FinancialCondition and Results of Operations (“MD&A”) in conjunction with our unaudited condensed consolidated financial statements and related notes in this report and the more detailed information in our 20162018 Form 10-K. You can find a “Glossary of Terms Used in ThisReport” in the MD&A of our 2018 Form 10-K.
ThisForward-looking statements in this report contains forward-looking statements that are based on management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please reviewcircumstances, as we describe in “Forward-Looking Statements” for more information on theforward-looking statements in this report.Our actualStatements.” Future events and our future results may differ materially from those reflected in our forward-looking statements due to a variety of factors, including but not limited to, those discussed in “Risk Factors” and elsewhere in this report and in our 20162018 Form 10-K.
You can find a “Glossary of Terms Used in ThisReport” in the MD&A of our 2016 Form 10-K.
Introduction
Fannie MaeMae’s mission is a government-sponsored enterprise (“GSE”) chartered by Congress. We serve asto provide a stable source of liquidity to support housing for purchases of homeslow- and financing of multifamily rental housing, as well as for refinancing existing mortgages. Our role in the market enables qualified borrowers to have reliable access to affordable mortgage credit, including a variety of conforming mortgage products such as the prepayable 30-year fixed-rate mortgage that protects homeowners from fluctuations in interest rates.
moderate-income Americans. We provide liquidity to the mortgage market and increase the availability and affordability of housing in the United States through our two business segments—a Single-Family business, which operatesoperate in the secondary mortgage market, relatingprimarily working with lenders, who originate loans to borrowers. We do not originate loans secured by properties containing four or fewer residential dwelling units, and a Multifamily business, which operateslend money directly to borrowers in the secondaryprimary mortgage market relating primarily to loans secured by properties containing five or more residential units. We support the liquidity and stability of the U.S. mortgage market primarily by securitizingmarket. Instead, we securitize mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee which(which we refer to as Fannie Mae MBS. We alsoMBS or our MBS); purchase mortgage loans and mortgage-related securities, primarily for securitization and sale at a later date. We usedate; manage mortgage credit risk; and engage in other activities that support access to credit and the term “acquire” in this report to refer to both our securitizations and our purchasessupply of mortgage-related assets. We do not originate loans or lend money directly to consumersaffordable housing. Our common stock is traded in the primaryover-the-counter market and quoted on the OTCQB, operated by OTC Markets Group, Inc., under the ticker symbol “FNMA.”
Through our single-family and multifamily business segments, we provided $460 billion in liquidity to the mortgage market.
We remain in conservatorship and our conservatorship has no specified termination date. We do not know when or how the conservatorship will terminate, what further changes to our business will be made during or following conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated, or whether we will continue to exist following conservatorship. In addition, as a result of our agreements with Treasury and directives from our conservator, we are not permitted to retain our net worth (other than a limited amount that will decrease to zeromarket in the first quarternine months of 2018), rebuild our capital position2019, which enabled the financing of approximately 2.1 million home purchases, refinancings or pay dividends or other distributions to stockholders other than Treasury. Our senior preferred stock purchase agreement with Treasury also includes covenants that significantly restrict our business activities. Congress continues to consider options for reformrental units.
Fannie Mae Provided $460 Billion in Liquidity in the First Nine Months of the housing finance system, including the GSEs. We cannot predict the prospects for the enactment, timing or final content of housing finance2019
|
| | | | | |
| Unpaid Principal Balance | | Units |
| | | | | |
| $240.1B | | 942K
Single-Family Home Purchases |
|
|
| | | | | |
| $167.3B | | 649K
Single-Family Refinancings |
|
|
| | | | | |
| $52.1B | | 548K
Multifamily Rental Units |
|
|
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 1 |
|
| | |
| | | MD&A | IntroductionExecutive Summary |
reform legislation or actionsExecutive Summary
Summary of Our Financial Performance
|
|
Quarterly Condensed Consolidated Results
|
|
|
|
|
Our net income in the third quarter of 2019 remained flat compared with the third quarter of 2018 primarily due to: • an increase in our credit-related income;• offset by a shift from fair value gains to fair value losses.See “Consolidated Results of Operations” for more information on our financial results.
|
|
|
|
Year-to-Date Condensed Consolidated Results
|
|
|
|
|
The decrease in our net income in the first nine months of 2019, compared with the first nine months of 2018, was primarily driven by: • a shift from fair value gains to fair value losses; and• a decrease in net interest income;• partially offset by an increase in our credit-related income.See “Consolidated Results of Operations” for more information on our financial results.
|
|
Net worth. Our net worth was $10.3 billion as of September 30, 2019. This amount reflects:
our net worth of $6.4 billion as of June 30, 2019, of which we previously expected to pay Treasury $3.4 billion as a third-quarter 2019 dividend; and
our comprehensive income of $4.0 billion for the Administration or FHFA may takethird quarter of 2019.
As we describe in “Legislation and Regulation—Letter Agreement with respect to housing finance reform. We provide additional information onTreasury,” the uncertainty of our future, the conservatorship, thedividend provisions of our agreementssenior preferred stock were modified on September 27, 2019. As a result, no dividends were payable on the senior preferred stock for the third quarter of 2019, as our net worth of $6.4 billion as of June 30, 2019 was lower than the $25 billion capital reserve amount. Additionally, no dividends will be payable on the senior preferred stock for the fourth quarter of 2019, as our net worth of $10.3 billion as of September 30, 2019 was lower than $25 billion.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 2 |
Net Worth, Treasury Funding and Senior Preferred Stock Dividends
Treasury has made a commitment under a senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. Pursuant to the senior preferred stock purchase agreement, we issued shares of senior preferred stock to Treasury in 2008. We have paid dividends to Treasury on the senior preferred stock on a quarterly basis for every dividend period for which dividends were payable since we entered conservatorship in 2008.
Under the modified dividend provisions of the senior preferred stock described in “Legislation and Regulation—Letter Agreement with Treasury, their impact on” effective with the third quarter 2019 dividend period, we are not required to pay further dividends to Treasury until we have accumulated over $25 billion in net worth. Accordingly, no dividends were payable to Treasury for the third quarter of 2019, and none will be payable for the fourth quarter of 2019. Changes in our business,net worth can be significantly impacted by market conditions that affect our net interest income, fluctuations in the estimated fair value of our derivatives and recent actionsother financial instruments that we mark to market through our earnings, developments that affect our loss reserves such as changes in interest rates, home prices or accounting standards, or events such as natural disasters, and statements relating to housing finance reform by the Administration, Congress and FHFAother factors, as we discuss in “Business—Conservatorship and Treasury Agreements,” “Business—Legislation and Regulation—Housing Finance Reform” and “Risk Factors” and “Consolidated Results of Operations” in our 20162018 Form 10-K and in this report.
The charts below show information about our net worth, the remaining amount of Treasury’s funding commitment to us, senior preferred stock dividends we have paid Treasury and funds we have drawn from Treasury pursuant to its funding commitment.
| |
(1) | Aggregate amount of dividends we have paid to Treasury on the senior preferred stock from 2008 through September 30, 2019. Under the terms of the senior preferred stock purchase agreement, dividend payments we make to Treasury do not offset our draws of funds from Treasury. |
| |
(2) | Aggregate amount of funds we have drawn from Treasury pursuant to the senior preferred stock purchase agreement from 2008 through September 30, 2019. |
Under the modified liquidation preference provisions of the senior preferred stock described in “Legislation and Regulation” and “Risk Factors”Regulation—Letter Agreement with Treasury,” the aggregate liquidation preference of the senior preferred stock increased from $123.8 billion as of June 30, 2019 to $127.2 billion as of September 30, 2019 due to the $3.4 billion increase in our quarterly report onnet worth during the second quarter of 2019. The aggregate liquidation preference of the senior preferred stock will further increase to $131.2 billion as of December 31, 2019 due to the $4.0 billion increase in our net worth during the third quarter of 2019.
For a description of the terms of the senior preferred stock purchase agreement and the senior preferred stock, see “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” in our 2018 Form 10-Q for the quarter ended March 31, 2017 (“First Quarter 2017 Form 10-Q”), our quarterly report on Form 10-Q for the quarter ended June 30, 2017 (“Second Quarter 2017 Form 10-Q”),10-K and “Legislation and Regulation—Letter Agreement with Treasury” in this report.report.
Although Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock and has made a commitment under athe senior preferred stock purchase agreement to provide us with funds to maintain a positive net worth under specified conditions, the U.S. government does not guarantee our securities or other obligations.
Our common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol “FNMA.” Our debt securities are actively traded in the over-the-counter market.
Summary of Our Financial Performance
Quarterly Results
We recognized comprehensive income and net income of $3.0 billion in the third quarter of 2017. In comparison, we recognized comprehensive income of $3.0 billion in the third quarter of 2016, consisting of net income of $3.2 billion, partially offset by other comprehensive loss of $207 million. The decrease in our net income in the third quarter of 2017 compared with the third quarter of 2016 was primarily driven by a shift to credit-related expense from credit-related income, partially offset by higher fee and other income and lower fair value losses.
Year-to-Date Results
We recognized comprehensive income of $8.9 billion in the first nine months of 2017, consisting of net income of $9.0 billion, partially offset by other comprehensive loss of $52 million. In comparison, we recognized comprehensive income of $6.8 billion in the first nine months of 2016, consisting of net income of $7.3 billion, partially offset by other comprehensive loss of $484 million. The increase in our net income in the first nine months of 2017 compared with the first nine months of 2016 was primarily driven by lower fair value losses and higher fee and other income, partially offset by lower credit-related income.
The table below highlights our financial results and key performance data. The performance measures shown below are discussed in later sections of MD&A. See “Consolidated Results of Operations” for more information on our financial results.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 2 |
Financial Results and Key Performance Data
|
| | | | |
| | Third Quarter | First Nine Months |
| | 2017 | 2016 | 2017 | 2016 |
Comprehensive income | $3.0 billion | $3.0 billion | $8.9 billion | $6.8 billion |
| Net income | 3.0 billion | 3.2 billion | 9.0 billion | 7.3 billion |
Net interest income Net interest income in the third quarter and first nine months of 2017 was primarily derived from guaranty fees from our guaranty book of business and remained relatively flat compared with the third quarter and first nine months of 2016. We receive guaranty fee income as compensation for managing the credit risk on loans underlying Fannie Mae MBS held by third parties. | 5.3 billion | 5.4 billion | 15.6 billion | 15.5 billion |
Fee and other income Fee and other income in the third quarter and first nine months of 2017 was primarily the result of a settlement agreement resolving legal claims related to private-label securities we purchased. | 1.2 billion | 0.2 billion | 1.8 billion | 0.6 billion |
Net fair value losses Fair value losses in the third quarter and first nine months of 2017 were primarily due to losses on commitments to sell mortgage-related securities due to an increase in prices as interest rates decreased during the commitment periods. In addition, we recognized fair value losses on our risk management derivatives primarily attributable to declines in long-term swap rates during the periods. Fair value losses in the third quarter of 2016 were primarily due to losses on Connecticut Avenue Securities™ (“CAS”) debt we issued prior to 2016 which, unlike CAS debt we currently issue, is reported at fair value. These losses resulted from tightening spreads between CAS debt yields and LIBOR during the periods. Fair value losses in the first nine months of 2016 were primarily due to losses on risk management derivatives resulting from decreases in the fair value of our pay-fixed derivatives due to declines in longer-term swap rates.
| 0.3 billion | 0.5 billion | 1.0 billion | 5.0 billion |
Credit-related income (expense)
Credit-related expense in the third quarter of 2017 was primarily driven by a provision for credit losses of approximately $1.0 billion resulting from the impact of estimated incurred losses from the hurricanes, partially offset by a benefit for credit losses driven by an increase in actual home prices and the redesignation of mortgage loans from held-for-investment (“HFI”) to held-for-sale (“HFS”). Credit-related income in the first nine months of 2017 was primarily driven by an increase in actual and forecasted home prices, and the redesignation of mortgage loans from HFI to HFS. The credit-related income was partially offset by a provision for credit losses resulting from the impact of estimated incurred losses from the hurricanes.
Credit-related income in the third quarter and first nine months of 2016 was primarily attributable to an increase in home prices, including distressed property valuations. Credit-related income in the first nine months of 2016 was also attributable to a decline in actual and projected mortgage interest rates in the period. | (0.3) billion | 0.6 billion | 1.1 billion | 3.0 billion |
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 3 |
|
| | | | |
| | Third Quarter | First Nine Months |
| | 2017 | 2016 | 2017 | 2016 |
Retained mortgage portfolio as of period end | 245.1 billion | 306.5 billion | 245.1 billion | 306.5 billion |
Single-family guaranty book of business as of period end | 2.9 trillion | 2.8 trillion | 2.9 trillion | 2.8 trillion |
Net worth as of period end | 3.6 billion | 4.2 billion | 3.6 billion | 4.2 billion |
Capital reserve amount applicable to quarterly dividend payment to Treasury | 600 million | 1.2 billion | 600 million | 1.2 billion |
Dividends paid to Treasury in the period
| 3.1 billion | 2.9 billion | 11.4 billion | 6.7 billion |
Impact of Hurricanes Harvey, Irma and Maria. As of September 30, 2017, our allowance for loan losses of $20.2 billion includes an estimate of incurred credit losses from Hurricanes Harvey, Irma and Maria (collectively, the “hurricanes”) of approximately $1.0 billion. Approximately 80% of the estimate relates to our single-family mortgage loans in Puerto Rico which, as of September 30, 2017, had an unpaid principal balance of $8.9 billion. See “Critical Accounting Policies and Estimates” for further information.
Future Volatility. We expect volatility from period to period in our financial results from a number of factors, particularly changes in market conditions that result in fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings. These instruments include derivatives and certain securities whose estimated fair value may fluctuate substantially from period to period because of changes in interest rates, the yield curve, mortgage and credit spreads, and implied volatility, as well as activity related to these financial instruments. We use derivatives to manage the interest rate risk exposure of our net portfolio, which consists of our retained mortgage portfolio, other investments portfolio, and outstanding debt of Fannie Mae. Some of these financial instruments in our net portfolio are not recorded at fair value in our condensed consolidated financial statements, and as a result we may experience accounting gains or losses due to changes in interest rates or other market conditions that may not be indicative of the economic interest rate risk exposure of our net portfolio. See “Risk Management—Market Risk Management, Including Interest Rate Risk Management” for more information. In addition, our credit-related income or expense can vary substantially from period to period based on a number of factors such as changes in actual and expected home prices, fluctuations in interest rates, borrower payment behavior, the types and volume of our loss mitigation activities, the volume of foreclosures completed, the impact of natural disasters, and redesignations of loans from HFI to HFS.
Our Strategy and Business Objectives
Our vision is to be America’s most valued housing partner and to provide liquidity, access to credit and affordability in all U.S. housing markets at all times, while effectively managing and reducing risk to our business, taxpayers and the housing finance system. In support of this vision, we are focused on:
advancing a sustainable and reliable business model that reduces risk to the housing finance system and taxpayers;
providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners; and
serving customer needs by building a company that is efficient, innovative and continuously improving.
Advancing a sustainable and reliable business model that reduces risk to the housing finance system and taxpayers
We have significantly changed our business model since we entered conservatorship in 2008 and our business continues to evolve. We have strengthened our underwriting and eligibility standards and transitioned from a portfolio-focused business to a guaranty-focused business. In addition, we are transferring an increasing portion of the credit risk on our guaranty book of business. These changes have transformed our business model and reduced certain risks of our business as compared with our business prior to entering conservatorship.
Our business also continues to evolve as a result of our many other efforts to build a safer and sustainable housing finance system and to pursue the strategic goals identified by our conservator. See “Business—Legislation and Regulation—Housing Finance Reform—Conservator Developments and Strategic Goals” in our 2016 Form 10-K for a discussion of some of these efforts and FHFA’s strategic goals for our conservatorship.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 4 |
Stronger underwriting and eligibility standards
We strengthened our underwriting and eligibility standards for loans we acquired beginning in late 2008 and 2009. These changes improved the credit quality of our single-family guaranty book of business and contributed to improvement in our credit performance. As of September 30, 2017, 90% of our single-family conventional guaranty book of business consisted of loans acquired since 2009. Our single-family serious delinquency rate has declined or remained flat each quarter since the first quarter of 2010 and was 1.01% as of September 30, 2017.
__________
| |
* | We have acquired HARP loans and other Refi Plus loans under our Refi PlusTM initiative since 2009. Our Refi Plus initiative offers refinancing flexibility to eligible borrowers who are current on their loans and whose loans are owned or guaranteed by us and meet certain additional criteria. HARP loans, which have loan-to-value (“LTV”) ratios at origination greater than 80%, refers to loans we have acquired pursuant to the Home Affordable Refinance Program® (“HARP®”). Other Refi Plus loans, which have LTV ratios at origination of 80% or less, refers to loans we have acquired under our Refi Plus initiative other than HARP loans. Loans we acquire under Refi Plus and HARP are refinancings of loans that were originated prior to June 2009.
|
See “Business Segments—Single-Family Business” for information on our recent single-family acquisitions and the credit performance of our single-family mortgage loans.
Transition to a guaranty-focused business
We have two primary sources of revenues: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets. Our retained mortgage portfolio refers to the mortgage-related assets we own (which excludes the portion of assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties).
As shown in the chart below, in recent years an increasing portion of our net interest income has been derived from guaranty fees, rather than from our retained mortgage portfolio assets. This shift has been driven by both the guaranty fee increases we implemented in 2012 and the reduction of our retained mortgage portfolio. More than 75% of our net interest income for the first nine months of 2017 was derived from the loans underlying our Fannie Mae MBS in consolidated trusts, which primarily generate income through guaranty fees.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 5 |
__________
| |
* | Guaranty fee income reflects the impact of a 10 basis point guaranty fee increase implemented in 2012 pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011, the incremental revenue from which is remitted to Treasury and not retained by us. |
Transferring a portion of the mortgage credit risk on our single-family book of business
In late 2013, we began entering into credit risk transfer transactions with the goal of transferring, to the extent economically sensible, a portion of the mortgage credit risk on some of the recently acquired loans in our single-family book of business in order to reduce the economic risk to us and to taxpayers of future borrower defaults. Our primary method of achieving this objective has been through our CAS and Credit Insurance Risk TransferTM (“CIRTTM”) transactions. In these transactions, we transfer to investors a portion of the mortgage credit risk associated with losses on a reference pool of mortgage loans and in exchange we pay investors a premium that effectively reduces the guaranty fee income we retain on the loans. As of September 30, 2017, $884 billion in outstanding unpaid principal balance of our single-family loans, or 31% of the loans in our single-family conventional guaranty book of business measured by unpaid principal balance, were included in a reference pool for a credit risk transfer transaction. Over time, we expect that a larger portion of our single-family conventional guaranty book of business will be covered by credit risk transfer transactions.
The chart below shows as of the dates specified the total outstanding unpaid principal balance of our single-family loans, as well as the percentage of our total single-family conventional guaranty book of business measured by unpaid principal balance, that were included in a reference pool for a credit risk transfer transaction.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 6 |
The risk in force of these transactions, which refers to the maximum amount of losses that could be absorbed by credit risk transfer investors, was approximately $28 billion as of September 30, 2017. For further discussion of our credit risk transfer transactions, including more detailed information on the portion of the credit risk of these loans we have transferred, see “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk: Single-Family Credit Risk Transfer Transactions.”
Providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners
We continued to provide reliable, large-scale access to affordable mortgage credit to the U.S. housing market and to help struggling homeowners in the third quarter of 2017:
We provided approximately $150 billion in liquidity to the mortgage market in the third quarter of 2017 through our purchases of loans and guarantees of loans and securities. This liquidity enabled borrowers to complete approximately 229,000 mortgage refinancings and approximately 358,000 home purchases, and provided financing for approximately 189,000 units of multifamily housing.
We provided approximately 23,500 loan workouts in the third quarter of 2017 to help homeowners stay in their homes or otherwise avoid foreclosure.
| |
• | We helped borrowers refinance loans, including through our Refi PlusTM initiative, which offers refinancing flexibility to eligible borrowers who are current on their loans, whose loans are owned or guaranteed by us and who meet certain additional criteria. We acquired approximately 17,800 Refi Plus loans in the third quarter of 2017. Refinancings delivered to us through Refi Plus in the third quarter of 2017 reduced borrowers’ monthly mortgage payments by an average of $182.
|
We support affordability in the multifamily rental market. Supporting affordability has become more challenging as rent growth has generally outpaced wage growth in recent years, making units at many income levels less affordable than in prior years. Approximately 90% of the multifamily units we financed in the third quarter of 2017 were affordable to families earning at or below 120% of the median income in their area, providing support for both workforce housing and affordable housing.
Serving customer needs by building a company that is efficient, innovative and continuously improving
We are committed to providing our lender customers with the products, services and tools they need to serve the housing market more effectively and efficiently, as well as continuing to improve our business processes. See “Business—Executive Summary—Our Strategy and Business Objectives” in our 2016 Form 10-K for information on changes we have made to help our customers originate mortgages with increased certainty and efficiency, and lower costs.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 7 |
|
| | |
| | | MD&A | Executive SummaryLegislation and Regulation |
Treasury DrawsLegislation and Dividend Payments
Treasury has made a commitment under a senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. Acting as successor to the rights, titles, powers and privileges of the Board, the conservator has declared and directed us to pay dividends to Treasury on the senior preferred stock on a quarterly basis since we entered into conservatorship in 2008.
The chart below shows the funds we have drawn from Treasury pursuant to the senior preferred stock purchase agreement, as well as the dividend payments we have made to Treasury on the senior preferred stock, since entering into conservatorship.
__________
| |
(1)
| Under the terms of the senior preferred stock purchase agreement, dividend payments we make to Treasury do not offset our prior draws of funds from Treasury, and we are not permitted to pay down draws we have made under the agreement except in limited circumstances. Accordingly, the current aggregate liquidation preference of the senior preferred stock is $117.1 billion, due to the initial $1.0 billion liquidation preference of the senior preferred stock (for which we did not receive cash proceeds) and the $116.1 billion we have drawn from Treasury. Amounts may not sum due to rounding. |
| |
(2)
| Treasury draws are shown in the period for which requested, not when the funds were received by us. We have not requested a draw for any period since 2012. |
The dividend provisions of the senior preferred stock provide for quarterly dividends consisting of the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. This capital reserve amount is $600 million for each quarter of 2017 and will decrease to zero in the first quarter of 2018. These are referred to as “net worth sweep” dividend provisions. As a result of these provisions, we will pay Treasury a dividend of $3.0 billion for the fourth quarter of 2017 by December 31, 2017, calculated based on our net worth of $3.6 billion as of September 30, 2017, less the current capital reserve amount of $600 million, if our conservator declares a dividend in this amount before December 31, 2017. To the extent that these quarterly dividends are not paid, they will accumulate and be added to the liquidation preference of the senior preferred stock. This would not affect the amount of available funding from Treasury under the senior preferred stock purchase agreement.
If we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership. As of the date of this filing, the maximum amount of remaining funding under the agreement is $117.6 billion. If we were to draw additional funds from Treasury under the agreement in a future period, the amount of remaining funding
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 8 |
under the agreement would be reduced by the amount of our draw. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the agreement. For a description of the terms of the senior preferred stock purchase agreement and the senior preferred stock, see “Business—Conservatorship and Treasury Agreements—Treasury Agreements” in our 2016 Form 10-K. See “Risk Factors” in our 2016 Form 10-K for a discussion of the risks associated with our limited and declining capital reserves, and “Outlook” in this report for our current expectations about our future financial results.
In May 2017, the Director of FHFA testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs that a draw by Fannie Mae or Freddie Mac could erode investor confidence, which could affect liquidity and increase the cost of mortgage credit for borrowers. To avoid a draw, the Director indicated that FHFA has the authority to withhold dividend payments without the consent of Treasury, but that his first option would be to work with the Secretary of the Treasury. He further stated that any action FHFA may take to avoid additional draws would not be intended to influence the outcome of housing finance reform or as a step toward “recap and release,” which refers to proposals by some investors to recapitalize Fannie Mae and Freddie Mac with private capital and release them from conservatorship. The Secretary of the Treasury testified before the same committee later that month and stated that it was Treasury’s expectation that dividends should be paid per the terms of the senior preferred stock purchase agreement.
As described in “Legal Proceedings” and “Note 15, Commitments and Contingencies,” several lawsuits have been filed by preferred and common stockholders of Fannie Mae and Freddie Mac against one or more of the United States, Treasury and FHFA challenging actions taken by the defendants relating to the senior preferred stock purchase agreements and the conservatorships of Fannie Mae and Freddie Mac, including challenges to the net worth sweep dividend provisions of the senior preferred stock. We are also a party to some of those lawsuits. We cannot predict the outcome of the lawsuits that remain pending, or the actions the U.S. government (including Treasury or FHFA) may take in response to any ruling or finding in any of these lawsuits.
2017 Market Share
We were the largest issuer of single-family mortgage-related securities in the secondary market in the third quarter of 2017. Our estimated market share of new single-family mortgage-related securities issuances was 39% in both the second quarter and third quarter of 2017, compared with 38% in the third quarter of 2016. The chart below shows our market share of single-family mortgage-related securities issuances in the third quarter of 2017 compared with that of our primary competitors.
We remained a continuous source of liquidity in the multifamily market in the third quarter of 2017. We owned or guaranteed approximately 20% of the outstanding debt on multifamily properties as of June 30, 2017 (the latest date for which information is available).
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 9 |
Outlook
In this section, we present a number of estimates and expectations regarding our future performance, as well as future home prices. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous factors. See “Forward-Looking Statements” and “Risk Factors” in this report and in our 2016 Form 10-K for discussions of factors that could cause actual results to differ materially from our current estimates and expectations. Due to the large size of our guaranty book of business, even small changes in these factors could have a significant impact on our financial results for a particular period.
Financial Results. We continued to be profitable in the third quarter of 2017, with net income of $3.0 billion. We expect to remain profitable on an annual basis for the foreseeable future; however, certain factors, such as changes in interest rates or home prices, could result in significant volatility in our financial results from quarter to quarter or year to year. Our future financial results also will be affected by a number of other factors, including: our guaranty fee rates; the volume of single-family mortgage originations in the future; the size, composition and quality of our retained mortgage portfolio and guaranty book of business; and economic and housing market conditions. Although we expect to remain profitable on an annual basis for the foreseeable future, due to our limited and declining capital reserves (which decrease to zero in the first quarter of 2018) and the potential for significant volatility in our financial results, we could experience a net worth deficit in a future quarter. If we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement to avoid being placed into receivership.
Our expectations for our future financial results do not take into account the impact on our business of potential future legislative or regulatory changes, which could have a material impact on our financial results, particularly the enactment of housing finance reform legislation, corporate income tax reform legislation and changes in accounting standards. For example, the current Administration proposes reducing the U.S. corporate income tax rate. Under applicable accounting standards, a significant reduction in the U.S. corporate income tax rate would require that we record a substantial reduction in the value of our deferred tax assets in the quarter in which the legislation is enacted. Thus, if legislation significantly lowering the U.S. corporate income tax rate is enacted, we expect to incur a significant net loss and net worth deficit for the quarter in which the legislation is enacted and we could potentially incur a net loss for that year. As noted above, if we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership.
See “Risk Factors” in our 2016 Form 10-K and in this report for discussions of the risks associated with our limited and declining capital reserves and the potential impact of legislative and regulatory actions.
Revenues. We have two primary sources of revenues: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets.
Our guaranty fee revenues consist of two primary components: (1) the base guaranty fees that we receive over the life of the loan; and (2) upfront fees we receive at loan acquisition which are amortized over the contractual life of the loan. When mortgage loans prepay faster due to a lower interest rate environment, we typically have higher amortization income. Conversely, when mortgage loans prepay more slowly due to a higher interest rate environment, we typically have lower amortization income. Our guaranty fee revenues increased in recent years primarily driven by: (1) loans with higher base guaranty fees comprising a larger part of our guaranty book of business; and (2) an increase in amortization income as a lower interest rate environment during portions of these years increased prepayments on mortgage loans. We expect loans with lower guaranty fees to continue to liquidate from our book of business and be replaced with new loans that typically have higher guaranty fees, which will contribute to increasing guaranty fee revenues. However, the impact of this trend on our guaranty fee revenues could be more than offset by lower amortization income if mortgage loans prepay more slowly due to a higher interest rate environment.
We expect the size of our retained mortgage portfolio to continue to decrease in 2017, which will continue to negatively impact our net interest income and net revenues.
Factors that may affect our future revenues include: changes to guaranty fee pricing we may make in the future and their impact on our competitive environment and guaranty fee revenues; economic and housing market conditions, including changes in interest rates and home prices; the size, composition and quality of our guaranty
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 10 |
book of business; the life of the loans in our guaranty book of business; the size, composition and quality of our retained mortgage portfolio; our market share; and legislative and regulatory changes.
Home Prices. Based on our home price index, we estimate that home prices on a national basis increased by 1.1% in the third quarter of 2017 and by 5.3% in the first nine months of 2017. We expect the rate of home price appreciation on a national basis in 2017 will be similar to the estimated 5.7% rate in 2016. We also expect significant regional variation in the timing and rate of home price growth.
Credit Losses. Our credit losses, which include our charge-offs, net of recoveries, reflect our realization of losses on our loans. Our credit losses were $2.4 billion for the first nine months of 2017, down from $3.0 billion for the first nine months of 2016. We expect our credit losses for 2017 to be lower than for 2016; however, we expect a significantly smaller decline in credit losses for 2017 than the $7.0 billion decline for 2016. See “Consolidated Results of Operations—Credit-Related Income (Expense)—Credit Loss Performance Metrics” for a discussion of our credit losses for the third quarter and first nine months of 2017 and 2016.
Loss Reserves. Our allowance for loan losses was $20.2 billion as of September 30, 2017, down from $23.5 billion as of December 31, 2016. Our loss reserves declined in recent years and are expected to decline further in 2017. For more information on the factors that contributed to changes in our loss reserves in the third quarter and first nine months of 2017, see “Consolidated Results of Operations—Credit-Related Income (Expense),” “Consolidated Balance Sheet Analysis—Mortgage Loans and Allowance for Loan Losses” and “Critical Accounting Policies and Estimates.”
|
| | | | |
Legislation and Regulation |
The information in this section updates and supplements information regarding legislationlegislative and regulationregulatory developments affecting our business set forth in “Business—LegislationConservatorship, Treasury Agreements and Housing Finance Reform” and “Business—Charter Act and Regulation” in our 20162018 Form 10-K, andas well as in “MD&A—Legislation and Regulation” in our Form 10-Q for the quarter ended March 31, 2019 (“First Quarter 20172019 Form 10-Q”) and our Form 10-Q and in our for the quarter ended June 30, 2019 (“Second Quarter 20172019 Form 10-Q.10-Q”). Also see “Risk Factors” in this report and in our 20162018 Form 10-K for discussions of risks relating to legislative and regulatory matters.
Housing Finance Reform
In March 2019, President Trump issued a memorandum directing the Secretary of the Treasury to develop a plan for administrative and legislative reforms relating to Fannie Mae and Freddie Mac (collectively referred to as the “government-sponsored enterprises” or the “GSEs”), as described in our First Quarter 2019 Form 10-Q.
On September 5, 2019, Treasury released its plan to reform the housing finance system. The Treasury Housing Reform Plan (the “Treasury plan”) is far-reaching in scope and could have a significant impact on our structure, our role in the secondary mortgage market, our capitalization, our business and our competitive environment. The Treasury plan includes 49 recommended reforms—31 proposed administrative reforms and 18 proposed legislative reforms—to define a limited role for the federal government in the housing finance system, enhance taxpayer protections against future bailouts, and promote competition in the housing finance system. The Treasury plan includes recommendations relating to ending our conservatorship, amending our senior preferred stock purchase agreement with Treasury, considering additional restrictions and requirements on our business, and many other matters. While the Treasury plan states that it is Treasury’s preference and recommendation that Congress continues to considerenact comprehensive housing finance reform legislation, the plan also states that “reform should not and need not wait on Congress. . . . Pending legislation, Treasury will continue to support FHFA’s administrative actions to enhance regulation of the GSEs, promote private sector competition, and satisfy the preconditions set forth in this plan for ending the GSEs’ conservatorships.”
The Treasury plan contemplates FHFA ending the conservatorships of each of Fannie Mae and Freddie Mac when the GSE has met specified preconditions, which the plan recommends should include, at a minimum, that:
FHFA has prescribed regulatory capital requirements for both GSEs;
FHFA has approved the GSE’s capital restoration plan, and the GSE has retained or raised sufficient capital and other loss-absorbing capacity to operate in a safe and sound manner;
the senior preferred stock purchase agreement between Treasury and the GSE has been amended to:
| |
| ◦ | require the GSE to fully compensate the federal government in the form of an ongoing payment for the ongoing support provided to the GSE under the senior preferred stock purchase agreement; |
| |
| ◦ | focus the GSE’s activities on its core statutory mission and otherwise tailor government support to the underlying rationale for that support; |
| |
| ◦ | further limit the size of the GSE’s retained mortgage portfolio; |
| |
| ◦ | subject the GSE to heightened prudential requirements and safety and soundness standards, including increased capital requirements, designed to prevent a future taxpayer bailout and minimize risks to financial stability; and |
| |
| ◦ | ensure that the risk posed by the GSE’s activities is calibrated to the amount of the remaining commitment under the senior preferred stock purchase agreement; |
appropriate provision has been made to ensure there is no disruption to the market for the GSE’s MBS, including its previously-issued MBS;
FHFA, after consulting with the Financial Stability Oversight Council, has determined that the heightened prudential requirements incorporated into the amended senior preferred stock purchase agreements are, together with the requirements and restrictions imposed by FHFA in its capacity as regulator, appropriate to minimize risks to financial stability; and
any other conditions that FHFA, in its discretion, determines are necessary to ensure that the GSE would operate in a safe and sound manner after the conservatorship, including as to the GSE’s compliance with FHFA’s directives or other requirements and also as to the build out of FHFA’s supervisory function.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 4 |
|
| | |
| MD&A | Legislation and Regulation |
The Treasury plan also contemplates Treasury and FHFA adjusting Fannie Mae’s and Freddie Mac’s senior preferred stock purchase agreements with Treasury to allow each company to retain and raise capital. The Treasury plan does not specify how Fannie Mae or Freddie Mac would recapitalize but states that potential approaches to recapitalization could include one or more of the following, among other options:
eliminating all or a portion of the liquidation preference of Treasury’s senior preferred stock or exchanging all or a portion of that interest for common stock or other interests in the GSE;
adjusting the net worth sweep dividend on the senior preferred stock to allow the GSE to retain earnings in excess of the $3 billion capital reserve in effect when the Treasury plan was released, with appropriate compensation to Treasury for any deferred or forgone dividends;
issuing shares of common or preferred stock, and perhaps also convertible debt or other loss-absorbing instruments, through private or public offerings, perhaps in connection with the exercise of Treasury’s warrants for 79.9% of the GSE’s common stock;
negotiating exchange offers for one or more classes of the GSE’s existing junior preferred stock; and
placing the GSE in receivership to facilitate a restructuring of the capital structure.
The Treasury plan recommends that Treasury’s commitment to provide funding under the senior preferred stock purchase agreement should be replaced with legislation that authorizes an explicit, paid-for guarantee backed by the full faith and credit of the Federal Government that is limited to the timely payment of principal and interest on qualifying MBS. The Treasury plan further recommends that, pending legislation, even after conservatorship Treasury should maintain its ongoing commitment to support each GSE’s single-family and multifamily mortgage-backed securities through the senior preferred stock purchase agreements, as amended as contemplated by the plan.
The Treasury plan contains recommendations for legislative and administrative reforms to limit our single-family activities and restrict our multifamily footprint. For example, the plan recommends that FHFA assess whether each of our current single-family products, services and other activities, including our support for cash-out refinancings, investor loans, and higher principal balance loans, should continue to benefit from support under our senior preferred stock purchase agreement. It also recommends that FHFA and Treasury consider amendments to the senior preferred stock purchase agreement to further limit the type and volume of multifamily loans we guarantee. The Treasury plan also contains a number of other recommendations that could resultsignificantly affect our business and competitive environment if implemented. For example, the Treasury plan recommends that: FHFA conduct assessments of our single-family and multifamily underwriting criteria; FHFA and the U.S. Department of Housing and Urban Development (“HUD”) coordinate to identify and mitigate areas of duplication in significant changes in our structuregovernment support for affordable housing; and role in the future. AsConsumer Financial Protection Bureau (the “CFPB”) amend its ability-to-repay rule to establish a result, therebright-line safe harbor that replaces the “qualified mortgage” patch for GSE-eligible loans.
There continues to be significant uncertainty regarding the timing, content and impact of future legislative and regulatory actions affecting us, including the enactment of our company.housing finance reform legislation and the implementation of all or any portion of the Treasury plan. See “Risk Factors” in this report and in our 2018 Form 10-K for a discussiondescription of the risks toassociated with our business relating to the uncertain future of our company.and potential housing finance reform.
The Future of LIBOR and Alternative Reference RatesLetter Agreement with Treasury
On JulySeptember 27, 2017,2019, we, through FHFA acting on our behalf in its capacity as our conservator, and Treasury entered into a letter agreement modifying the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced its intention to stop persuading or compellingdividend and liquidation preference provisions of the groupsenior preferred stock held by Treasury. These modifications and other specified provisions of major banks that sustains LIBOR to submit rate quotations after 2021. the letter agreement are described below.
| |
| • | Modification to Dividend Provisions—Increase in Applicable Capital Reserve Amount. 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 the applicable capital reserve amount. The letter agreement modified the dividend provisions of the senior preferred stock to increase the applicable capital reserve amount from $3 billion to $25 billion, effective for dividend periods beginning July 1, 2019. |
As a result itof this change to the senior preferred stock dividend provisions:
| |
| ◦ | No dividends were payable on the senior preferred stock for the third quarter of 2019, as our net worth of $6.4 billion as of June 30, 2019 was lower than the $25 billion capital reserve amount. |
| |
| ◦ | No dividends will be payable on the senior preferred stock for the fourth quarter of 2019, as our net worth of $10.3 billion as of September 30, 2019 is lower than the $25 billion capital reserve amount. |
| |
| • | Modification to Liquidation Preference Provisions—Increase in Liquidation Preference. The letter agreement provides that, on September 30, 2019, and at the end of each fiscal quarter thereafter, the liquidation preference of the senior preferred stock will increase by an amount equal to the increase in our net worth, if any, during the immediately prior fiscal quarter, until such time as the liquidation preference has increased by $22 billion. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 5 |
|
| | |
| MD&A | Legislation and Regulation |
As a result of this change to the senior preferred stock liquidation preference provisions:
| |
| ◦ | The aggregate liquidation preference of the senior preferred stock increased from $123.8 billion as of June 30, 2019 to $127.2 billion as of September 30, 2019, due to the $3.4 billion increase in our net worth during the second quarter of 2019. |
| |
| ◦ | The aggregate liquidation preference of the senior preferred stock will increase from $127.2 billion as of September 30, 2019 to $131.2 billion as of December 31, 2019, due to the $4.0 billion increase in our net worth during the third quarter of 2019. |
| |
| • | New Certificate of Designation. Pursuant to the letter agreement, Fannie Mae replaced the Certificate of Designation for the senior preferred stock to reflect the revised dividend provisions, effective September 30, 2019. The new Certificate of Designation is filed as Exhibit 4.1 to this report. |
| |
| • | Agreement to Amend Senior Preferred Stock Purchase Agreement to Enhance Taxpayer Protections. The letter agreement provides that we and Treasury agree to negotiate and execute an additional amendment to the senior preferred stock purchase agreement that further enhances taxpayer protections by adopting covenants broadly consistent with recommendations for administrative reform contained in the Treasury plan. |
As described in “Housing Finance Reform,” the Treasury plan recommends that the GSEs have a capital restoration plan that provides for sufficient capital and other loss-absorbing capacity to operate in a safe and sound manner. In announcing the letter agreement, Treasury noted that subsequent amendments to the senior preferred stock purchase agreement may be appropriate to facilitate the implementation of any eventual recapitalization plan.
We describe the terms of the senior preferred stock and the related senior preferred stock purchase agreement with Treasury, prior to the modifications described above, in our 2018 Form 10-K under the heading “Business—Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements.”
New FHFA Strategic Plan for Conservatorships and 2020 Scorecard
On October 28, 2019, FHFA released its 2019 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac (the “2019 strategic plan”), along with its 2020 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions (the “2020 scorecard”), which is uncertain whether LIBOR will continue to be quoted after 2021. The Federal Reserve convened a group of private-market participants, known as the Alternative Reference Rate Committee, to identify a set of alternative U.S. dollar reference interest ratescorporate performance objectives that define our key priorities for 2020 and an adoptionalign with the 2019 strategic plan. According to the plan, “[FHFA’s] end-state vision is for those alternative rates. In June 2017the [GSEs] to return to operating as fully-private companies within a competitive, liquid, efficient, and resilient housing finance system, while a strengthened and independent FHFA ensures they have the capital reserves, risk management capabilities, corporate governance, and regulatory oversight that committee recommended an alternative reference rate whichare appropriate for their size, risk, and systemic importance outside of conservatorship.” FHFA indicated that implementing the Federal Reserve Bank of New York would publish that,2019 strategic plan and 2020 scorecard, combined with the framework for reform put forward in the consensus viewTreasury plan, will “reduce the role of government in the mortgage market, protect taxpayers, support sustainable homeownership and affordable rental housing, and foster a mortgage finance market that is stable and liquid through the cycle.”
The new strategic plan, which replaces FHFA’s 2014 strategic plan, and the 2020 scorecard identify three broad objectives to ensure that Fannie Mae and Freddie Mac:
| |
| 1. | Focus on their core mission responsibilities to foster competitive, liquid, efficient, and resilient (“CLEAR”) national housing finance markets that support sustainable homeownership and affordable rental housing; |
| |
| 2. | Operate in a safe and sound manner appropriate for entities in conservatorship; and |
| |
| 3. | Prepare for their eventual exits from conservatorship. |
See “Risk Factors” in this report and in our 2018 Form 10-K for a description of the Alternative Reference Rate Committee, wouldrisks associated with our uncertain future and potential housing finance reform. For information on the objectives in the 2020 scorecard, see our Current Report on Form 8-K filed with the Securities and Exchange Commission (‘‘SEC’’) on October 29, 2019.
Revised Multifamily Business Volume Cap
On September 13, 2019, FHFA announced revisions to the structure of the loan acquisition volume caps applicable to Fannie Mae’s and Freddie Mac’s multifamily loan purchases. Previously, FHFA’s 2019 conservatorship scorecard included an objective to maintain the dollar volume of new multifamily business for each company at or below $35 billion for the year, excluding certain targeted affordable and underserved market business segments such as loans financing energy or water efficiency improvements. The new multifamily loan purchase caps, which replaced the prior caps effective October 1, 2019, are $100 billion for all new multifamily business, with no exclusions, for each of Fannie Mae and Freddie Mac for the five-quarter period beginning in the fourth quarter of 2019 through the fourth quarter of 2020. In addition, FHFA directed that at least 37.5% of each company’s multifamily business during that period must be its preferred alternative reference rate. At this time, it is not possiblemission-driven, affordable housing, pursuant to predict the effect of these developments. Because we routinely engage in transactions involving financial instruments that reference LIBOR, these developments could have a material impact on us.FHFA’s guidelines for mission-driven loans.
2016
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 6 |
|
| | |
| MD&A | Legislation and Regulation |
2018 Housing Goals Performance
We are subject to housing goals, which establish specified requirements for our mortgage acquisitions relating to affordability or location. Our single-family performance is measured against the lower of benchmarks established by FHFA or goals-qualifying originations in the primary mortgage market. Multifamily goals are established as a number of units to be financed.
In October 2017, after the release of data reported under the Home Mortgage Disclosure Act,September 2019, FHFA notified us that it had preliminarily determined that we met threeall of our five single-family housing goals and all of our multifamily housing goals for 2016. For2018. See “Business—Charter Act and Regulation—GSE Act and Other Regulation—Housing Goals” in our 2018 Form 10-K and “MD&A—Legislation and Regulation—2018 Housing Goals Performance” in our First Quarter 2019 Form 10-Q for more information regarding our housing goals.
Final Rule on Credit Score Models
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the “Economic Growth Act”) provides that, if we condition the single-family very low-income families home purchase goal,of a mortgage loan on a borrower's credit score, that credit score must be produced by a model that has been validated and approved by us based on the standards and criteria in the Economic Growth Act and FHFA regulations.On August 16, 2019, FHFA published a final rule on the validation and approval of credit score models, which became effective in October 2019. The final rule establishes standards and criteria, and outlines a four-phase process by which we and Freddie Mac should validate and approve third-party credit score models. The credit score models will be evaluated for factors such as accuracy, reliability and integrity, as well as impacts on fair lending and the mortgage industry. Once our evaluation is complete, we must submit the proposed third-party credit score models to FHFA for a final decision. The final rule does not address the time frame for industry adoption and implementation of the new credit score models.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 117 |
|
| | |
| MD&A | Uniform Mortgage-Backed Securities |
Uniform Mortgage-Backed Securities
Overview
On June 3, 2019, we and Freddie Mac began issuing single-family uniform mortgage-backed securities, or “UMBSTM.” We also began using the common securitization platform operated by Common Securitization Solutions, LLC (“CSS”), a limited liability company we own jointly with Freddie Mac, to perform certain aspects of the securitization process for our single-family Fannie Mae MBS issuances beginning in May 2019. This represented the final implementation of the Single Security Initiative that we, Freddie Mac and FHFA began working on in 2014 to develop a single common mortgage-backed security issued by both Fannie Mae and Freddie Mac to finance fixed-rate mortgage loans backed by single-family properties. The issuance of UMBS and use of the common securitization platform represent significant changes for the mortgage market and for our securitization operations and business.
UMBS and Structured Securities
Each of Fannie Mae and Freddie Mac 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 to-be-announced (“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.
| |
| • | 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 SupersTM, which are single-class resecuritizations, and real estate mortgage investment conduit securities (“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. |
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 UMBS, whether issued before or after the June 3, 2019 Single Security Initiative implementation date. 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.
When we issue a structured security backed in whole or part by Freddie Mac securities, we provide a new and separate guaranty of principal and interest on the newly-formed structured security. If Freddie Mac were to fail 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.
See “Risk Factors” in this report and in our 2018 Form 10-K, “MD&A—Single Security Initiative & Common Securitization Platform” in our Second Quarter 2019 Form 10-Q, and “Risk Management—Institutional Counterparty Credit Risk Management—Counterparty Credit Risk Exposure arising from the Resecuritization of Freddie Mac-issued securities” in this report for a discussion of the risks to our business associated with the Single Security Initiative, the resecuritization of Freddie Mac-issued securities, and the common securitization platform.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 8 |
|
| | |
| MD&A | Key Market Economic Indicators |
Key Market Economic Indicators
The graphs below display certain macroeconomic indicators that can significantly influence our business and financial results.
Selected Benchmark Interest Rates
|
| | |
———3-month LIBOR(1) | ———2-year swap rate(1) | ———10-year swap rate(1) |
———10-year Treasury rate(1) | ———30-year Fannie Mae MBS par coupon rate(1) | ———30-year FRM rate(2)
|
| |
(1) | According to Bloomberg. |
| |
(2) | Refers to the U.S. weekly average fixed-rate mortgage rate according to Freddie Mac's Primary Mortgage Market Survey®. These rates are reported using the latest available data for a given period. |
How Interest Rates Can Affect Our Financial Results
| |
| • | Net interest income. In a rising interest rate environment, our mortgage loans tend to prepay more slowly, which typically results in lower net amortization income from cost basis adjustments on mortgage loans and related debt. Conversely, in a declining interest rate environment, our mortgage loans tend to prepay faster, typically resulting in higher net amortization income from cost basis adjustments on mortgage loans and related debt. |
| |
| • | Fair value gains (losses). We have exposure to fair value gains and losses resulting from changes in interest rates, primarily through our risk management derivatives and mortgage commitment derivatives, which we mark to market. Generally, we experience fair value losses when swap rates decrease and fair value gains when swap rates increase; however, because the composition of our derivative position varies across the yield curve, different yield curve changes (for example, parallel, steepening or flattening) will generate different gains and losses. |
| |
| • | Credit-related income (expense). Increases in mortgage interest rates tend to lengthen the expected lives of our modified loans, which generally increases the impairment and provision for credit losses on such loans. Decreases in mortgage interest rates tend to shorten the expected lives of our modified loans, which reduces the impairment and provision for credit losses on such loans. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 9 |
|
| | |
| | MD&A | Legislation and RegulationKey Market Economic Indicators |
preliminarily determined
|
|
| Home prices and how they can affect our financial results |
• We expect home price appreciation on a national basis to moderate in the remainder of this year and 2020, as compared with 2018. We also expect significant regional variation in the timing and rate of home price growth. For further discussion on housing activity, see “Single-Family Business—Single-Family Mortgage Market” and “Multifamily Business—Multifamily Mortgage Market.”• Actual and forecasted home prices impact our provision or benefit for credit losses.• Changes in home prices affect the amount of equity that borrowers have in their homes. Borrowers with less equity typically have higher delinquency and default rates.• As home prices increase, the severity of losses we incur on defaulted loans that we hold or guarantee decreases because the amount we can recover from the properties securing the loans increases. Decreases in home prices increase the losses we incur on defaulted loans.
|
| |
(1) | Calculated internally using property data on loans purchased by Fannie Mae, Freddie Mac, and other third-party home sales data. Fannie Mae’s home price index is a weighted repeat transactions index, measuring average price changes in repeat sales on the same properties. Fannie Mae’s home price index excludes prices on properties sold in foreclosure. Fannie Mae’s home price estimates are based on preliminary data and are subject to change as additional data become available. |
|
|
| How housing activity can affect our financial results |
• Homebuilding has typically been a leading indicator of broader economic indicators, such as the U.S. Gross Domestic Product, or GDP, and the unemployment rate. Residential construction activity tends to soften prior to a weakness in the economy and can improve prior to a recovery in economic activity. Broader economic indicators can affect several mortgage market factors including the demand for both single-family and multifamily housing and the level of loan delinquencies.• Fewer housing starts results in fewer properties being available for purchase, which can lower the volume of originations in the mortgage market.• Construction activity can also affect credit losses. When the pace of construction does not meet demand, the resulting growth in home prices can increase the risk profile of newly acquired home purchase loans and increase the risk of default if home prices subsequently decline. Reduced construction may also coincide with a broader deterioration in housing conditions, which may result in higher levels of delinquencies and greater losses on defaulted loans. |
| |
(2) | According to U.S. Census Bureau and subject to revision. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 10 |
|
| | |
| MD&A | Key Market Economic Indicators |
GDP, Unemployment Rate and Personal Income
| |
(1) | According to the U.S. Bureau of Labor Statistics and subject to revision. |
| |
(2) | According to the U.S. Bureau of Economic Analysis, calculated by the Federal Reserve Bank of St. Louis and subject to revision. |
| |
(3) | GDP growth for periods prior to the third quarter of 2019 is based on the quarterly series calculated by the Bureau of Economic Analysis and is subject to revision. GDP growth for the third quarter of 2019 is based on Fannie Mae’s forecast. |
How GDP, the unemployment rate and personal income can affect our performance was 5.2% of our 2016 acquisitions offinancial results
Changes in GDP, the unemployment rate and personal income can affect several mortgage market factors, including the demand for both single-family owner-occupied purchase money mortgage loans, which failed to meetand multifamily housing and the FHFA-established benchmark of 6% or the overall market level of 5.4% for 2016. Forloan delinquencies.
Decreases in the single-family low-income families refinancing goal, FHFA preliminarily determined that our performance was 19.5%unemployment rate typically result in lower levels of our 2016 acquisitions of single-family owner-occupied refinance mortgage loans,delinquencies, which failed to meet the FHFA-established benchmark of 21% or the overall market level of 19.8% for 2016.
If FHFA’s final determination is that we did not meet these housing goals, it will determine whether the goals were feasible. If FHFA finds that these goals were feasible, we may become subjectoften correlate to a housing plan thatdecrease in credit losses.
Slower growth or outright declines in personal income heightens the risk of delinquency by reducing homeowners’ ability to pay their mortgages. Slower income growth could require us to take additional steps, which may increase our credit lossesalso negatively impact affordability, constraining home sales and credit-related expenses. 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.mortgage originations.
See “Business—Legislation and Regulation—GSE Act and Other Regulation of Our Business—Housing Goals”“Risk Factors” in our 20162018 Form 10-K and this report for a more detailedfurther discussion of risks to our business and financial results associated with interest rates, home prices, housing goals.activity and economic conditions.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 11 |
|
| | |
| MD&A | Consolidated Results of Operations |
Consolidated Results of Operations
|
| | | | |
Consolidated Results of Operations |
This section provides a discussion of our condensed consolidated results of operations and should be read together with our condensed consolidated financial statements, including the accompanying notes.
Our long-term financial performance will depend on many factors, including:
the size of and our share of the U.S. mortgage market, which in turn will depend upon such factors as population growth, household formation and home price appreciation;
borrower performance and interest rate movements; and
actions by FHFA, the Administration and Congress relating to our business and housing finance reform, including the capital requirements that will be applicable to us, our ongoing financial obligations to Treasury and our competitive environment.
Quarterly fluctuations in acquisition volumes, market share, guaranty fees, or acquisition credit characteristics in any one period have limited impact on the size and stability of our conventional guaranty book of business and the associated revenue, profitability, and credit quality.
| | | Table 1: Summary of Condensed Consolidated Results of Operations | |
| Summary of Condensed Consolidated Results of Operations | | Summary of Condensed Consolidated Results of Operations |
| | For the Three Months | | For the Nine Months | | For the Three Months Ended September 30, | | | | For the Nine Months Ended September 30, | | |
| | Ended September 30, | | Ended September 30, | | | | |
| | 2017 | | 2016 | | Variance | | 2017 | | 2016 | | Variance | | 2019 | | 2018 | | Variance | | 2019 | | 2018 | | Variance |
| | (Dollars in millions) | | (Dollars in millions) |
| Net interest income | $ | 5,274 |
| | $ | 5,435 |
| | $ | (161 | ) | | $ | 15,622 |
| | $ | 15,490 |
| | $ | 132 |
| | $ | 5,229 |
| | $ | 5,369 |
| | $ | (140 | ) | | $ | 15,112 |
| | $ | 15,978 |
| | $ | (866 | ) |
| Fee and other income | 1,194 |
| | 175 |
| | 1,019 |
| | 1,796 |
| | 552 |
| | 1,244 |
| | 402 |
| | 271 |
| | 131 |
| | 875 |
| | 830 |
| | 45 |
|
| Net revenues | 6,468 |
| | 5,610 |
| | 858 |
| | 17,418 |
| | 16,042 |
| | 1,376 |
| | 5,631 |
| | 5,640 |
| | (9 | ) | | 15,987 |
| | 16,808 |
| | (821 | ) |
| Investment gains, net | 313 |
| | 467 |
| | (154 | ) | | 689 |
| | 934 |
| | (245 | ) | | 253 |
| | 166 |
| | 87 |
| | 847 |
| | 693 |
| | 154 |
|
| Fair value losses, net | (289 | ) | | (491 | ) | | 202 |
| | (1,020 | ) | | (4,971 | ) | | 3,951 |
| |
| Fair value gains (losses), net | | | (713 | ) | | 386 |
| | (1,099 | ) | | (2,298 | ) | | 1,660 |
| | (3,958 | ) |
| Administrative expenses | (664 | ) | | (661 | ) | | (3 | ) | | (2,034 | ) | | (2,027 | ) | | (7 | ) | | (749 | ) | | (740 | ) | | (9 | ) | | (2,237 | ) | | (2,245 | ) | | 8 |
|
| Credit-related income (expense): | | | | | | | | | | | | |
| Benefit (provision) for credit losses | (182 | ) | | 673 |
| | (855 | ) | | 1,481 |
| | 3,458 |
| | (1,977 | ) | |
| Credit-related income: | | | | | | | | | | | | | |
| Benefit for credit losses | | | 1,857 |
| | 716 |
| | 1,141 |
| | 3,732 |
| | 2,229 |
| | 1,503 |
|
| Foreclosed property expense | (140 | ) | | (110 | ) | | (30 | ) | | (391 | ) | | (507 | ) | | 116 |
| | (96 | ) | | (159 | ) | | 63 |
| | (364 | ) | | (460 | ) | | 96 |
|
| Total credit-related income (expense) | (322 | ) | | 563 |
| | (885 | ) | | 1,090 |
| | 2,951 |
| | (1,861 | ) | |
| Total credit-related income | | | 1,761 |
| | 557 |
| | 1,204 |
| | 3,368 |
| | 1,769 |
| | 1,599 |
|
| Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) fees | (531 | ) | | (465 | ) | | (66 | ) | | (1,552 | ) | | (1,358 | ) | | (194 | ) | | (613 | ) | | (576 | ) | | (37 | ) | | (1,806 | ) | | (1,698 | ) | | (108 | ) |
| Other expenses, net | (427 | ) | | (300 | ) | | (127 | ) | | (1,100 | ) | | (818 | ) | | (282 | ) | | (571 | ) | | (377 | ) | | (194 | ) | | (1,514 | ) | | (946 | ) | | (568 | ) |
| Income before federal income taxes | 4,548 |
| | 4,723 |
| | (175 | ) | | 13,491 |
| | 10,753 |
| | 2,738 |
| | 4,999 |
| | 5,056 |
| | (57 | ) | | 12,347 |
| | 16,041 |
| | (3,694 | ) |
| Provision for federal income taxes | (1,525 | ) | | (1,527 | ) | | 2 |
| | (4,495 | ) | | (3,475 | ) | | (1,020 | ) | | (1,036 | ) | | (1,045 | ) | | 9 |
| | (2,552 | ) | | (3,312 | ) | | 760 |
|
| Net income | $ | 3,023 |
| | $ | 3,196 |
| | $ | (173 | ) | | $ | 8,996 |
| | $ | 7,278 |
| | $ | 1,718 |
| | $ | 3,963 |
| | $ | 4,011 |
| | $ | (48 | ) | | $ | 9,795 |
| | $ | 12,729 |
| | $ | (2,934 | ) |
| Total comprehensive income | $ | 3,048 |
| | $ | 2,989 |
| | $ | 59 |
| | $ | 8,944 |
| | $ | 6,794 |
| | $ | 2,150 |
| | $ | 3,977 |
| | $ | 3,975 |
| | $ | 2 |
| | $ | 9,703 |
| | $ | 12,372 |
| | $ | (2,669 | ) |
Net Interest Income
We have two primary sources of net interest income:
the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and
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.
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 pricing 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 our loans underlying our Fannie Mae MBS in consolidated trusts on our consolidated balance sheets. Those guaranty fees are
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 12 |
|
| | |
| | MD&A | Consolidated Results of Operations |
upfront fees that we receive at the time of loan acquisition, primarily related to single-family loan level pricing adjustments and other fees we receive from lenders, which are amortized over the contractual life of the loan.
Guaranty fees include revenues generated by the 10 basis point increase in guaranty fees we implemented in 2012 pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us. We recognize almost all of our guaranty fee revenue in net interest income due to the consolidation of the substantial majority of loans underlying our Fannie Mae MBS in consolidated trusts on our balance sheet. Those guaranty fees are the primary component of the difference between the interest income on loans in consolidated trusts and the interest expense on the debt of consolidated trusts.
Table 2The 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.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Components of Net Interest Income |
| | | For the Three Months Ended September 30, | | | | For the Nine Months Ended September 30, | | | |
| | | 2019 | | 2018 | | Variance | | 2019 | | 2018 | | Variance | |
| | | (Dollars in millions) |
| Net interest income from guaranty book of business: | | | | | | | | | | | | | |
| Base guaranty fee income, net of TCCA | | $ | 2,371 |
| | $ | 2,153 |
| | $ | 218 |
| | $ | 6,942 |
| | $ | 6,352 |
| | $ | 590 |
| |
Base guaranty fee income related to TCCA(1) | | 613 |
| | 576 |
| | 37 |
| | 1,806 |
| | 1,698 |
| | 108 |
| |
| Net amortization income | | 1,475 |
| | 1,508 |
| | (33 | ) | | 3,828 |
| | 4,503 |
| | (675 | ) | |
| Total net interest income from guaranty book of business | | 4,459 |
| | 4,237 |
| | 222 |
| | 12,576 |
| | 12,553 |
| | 23 |
| |
Net interest income from portfolios(2) | | 770 |
| | 1,132 |
| | (362 | ) | | 2,536 |
| | 3,425 |
| | (889 | ) | |
| Total net interest income | | $ | 5,229 |
| | $ | 5,369 |
| | $ | (140 | ) | | $ | 15,112 |
| | $ | 15,978 |
| | $ | (866 | ) | |
| |
(1) | 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) | Includes interest income from assets held in our retained mortgage portfolio and our other investments portfolio, as well as other assets used to generate lender liquidity. Also includes interest expense on our outstanding Connecticut Avenue Securities® of $356 million and $366 million for the three months ended September 30, 2019 and 2018, respectively, and $1.1 billion and $1.0 billion for the first nine months of 2019 and 2018, respectively. |
Net interest income declined in the third quarter and first nine months of 2019 compared with the third quarter and first nine months of 2018, driven by lower net interest income from portfolios and a decline in net amortization income, partially offset by higher base guaranty fee income.
Net interest income from portfolios decreased in the third quarter and first nine months of 2019 compared with the third quarter and first nine months of 2018 primarily due to sales of reperforming loans in our loss mitigation portfolio as well as liquidations, which reduced the average balance of our retained mortgage portfolio. This was partially offset by increased interest income on our other investments portfolio due to higher short-term interest rates on our federal funds sold and securities purchased under agreements to resell or similar arrangements, and a higher average balance of non-mortgage securities. See “Retained Mortgage Portfolio” for more information on our loss mitigation portfolio.
Net interest income from base guaranty fees increased in the third quarter and first nine months of 2019 compared with the third quarter and first nine months of 2018 due to an increase in the size of our guaranty book of business and loans with higher base guaranty fees comprising a larger part of our guaranty book of business.
Net amortization income decreased in the first nine months of 2019 compared with the first nine months of 2018 primarily due to a sharp decline in prepayment volumes in the first quarter of 2019, which resulted in lower amortization of cost basis adjustments on mortgage loans of consolidated trusts and the related debt.
Analysis of Deferred Amortization Income
We initially recognize mortgage loans and debt of consolidated trusts in our condensed consolidated balance sheet at fair value. The difference between the initial fair value and the carrying value of these instruments is recorded as cost basis adjustments, either as premiums or discounts. These cost basis adjustments are amortized as yield adjustments over the contractual lives of the loans or debt. On a net basis, for mortgage loans and debt of consolidated trusts, we are in a premium position with respect to debt of consolidated trusts, which represents deferred income we will recognize in our condensed consolidated statements of operations and comprehensive income as amortization income in future periods.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 13 |
|
| | |
| MD&A | Consolidated Results of Operations |
Deferred Income Represented by Net Premium Position on
Debt of Consolidated Trusts
(Dollars in billions)
The timing of when we recognize amortization income can vary based on a number of factors, the most significant of which is interest rates. In a rising interest rate environment, our mortgage loans tend to prepay more slowly, which typically results in lower net amortization income. Conversely, in a declining interest rate environment, our mortgage loans tend to prepay faster, typically resulting in higher net amortization income.
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 amortized cost. When daily average balance information is not available, such as for mortgage loans, we use monthly averages.Table 3 displays the change in our net interest income between periods and the extent to which that variance is attributable to: (1) changes in the volume of our interest-earning assets and interest-bearing liabilities or (2) changes in the interest rates of these assets and liabilities.
| | | Table 2: Analysis of Net Interest Income and Yield | |
| Analysis of Net Interest Income and Yield | | Analysis of Net Interest Income and Yield |
| | For the Three Months Ended September 30, | | For the Three Months Ended September 30, |
| | 2017 | | 2016 | | 2019 | | 2018 |
| | 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 | | Average
Balance | | Interest
Income/
(Expense) | | Average
Rates
Earned/Paid |
| | (Dollars in millions) | | (Dollars in millions) |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage loans of Fannie Mae | $ | 181,445 |
| | $ | 1,879 |
| | 4.14 | % | | $ | 226,334 |
| | $ | 2,357 |
| | 4.17 | % | | $ | 119,887 |
| | $ | 1,248 |
| | 4.16 | % | | $ | 149,859 |
| | $ | 1,665 |
| | 4.44 | % |
| Mortgage loans of consolidated trusts | 2,979,153 |
| | 25,168 |
| | 3.38 |
| | 2,837,241 |
| | 23,254 |
| | 3.28 |
| | 3,185,389 |
| | 27,610 |
| | 3.47 |
| | 3,090,212 |
| | 27,058 |
| | 3.50 |
|
Total mortgage loans(1) | 3,160,598 |
| | 27,047 |
| | 3.42 |
| | 3,063,575 |
| | 25,611 |
| | 3.34 |
| | 3,305,276 |
| | 28,858 |
| | 3.49 |
| | 3,240,071 |
| | 28,723 |
| | 3.55 |
|
| Mortgage-related securities, net | 12,132 |
| | 99 |
| | 3.30 |
| | 19,258 |
| | 203 |
| | 4.22 |
| |
| Mortgage-related securities | | | 10,859 |
| | 111 |
| | 4.09 |
| | 10,513 |
| | 115 |
| | 4.38 |
|
Non-mortgage-related securities(2) | 57,880 |
| | 173 |
| | 1.17 |
| | 57,013 |
| | 71 |
| | 0.49 |
| | 62,294 |
| | 347 |
| | 2.18 |
| | 57,271 |
| | 302 |
| | 2.06 |
|
Other(3) | 41,728 |
| | 142 |
| | 1.33 |
| | 35,731 |
| | 66 |
| | 0.72 |
| |
| Federal funds sold and securities purchased under agreements to resell or similar arrangements | | | 29,792 |
| | 178 |
| | 2.34 |
| | 32,208 |
| | 166 |
| | 2.02 |
|
| Advances to lenders | | | 6,287 |
| | 47 |
| | 2.93 |
| | 4,459 |
| | 38 |
| | 3.34 |
|
| Total interest-earning assets | $ | 3,272,338 |
| | $ | 27,461 |
| | 3.36 | % | | $ | 3,175,577 |
| | $ | 25,951 |
| | 3.27 | % | | $ | 3,414,508 |
| | $ | 29,541 |
| | 3.46 | % | | $ | 3,344,522 |
| | $ | 29,344 |
| | 3.51 | % |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | |
| Short-term funding debt | $ | 27,967 |
| | $ | 71 |
| | 0.99 | % | | $ | 50,579 |
| | $ | 55 |
| | 0.43 | % | | $ | 23,064 |
| | $ | (125 | ) | | 2.12 | % | | $ | 22,837 |
| | $ | (114 | ) | | 1.95 | % |
| Long-term funding debt | 268,312 |
| | 1,506 |
| | 2.25 |
| | 302,629 |
| | 1,647 |
| | 2.18 |
| | 163,996 |
| | (1,056 | ) | | 2.58 |
| | 196,266 |
| | (1,133 | ) | | 2.31 |
|
| Total funding debt | 296,279 |
| | 1,577 |
| | 2.13 |
| | 353,208 |
| | 1,702 |
| | 1.93 |
| |
Connecticut Avenue Securities® (“CAS”) | | | 23,364 |
| | (356 | ) | | 6.09 |
| | 25,100 |
| | (366 | ) | | 5.83 |
|
| Total debt of Fannie Mae | | | 210,424 |
| | (1,537 | ) | | 2.92 |
| | 244,203 |
| | (1,613 | ) | | 2.64 |
|
| Debt securities of consolidated trusts held by third parties | 2,984,811 |
| | 20,610 |
| | 2.76 |
| | 2,839,871 |
| | 18,814 |
| | 2.65 |
| | 3,196,503 |
| | (22,775 | ) | | 2.85 |
| | 3,090,509 |
| | (22,362 | ) | | 2.89 |
|
| Total interest-bearing liabilities | $ | 3,281,090 |
| | $ | 22,187 |
| | 2.70 | % | | $ | 3,193,079 |
| | $ | 20,516 |
| | 2.57 | % | | $ | 3,406,927 |
| | $ | (24,312 | ) | | 2.85 | % | | $ | 3,334,712 |
| | $ | (23,975 | ) | | 2.88 | % |
| Net interest income/net interest yield | | | $ | 5,274 |
| | 0.64 | % | | | | $ | 5,435 |
| | 0.68 | % | | | | $ | 5,229 |
| | 0.61 | % | | | | $ | 5,369 |
| | 0.64 | % |
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 1314 |
|
| | |
| | MD&A | Consolidated Results of Operations |
|
| | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | 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 | $ | 190,552 |
| | $ | 5,950 |
| | 4.16 | % | | $ | 232,222 |
| | $ | 7,082 |
| | 4.07 | % |
| Mortgage loans of consolidated trusts | 2,951,478 |
| | 75,155 |
| | 3.40 |
| | 2,826,405 |
| | 71,746 |
| | 3.38 |
|
Total mortgage loans(1) | 3,142,030 |
| | 81,105 |
| | 3.44 |
| | 3,058,627 |
| | 78,828 |
| | 3.44 |
|
| Mortgage-related securities, net | 13,796 |
| | 368 |
| | 3.55 |
| | 22,966 |
| | 713 |
| | 4.14 |
|
Non-mortgage-related securities(2) | 56,145 |
| | 414 |
| | 0.97 |
| | 53,509 |
| | 182 |
| | 0.45 |
|
Other(3) | 42,705 |
| | 351 |
| | 1.08 |
| | 30,104 |
| | 160 |
| | 0.70 |
|
| Total interest-earning assets | $ | 3,254,676 |
| | $ | 82,238 |
| | 3.37 | % | | $ | 3,165,206 |
| | $ | 79,883 |
| | 3.36 | % |
| Interest-bearing liabilities: | | | | | | | | | | | |
| Short-term funding debt | $ | 30,231 |
| | $ | 170 |
| | 0.74 | % | | $ | 55,580 |
| | $ | 161 |
| | 0.38 | % |
| Long-term funding debt | 280,030 |
| | 4,821 |
| | 2.30 |
| | 308,349 |
| | 5,237 |
| | 2.26 |
|
| Total funding debt | 310,261 |
| | 4,991 |
| | 2.14 |
| | 363,929 |
| | 5,398 |
| | 1.98 |
|
| Debt securities of consolidated trusts held by third parties | 2,953,203 |
| | 61,625 |
| | 2.78 |
| | 2,819,775 |
| | 58,995 |
| | 2.79 |
|
| Total interest-bearing liabilities | $ | 3,263,464 |
| | $ | 66,616 |
| | 2.72 | % | | $ | 3,183,704 |
| | $ | 64,393 |
| | 2.70 | % |
| Net interest income/net interest yield | | | $ | 15,622 |
| | 0.64 | % | | | | $ | 15,490 |
| | 0.65 | % |
|
| | | | | |
| | As of September 30, |
| | 2017 | | 2016 |
| Selected benchmark interest rates | | | |
| 3-month LIBOR | 1.33 | % | | 0.85 | % |
| 2-year swap rate | 1.74 |
| | 1.01 |
|
| 5-year swap rate | 2.00 |
| | 1.18 |
|
| 10-year swap rate | 2.29 |
| | 1.46 |
|
| 30-year Fannie Mae MBS par coupon rate | 2.97 |
| | 2.36 |
|
__________ |
| | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2019 |
| 2018 |
| | 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 | | $ | 119,180 |
|
| $ | 3,848 |
|
| 4.30 | % |
| $ | 156,168 |
| | $ | 5,187 |
| | 4.43 | % |
| Mortgage loans of consolidated trusts | | 3,167,172 |
|
| 84,157 |
|
| 3.54 |
|
| 3,068,521 |
| | 79,877 |
| | 3.47 |
|
Total mortgage loans(1) | | 3,286,352 |
|
| 88,005 |
|
| 3.57 |
|
| 3,224,689 |
| | 85,064 |
| | 3.52 |
|
| Mortgage-related securities | | 9,904 |
|
| 320 |
|
| 4.31 |
|
| 10,670 |
| | 321 |
| | 4.01 |
|
Non-mortgage-related securities(2) | | 61,109 |
|
| 1,095 |
|
| 2.36 |
|
| 54,572 |
| | 771 |
| | 1.86 |
|
| Federal funds sold and securities purchased under agreements to resell or similar arrangements | | 37,349 |
|
| 698 |
|
| 2.46 |
|
| 33,826 |
| | 457 |
| | 1.78 |
|
| Advances to lenders | | 4,975 |
|
| 120 |
|
| 3.18 |
|
| 4,171 |
| | 102 |
| | 3.22 |
|
| Total interest-earning assets | | $ | 3,399,689 |
|
| $ | 90,238 |
|
| 3.54 | % |
| $ | 3,327,928 |
| | $ | 86,715 |
| | 3.47 | % |
| Interest-bearing liabilities: | |
|
|
|
|
|
| | | | | |
| Short-term funding debt | | $ | 21,138 |
|
| $ | (369 | ) |
| 2.30 | % |
| $ | 26,395 |
| | $ | (328 | ) | | 1.64 | % |
| Long-term funding debt | | 172,284 |
|
| (3,272 | ) |
| 2.53 |
|
| 204,543 |
| | (3,426 | ) | | 2.23 |
|
| Connecticut Avenue Securities | | 24,170 |
|
| (1,114 | ) |
| 6.15 |
|
| 23,830 |
| | (1,007 | ) | | 5.63 |
|
| Total debt of Fannie Mae | | 217,592 |
|
| (4,755 | ) |
| 2.91 |
|
| 254,768 |
| | (4,761 | ) | | 2.49 |
|
| Debt securities of consolidated trusts held by third parties | | 3,173,700 |
|
| (70,371 | ) |
| 2.96 |
|
| 3,068,839 |
| | (65,976 | ) | | 2.87 |
|
| Total interest-bearing liabilities | | $ | 3,391,292 |
|
| $ | (75,126 | ) |
| 2.95 | % |
| $ | 3,323,607 |
| | $ | (70,737 | ) | | 2.84 | % |
| Net interest income/net interest yield | |
|
| $ | 15,112 |
|
| 0.59 | % |
| | | $ | 15,978 |
| | 0.64 | % |
| |
(1) | Average balance includes mortgage loans on nonaccrual status. A single-family loan is placed on nonaccrual status when the payment of principal or interest on the loan is 60 days or more past due. A multifamily loan is placed on nonaccrual status when the loan becomes 90 days or more past due according to its contractual terms or is deemed individually impaired. Typically, interest income on nonaccrual mortgage loans is recognized when cash is received. Interest income not recognized for loans on nonaccrual status was $209$110 million and $611$301 million, respectively, for the third quarter and first nine months of 2017,2019, compared with $318$86 million and $977$351 million, respectively, for the third quarter and first nine months of 2016.2018. |
| |
(2) | Includes cash equivalents. |
| |
(3)
| Consists of federal funds soldcash, cash equivalents and securities purchased under agreements to resell or similar arrangements and advances to lenders.U.S Treasury securities. |
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 14 |
|
| | |
| MD&A | Consolidated Results of Operations |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Table 3: Rate/Volume Analysis of Changes in Net Interest Income | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2017 vs. 2016 | | September 30, 2017 vs. 2016 |
| Total Variance | | Variance Due to:(1) | | Total Variance | | Variance Due to:(1) |
| | Volume | | Rate | | | Volume | | Rate |
| | (Dollars in millions) |
| Interest income: | | | | | | | | | | | |
| Mortgage loans of Fannie Mae | $ | (478 | ) | | $ | (465 | ) | | $ | (13 | ) | | $ | (1,132 | ) | | $ | (1,298 | ) | | $ | 166 |
|
| Mortgage loans of consolidated trusts | 1,914 |
| | 1,185 |
| | 729 |
| | 3,409 |
| | 3,184 |
| | 225 |
|
| Total mortgage loans | 1,436 |
| | 720 |
| | 716 |
| | 2,277 |
| | 1,886 |
| | 391 |
|
| Mortgage-related securities, net | (104 | ) | | (66 | ) | | (38 | ) | | (345 | ) | | (260 | ) | | (85 | ) |
Non-mortgage-related securities(2) | 102 |
| | 1 |
| | 101 |
| | 232 |
| | 9 |
| | 223 |
|
Other(3) | 76 |
| | 8 |
| | 68 |
| | 191 |
| | 62 |
| | 129 |
|
| Total interest income | $ | 1,510 |
| | $ | 663 |
| | $ | 847 |
| | $ | 2,355 |
| | $ | 1,697 |
| | $ | 658 |
|
| Interest expense: | | | | | | | | | | | |
| Short-term funding debt | 16 |
| | (33 | ) | | 49 |
| | 9 |
| | (96 | ) | | 105 |
|
| Long-term funding debt | (141 | ) | | (191 | ) | | 50 |
| | (416 | ) | | (487 | ) | | 71 |
|
| Total funding debt | (125 | ) | | (224 | ) | | 99 |
| | (407 | ) | | (583 | ) | | 176 |
|
| Debt securities of consolidated trusts held by third parties | 1,796 |
| | 999 |
| | 797 |
| | 2,630 |
| | 2,861 |
| | (231 | ) |
| Total interest expense | $ | 1,671 |
| | $ | 775 |
| | $ | 896 |
| | $ | 2,223 |
| | $ | 2,278 |
| | $ | (55 | ) |
| Net interest income | $ | (161 | ) | | $ | (112 | ) | | $ | (49 | ) | | $ | 132 |
| | $ | (581 | ) | | $ | 713 |
|
__________
| |
(1)
| Combined rate/volume variances are allocated to rate and volume based on the relative size of each variance.
|
| |
(2)
| Includes cash equivalents. |
| |
(3)
| Consists of federal funds sold and securities purchased under agreements to resell or similar arrangements and advances to lenders. |
Net interest income and net interest yield decreased in the third quarter of 2017 compared with the third quarter of 2016 due to a decline in the average balance of our retained mortgage portfolio as we continued to reduce this portfolio. The decrease in net interest income was partially offset by a slight increase in guaranty fee income driven by loans with higher base guaranty fees comprising a larger part of our guaranty book of business in the third quarter of 2017 compared with the third quarter of 2016.
Net interest income increased in the first nine months of 2017 compared with the first nine months of 2016 due to an increase in guaranty fee income driven by: (1) loans with higher base guaranty fees comprising a larger part of our guaranty book of business in the first nine months of 2017 compared with the first nine months of 2016; and (2) an increase in amortization income in the first nine months of 2017 due to activity related to increased prepayments on mortgage loans and liquidations of MBS debt of consolidated trusts, which accelerated the amortization of cost basis adjustments on the loans and related debt. The increase in net interest income due to higher guaranty fee income was partially offset by a decline in the average balance of our retained mortgage portfolio as we continued to reduce this portfolio. See “Retained Mortgage Portfolio” for information about our retained mortgage portfolio.
We initially recognize mortgage loans and debt of consolidated trusts in our consolidated balance sheets at fair value. We recognize the difference between: (1) the initial fair value of the consolidated trust’s mortgage loans and debt and (2) the unpaid principal balance of these mortgage loans and debt as cost basis adjustments in our consolidated balance sheets. We amortize cost basis adjustments, including premiums and discounts on mortgage loans and securities, as a yield adjustment over the contractual life of the loan or security as a component of net interest income. Net unamortized premiums on debt of consolidated trusts exceeded net unamortized premiums on the related mortgage loans of consolidated trusts by $36.9 billion as of September 30, 2017, compared with $34.7 billion as of December 31, 2016. The amortization of this net premium position will contribute to our net interest income over time.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 15 |
|
| | |
| MD&A | Consolidated Results of Operations |
We had $7.8 billion in net unamortized discounts and other cost basis adjustments on mortgage loans of Fannie Mae included in our consolidated balance sheets as of September 30, 2017, compared with $10.4 billion as of December 31, 2016. This net discount position on mortgage loans was primarily recorded upon the acquisition of credit-impaired loans and the extent to which we may record them as income in future periods will be based on the actual performance of the loans.
Fee and Other Income
Fee and other income includes transaction fees, technology fees, multifamily fees and other miscellaneous income. Fee and other income increased in the third quarter of 2019 compared with the third quarter of 2018, primarily due to an increase in yield maintenance fees due to increased prepayments on multifamily loans as interest rates decreased.
Investment Gains, Net
Investment gains, net primarily includes gains and losses recognized from the sale of loans and available-for-sale securities, gains and losses recognized on the consolidation and deconsolidation of securities, the lower of cost or fair value adjustments on held for sale (“HFS”) loans, and net other-than-temporary impairments recognized on our investments. Investment gains, net increased in the third quarter and the first nine months of 2017,2019 compared with the third quarter and first nine months of 2016,2018, primarily as a resultdriven by an increase in gains on sales of $975 million of income in the third quarter of 2017 resulting from a settlement agreement resolving legal claims related to private-label securities we purchased. See “Legal Proceedings—FHFA Private-Label Mortgage-Related Securities Litigation” for additional information.single-family loans.
Fair Value Losses,Gains (Losses), Net
The estimated fair value of our derivatives, and trading securities and other financial instruments carried at fair value may fluctuate substantially from period to period because of changes in interest rates, the yield curve, mortgage and credit spreads and interest rateimplied volatility, as well as activity related to these financial instruments. While the estimated fair value of our derivatives that serve to mitigate certain risk exposures may fluctuate, some of the financial instruments that generate these exposures are not recorded at fair value in our condensed consolidated financial statements. We are developing capabilities to implement hedge accounting to reduce interest rate volatility in our consolidated statements of operations and comprehensive income.
Table 4 displays the components of our fair value gains and losses.
|
| | | | | | | | | | | | | | | |
| Table 4: Fair Value Losses, Net |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
| Risk management derivatives fair value gains (losses) attributable to: | | | | | | | |
| Net contractual interest expense accruals on interest rate swaps | $ | (223 | ) | | $ | (295 | ) | | $ | (702 | ) | | $ | (855 | ) |
| Net change in fair value during the period | 75 |
| | 362 |
| | 364 |
| | (2,639 | ) |
| Total risk management derivatives fair value gains (losses), net | (148 | ) | | 67 |
| | (338 | ) | | (3,494 | ) |
| Mortgage commitment derivatives fair value losses, net | (248 | ) | | (216 | ) | | (520 | ) | | (945 | ) |
| Total derivatives fair value losses, net | (396 | ) | | (149 | ) | | (858 | ) | | (4,439 | ) |
| Trading securities gains, net | 59 |
| | 38 |
| | 145 |
| | 88 |
|
CAS debt fair value gains (losses), net(1) | 113 |
| | (388 | ) | | (218 | ) | | (616 | ) |
Other, net(2) | (65 | ) | | 8 |
| | (89 | ) | | (4 | ) |
| Fair value losses, net | $ | (289 | ) | | $ | (491 | ) | | $ | (1,020 | ) | | $ | (4,971 | ) |
__________ | |
(1)
| Consists of fair value gains and losses on CAS debt reported at fair value. |
| |
(2)
| Consists of fair value gains and losses on non-CAS debt and mortgage loans. |
Fair value losses in the third quarter and first nine months of 2017 were primarily driven by:
decreases in the fair value of our mortgage commitments due to losses on commitments to sell mortgage-related securities due to an increase in prices as interest rates decreased during most of the commitment periods; and
decreases in the fair value of our pay-fixed risk management derivatives due to declines in longer-term swap rates during the second quarter and most of the third quarter.
Fair value losses in the third quarter of 2016 were primarily due to losses on CAS debt reported at fair value resulting from tightening spreads between CAS debt yields and LIBOR during the periods. Fair value losses in the first nine months of 2016 were primarily due to losses on risk management derivatives resulting from decreases in the fair value of our pay-fixed derivatives due to declines in longer-term swap rates.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 1615 |
|
| | |
| MD&A | Consolidated Results of Operations |
Credit-Related Income (Expense)
We refer to our benefit (provision) for loan losses and benefit (provision) for guaranty losses collectively as our “benefit (provision) for credit losses.” Credit-related income (expense) consists of our benefit (provision) for credit losses and foreclosed property income (expense).
Provision (Benefit) for Credit Losses
Our combined loss reserves provide for an estimate of credit losses incurred in our guaranty book of business, including concessions we granted borrowers upon modification of their loans. We establish our combined loss reserves through our provision for credit losses for losses that we believe have been incurred and will eventually be realized over time in our financial statements. When we reduce our combined loss reserves, we recognize a benefit for credit losses. When we determine that a loan is uncollectible, typically upon foreclosure or other liquidation event (such as a deed-in-lieu of foreclosure or a short sale), we recognize a charge-off against our combined loss reserves. For a subset of delinquent single-family loans, we charge off the portion of the loans that is deemed uncollectible prior to foreclosure when the loans have been delinquent for a specified length of time and meet specified mark-to-market LTV ratios. We also recognize a charge-off upon the redesignation of loans from HFI to HFS. If the amounts charged off upon redesignation exceed the allowance related to the loans, we record a provision for credit losses. If the amounts charged off are less than the allowance related to the loans, we recognize a benefit for credit losses. We record recoveries of previously charged-off amounts as a reduction to charge-offs.
Table 5 displays the changes in the combined loss reserves, which consists of the allowance for loan losses and the reserve for guaranty losses.
|
| | | | | | | | | | | | | | | |
| Table 5: Changes in Combined Loss Reserves |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
| Changes in combined loss reserves: | | | | | | | |
| Beginning balance | $ | 20,742 |
| | $ | 24,089 |
| | $ | 23,835 |
| | $ | 28,590 |
|
| Provision (benefit) for credit losses | 182 |
| | (673 | ) | | (1,481 | ) | | (3,458 | ) |
| Charge-offs | (458 | ) | | (630 | ) | | (2,224 | ) | | (2,761 | ) |
| Recoveries | 75 |
| | 207 |
| | 373 |
| | 536 |
|
| Other | (17 | ) | | 10 |
| | 21 |
| | 96 |
|
| Ending balance | $ | 20,524 |
| | $ | 23,003 |
| | $ | 20,524 |
| | $ | 23,003 |
|
|
| | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | (Dollars in millions) |
| Allocation of combined loss reserves: | | | | | |
| Balance at end of each period attributable to: | | | | | |
| Single-family | $ | 20,291 |
| | | $ | 23,639 |
| |
| Multifamily | 233 |
| | | 196 |
| |
| Total | $ | 20,524 |
| | | $ | 23,835 |
| |
| Single-family and multifamily combined loss reserves as a percentage of applicable guaranty book of business: | | | | | |
| Single-family | 0.70 |
| % | | 0.83 |
| % |
| Multifamily | 0.09 |
| | | 0.08 |
| |
| Combined loss reserves as a percentage of: | | | | | |
| Total guaranty book of business | 0.65 |
| % | | 0.77 |
| % |
| Recorded investment in nonaccrual loans | 53.84 |
| | | 53.62 |
| |
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 17 |
|
| | |
| | MD&A | Consolidated Results of Operations |
The followingtable below displays the components of our fair value gains and losses.
|
| | | | | | | | | | | | | | | | |
| Fair Value Gains (Losses), Net |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| | | (Dollars in millions) |
| Risk management derivatives fair value gains (losses) attributable to: | | | | | | | | |
| Net contractual interest expense accruals on interest rate swaps | | $ | (190 | ) | | $ | (285 | ) | | $ | (698 | ) | | $ | (786 | ) |
| Net change in fair value during the period | | (294 | ) | | 528 |
| | (541 | ) | | 1,367 |
|
| Total risk management derivatives fair value gains (losses), net | | (484 | ) | | 243 |
| | (1,239 | ) | | 581 |
|
| Mortgage commitment derivatives fair value gains (losses), net | | (177 | ) | | 118 |
| | (946 | ) | | 606 |
|
| Credit enhancement derivatives fair value losses, net | | (7 | ) | | (1 | ) | | (31 | ) | | (2 | ) |
| Total derivatives fair value gains (losses), net | | (668 | ) | | 360 |
| | (2,216 | ) | | 1,185 |
|
| Trading securities gains (losses), net | | 95 |
| | (40 | ) | | 370 |
| | 79 |
|
| CAS debt fair value gains, net | | 59 |
| | 16 |
| | 156 |
| | 35 |
|
Other, net(1) | | (199 | ) | | 50 |
| | (608 | ) | | 361 |
|
| Fair value gains (losses), net | | $ | (713 | ) | | $ | 386 |
| | $ | (2,298 | ) | | $ | 1,660 |
|
| |
(1) | Consists of fair value gains and losses on non-CAS debt and mortgage loans held at fair value. |
Fair value losses in the third quarter and first nine months of 2019 were primarily driven by:
net interest expense accruals on risk management derivatives combined with decreases in the fair value of pay-fixed risk management derivatives due to declines in medium- to longer-term swap rates, which were partially offset by increases in the fair value of receive-fixed risk management derivatives;
decreases in the fair value of mortgage commitment derivatives due to losses on commitments to sell mortgage-related securities as a result of increases in the prices of securities as interest rates declined during the commitment periods, partially offset by gains on commitments to buy mortgage-related securities; and
increases in the fair value of long-term debt of consolidated trusts held at fair value, which are included in “Other, net,” due to declines in interest rates.
Fair value gains in the third quarter and first nine months of 2018 were primarily driven by:
increases in the fair value of mortgage commitment derivatives due to gains on commitments to sell mortgage-related securities as a result of decreases in the prices of securities as interest rates rose during the commitment periods; and
increases in the fair value of pay-fixed risk management derivatives due to an increase in longer-term swap rates during the periods.
Credit-Related Income
Our credit-related income or expense can vary substantially from period to period based on a number of factors, such as changes in actual and expected home prices, fluctuations in interest rates, borrower payment behavior, events such as natural disasters, the types and volume of our loss mitigation activities, the volume of foreclosures completed, and the redesignation of loans from held for investment (“HFI”) to HFS. In addition, our credit-related income or expense and our loss reserves can be impacted by updates to the models, assumptions and data used in determining our allowance for loan losses.
While the redesignation of certain reperforming and nonperforming single-family loans from HFI to HFS has been a significant driver of credit-related income in recent periods, we may see a reduced impact from this activity in the future to the extent the population of loans we are considering for redesignation declines. Further, our implementation of Accounting Standards Update 2016-13, Financial Instruments—Credit Losses, Measurement of Credit Losses on Financial Instruments and related amendments (the “CECL standard”) on January 1, 2020 will likely introduce additional volatility in our results as credit-related income or expense will include expected lifetime losses on our loans and other financial instruments subject to the standard and thus become more sensitive to fluctuations in the factors detailed above.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 16 |
|
| | |
| MD&A | Consolidated Results of Operations |
Benefit for Credit Losses
The table below displays components of the drivers of our single-family benefit for credit losses for the periods presented. Many of the drivers that contribute to our benefit or provision for credit losses overlap or are interdependent. The attribution shown below is based on internal allocation estimates. The table does not display our multifamily benefit or provision for credit losses as the amounts for all periods presented were less than $50 million.
|
| | | | | | | | | | | | | | | | | |
| Components of Benefit for Credit Losses | | |
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, |
| | | 2019 | | 2018 | | | 2019 | | 2018 |
| | | (Dollars in billions) |
| Single-family benefit for credit losses: | | | | | | | | | |
Changes in loan activity(1) | | $ | 0.2 |
| | $ | 0.4 |
| | | $ | 0.4 |
| | $ | 0.7 |
|
| Redesignation of loans from HFI to HFS | | 0.5 |
| | 0.4 |
| | | 1.2 |
| | 1.4 |
|
| Actual and forecasted home prices | | 0.2 |
| | 0.2 |
| | | 0.7 |
| | 0.9 |
|
| Actual and projected interest rates | | 0.1 |
| | (0.3 | ) | | | 0.5 |
| | (1.0 | ) |
Other(2) | | 0.9 |
| | * |
| | | 1.0 |
| | 0.2 |
|
| Total single-family benefit for credit losses | | $ | 1.9 |
| | $ | 0.7 |
| | | $ | 3.8 |
| | $ | 2.2 |
|
| |
| * | Represents less than $50 million. |
| |
(1) | Primarily consists of changes in the allowance due to loan delinquency, loan liquidations, new troubled debt restructurings, amortization of concessions granted to borrowers and the impact of FHFA’s Advisory Bulletin 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” (the “Advisory Bulletin”). |
| |
(2) | Primarily consists of the impact of model and assumption changes and changes in the reserve for guaranty losses that are not separately included in the other components. |
The factors that contributed to our benefit for credit losses in the third quarter and first nine months of 2017:2019 were:
The estimateredesignation of incurred lossescertain reperforming single-family loans from HFI to HFS as we no longer intend to hold them for the hurricanes contributed approximately $1.0 billionforeseeable future or to maturity. Upon redesignation of these loans, we recorded the loans at the lower of cost or fair value with a charge-off to the provisionallowance for loan losses. Amounts recorded in the allowance related to these loans exceeded the amounts charged off, which contributed to the benefit for credit losses.
In the third quarter of 2019, we enhanced the model used to estimate cash flows for individually impaired single-family loans within our allowance for loan losses. This enhancement was performed as a part of management’s routine model performance review process. In addition to incorporating recent loan performance data, this model enhancement better captures recent prepayment activity, default rates, and loss severity in the event of default. The enhancement resulted in a decrease to our allowance for loan losses and an incremental benefit for credit losses of approximately $850 million and is included in “Other” in the majority of which relates to single-family loans locatedtable above.
An increase in Puerto Rico.
This was partially offset by a benefit primarily due to higher actual and forecasted home prices. Higher home prices decrease the likelihood that loans will default and reduce the amount of credit loss on loans that do default, which impacts our estimate of losses and ultimately reduces our total loss reserves and provision for credit losses.
In addition, we recognized a benefit from the redesignation of certain reperforming single-family loans from HFI to HFS during the period as we no longer intend to hold them to maturity. Upon redesignation of these loans, we recorded the loans at the lower of cost or fair value via a charge-off to the allowance for loan losses. Amounts recorded in the allowance related to the loans exceeded the amount charged off, which reduced the provision for credit losses.
The following factors impacted our benefit for credit losses in the first nine months of 2017:
We recognized a benefit for credit losses due to higherLower actual and forecasted home prices.
We also recognized a benefit from the redesignation of certain reperforming and nonperforming single-family loans from HFI to HFS during the period.
This was partially offset by the estimate of incurred losses from the hurricanes, which contributed approximately $1.0 billion to the allowance for loan losses.
The following factors contributed to our benefit for credit losses in the third quarter and first nine months of 2016:
We recognized a benefit for credit losses in the third quarter of 2016 primarily due to an increase in home prices, including distressed property valuations.
We recognized a benefit for credit losses in the first nine months of 2016 primarily due to an increase in home prices, including distressed property valuations and a decline inprojected mortgage interest rates. As mortgage interest rates decline, we expect an increase in future prepayments on single-family individually impaired loans, including modified loans. Higher expected prepayments shorten the expected lives of modified loans, which decreases the impairment relating to term and interest rate concessions provided on these loans and results in a decrease in the provision for credit losses.
Changes in loan activity. Higher loan liquidation activity generally occurs during a lower interest rate environment as loans prepay, and during the peak home buying season of the second and third quarters of each year. When mortgage loans prepay, we reverse any remaining allowance related to these loans, which contributed to the benefit for credit losses.
The primary factors that impacted our benefit for credit losses in the third quarter and first nine months of 2018 were:
We discuss our expectations regarding our future loss reservesrecognized a benefit from the redesignation of certain reperforming and nonperforming single-family loans from HFI to HFS during the periods.
An increase in “Executive Summary—Outlook—Loss Reserves.”actual home prices, which contributed to the benefit for credit losses.
Troubled Debt Restructurings and Nonaccrual Loans
Table 6 displays the composition of loans restructured in a troubled debt restructuring (“TDR”) that are on accrual status and loans on nonaccrual status. The table includes our recorded investment in HFI and HFS mortgage loans. For information onThese factors were partially offset by the impact of TDRshigher actual and otherprojected mortgage interest rates. As mortgage interest rates rise, we expect a decrease in future prepayments on single-family individually impaired loans, on our allowance for loan losses, see “Note 3, Mortgage Loans.”including modified loans. Lower expected prepayments lengthen the expected lives of modified loans, which increases the
|
| | | | | | | | | | | |
| Table 6: Troubled Debt Restructurings and Nonaccrual Loans |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | (Dollars in millions) |
| TDRs on accrual status: | | | | | | | |
| Single-family | | $ | 117,724 |
| | | | $ | 127,353 |
| |
| Multifamily | | 164 |
| | | | 141 |
| |
| Total TDRs on accrual status | | $ | 117,888 |
| | | | $ | 127,494 |
| |
| Nonaccrual loans: | | | | | | | |
| Single-family | | $ | 37,797 |
| | | | $ | 44,047 |
| |
| Multifamily | | 322 |
| | | | 403 |
| |
| Total nonaccrual loans | | $ | 38,119 |
| | | | $ | 44,450 |
| |
Accruing on-balance sheet loans past due 90 days or more(1) | | $ | 289 |
| | | | $ | 402 |
| |
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 1817 |
|
| | |
| | MD&A | Consolidated Results of Operations |
|
| | | | | | | |
| | For the Nine Months |
| | Ended September 30, |
| | 2017 | | 2016 |
| | (Dollars in millions) |
| Interest related to on-balance sheet TDRs and nonaccrual loans: | | | |
Interest income forgone(2) | $ | 2,628 |
| | $ | 3,312 |
|
Interest income recognized for the period(3) | 4,253 |
| | 4,565 |
|
__________
| |
(1)
| Includes loans that, as of the end of each period, are 90 days or more past due and continuing to accrue interest. The majority of these amounts consists of loans insured or guaranteed by the U.S. government and loans for which we have recourse against the seller in the event of a default. |
| |
(2)
| Represents the amount of interest income we did not recognize, but would have recognized during the period for nonaccrual loans and TDRs on accrual status as of the end of each period had the loans performed according to their original contractual terms. |
| |
(3)
| Represents interest income recognized during the period, including the amortization of any deferred cost basis adjustments, for loans classified as either nonaccrual loans or TDRs on accrual status as of the end of each period. Includes primarily amounts accrued while the loans were performing and cash payments received on nonaccrual loans. |
Credit Loss Performance Metrics
Our credit-related income (expense) should be consideredimpairment relating to term and interest rate concessions provided on these loans and results in conjunction with our credit loss performance metrics. Our credit loss performance metrics, however, are not defined terms within generally accepted accounting principles (“GAAP”) and may not be calculatedan increase in the same manner as similarly titled measures reported by other companies. Because management does not view changes in the fair value of our mortgage loans asprovision for credit losses, we adjust our credit loss performance metrics for the impact associated with our acquisition of credit-impaired loans from unconsolidated MBS trusts. We also exclude interest forgone on nonaccrual loans and TDRs, other-than-temporary impairment losses resulting from deterioration in the credit quality of our mortgage-related securities and accretion of interest income on acquired credit-impaired loans from credit losses. We believe that credit loss performance metrics may be useful to investors as the losses are presented as a percentage of our book of business and have historically been used by analysts, investors and other companies within the financial services industry. Moreover, by presenting credit losses with and without the effect of fair value losses associated with the acquisition of credit-impaired loans, investors are able to evaluate our credit performance on a more consistent basis among periods.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 19 |
|
| | |
| MD&A | Consolidated Results of Operations |
Table 7 displays the components of our credit loss performance metrics as well as our single-family and multifamily initial charge-off severity rates.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 7: Credit Loss Performance Metrics |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | Amount | | Ratio(1) | | Amount | | Ratio(1) | | Amount | | Ratio(1) | | Amount | | Ratio(1) |
| | (Dollars in millions) |
| Charge-offs, net of recoveries | $ | 383 |
| | 4.9 | bps | | $ | 423 |
| | 5.6 | bps | | $ | 1,851 |
| | 7.9 | bps | | $ | 2,225 |
| | 9.8 | bps |
| Foreclosed property expense | 140 |
| | 1.8 | | | 110 |
| | 1.4 | | | 391 |
| | 1.7 | | | 507 |
| | 2.2 | |
| Credit losses including the effect of fair value losses on acquired credit-impaired loans | 523 |
| | 6.7 | | | 533 |
| | 7.0 | | | 2,242 |
| | 9.6 | | | 2,732 |
| | 12.0 | |
Plus: Impact of acquired credit-impaired loans on charge-offs and foreclosed property expense(2) | 61 |
| | 0.7 | | | 83 |
| | 1.1 | | | 183 |
| | 0.7 | | | 273 |
| | 1.1 | |
| Credit losses and credit loss ratio | $ | 584 |
| | 7.4 | bps | | $ | 616 |
| | 8.1 | bps | | $ | 2,425 |
| | 10.3 | bps | | $ | 3,005 |
| | 13.1 | bps |
| Credit losses attributable to: | | | | | | | | | | | | | | | | | | | |
| Single-family | $ | 600 |
| | | | | $ | 622 |
| | | | | $ | 2,439 |
| | | | | $ | 3,003 |
| | | |
Multifamily(3) | (16 | ) | | | | | (6 | ) | | | | | (14 | ) | | | | | 2 |
| | | |
| Total | $ | 584 |
| | | | | $ | 616 |
| | | | | $ | 2,425 |
| | | | | $ | 3,005 |
| | | |
Single-family initial charge-off severity rate(4) | | | 13.8 | % | | | | 16.0 | % | | | | 15.5 | % | | | | 20.3 | % |
Multifamily initial charge-off severity rate(4) | | | 11.8 | % | | | | 22.0 | % | | | | 7.2 | % | | | | 15.4 | % |
__________
| |
(1)
| Basis points are based on the annualized amount for each line item presented divided by the average guaranty book of business during the period. |
| |
(2)
| Includes fair value losses from acquired credit-impaired loans. |
| |
(3)
| Negative credit losses are the result of recoveries on previously charged-off amounts. |
| |
(4)
| Single-family and multifamily rates exclude fair value losses on credit-impaired loans acquired from MBS trusts and any costs, gains or losses associated with real estate owned (“REO”) after initial acquisition through final disposition. The single-family rate includes charge-offs pursuant to the provisions of FHFA’s Advisory Bulletin 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” and charge-offs of property tax and insurance receivables, while it excludes charge-offs from short sales and third-party sales. Multifamily rate is net of risk sharing agreements. |
Credit losses and our credit loss ratio decreased in the third quarter and first nine months of 2017 compared with the third quarter and first nine months of 2016 primarily due to lower charge-offs as a result of lower serious delinquencies.
We discuss our expectations regarding our future credit losses in “Executive Summary—Outlook—Credit Losses.”
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 20 |
|
| | |
| MD&A | Consolidated Results of Operations |
Table 8 displays concentrations of our single-family credit losses based on geography, credit characteristics and loan vintages. |
| | | | | | | | | | | | | | | | | | | | |
| Table 8: Credit Loss Concentration Analysis |
| | Percentage of Single-Family Conventional Guaranty Book of Business Outstanding(1) | | Percentage of Single-Family Credit Losses(2) |
| | As of | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | September 30, |
| December 31, |
| September 30, | |
| | 2017 |
| 2016 |
| 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Geographical distribution: | | | | | | | | | | | | | |
| California | 19 | % | | 19 | % | | 20 | % | | 9 | % | | 1 | % | | 9 | % | | 1 | % |
| Florida | 6 |
| | 6 |
| | 6 |
| | 3 |
| | 4 |
| | 10 |
| | 7 |
|
| Illinois | 4 |
| | 4 |
| | 4 |
| | 9 |
| | 10 |
| | 9 |
| | 8 |
|
| New Jersey | 4 |
| | 4 |
| | 4 |
| | 17 |
| | 18 |
| | 14 |
| | 18 |
|
| New York | 5 |
| | 5 |
| | 5 |
| | 12 |
| | 11 |
| | 11 |
| | 20 |
|
| All other states | 62 |
| | 62 |
| | 61 |
| | 50 |
| | 56 |
| | 47 |
| | 46 |
|
Select higher-risk product features(3) | 21 |
| | 21 |
| | 22 |
| | 55 |
| | 68 |
| | 60 |
| | 59 |
|
Vintages:(4) | | | | | | | | | | | | | |
| 2004 and prior | 4 |
| | 5 |
| | 4 |
| | 11 |
| | 13 |
| | 11 |
| | 16 |
|
| 2005 - 2008 | 7 |
| | 8 |
| | 9 |
| | 66 |
| | 60 |
| | 66 |
| | 64 |
|
| 2009 - 2017 | 89 |
| | 87 |
| | 87 |
| | 23 |
| | 27 |
| | 23 |
| | 20 |
|
__________
| |
(1)
| Calculated based on the unpaid principal balance of loans, where we have detailed loan level information, for each category divided by the unpaid principal balance of our single-family conventional guaranty book of business as of the end of each period. |
| |
(2)
| Excludes the impact of recoveries resulting from resolution agreements related to representation and warranty matters and compensatory fee income related to servicing matters that have not been allocated to specific loans. |
| |
(3)
| Includes Alt-A loans, subprime loans, interest-only loans, loans with original LTV ratios greater than 90% and loans with FICO® scores less than 620.
|
| |
(4)
| Credit losses on mortgage loans typically do not peak until the third through sixth years following origination; however, this range can vary based on many factors, including changes in macroeconomic conditions and foreclosure timelines. |
As shown in Table 8, the percentage of our credit losses for loans in California was higher in the third quarter and first nine months of 2017 compared with the third quarter and first nine months of 2016 because a large portion of the reperforming loans that were redesignated as HFS and charged-off in the third quarter and first nine months of 2017 were single-family loans located in California. The percentage of our credit losses for loans in New Jersey and New York were lower in the first nine months of 2017 compared with the first nine months of 2016 because we charged off a greater portion of excessively delinquent loans in these states in 2016. The majority of our credit losses for the third quarter and first nine months of 2017 continued to be driven by loans originated in 2005 through 2008. We provide more detailed single-family credit performance information, including serious delinquency rate share and foreclosure activity, in “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management.”
Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”)TCCA Fees
Pursuant to the TCCA, in 2012 FHFA directed us to increase our single-family guaranty fees by 10 basis points and remit this increase to Treasury. This TCCA-related revenue is included in “Net interest income” and the expense is recognized as “TCCA fees.”fees” in our condensed consolidated financial statements. TCCA fees increased in the third quarter and first nine months of 20172019 compared with the third quarter and first nine months of 20162018 as our book of business subject to the TCCA continued to grow. We expect the guaranty fees collected and expenses incurred under the TCCA to continue to increase.
Other Expenses, Net
Other expenses, net primarily consist of credit enhancement and mortgage insurance expenses, debt extinguishment gains and losses, housing trust fund expenses, loan subservicing costs and multifamily fees. Other expenses, net increased in the third quarter and first nine months of 2019 compared with the third quarter and first nine months of 2018 primarily due to an increase in credit enhancement costs resulting from higher outstanding volumes of credit risk transfer transactions. We expect our credit enhancement expenses to continue to rise as the percentage of our guaranty book of business on which we have transferred a portion of credit risk continues to increase. We discuss transfer of mortgage credit risk in “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—Transfer of Multifamily Mortgage Credit Risk.”
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 2118 |
|
| | |
| | MD&A | Consolidated Balance Sheet Analysis |
Consolidated Balance Sheet Analysis
|
| | | | |
Consolidated Balance Sheet Analysis |
This section provides a discussion of our condensed consolidated balance sheets and should be read together with our condensed consolidated financial statements, including the accompanying notes.
| | | Table 9: Summary of Condensed Consolidated Balance Sheets | |
| Summary of Condensed Consolidated Balance Sheets | | Summary of Condensed Consolidated Balance Sheets |
| | As of | | | | As of | | |
| | September 30, 2017 | | December 31, 2016 | | Variance | | September 30, 2019 | | December 31, 2018 | | Variance |
| | (Dollars in millions) | | (Dollars in millions) |
Assets | | | | | | | | | | | |
| Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar arrangements | $ | 47,654 |
| | $ | 55,639 |
| | $ | (7,985 | ) | | $ | 45,768 |
| | $ | 58,495 |
| | $ | (12,727 | ) |
| Restricted cash | 28,137 |
| | 36,953 |
| | (8,816 | ) | | 41,906 |
| | 23,866 |
| | 18,040 |
|
Investments in securities(1) | 42,849 |
| | 48,925 |
| | (6,076 | ) | | 46,896 |
| | 45,296 |
| | 1,600 |
|
| Mortgage loans: | | | | | | | | | | | |
| Of Fannie Mae | 174,964 |
| | 207,190 |
| | (32,226 | ) | | 116,639 |
| | 120,717 |
| | (4,078 | ) |
| Of consolidated trusts | 2,997,989 |
| | 2,896,028 |
| | 101,961 |
| | 3,206,873 |
| | 3,142,881 |
| | 63,992 |
|
| Allowance for loan losses | (20,194 | ) | | (23,465 | ) | | 3,271 |
| | (9,376 | ) | | (14,203 | ) | | 4,827 |
|
| Mortgage loans, net of allowance for loan losses | 3,152,759 |
| | 3,079,753 |
| | 73,006 |
| | 3,314,136 |
| | 3,249,395 |
| | 64,741 |
|
| Deferred tax assets, net | 30,454 |
| | 33,530 |
| | (3,076 | ) | | 11,994 |
| | 13,188 |
| | (1,194 | ) |
| Other assets | 28,906 |
| | 33,168 |
| | (4,262 | ) | | 33,736 |
| | 28,078 |
| | 5,658 |
|
| Total assets | $ | 3,330,759 |
| | $ | 3,287,968 |
| | $ | 42,791 |
| | $ | 3,494,436 |
| | $ | 3,418,318 |
| | $ | 76,118 |
|
| Liabilities and equity | | | | | | | | | | | |
| Debt: | | | | | | | | | | | |
| Of Fannie Mae | $ | 291,289 |
| | $ | 327,097 |
| | $ | (35,808 | ) | | $ | 213,522 |
| | $ | 232,074 |
| | $ | (18,552 | ) |
| Of consolidated trusts | 3,017,294 |
| | 2,935,219 |
| | 82,075 |
| | 3,248,336 |
| | 3,159,846 |
| | 88,490 |
|
| Other liabilities | 18,528 |
| | 19,581 |
| | (1,053 | ) | | 22,236 |
| | 20,158 |
| | 2,078 |
|
| Total liabilities | 3,327,111 |
| | 3,281,897 |
| | 45,214 |
| | 3,484,094 |
| | 3,412,078 |
| | 72,016 |
|
| Equity | 3,648 |
| | 6,071 |
| | (2,423 | ) | |
| Fannie Mae stockholders’ equity: | | | | | | | |
| Senior preferred stock | | | 120,836 |
| | 120,836 |
| | — |
|
| Other net deficit | | | (110,494 | ) | | (114,596 | ) | | 4,102 |
|
| Total equity | | | 10,342 |
| | 6,240 |
| | 4,102 |
|
| Total liabilities and equity | $ | 3,330,759 |
| | $ | 3,287,968 |
| | $ | 42,791 |
| | $ | 3,494,436 |
| | $ | 3,418,318 |
| | $ | 76,118 |
|
__________
| |
(1)
| Includes $30.8 billion as of September 30, 2017 and $32.3 billion as of December 31, 2016 of U.S. Treasury securities that are included in our other investments portfolio.
|
Other Investments PortfolioOur other investments portfolio consistsMortgage Loans, Net of Allowance for Loan Losses
The mortgage loans reported in our condensed consolidated balance sheets are classified as either HFS or HFI and include loans owned by Fannie Mae and loans held in consolidated trusts.
Mortgage loans, net of allowance for loan losses increased as of September 30, 2019 compared with December 31, 2018 primarily driven by:
an increase in mortgage loans due to acquisitions outpacing liquidations and sales; and
a decrease in our allowance for loan losses primarily driven by the redesignation of certain nonperforming and reperforming single-family loans from HFI to HFS and as a result of an enhancement to the model, including the incorporation of recent loan performance data, used to estimate cash flows for individually impaired single-family loans.
For additional information on our mortgage loans, see “Note 3, Mortgage Loans,” and cash equivalents, securities purchased under agreements to resell or similar arrangements, and investments in U.S. Treasury securities. See “Liquidity and Capital Management—Liquidity Management—Other Investments Portfolio” for additional information on changes in our other investments portfolio.allowance for loan losses, see “Note 4, Allowance for Loan Losses.”
Restricted Cash
Restricted cash primarily includes unscheduled borrower payments received by servicers of loans backing consolidated trusts due to be remitted to the MBS certificateholders in the subsequent month. Our restricted cash decreased as of September 30, 2017 compared with the balance as of December 31, 2016 primarily as a result of a decrease in prepayments received on mortgage loans in September 2017 compared with prepayments received in December 2016.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 2219 |
|
| | |
| MD&A | Consolidated Balance Sheet Analysis |
Investments in Mortgage-Related Securities
Our investments in mortgage-related securities are classified in our condensed consolidated balance sheets as either trading or available-for-sale and are measured at fair value. Table 10 displays the fair value of our investments in trading and available-for-sale mortgage-related securities. We classify private-label securities as Alt-A, subprime or commercial mortgage-backed securities (“CMBS”) if the securities were labeled as such when issued. We have also invested in subprime private-label mortgage-related securities that we have resecuritized to include our guaranty.
|
| | | | | | | | | | | |
| Table 10: Summary of Mortgage-Related Securities at Fair Value |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | (Dollars in millions) |
| Mortgage-related securities: | | | | | | | |
| Fannie Mae | | $ | 6,308 |
| | | | $ | 7,323 |
| |
| Other agency | | 1,819 |
| | | | 2,605 |
| |
| Alt-A and subprime private-label securities | | 2,583 |
| | | | 3,345 |
| |
| CMBS | | 191 |
| | | | 1,580 |
| |
| Mortgage revenue bonds | | 750 |
| | | | 1,293 |
| |
| Other mortgage-related securities | | 399 |
| | | | 462 |
| |
| Total | | $ | 12,050 |
| | | | $ | 16,608 |
| |
The decrease in mortgage-related securities at fair value from December 31, 2016 to September 30, 2017 was primarily driven by liquidations and sales of securities.
See “Note 5, Investments in Securities” for additional information on our investments in mortgage-related securities, including the composition of our trading and available-for-sale securities at amortized cost and fair value and the gross unrealized gains and losses related to our available-for-sale securities as of September 30, 2017 and December 31, 2016.
Mortgage Loans and Allowance for Loan Losses
The increase in mortgage loans, net of allowance for loan losses, from December 31, 2016 to September 30, 2017 was driven by an increase in mortgage loans of consolidated trusts as we continued to add to our guaranty book of business through securitization activity. Partially offsetting this was a decline in mortgage loans of Fannie Mae resulting from liquidations, portfolio securitizations and sales. For additional information on our mortgage loans, see “Note 3, Mortgage Loans.”
The decrease in our allowance for loan losses from December 31, 2016 to September 30, 2017 was primarily driven by the relief of the allowance for loan losses upon redesignation of certain reperforming and nonperforming single-family loans from HFI to HFS, liquidations and higher actual and forecasted home prices. This decrease was partially offset by estimated incurred losses of approximately $1.0 billion resulting from the hurricanes.
Other Assets
The decrease in other assets from December 31, 2016 to September 30, 2017 was primarily driven by a decrease in advances to lenders as a result of lower lender funding needs. For additional information on our accounting policy for advances to lenders, refer to “Note 1, Summary of Significant Accounting Policies” in our 2016 Form 10-K.
Debt
Debt of Fannie Mae is the primary means of funding our mortgage purchases. Debt of consolidated trusts represents the amount of Fannie Mae MBS issued from consolidated trusts and held by third-party certificateholders. We provide a summary of the activity of the debt of Fannie Mae and a comparison of the mix between our outstanding short-term and long-term debt in “Liquidity and Capital Management—Liquidity Management—Debt Funding.” Also see “Note 7, Short-Term Borrowings and Long-Term Debt” for additional information on our outstanding debt.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 23 |
|
| | |
| | MD&A | Consolidated Balance Sheet Analysis |
Other Assets
The increase in other assets from December 31, 2018 to September 30, 2019 was primarily driven by an increase in advances to lenders. As interest rates declined during the first nine months of 2019, mortgage origination activity increased, resulting in higher funding needs by lenders. For information on our accounting policy for advances to lenders, refer to “Note 1, Summary of Significant Accounting Policies” in our 2018 Form 10-K.
Debt
The decrease in debt of Fannie Mae from December 31, 20162018 to September 30, 20172019 was primarily driven by lower funding needs, asthe decline in the size of our retained mortgage portfolio decreased.portfolio. We did not issue new debt to replace all of our debt of Fannie Mae that paid off during the first nine months of 2019. The increase in debt of consolidated trusts from December 31, 20162018 to September 30, 20172019 was primarily driven by sales of Fannie Mae MBS, which are accounted for as issuances of debt of consolidated trusts in our condensed consolidated balance sheets, since the MBS certificate ownership is transferred from us to a third party. See “MD&A—Liquidity and Capital Management—Liquidity Management—Debt Funding” for a summary of the activity of the debt of Fannie Mae and a comparison of the mix between our outstanding short-term and long-term debt. Also see “Note 7, Short-Term and Long-Term Debt” for additional information on our outstanding debt.
Stockholders’ Equity
Our net equity decreasedincreased as of September 30, 20172019 compared with December 31, 2016 due to2018 by the amount of our comprehensive income recognized during the first nine months of 2019, partially offset by our payments of senior preferred stock dividends to Treasury during the first nine monthstwo quarters of 2017, partially offset by our comprehensive income recognized during2019.
Under the first nine monthsmodified liquidation preference provisions of 2017.the senior preferred stock described in “Legislation and Regulation—Letter Agreement with Treasury,” the aggregate liquidation preference of the senior preferred stock increased from $123.8 billion as of June 30, 2019 to $127.2 billion as of September 30, 2019, and will further increase to $131.2 billion as of December 31, 2019.
Retained Mortgage Portfolio
|
| | | | |
Retained Mortgage Portfolio |
Our retained mortgage portfolio consists of mortgage loans and mortgage-related securities that we own, including Fannie Mae MBS and non-Fannie Mae mortgage-related securities. Assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties are not included in our retained mortgage portfolio.
Table 11 displaysWe use our retained mortgage portfolio primarily to provide liquidity to the mortgage market and support our loss mitigation activities. Previously, we also used our retained mortgage portfolio for investment purposes.
The chart below separates the instruments within our retained mortgage portfolio, measured by unpaid principal balance, of our retained mortgage portfolio.
|
| | | | | | | | | | | |
| Table 11: Retained Mortgage Portfolio |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | (Dollars in millions) |
| Single-family: | | | | | | | |
Mortgage loans(1) | | $ | 152,731 |
| | | | $ | 181,219 |
| |
| Reverse mortgages | | 27,456 |
| | | | 29,443 |
| |
| Mortgage-related securities: | | | | | | | |
Agency securities(2) | | 36,714 |
| | | | 25,667 |
| |
| Fannie Mae-wrapped reverse mortgage securities | | 6,884 |
| | | | 7,420 |
| |
| Other Fannie Mae-wrapped securities | | 3,518 |
| | | | 3,773 |
| |
| Private-label and other securities | | 3,623 |
| | | | 4,980 |
| |
Total single-family mortgage-related securities(3) | | 50,739 |
| | | | 41,840 |
| |
| Total single-family mortgage loans and mortgage-related securities | | 230,926 |
| | | | 252,502 |
| |
| Multifamily: | | | | | | | |
Mortgage loans(4) | | 5,252 |
| | | | 9,407 |
| |
| Mortgage-related securities: | | | | | | | |
Agency securities(2) | | 8,095 |
| | | | 7,693 |
| |
| CMBS | | 191 |
| | | | 1,567 |
| |
| Mortgage revenue bonds | | 669 |
| | | | 1,185 |
| |
Total multifamily mortgage-related securities(5) | | 8,955 |
| | | | 10,445 |
| |
| Total multifamily mortgage loans and mortgage-related securities | | 14,207 |
| | | | 19,852 |
| |
| Total retained mortgage portfolio | | $ | 245,133 |
| | | | $ | 272,354 |
| |
__________into three categories based on each instrument’s use:
| |
(1)
• | IncludesLender liquidity, which includes balances related to our whole loan conduit activity, supports our efforts to provide liquidity to the single-family loans restructured in a TDR that were on accrual status of $93.4 billion and $119.4 billion as of September 30, 2017 and December 31, 2016, respectively, and single-family loans on nonaccrual status of $32.6 billion and $38.7 billion as of September 30, 2017 and December 31, 2016, respectively.multifamily mortgage markets. |
| |
(2)
• | Includes Fannie Mae, Freddie Mac and Ginnie Mae mortgage-related securities, excluding Fannie Mae-wrapped reverse mortgage securities and other Fannie Mae-wrapped securities.Loss mitigation supports our loss mitigation efforts through the purchase of delinquent loans from our MBS trusts. |
| |
(3)
• | The fair valueOther represents assets that were previously purchased for investment purposes. More than half of these single-family mortgage-related securities was $52.9 billion and $42.9 billionthe balance of “Other” as of September 30, 20172019 consisted of Fannie Mae reverse mortgage securities and December 31, 2016, respectively.reverse mortgage loans. We expect the amount of assets in “Other” will continue to decline over time as they liquidate, mature or are sold. |
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 2420 |
|
| | |
| | MD&A | Retained Mortgage Portfolio |
Retained Mortgage Portfolio
(Dollars in billions)
The table below displays the components of our retained mortgage portfolio, measured by unpaid principal balance.
|
| | | | | | | | | | | |
| Retained Mortgage Portfolio |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | (Dollars in millions) |
| Lender liquidity: | | | | | | | |
Agency securities(1) | | $ | 45,178 |
| | | | $ | 40,528 |
| |
| Mortgage loans | | 24,808 |
| | | | 8,640 |
| |
| Total lender liquidity | | 69,986 |
| | | | 49,168 |
| |
Loss mitigation mortgage loans(2) | | 70,729 |
| | | | 87,220 |
| |
| Other: | | | | | | | |
| Reverse mortgage loans | | 18,488 |
| | | | 21,856 |
| |
Mortgage loans
| | 7,495 |
| | | | 8,959 |
| |
Reverse mortgage securities(3) | | 7,723 |
| | | | 7,883 |
| |
| Private-label and other securities | | 1,679 |
| | | | 3,042 |
| |
| Fannie Mae-wrapped private-label securities | | 595 |
| | | | 650 |
| |
| Mortgage revenue bonds | | 294 |
| | | | 375 |
| |
| Total other | | 36,274 |
| | | | 42,765 |
| |
| Total retained mortgage portfolio | | $ | 176,989 |
| | | | $ | 179,153 |
| |
| | | | | | | | |
Retained mortgage portfolio by segment:
| | | | | | | |
| Single-family mortgage loans and mortgage-related securities | | $ | 167,305 |
| | | | $ | 168,338 |
| |
| Multifamily mortgage loans and mortgage-related securities | | $ | 9,684 |
| | | | $ | 10,815 |
| |
| |
(4)(1)
| Consists of Fannie Mae, Freddie Mac, and Ginnie Mae mortgage-related securities, including Freddie Mac securities guaranteed by Fannie Mae. Excludes Fannie Mae and Ginnie Mae reverse mortgage securities and Fannie Mae-wrapped private-label securities. |
| |
(2) | Includes multifamilysingle-family loans restructured in a TDRclassified as troubled debt restructurings (“TDRs”) that were on accrual status of $159$46.2 billion and $58.5 billion as of September 30, 2019 and December 31, 2018, respectively, and single-family loans on nonaccrual status of $21.0 billion and $24.4 billion as of September 30, 2019 and December 31, 2018, respectively. Includes multifamily loans classified as TDRs that were on accrual status of $35 million and $131$57 million as of September 30, 20172019 and December 31, 2016,2018, respectively, and multifamily loans on nonaccrual status of $133$260 million and $246$150 million as of September 30, 20172019 and December 31, 2016,2018, respectively. |
| |
(5)(3)
| The fair valueConsists of these multifamily mortgage-related securities was $9.6 billionFannie Mae and $11.2 billion as of September 30, 2017 and December 31, 2016, respectively.Ginnie Mae reverse mortgage securities. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 21 |
|
| | |
| MD&A | Retained Mortgage Portfolio |
The amount of mortgage assets that we may own is capped at $250 billion by our senior preferred stock purchase agreement with Treasury, and FHFA has directed that we further cap our mortgage assets at $225 billion, as described in “Business—Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements” in our 2018 Form 10-K. We expect our retained mortgage portfolio to remain below the current $225 billion cap directed by FHFA. The September 2019 Treasury plan includes a recommendation that Treasury and FHFA amend our senior preferred stock purchase agreement to further reduce the cap on our investments in mortgage-related assets, and also to restrict our retained mortgage portfolio to solely supporting the business of securitizing MBS.
We have the option or, in some instances, the obligation, to purchase mortgage loans that meet specific criteria from an MBS trust. In support of our loss mitigation strategy, we purchased $8.9$7.8 billion of loans from our single-family MBS trusts in the first nine months of 2017,2019, the substantial majority of which were delinquent. In deciding whether and when to exercise our option to purchase a loan from a single-family MBS trust, we consider a variety of factors, including, but not limited to, the cost of funds, general market conditions, and relevant market yields. The weight we give to these factors, among others, changes depending on market circumstances and other factors. See “Business—“MD&A—Retained Mortgage Securitizations—Portfolio—Purchases of Loans from Our MBS Trusts” in our 20162018 Form 10-K for more information relating to our purchases of loans from MBS trusts.
We primarily use our retained mortgage portfolio to: (1) provide liquidity to the mortgage market and (2) support our loss mitigation activities. Previously, we also used our retained mortgage portfolio for investment purposes.
The amount of mortgage assets that we may own is restricted by our senior preferred stock purchase agreement with Treasury and FHFA’s additional cap, as described in “Business—Conservatorship and Treasury Agreements—Treasury Agreements” in our 2016 Form 10-K. Our retained mortgage portfolio is already below the caps that will become effective on December 31, 2017, and is below the final $250 billion cap under the senior preferred stock purchase agreement, which becomes effective on December 31, 2018. The amount is not yet below the final FHFA cap of $225 billion that becomes effective on December 31, 2018. We expect the size of our retained mortgage portfolio will continue to decrease in 2017.
Table 12 below separates the instruments within our retained mortgage portfolio by unpaid principal balance into three categories based on each instrument’s use. “Lender liquidity,” which includes balances related to our whole loan conduit activity, supports our efforts to provide liquidity to the Single-Family and Multifamily mortgage markets. “Loss mitigation” supports our loss mitigation efforts through the purchase of delinquent loans from MBS trusts. “Other” represents assets that were previously purchased for investment purposes. More than half of the balance of “Other” consisted of reverse mortgage loans and Fannie Mae-wrapped reverse mortgage securities as of September 30, 2017 and December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 12: Retained Mortgage Portfolio Profile |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | Single-Family | | Multifamily | | Total | | % of Mortgage Credit Book of Business | | Single-Family | | Multifamily | | Total | | % of Mortgage Credit Book of Business |
| | (Dollars in millions) |
| Lender liquidity | $ | 52,041 |
| | $ | 8,095 |
| | $ | 60,136 |
| | 2 | % | | $ | 36,272 |
| | $ | 7,694 |
| | $ | 43,966 |
| | 2 | % |
| Loss mitigation | 131,077 |
| | 292 |
| | 131,369 |
| | 4 |
| | 164,028 |
| | 376 |
| | 164,404 |
| | 5 |
|
| Other | 47,808 |
| | 5,820 |
| | 53,628 |
| | 2 |
| | 52,202 |
| | 11,782 |
| | 63,984 |
| | 2 |
|
| Total | $ | 230,926 |
| | $ | 14,207 |
| | $ | 245,133 |
| | 8 | % | | $ | 252,502 |
| | $ | 19,852 |
| | $ | 272,354 |
| | 9 | % |
|
| | | | |
Mortgage Credit Book of Business |
Table 13 displays the composition of our mortgage credit book of business based on unpaid principal balance. Our single-family mortgage credit book of business accounted for 92% of our mortgage credit book of business as of September 30, 2017 and December 31, 2016. While our mortgage credit book of business includes all of our mortgage-related assets, both on- and off-balance sheet, our guaranty book of business excludes non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 2522 |
|
| | |
| | MD&A | Mortgage CreditGuaranty Book of Business |
Guaranty Book of Business
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Table 13: Composition of Mortgage Credit Book of Business |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | Single-Family | | Multifamily | | Total | | Single-Family | | Multifamily | | Total |
| | (Dollars in millions) |
Mortgage loans and Fannie Mae MBS(1) | $ | 2,882,463 |
| | $ | 253,031 |
| | $ | 3,135,494 |
| | $ | 2,838,086 |
| | $ | 229,896 |
| | $ | 3,067,982 |
|
Unconsolidated Fannie Mae MBS, held by third parties(2) | 6,688 |
| | 1,086 |
| | 7,774 |
| | 7,795 |
| | 1,159 |
| | 8,954 |
|
Other credit guarantees(3) | 1,925 |
| | 12,564 |
| | 14,489 |
| | 2,193 |
| | 13,142 |
| | 15,335 |
|
| Guaranty book of business | $ | 2,891,076 |
| | $ | 266,681 |
| | $ | 3,157,757 |
| | $ | 2,848,074 |
| | $ | 244,197 |
| | $ | 3,092,271 |
|
Other agency mortgage-related securities(4) | 1,730 |
| | — |
| | 1,730 |
| | 2,500 |
| | — |
| | 2,500 |
|
Other mortgage-related securities(5) | 3,623 |
| | 860 |
| | 4,483 |
| | 4,980 |
| | 2,752 |
| | 7,732 |
|
Mortgage credit book of business | $ | 2,896,429 |
| | $ | 267,541 |
| | $ | 3,163,970 |
| | $ | 2,855,554 |
| | $ | 246,949 |
| | $ | 3,102,503 |
|
| Guaranty Book of Business Detail: | | | | | | | | | | | |
Conventional Guaranty Book of Business(6) | $ | 2,849,182 |
| | $ | 265,399 |
| | $ | 3,114,581 |
| | $ | 2,802,572 |
| | $ | 242,834 |
| | $ | 3,045,406 |
|
Government Guaranty Book of Business(7) | $ | 41,894 |
| | $ | 1,282 |
| | $ | 43,176 |
| | $ | 45,502 |
| | $ | 1,363 |
| | $ | 46,865 |
|
__________Our “guaranty book of business” consists of:
Fannie Mae MBS outstanding, excluding the portions of any structured securities we issue that are backed by Freddie Mac securities;
mortgage loans of Fannie Mae held in our retained mortgage portfolio; and
other credit enhancements that we provide on mortgage assets.
“Total Fannie Mae guarantees” consists of:
our guaranty book of business; and
the portions of any structured securities we issue that are backed by Freddie Mac securities.
When we resecuritize Freddie Mac securities into Fannie Mae-issued structured securities, our guaranty of principal and interest extends to the underlying Freddie Mac securities. However, Freddie Mac continues to guaranty the payment of principal and interest on the underlying Freddie Mac securities that we have resecuritized. We do not charge an incremental guaranty fee to include Freddie Mac securities in the structured securities that we issue.
The table below displays the composition of our guaranty book of business based on unpaid principal balance. Our single-family guaranty book of business accounted for 90% of our guaranty book of business as of September 30, 2019 and 91% of our guaranty book of business as of December 31, 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Composition of Fannie Mae Guaranty Book of Business(1)
|
| | | As of |
| | | September 30, 2019 | | December 31, 2018 |
| | | Single-Family | | Multifamily | | Total | | Single-Family | | Multifamily | | Total |
| | | (Dollars in millions) |
Conventional guaranty book of business(2) | | $ | 2,989,312 |
| | $ | 333,030 |
| | $ | 3,322,342 |
| | $ | 2,925,246 |
| | $ | 308,543 |
| | $ | 3,233,789 |
|
Government guaranty book of business(3) | | 29,311 |
| | 1,157 |
| | 30,468 |
| | 34,158 |
| | 1,205 |
| | 35,363 |
|
| Guaranty book of business | | 3,018,623 |
| | 334,187 |
| | 3,352,810 |
| | 2,959,404 |
| | 309,748 |
| | 3,269,152 |
|
| | | | | | | | | | | | | |
Freddie Mac securities guaranteed by Fannie Mae(4) | | 28,942 |
| | — |
| | 28,942 |
| | — |
| | — |
| | — |
|
| Total Fannie Mae guarantees | | $ | 3,047,565 |
| | $ | 334,187 |
| | $ | 3,381,752 |
| | $ | 2,959,404 |
| | $ | 309,748 |
| | $ | 3,269,152 |
|
| |
(1) | Consists of mortgage loans andIncludes other single-family Fannie Mae MBS recognized in our condensed consolidated balance sheets.guaranty arrangements of $1.4 billion and $1.6 billion as of September 30, 2019 and December 31, 2018, respectively, and other multifamily Fannie Mae guaranty arrangements of $11.6 billion and $12.3 billion as of September 30, 2019 and December 31, 2018, respectively. The unpaid principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount. |
| |
(2) | The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount. |
| |
(3)
| Consists of single-family and multifamily credit enhancements that we have provided and that are not otherwise reflected in the table. |
| |
(4)
| Consists of mortgage-related securities issued by Freddie Mac and Ginnie Mae. |
| |
(5)
| Primarily includes mortgage revenue bonds, Alt-A and subprime private-label securities, and CMBS. |
| |
(6)
| Consists ofRefers to mortgage loans and mortgage-related securities that are not guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies.government. |
| |
(7)(3)
| Consists ofRefers to mortgage loans and mortgage-related securities guaranteed or insured, in whole or in part, by the U.S. governmentgovernment. |
| |
(4) | Consists of approximately (i) $23.0 billion in unpaid principal balance of Freddie Mac-issued UMBS backing Fannie Mae-issued Supers; and (ii) $5.9 billion in unpaid principal balance of Freddie Mac securities backing Fannie Mae-issued REMICs, a portion of which may be backed in whole or one of its agencies.in part by Fannie Mae MBS. Therefore, our total exposure to Freddie Mac securities included in Fannie Mae REMIC collateral may be lower. |
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended, including by the Federal Housing Finance Regulatory Reform Act of 2008 (together, the “GSE Act”), requires us to set aside each year an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of our total new business purchases and to pay this amount to specified U.S. Department of Housing and Urban Development (“HUD”)HUD and Treasury funds. 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. In February 2017,April 2019, we paid $268$215 million to the funds based on our new business purchases in 2016. Our new business purchases were $421.4 billion for2018. For the first nine months of 2017. Accordingly,2019, we recognized an expense of $177$193 million related to this obligation forbased on our $460.0 billion in new business purchases during the first nine months of 2017.period. We expect to pay this amount to the funds in 2020, plus additional amounts to be accrued based on our new business purchases in the last three monthsfourth quarter of 2017, to the funds on or before March 1, 2018.2019. See “Business—“MD&A—Legislation and Regulation—GSE Act and Other Regulation of Our Business—Affordable Housing Allocations” in our 2016First Quarter 2019 Form 10-K10-Q for more information regarding this obligation.
Overview
We have two reportable business segments: Single-Family and Multifamily. Previously, we had a third reportable business segment, Capital Markets, which was incorporated into the Single-Family and Multifamily segments in the fourth quarter of 2016. Results of our two business segments are intended to reflect each segment as if it were a stand-alone business. We have revised the presentation of our segment results for the prior periods to be consistent with the current period presentation.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 2623 |
This section describesBusiness Segments
We have two reportable business segments: Single-Family and Multifamily. The Single-Family business operates in the followingsecondary mortgage market relating to single-family mortgage loans, which are secured by properties containing four or fewer residential dwelling units. The Multifamily business operates in the secondary mortgage market relating primarily to multifamily mortgage loans, which are secured by properties containing five or more residential units.
The chart below displays the net revenues and net income for each of our business segments:segments for the first nine months of 2018 compared with the first nine months of 2019. Net revenues consist of net interest income and fee and other income.
market conditions relatingBusiness Segment Net Revenues and Net Income
(Dollars in billions)
Segment Allocation Methodology
The majority of our revenues and expenses are directly associated with either our single-family or our multifamily business segment and are included in determining that segment’s operating results. Other revenues and expenses, including administrative expenses, that are not directly attributable to a particular business segment are allocated based on the size of each segment’s guaranty book of business. The substantial majority of the gains and losses associated with our risk management derivatives are allocated to our single-family business segment;segment.
In the following sections, we describe each segment’s business metrics and financial results; and
results. We also describe how each segment manages mortgage credit risk management relating to the business segment.
This section should be read together with our comparative discussion of our condensed consolidated results of operations in “Consolidated Results of Operations.”and its credit metrics.
Single-Family Business
Working with our lender customers, our Single-Family business provides liquidity to the mortgage market primarily by acquiring single-family loans from lenders and securitizing those loans into Fannie Mae MBS, which are either delivered to the lenders or sold to investors or dealers. A single-family loan is secured by a property with four or fewer residential units.
This section supplements and updates information regarding our Single-Family business segment in our 2018 Form 10-K. See “MD&A—Single-Family Business” in our 2018 Form 10-K for additional information regarding the primary business activities, customers and competition of our Single-Family business.
Presentation of our single-family guaranty book of business
For purposes of the information reported in this “Single-Family Business” section, we measure the single-family guaranty book of business by using the unpaid principal balance of our mortgage loans underlying Fannie Mae MBS outstanding. By contrast, the single-family guaranty book of business presented in the “Composition of Fannie Mae Guaranty Book of Business” table in the “Guaranty Book of Business” section is based on the unpaid principal balance of the Fannie Mae MBS outstanding, rather than the unpaid principal balance of the underlying mortgage loans. These amounts differ primarily as a result of payments we receive on underlying loans that have not yet been remitted to the MBS holders. As measured for purposes of the information reported below, our single-family conventional guaranty book of business was $2,940 billion as of September 30, 2019 and $2,903 billion as of December 31, 2018.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 24 |
|
| | |
| MD&A | Single-Family Business |
Single-Family HousingMarket Share
Single-Family Mortgage Acquisition Market Share
Our share of the single-family acquisition market, including loans held on lenders’ books, may fluctuate from period to period. We currently estimate our single-family acquisition market share in the last three years remained within the range of 24% to 30%, supporting approximately one in four single-family mortgage loans. Our market share estimate is based on publicly available data regarding the amount of single-family first-lien mortgage loans originated and Mortgageour competitors’ acquisitions. Our single-family acquisitions were $194.3 billion for the third quarter of 2019, compared with $122.3 billion for the third quarter of 2018.
Single-Family Mortgage-Related Securities Issuances Market and Economic ConditionsShare
According toOur single-family Fannie Mae MBS issuances were $188.5 billion for the U.S. Bureauthird quarter of Economic Analysis advance estimate,2019, compared with $129.9 billion for the inflation-adjusted U.S. gross domestic product, or GDP, rose by 3.0% on an annualized basisthird quarter of 2018. The chart below displays our market share, using data available as of publication, of single-family mortgage-related securities issuances in the third quarter of 2017,2019 as compared with an increasethat of 3.1%our primary competitors for the issuance of single-family mortgage-related securities.
New Single-Family Mortgage-Related Securities Issuances
Third Quarter 2019 Market Share
We estimate our market share of single-family mortgage-related securities issuances was 39% in the third quarter of 2019, compared with 35% in the second quarter of 2017. The overall economy gained an estimated 274,000 non-farm jobs2019 and 40% in the third quarter of 2017.2018.
Single-Family Mortgage Market
Housing activity rose slightly in the third quarter of 2019 compared with the second quarter of 2019. Total existing home sales averaged 5.4 million units annualized in the third quarter of 2019, compared with 5.3 million units in the second quarter of 2019, according to data from the National Association of REALTORS®. According to the U.S. Census Bureau, new single-family home sales increased during the third quarter of Labor Statistics, over the 12 months ending in September 2017, the economy created2019, averaging an estimated 1.8 million non-farm jobs. The unemploymentannualized rate was 4.2% in September 2017,of 691,000 units, compared with 4.4%661,000 units in June 2017.the second quarter of 2019.
AccordingThe 30-year fixed mortgage rate averaged 3.66% in the third quarter of 2019, compared with 4.01% in the second quarter of 2019, according to the Federal Reserve, total U.S. residential mortgage debt outstanding, which includes $10.4 trillion of single-family debt outstanding, was estimated to be approximately $11.7 trillion as of June 30, 2017 (the latest date for which information is available) and $11.6 trillion as of December 31, 2016.Freddie Mac’s Primary Mortgage Market Survey®.
We forecast that total originations in the U.S. single-family mortgage market in 20172019 will decreaseincrease from 20162018 levels by approximately 13%15%, from an estimated $2.05$1.77 trillion in 20162018 to $1.79$2.04 trillion in 2017,2019, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will decreaseincrease from an estimated $1.0 trillion in 2016 to $662$532 billion in 2017.
Housing sales remained relatively flat2018 to $761 billion in the third quarter of 2017 compared with the second quarter of 2017. Total existing home sales averaged 5.4 million units annualized in the third quarter of 2017, a 3.1% decrease from the second quarter of 2017, according to data from the National Association of REALTORS®. Sales of foreclosed homes and preforeclosure, or “short,” sales (together, “distressed sales”) accounted for 4.0% of existing home sales in September 2017, the same2019, as in June 2017 and September 2016. According to the U.S. Census Bureau, new single-family home sales decreased during the third quarter of 2017, averaging an annualized rate of 603,000 units, a 0.3% decrease from the second quarter of 2017.
The number of months’ supply, or the inventory/sales ratio, of available existing homes and of new homes were each below their historical average at the end of the third quarter of 2017. According to the U.S. Census Bureau, the months’ supply of new single-family unsold homes was 5.0 months as of September 30, 2017, compared with 5.3 months as of June 30, 2017. According to the National Association of REALTORS®, the months’ supply of existing unsold homes was 4.2 months as of September 30, 2017, the same as of June 30, 2017.
The overall mortgage market serious delinquency rate fell to 2.5% as of June 30, 2017 (the latest date for which information is available), according to the Mortgage Bankers Association’s National Delinquency Survey, compared with 3.1% as of June 30, 2016. We provide information about Fannie Mae’s serious delinquency rate in “Single-Family Mortgage Credit Risk Management” below.
Based on our home price index, we estimate that home prices on a national basis increased by 1.1% in the third quarter of 2017 and by 5.3% in the first nine months of 2017, following increases of 5.7% in 2016, 4.6% in 2015 and 4.2% in 2014. Our home price estimates are based on preliminary data and are subject to change as additional data become available.
Thirty-year fixed-rate mortgage rates ended the quarter at 3.83% for the week of September 30, 2017, down from 3.88% for the week of June 30, 2017, according to Freddie Mac’s Primary Mortgage Market Survey®.have declined in 2019.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 2725 |
|
| | |
| | MD&A | Single-Family Business Segments |
Single-Family Business Metrics
Net interest income from guaranty fees for our Single-Family business is driven by the guaranty fees we charge on our single-family conventional guaranty book of business and the size of our single-family conventional guaranty book of business. The guaranty fees we charge are based on the characteristics of the loans we acquire. We adjust our guaranty fees in light of market conditions and to achieve return targets, which are based on FHFA’s proposed capital framework. As a result, the average charged guaranty fee on new acquisitions may fluctuate based on the credit quality and product mix of loans acquired, as well as market conditions and other factors. |
| | | | | | | | | | | | | | | | | | | |
| Table 14: Single-Family Business Key Performance Data |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
| Securitization Activity/New Business | | | | | | | | | | | |
| Single-family Fannie Mae MBS issuances | $ | 138,603 |
| | | $ | 166,023 |
| | | $ | 387,118 |
| | | $ | 399,906 |
| |
| Single-family Fannie Mae MBS outstanding, at end of period | $ | 2,738,647 |
| | | $ | 2,646,908 |
| | | $ | 2,738,647 |
| | | $ | 2,646,908 |
| |
| Portfolio Data | | | | | | | | | | | |
| Single-family retained mortgage portfolio, at end of period | $ | 230,926 |
| | | $ | 283,372 |
| | | $ | 230,926 |
| | | $ | 283,372 |
| |
| Credit Guaranty Activity | | | | | | | | | | | |
Average single-family guaranty book of business(1) | $ | 2,882,733 |
| | | $ | 2,821,030 |
| | | $ | 2,869,986 |
| | | $ | 2,823,787 |
| |
Average charged guaranty fee on single-family guaranty book of business:(2) | | | | | | | | | | | |
Fee, net of TCCA fees (in basis points)(3) | 42.4 |
| | | 41.1 |
| | | 42.1 |
| | | 40.7 |
| |
| Total fee (in basis points) | 49.9 |
| | | 47.8 |
| | | 49.4 |
| | | 47.2 |
| |
Average charged guaranty fee on new single-family acquisitions:(4) | | | | | | | | | | | |
Fee, net of TCCA fees (in basis points)(3) | 47.1 |
| | | 46.2 |
| | | 47.9 |
| | | 47.3 |
| |
| Total fee (in basis points) | 57.1 |
| | | 56.2 |
| | | 57.9 |
| | | 57.3 |
| |
Single-family credit loss ratio (in basis points)(5) | 8.3 |
| | | 8.8 |
| | | 11.3 |
| | | 14.2 |
| |
Single-family serious delinquency rate, at end of period(6) | 1.01 |
| % | | 1.24 |
| % | | 1.01 |
| % | | 1.24 |
| % |
__________
| |
(1) | Our single-family guaranty bookRepresents the sum of business consists of (a) single-family mortgage loans of Fannie Mae, (b) single-family mortgage loans underlying Fannie Mae MBS, and (c) other credit enhancements that we provide on single-family mortgage assets, such as long-term standby commitments. It excludes non-Fannie Mae single-family mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty. |
| |
(2)
| Calculated based on the average guaranty fee rate for our single-family conventional guaranty arrangements outstanding during the period plus the recognition of any upfront cash payments relating to these guaranty arrangements over an estimated average life. |
| |
(3)
| life at the time of acquisition. For the prior period, the methodology used to estimate average life at the time of acquisition has been updated. Excludes the impact of a 10 basis point guaranty fee increase implemented in 2012 pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us. |
| |
(4)(2)
| Calculated based on the average guaranty fee rate for our single-family guaranty arrangements entered into during the period plus the recognition of any upfront cash payments over an estimated average life. |
| |
(5)
| Calculated based on single-family segment credit losses divided by the average single-family guaranty book of business. |
| |
(6)
| Calculated based on the number of single-family conventional loans that are 90 days or more past due or in the foreclosure process, divided by the number of loans in ourOur single-family conventional guaranty book of business.business consists primarily of single-family conventional mortgage loans underlying Fannie Mae MBS outstanding. It also includes single-family conventional mortgage loans of Fannie Mae held in our retained mortgage portfolio, and other credit enhancements that we provide on single-family conventional mortgage assets. Our single-family conventional guaranty book of business does not include: (a) non-Fannie Mae single-family mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty; (b) mortgage loans guaranteed or insured, in whole or in part, by the U.S. government; or (c) Freddie Mac-acquired mortgage loans underlying Freddie Mac-issued UMBS that we have resecuritized. |
Our average charged guaranty fee on newly acquired conventional single-family Fannie Mae MBS issuancesloans, net of TCCA fees, decreased from 49.7 basis points in the third quarter and first nine months of 2017 compared with the third quarter and first nine months of 2016 driven primarily by a decrease in refinance activity, partially offset by an increase in our acquisition of home purchase mortgage loans2018 to 45.9 basis points in the third quarter and first nine months of 2017.2019, primarily driven by the stronger credit profile of our newly acquired single-family loans. Under FHFA’s proposed capital requirements, loans with stronger credit profiles typically require less capital.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 2826 |
|
| | |
| | MD&A | Single-Family Business Segments |
Single-Family Business Financial Results
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Table 15: Single-Family Business Financial Results |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | Variance | | 2017 | | 2016 | | Variance |
| | (Dollars in millions) |
Net interest income(1) | $ | 4,627 |
| | $ | 4,857 |
| | $ | (230 | ) | | $ | 13,749 |
| | $ | 13,832 |
| | $ | (83 | ) |
| Fee and other income | 1,005 |
| | 77 |
| | 928 |
| | 1,192 |
| | 222 |
| | 970 |
|
| Net revenues | 5,632 |
| | 4,934 |
| | 698 |
| | 14,941 |
| | 14,054 |
| | 887 |
|
| Investment gains, net | 286 |
| | 399 |
| | (113 | ) | | 557 |
| | 735 |
| | (178 | ) |
| Fair value losses, net | (300 | ) | | (499 | ) | | 199 |
| | (997 | ) | | (5,028 | ) | | 4,031 |
|
| Administrative expenses | (580 | ) | | (582 | ) | | 2 |
| | (1,781 | ) | | (1,788 | ) | | 7 |
|
Credit-related income (expense)(2) | (294 | ) | | 532 |
| | (826 | ) | | 1,113 |
| | 2,895 |
| | (1,782 | ) |
TCCA fees(1) | (531 | ) | | (465 | ) | | (66 | ) | | (1,552 | ) | | (1,358 | ) | | (194 | ) |
| Other expenses, net | (320 | ) | | (275 | ) | | (45 | ) | | (731 | ) | | (773 | ) | | 42 |
|
| Income before federal income taxes | 3,893 |
| | 4,044 |
| | (151 | ) | | 11,550 |
| | 8,737 |
| | 2,813 |
|
| Provision for federal income taxes | (1,361 | ) | | (1,399 | ) | | 38 |
| | (4,014 | ) | | (3,042 | ) | | (972 | ) |
| Net income | $ | 2,532 |
| | $ | 2,645 |
| | $ | (113 | ) | | $ | 7,536 |
| | $ | 5,695 |
| | $ | 1,841 |
|
__________ |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, | | | | For the Nine Months Ended September 30, | | |
| | | 2019 | | 2018 | | Variance | | 2019 | | 2018 | | Variance |
| | | (Dollars in millions) |
Net interest income(1) | | $ | 4,484 |
| | $ | 4,670 |
| | $ | (186 | ) | | $ | 12,942 |
| | $ | 13,954 |
| | $ | (1,012 | ) |
| Fee and other income | | 156 |
| | 79 |
| | 77 |
| | 350 |
| | 306 |
| | 44 |
|
| Net revenues | | 4,640 |
| | 4,749 |
| | (109 | ) | | 13,292 |
| | 14,260 |
| | (968 | ) |
| Investment gains, net | | 198 |
| | 146 |
| | 52 |
| | 709 |
| | 640 |
| | 69 |
|
| Fair value gains (losses), net | | (719 | ) | | 417 |
| | (1,136 | ) | | (2,364 | ) | | 1,729 |
| | (4,093 | ) |
| Administrative expenses | | (634 | ) | | (636 | ) | | 2 |
| | (1,899 | ) | | (1,928 | ) | | 29 |
|
Credit-related income(2) | | 1,747 |
| | 582 |
| | 1,165 |
| | 3,391 |
| | 1,775 |
| | 1,616 |
|
TCCA fees(1) | | (613 | ) | | (576 | ) | | (37 | ) | | (1,806 | ) | | (1,698 | ) | | (108 | ) |
| Other expenses, net | | (424 | ) | | (282 | ) | | (142 | ) | | (1,179 | ) | | (684 | ) | | (495 | ) |
| Income before federal income taxes | | 4,195 |
| | 4,400 |
| | (205 | ) | | 10,144 |
| | 14,094 |
| | (3,950 | ) |
| Provision for federal income taxes | | (872 | ) | | (938 | ) | | 66 |
| | (2,125 | ) | | (2,998 | ) | | 873 |
|
| Net income | | $ | 3,323 |
| | $ | 3,462 |
| | $ | (139 | ) | | $ | 8,019 |
| | $ | 11,096 |
| | $ | (3,077 | ) |
| |
(1) | Reflects the impact of a 10 basis point guaranty fee increase implemented in 2012 pursuant to the TCCA, the incremental revenue from which is remitted to Treasury. The resulting revenue is included in net interest income and the expense is recognized as “TCCA fees.” |
| |
(2) | Consists of the benefit (provision)or provision for credit losses and foreclosed property income or expense. |
Single-family netNet interest income decreased in the third quarter of 2017 compared with the third quarter of 2016 driven by a shift to credit-related expense from credit-related income and a decrease in net interest income. The decrease in net income was partially offset by an increase in fee and other income. Single-family net income increased in the first nine months of 2017 compared with the first nine months of 2016 driven by lower fair value losses and an increase in fee and other income, partially offset by lower credit-related income.
Single-family net interest income decreased in the third quarter and first nine months of 20172019 compared with the third quarter and first nine months of 2016,2018, primarily due to a decline in the average balance of our retained mortgage portfolionet interest income from portfolios and a decline in net amortization income, partially offset by a slightan increase in single-family base guaranty fee income. The drivers of net interest income for the single-family segment for the third quarter and first nine months of 20172019 are consistent with the drivers of net interest income discussed in our condensed consolidated statements of operations and comprehensive income. Seeincome, which we discuss in “Consolidated Results of Operations—Net Interest Income” for more information on the drivers of ourIncome.”
Fair value gains (losses), net interest income.
Fee and other income increasedFair value losses in the third quarter and first nine months of 2017 compared with2019 were primarily driven by decreases in the fair value of our pay-fixed risk management derivatives, partially offset by increases in the fair value of our receive-fixed risk management derivatives, and decreases in the fair value of our mortgage commitments. In addition, increases in the fair value of our debt also resulted in fair value losses for the third quarter and first nine months of 2016 due to income recognized in the third quarter of 2017 resulting from a settlement agreement resolving legal claims relating to private-label securities we purchased.
Fair2019. Conversely, fair value losses decreasedgains in the third quarter and first nine months of 2017 compared with2018 were primarily driven by increases in the third quarter and first nine months of 2016. The fair value losses that are reportedof our mortgage commitments derivatives and our pay-fixed risk management derivatives.
The drivers of our fair value gains (losses), net for the single-family segment for all periods presented are consistent with the drivers of fair value losses reportedgains (losses), net in our condensed consolidated statements of operations and comprehensive income. Weincome, which we discuss our fair value gains and losses in “Consolidated Results of Operations—Fair Value Losses,Gains (Losses), Net.”
Credit-related expenseincome
Credit-related income in the third quarter and first nine months of 20172019 was primarily driven by the provision for credit losses resulting from the impact of estimated incurred losses from the hurricanes, partially offset by the benefit for credit losses resulting from increases in actual home prices and the redesignation of certain reperformingsingle-family loans from HFI to HFS. Credit-related income inHFS; the first nine monthsenhancement to the model, including the incorporation of 2017 was primarily driven byrecent loan performance data used to estimate cash flows for individually impaired single-family loans; an increase in actual and forecasted home pricesprices; lower actual and a benefit for credit losses resulting fromprojected mortgage interest rates; and changes in loan activity related to loan liquidations.
Credit-related income in the third quarter and first nine months of 2018 was primarily driven by the redesignation of certain reperforming and nonperforming single-family loans from HFI to HFS and an increase in actual home prices. These factors were partially offset by estimated incurred losses resulting from the hurricanes. We recognized a benefit for credit lossesimpact of higher actual and projected mortgage interest rates in the third quarterperiods.
See “Consolidated Results of 2016 primarily due to an increaseOperations—Credit-Related Income” in home prices, including distressed property valuations. We recognized a benefitthis report for credit losses in the first nine months of 2016more information on our credit-related income.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 2927 |
|
| | |
| | MD&A | Single-Family Business Segments |
Other expenses, net
Other expenses, net increased in the third quarter and first nine months of 2019 compared with the third quarter and first nine months of 2018, primarily due to an increase in home prices, including distressed property valuationscredit enhancement costs resulting from higher outstanding volumes of loans covered by a credit risk transfer transaction. The drivers of other expenses, net for the single-family segment for the third quarter and a declinefirst nine months of 2019 are consistent with the drivers discussed in interest rates.our condensed consolidated statements of operations and comprehensive income, which we discuss in “Consolidated Results of Operations—Other Expenses, Net.”
Single-Family Mortgage Credit Risk Management
Our strategy in managing single-family mortgage credit risk consists of five primary components:
our acquisition and servicing policies along with our underwriting and servicing standards;
the transfer of credit risk through credit risk transfer transactions and the use of credit enhancements;
portfolio diversification and monitoring;
management of problem loans; and
real estate owned (“REO”) management.
This section updates our discussion of single-family mortgage credit risk management in our 20162018 Form 10-K in10-K. For information on our acquisition and servicing policies, underwriting and servicing standards, quality control process, repurchase requests, and representation and warranty framework, see “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management.” For additional information on how we manage risk, see “MD&A—Risk Management” and “Risk Factors” in our 20162018 Form 10-K.
The single-family credit statistics we focus on and report below generally relate to our single-family conventional guaranty book of business, which represents the substantial majority of our total single-family guaranty book of business. We exclude from these credit statistics approximately 1% of our single-family conventional guaranty book of business for which our loan level information is incomplete as of September 30, 2017 and December 31, 2016. We typically obtain this data from the sellers or servicers of the mortgage loans in our guaranty book of business and receive representations and warranties from them as to the accuracy of the information. While we perform various quality assurance checks by sampling loans to assess compliance with our underwriting and eligibility criteria, we do not independently verify all reported information. We rely on a combination of data verification tools we make available to lenders and lender representations regarding the accuracy of the characteristics of loans in our guaranty book of business. We provide information on non-Fannie Mae mortgage-related securities held in our portfolio in “Note 5, Investments in Securities.”
Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards
For an overview and additional information on our quality control process and recent changes, see “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards” in our 2016 Form 10-K and Second Quarter 2017 Form 10-Q.
Repurchase Requests
If we determine that a mortgage loan did not meet our underwriting or eligibility requirements, loan representations or warranties were violated or a mortgage insurer rescinded coverage, then our mortgage sellers and/or servicers are obligated to either repurchase the loan or foreclosed property, reimburse us for our losses or provide other remedies, unless the loan is eligible for representation and warranty relief as described below. We collectively refer to our demands that mortgage sellers and servicers meet these obligations as repurchase requests. The unpaid principal balance of single-family loans that are subject to a repurchase request has declined significantly since we strengthened our underwriting standards in late 2008 and 2009, implemented changes to our quality control process in 2013 and implemented our revised representation and warranty framework described below. As of September 30, 2017, we had issued repurchase requests on approximately 0.09% of the $594.4 billion of unpaid principal balance of single-family loans delivered to us during the twelve months ended January 2017. Our total outstanding repurchase requests were $202 million as of September 30, 2017, compared with $303 million as of December 31, 2016.
Representation and Warranty Relief
We implemented a revised representation and warranty framework in 2013 to provide lenders with a higher degree of certainty and clarity regarding their exposure to repurchase requests on future deliveries, as well as greater consistency around repurchase timelines and remedies. This framework was further revised in 2014. Under the framework, lenders are relieved of certain repurchase liabilities for loans that meet specific requirements. In addition, through our Day 1 CertaintyTM initiative we have developed new tools that enable lenders to obtain relief from certain representations and warranties at an earlier date than provided for under the
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 30 |
framework. For information on our representation and warranty framework and our Day 1 Certainty initiative, see “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards—Representation and Warranty Relief” in our 2016 Form 10-K.
As of September 30, 2017, approximately 54% of the outstanding loans in our single-family conventional guaranty book of business were acquired after January 1, 2013 and are subject to the revised representation and warranty framework, compared with 48% as of December 31, 2016. Table 16 below displays information regarding the relief status of outstanding single-family conventional loans, based only on payment history or the satisfactory conclusion of a full-file quality control review, delivered to us beginning in 2013 under the revised representation and warranty framework.
|
| | | | | | | | | | | | | | | | | | | | |
| Table 16: Representation and Warranty Status of Single-Family Conventional Loans Acquired in 2013-2017 |
| | As of September 30, 2017 |
| | Refi Plus | | Non-Refi Plus | | Total |
| | Unpaid Principal Balance | | Number of Loans | | Unpaid Principal Balance | | Number of Loans | | Unpaid Principal Balance | | Number of Loans |
| | (Dollars in millions) |
| Single-family conventional loans that: | | | | | | | | | | | |
| Obtained relief | $ | 165,881 |
| | 1,216,744 |
| | $ | 423,831 |
| | 2,325,929 |
| | $ | 589,712 |
| | 3,542,673 |
|
| Remain eligible for relief | 19,566 |
| | 130,176 |
| | 1,172,898 |
| | 5,418,206 |
| | 1,192,464 |
| | 5,548,382 |
|
| Are not eligible for relief | 4,521 |
| | 30,430 |
| | 17,490 |
| | 93,889 |
| | 22,011 |
| | 124,319 |
|
| Total outstanding loans acquired since January 1, 2013 | $ | 189,968 |
| | 1,377,350 |
| | $ | 1,614,219 |
| | 7,838,024 |
| | $ | 1,804,187 |
| | 9,215,374 |
|
As of September 30, 2017, approximately 38% of loans acquired under the revised representation and warranty framework had obtained relief, compared with 37% as of December 31, 2016. Providing lenders with relief from repurchasing loans for breaches of certain representations and warranties on loans that meet specified eligibility requirements shifts some of the risk of non-compliance with our requirements back to us. However, we believe that we have taken appropriate steps to mitigate this risk, including moving the primary focus and timing of our quality control reviews to shortly after loan delivery. We also retain the right to review all loans, including reviews for any violations of “life of loan” representations and warranties.
Transfer of Mortgage Credit Risk: Single-Family Credit Risk Transfer Transactions
Our Single-Family business has developed risk-sharing capabilities to transfer portions of our single-family mortgage credit risk to the private market. The goal of these transactions is, to the extent economically sensible, to transfer a portion of the existing mortgage credit risk on a portion of recently acquired loans in our single-family guaranty book of business in order to reduce the economic risk to us and to taxpayers of future borrower defaults. Our primary method of achieving this objective has been through our CAS and CIRT transactions. In these transactions, we transfer to investors a portion of the mortgage credit risk associated with losses on a reference pool of mortgage loans and in exchange we pay investors a premium that effectively reduces the guaranty fee income we retain on the loans. We enter into other types of credit risk transfer transactions in addition to our CAS and CIRT transactions, including lender risk-sharing transactions. For information on our credit risk transfer transactions, see “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk—Credit Risk Transfer Transactions” in our 2016 Form 10-K.
As of September 30, 2017, $884 billion in outstanding unpaid principal balance of our single-family loans, or 31% of the loans in our single-family conventional guaranty book of business measured by unpaid principal balance, were included in a reference pool for a credit risk transfer transaction. During the first nine months of 2017, pursuant to our credit risk transfer transactions, we transferred a portion of the mortgage credit risk on single-family mortgages with an unpaid principal balance of $345 billion at the time of the transactions. Our CAS and CIRT transactions are our primary credit risk transfer transactions. In the first nine months of 2017, we paid $568 million on our outstanding CAS debt for the spread over LIBOR at the time of issuance of the debt and $127 million in CIRT premiums, compared with $377 million on CAS debt and $77 million in CIRT premiums in the first
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 31 |
nine months of 2016. These amounts increased from the first nine months of 2016 to the first nine months of 2017 as we continue to transfer credit risk on a larger portion of our single-family book of business.
We generally include approximately half of our recent single-family acquisitions in credit risk transfer transactions, as we target only certain types of loan categories for these transactions. Loan categories we have targeted for credit risk transfer transactions generally consist of fixed-rate 30-year single-family conventional loans that meet certain credit performance characteristics, are non-Refi Plus and have LTV ratios between 60% and 97%. The portion of our single-family loan acquisitions we include in credit risk transfer transactions can vary from period to period based on market conditions and other factors.
Table 17 displays the mortgage credit risk transferred to third parties and retained by Fannie Mae at the time of issuance and the outstanding reference pool balances as of September 30, 2017 pursuant to our single-family credit risk transfer transactions.
|
| | | | | | | | | | | | | | | | |
| Table 17: Single-Family Credit Risk Transfer Transactions |
| Issuances from Inception to September 30, 2017 |
(Dollars in billions)
|
| Senior | | Fannie Mae(1) | | |
| $1,112 | | |
| | | | | | | | | | | |
| Mezzanine | | Fannie Mae(1) | | CIRT(2)(3) | | CAS(2) | | Lender Risk-Sharing(2) | | Initial Reference Pool(4) |
| $1 | | $5 | | $26 | | * | | $1,153 |
| | | | | | | | | | | |
| First Loss | | Fannie Mae(1) | | CAS(2)(5) | | Lender Risk-Sharing(2) | | |
| $6 | | $2 | | $1 | | |
|
| | | | | | | | | | | | | | | | |
| Outstanding as of September 30, 2017 |
(Dollars in billions)
|
| Senior | | Fannie Mae(1) | | |
| $849 | | |
| | | | | | | | | | | |
| Mezzanine | | Fannie Mae(1) | | CIRT(2)(3) | | CAS(2) | | Lender Risk-Sharing(2) | | Outstanding Reference Pool(4)(6) |
| $1 | | $5 | | $20 | | * | | $884 |
| | | | | | | | | | | |
| First Loss | | Fannie Mae(1) | | CAS(2)(5) | | Lender Risk-Sharing(2) | | |
| $6 | | $2 | | $1 | | |
__________
| |
* | Represents less than $500 million. |
| |
(1)
| Credit risk retained by Fannie Mae in CAS, CIRT and lender risk-sharing transactions. Tranche sizes vary across programs. |
| |
(2)
| Credit risk transferred to third parties. Tranche sizes vary across programs. |
| |
(3)
| Includes mortgage pool insurance transactions covering loans with an unpaid principal balance of approximately $7 billion at issuance and approximately $4 billion outstanding as of September 30, 2017. |
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 32 |
| |
(4)
| For CIRT and some lender risk-sharing transactions, “reference pool” reflects a pool of covered loans. |
| |
(5)
| For CAS transactions, “First Loss” represents all B tranche balances. |
| |
(6)
| For CAS and some lender risk-sharing transactions, represents outstanding reference pools, not the outstanding unpaid principal balance of the underlying loans, as of September 30, 2017. |
As shown in the outstanding balances in Table 17 above, we have designed our credit risk transfer transactions so that prepayment activity typically has a more substantial impact on the senior tranches retained by Fannie Mae than on the risk transferred to third parties. Principal payments on the underlying reference pool are first allocated between the senior tranches and then applied sequentially to the subordinate tranches. Losses are applied in reverse sequential order starting with the first loss tranche. For CAS transactions, all principal payments and losses are allocated pro rata between the sold notes and the portion we retain. The decreases in outstanding balances from issuance to September 30, 2017 in the senior and mezzanine tranches are the result of paydowns. Outstanding balances from issuance to September 30, 2017 in the first loss tranches decreased only slightly as the losses allocated to those tranches were insignificant.
While these deals are expected to mitigate some of our potential future credit losses, they are not designed to shield us from all losses. We retain a portion of the risk of future credit losses on loans covered by CAS and CIRT transactions, including all or at least half of the first loss positions and all of the senior loss positions. In addition, on our CAS transactions, we retain a pro rata share of risk equal to approximately 5% of all notes sold. When structuring these transactions, we seek to optimize benefit to cost considerations by taking into account a number of factors, including the level of investor demand, liquidity and pricing levels, and the amount of risk reduction provided assuming various economic scenarios. Due to differences in accounting, there also could be a significant lag between the time when we recognize a provision for credit losses and when we recognize the related recovery from our CAS transactions. See “Risk Factors” in our 2016 Form 10-K for a discussion of factors that may limit our ability to use credit risk transfer transactions to mitigate some of our potential future credit losses, including factors that may result in these transactions providing less protection than we expect.
We continue to explore ways to innovate and improve our credit risk transfer programs. As part of this continued innovation, we announced a proposed new structure that would enhance our CAS program by structuring our CAS offerings as notes issued by trusts that qualify as real estate mortgage investment conduits. This proposed enhancement to our CAS program is designed to promote the continued growth of the market by expanding the potential investor base for these securities, making the program more attractive to real estate investment trust investors, as well as certain other investors, and limiting investor exposure to Fannie Mae counterparty risk.
Single-Family Portfolio Diversification and Monitoring
Overview
Diversification within our single-family mortgage credit bookThe profile of business by product type, loan characteristics and geography is an important factor that influences credit quality and performance and may reduce our credit risk. We monitor various loan attributes, in conjunction with housing market and economic conditions, to determine if our pricing, eligibility and underwriting criteria accurately reflect the risk associated with loans we acquire or guarantee. In some cases, we may decide to significantly reduce our participation in riskier loan product categories. We also review the payment performance of loans in order to help identify potential problem loans early in the delinquency cycle and to guide the development of our loss mitigation strategies. For information on key loan attributes, see “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring” in our 2016 Form 10-K.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 33 |
Credit Risk Profile of Our Single-Family Acquisitions and Book of Business
Table 18 below displays information regarding the credit characteristics of the loans in our single-family conventional guaranty book of business by acquisition period. |
| | | | | | | | | | | |
| Table 18: Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period |
| | As of September 30, 2017 |
| | % of Single-Family Conventional Guaranty Book of Business(1) | | Current Estimated Mark-to-Market LTV Ratio(2) | | Current Estimated Mark-to-Market LTV Ratio>100%(3) | | Serious Delinquency Rate |
| 2009-2017 acquisitions, excluding HARP and other Refi Plus loans | 76 | % | | 57 | % | | * | % | | 0.23 | % |
HARP loans(4) | 8 | | | 71 | | | 6 | | | 1.09 | |
Other Refi Plus loans(5) | 6 | | | 42 | | | * | | | 0.43 | |
| 2005-2008 acquisitions | 7 | | | 67 | | | 8 | | | 5.69 | |
| 2004 and prior acquisitions | 3 | | | 40 | | | 1 | | | 2.78 | |
| Total single-family conventional guaranty book of business | 100 | % | | 58 | % | | 1 | % | | 1.01 | % |
__________includes the following key risk characteristics:
| |
*• | Represents less than 0.5%. |
| |
(1)
| Calculated based onLoan-to-value ratio. Loan-to-value (“LTV”) ratio is a strong predictor of credit performance. The likelihood of default and the aggregate unpaid principal balancegross severity of single-family loans for each category divided bya loss in the aggregate unpaid principal balanceevent of loans in our single-family conventional guaranty book of businessdefault are typically lower as of September 30, 2017. |
| |
(2)
| The aggregatethe LTV ratio decreases. This also applies to the estimated mark-to-market LTV ratio is based onratios, particularly those over 100%, as this indicates that the unpaid principalborrower’s mortgage balance ofexceeds the loans as of the end of the period divided by the estimated current value of the properties, which we calculate using an internal valuation model that estimates periodic changes in homeproperty value. Excludes loans for which this information is not readily available. |
| |
(3)
| The current estimated mark-to-market LTV ratio greater than 100% is based on the unpaid principal balance of the loans with mark-to-market LTV ratios greater than 100% for each category as of the end of the period divided by the aggregate unpaid principal balance of loans for each category in our single-family conventional guaranty book of business as of September 30, 2017. |
| |
(4)
| HARP loans, which we began to acquire in 2009, have LTV ratios at origination in excess of 80%. Some borrowers for HARP loans may have lower FICOcredit scores and may provide less documentation than we would otherwise require. As of September 30, 2017, HARP loans had a weighted average FICOcredit score at origination of 725 compared with 745 for loans in our single-family book of business overall.
|
| |
(5)
• | Other Refi PlusProduct type. Certain loan product types have features that may result in increased risk. Generally, intermediate-term, fixed-rate mortgages exhibit the lowest default rates, followed by long-term, fixed-rate mortgages. Historically, adjustable-rate mortgages (“ARMs”), including negative-amortizing and interest-only loans, which we began to acquire in 2009, includes all other Refi Plus loans that are not HARP loans.and balloon/reset mortgages have exhibited higher default rates than fixed-rate mortgages, partly because the borrower’s payments rose, within limits, as interest rates changed. |
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q• | 34Number of units. Mortgages on one-unit properties tend to have lower credit risk than mortgages on two-, three- or four-unit properties. |
|
| | |
| • | MD&A | Business SegmentsProperty type. Certain property types have a higher risk of default. For example, condominiums generally are considered to have higher credit risk than single-family detached properties. |
| |
| • | Occupancy type. Mortgages on properties occupied by the borrower as a primary or secondary residence tend to have lower credit risk than mortgages on investment properties. |
| |
| • | Credit score. Credit score is a measure often used by the financial services industry, including us, to assess borrower credit quality and the likelihood that a borrower will repay future obligations as expected. A higher credit score typically indicates lower credit risk. |
| |
| • | Debt-to-income ratio. Debt-to-income (“DTI”) ratio refers to the ratio of a borrower’s outstanding debt obligations (including both mortgage debt and certain other long-term and significant short-term debts) to that borrower’s reported or calculated monthly income, to the extent the income is used to qualify for the mortgage. As a borrower’s DTI ratio increases, the associated risk of default on the loan generally increases, especially if other higher-risk factors are present. From time to time, we revise our guidelines for determining a borrower’s DTI ratio. The amount of income reported by a borrower and used to qualify for a mortgage may not represent the borrower’s total income; therefore, the DTI ratios we report may be higher than borrowers’ actual DTI ratios. |
| |
| • | Loan purpose. Loan purpose refers to how the borrower intends to use the funds from a mortgage loan—either for a home purchase or refinancing of an existing mortgage. Cash-out refinancings have a higher risk of default than either mortgage loans used for the purchase of a property or other refinancings that restrict the amount of cash returned to the borrower. |
| |
| • | Geographic concentration. Local economic conditions affect borrowers’ ability to repay loans and the value of collateral underlying loans. Geographic diversification reduces mortgage credit risk. |
| |
| • | Loan age. We monitor year of origination and loan age, which is defined as the number of years since origination. Credit losses on mortgage loans typically do not peak until the third through sixth year following origination; however, this range can vary based on many factors, including changes in macroeconomic conditions and foreclosure timelines. |
Table 19The table below displays our single-family conventional business volumes and our single-family conventional guaranty book of business, based on certain key risk characteristics that we use to evaluate the risk profile and credit quality of our single-family loans. We exclude from the single-family credit statistics reported below less than 1% of our single-family conventional guaranty book of business for which our loan-level information was incomplete as of September 30, 2019 and December 31, 2018. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 19: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1) |
| | Percent of Single-Family Conventional Business Volume at Acquisition(2) | Percent of Single-Family Conventional Guaranty Book of Business(3)(4) As of |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | | September 30, 2017 | | December 31, 2016 |
Original LTV ratio:(5) | | | | | | | | | | | | | | | |
| <= 60% | 16 |
| % | 21 |
| % | 18 |
| % | 19 |
| % | | 21 |
| % | | | 21 |
| % |
| 60.01% to 70% | 12 |
| | 14 |
| | 13 |
| | 14 |
| | | 14 |
| | | | 14 |
| |
| 70.01% to 80% | 39 |
| | 38 |
| | 39 |
| | 39 |
| | | 38 |
| | | | 38 |
| |
| 80.01% to 90% | 13 |
| | 12 |
| | 12 |
| | 12 |
| | | 11 |
| | | | 11 |
| |
| 90.01% to 100% | 20 |
| | 15 |
| | 18 |
| | 16 |
| | | 13 |
| | | | 12 |
| |
| Greater than 100% | * |
| | * |
| | * |
| | * |
| | | 3 |
| | | | 4 |
| |
| Total | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | | 100 |
| % |
| Weighted average | 76 |
| % | 74 |
| % | 75 |
| % | 74 |
| % | | 75 |
| % | | | 75 |
| % |
| Average loan amount | $ | 228,445 |
| | $ | 232,225 |
| | $ | 225,123 |
| | $ | 228,183 |
| | | $ | 165,691 |
| | | | $ | 163,200 |
| |
Estimated mark-to-market LTV ratio:(6) | | | | | | | | | | | | | | | |
| <= 60% | | | | | | | | | | 53 |
| % | | | 49 |
| % |
| 60.01% to 70% | | | | | | | | | | 19 |
| | | | 19 |
| |
| 70.01% to 80% | | | | | | | | | | 16 |
| | | | 17 |
| |
| 80.01% to 90% | | | | | | | | | | 8 |
| | | | 9 |
| |
| 90.01% to 100% | | | | | | | | | | 3 |
| | | | 4 |
| |
| Greater than 100% | | | | | | | | | | 1 |
| | | | 2 |
| |
| Total | | | | | | | | | | 100 |
| % | | | 100 |
| % |
| Weighted average | | | | | | | | | | 58 |
| % | | | 60 |
| % |
| Product type: | | | | | | | | | | | | | | | |
Fixed-rate:(7) | | | | | | | | | | | | | | | |
| Long-term | 85 |
| % | 81 |
| % | 83 |
| % | 81 |
| % | | 79 |
| % | | | 77 |
| % |
| Intermediate-term | 12 |
| | 17 |
| | 14 |
| | 17 |
| | | 16 |
| | | | 17 |
| |
| Interest-only | — |
| | — | | — |
| | — |
| | | * |
| | | | * |
| |
| Total fixed-rate | 97 |
| | 98 |
| | 97 |
| | 98 |
| | | 95 |
| | | | 94 |
| |
| Adjustable-rate: | | | | | | | | | | | | | | | |
| Interest-only | — | | — |
| | — |
| | — |
| | | 1 |
| | | | 1 |
| |
| Other ARMs | 3 |
| | 2 |
| | 3 |
| | 2 |
| | | 4 |
| | | | 5 |
| |
| Total adjustable-rate | 3 |
| | 2 |
| | 3 |
| | 2 |
| | | 5 |
| | | | 6 |
| |
| Total | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | | 100 |
| % |
| Number of property units: | | | | | | | | | | | | | | | |
| 1 unit | 98 |
| % | 98 |
| % | 97 |
| % | 98 |
| % | | 97 |
| % | | | 97 |
| % |
| 2-4 units | 2 |
| | 2 |
| | 3 |
| | 2 |
| | | 3 |
| | | | 3 |
| |
| Total | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | | 100 |
| % |
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 3528 |
|
| | |
| | MD&A | Single-Family Business Segments |
We provide additional information on the credit characteristics of our single-family loans in quarterly financial supplements, which we submit to the SEC with current reports on Form 8-K. Information in our quarterly financial supplements is not incorporated by reference into this report. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Key Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1) |
| | | Percent of Single-Family Conventional Business Volume at Acquisition(2) | Percent of Single-Family Conventional Guaranty Book of Business(3) As of |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | | 2019 | | 2018 | | 2019 | | 2018 | | | September 30, 2019 | | | December 31, 2018 | |
Original LTV ratio:(4) | | | | | | | | | | | | | | | |
| <= 60% | | 16 |
| % | 14 |
| % | 16 |
| % | 16 |
| % | | 19 |
| % | | 19 |
| % |
| 60.01% to 70% | | 12 |
| | 11 |
| | 12 |
| | 12 |
| | | 13 |
| | | 13 |
| |
| 70.01% to 80% | | 38 |
| | 37 |
| | 37 |
| | 37 |
| | | 37 |
| | | 38 |
| |
| 80.01% to 90% | | 13 |
| | 14 |
| | 13 |
| | 13 |
| | | 12 |
| | | 12 |
| |
| 90.01% to 95% | | 14 |
| | 16 |
| | 14 |
| | 15 |
| | | 12 |
| | | 11 |
| |
| 95.01% to 100% | | 7 |
| | 8 |
| | 8 |
| | 7 |
| | | 5 |
| | | 4 |
| |
| Greater than 100% | | — |
| | * |
| | * |
| | * |
| | | 2 |
| | | 3 |
| |
| Total | | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | 100 |
| % |
| Weighted average | | 77 |
| % | 78 |
| % | 77 |
| % | 77 |
| % | | 76 |
| % | | 75 |
| % |
| Average loan amount | | $ | 269,204 |
| | $ | 235,125 |
| | $ | 255,909 |
| | $ | 233,027 |
| | | $ | 172,566 |
| | | $ | 170,076 |
| |
Estimated mark-to-market LTV ratio:(5) | | | | | | | | | | | | | | | |
| <= 60% | | | | | | | | | | | 55 |
| % | | 54 |
| % |
| 60.01% to 70% | | | | | | | | | | | 17 |
| | | 18 |
| |
| 70.01% to 80% | | | | | | | | | | | 16 |
| | | 16 |
| |
| 80.01% to 90% | | | | | | | | | | | 8 |
| | | 8 |
| |
| 90.01% to 100% | | | | | | | | | | | 4 |
| | | 4 |
| |
| Greater than 100% | | | | | | | | | | | * |
| | | * |
| |
| Total | | | | | | | | | | | 100 |
| % | | 100 |
| % |
| Weighted average | | | | | | | | | | | 56 |
| % | | 57 |
| % |
| Product type: | | | | | | | | | | | | | | | |
Fixed-rate:(6) | | | | | | | | | | | | | | | |
| Long-term | | 90 |
| % | 91 |
| % | 90 |
| % | 89 |
| % | | 85 |
| % | | 84 |
| % |
| Intermediate-term | | 10 |
| | 7 |
| | 9 |
| | 9 |
| | | 13 |
| | | 14 |
| |
| Total fixed-rate | | 100 |
| | 98 |
| | 99 |
| | 98 |
| | | 98 |
| | | 98 |
| |
| Adjustable-rate | | * |
| | 2 |
| | 1 |
| | 2 |
| | | 2 |
| | | 2 |
| |
| Total | | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | 100 |
| % |
| Number of property units: | | | | | | | | | | | | | | | |
| 1 unit | | 98 |
| % | 98 |
| % | 98 |
| % | 98 |
| % | | 97 |
| % | | 97 |
| % |
| 2 to 4 units | | 2 |
| | 2 |
| | 2 |
| | 2 |
| | | 3 |
| | | 3 |
| |
| Total | | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | 100 |
| % |
| Property type: | | | | | | | | | | | | | | | |
| Single-family homes | | 91 |
| % | 90 |
| % | 91 |
| % | 90 |
| % | | 91 |
| % | | 91 |
| % |
| Condo/Co-op | | 9 |
| | 10 |
| | 9 |
| | 10 |
| | | 9 |
| | | 9 |
| |
| Total | | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | 100 |
| % |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 29 |
|
| | |
| MD&A | Single-Family Business |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Percent of Single-Family Conventional Business Volume at Acquisition(2) | Percent of Single-Family Conventional Guaranty Book of Business(3)(4) As of |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | | September 30, 2017 | | December 31, 2016 |
| Property type: | | | | | | | | | | | | | | | |
| Single-family homes | 90 |
| % | 91 |
| % | 90 |
| % | 90 |
| % | | 91 |
| % | | | 91 |
| % |
| Condo/Co-op | 10 |
| | 9 |
| | 10 |
| | 10 |
| | | 9 |
| | | | 9 |
| |
| Total | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | | 100 |
| % |
| Occupancy type: | | | | | | | | | | | | | | | |
| Primary residence | 89 |
| % | 91 |
| % | 89 |
| % | 90 |
| % | | 88 |
| % | | | 88 |
| % |
| Second/vacation home | 4 |
| | 4 |
| | 4 |
| | 4 |
| | | 4 |
| | | | 4 |
| |
| Investor | 7 |
| | 5 |
| | 7 |
| | 6 |
| | | 8 |
| | | | 8 |
| |
| Total | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | | 100 |
| % |
| FICO credit score at origination: | | | | | | | | | | | | | | | |
< 620(8) | * |
| % | * |
| % | * |
| % | * |
| % | | 2 |
| % | | | 2 |
| % |
| 620 to < 660 | 5 |
| | 4 |
| | 5 |
| | 4 |
| | | 5 |
| | | | 5 |
| |
| 660 to < 700 | 13 |
| | 11 |
| | 13 |
| | 12 |
| | | 12 |
| | | | 12 |
| |
| 700 to < 740 | 23 |
| | 20 |
| | 23 |
| | 21 |
| | | 20 |
| | | | 20 |
| |
| >= 740 | 59 |
| | 65 |
| | 59 |
| | 63 |
| | | 61 |
| | | | 61 |
| |
| Total | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | | 100 |
| % |
| Weighted average | 745 |
| | 752 |
| | 745 |
| | 749 |
| | | 745 |
| | | | 745 |
| |
Loan purpose: | | | | | | | | | | | | | | | |
| Purchase | 63 |
| % | 47 |
| % | 56 |
| % | 47 |
| % | | 38 |
| % | | | 35 |
| % |
| Cash-out refinance | 19 |
| | 18 |
| | 21 |
| | 18 |
| | | 20 |
| | | | 20 |
| |
| Other refinance | 18 |
| | 35 |
| | 23 |
| | 35 |
| | | 42 |
| | | | 45 |
| |
| Total | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | | 100 |
| % |
Geographic concentration:(9) | | | | | | | | | | | | | | | |
| Midwest | 15 |
| % | 15 |
| % | 14 |
| % | 14 |
| % | | 15 |
| % | | | 15 |
| % |
| Northeast | 14 |
| | 14 |
| | 14 |
| | 14 |
| | | 18 |
| | | | 18 |
| |
| Southeast | 23 |
| | 21 |
| | 23 |
| | 21 |
| | | 22 |
| | | | 22 |
| |
| Southwest | 20 |
| | 19 |
| | 20 |
| | 20 |
| | | 17 |
| | | | 17 |
| |
| West | 28 |
| | 31 |
| | 29 |
| | 31 |
| | | 28 |
| | | | 28 |
| |
| Total | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | | 100 |
| % |
__________ |
| | | | | | | | | | | | | | | | | | | | | |
| | | Percent of Single-Family Conventional Business Volume at Acquisition(2) | Percent of Single-Family Conventional Guaranty Book of Business(3) As of |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | | 2019 | | 2018 | | 2019 | | 2018 | | | September 30, 2019 | | | December 31, 2018 | |
| Occupancy type: | | | | | | | | | | | | | | | |
| Primary residence | | 93 |
| % | 89 |
| % | 91 |
| % | 89 |
| % | | 89 |
| % | | 89 |
| % |
| Second/vacation home | | 3 |
| | 4 |
| | 4 |
| | 4 |
| | | 4 |
| | | 4 |
| |
| Investor | | 4 |
| | 7 |
| | 5 |
| | 7 |
| | | 7 |
| | | 7 |
| |
| Total | | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | 100 |
| % |
| FICO credit score at origination: | | | | | | | | | | | | | | | |
| < 620 | | * |
| % | * |
| % | * |
| % | * |
| % | | 1 |
| % | | 2 |
| % |
| 620 to < 660 | | 3 |
| | 6 |
| | 4 |
| | 6 |
| | | 5 |
| | | 5 |
| |
| 660 to < 680 | | 3 |
| | 5 |
| | 4 |
| | 5 |
| | | 5 |
| | | 5 |
| |
| 680 to < 700 | | 7 |
| | 9 |
| | 8 |
| | 9 |
| | | 7 |
| | | 7 |
| |
| 700 to < 740 | | 22 |
| | 23 |
| | 23 |
| | 23 |
| | | 21 |
| | | 20 |
| |
| >= 740 | | 65 |
| | 57 |
| | 61 |
| | 57 |
| | | 61 |
| | | 61 |
| |
| Total | | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | 100 |
| % |
| Weighted average | | 751 |
| | 743 |
| | 747 |
| | 743 |
| | | 746 |
| | | 746 |
| |
DTI ratio at origination:(7) | | | | | | | | | | | | | | | |
| <= 43% | | 74 |
| % | 66 |
| % | 71 |
| % | 66 |
| % | | 76 |
| % | | 77 |
| % |
| 43.01% to 45% | | 9 |
| | 9 |
| | 9 |
| | 9 |
| | | 9 |
| | | 9 |
| |
| Greater than 45% | | 17 |
| | 25 |
| | 20 |
| | 25 |
| | | 15 |
| | | 14 |
| |
| Total | | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | 100 |
| % |
| Weighted average | | 36 |
| % | 38 |
| % | 36 |
| % | 37 |
| % | | 35 |
| % | | 35 |
| % |
Loan purpose: | | | | | | | | | | | | | | | |
| Purchase | | 54 |
| % | 72 |
| % | 59 |
| % | 64 |
| % | | 45 |
| % | | 43 |
| % |
| Cash-out refinance | | 18 |
| | 19 |
| | 19 |
| | 22 |
| | | 19 |
| | | 20 |
| |
| Other refinance | | 28 |
| | 9 |
| | 22 |
| | 14 |
| | | 36 |
| | | 37 |
| |
| Total | | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | 100 |
| % |
Geographic concentration:(8) | | | | | | | | | | | | | | | |
| Midwest | | 14 |
| % | 15 |
| % | 14 |
| % | 14 |
| % | | 15 |
| % | | 15 |
| % |
| Northeast | | 14 |
| | 14 |
| | 14 |
| | 13 |
| | | 17 |
| | | 17 |
| |
| Southeast | | 21 |
| | 23 |
| | 22 |
| | 23 |
| | | 22 |
| | | 22 |
| |
| Southwest | | 20 |
| | 21 |
| | 21 |
| | 21 |
| | | 18 |
| | | 18 |
| |
| West | | 31 |
| | 27 |
| | 29 |
| | 29 |
| | | 28 |
| | | 28 |
| |
| Total | | 100 |
| % | 100 |
| % | 100 |
| % | 100 |
| % | | 100 |
| % | | 100 |
| % |
| Origination year: | | | | | | | | | | | | | | | |
| 2013 and prior | | | | | | | | | | | 35 |
| % | | 40 |
| % |
| 2014 | | | | | | | | | | | 5 |
| | | 6 |
| |
| 2015 | | | | | | | | | | | 9 |
| | | 10 |
| |
| 2016 | | | | | | | | | | | 14 |
| | | 16 |
| |
| 2017 | | | | | | | | | | | 13 |
| | | 15 |
| |
| 2018 | | | | | | | | | | | 12 |
| | | 13 |
| |
| 2019 | | | | | | | | | | | 12 |
| | | — |
| |
| Total | | | | | | | | | | | 100 |
| % | | 100 |
| % |
| |
| * | Represents less than 0.5% of single-family conventional business volume or book of business. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 30 |
|
| | |
| MD&A | Single-Family Business |
| |
(1) | Second lienSecond-lien mortgage loans held by third parties are not reflected in the original LTV or the estimated mark-to-market LTV ratios in this table. |
| |
(2) | Calculated based on the unpaid principal balance of single-family loans for each category at time of acquisition. |
| |
(3) | Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business as of the end of each period. |
| |
(4) | Our single-family conventional guaranty book of business includes jumbo-conforming and high-balance loans that represented approximately 6% of our single-family conventional guaranty book of business as of September 30, 2017 and December 31, 2016. See “Business—Legislation and Regulation—Charter Act” and “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring—Jumbo-Conforming and High-Balance Loans” in our 2016 Form 10-K for information on our loan limits. |
| |
(5)
| The original LTV ratio generally is based on the original unpaid principal balance of the loan divided by the appraised property value reported to us at the time of acquisition of the loan. Excludes loans for which this information is not readily available. |
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 36 |
| |
(6)(5)
| The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of each reported period divided by the estimated current value of the property, which we calculate using an internal valuation model that estimates periodic changes in home value. Excludes loans for which this information is not readily available. |
| |
(7)(6)
| Long-term fixed-rate consists of mortgage loans with maturities greater than 15 years, while intermediate-term fixed-rate loans have maturities equal to or less than 15 years. Loans with interest-only terms are included in the interest-only category regardless of their maturities. |
| |
(8)(7)
| Loans acquired after 2009 with FICO credit scores at origination below 620 consist primarily of the refinance of existingExcludes loans under our Refi Plus initiative.for which this information is not readily available. |
| |
(9)(8)
| Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD and WI. Northeast consists of CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI, VT and VI. Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA and WV. Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX and UT. West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY. |
Our acquisitions in the first nine monthsCharacteristics of 2017 continued to have a strong credit profile with a weighted average original LTV ratioour New Single-Family Loan Acquisitions
The share of 75% and a weighted average FICOcredit score at origination of 745. As shown in the table above, the first nine months of 2017 had a higher proportion ofour single-family loan acquisitions consisting of refinance loans rather than home purchase loans than refinance loansincreased in the third quarter of 2019 compared with the first nine monthsthird quarter of 2016. The shift toward2018, primarily due to a lower interest rate environment, which encouraged refinance activity. Typically, refinance loans have lower LTV ratios than home purchase loans drove uploans. This trend contributed to a decrease in the proportionpercentage of our single-family loan acquisitions consistingwith LTV ratios over 90%—from 24% in the third quarter of 2018 to 21% in the third quarter of 2019.
Our share of acquisitions of loans with a weighted average original LTV ratio over 90%DTI ratios above 45% decreased in the third quarter of 2019 compared with the third quarter of 2018. This decrease was driven in part by changes in our eligibility guidelines implemented in December 2018 and July 2019 to further limit risk layering, particularly with respect to loans with DTI ratios above 45%, as home purchase loans tend to have less equity thanwell as a higher volume of refinance loans. Additionally, lower refinancing activity led to a lower weighted average FICO credit score at origination during the first nine months of 2017.loan acquisitions.
The credit profileDesktop Underwriter Update
As part of our futurecomprehensive risk management approach, we periodically update our proprietary automated underwriting system, Desktop Underwriter® (“DU®”), to reflect changes to our underwriting and eligibility guidelines. In July 2019, we implemented the following changes to DU:
| |
| • | HomeReady® income limits. To better align with our housing goals, we changed the income limit requirement for HomeReady loans, our flagship affordable product, to set a maximum borrower income limit of 80% of area median income for the property’s location. Previously, a borrower could be eligible for a HomeReady loan if the borrower’s total annual income did not exceed 100% of area median income or if the property was located in a low-income census tract. We expect this change will reduce the proportion of our loan acquisitions consisting of HomeReady loans, which we also expect may reduce the proportion of our loan acquisitions with LTV ratios over 90%. Approximately 7% of our single-family conventional loan acquisitions in the third quarter of 2019 consisted of HomeReady loans, compared with approximately 9% in the second quarter of 2019. |
| |
| • | DU eligibility assessment. As part of normal business operations, we regularly review DU to determine whether its risk analysis and eligibility assessment are appropriate based on the current market environment and loan performance information. As a result of our most recent review, we updated the DU eligibility assessment to better align the mix of business delivered to us with the composition of business in the overall market. We expect this change will result in fewer acquisitions of loans with multiple higher-risk characteristics. |
We will continue to monitor loan acquisitions will depend on many factors. For example, if a higher proportion ofand market conditions and, as appropriate, make changes in our future acquisitions consists of home purchase loans and we acquire lower volumes of refinance loans in future periods,eligibility criteria so that the loans we acquire are consistent with our risk appetite.
For further information regarding Desktop Underwriter, please see “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards” in those periods may haveour 2018 Form 10-K.
For a higher weighted average original LTV ratio and a lower weighted average FICO credit score at origination than our acquisitions in recent periods. Otherdiscussion of factors that may affectimpact the credit profile of our future acquisitions include: our future guaranty fee pricing and our competitors’ pricing, and any impact of that pricing on the volume and mix of loans we acquire; our future eligibility standards and those of mortgage insurers, the Federal Housing Administration and the U.S. Department of Veteran Affairs; changes in interest rates; our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers; government policy; market and competitive conditions; and the volume and characteristics of HARP and high LTV refinance loans we acquire in the future. We expect the ultimate performance of all our loans will be affected by borrower behavior, public policy and macroeconomic trends, including unemployment, the economy and home prices. In addition, if lender customers retain more of the higher-quality loans they originate, it could negatively affect the credit profile of our new single-family acquisitions.
In August 2016, FHFA directed us and Freddie Mac to implement a new high LTV refinance offering aimed at borrowers who are making their mortgage payments on time and whose current LTV ratio exceeds a specified amount. In August 2017, FHFA announced that the new high LTV refinance offering will be available for borrowers whose loans were originated on or after October 1, 2017 and who meet other eligibility requirements. FHFA also directed us and Freddie Mac to extend the HARP sunset date from September 30, 2017 to December 31, 2018. We have also extended the end date of our Refi Plus initiative to December 31, 2018.
Seefuture, see “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring” in our 20162018 Form 10-K. In this section of our 2018 Form 10-K, forwe also provide more information on the credit characteristics of loans in our single-family conventional guaranty book of business, including Home Affordable Refinance Program® (“HARP®”) and Refi Plus loans, Alt-ATM loans, jumbo-conforming and high-balance loans, reverse mortgages and mortgage products with rate resets.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 31 |
|
| | |
| MD&A | Single-Family Business |
Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk
Single-Family Credit Enhancement
Our charter generally requires credit enhancement on any single-family conventional mortgage loan that we purchase or securitize if it has an LTV ratio over 80% at the time of purchase. We generally achieve this charter requirement through primary mortgage insurance. We also enter into various other types of transactions in which we transfer mortgage credit risk to third parties.
The table below displays information about loans in our single-family conventional guaranty book of business covered by one or more forms of credit enhancement, including mortgage insurance or a credit risk transfer transaction. For a description of primary mortgage insurance and the other types of credit enhancements specified in the table, see “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk” in our 2018 Form 10-K. For a discussion of our exposure to and management of the institutional counterparty credit risk associated with the providers of these credit enhancements, see “MD&A—Risk Management—Institutional Counterparty Credit Risk Management” and "Note 13, Concentrations of Credit Risk" in our 2018 Form 10-K and “Note 10, Concentrations of Credit Risk” in this report.
|
| | | | | | | | | | | | | | |
| Single-Family Loans with Credit Enhancement |
| | As of |
| | | September 30, 2019 | | December 31, 2018 |
| | | Unpaid Principal Balance | | Percentage of Single-Family Conventional Guaranty Book of Business | | Unpaid Principal Balance | | Percentage of Single-Family Conventional Guaranty Book of Business |
| | (Dollars in billions) |
| Primary mortgage insurance and other | | $ | 644 |
| | 22 | % | | $ | 618 |
| | 21 | % |
| Connecticut Avenue Securities | | 816 |
| | 28 |
| | 798 |
| | 27 |
|
Credit Insurance Risk TransferTM (“CIRTTM”) | | 263 |
| | 9 |
| | 243 |
| | 8 |
|
| Lender risk sharing | | 135 |
| | 4 |
| | 102 |
| | 4 |
|
| Less: Loans covered by multiple credit enhancements | | (413 | ) | | (14 | ) | | (394 | ) | | (13 | ) |
| Total single-family loans with credit enhancement | | $ | 1,445 |
| | 49 | % | | $ | 1,367 |
| | 47 | % |
Transfer of Mortgage Credit Risk
In addition to primary mortgage insurance, our Single-Family business has developed other risk-sharing capabilities to transfer portions of our single-family mortgage credit risk to the private market. Our credit risk transfer transactions are designed to transfer a portion of the losses we expect would be incurred in a stressed credit environment, such as a severe or prolonged economic downturn. We continually evaluate our credit risk transfer transactions which, in addition to managing our credit risk, also affect our returns on capital and may impact the amount of capital we would be required to hold under FHFA’s proposed capital requirements. We discuss FHFA’s proposed capital rule in “Business—Charter Act and Regulation—GSE Act and Other Regulation” in our 2018 Form 10-K.
During the first nine months of 2019, pursuant to our credit risk transfer transactions, we transferred a portion of the mortgage credit risk on single-family mortgages with an unpaid principal balance of $223 billion at the time of the transactions. As of September 30, 2019, approximately 41% of the loans in our single-family conventional guaranty book of business, measured by unpaid principal balance, were included in a reference pool for a credit risk transfer transaction.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 32 |
|
| | |
| MD&A | Single-Family Business |
The table below displays the mortgage credit risk transferred to third parties and retained by Fannie Mae pursuant to our single-family credit risk transfer transactions.
|
| | | | | | | | | | | | | | | | |
| Single-Family Credit Risk Transfer Transactions |
| Issuances from Inception to September 30, 2019 |
(Dollars in billions)
|
| Senior | | Fannie Mae(1) | | Initial Reference Pool(5) |
| $1,744 | |
| | | | | | | | | | |
| Mezzanine | | Fannie Mae(1) | | CIRT(2)(3) | | CAS(2) | | Lender Risk-Sharing(2)(4) | |
| $2 | | $10 | | $36 | | $3 | | $1,811 |
| | | | | | | | | | |
| First Loss | | Fannie Mae(1) | | CAS(2)(6) | | Lender Risk-Sharing(2)(4) | |
| $9 | | $4 | | $3 | |
|
| | | | | | | | | | | | | | | | |
| Outstanding as of September 30, 2019 |
(Dollars in billions)
|
| Senior | | Fannie Mae(1) | | Outstanding Reference Pool(5)(7) |
| $1,199 | |
| | | | | | | | | | |
| Mezzanine | | Fannie Mae(1) | | CIRT(2)(3) | | CAS(2) | | Lender Risk-Sharing(2)(4) | |
| $2 | | $8 | | $24 | | $3 | | $1,252 |
| | | | | | | | | | |
| First Loss | | Fannie Mae(1) | | CAS(2)(6) | | Lender Risk-Sharing(2)(4) | |
| $9 | | $4 | | $3 | |
| |
(1) | Credit risk retained by Fannie Mae in CAS, CIRT and lender risk-sharing transactions. Tranche sizes vary across programs. |
| |
(2) | Credit risk transferred to third parties. Tranche sizes vary across programs. |
| |
(3) | Includes mortgage pool insurance transactions covering loans with an unpaid principal balance of approximately $7 billion at issuance and approximately $3 billion outstanding as of September 30, 2019. |
| |
(4) | For some lender risk-sharing transactions, does not reflect completed transfers of risk prior to settlement. |
| |
(5) | For CIRT and some lender risk-sharing transactions, “Reference Pool” reflects a pool of covered loans. |
| |
(6) | For CAS transactions, “First Loss” represents all B tranche balances. |
| |
(7) | For CAS and some lender risk-sharing transactions, represents outstanding reference pools, not the outstanding unpaid principal balance of the underlying loans. The outstanding unpaid principal balance for all loans covered by credit risk transfer programs, including all loans on which risk has been transferred in lender risk-sharing transactions, was $1,213 billion as of September 30, 2019. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 33 |
|
| | |
| MD&A | Single-Family Business |
The following table displays the approximate cash paid or transferred to investors for these credit risk transfer transactions. The cash represents the portion of the guaranty fee paid to investors as compensation for taking on a share of the credit risk. These expenses increased from the first nine months of 2018 to the first nine months of 2019. We expect these expenses will continue to increase as the percentage of our single-family conventional guaranty book of business that is covered by a credit risk transfer transaction increases.
|
| | | | | | | | |
| Credit Risk Transfer Transactions |
| | | For the Nine Months Ended September 30, |
| | | 2019 | | 2018 |
| Cash paid or transferred for: | | (Dollars in millions) |
CAS transactions(1) | | $ | 724 |
| | $ | 655 |
|
| CIRT transactions | | 264 |
| | 205 |
|
| Lender risk-sharing transactions | | 207 |
| | 97 |
|
| |
(1) | Consists of cash paid for interest expense net of LIBOR on outstanding CAS debt and amounts paid for CAS REMICTM transactions. “CAS REMICs” are Connecticut Avenue Securities that are structured as notes issued by trusts that qualify as REMICs. |
With our July 2019 CAS REMICTM transaction, we updated the following terms of our CAS REMIC transactions compared with our prior CAS REMIC transactions: extended the term from 12.5 years to 20 years; shortened the call option from 10 years to 7 years; and retained a smaller first-loss position (that is, investors purchased a larger portion of the risk that we refer to as the first-loss tranche). These updates were primarily designed to further reduce the amount of capital we would be required to hold for the associated loans in the reference pool under FHFA’s proposed capital framework. Our subsequent CAS REMIC transactions included these updated terms, and we currently expect that our future CAS REMIC transactions will contain similar terms.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 34 |
|
| | |
| MD&A | Single-Family Business |
Single-Family Problem Loan Management
Our problem loan management strategies are primarily focused on reducing defaults to avoid losses that would otherwise occur and pursuing foreclosure alternatives to attempt to minimizemitigate the severity of the losses we incur. If a borrower does not make required payments, or is in jeopardy of not making payments, we work with the loan servicer to offer workout solutions to minimize the likelihood of foreclosure as well as the severity of loss. Our loan workouts reflect our various types of home retention solutions, including loan modifications, repayment plans and forbearances, and foreclosure alternatives, including short sales and deeds-in-lieu of foreclosure. When appropriate, we seek to move to foreclosure expeditiously. See “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Problem Loan Management” in our 20162018 Form 10-K for a discussion of our work with mortgage servicers to implement our foreclosure prevention initiatives.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 37 |
In the following section, we presentdelinquency statistics on our problem loans, describe efforts undertaken to manage theseour problem loans, and prevent foreclosures, and provide metrics regarding the performance of our loan workout activities. Unless otherwise noted,activities, real estate owned (“REO”) management and other single-family credit-related disclosures. The discussion below updates some of that information.
Delinquency
The table below displays the delinquency data is calculatedstatus of loans and changes in the balance of seriously delinquent loans in our single-family conventional guaranty book of business, based on the number of loans. We include single-family conventional loans that we own and those that back Fannie Mae MBS in the calculation of the single-family delinquency rate. SeriouslySingle-family seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process.
|
| | | | | | | | |
| Delinquency Status and Activity of Single-Family Conventional Loans |
| | As of |
| | September 30,
2019 | | December 31, 2018 | | September 30,
2018 |
| Delinquency status: | | | | | |
| 30 to 59 days delinquent | 1.28 | % | | 1.37 | % | | 1.52 | % |
| 60 to 89 days delinquent | 0.35 |
| | 0.38 |
| | 0.37 |
|
| Seriously delinquent (“SDQ”) | 0.68 |
| | 0.76 |
| | 0.82 |
|
| Percentage of SDQ loans that have been delinquent for more than 180 days | 50 | % | | 49 | % | | 53 | % |
| Percentage of SDQ loans that have been delinquent for more than two years | 11 |
| | 12 |
| | 13 |
|
|
| | | | | | |
| | | For the Nine Months Ended September 30, |
| | | 2019 | | 2018 |
| Single-family SDQ loans (number of loans): | | | | |
| Beginning balance | | 130,440 |
| | 212,183 |
|
| Additions | | 150,288 |
| | 171,516 |
|
| Removals: | | | | |
| Modifications and other loan workouts | | (35,242 | ) | | (83,567 | ) |
| Liquidations and sales | | (39,066 | ) | | (58,912 | ) |
| Cured or less than 90 days delinquent | | (91,255 | ) | | (101,524 | ) |
| Total removals | | (165,563 | ) | | (244,003 | ) |
| Ending balance | | 115,165 |
| | 139,696 |
|
Our single-family serious delinquency rate decreased as of September 30, 2019 compared with December 31, 2018 and September 30, 2018. The decrease in our single-family serious delinquency rate in the first nine months of 2019 was primarily driven by improved loan payment performance and the sale of nonperforming loans. The decline through the first nine months of 2018 was driven primarily by delinquent borrowers in the regions affected by Hurricanes Harvey, Irma and Maria (collectively, the “2017 hurricanes”) continuing to resolve their loan delinquencies.
Certain higher-risk loan categories, such as Alt-A loans, loans with mark-to-market LTV ratios greater than 100%, and our 2005 through 2008 loan vintages, continue to exhibit higher-than-average delinquency rates and/or account for a higher share of our credit losses. Single-family loans originated in 2005 through 2008 constituted 4% of our single-family book of business as of September 30, 2019, but constituted 36% of our seriously delinquent single-family loans as of September 30, 2019 and drove 64% of our single-family credit losses in the first nine months of 2019. In addition, loans in certain judicial foreclosure states such as Florida, New Jersey and New York with historically long foreclosure timelines have exhibited higher-than-average delinquency rates and/or account for a higher share of our credit losses.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 35 |
|
| | |
| MD&A | Single-Family Business |
The table below displays the serious delinquency rates for, and the percentage of our total seriously delinquent single-family conventional loans represented by, the specified loan categories. Percentage of book outstanding calculations are based on the unpaid principal balance of loans for each category divided by the unpaid principal balance of our total single-family conventional guaranty book of business for which we have detailed loan levelloan-level information.
Problem Loan Statistics
Table 20 displays the delinquency status of loans in our single-family conventional guaranty book of business (based on number of loans) and changes in the balance of seriously delinquent loans in our single-family conventional guaranty book of business.
|
| | | | | | | | |
| Table 20: Delinquency Status and Activity of Single-Family Conventional Loans |
| | As of |
| | September 30, 2017 | | December 31, 2016 | | September 30,
2016 |
| Delinquency status: | | | | | |
| 30 to 59 days delinquent | 1.63 | % | | 1.51 | % | | 1.45 | % |
| 60 to 89 days delinquent | 0.40 |
| | 0.41 |
| | 0.39 |
|
| Seriously delinquent (“SDQ”) | 1.01 |
| | 1.20 |
| | 1.24 |
|
| Percentage of SDQ loans that have been delinquent for more than 180 days | 57 | % | | 59 | % | | 64 | % |
| Percentage of SDQ loans that have been delinquent for more than two years | 18 |
| | 21 |
| | 25 |
|
|
| | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| Single-family SDQ loans (number of loans): | | | |
| Beginning balance | 206,549 |
| | 267,174 |
|
| Additions | 177,449 |
| | 183,395 |
|
| Removals: | | | |
| Modifications and other loan workouts | (56,048 | ) | | (60,985 | ) |
| Liquidations and sales | (63,854 | ) | | (89,236 | ) |
| Cured or less than 90 days delinquent | (91,545 | ) | | (88,863 | ) |
| Total removals | (211,447 | ) | | (239,084 | ) |
| Ending balance | 172,551 |
| | 211,485 |
|
Our single-family serious delinquency rate was 1.01% as of September 30, 2017, compared with 1.20% as of December 31, 2016. The decrease in our serious delinquency rate in the first nine months of 2017 was primarily the result of home retention solutions, foreclosure alternatives and completed foreclosures, improved loan payment performance and nonperforming loan sales. Our 30 to 59 days delinquency rate increased to 1.63% as of September 30, 2017, compared with 1.51% as of December 31, 2016. This increase was greatest in Texas, Florida and Puerto Rico, which were most significantly impacted by the hurricanes. Our 30 to 59 days delinquency rate includes delinquent loans that have a temporary forbearance arrangement.
We expect our single-family serious delinquency rate to continue to decline over the long term; however, because our single-family serious delinquency rate has already declined significantly over the past several years, we expect more modest declines and, as a result, may experience period to period fluctuations in this rate. In addition, we expect our single-family serious delinquency rate will likely increase in the short term due to the hurricanes. Our single-family serious delinquency rate and the period of time that loans remain seriously delinquent continue to be negatively affected by the length of time required to complete a foreclosure in some
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 38 |
states. Other factors that affect our single-family serious delinquency rate include the pace of loan modifications, the timing and volume of nonperforming loan sales we make, servicer performance, natural disasters, and changes in home prices, unemployment levels and other macroeconomic conditions.
Certain higher-risk loan categories, such as Alt-A loans, loans with higher mark-to-market LTV ratios, and our 2005 through 2008 loan vintages, continue to exhibit higher than average delinquency rates and/or account for a higher share of our credit losses. Single-family loans originated in 2005 through 2008 constituted 7% of our single-family book of business as of September 30, 2017, but constituted 48% of our seriously delinquent single-family loans as of September 30, 2017 and drove 66% of our single-family credit losses in the first nine months of 2017. In addition, loans in certain states such as Florida, New Jersey and New York have exhibited higher than average delinquency rates and/or account for a higher share of our credit losses.
Table 21 displays the serious delinquency rates for, and the percentage of our total seriously delinquent single-family conventional loans represented by, the specified loan categories. We also include information for our loans in California, as this state accounts for a large share of our single-family conventional guaranty book of business. The reported categories are not mutually exclusive.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 21: Single-Family Conventional Seriously Delinquent Loan Concentration Analysis |
| | As of |
| | September 30, 2017 | December 31, 2016 | September 30, 2016 |
| | | Percentage of Book Outstanding | | Percentage of Seriously Delinquent Loans(1) | | Serious Delinquency Rate | | Percentage of Book Outstanding | | Percentage of Seriously Delinquent Loans(1) | | Serious Delinquency Rate | | Percentage of Book Outstanding | | Percentage of Seriously Delinquent Loans(1) | | Serious Delinquency Rate |
| States: | | | | | | | | | | | | | | | | | | |
| California | | 19 | % | | 6 | % | | 0.43 | % | | 19 | % | | 6 | % | | 0.50 | % | | 20 | % | | 6 | % | | 0.49 | % |
| Florida | | 6 |
| | 10 |
| | 1.50 |
| | 6 |
| | 10 |
| | 1.89 |
| | 6 |
| | 11 |
| | 2.05 |
|
| New Jersey | | 4 |
| | 7 |
| | 2.36 |
| | 4 |
| | 8 |
| | 3.07 |
| | 4 |
| | 9 |
| | 3.47 |
|
| New York | | 5 |
| | 9 |
| | 2.13 |
| | 5 |
| | 10 |
| | 2.65 |
| | 5 |
| | 10 |
| | 2.77 |
|
| All other states | | 66 |
| | 68 |
| | 0.94 |
| | 66 |
| | 66 |
| | 1.11 |
| | 65 |
| | 64 |
| | 1.11 |
|
| Product type: | | | | | | | | | | | | | | | | | | |
Alt-A(2) | | 3 |
| | 14 |
| | 4.54 |
| | 3 |
| | 15 |
| | 5.00 |
| | 3 |
| | 16 |
| | 5.27 |
|
| Vintages: | | | | | | | | | | | | | | | | | | |
| 2004 and prior | | 4 |
| | 25 |
| | 2.75 |
| | 5 |
| | 26 |
| | 2.82 |
| | 4 |
| | 26 |
| | 2.75 |
|
| 2005-2008 | | 7 |
| | 48 |
| | 5.83 |
| | 8 |
| | 51 |
| | 6.39 |
| | 9 |
| | 53 |
| | 6.49 |
|
| 2009-2017 | | 89 |
| | 27 |
| | 0.33 |
| | 87 |
| | 23 |
| | 0.36 |
| | 87 |
| | 21 |
| | 0.33 |
|
| Estimated mark-to-market LTV ratio: | | | | | | | | | | | | | | | | | | |
| <= 60% | | 53 |
| | 40 |
| | 0.66 |
| | 49 |
| | 33 |
| | 0.70 |
| | 49 |
| | 32 |
| | 0.69 |
|
| 60.01% to 70% | | 19 |
| | 17 |
| | 1.05 |
| | 19 |
| | 15 |
| | 1.13 |
| | 19 |
| | 15 |
| | 1.13 |
|
| 70.01% to 80% | | 16 |
| | 15 |
| | 1.17 |
| | 17 |
| | 16 |
| | 1.31 |
| | 17 |
| | 16 |
| | 1.40 |
|
80.01% to 90% | | 8 |
| | 11 |
| | 1.77 |
| | 9 |
| | 13 |
| | 2.11 |
| | 9 |
| | 13 |
| | 2.26 |
|
| 90.01% to 100% | | 3 |
| | 7 |
| | 2.72 |
| | 4 |
| | 9 |
| | 2.99 |
| | 4 |
| | 9 |
| | 3.61 |
|
| Greater than 100% | | 1 |
| | 10 |
| | 10.73 |
| | 2 |
| | 14 |
| | 10.44 |
| | 2 |
| | 15 |
| | 10.56 |
|
Credit enhanced:(3) | | | | | | | | | | | | | | | | | | |
Primary MI & other(4) | | 19 |
| | 26 |
| | 1.62 |
| | 18 |
| | 28 |
| | 2.18 |
| | 18 |
| | 28 |
| | 2.19 |
|
Credit risk transfer(5) | | 31 |
| | 4 |
| | 0.16 |
| | 22 |
| | 2 |
| | 0.17 |
| | 23 |
| | 2 |
| | 0.12 |
|
| Non-credit enhanced | | 60 |
| | 72 |
| | 1.05 |
| | 67 |
| | 70 |
| | 1.16 |
| | 66 |
| | 71 |
| | 1.20 |
|
__________ |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Single-Family Conventional Seriously Delinquent Loan Concentration Analysis |
| | As of |
| | September 30, 2019 | December 31, 2018 | September 30, 2018 |
| | | Percentage of Book Outstanding | | Percentage of Seriously Delinquent Loans(1) | | Serious Delinquency Rate | | Percentage of Book Outstanding | | Percentage of Seriously Delinquent Loans(1) | | Serious Delinquency Rate | | Percentage of Book Outstanding | | Percentage of Seriously Delinquent Loans(1) | | Serious Delinquency Rate |
| States: | | | | | | | | | | | | | | | | | | |
| California | | 19 | % | | 7 | % | | 0.32 | % | | 19 | % | | 6 | % | | 0.34 | % | | 19 | % | | 6 | % | | 0.34 | % |
| Florida | | 6 |
| | 8 |
| | 0.87 |
| | 6 |
| | 10 |
| | 1.16 |
| | 6 |
| | 12 |
| | 1.51 |
|
| New Jersey | | 3 |
| | 5 |
| | 1.21 |
| | 4 |
| | 5 |
| | 1.38 |
| | 4 |
| | 6 |
| | 1.51 |
|
| New York | | 5 |
| | 8 |
| | 1.24 |
| | 5 |
| | 8 |
| | 1.40 |
| | 5 |
| | 8 |
| | 1.55 |
|
| All other states | | 67 |
| | 72 |
| | 0.67 |
| | 66 |
| | 71 |
| | 0.75 |
| | 66 |
| | 68 |
| | 0.77 |
|
| Product type: | | | | | | | | | | | | | | | | | | |
Alt-A(2) | | 2 |
| | 10 |
| | 3.09 |
| | 2 |
| | 11 |
| | 3.35 |
| | 2 |
| | 12 |
| | 3.68 |
|
| Vintages: | | | | | | | | | | | | | | | | | | |
| 2004 and prior | | 2 |
| | 21 |
| | 2.53 |
| | 3 |
| | 23 |
| | 2.69 |
| | 3 |
| | 23 |
| | 2.77 |
|
| 2005-2008 | | 4 |
| | 36 |
| | 4.24 |
| | 5 |
| | 39 |
| | 4.61 |
| | 5 |
| | 41 |
| | 4.90 |
|
| 2009-2019 | | 94 |
| | 43 |
| | 0.33 |
| | 92 |
| | 38 |
| | 0.34 |
| | 92 |
| | 36 |
| | 0.34 |
|
| Estimated mark-to-market LTV ratio: | | | | | | | | | | | | | | | | | | |
| <= 60% | | 55 |
| | 52 |
| | 0.54 |
| | 54 |
| | 48 |
| | 0.58 |
| | 56 |
| | 47 |
| | 0.61 |
|
| 60.01% to 70% | | 17 |
| | 17 |
| | 0.81 |
| | 18 |
| | 17 |
| | 0.87 |
| | 18 |
| | 17 |
| | 0.91 |
|
| 70.01% to 80% | | 16 |
| | 14 |
| | 0.79 |
| | 16 |
| | 14 |
| | 0.90 |
| | 15 |
| | 15 |
| | 0.99 |
|
| 80.01% to 90% | | 8 |
| | 9 |
| | 1.04 |
| | 8 |
| | 10 |
| | 1.24 |
| | 7 |
| | 10 |
| | 1.38 |
|
| 90.01% to 100% | | 4 |
| | 4 |
| | 0.97 |
| | 4 |
| | 5 |
| | 1.33 |
| | 3 |
| | 5 |
| | 1.74 |
|
| Greater than 100% | | * |
| | 4 |
| | 10.62 |
| | * |
| | 6 |
| | 9.85 |
| | 1 |
| | 6 |
| | 10.65 |
|
Credit enhanced:(3) | | | | | | | | | | | | | | | | | | |
Primary MI & other(4) | | 22 |
| | 26 |
| | 0.97 |
| | 21 |
| | 26 |
| | 1.11 |
| | 21 |
| | 25 |
| | 1.19 |
|
Credit risk transfer(5) | | 41 |
| | 13 |
| | 0.27 |
| | 39 |
| | 10 |
| | 0.24 |
| | 38 |
| | 8 |
| | 0.23 |
|
| Non-credit enhanced | | 51 |
| | 67 |
| | 0.75 |
| | 53 |
| | 69 |
| | 0.85 |
| | 55 |
| | 70 |
| | 0.90 |
|
| |
| * | Represents less than 0.5% of single-family conventional business volume or book of business. |
| |
(1) | Calculated based on the number of single-family loans that were seriously delinquent for each category divided by the total number of single-family conventional loans that were seriously delinquent. |
| |
(2) | For a description of our Alt-A loan classification criteria, see “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring”Glossary of Terms Used in this Report” in our 20162018 Form 10-K. |
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 39 |
| |
(3) | The credit-enhanced categories are not mutually exclusive. A loan with primary mortgage insurance that is also covered by a credit risk transfer transaction will be included in both the “Primary MI & other” category and the “Credit risk transfer” category. As a result, the “Credit enhanced” and “Non-credit enhanced” categories do not sum to 100%. The total percentage of our single-family conventional guaranty book of business with some form of credit enhancement as of September 30, 20172019 was 40%49%. |
| |
(4) | Refers to loans included in an agreement used to reduce credit risk by requiring primary mortgage insurance, collateral, letters of credit, corporate guarantees, or other agreements to provide an entity with some assurance that it will be compensated to some degree in the event of a financial loss. Excludes loans covered by credit risk transfer transactions unless such loans are also covered by primary mortgage insurance. |
| |
(5) | Refers to loans included in reference pools for credit risk transfer transactions, including loans in these transactions that are also covered by primary mortgage insurance. For Connecticut Avenue SecuritiesCAS and some lender risk-sharing transactions, this represents outstanding unpaid principal balance of the underlying loans on the single-family mortgage credit book, not the outstanding reference pool, as of the specified date. Loans included in our credit risk transfer transactions have all been acquired since 2012 and newer2012. Newer vintages typically have significantly lower delinquency rates than more seasoned loans. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 36 |
|
| | |
| MD&A | Single-Family Business |
Loan Workout Metrics
Our loan workouts reflect reflect:
our home retention solutions, including loan modifications, repayment plans and forbearances,forbearances; and
foreclosure alternatives, including short sales and deeds-in-lieu of foreclosure.
Our primary loan modification initiatives have includedThe chart below displays the Home Affordable Modification Program (“HAMP”), which had a December 31, 2016 applicationdeadline, andunpaid principal balance of our proprietary Standard and Streamlined Modification initiatives. In December 2016, we announced a new modification program, the Fannie Mae Flex Modification, which replaces both HAMP and our Standard and Streamlined Modification programs with a single modification program that leverages the lessons learned from the housing crisis. The Flex Modification program became available for our servicers to implement on March 1, 2017 and was required to be implemented by October 1, 2017. The program offers additional payment relief allowing forbearance of principal to an 80% mark-to-market LTV ratio for eligible borrowers and targeting a 20% payment reduction.
Table 22 displays statistics on ourcompleted single-family loan workouts that were completed, by type. For a descriptiontype for the first nine months of our2018 compared with the first nine months of 2019, as well as the number of loan workout types, see “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Problem Loan Management—workouts for each period.
Loan Workout Metrics”Activity
(Dollars in our 2016 Form 10-K.billions)
|
| | | | | | | | | | | | | | | | | |
Table 22: Statistics on Single-Family Loan Workouts(1) |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | Unpaid Principal Balance | | | Number of Loans | | | Unpaid Principal Balance | | | Number of Loans | |
| | (Dollars in millions) | |
| Home retention solutions: | | | | | | | | | | | |
| Modifications | $ | 10,101 |
| | | 61,394 |
| | | $ | 10,553 |
| | | 62,979 |
| |
Repayment plans and forbearances completed(2) | 706 |
| | | 4,944 |
| | | 631 |
| | | 4,491 |
| |
| Total home retention solutions | 10,807 |
| | | 66,338 |
| | | 11,184 |
| | | 67,470 |
| |
| Foreclosure alternatives: | | | | | | | | | | | |
| Short sales | 1,222 |
| | | 5,887 |
| | | 1,777 |
| | | 8,577 |
| |
| Deeds-in-lieu of foreclosure | 460 |
| | | 3,041 |
| | | 702 |
| | | 4,631 |
| |
| Total foreclosure alternatives | 1,682 |
| | | 8,928 |
| | | 2,479 |
| | | 13,208 |
| |
| Total loan workouts | $ | 12,489 |
| | | 75,266 |
| | | $ | 13,663 |
| | | 80,678 |
| |
| Loan workouts as a percentage of single-family guaranty book of business | 0.58 |
| % | | 0.58 |
| % | | 0.65 |
| % | | 0.63 |
| % |
__________
| |
(1) | These statistics includeConsists of loan modifications but do not include trial modifications, loans to certain borrowers who have received bankruptcy relief that are classified as TDRs, orand completed repayment or forbearance plans that have been initiated but not completed. As of September 30, 2017, there were approximately 32,800 loans in a trial modification period. |
| |
(2)
| and forbearances. Repayment plans reflect only those plans associated with loans that were 60 days or more delinquent. Forbearances reflect loans that were 90 days or more delinquent. Excludes trial modifications, loans to certain borrowers who have received bankruptcy relief that are classified as troubled debt restructurings, and repayment and forbearance plans that have been initiated but not completed. There were approximately 13,200 loans in a trial modification period as of September 30, 2019. |
| |
(2) | Consists of short sales and deeds-in-lieu of foreclosure. |
The decrease in home retention solutions in the first nine months of 2019 compared with the first nine months of 2018 was primarily driven by improved loan performance and a decrease in the volume of modifications and forbearances granted, which was elevated in 2018 due to the number of borrowers affected by the 2017 hurricanes.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 4037 |
|
| | |
| | MD&A | Single-Family Business Segments |
The volume of modifications completed in the first nine months of 2017 decreased compared with the first nine months of 2016, primarily due to a decline in the number of delinquent loans in the first nine months of 2017 compared with the first nine months of 2016.
Nonperforming Loan Sales
FHFA’s 2017 conservatorship scorecard includes an objective relating to reducing the number of our severely-aged delinquent loans, including through nonperforming loan sales. During the first nine months of 2017, we sold approximately 9,900 nonperforming loans with an aggregate unpaid principal balance of $1.8 billion. As of September 30, 2017, we had sold a total of approximately 49,900 nonperforming loans with an aggregate unpaid principal balance of $9.4 billion. We plan to complete additional nonperforming loan sales in the future.
REO Management
Foreclosure and REO activity affectIf a loan defaults, we acquire the amounthome through foreclosure or a deed-in-lieu of credit losses we realize in a given period. Table 23foreclosure. The table below displays our foreclosure activity by region. Regional REO acquisition and charge-off trends generally follow a pattern that is similar to, but lags, that of regional delinquency trends.
|
| | | | | | | | | |
| Table 23: Single-Family Foreclosed Properties |
| For the Nine Months |
| Ended September 30, |
| | 2017 | | 2016 |
| Single-family foreclosed properties (number of properties): | | | | | |
Beginning of period inventory of single-family foreclosed properties (REO)(1) | 38,093 |
| | | 57,253 |
| |
Acquisitions by geographic area:(2) | | | | | |
| Midwest | 6,716 |
| | | 9,865 |
| |
| Northeast | 7,496 |
| | | 9,897 |
| |
| Southeast | 8,966 |
| | | 13,805 |
| |
| Southwest | 4,083 |
| | | 5,418 |
| |
| West | 2,156 |
| | | 3,788 |
| |
Total properties acquired through foreclosure(1) | 29,417 |
| | | 42,773 |
| |
| Dispositions of REO | (38,497 | ) | | | (58,053 | ) | |
End of period inventory of single-family foreclosed properties (REO)(1) | 29,013 |
| | | 41,973 |
| |
| Carrying value of single-family foreclosed properties (dollars in millions) | $ | 3,448 |
| | | $ | 4,833 |
| |
Single-family foreclosure rate(3) | 0.23 |
| % | | 0.33 |
| % |
REO net sales prices to unpaid principal balance(4) | 75 |
| % | | 74 |
| % |
Short sales net sales prices to unpaid principal balance(5) | 75 |
| % | | 74 |
| % |
__________ |
| | | | | | | | | | |
| Single-Family REO Properties |
| | | For the Nine Months Ended September 30, |
| | |
| | | 2019 | | 2018 |
| Single-family REO properties (number of properties): | | | | | | |
Beginning of period inventory of single-family REO properties(1) | | 20,156 |
| | | 26,311 |
| |
Acquisitions by geographic area:(2) | | | | | | |
| Midwest | | 3,734 |
| | | 4,675 |
| |
| Northeast | | 3,858 |
| | | 5,023 |
| |
| Southeast | | 5,001 |
| | | 6,190 |
| |
| Southwest | | 2,256 |
| | | 2,864 |
| |
| West | | 1,334 |
| | | 1,518 |
| |
Total REO acquisitions(1) | | 16,183 |
| | | 20,270 |
| |
| Dispositions of REO | | (18,468 | ) | | | (25,549 | ) | |
End of period inventory of single-family REO properties(1) | | 17,871 |
| | | 21,032 |
| |
| Carrying value of single-family REO properties (dollars in millions) | | $ | 2,349 |
| | | $ | 2,606 |
| |
Single-family foreclosure rate(3) | | 0.13 |
| % | | 0.16 |
| % |
REO net sales price to unpaid principal balance(4) | | 78 |
| % | | 77 |
| % |
Short sales net sales price to unpaid principal balance(5) | | 78 |
| % | | 77 |
| % |
| |
(1) | Includes acquisitions through foreclosure and deeds-in-lieu of foreclosure. Also includes held for useheld-for-use properties, which are reported in our condensed consolidated balance sheets as a component of “Other assets.” |
| |
(2) | See footnote 98 to “Table 19:the “Key Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” table for states included in each geographic region. |
| |
(3) | Estimated based on the annualized total number of properties acquired through foreclosure or deeds-in-lieu of foreclosure as a percentage of the total number of loans in our single-family conventional guaranty book of business as of the end of each respective period. |
| |
(4) | Calculated as the amount of sale proceeds received on disposition of REO properties during the respective periods, excluding those subject to repurchase requests made to our sellers or servicers, divided by the aggregate unpaid principal balance of the related loans at the time of foreclosure. Net sales price represents the contract sales price less selling costs for the property and other charges paid by the seller at closing. |
| |
(5) | Calculated as the amount of sale proceeds received on properties sold in short sale transactions during the respective periods divided by the aggregate unpaid principal balance of the related loans. Net sales price represents the contract sales price less the selling costs for the property and other charges paid by the seller at the closing, includingincludes borrower relocation incentive payments and subordinate lien(s) negotiated payoffs. |
The continued decrease in the number of our seriously delinquent single-family loans resulted in a reduction in the number ofSingle-family REO acquisitionsproperties declined in the first nine months of 20172019 compared with the first nine months of 2016.2018 primarily due to a reduction in REO acquisitions from serious delinquencies aged greater than 180 days, driven by improved loan performance and nonperforming loan sales.
Other Single-Family Credit Information
Single-Family Credit Loss Performance Metrics
The amount of credit loss or income we realize in a given period is driven by foreclosures, pre-foreclosure sales, REO activity, mortgage loan redesignations and charge-offs, net of recoveries. The table below displays the components of our single-family credit loss performance metrics, as well as our single-family initial charge-off severity rate.
Our credit loss performance metrics are not defined terms within generally accepted accounting principles in the United States of America (“GAAP”) and may not be calculated in the same manner as similarly titled measures reported by other companies. We believe these credit loss performance metrics may be useful to investors because they are presented as a percentage of our guaranty book of business and have historically been used by analysts, investors and other companies within the financial services industry.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Single-Family Credit Loss Performance Metrics |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | Amount | | Ratio(1) | | Amount | | Ratio(1) | | Amount | | Ratio(1) | | Amount | | Ratio(1) |
| | (Dollars in millions) |
| Charge-offs, net of recoveries | | $ | (255 | ) | | | 3.5 |
| bps | | | $ | (430 | ) | | | 5.8 |
| bps | | | $ | (1,115 | ) | | | 5.1 |
| bps | | | $ | (1,473 | ) | | | 6.7 |
| bps |
| Foreclosed property expense | | (93 | ) | | | 1.3 |
| | | | (150 | ) | | | 2.1 |
| | | | (362 | ) | | | 1.7 |
| | | | (448 | ) | | | 2.0 |
| |
Credit losses and credit loss ratio | | $ | (348 | ) | | | 4.8 |
| bps | | | $ | (580 | ) | | | 7.9 |
| bps | | | $ | (1,477 | ) | | | 6.8 |
| bps | | | $ | (1,921 | ) | | | 8.7 |
| bps |
Single-family initial charge-off severity rate(2) | | | | | 7.43 | % | | | | | | 10.34 | % | | | | | | 8.11 |
| % | | | | | | 11.56 | % |
| |
(1) | Basis points are calculated based on the amount of each line item divided by the average single-family conventional guaranty book of business during the period. |
| |
(2) | Credit losses on single-family loans initially charged off during the period divided by the average defaulted unpaid principal balance of those loans. The initial charge-off event is defined as the earliest of (1) when the loan is charged off pursuant to the provisions of the Advisory Bulletin, or (2) when there is a short sale, deed-in-lieu of foreclosure, or foreclosure of the underlying collateral. This severity rate does not reflect any gains or losses associated with subsequent events, such as REO transactions that occur after we acquire the property. |
Our single-family credit losses and credit loss ratio decreased in the third quarter and first nine months of 2019 compared with the third quarter and first nine months of 2018 primarily due to reduced foreclosures and foreclosure alternatives, lower charge-off expenses on the loans we redesignated from HFI to HFS, and lower charge-off severity rates due to continued home price appreciation.
For information on our credit-related income or expense, which includes changes in our allowance, see “Single-Family Financial Results.”
Single-Family Loss Reserves
Our single-family loss reserves, which include our allowance for loan losses and reserve for guaranty losses, provide for an estimate of credit losses incurred in our single-family guaranty book of business, including concessions we granted borrowers upon modification of their loans. The table below summarizes the changes in our single-family loss reserves.
|
| | | | | | | | | | | | | | | | | |
| Single-Family Loss Reserves |
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, |
| | | 2019 | | 2018 | | | 2019 | | 2018 |
| | | (Dollars in millions) |
| Changes in loss reserves: | | | | | | | | | |
| Beginning balance | | $ | (11,239 | ) | | $ | (16,638 | ) | | | $ | (14,007 | ) | | $ | (19,155 | ) |
| Benefit for credit losses | | 1,840 |
| | 732 |
| | | 3,753 |
| | 2,223 |
|
| Charge-offs | | 274 |
| | 514 |
| | | 1,221 |
| | 1,728 |
|
| Recoveries | | (19 | ) | | (84 | ) | | | (106 | ) | | (255 | ) |
| Other | | (1 | ) | | (2 | ) | | | (6 | ) | | (19 | ) |
| Ending balance | | $ | (9,145 | ) | | $ | (15,478 | ) | | | $ | (9,145 | ) | | $ | (15,478 | ) |
| | | | | | | | | | |
| | | | | | | | As of |
| | | | | | | | September 30, 2019 | | December 31, 2018 |
| Loss reserves as a percentage of: | | | | | | | | | |
| Single-family guaranty book of business | | | | | | | 0.31 | % | | 0.49 | % |
| Recorded investment in nonaccrual loans | | | | | | | 31.48 |
| | 44.24 |
|
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 4138 |
|
| | |
| | MD&A | Single-Family Business Segments |
We continue to manageTroubled Debt Restructurings and Nonaccrual Loans
The table below displays the single-family loans classified as TDRs that were on accrual status and single-family loans on nonaccrual status. The table includes our REO inventory to appropriately control costsrecorded investment in HFI and maximize sales proceeds. However, we are unable to marketHFS single-family mortgage loans. For information on the impact of TDRs and sell a large portion ofother individually impaired loans on our inventory, primarily due to occupancy and state or local redemption or confirmation periods, which extends the amount of time it takes to bring our properties to a marketable state and eventually dispose of them. This results in higher foreclosed property expenses, which include costs related to maintaining the property and ensuring that the property is vacant. As of September 30, 2017, approximately 39% of our REO properties were unable to be marketed, 25% of our REO properties were availableallowance for sale, 17% of our REO properties were pending sale settlement and 19% of our REO properties were pending appraisals and being prepared to be listed for sale.loan losses, see “Note 3, Mortgage Loans.”
|
| | | | | | | | | | | |
| Single-Family TDRs on Accrual Status and Nonaccrual Loans | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | (Dollars in millions) |
| TDRs on accrual status | | $ | 89,083 |
| | | | $ | 98,320 |
| |
| Nonaccrual loans | | 29,051 |
| | | | 31,658 |
| |
| Total TDRs on accrual status and nonaccrual loans | | $ | 118,134 |
| | | | $ | 129,978 |
| |
Accruing on-balance sheet loans past due 90 days or more(1) | | $ | 198 |
| | | | $ | 228 |
| |
|
| | | | | | | | | | | |
| | | For the Nine Months Ended September 30, | |
| | | |
| | | 2019 | | | | 2018 | |
| | | (Dollars in millions) | |
| Interest related to on-balance sheet TDRs on accrual status and nonaccrual loans: | | | | | | | |
Interest income forgone(2) | | $ | 1,280 |
| | | | $ | 1,680 |
| |
Interest income recognized(3) | | 3,614 |
| | | | 4,141 |
| |
| |
(1) | Includes loans that, as of the end of each period, are 90 days or more past due and continuing to accrue interest. The majority of these amounts consist of loans insured or guaranteed by the U.S. government and loans for which we have recourse against the seller in the event of a default. |
| |
(2) | Represents the amount of interest income we did not recognize, but would have recognized during the period for nonaccrual loans and TDRs on accrual status as of the end of each period had the loans performed according to their original contractual terms. |
| |
(3) | Includes primarily amounts accrued while the loans were performing and cash payments received on nonaccrual loans. |
Multifamily Business
Our Multifamily business provides mortgage market liquidity primarily for loans backed by properties with five or more residential units, which may be apartment communities, cooperative properties, seniors housing, dedicated student housing or manufactured housing communities.
This section supplements and updates information regarding our Multifamily business segment in our 2018 Form 10-K. See “MD&A—Multifamily Business” in our 2018 Form 10-K for additional information regarding the primary business activities, customers, competition and market share of our Multifamily business.
Presentation of our multifamily guaranty book of business
For purposes of the information reported in this “Multifamily Business” section, we measure our multifamily guaranty book of business by using the unpaid principal balance of mortgage loans underlying Fannie Mae MBS. By contrast, the multifamily guaranty book of business presented in the “Composition of Fannie Mae Guaranty Book of Business” table in the “Guaranty Book of Business” section is based on the unpaid principal balance of the Fannie Mae MBS outstanding, rather than the unpaid principal balance of the underlying mortgage loans. These amounts differ primarily as a result of payments we receive on underlying loans that have not yet been remitted to the MBS holders. As measured for purposes of the information reported below, the unpaid principal balance of our multifamily guaranty book of business was $329.6 billion as of September 30, 2019 and $305.9 billion as of December 31, 2018.
Multifamily Mortgage Market Conditions and Outlook
National multifamily market fundamentals, which include factors such as vacancy rates and rents, exhibited improved resultsremained steady during the third quarter of 2017.
Vacancy rates. According to preliminary third-party data, the national multifamily vacancy rate for institutional investment-type apartment properties was an estimated 5.3% as of September 30, 2017 and as of June 30, 2017. The national estimated multifamily vacancy rate remains below its average rate over the last 10 years.
Rents. Estimated multifamily rents increased during the third quarter of 2017 by an estimated 0.8%. Despite the recent moderating trend, because estimated multifamily rent growth has outpaced wage growth over the past few years, multifamily rental housing affordability has declined in recent years.
Despite the increase in new multifamily supply, estimated rent growth was positive during the third quarter of 2017,2019, most likely due to ongoing job growth, favorable demographic trends, and newrenter household formations.
| |
| • | Vacancy rates. Based on preliminary third-party data, the national multifamily vacancy rate for institutional investment-type apartment properties is estimated to have remained at 5.3% at September 30, 2019, which was the same as of June 30, 2019. |
| |
| • | Rents. Effective rents are estimated to have increased during the third quarter of 2019, with national asking rents increasing by an estimated 0.8% in the third quarter of 2019, compared with 1.0% during the second quarter of 2019. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 39 |
|
| | |
| MD&A | Multifamily Business |
Continued demand for multifamily rental units during the third quarter of 2019 was reflected in the estimated positive net absorption (that is, the net change in the number of occupied rental units during the time period) of approximately 31,00033,000 units, during the third quarter of 2017, according to preliminary data from Reis, Inc., compared with approximately 28,00049,000 units during the second quarter of 2017.2019.
As a resultVacancy rates and rents are important to loan performance because multifamily loans are generally repaid from the cash flows generated by the underlying property. Several years of the continued demand for multifamily rental units over the past few years, there has been animprovement in these fundamentals have helped to increase property values in the amount of new multifamily construction development nationally. According to Dodge Data & Analytics, itmost metropolitan areas. It is estimated that there will be approximately 422,000424,000 new multifamily units will be completed in 2017.2019. The bulk of this new supply is concentrated in a limited number of metropolitan areas. WeAlthough multifamily fundamentals remain positive, we believe this increase inincreasing supply will result in a continuing slowdown in national net absorption rates occupancy levels and effective rents for the remainder of 2019 compared with recent years.
Multifamily Business Metrics
Through the secondary mortgage market, we support rental housing for the workforce population, for senior citizens and students and for families with the greatest economic need. Over 90% of the multifamily units we financed in the early partthird quarter of 2018.2019 were affordable to families earning at or below 120% of the median income in their area, providing support for both workforce housing and affordable housing.
Multifamily New Business Volume
(Dollars in billions)
| |
(1) | Reflects unpaid principal balance of multifamily Fannie Mae MBS issued, multifamily loans purchased, and credit enhancements provided on multifamily mortgage assets during the period. |
FHFA’s 2019 conservatorship scorecard included an objective to maintain the dollar volume of new multifamily business at or below $35 billion for the year, excluding certain targeted affordable and underserved market business segments such as loans financing energy or water efficiency improvements. Approximately 44% of our multifamily new business volume of $52.1 billion for the first nine months of 2019 counted toward FHFA’s 2019 multifamily volume cap. On September 13, 2019, FHFA announced a revised multifamily business volume cap structure. The new multifamily volume cap, which replaced the prior cap effective October 1, 2019, is $100 billion for the five-quarter period ending December 31, 2020. The new cap applies with no exclusions. In addition, FHFA directed that 37.5% of our multifamily business during that time period must be mission-driven, affordable housing, pursuant to FHFA’s guidelines for mission-driven loans.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 4240 |
|
| | |
| | MD&A | Multifamily Business Segments |
Multifamily Business MetricsFinancial Results
|
| | | | | | | | | | | | | | | | | | | |
| Table 24: Multifamily Business Key Performance Data |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 |
| 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
| Securitization Activity/New Business | | | | | | | | | | | |
Multifamily new business volume(1) | $ | 16,178 |
| | | $ | 17,864 |
| | | $ | 45,854 |
| | | $ | 40,666 |
| |
| Multifamily units financed from new business volume | 189,000 |
| | | 240,000 |
| | | 553,000 |
| | | 542,000 |
| |
Other rental business volume(2) | $ | — |
| | | $ | — |
| | | $ | 945 |
| | | $ | — |
| |
Multifamily Fannie Mae MBS issuances(3) | $ | 15,835 |
| | | $ | 17,884 |
| | | $ | 45,378 |
| | | $ | 40,618 |
| |
| Multifamily Fannie Mae structured securities issuances | $ | 2,548 |
| | | $ | 2,067 |
| | | $ | 8,228 |
| | | $ | 7,651 |
| |
Multifamily Fannie Mae MBS outstanding, at end of period(3) | $ | 249,783 |
| | | $ | 214,387 |
| | | $ | 249,783 |
| | | $ | 214,387 |
| |
| Portfolio Data | | | |
|
| | | | | | | |
| Multifamily retained mortgage portfolio, at end of period | $ | 14,207 |
| | | $ | 23,165 |
| | | $ | 14,207 |
| | | $ | 23,165 |
| |
| Credit Guaranty Activity | | | |
|
| | | | | | | |
Average multifamily guaranty book of business(4) | $ | 262,553 |
| | | $ | 230,717 |
| | | $ | 256,007 |
| | | $ | 223,897 |
| |
| Average charged guaranty fee rate on multifamily guaranty book of business (in basis points), at end of period | 79.8 |
| | | 73.4 |
| | | 79.8 |
| | | 73.4 |
| |
Multifamily credit loss ratio (in basis points)(5) | (2.4 | ) | | | (1.0 | ) | | | (0.7 | ) | | | 0.1 |
| |
| Multifamily serious delinquency rate, at end of period | 0.03 |
| % | | 0.07 |
| % | | 0.03 |
| % | | 0.07 |
| % |
| Percentage of multifamily guaranty book of business with lender risk-sharing, at end of period | 96 |
| % | | 93 |
| % | | 96 |
| % | | 93 |
| % |
__________ |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, | | | | For the Nine Months Ended September 30, | | |
| | | 2019 | | 2018 | | Variance | | 2019 | | 2018 | | Variance |
| | | (Dollars in millions) |
| Net interest income | | $ | 745 |
| | $ | 699 |
| | $ | 46 |
| | $ | 2,170 |
| | $ | 2,024 |
| | $ | 146 |
|
| Fee and other income | | 246 |
| | 192 |
| | 54 |
| | 525 |
| | 524 |
| | 1 |
|
| Net revenues | | 991 |
| | 891 |
| | 100 |
| | 2,695 |
| | 2,548 |
| | 147 |
|
| Fair value gains (losses), net | | 6 |
| | (31 | ) | | 37 |
| | 66 |
| | (69 | ) | | 135 |
|
| Administrative expenses | | (115 | ) | | (104 | ) | | (11 | ) | | (338 | ) | | (317 | ) | | (21 | ) |
Credit-related income (expense)(1) | | 14 |
| | (25 | ) | | 39 |
| | (23 | ) | | (6 | ) | | (17 | ) |
Other expenses, net(2) | | (92 | ) | | (75 | ) | | (17 | ) | | (197 | ) | | (209 | ) | | 12 |
|
| Income before federal income taxes | | 804 |
| | 656 |
| | 148 |
| | 2,203 |
| | 1,947 |
| | 256 |
|
| Provision for federal income taxes | | (164 | ) | | (107 | ) | | (57 | ) | | (427 | ) | | (314 | ) | | (113 | ) |
| Net income | | $ | 640 |
| | $ | 549 |
| | $ | 91 |
| | $ | 1,776 |
| | $ | 1,633 |
| | $ | 143 |
|
| |
(1) | Reflects unpaid principal balanceConsists of multifamily Fannie Mae MBS issued (excluding portfolio securitizations), multifamily loans purchased,the benefit or provision for credit losses and credit enhancements provided during the period.foreclosed property income or expense. |
| |
(2) | Consists of a transaction backed by a pool of single-family rental properties financed in the second quarter of 2017.investment gains, gains or losses from partnership investments and other income or expenses. |
Net interest income
Multifamily net interest income is primarily driven by guaranty fee income. Guaranty fee income increased in the third quarter and first nine months of 2019 as compared with the third quarter and first nine months of 2018 as a result of growth in our multifamily guaranty book of business, partially offset by a decrease in charged guaranty fees on the guaranty book.
| |
(3)(1)
| Excludes a transaction backed by a pool of single-family rental properties financed in the second quarter of 2017. |
| |
(4)
| Our multifamily guaranty book of business consists of: (a) multifamily mortgage loans of Fannie Mae; (b) multifamily mortgage loans underlying Fannie Mae MBS;MBS outstanding, multifamily mortgage loans of Fannie Mae held in our retained mortgage portfolio, and (c) other credit enhancements that we provide on multifamily mortgage assets and relating to a transaction backed by a pool of single-family rental properties.assets. It excludes non-Fannie Mae multifamily mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty. |
| |
(5)
| Calculated based on Multifamily segment credit losses divided by the average multifamily guaranty book of business. Negative credit losses are a result of recoveries on previously charged-off amounts. |
FHFA’s 2017 conservatorship scorecard includes an objectiveOur average charged guaranty fee has trended downward from 2018 to maintain the dollar volume2019, driven by competitive market pressure on guaranty fees charged on newly acquired multifamily loans and liquidations of new multifamily business at or below $36.5 billion excluding certain targeted affordable and underserved market business segments. Approximately 47% of Fannie Mae’s multifamily new businessloans with higher guaranty fees.
Fee and other rental volume of $46.8 billion for the first nine months of 2017 counted towards FHFA’s 2017 multifamily volume cap.income
Fee and other income in all periods presented was primarily driven by yield maintenance fees resulting from prepayment activity.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 4341 |
|
| | |
| | MD&A | Multifamily Business Segments |
Fair value gains (losses), net
Depending on portfolio activity, our Multifamily Business Financial Results
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Table 25: Multifamily Business Financial Results |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | Variance | | 2017 | | 2016 | | Variance |
| | (Dollars in millions) |
| Net interest income | $ | 647 |
| | $ | 578 |
| | $ | 69 |
| | $ | 1,873 |
| | $ | 1,658 |
| | $ | 215 |
|
| Fee and other income | 189 |
| | 98 |
| | 91 |
| | 604 |
| | 330 |
| | 274 |
|
| Net revenues | 836 |
| | 676 |
| | 160 |
| | 2,477 |
| | 1,988 |
| | 489 |
|
| Fair value gains (losses), net | 11 |
| | 8 |
| | 3 |
| | (23 | ) | | 57 |
| | (80 | ) |
| Administrative expenses | (84 | ) | | (79 | ) | | (5 | ) | | (253 | ) | | (239 | ) | | (14 | ) |
Credit-related income (expense)(1) | (28 | ) | | 31 |
| | (59 | ) | | (23 | ) | | 56 |
| | (79 | ) |
Other income (expenses), net(2) | (80 | ) | | 43 |
| | (123 | ) | | (237 | ) | | 154 |
| | (391 | ) |
| Income before federal income taxes | 655 |
| | 679 |
| | (24 | ) | | 1,941 |
| | 2,016 |
| | (75 | ) |
| Provision for federal income taxes | (164 | ) | | (128 | ) | | (36 | ) | | (481 | ) | | (433 | ) | | (48 | ) |
| Net income | $ | 491 |
| | $ | 551 |
| | $ | (60 | ) | | $ | 1,460 |
| | $ | 1,583 |
| | $ | (123 | ) |
__________
| |
(1)
| Consists of the benefit (provision) for credit losses and foreclosed property income. |
| |
(2)
| Consists of investmentbusiness may be in a net buy or net sell position during any given period. Fair value gains gains on partnership investments and other income (expenses). |
Multifamily net income decreased in the third quarter of 2017 compared with the third quarter of 2016 primarily driven by a shift to credit-related expense from credit-related income and a decrease in investment gains, partially offset by an increase in net interest income. Multifamily net income decreased in the first nine months of 2017 compared with the first nine months of 2016 primarily driven by a shift to fair value losses from fair value gains, a shift to credit-related expense from credit-related income and a decrease in investment gains. This decrease was partially offset by an increase in net interest income.
Net interest income in all periods presented was primarily driven by guaranty fee income, which continued to increase as our multifamily guaranty book of business grew and loans with higher guaranty fees became a larger part of our book of business, while loans with lower guaranty fees continued to liquidate.
Fair value losses in the first nine months of 20172019 were primarily driven by lossesgains on commitments to sellbuy multifamily mortgage-related securities as a result of increases in prices as interest rates declined during the commitment periods.
Credit-related expenseFair value losses in the third quarter and first nine months of 2017 was2018 were primarily driven by an increaselosses on commitments to buy multifamily mortgage-related securities as a result of decreases in our allowance for loan losses, which included approximately $50 million in estimated losses fromprices as interest rates rose during the hurricanes.commitment periods.
Investment gains resulting from the sale of available-for-sale securities was the primary driver of other income in the third quarter and first nine months of 2016.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 44 |
Multifamily Mortgage Credit Risk Management
This section updates our discussion of multifamily mortgage credit risk management in our 20162018 Form 10-K in “MD&A—Business Segments—Multifamily Business—Multifamily Mortgage Credit Risk Management.”
We exclude from the multifamily credit statistics reported below the approximately 1% of our multifamily guaranty book of business for which our loan level information is incomplete as of September 30, 2017 and December 31, 2016.Multifamily Acquisition Policy and Underwriting Standards
Our multifamily business is responsible for pricing and managing the credit risk on multifamily mortgage loans we have purchased, on Fannie Mae MBS backed by multifamily loans (whether held in our retained mortgage portfolio or held by third parties), and on other credit enhancements provided on multifamily mortgage assets, with oversight from our Enterprise Risk Management division. Our primary multifamily delivery channel is the Delegated Underwriting and Servicing, or DUS®, program, which consists of large financial institutions and independent mortgage lenders. Multifamily loans that we purchase or that back Fannie Mae MBS are underwritten by Fannie Mae-approved lenders and may be subject to our underwriting review prior to closing, depending on the product type, loan size, market and other factors. Loans delivered to us by DUS lenders and their affiliates represented 98% of our multifamily guaranty book of business as of September 30, 2017, and 97% of our multifamily guaranty book of business as of December 31, 2016.
We use credit enhancement arrangements, primarily lender risk-sharing, for our multifamily loans. As of September 30, 2017, 96% of the unpaid principal balance of loans in our multifamily guaranty book of business had lender risk-sharing, compared with 94% as of December 31, 2016. Our maximum potential loss recovery from lenders under current risk-sharing agreements represented over 20% of the unpaid principal balance of our multifamily guaranty book of business as of September 30, 2017 and December 31, 2016.
Our standards for multifamily loans specify maximum original LTV ratio and minimum original debt service coverage ratio (“DSCR”) values that vary based on loan characteristics. Our experience has been that original LTV ratio and DSCR values have been reliable indicators of future credit performance.
At underwriting, we evaluate the DSCR is evaluated based on both actual and underwritten debt service payments. Underwritten debt service payments are based on debt service calculations that include both principal and interest payments. The original DSCR for the loan is calculated using thethese underwritten debt service payments for the loan, rather than the actual debt service payments, which, depending on the interest rate of the loan and loan structure, may result in a more conservative estimate of the debt service payments. This approach is used for all loans, including those with full and partial interest-only terms.
Table 26The following table displays original LTV ratio and DSCR metrics forkey risk characteristics of our multifamily guaranty book of business.
| | | Table 26: Multifamily Guaranty Book of Business Key Risk Characteristics | |
| Key Risk Characteristics of Multifamily Guaranty Book of Business | | Key Risk Characteristics of Multifamily Guaranty Book of Business |
| | As of | As of |
| | September 30, 2017 | | December 31, 2016 | | September 30,
2016 | September 30,
2019 | | December 31, 2018 | | September 30,
2018 |
| Weighted average original LTV ratio | | 67 | % | | | | 67 | % | | | | 67 | % | | | 66 | % | | 66 | % | | 67 | % |
| Original LTV ratio greater than 80% | | 2 |
| | 2 |
| | 2 |
| | | 1 | | 1 | | 1 | |
| Original DSCR less than or equal to 1.10 | | 14 |
| | 14 |
| | 13 |
| | | 11 |
| 12 |
| 13 | |
| Full interest-only loans | | | 26 | | 24 | | 23 | |
Partial interest-only loans(1) | | | 50 | | 49 | | 48 | |
| |
(1) | Consists of mortgage loans that were underwritten with an interest-only term, regardless of whether the loan is currently in its interest-only period. |
We provide additional information on the credit characteristics of our multifamily loans in quarterly financial supplements, which we submit to the SEC with current reports on Form 8-K. Information in our quarterly financial supplements is not incorporated by reference into this report.
Transfer of Multifamily Mortgage Credit Risk Lender risk-sharing is a cornerstone of our Multifamily business. We primarily transfer risk through our Delegated Underwriting and Servicing (“DUS®”) program, which delegates to DUS lenders the ability to underwrite and service multifamily loans, in accordance with our standards and requirements. DUS lenders receive credit risk-related revenues for their respective portion of credit risk retained, and, in turn, are required to fulfill any loss sharing obligation. This aligns the interests of the lender and Fannie Mae throughout the life of the loan.
Our DUS model typically results in our lenders sharing on a pro-rata or tiered basis approximately one-third of the credit risk on our multifamily loans. In the first nine months of 2019, nearly 100% of our new multifamily business volume had lender risk-sharing. As of September 30, 2019 and December 31, 2018, 98% of the unpaid principal balance of loans in our multifamily guaranty book of business had lender risk-sharing.
To complement our lender risk-sharing program through our DUS model, we engage in multifamily CIRT transactions, pursuant to which we transfer a portion of the mortgage credit risk on multifamily loans in our multifamily guaranty book of business to insurers or reinsurers. As of September 30, 2019, we have completed six multifamily CIRT transactions since the inception of the program, which covered multifamily loans with an unpaid principal balance of approximately $62.0 billion at the time of the transactions. As of September 30, 2019, 18% of the loans in our multifamily guaranty book of business, measured by unpaid principal balance, were covered by a CIRT transaction. We continue to support the growth of the credit risk transfer market and expand the types of loans covered in our credit risk transfer programs.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 42 |
|
| | |
| MD&A | Multifamily Business |
Multifamily Portfolio Diversification and Monitoring
Diversification within our multifamily mortgage credit book of business by geographic concentration, term to maturity, interest rate structure, borrower concentration, and loan size as well asand credit enhancement coverage, are important factors that influence credit performance and help reduce our credit risk.
WeAs part of our ongoing credit risk management process, we and our lenders monitor the performance and risk characteristics of our multifamily loans and the underlying properties on an ongoing basis throughout the loan term at the asset and portfolio level. We require lenders to provide quarterly and annual financial updates for the loans for which we are contractually entitled to receive such information. We closely monitor loans with an estimated current DSCR below 1.0, as that is an indicator of heightened default risk. The percentage of loans in our multifamily guaranty book of business, calculated based on unpaid principal balance, with a current DSCR less than 1.0 was approximately 1%2% as of September 30, 2017,2019 and December 31, 2018. Our estimates of current DSCRs are based on the latest available income information for these properties and exclude co-op loans. Although we use the most recently available results from our multifamily borrowers, there is a lag in reporting, which typically can range from three to six months, but in some cases may be longer.
In addition to the factors discussed above, we track the following credit risk characteristics to determine loan credit quality indicators, which are the internal risk categories we use and which are further discussed in “Note 3, Mortgage Loans”:
the physical condition of the property;
delinquency status;
the relevant local market and economic conditions that may signal changing risk or return profiles; and
other risk factors.
The percentage of our multifamily loans categorized as substandard based on these characteristics increased throughout 2018, but decreased as of September 30, 2019 as compared with approximately 2% as of December 31, 2016.2018 and remains at historically low levels. Substandard loans are loans that have a well-defined weakness that could impact the timely full repayment. While the vast majority of the substandard loans in our multifamily guaranty book of business are currently making timely payments, we continue to monitor the performance of the full substandard loan population.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 45 |
Multifamily Problem Loan Management and Foreclosure Prevention
We periodically refine our underwriting standards in response to market conditions and implement proactive portfolio management and monitoring, which are each designed to keep credit losses and delinquencies to a low level relative to our multifamily guaranty book of business. The multifamily serious delinquency rate was 0.03%0.06% as of September 30, 20172019 and 0.05%December 31, 2018 and 0.07% as of December 31, 2016.September 30, 2018. We classify multifamily loans as seriously delinquent when payment is 60 days or more past due.
Other Multifamily Credit Information
Multifamily Credit Loss Performance Metrics
The amount of credit loss or income we realize in a given period is driven by foreclosures, pre-foreclosure sales, REO activity and charge-offs, net of recoveries. Our credit loss performance metrics are not defined terms within GAAP and may not be calculated in the same manner as similarly titled measures reported by other companies. We believe our credit loss performance metrics may be useful to investors because they have historically been used by analysts, investors and other companies within the financial services industry.
We had $5 million in multifamily credit losses in the third quarter of 2019 compared with $7 million in the third quarter of 2018. We had $6 million in multifamily credit losses in the first nine months of 2019 compared with $15 million in the first nine months of 2018.
Credit losses in the third quarter of 2019 were primarily driven by foreclosed property expenses. Credit losses in the first nine months of 2019 were primarily driven by charge-off activity in the second quarter.
Multifamily Loss Reserves
The table below summarizes the changes in our multifamily loss reserves, which includes our allowance for loan losses and our reserve for guaranty losses for multifamily loans.
|
| | | | | | | | | | | | | | | | | | |
| Multifamily Loss Reserves | |
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | | 2019 | | 2018 | | | 2019 | | 2018 | |
| | | (Dollars in millions) | |
| Changes in loss reserves: | | | | | | | | | | |
| Beginning balance | | $ | (281 | ) | | $ | (218 | ) | | | $ | (245 | ) | | $ | (245 | ) | |
| Benefit (provision) for credit losses | | 17 |
| | (16 | ) | | | (21 | ) | | 6 |
| |
| Charge-offs | | 3 |
| | 1 |
| | | 7 |
| | 6 |
| |
| Recoveries | | (1 | ) | | (3 | ) | | | (3 | ) | | (3 | ) | |
| Ending balance | | $ | (262 | ) | | $ | (236 | ) | | | $ | (262 | ) | | $ | (236 | ) | |
| | | | | | | | | | | |
| | | | | | As of | |
| | | September 30, 2019 | | December 31, 2018 | |
| Loss reserves as a percentage of multifamily guaranty book of business | | | 0.08 | % | | 0.08 | % | |
Troubled Debt Restructurings and Nonaccrual Loans
The table below displays the multifamily loans classified as TDRs that were on accrual status and multifamily loans on nonaccrual status. The table includes our recorded investment in HFI and HFS multifamily mortgage loans. For information on the impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 3, Mortgage Loans.”
|
| | | | | | | | | |
| Multifamily TDRs on Accrual Status and Nonaccrual Loans |
| | | As of |
| | | September 30, 2019 | | December 31, 2018 | |
| | | (Dollars in millions) |
| TDRs on accrual status | | $ | 33 |
| | $ | 55 |
| |
| Nonaccrual loans | | 608 |
| | 492 |
| |
| Total TDRs on accrual status and nonaccrual loans | | $ | 641 |
| | $ | 547 |
| |
|
| | | | | | | | | |
| | | For the Nine Months Ended September 30, | |
| | | |
| | | 2019 | | 2018 | |
| | | (Dollars in millions) | |
| Interest related to on-balance sheet TDRs on accrual status and nonaccrual loans: | | | | | |
Interest income forgone(1) | | $ | 18 |
| | $ | 20 |
| |
Interest income recognized(2) | | 5 |
| | 2 |
| |
| |
(1) | Represents the amount of interest income we did not recognize, but would have recognized during the period for nonaccrual loans and TDRs on accrual status as of the end of each period had the loans performed according to their original contractual terms. |
| |
(2) | Represents interest income recognized during the period, including the amortization of any deferred cost basis adjustments, for loans classified as either nonaccrual loans or TDRs on accrual status as of the end of each period. Primarily includes amounts accrued while the loans were performing. |
REO Management
The number of multifamily foreclosed properties held for sale remained low at 14was 16 properties with a carrying value of $78$88 million as of September 30, 2017,2019, compared with 1316 properties with a carrying value of $85$81 million as of December 31, 2016.2018.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 43 |
|
| | |
| MD&A | Liquidity and Capital Management |
Liquidity and Capital Management
|
| | | | |
Liquidity and Capital Management | | | | |
Liquidity Management
Our business activities require that we maintain adequate liquidity to fund our operations. Our liquidity risk management framework is designed to address our liquidity risk. Liquidity risk is the risk that we will not be able to meet our funding obligations in a timely manner. Liquidity risk management involves forecasting funding requirements, maintaining sufficient capacity to meet our needs based on our ongoing assessment of financial market liquidity and adhering to our regulatory requirements.
Our primary source of funds is proceeds from the issuance of short-term and long-term debt securities. Accordingly, our liquidity depends largely on our ability to issue unsecured debt in the capital markets. Our status as a GSE and federal government support of our business continue to be essential to maintaining our access to the unsecured debt markets. Our treasury group is responsible for implementing our liquidity and contingency planning strategies. We hold a portfolio of highly liquid investments and maintain access to alternative sources of liquidity which are designed to provide near term availability of cash in the event that our access to the debt markets becomes limited. While our liquidity contingency planning attempts to address stressed market conditions and our status under conservatorship and Treasury arrangements, we believe that our liquidity contingency plans may be difficult or impossible to execute for a company of our size in our circumstances.
Our liquidity position could be adversely affected by many factors, both internal and external to our business, including: actions taken by FHFA, the Federal Reserve, Treasury or other government agencies; legislation relating to us or our business; a U.S. government payment default on its debt obligations; a downgrade in the credit ratings of our senior unsecured debt or the U.S. government’s debt from the major ratings organizations; a systemic event leading to the withdrawal of liquidity from the market; an extreme market-wide widening of credit spreads; public statements by key policy makers; a significant decline in our net worth; potential investor concerns about the adequacy of funding available to us under the senior preferred stock purchase agreement; loss of demand for our debt, or certain types of our debt, from a major group of investors; a significant credit event involving one of our major institutional counterparties; a sudden catastrophic operational failure in the financial sector; or elimination of our GSE status.
This section supplements and updates information regarding liquidity risk management in our 20162018 Form 10-K. See “MD&A—Liquidity and Capital Management—Liquidity Management” and “Risk Factors” in our 20162018 Form 10-K for additional information, including discussions of our primary sources and uses of funds, our liquidity and funding risk management practices and liquidity contingency planning, factors that influence our debt funding activity, factors that may impact our access to or the cost of our debt funding and factors that could adversely affect our liquidity.liquidity and funding.
Debt Funding
We fund our business primarily through the issuance of a variety of short-term and long-term debt securities in the domestic and international capital markets. Because debt issuance is our primary funding source, we are subject to “roll over,” or refinancing, risk on our outstanding debt.
Our debt funding needs and debt funding activity may vary from quarter to quarter depending on market conditions and are influenced by anticipated liquidity needs, the size of our retained mortgage portfolio and our
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 46 |
|
| | |
| MD&A | Liquidity and Capital Management |
dividend payments to Treasury. See “Retained Mortgage Portfolio” for information about our retained mortgage portfolio and our requirement to reduce the size of our retained mortgage portfolio.
Fannie Mae Debt Funding Activity
Table 27 displays the activity in debt of Fannie Mae. This activity excludes the debt of consolidated trusts and intraday loans. Activity for short-term debt of Fannie Mae relates to borrowings with an original contractual maturity of one year or less while activity for long-term debt of Fannie Mae relates to borrowings with an original contractual maturity of greater than one year. The reported amounts of debt issued and paid off during the period represent the face amount of the debt at issuance and redemption.
The increase in our issuances and payoffs of short-term debt during the first nine months of 2017 compared with the first nine months of 2016 was driven by increased utilization of notes with overnight maturities. The decrease in our issuances and payoffs of long-term debt during the third quarter and first nine months of 2017 compared with the third quarter and first nine months of 2016 was primarily due to decreased funding needs, as well as declines in call activity due to a higher interest rate environment.
|
| | | | | | | | | | | | | | | |
| Table 27: Activity in Debt of Fannie Mae | | | | |
| | For the Three Months | | For the Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
| Issued during the period: | | | | | | | |
| Short-term: | | | | | | | |
| Amount | $ | 199,940 |
| | $ | 142,937 |
| | $ | 513,635 |
| | $ | 419,822 |
|
| Weighted-average interest rate | 0.97 | % | | 0.23 | % | | 0.78 | % | | 0.25 | % |
Long-term:(1) | | | | | | | |
| Amount | $ | 6,435 |
| | $ | 48,853 |
| | $ | 25,457 |
| | $ | 100,505 |
|
| Weighted-average interest rate | 2.44 | % | | 1.42 | % | | 2.44 | % | | 1.58 | % |
| Total issued: | | | | | | | |
| Amount | $ | 206,375 |
| | $ | 191,790 |
| | $ | 539,092 |
| | $ | 520,327 |
|
| Weighted-average interest rate | 1.02 | % | | 0.54 | % | | 0.85 | % | | 0.51 | % |
Paid off during the period:(2) | | | | | | | |
| Short-term: | | | | | | | |
| Amount | $ | 197,034 |
| | $ | 152,088 |
| | $ | 515,220 |
| | $ | 439,408 |
|
| Weighted-average interest rate | 0.93 | % | | 0.31 | % | | 0.71 | % | | 0.28 | % |
Long-term:(1) | | | | | | | |
| Amount | $ | 21,123 |
| | $ | 51,211 |
| | $ | 60,419 |
| | $ | 116,657 |
|
| Weighted-average interest rate | 1.35 | % | | 1.92 | % | | 2.81 | % | | 2.01 | % |
| Total paid off: | | | | | | | |
| Amount | $ | 218,157 |
| | $ | 203,299 |
| | $ | 575,639 |
| | $ | 556,065 |
|
| Weighted-average interest rate | 0.97 | % | | 0.71 | % | | 0.93 | % | | 0.64 | % |
__________
| |
(1)
| Includes credit risk-sharing securities issued under our CAS series. For additional information on our credit risk transfer transactions, see “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk: Single-Family Credit Risk Transfer Transactions.” |
| |
(2)
| Consists of all payments on debt, including regularly scheduled principal payments, payments at maturity, payments resulting from calls and payments for any other repurchases. Repurchases of debt and early retirements of zero-coupon debt are reported at original face value, which does not equal the amount of actual cash payment. |
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 47 |
|
| | |
| MD&A | Liquidity and Capital Management |
Intraday Line of Credit
We use a secured intraday funding line of credit provided by a large financial institution. We post collateral which, in some circumstances, the secured party has the right to repledge to third parties. As this line of credit is an uncommitted intraday loan facility, we may be unable to draw on it if and when needed. The line of credit under this facility was $15.0 billion as of September 30, 2017 and 2016.
Outstanding Debt
Total outstanding debt of Fannie Mae includes short-term and long-term debt excludingand excludes debt of consolidated trusts. Short-term debt of Fannie Mae consists of borrowings with an original contractual maturity of one year or less and, therefore, does not include the current portion of long-term debt. Long-term debt of Fannie Mae consists of borrowings with an original contractual maturity of greater than one year.
OurThe chart and table below display information on our outstanding short-term debt, based on its original contractual maturity, as a percentage of our total outstanding debt, was 11% as of September 30, 2017 and December 31, 2016. The weighted-average interest rate on our long-term debt based on its original contractual maturity, decreasedmaturity. The increase in our short-term debt from December 31, 2018 to 2.30% as of September 30, 2017 from 2.31%2019 was primarily driven by an increase in our acquisition of mortgage loans through our whole loan conduit as mortgage refinance activity increased during the third quarter of December 31, 2016.
Our outstanding debt maturing within one year, including the current portion of2019. The decrease in our long-term debt and amounts we have announced for early redemption, as a percentagefrom December 31, 2018 to September 30, 2019 was primarily driven by the decline in the size of our total outstandingretained mortgage portfolio. We did not issue new debt excluding debt of consolidated trusts, was 31% as of September 30, 2017 and 32% as of December 31, 2016. The weighted-average maturityto replace all of our outstanding debt that is maturing within one year was 114 days aspaid off during the first nine months of September 30, 2017, compared with 146 days as of December 31, 2016. The weighted-average maturity of our outstanding debt maturing in more than one year was approximately 57 months as of September 30, 2017, compared with approximately 56 months as of December 31, 2016.2019.
|
| | | | | | | | |
| Selected Debt Information |
| | | As of |
| | | December 31, 2018 | | September 30, 2019 |
| | | (Dollars in billions) |
Selected Weighted-Average Interest Rates(1) | | | | |
| Interest rate on short-term debt | | 2.29 | % | | 2.04 | % |
| Interest rate on long-term debt, including portion maturing within one year | | 2.83 | % | | 3.14 | % |
| Interest rate on callable long-term debt | | 2.95 | % | | 3.39 | % |
| Selected Maturity Data | | | | |
| Weighted-average maturity of debt maturing within one year (in days) | | 163 |
| | 110 |
|
| Weighted-average maturity of debt maturing in more than one year (in months) | | 63 |
| | 63 |
|
| Other Data | | | | |
| Outstanding callable long-term debt | | $ | 64.3 |
| | $ | 45.7 |
|
Connecticut Avenue Securities debt(2) | | $ | 25.6 |
| | $ | 23.0 |
|
| | | | | |
| | | | | |
| | | | | |
| |
(1) | Outstanding debt amounts and weighted-average interest rates reported in this chart and table include the effects of discounts, premiums, other cost basis adjustments and fair value gains and losses associated with debt that we elected to carry at fair value. Reported amounts include unamortized cost basis adjustments and fair value adjustments of $74 million and $432 million as of September 30, 2019 and December 31, 2018, respectively. |
| |
(2) | Represents CAS debt issued prior to the implementation of our CAS REMIC structure in November 2018. See “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk—Credit Risk Transfer Transactions” in our 2018 Form 10-K and in this report for information regarding our Connecticut Avenue Securities. |
We intend to repay our short-term and long-term debt obligations as they become due primarily through proceeds from the issuance of additional debt securities. We also may use proceeds from our mortgage assets to pay our debt obligations.
Pursuant toFor more information on the termsmaturity profile of the senior preferred stock purchase agreement, we are prohibited from issuing debt without the prior consent of Treasury if it would result in our aggregate indebtedness exceeding our outstanding long-term debt, limit, which is 120%see “Note 7, Short-Term and Long-Term Debt.”
Debt Funding Activity
The table below displays the activity in debt of the amount of mortgage assets we were allowed to own under the senior preferred stock purchase agreement on December 31 of the immediately preceding calendar year. Our debt limit under the senior preferred stock purchase agreement was reduced to $407.2 billion in 2017. As of September 30, 2017, our aggregate indebtedness totaled $292.2 billion, which was $115.0 billion below our debt limit. The calculation of our indebtedness for purposes of complying with our debt limit reflects the unpaid principal balance andFannie Mae. This activity excludes debt basis adjustments andthe debt of consolidated trusts. Becausetrusts and intraday loans. Activity for short-term debt of Fannie Mae relates to borrowings with an original contractual maturity of one year or less while activity for long-term debt of Fannie Mae relates to borrowings with an original contractual maturity of greater than one year. The reported amounts of debt issued and paid off during each period represent the face amount of the debt at issuance and redemption.
The increase in our debt issued and paid off during the third quarter of 2019 compared with the third quarter of 2018 was primarily driven by an increase in our acquisition of mortgage loans through our whole loan conduit as mortgage refinance activity increased during the third quarter of 2019. The decrease in debt issued and paid off during the first nine months of 2019 compared with the first nine months of 2018 was primarily driven by the decline in the size of our retained mortgage portfolio. We did not issue new debt to replace all of our debt limit, we may be restricted inthat paid off during the amountfirst nine months of debt we issue to fund our operations.2019.
|
| | | | | | | | | | | | | | | |
| Activity in Debt of Fannie Mae |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (Dollars in millions) |
| Issued during the period: | | | | | | | |
| Short-term: | | | | | | | |
| Amount | $ | 161,434 |
| | $ | 106,520 |
| | $ | 418,202 |
| | $ | 446,914 |
|
| Weighted-average interest rate | 2.13 | % | | 1.90 | % | | 2.27 | % | | 1.52 | % |
Long-term:(1) | | | | | | | |
| Amount | $ | 6,940 |
| | $ | 6,032 |
| | $ | 18,335 |
| | $ | 17,595 |
|
| Weighted-average interest rate | 1.95 | % | | 3.26 | % | | 2.32 | % | | 3.08 | % |
| Total issued: | | | | | | | |
| Amount | $ | 168,374 |
| | $ | 112,552 |
| | $ | 436,537 |
| | $ | 464,509 |
|
| Weighted-average interest rate | 2.12 | % | | 1.97 | % | | 2.27 | % | | 1.58 | % |
Paid off during the period:(2) | | | | | | | |
| Short-term: | | | | | | | |
| Amount | $ | 147,507 |
| | $ | 103,256 |
| | $ | 406,135 |
| | $ | 451,295 |
|
| Weighted-average interest rate | 1.99 | % | | 1.82 | % | | 2.11 | % | | 1.42 | % |
Long-term:(1) | | | | | | | |
| Amount | $ | 23,246 |
| | $ | 12,668 |
| | $ | 48,156 |
| | $ | 42,854 |
|
| Weighted-average interest rate | 1.55 | % | | 1.62 | % | | 1.67 | % | | 1.47 | % |
| Total paid off: | | | | | | | |
| Amount | $ | 170,753 |
| | $ | 115,924 |
| | $ | 454,291 |
| | $ | 494,149 |
|
| Weighted-average interest rate | 1.93 | % | | 1.79 | % | | 2.06 | % | | 1.43 | % |
| |
(1) | Includes credit risk-sharing securities issued as CAS debt prior to the implementation of our CAS REMIC structure in November 2018. For information on our credit risk transfer transactions, see “MD&A—Single Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk—Credit Risk Transfer Transactions” in our 2018 Form 10-K and in this report. |
| |
(2) | Consists of all payments on debt, including regularly scheduled principal payments, payments at maturity, payments resulting from calls and payments for any other repurchases. Repurchases of debt and early retirements of zero-coupon debt are reported at original face value, which does not equal the amount of actual cash payment. |
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 4844 |
|
| | |
| | MD&A | Liquidity and Capital Management |
Table 28 displays information on our outstanding short-term and long-term debt based on its original contractual terms.
|
| | | | | | | | | | | | | | | | | |
Table 28: Outstanding Short-Term Borrowings and Long-Term Debt(1) |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | Maturities | | Outstanding | | Weighted- Average Interest Rate | | Maturities | | Outstanding | | Weighted- Average Interest Rate |
| | (Dollars in millions) |
Federal funds purchased and securities sold under agreements to repurchase(2) | — | | $ | 81 |
| | 0.25 | % | | — | | $ | — |
| | — | % |
| | | | | | | | | | | | |
| Short-term debt: | | | | | | | | | | | |
| Debt of Fannie Mae | — | | $ | 33,332 |
| | 1.03 | % | | — | | $ | 34,995 |
| | 0.49 | % |
| Debt of consolidated trusts | — | | 459 |
| | 0.78 |
| | — | | 584 |
| | 0.48 |
|
| Total short-term debt | | | $ | 33,791 |
| | 1.02 | % | | | | $ | 35,579 |
| | 0.49 | % |
| Long-term debt: | | | | | | | | | | | |
| Senior fixed: | | | | | | | | | | | |
| Benchmark notes and bonds | 2017 - 2030 | | $ | 133,022 |
| | 2.01 | % | | 2017 - 2030 | | $ | 153,983 |
| | 2.16 | % |
Medium-term notes(3) | 2017 - 2026 | | 78,087 |
| | 1.41 |
| | 2017 - 2026 | | 82,230 |
| | 1.40 |
|
Other(4) | 2017 - 2038 | | 7,852 |
| | 4.83 |
| | 2017 - 2038 | | 12,800 |
| | 6.74 |
|
| Total senior fixed | | | 218,961 |
| | 1.90 |
| | | | 249,013 |
| | 2.14 |
|
| Senior floating: | | | | | | | | | | | |
Medium-term notes(3) | 2017 - 2020 | | 11,424 |
| | 1.26 |
| | 2017 - 2019 | | 21,476 |
| | 0.71 |
|
Connecticut Avenue Securities(5) | 2023 - 2030 | | 22,131 |
| | 5.08 |
| | 2023 - 2029 | | 16,511 |
| | 4.77 |
|
Other(6) | 2020 - 2037 | | 369 |
| | 7.44 |
| | 2020 - 2037 | | 346 |
| | 6.75 |
|
| Total senior floating | | | 33,924 |
| | 3.78 |
| | | | 38,333 |
| | 2.48 |
|
| Subordinated debentures | 2019 | | 4,987 |
| | 9.93 |
| | 2019 | | 4,645 |
| | 9.93 |
|
Secured borrowings(7) | 2021 - 2022 | | 85 |
| | 1.52 |
| | 2021 - 2022 | | 111 |
| | 1.44 |
|
| Total long-term debt of Fannie Mae | | | 257,957 |
| | 2.30 |
| | | | 292,102 |
| | 2.31 |
|
| Debt of consolidated trusts | 2017 - 2057 | | 3,016,835 |
| | 2.75 |
| | 2017 - 2056 | | 2,934,635 |
| | 2.57 |
|
| Total long-term debt | | | $ | 3,274,792 |
| | 2.71 | % | | | | $ | 3,226,737 |
| | 2.54 | % |
Outstanding callable debt of Fannie Mae(8) | | | $ | 73,743 |
| | 2.23 | % | | | | $ | 77,257 |
| | 1.89 | % |
__________
| |
(1)
| Outstanding debt amounts and weighted-average interest rates reported in this table include the effects of discounts, premiums and other cost basis adjustments. Reported outstanding amounts include fair value gains and losses associated with debt that we elected to carry at fair value. Reported amounts for total debt of Fannie Mae include unamortized discounts and premiums, other cost basis adjustments and fair value adjustments of $1.0 billion and $1.8 billion as of September 30, 2017 and December 31, 2016, respectively. |
| |
(2)
| Represents agreements to repurchase securities for a specified price, with repayment generally occurring on the following day. |
| |
(3)
| Includes long-term debt with an original contractual maturity of greater than 1 year and up to 10 years, excluding zero-coupon debt. |
| |
(4)
| Includes other long-term debt with an original contractual maturity of greater than 10 years. |
| |
(5)
| Credit risk-sharing securities that transfer a portion of the credit risk on specified pools of mortgage loans in our single-family guaranty book of business to the investors in these securities, a portion of which is reported at fair value. For additional information on our credit risk transfer transactions, see “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk: Single-Family Credit Risk Transfer Transactions.” |
| |
(6)
| Consists of structured debt instruments that are reported at fair value. |
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 49 |
|
| | |
| MD&A | Liquidity and Capital Management |
| |
(7)
| Represents remaining liability resulting from the transfer of financial assets from our condensed consolidated balance sheets that did not qualify as a sale. |
| |
(8)
| Consists of the unpaid principal balance of long-term callable debt of Fannie Mae that can be paid off in whole or in part at our option at any time on or after a specified date. |
Other Investments Portfolio
Table 29The chart below displays information on the composition of our other investments portfolio. The balance of our other investments portfolio fluctuates based onas a result of changes in our cash flows, liquidity in the fixed incomefixed-income markets, and our liquidity risk management framework and practices. See “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Counterparty Credit Exposure of Investments Held in Our
Other Investments Portfolio” for additional information on the risks associated with the assetsPortfolio
(Dollars in our other investments portfolio.billions)
|
| | | | | | | | | | | |
| Table 29: Other Investments Portfolio |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | (Dollars in millions) |
| Cash and cash equivalents | | $ | 23,914 |
| | | | $ | 25,224 |
| |
| Federal funds sold and securities purchased under agreements to resell or similar arrangements | | 23,740 |
| | | | 30,415 |
| |
| U.S. Treasury securities | | 30,799 |
| | | | 32,317 |
| |
| Total other investments | | $ | 78,453 |
| | | | $ | 87,956 |
| |
Cash Flows
Nine Months EndedSeptember 30, 20172019. Cash, and cash equivalents decreased by $1.3 billionand restricted cash increased from $25.2$49.4 billion as of December 31, 20162018 to $23.9$64.5 billion as of September 30, 2017.2019. The increase was primarily driven by cash inflows from (1) proceeds from repayments and sales of loans, (2) the sale of Fannie Mae MBS to third parties, and (3) the net decrease in federal funds sold and securities purchased under agreements to resell or similar agreements.
Partially offsetting these cash inflows were cash outflows primarily from (1) payments on outstanding debt of consolidated trusts, (2) purchases of loans held for investment, and (3) the redemption of funding debt, which outpaced issuances, due to lower funding needs.
Nine Months EndedSeptember 30, 2018. Cash, cash equivalents and restricted cash decreased from $60.3 billion as of December 31, 2017 to $51.0 billion as of September 30, 2018. The decrease was primarily driven by cash outflows from (1) the purchase of Fannie Mae MBS from third parties, (2) the redemption of funding debt, which outpaced issuances, due to lower funding needs, (2) the purchase of Fannie Mae MBS from third parties, and (3) the paymentacquisition of dividends to Treasury under our senior preferred stock purchase agreement.delinquent loans out of MBS trusts.
Partially offsetting these cash outflows were cash inflows from, among other things, (1) the sale of Fannie Mae MBS to third parties and (2) proceeds from repayments and sales of loans of Fannie Mae.
Nine Months EndedSeptember 30, 2016. Cash and cash equivalents increased by $11.9 billion from $14.7 billion as of December 31, 2015 to $26.6 billion as of September 30, 2016. The increase was primarily driven by cash inflows from (1) the sale of Fannie Mae MBS to third parties, (2) proceeds from the repayments and sales of loans of Fannie Mae and (3) proceeds from the sale and liquidation of mortgage-related securities.
Partially offsetting these cash inflows were cash outflows from (1) the redemption of funding debt, which outpaced issuances, due to lower funding needs, (2) the acquisition of delinquent loans out of MBS trusts and (3) the payment of dividends to Treasury under our senior preferred stock purchase agreement.
Credit Ratings
As of September 30, 2017,2019, our credit ratings have not changed since we filed our 20162018 Form 10-K.10-K. For additional information on our credit ratings, see “MD&A—&A—Liquidity and Capital Management—Management—Liquidity Management—Management—Credit Ratings” in our 20162018 Form 10-K.
Capital Management
Regulatory Capital
The deficit of our core capital over statutory minimum capital was $133.8 billion as of September 30, 2019 and $137.1 billion as of December 31, 2018. For information on our current and proposed capital requirements, see “Business—Charter Act and
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 45 |
|
| | |
| MD&A | Liquidity and Capital Management |
Regulation—GSE Act and Other Regulation” and “Note 12, Regulatory Capital Requirements” in our 2018 Form 10-K and “Legislation and Regulation—Housing Finance Reform” in this report.
Capital Activity
Under the modified dividend provisions of the senior preferred stock described in “Legislation and Regulation—Letter Agreement with Treasury,” effective with the third quarter 2019 dividend period, we are not required to pay further dividends to Treasury until we have accumulated over $25 billion in net worth. Accordingly, no dividends were payable to Treasury for the third quarter of 2019 and none are payable for the fourth quarter of 2019. As of September 30, 2019, our net worth was $10.3 billion.
Under the modified liquidation preference provisions of the senior preferred stock described in “Legislation and Regulation—Letter Agreement with Treasury,” the aggregate liquidation preference of the senior preferred stock increased from $123.8 billion as of June 30, 2019 to $127.2 billion as of September 30, 2019, and will further increase to $131.2 billion as of December 31, 2019.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements result primarily from the following:
our guaranty of mortgage loan securitization and resecuritization transactions, and other guaranty commitments, over which we do not have control;
liquidity support transactions; and
partnership interests.
Since we began issuing UMBS in June 2019, some of the securities we issue are structured securities backed, in whole or in part, by Freddie Mac securities. When we issue a structured security, we provide a guaranty that we will supplement amounts received from the underlying mortgage-related security as required to permit timely payment of principal and interest on the certificates related to the resecuritization trust. Accordingly, when we issue structured securities backed in whole or in part by Freddie Mac securities, we extend our guaranty to the underlying Freddie Mac security included in the structured security. Our issuance of structured securities backed in whole or in part by Freddie Mac securities creates additional off-balance sheet exposure as we do not have control over the Freddie Mac mortgage loan securitizations. Because we do not have the power to direct matters (primarily the servicing of mortgage loans) that impact the credit risk to which we are exposed, which constitute control of these securitization trusts, we do not consolidate these trusts in our condensed consolidated balance sheet, giving rise to off-balance sheet exposure.
The total amount of our off-balance sheet exposure related to unconsolidated Fannie Mae MBS net of any beneficial interest that we retain, and other financial guarantees was $48.5 billion as of September 30, 2019. Approximately $23.0 billion of this amount consisted of the unpaid principal balance of Freddie Mac-issued UMBS backing Fannie Mae-issued Supers. Additionally, off-balance sheet exposure includes approximately $5.9 billion of the unpaid principal balance of Freddie Mac securities backing Fannie Mae-issued REMICs; however, a portion of these Freddie Mac securities may be backed in whole or in part by Fannie Mae MBS. Therefore, our total exposure to Freddie Mac securities included in Fannie Mae REMIC collateral may be lower. We expect our off-balance sheet exposure to Freddie Mac securities to increase as we issue more structured securities backed by Freddie Mac securities in the future. The total amount of our off-balance sheet exposure related to unconsolidated Fannie Mae MBS and other financial guarantees was $21.1 billion as of December 31, 2018. We did not have any Freddie Mac-issued UMBS backing Fannie Mae structured securities as of December 31, 2018.
We also have off-balance sheet exposure to losses from liquidity support transactions and partnership interests.
Our total outstanding liquidity commitments to advance funds for securities backed by multifamily housing revenue bonds totaled $7.4 billion as of September 30, 2019 and $8.3 billion as of December 31, 2018. These commitments require us to advance funds to third parties that enable them to repurchase tendered bonds or securities that are unable to be remarketed. We hold cash and cash equivalents in our other investments portfolio in excess of these commitments to advance funds.
We make investments in various limited partnerships and similar legal entities, which consist of low-income housing tax credit investments, community investments and other entities. When we do not have a controlling financial interest in those entities, our condensed consolidated balance sheets reflect only our investment rather than the full amount of the partnership’s assets and liabilities.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 46 |
Risk Management
Our business activities expose us to the following major categories of risk: credit risk (including mortgage credit risk and institutional counterparty credit risk), market risk (including interest rate risk), liquidity and funding risk, and operational risk (including cyber/information security risk, third-party risk and model risk), as well as strategic risk, compliance risk and reputational risk. See “MD&A—Risk Management” in our 2018 Form 10-K for a discussion of our management of these risks. This section supplements and updates that discussion but does not repeat all of the risk management categories described in our 2018 Form 10-K.
CapitalInstitutional Counterparty Credit Risk Management
This section supplements and updates our discussion of institutional counterparty credit risk management in our 2018 Form 10-K. See “MD&A—Risk Management—Institutional Counterparty Credit Risk Management” and “Risk Factors—Credit Risk” in our 2018 Form 10-K for additional information, including our exposure to institutional counterparty credit risk and our strategy for managing this risk.
Counterparty Credit Risk Exposure arising from the Resecuritization of Freddie Mac-issued Securities
We began resecuritizing Freddie Mac-issued securities in connection with the implementation of the Single Security Initiative in June 2019, which has increased our credit risk exposure and operational risk exposure to Freddie Mac, and our risk exposure to Freddie Mac is expected to increase as we issue more structured securities backed by Freddie Mac securities going forward. Our inclusion of Freddie Mac securities as collateral for the structured securities that we issue increases our counterparty credit risk exposure to Freddie Mac. In the event Freddie Mac were to fail (for credit or operational reasons) to make a payment on a payment date on Freddie Mac securities that we had resecuritized in a Fannie Mae-issued structured security, we would be responsible for making the entire payment on the Freddie Mac securities included in that structured security in order to make payments on any of our outstanding single-family Fannie Mae MBS to be paid on that payment date. Accordingly, as the amount of structured securities we issue that are backed by Freddie Mac securities grows, if Freddie Mac were to fail to meet its obligations to us under the terms of these securities, it could have a material adverse effect on our earnings and financial condition. We believe the risk of default by Freddie Mac is negligible because of the funding commitment available to Freddie Mac through its senior preferred stock purchase agreement with Treasury.
As of September 30, 2019, approximately $28.9 billion in Freddie Mac securities were backing Fannie Mae-issued structured securities. We had no such transactions or activity in 2018. See “Uniform Mortgage-Backed Securities” and “Risk Factors” in this report for more information on UMBS and the risks associated with the Single Security Initiative.
Market Risk Management, Including Interest Rate Risk Management
This section supplements and updates information regarding market risk management in our 2018 Form 10-K. See “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management” and “Risk Factors” in our 2018 Form 10-K for additional information, including our sources of interest rate risk exposure, business risks posed by changes in interest rates, and our strategy for managing interest rate risk.
Measurement of Interest Rate Risk
The table below displays the pre-tax market value sensitivity of our net portfolio to changes in the level of interest rates and the slope of the yield curve as measured on the last day of each period presented. The table below also provides the daily average, minimum, maximum and standard deviation values for duration gap and for the most adverse market value impact on the net portfolio to changes in the level of interest rates and the slope of the yield curve for the three months ended September 30, 2019 and 2018.
For information on how we measure our interest rate risk, see our 2018 Form 10-K in “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management.”
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 47 |
|
| | | | | | | | | | | |
| Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve |
| | As of (1)(2) |
| | September 30, 2019 | | December 31, 2018 |
| | (Dollars in millions) |
| Rate level shock: | | | | | | | |
| -100 basis points | | $ | 99 |
| | | | $ | (286 | ) | |
| -50 basis points | | 24 |
| | | | (119 | ) | |
| +50 basis points | | 38 |
| | | | 48 |
| |
| +100 basis points | | 124 |
| | | | 29 |
| |
| Rate slope shock: | | | | | | | |
| -25 basis points (flattening) | | (13 | ) | | | | (7 | ) | |
| +25 basis points (steepening) | | 12 |
| | | | 6 |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30,(1)(3) |
| | | 2019 | | 2018 |
| | | Duration Gap | | Rate Slope Shock 25 bps | | Rate Level Shock 50 bps | | Duration Gap | | Rate Slope Shock 25 bps | | Rate Level Shock 50 bps |
| | | | | Market Value Sensitivity | | | | Market Value Sensitivity
|
| | | (In years) | | (Dollars in millions) | | (In years) | | (Dollars in millions) |
| Average | | 0.01 | | | $ | (8 | ) | | | | $ | (24 | ) | | | 0.01 | | | $ | (13 | ) | | | | $ | (51 | ) | |
| Minimum | | (0.09) | | | (21 | ) | | | | (100 | ) | | | (0.01) | | | (22 | ) | | | | (119 | ) | |
| Maximum | | 0.09 | | | (2 | ) | | | | 26 |
| | | 0.07 | | | (1 | ) | | | | (30 | ) | |
| Standard deviation | | 0.04 | | | 6 |
| | | | 28 |
| | | 0.02 | | | 6 |
| | | | 17 |
| |
| |
(1) | Computed based on changes in U.S. LIBOR interest rates swap curve. Changes in the level of interest rates assume a parallel shift in all maturities of the U.S. LIBOR interest rate swap curve. Changes in the slope of the yield curve assume a constant 7-year rate, a shift of 16.7 basis points for the 1-year rate (and shorter tenors) and an opposite shift of 8.3 basis points for the 30-year rate. Rate shocks for remaining maturity points are interpolated. |
| |
(2) | Measured on the last business day of each period presented. |
| |
(3) | Computed based on daily values during the period presented. |
The market value sensitivity of our net portfolio varies across a range of interest rate shocks depending upon the duration and convexity profile of our net portfolio. Because the effective duration gap of our net portfolio was close to zero years in the periods presented, the convexity exposure was the primary driver of the market value sensitivity of our net portfolio as of September 30, 2019. In addition, the convexity exposure may result in similar market value sensitivities for positive and negative interest rate shocks of the same magnitude.
We use derivatives to help manage the residual interest rate risk exposure between our assets and liabilities. Derivatives have enabled us to keep our interest rate risk exposure at consistently low levels in a wide range of interest-rate environments. The table below displays an example of how derivatives impacted the net market value exposure for a 50 basis point parallel interest rate shock.
|
| | | | | | | | | | | |
| Derivative Impact on Interest Rate Risk (50 Basis Points) |
| | As of (1) |
| | September 30, 2019 | | December 31, 2018 |
| | (Dollars in millions) |
| Before derivatives | | $ | (201 | ) | | | | $ | (535 | ) | |
| After derivatives | | 38 |
| | | | 48 |
| |
| Effect of derivatives | | 239 |
| | | | 583 |
| |
| |
(1) | Measured on the last business day of each period presented. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 48 |
|
| | |
| MD&A | Critical Accounting Policies and Estimates |
Critical Accounting Policies and Estimates The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our condensed consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in “Note 1, Summary of Significant Accounting Policies” in this report and in our 2018 Form 10-K.
We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. We previously identified our fair value measurement as a critical accounting estimate due to the subjectivity of the unobservable inputs used to measure Level 3 assets and liabilities recorded at fair value. However, because the amount of Level 3 assets and liabilities that we report at fair value has continued to decline, using reasonably different estimates and assumptions in valuing these assets and liabilities would not have a material impact on our reported results of operations or financial condition. Consequently, we no longer consider our fair value measurement a critical accounting estimate.
We continue to identify the allowance for loan losses as critical because it involves significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. See “MD&A—Critical Accounting Policies and Estimates” in our 2018 Form 10-K for more discussion of our allowance for loan losses. See “Risk Factors” in our 2018 Form 10-K for a discussion of the risks associated with the need for management to make judgments and estimates in applying our accounting policies and methods.
Impact of Future Adoption of New Accounting Guidance
We identify and discuss the expected impact on our condensed consolidated financial statements of recently issued accounting guidance in “Note 1, Summary of Significant Accounting Policies.”
Forward-Looking Statements
This report includes statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (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:
factors that will affect our future net worth;
our future financial condition and results of operations, and the factors that will affect them;
factors that will affect our long-term financial performance;
trends and the impact of fluctuations in our acquisition volumes, market share, guaranty fees, or acquisition credit characteristics;
our business plans and strategies and the impact of such plans and strategies;
continued consideration of housing finance reform by the Administration, FHFA and Congress, including the recommended administrative and legislative reforms in the Treasury plan, efforts and plans to implement such reforms; and the impact of housing finance reform on our conservatorship, our structure, our role in the secondary mortgage market, our capitalization, our business and our competitive environment;
our dividend payments to Treasury and the liquidation preference of the senior preferred stock;
volatility in our future financial results and efforts we may make to address volatility;
the size or composition of our retained mortgage portfolio;
the impact of legislation and regulation on our business or financial results;
our payments to HUD and Treasury funds under the GSE Act;
our plans relating to and the effects of our credit risk transfer transactions;
factors that could affect or mitigate our credit risk exposure;
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 49 |
|
| | |
| MD&A | Forward-Looking Statements |
mortgage market and economic conditions (including home price appreciation rates) and the impact of such conditions on our business or financial results;
the effects on our business, risk profile and financial condition of our issuance of UMBS and of structured securities backed by Freddie Mac-issued UMBS, including the level and impact of our credit and operational risk exposure to Freddie Mac;
the risks to our business;
our loan acquisitions, the credit risk profile of such acquisitions, and the factors that will affect them;
our response to legal and regulatory proceedings and their impact on our business or financial condition; and
the impact of our adoption of the CECL standard on our financial condition and results of operations.
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 factors in the markets in which we are active and that otherwise impact our business plans. Forward-looking statements are not guaranties 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:
the uncertainty of our future;
future legislative and regulatory requirements or changes affecting us, such as the enactment of housing finance reform legislation (including all or any portion of the Treasury plan), including changes that limit our business activities or our footprint;
actions by FHFA, Treasury, HUD, the CFPB or other regulators, or Congress, that affect our business, including new capital requirements that become applicable to us or changes in the ability-to-repay rule to replace the qualified mortgage patch for GSE-eligible loans;
changes in the structure and regulation of the financial services industry;
the timing and level of, as well as regional variation in, home price changes;
changes in interest rates and credit spreads;
developments that may be difficult to predict, including market conditions that result in changes in our net amortization income from our guaranty book of business, fluctuations in the estimated fair value of our derivatives and other financial instruments that we mark to market through our earnings, developments that affect our loss reserves such as changes in interest rates, home prices or accounting standards, or events such as natural disasters;
uncertainties relating to the potential discontinuance of LIBOR, or other market changes that could impact the loans we own or guarantee or our MBS;
credit availability;
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 the U.S. GDP, unemployment rates, personal income and other indicators thereof;
changes in the fiscal and monetary policies of the Federal Reserve;
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 and quality of our guaranty book of business and retained mortgage portfolio;
the competitive environment in which we operate, including the impact of legislative or other developments on levels of competition in our industry and other factors affecting our market share;
the life of the loans in our guaranty book of business;
challenges we face in retaining and hiring qualified executives and other employees;
our future serious delinquency rates;
the deteriorated credit performance of many loans in our guaranty book of business;
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 50 |
|
| | |
| MD&A | Forward-Looking Statements |
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 potential changes to the terms of the senior preferred stock purchase agreement or senior preferred stock, and its effect on our business, including restrictions imposed on us by the terms of the senior preferred stock purchase agreement, the senior preferred stock, and Treasury’s warrant, as well as the possibility that these or other restrictions on our business and activities may be 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;
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 future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers;
the possibility that future changes in leadership at FHFA or the Administration may result in changes in FHFA’s or Treasury’s willingness to pursue the administrative reform recommendations in the Treasury plan;
a decrease in our credit ratings;
limitations on our ability to access the debt capital markets;
significant changes in modification and foreclosure activity;
the volume and pace of future nonperforming and reperforming loan sales and their impact on our results and serious delinquency rates;
changes in borrower behavior;
the effectiveness of our loss mitigation strategies, management of our 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 and changes to our accounting policies;
changes in the fair value of our assets and liabilities;
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 increasing interdependence between the single-family mortgage securitization programs of Fannie Mae and Freddie Mac in connection with uniform mortgage-backed securities;
operational control weaknesses;
our reliance on models and future updates we make to our models, including the assumptions used by these models;
domestic and global political risks and uncertainties;
natural disasters, environmental disasters, terrorist attacks, pandemics or other major disruptive events;
cyber attacks or other information security breaches or threats; and
the other factors described in “Risk Factors” in this report and in our 2018 Form 10-K.
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 our 2018 Form 10-K and 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.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 51 |
|
| | |
| Financial Statements | Condensed Consolidated Balance Sheets |
Item 1. Financial Statements
FANNIE MAE
(In conservatorship)
Condensed Consolidated Balance Sheets — (Unaudited)
(Dollars in millions)
|
| | | | | | | | | | | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | |
| ASSETS |
| Cash and cash equivalents | | $ | 22,592 |
| | | | $ | 25,557 |
| |
| Restricted cash (includes $35,496 and $17,849, respectively, related to consolidated trusts) | | 41,906 |
| | | | 23,866 |
| |
| Federal funds sold and securities purchased under agreements to resell or similar arrangements | | 23,176 |
| | | | 32,938 |
| |
| Investments in securities: | | | | | | | |
| Trading, at fair value (includes $4,304 and $3,061, respectively, pledged as collateral) | | 44,206 |
| | | | 41,867 |
| |
| Available-for-sale, at fair value | | 2,690 |
| | | | 3,429 |
| |
| Total investments in securities | | 46,896 |
| | | | 45,296 |
| |
| Mortgage loans: | | | | | | | |
| Loans held for sale, at lower of cost or fair value | | 12,289 |
| | | | 7,701 |
| |
| Loans held for investment, at amortized cost: | | | | | | | |
| Of Fannie Mae | | 104,367 |
| | | | 113,039 |
| |
| Of consolidated trusts | | 3,206,856 |
| | | | 3,142,858 |
| |
| Total loans held for investment (includes $8,183 and $8,922, respectively, at fair value) | | 3,311,223 |
| | | | 3,255,897 |
| |
| Allowance for loan losses | | (9,376 | ) | | | | (14,203 | ) | |
| Total loans held for investment, net of allowance | | 3,301,847 |
| | | | 3,241,694 |
| |
| Total mortgage loans | | 3,314,136 |
| | | | 3,249,395 |
| |
| Deferred tax assets, net | | 11,994 |
| | | | 13,188 |
| |
| Accrued interest receivable, net (includes $8,450 and $7,928, respectively, related to consolidated trusts) | | 8,923 |
| | | | 8,490 |
| |
| Acquired property, net | | 2,452 |
| | | | 2,584 |
| |
| Other assets | | 22,361 |
| | | | 17,004 |
| |
| Total assets | | $ | 3,494,436 |
| | | | $ | 3,418,318 |
| |
| LIABILITIES AND EQUITY |
| Liabilities: | | | | | | | |
| Accrued interest payable (includes $9,348 and $9,133, respectively, related to consolidated trusts) | | $ | 10,400 |
| | | | $ | 10,211 |
| |
| Debt: | | | | | | | |
| Of Fannie Mae (includes $6,041 and $6,826, respectively, at fair value) | | 213,522 |
| | | | 232,074 |
| |
| Of consolidated trusts (includes $22,719 and $23,753, respectively, at fair value) | | 3,248,336 |
| | | | 3,159,846 |
| |
| Other liabilities (includes $359 and $356, respectively, related to consolidated trusts) | | 11,836 |
| | | | 9,947 |
| |
| Total liabilities | | 3,484,094 |
| | | | 3,412,078 |
| |
| Commitments and contingencies (Note 13) | | — |
| | | | — |
| |
| Fannie Mae stockholders’ equity: | | | | | | | |
| Senior preferred stock (liquidation preference of $127,201 and $123,836, respectively) | | 120,836 |
| | | | 120,836 |
| |
| Preferred stock, 700,000,000 shares are authorized—555,374,922 shares issued and outstanding | | 19,130 |
| | | | 19,130 |
| |
| Common stock, no par value, no maximum authorization—1,308,762,703 shares issued and 1,158,087,567 shares outstanding | | 687 |
| | | | 687 |
| |
| Accumulated deficit | | (123,141 | ) | | | | (127,335 | ) | |
| Accumulated other comprehensive income | | 230 |
| | | | 322 |
| |
| Treasury stock, at cost, 150,675,136 shares | | (7,400 | ) | | | | (7,400 | ) | |
| Total stockholders’ equity (See Note 1: Senior Preferred Stock Purchase Agreement and Senior Preferred Stock for information on the related dividend obligation and liquidation preference) | | 10,342 |
| | | | 6,240 |
| |
| Total liabilities and equity | | $ | 3,494,436 |
| | | | $ | 3,418,318 |
| |
See Notes to Condensed Consolidated Financial Statements
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 52 |
|
| | |
| Financial Statements | Condensed Consolidated Statements of Operations and Comprehensive Income |
FANNIE MAE
(In conservatorship)
Condensed Consolidated Statements of Operations and Comprehensive Income — (Unaudited)
(Dollars and shares in millions, except per share amounts) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Interest income: | | | | | | | | | | | | | | | |
| Trading securities | | $ | 418 |
| | | | $ | 363 |
| | | | $ | 1,277 |
| | | | $ | 917 |
| |
| Available-for-sale securities | | 40 |
| | | | 54 |
| | | | 138 |
| | | | 175 |
| |
| Mortgage loans (includes $27,610 and $27,058, respectively, for the three months ended and $84,157 and $79,877, respectively, for the nine months ended related to consolidated trusts) | | 28,858 |
| | | | 28,723 |
| | | | 88,005 |
| | | | 85,064 |
| |
| Federal funds sold and securities purchased under agreements to resell or similar arrangements | | 178 |
| | | | 166 |
| | | | 698 |
| | | | 457 |
| |
| Other | | 47 |
| | | | 38 |
| | | | 120 |
| | | | 102 |
| |
| Total interest income | | 29,541 |
| | | | 29,344 |
| | | | 90,238 |
| | | | 86,715 |
| |
| Interest expense: | | | | | | | | | | | | | | | |
| Short-term debt | | (125 | ) | | | | (114 | ) | | | | (369 | ) | | | | (331 | ) | |
| Long-term debt (includes $22,775 and $22,361, respectively, for the three months ended and $70,371 and $65,972, respectively, for the nine months ended related to consolidated trusts) | | (24,187 | ) | | | | (23,861 | ) | | | | (74,757 | ) | | | | (70,406 | ) | |
| Total interest expense | | (24,312 | ) | | | | (23,975 | ) | | | | (75,126 | ) | | | | (70,737 | ) | |
| Net interest income | | 5,229 |
| | | | 5,369 |
| | | | 15,112 |
| | | | 15,978 |
| |
| Benefit for credit losses | | 1,857 |
| | | | 716 |
| | | | 3,732 |
| | | | 2,229 |
| |
| Net interest income after benefit for credit losses | | 7,086 |
| | | | 6,085 |
| | | | 18,844 |
| | | | 18,207 |
| |
| Investment gains, net | | 253 |
| | | | 166 |
| | | | 847 |
| | | | 693 |
| |
| Fair value gains (losses), net | | (713 | ) | | | | 386 |
| | | | (2,298 | ) | | | | 1,660 |
| |
| Fee and other income | | 402 |
| | | | 271 |
| | | | 875 |
| | | | 830 |
| |
| Non-interest income (loss) | | (58 | ) | | | | 823 |
| | | | (576 | ) | | | | 3,183 |
| |
| Administrative expenses: | | | | | | | | | | | | | | | |
| Salaries and employee benefits | | (361 | ) | | | | (355 | ) | | | | (1,123 | ) | | | | (1,101 | ) | |
| Professional services | | (241 | ) | | | | (247 | ) | | | | (699 | ) | | | | (744 | ) | |
| Other administrative expenses | | (147 | ) | | | | (138 | ) | | | | (415 | ) | | | | (400 | ) | |
| Total administrative expenses | | (749 | ) | | | | (740 | ) | | | | (2,237 | ) | | | | (2,245 | ) | |
| Foreclosed property expense | | (96 | ) | | | | (159 | ) | | | | (364 | ) | | | | (460 | ) | |
| Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) fees | | (613 | ) | | | | (576 | ) | | | | (1,806 | ) | | | | (1,698 | ) | |
| Other expenses, net | | (571 | ) | | | | (377 | ) | | | | (1,514 | ) | | | | (946 | ) | |
| Total expenses | | (2,029 | ) | | | | (1,852 | ) | | | | (5,921 | ) | | | | (5,349 | ) | |
| Income before federal income taxes | | 4,999 |
| | | | 5,056 |
| | | | 12,347 |
| | | | 16,041 |
| |
| Provision for federal income taxes | | (1,036 | ) | | | | (1,045 | ) | | | | (2,552 | ) | | | | (3,312 | ) | |
| Net income | | 3,963 |
| | | | 4,011 |
| | | | 9,795 |
| | | | 12,729 |
| |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | |
| Changes in unrealized gains on available-for-sale securities, net of reclassification adjustments and taxes | | 16 |
| | | | (33 | ) | | | | (85 | ) | | | | (349 | ) | |
| Other, net of taxes | | (2 | ) | | | | (3 | ) | | | | (7 | ) | | | | (8 | ) | |
| Total other comprehensive income (loss) | | 14 |
| | | | (36 | ) | | | | (92 | ) | | | | (357 | ) | |
| Total comprehensive income | | $ | 3,977 |
| | | | $ | 3,975 |
| | | | $ | 9,703 |
| | | | $ | 12,372 |
| |
| Net income | | $ | 3,963 |
| | | | $ | 4,011 |
| | | | $ | 9,795 |
| | | | $ | 12,729 |
| |
| Dividends distributed or amounts attributable to senior preferred stock | | (3,977 | ) | | | | (3,975 | ) | | | | (9,703 | ) | | | | (9,372 | ) | |
| Net income (loss) attributable to common stockholders | | $ | (14 | ) | | | | $ | 36 |
| | | | $ | 92 |
| | | | $ | 3,357 |
| |
| Earnings per share: | | | | | | | | | | | | | | | |
| Basic | | $ | 0.00 |
| | | | $ | 0.01 |
| | | | $ | 0.02 |
| | | | $ | 0.58 |
| |
| Diluted | | 0.00 |
| | | | 0.01 |
| | | | 0.02 |
| | | | 0.57 |
| |
| Weighted-average common shares outstanding: | | | | | | | | | | | | | | | |
| Basic | | 5,762 |
| | | | 5,762 |
| | | | 5,762 |
| | | | 5,762 |
| |
| Diluted | | 5,762 |
| | | | 5,893 |
| | | | 5,893 |
| | | | 5,893 |
| |
See Notes to Condensed Consolidated Financial Statements
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 53 |
|
| | |
| Financial Statements | Condensed Consolidated Statements of Cash Flows |
FANNIE MAE
(In conservatorship)
Condensed Consolidated Statements of Cash Flows — (Unaudited)
(Dollars in millions)
|
| | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2019 | | 2018 |
| Net cash provided by (used in) operating activities | | $ | 3,176 |
| | | | $ | (1,796 | ) | |
| Cash flows provided by investing activities: | | | | | | | |
| Proceeds from maturities and paydowns of trading securities held for investment | | 46 |
| | | | 163 |
| |
| Proceeds from sales of trading securities held for investment | | 49 |
| | | | 96 |
| |
| Proceeds from maturities and paydowns of available-for-sale securities | | 364 |
| | | | 564 |
| |
| Proceeds from sales of available-for-sale securities | | 376 |
| | | | 729 |
| |
| Purchases of loans held for investment | | (181,898 | ) | | | | (135,913 | ) | |
| Proceeds from repayments of loans acquired as held for investment of Fannie Mae | | 9,338 |
| | | | 11,651 |
| |
| Proceeds from sales of loans acquired as held for investment of Fannie Mae | | 8,987 |
| | | | 10,637 |
| |
| Proceeds from repayments and sales of loans acquired as held for investment of consolidated trusts | | 377,789 |
| | | | 306,374 |
| |
| Advances to lenders | | (95,636 | ) | | | | (83,643 | ) | |
| Proceeds from disposition of acquired property and preforeclosure sales | | 5,644 |
| | | | 7,090 |
| |
| Net change in federal funds sold and securities purchased under agreements to resell or similar arrangements | | 9,762 |
| | | | (7,128 | ) | |
| Other, net | | (74 | ) | | | | (56 | ) | |
| Net cash provided by investing activities | | 134,747 |
| | | | 110,564 |
| |
| Cash flows used in financing activities: | | | | | | | |
| Proceeds from issuance of debt of Fannie Mae | | 587,659 |
| | | | 636,466 |
| |
| Payments to redeem debt of Fannie Mae | | (606,665 | ) | | | | (666,888 | ) | |
| Proceeds from issuance of debt of consolidated trusts | | 286,126 |
| | | | 278,357 |
| |
| Payments to redeem debt of consolidated trusts | | (385,496 | ) | | | | (364,942 | ) | |
| Payments of cash dividends on senior preferred stock to Treasury | | (5,601 | ) | | | | (5,397 | ) | |
| Proceeds from senior preferred stock purchase agreement with Treasury | | — |
| | | | 3,687 |
| |
| Other, net | | 1,129 |
| | | | 720 |
| |
| Net cash used in financing activities | | (122,848 | ) | | | | (117,997 | ) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | 15,075 |
| | | | (9,229 | ) | |
| Cash, cash equivalents and restricted cash at beginning of period | | 49,423 |
| | | | 60,260 |
| |
| Cash, cash equivalents and restricted cash at end of period | | $ | 64,498 |
| | | | $ | 51,031 |
| |
| Cash paid during the period for: | | | | | | | |
| Interest | | $ | 86,699 |
| | | | $ | 82,010 |
| |
| Income taxes | | 1,250 |
| | | | 460 |
| |
See Notes to Condensed Consolidated Financial Statements
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 54 |
|
| | |
| Financial Statements | Condensed Consolidated Statements of Changes in Equity (Deficit) |
FANNIE MAE
(In conservatorship)
CondensedConsolidated Statements of Changes in Equity (Deficit) —(Unaudited)
(Dollars and shares in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fannie Mae Stockholders’ Equity (Deficit) |
| | | Shares Outstanding | | Senior
Preferred Stock | | Preferred
Stock | | Common
Stock | |
Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Treasury
Stock | | Total
Equity |
| | Senior
Preferred | | Preferred | | Common | |
| Balance as of June 30, 2019 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (127,104 | ) | | $ | 216 |
| | $ | (7,400 | ) | | $ | 6,365 |
|
| Senior preferred stock dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,963 |
| | — |
| | — |
| | 3,963 |
|
| Other comprehensive income, net of tax effect: | | | | | | | | | | | | | | | | | | | | |
| Changes in net unrealized gains on available-for-sale securities (net of taxes of $2) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
|
| Reclassification adjustment for gains included in net income (net of taxes of $1) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6 |
| | — |
| | 6 |
|
| Other (net of taxes of $1) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | 3,977 |
|
| Balance as of September 30, 2019 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (123,141 | ) | | $ | 230 |
| | $ | (7,400 | ) | | $ | 10,342 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fannie Mae Stockholders’ Equity (Deficit) |
| | | Shares Outstanding | | Senior
Preferred Stock | | Preferred
Stock | | Common
Stock | |
Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Treasury
Stock | | Total
Equity |
| | Senior
Preferred | | Preferred | | Common | |
| Balance as of December 31, 2018 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (127,335 | ) | | $ | 322 |
| | $ | (7,400 | ) | | $ | 6,240 |
|
| Senior preferred stock dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,601 | ) | | — |
| | — |
| | (5,601 | ) |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9,795 |
| | — |
| | — |
| | 9,795 |
|
| Other comprehensive income, net of tax effect: | | | | | | | | | | | | | | | | | | | | |
| Changes in net unrealized gains on available-for-sale securities (net of taxes of $7) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 27 |
| | — |
| | 27 |
|
| Reclassification adjustment for gains included in net income (net of taxes of $30) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (112 | ) | | — |
| | (112 | ) |
| Other (net of taxes of $2) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | 9,703 |
|
| Balance as of September 30, 2019 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (123,141 | ) | | $ | 230 |
| | $ | (7,400 | ) | | $ | 10,342 |
|
See Notes to Condensed Consolidated Financial Statements
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 55 |
|
| | |
| Financial Statements | Condensed Consolidated Statements of Changes in Equity (Deficit) |
FANNIE MAE
(In conservatorship)
CondensedConsolidated Statements of Changes in Equity (Deficit) —(Unaudited)
(Dollars and shares in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fannie Mae Stockholders’ Equity (Deficit) |
| | | Shares Outstanding | | Senior
Preferred Stock | | Preferred
Stock | | Common
Stock | |
Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Treasury
Stock | | Total
Equity
(Deficit) |
| | | Senior
Preferred | | Preferred | | Common | |
| Balance as of June 30, 2018 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (126,143 | ) | | $ | 349 |
| | $ | (7,400 | ) | | $ | 7,459 |
|
| Senior preferred stock dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,459 | ) | | — |
| | — |
| | (4,459 | ) |
| Increase to senior preferred stock | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,011 |
| | — |
| | — |
| | 4,011 |
|
| Other comprehensive income, net of tax effect: | | | | | | | | | | | | | | | | | | | | |
| Changes in net unrealized gains on available-for-sale securities (net of taxes of $8) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | — |
| | (31 | ) |
| Reclassification adjustment for gains included in net income (net of taxes of $1) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | 3,975 |
|
Reclassification related to Tax Cuts
and Jobs Act | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance as of September 30, 2018 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (126,591 | ) | | $ | 313 |
| | $ | (7,400 | ) | | $ | 6,975 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fannie Mae Stockholders’ Equity (Deficit) |
| | | Shares Outstanding | | Senior
Preferred Stock | | Preferred
Stock | | Common
Stock | |
Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Treasury
Stock | | Total
Equity (Deficit) |
| | | Senior
Preferred | | Preferred | | Common | |
| Balance as of December 31, 2017 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 117,149 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (133,805 | ) | | $ | 553 |
| | $ | (7,400 | ) | | $ | (3,686 | ) |
| Senior preferred stock dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,397 | ) | | — |
| | — |
| | (5,397 | ) |
| Increase to senior preferred stock | | — |
| | — |
| | — |
| | 3,687 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,687 |
|
| Comprehensive income: | |
| |
| |
| | | | | | | | | | | | | |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,729 |
| | — |
| | — |
| | 12,729 |
|
| Other comprehensive income, net of tax effect: | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
| Changes in net unrealized gains on available-for-sale securities (net of taxes of $22) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (84 | ) | | — |
| | (84 | ) |
| Reclassification adjustment for gains included in net income (net of taxes of $71) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (265 | ) | | — |
| | (265 | ) |
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) |
| Total comprehensive income | |
| |
| |
| | | | | | | | | | | | | | 12,372 |
|
Reclassification related to Tax Cuts
and Jobs Act | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (117 | ) | | 117 |
| | — |
| | — |
|
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
| Balance as of September 30, 2018 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (126,591 | ) | | $ | 313 |
| | $ | (7,400 | ) | | $ | 6,975 |
|
See Notes to Condensed Consolidated Financial Statements
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 56 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
FANNIE MAE
(In conservatorship)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
We are a stockholder-owned corporation organized and existing under the Federal National Mortgage Association Charter Act (the “Charter Act” or our “charter”). We are a government-sponsored enterprise (“GSE”), and we are subject to government oversight and regulation. Our regulators include the Federal Housing Finance Agency (“FHFA”), the U.S. Department of Housing and Urban Development (“HUD”), the U.S. Securities and Exchange Commission (“SEC”), and the U.S. Department of the Treasury (“Treasury”). The U.S. government does not guarantee our securities or other obligations.
We have been under conservatorship, with FHFA acting as conservator, since September 6, 2008. See below and “Note 1, Summary of Significant Accounting Policies” in our annual report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”) for additional information on our conservatorship and the impact of U.S. government support of our business.
The unaudited interim condensed consolidated financial statements as of and for the three and nine months ended September 30, 2019 and related notes, should be read in conjunction with our audited consolidated financial statements and related notes included in our 2018 Form 10-K.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the SEC’s instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. The accompanying condensed consolidated financial statements include our accounts as well as the accounts of other entities in which we have a controlling financial interest. All intercompany accounts and transactions have been eliminated. To conform to our current period presentation, we have reclassified certain amounts reported in our prior period condensed consolidated financial statements. Results for the three and nine months ended September 30, 2019 may not necessarily be indicative of the results for the year ending December 31, 2019.
Use of Estimates
Preparing condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect our reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of our condensed consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting periods. Management has made significant estimates in a variety of areas including, but not limited to, the allowance for loan losses. Actual results could be different from these estimates.
Conservatorship
On September 7, 2008, the Secretary of the Treasury and the Director of FHFA announced several actions taken by Treasury and FHFA regarding Fannie Mae, which included: (1) placing us in conservatorship and (2) the execution of a senior preferred stock purchase agreement by our conservator, on our behalf, and Treasury, pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase common stock.
On September 5, 2019, Treasury released its plan to reform the housing finance system. The Treasury Housing Reform Plan (the “Treasury plan”) is far-reaching in scope and could have a significant impact on our structure, our role in the secondary mortgage market, our capitalization, our business and our competitive environment. The Treasury plan includes recommendations relating to ending our conservatorship, amending our senior preferred stock purchase agreement with Treasury, considering additional restrictions and requirements on our business, and many other matters. The Treasury plan recommends that Treasury’s commitment to provide funding under the senior preferred stock purchase agreement should be replaced with legislation that authorizes an explicit, paid-for guarantee backed by the full faith and credit of the Federal Government that is limited to the timely payment of principal and interest on qualifying MBS. The Treasury plan further recommends that, pending legislation, even after conservatorship Treasury should maintain its ongoing commitment to support our single-family and multifamily mortgage-backed securities through the senior preferred stock purchase agreement, as amended as contemplated by the plan.
There continues to be significant uncertainty regarding our future, including how long we will continue to exist in our current form, the extent of our role in the market, how long we will be in conservatorship, what form we will have and what ownership
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 57 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
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. Treasury has made a commitment under the senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. We are not aware of any plans of FHFA (1) to fundamentally change our business model, other than changes that might result from recommendations in the Treasury plan, if implemented, or (2) to reduce the aggregate amount available to or held by the company under our capital structure, which includes the senior preferred stock purchase agreement.
Senior Preferred Stock Purchase Agreement and Senior Preferred Stock
Treasury has made a commitment under the senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. Pursuant to the senior preferred stock purchase agreement, we have received a total of $119.8 billion from Treasury as of September 30, 2019, and the amount of remaining funding available to us under the agreement was $113.9 billion.
Pursuant to the senior preferred stock purchase agreement, we issued shares of senior preferred stock in 2008. On September 27, 2019, we, through FHFA acting on our behalf in its capacity as our conservator, and Treasury entered into a letter agreement modifying the dividend and liquidation preference provisions of the senior preferred stock. These modifications and other specified provisions of the letter agreement are described below.
| |
| • | Modification to Dividend Provisions—Increase in Applicable Capital Reserve Amount. 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 the applicable capital reserve amount. The letter agreement modified the dividend provisions of the senior preferred stock to increase the applicable capital reserve amount from $3 billion to $25 billion, effective for dividend periods beginning July 1, 2019. |
As a result of this change to the senior preferred stock dividend provisions:
| |
| ◦ | No dividends were payable on the senior preferred stock for the third quarter of 2019, as our net worth of $6.4 billion as of June 30, 2019 was lower than the $25 billion capital reserve amount. |
| |
| ◦ | No dividends will be payable on the senior preferred stock for the fourth quarter of 2019, as our net worth of $10.3 billion as of September 30, 2019 is lower than the $25 billion capital reserve amount. |
| |
| • | Modification to Liquidation Preference Provisions—Increase in Liquidation Preference. The letter agreement provides that, on September 30, 2019, and at the end of each fiscal quarter thereafter, the liquidation preference of the senior preferred stock will increase by an amount equal to the increase in our net worth, if any, during the immediately prior fiscal quarter, until such time as the liquidation preference has increased by $22 billion. |
As a result of this change to the senior preferred stock liquidation preference provisions:
| |
| ◦ | The aggregate liquidation preference of the senior preferred stock increased from $123.8 billion as of June 30, 2019 to $127.2 billion as of September 30, 2019, due to the $3.4 billion increase in our net worth during the second quarter of 2019. |
| |
| ◦ | The aggregate liquidation preference of the senior preferred stock will increase from $127.2 billion as of September 30, 2019 to $131.2 billion as of December 31, 2019, due to the $4.0 billion increase in our net worth during the third quarter of 2019. |
| |
| • | Agreement to Amend Senior Preferred Stock Purchase Agreement to Enhance Taxpayer Protections. The letter agreement provides that we and Treasury agree to negotiate and execute an additional amendment to the senior preferred stock purchase agreement that further enhances taxpayer protections by adopting covenants broadly consistent with recommendations for administrative reform contained in the Treasury plan. |
See “Note 11, Equity (Deficit)” in our 2018 Form 10-K for additional information about the senior preferred stock purchase agreement and the senior preferred stock.
Principles of Consolidation
Our condensed consolidated financial statements include our accounts as well as the accounts of the other entities in which we have a controlling financial interest. All intercompany balances and transactions have been eliminated. The typical condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. A controlling financial interest may also exist in entities through arrangements that do not involve voting interests, such as a variable interest entity (“VIE”).
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 58 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
Single Security Initiative and UMBS
The Single Security Initiative was a joint initiative among Fannie Mae, Freddie Mac, and our jointly owned limited liability company, Common Securitization Solutions, LLC (“CSS”), under the direction of FHFA, to develop a single common mortgage-backed security issued by both Fannie Mae and Freddie Mac to finance fixed-rate mortgage loans backed by one- to four-unit single-family properties. We and Freddie Mac began issuing uniform mortgage-backed securities (“UMBS”) pursuant to the Single Security Initiative in June 2019. We and Freddie Mac also began resecuritizing UMBS certificates into structured securities in June 2019. The structured securities backed by UMBS that we may issue include Supers, which are single-class resecuritization transactions, and Real Estate Mortgage Investment Conduit securities (“REMICs”) and interest-only and principal-only strip securities (“SMBS”), which are multi-class resecuritization transactions.
Since the implementation of the Single Security Initiative in June 2019, we have been able to include UMBS, Supers and other structured securities issued by Freddie Mac in some of our resecuritization trusts. The mortgage loans that serve as collateral for Freddie Mac-issued UMBS are not held in trusts that are consolidated by Fannie Mae. When we include Freddie Mac securities in our structured securities, we are subject to additional credit risk because we guarantee securities that were not previously guaranteed by Fannie Mae. However, Freddie Mac continues to guarantee the payment of principal and interest on the underlying Freddie Mac securities that we have resecuritized. We have concluded that this additional credit risk is negligible because of the funding commitment available to Freddie Mac through its senior preferred stock purchase agreement with Treasury. Prior to the implementation of the Single Security Initiative, the vast majority of underlying assets of our resecuritization trusts were limited to Fannie Mae securities that were collateralized by mortgage loans held in consolidated trusts.
Single-Class Resecuritization Trusts
Fannie Mae single-class resecuritization trusts are created by depositing mortgage-backed securities (“MBS”) into a new securitization trust for the purpose of aggregating multiple mortgage-related securities into a single security. Single-class resecuritization securities pass through directly to the holders of the securities all of the cash flows of the underlying mortgage-backed securities held in the resecuritization trust. With the implementation of the Single Security Initiative, these securities can now be collateralized directly or indirectly by cash flows from underlying securities issued by Fannie Mae, Freddie Mac, or a combination of both. Resecuritization trusts backed directly or indirectly only by Fannie Mae MBS are non-commingled resecuritization trusts. Resecuritization trusts collateralized directly or indirectly by cash flows either in part or in whole from Freddie Mac securities are commingled resecuritization trusts.
Securities issued by our non-commingled single-class resecuritization trusts are backed solely by Fannie Mae MBS and the guarantee we provide on the trust does not subject us to additional credit risk because we have already provided a guarantee on the underlying securities. Further, the securities issued by our non-commingled single-class resecuritization trusts pass through all of the cash flows of the underlying Fannie Mae MBS directly to the holders of the securities. Accordingly, these securities are deemed to be substantially the same as the underlying Fannie Mae MBS collateral. Additionally, our involvement with these trusts does not provide us with any incremental rights or powers that would enable us to direct any activities of the trusts. As a result, we have concluded that we are not the primary beneficiaries of, and as a result, we do not consolidate, our non-commingled single-class resecuritization trusts. Therefore, we account for purchases and sales of securities issued by non-commingled single-class resecuritization trusts as extinguishments and issuances of the underlying MBS debt, respectively.
Securities issued by our commingled single-class resecuritization trusts are backed in whole or in part by Freddie Mac securities. The guaranty we provide to the commingled single-class resecuritization trust subjects us to additional credit risk because we are providing a guaranty for the timely payment of principal and interest on the underlying Freddie Mac securities that we have not previously guaranteed. Accordingly, securities issued by our commingled resecuritization trusts are not deemed to be substantially the same as the underlying collateral. We do not have any incremental rights or powers related to commingled single-class resecuritization trusts that would enable us to direct any activities of the underlying trusts. As a result, we have concluded that we are not the primary beneficiary of, and therefore do not consolidate, our commingled single-class resecuritization trusts unless we have the unilateral right to dissolve the trust. We have this right when we hold 100% of the beneficial interests issued by the resecuritization trust. Therefore, we account for purchases and sales of these securities as purchases and sales of investment securities.
Multi-Class Resecuritization Trusts
Multi-class resecuritization trusts are trusts we create to issue multi-class Fannie Mae structured securities, including REMICs and SMBS, in which the cash flows of the underlying mortgage assets are divided, creating several classes of securities, each of which represents a beneficial ownership interest in a separate portion of cash flows. We guarantee to each multi-class resecuritization trust that we will supplement amounts received by the trusts as required to permit timely payments of principal and interest, as applicable, on the related Fannie Mae structured securities. With the implementation of the Single Security Initiative, these multi-class structured securities can now be collateralized, directly or indirectly, by securities issued by Fannie Mae, Freddie Mac, or a combination of both.
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 59 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
The guaranty we provide to our non-commingled multi-class resecuritization trusts does not subject us to additional credit risk, because the underlying assets are Fannie Mae-issued securities for which we have already provided a guaranty. However, for commingled multi-class structured securities, we are subject to additional credit risk because we are providing a guaranty for the timely payment of principal and interest on the underlying Freddie Mac securities that we have not previously guaranteed. For both commingled and non-commingled multi-class resecuritization trusts, we may also be exposed to prepayment risk via our ownership of securities issued by these trusts. We do not have the ability via our involvement with a multi-class resecuritization trust to impact either the credit risk or prepayment risk to which we are exposed. Therefore, we have concluded that we do not have the characteristics of a controlling financial interest and do not consolidate multi-class resecuritization trusts unless we have the unilateral right to dissolve the trust as noted below.
Securities issued by multi-class resecuritization trusts do not directly pass through all of the cash flows of the underlying securities and therefore the issued and underlying securities are not considered substantially the same. Accordingly, if a multi-class resecuritization trust is not consolidated, we account for purchases and sales of securities issued by the trust as purchases and sales of investment securities.
Since the implementation of the Single Security Initiative in June 2019, we may now include UMBS, Supers and other structured securities backed by securities issued by Freddie Mac in our resecuritization trusts. As a result, we adopted a consolidation threshold for multi-class resecuritization trusts that is based on our ability to unilaterally dissolve the resecuritization trust. This ability exists only when we hold 100% of the outstanding beneficial interests issued by the resecuritization trust. This new consolidation threshold was applied prospectively upon implementation of the Single Security Initiative in the second quarter of 2019 and prior period amounts were not recast. Prior to the implementation of the Single Security Initiative, we consolidated multi-class resecuritization trusts when we held a substantial portion of the outstanding beneficial interests issued by the trust. Our adoption of the new consolidation threshold did not have a material impact on our condensed consolidated financial statements.
Regulatory CapitalSingle-Family Loss Reserves
FHFA stated that, during conservatorship,Our single-family loss reserves, which include our existing statutoryallowance for loan losses and FHFA-directed regulatory capital requirements will not be binding and FHFA will not issue quarterly capital classifications. The deficitreserve for guaranty losses, provide for an estimate of our core capital over statutory minimum capital was $137.7 billion as of September 30, 2017 and $136.2 billion as of December 31, 2016. For more information on our minimum capital requirements, see “Note 14, Regulatory Capital Requirements”credit losses incurred in our 2016 Form 10-K.single-family guaranty book of business, including concessions we granted borrowers upon modification of their loans. The table below summarizes the changes in our single-family loss reserves.
|
| | | | | | | | | | | | | | | | | |
| Single-Family Loss Reserves |
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, |
| | | 2019 | | 2018 | | | 2019 | | 2018 |
| | | (Dollars in millions) |
| Changes in loss reserves: | | | | | | | | | |
| Beginning balance | | $ | (11,239 | ) | | $ | (16,638 | ) | | | $ | (14,007 | ) | | $ | (19,155 | ) |
| Benefit for credit losses | | 1,840 |
| | 732 |
| | | 3,753 |
| | 2,223 |
|
| Charge-offs | | 274 |
| | 514 |
| | | 1,221 |
| | 1,728 |
|
| Recoveries | | (19 | ) | | (84 | ) | | | (106 | ) | | (255 | ) |
| Other | | (1 | ) | | (2 | ) | | | (6 | ) | | (19 | ) |
| Ending balance | | $ | (9,145 | ) | | $ | (15,478 | ) | | | $ | (9,145 | ) | | $ | (15,478 | ) |
| | | | | | | | | | |
| | | | | | | | As of |
| | | | | | | | September 30, 2019 | | December 31, 2018 |
| Loss reserves as a percentage of: | | | | | | | | | |
| Single-family guaranty book of business | | | | | | | 0.31 | % | | 0.49 | % |
| Recorded investment in nonaccrual loans | | | | | | | 31.48 |
| | 44.24 |
|
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 5038 |
|
| | |
| MD&A | Single-Family Business |
Troubled Debt Restructurings and Nonaccrual Loans
The table below displays the single-family loans classified as TDRs that were on accrual status and single-family loans on nonaccrual status. The table includes our recorded investment in HFI and HFS single-family mortgage loans. For information on the impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 3, Mortgage Loans.”
|
| | | | | | | | | | | |
| Single-Family TDRs on Accrual Status and Nonaccrual Loans | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | (Dollars in millions) |
| TDRs on accrual status | | $ | 89,083 |
| | | | $ | 98,320 |
| |
| Nonaccrual loans | | 29,051 |
| | | | 31,658 |
| |
| Total TDRs on accrual status and nonaccrual loans | | $ | 118,134 |
| | | | $ | 129,978 |
| |
Accruing on-balance sheet loans past due 90 days or more(1) | | $ | 198 |
| | | | $ | 228 |
| |
|
| | | | | | | | | | | |
| | | For the Nine Months Ended September 30, | |
| | | |
| | | 2019 | | | | 2018 | |
| | | (Dollars in millions) | |
| Interest related to on-balance sheet TDRs on accrual status and nonaccrual loans: | | | | | | | |
Interest income forgone(2) | | $ | 1,280 |
| | | | $ | 1,680 |
| |
Interest income recognized(3) | | 3,614 |
| | | | 4,141 |
| |
| |
(1) | Includes loans that, as of the end of each period, are 90 days or more past due and continuing to accrue interest. The majority of these amounts consist of loans insured or guaranteed by the U.S. government and loans for which we have recourse against the seller in the event of a default. |
| |
(2) | Represents the amount of interest income we did not recognize, but would have recognized during the period for nonaccrual loans and TDRs on accrual status as of the end of each period had the loans performed according to their original contractual terms. |
| |
(3) | Includes primarily amounts accrued while the loans were performing and cash payments received on nonaccrual loans. |
Multifamily Business
Our Multifamily business provides mortgage market liquidity primarily for properties with five or more residential units, which may be apartment communities, cooperative properties, seniors housing, dedicated student housing or manufactured housing communities.
This section supplements and updates information regarding our Multifamily business segment in our 2018 Form 10-K. See “MD&A—Multifamily Business” in our 2018 Form 10-K for additional information regarding the primary business activities, customers, competition and market share of our Multifamily business.
Presentation of our multifamily guaranty book of business
For purposes of the information reported in this “Multifamily Business” section, we measure our multifamily guaranty book of business by using the unpaid principal balance of mortgage loans underlying Fannie Mae MBS. By contrast, the multifamily guaranty book of business presented in the “Composition of Fannie Mae Guaranty Book of Business” table in the “Guaranty Book of Business” section is based on the unpaid principal balance of the Fannie Mae MBS outstanding, rather than the unpaid principal balance of the underlying mortgage loans. These amounts differ primarily as a result of payments we receive on underlying loans that have not yet been remitted to the MBS holders. As measured for purposes of the information reported below, the unpaid principal balance of our multifamily guaranty book of business was $329.6 billion as of September 30, 2019 and $305.9 billion as of December 31, 2018.
Multifamily Mortgage Market
National multifamily market fundamentals, which include factors such as vacancy rates and rents, remained steady during the third quarter of 2019, most likely due to ongoing job growth, favorable demographic trends, and renter household formations.
| |
| • | Vacancy rates. Based on preliminary third-party data, the national multifamily vacancy rate for institutional investment-type apartment properties is estimated to have remained at 5.3% at September 30, 2019, which was the same as of June 30, 2019. |
| |
| • | Rents. Effective rents are estimated to have increased during the third quarter of 2019, with national asking rents increasing by an estimated 0.8% in the third quarter of 2019, compared with 1.0% during the second quarter of 2019. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 39 |
|
| | |
| MD&A | Multifamily Business |
Continued demand for multifamily rental units during the third quarter of 2019 was reflected in the estimated positive net absorption (that is, the net change in the number of occupied rental units during the time period) of approximately 33,000 units, according to data from Reis, Inc., compared with approximately 49,000 units during the second quarter of 2019.
Vacancy rates and rents are important to loan performance because multifamily loans are generally repaid from the cash flows generated by the underlying property. Several years of improvement in these fundamentals have helped to increase property values in most metropolitan areas. It is estimated that approximately 424,000 new multifamily units will be completed in 2019. The bulk of this new supply is concentrated in a limited number of metropolitan areas. Although multifamily fundamentals remain positive, we believe increasing supply will result in a continuing slowdown in national net absorption rates and effective rents for the remainder of 2019 compared with recent years.
Multifamily Business Metrics
Through the secondary mortgage market, we support rental housing for the workforce population, for senior citizens and students and for families with the greatest economic need. Over 90% of the multifamily units we financed in the third quarter of 2019 were affordable to families earning at or below 120% of the median income in their area, providing support for both workforce housing and affordable housing.
Multifamily New Business Volume
(Dollars in billions)
| |
(1) | Reflects unpaid principal balance of multifamily Fannie Mae MBS issued, multifamily loans purchased, and credit enhancements provided on multifamily mortgage assets during the period. |
FHFA’s 2019 conservatorship scorecard included an objective to maintain the dollar volume of new multifamily business at or below $35 billion for the year, excluding certain targeted affordable and underserved market business segments such as loans financing energy or water efficiency improvements. Approximately 44% of our multifamily new business volume of $52.1 billion for the first nine months of 2019 counted toward FHFA’s 2019 multifamily volume cap. On September 13, 2019, FHFA announced a revised multifamily business volume cap structure. The new multifamily volume cap, which replaced the prior cap effective October 1, 2019, is $100 billion for the five-quarter period ending December 31, 2020. The new cap applies with no exclusions. In addition, FHFA directed that 37.5% of our multifamily business during that time period must be mission-driven, affordable housing, pursuant to FHFA’s guidelines for mission-driven loans.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 40 |
|
| | |
| MD&A | Multifamily Business |
Multifamily Business Financial Results
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, | | | | For the Nine Months Ended September 30, | | |
| | | 2019 | | 2018 | | Variance | | 2019 | | 2018 | | Variance |
| | | (Dollars in millions) |
| Net interest income | | $ | 745 |
| | $ | 699 |
| | $ | 46 |
| | $ | 2,170 |
| | $ | 2,024 |
| | $ | 146 |
|
| Fee and other income | | 246 |
| | 192 |
| | 54 |
| | 525 |
| | 524 |
| | 1 |
|
| Net revenues | | 991 |
| | 891 |
| | 100 |
| | 2,695 |
| | 2,548 |
| | 147 |
|
| Fair value gains (losses), net | | 6 |
| | (31 | ) | | 37 |
| | 66 |
| | (69 | ) | | 135 |
|
| Administrative expenses | | (115 | ) | | (104 | ) | | (11 | ) | | (338 | ) | | (317 | ) | | (21 | ) |
Credit-related income (expense)(1) | | 14 |
| | (25 | ) | | 39 |
| | (23 | ) | | (6 | ) | | (17 | ) |
Other expenses, net(2) | | (92 | ) | | (75 | ) | | (17 | ) | | (197 | ) | | (209 | ) | | 12 |
|
| Income before federal income taxes | | 804 |
| | 656 |
| | 148 |
| | 2,203 |
| | 1,947 |
| | 256 |
|
| Provision for federal income taxes | | (164 | ) | | (107 | ) | | (57 | ) | | (427 | ) | | (314 | ) | | (113 | ) |
| Net income | | $ | 640 |
| | $ | 549 |
| | $ | 91 |
| | $ | 1,776 |
| | $ | 1,633 |
| | $ | 143 |
|
| |
(1) | Consists of the benefit or provision for credit losses and foreclosed property income or expense. |
| |
(2) | Consists of investment gains, gains or losses from partnership investments and other income or expenses. |
Net interest income
Multifamily net interest income is primarily driven by guaranty fee income. Guaranty fee income increased in the third quarter and first nine months of 2019 as compared with the third quarter and first nine months of 2018 as a result of growth in our multifamily guaranty book of business, partially offset by a decrease in charged guaranty fees on the guaranty book.
| |
(1) | Our multifamily guaranty book of business consists of multifamily mortgage loans underlying Fannie Mae MBS outstanding, multifamily mortgage loans of Fannie Mae held in our retained mortgage portfolio, and other credit enhancements that we provide on multifamily mortgage assets. It excludes non-Fannie Mae multifamily mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty. |
Our average charged guaranty fee has trended downward from 2018 to 2019, driven by competitive market pressure on guaranty fees charged on newly acquired multifamily loans and liquidations of loans with higher guaranty fees.
Fee and other income
Fee and other income in all periods presented was primarily driven by yield maintenance fees resulting from prepayment activity.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 41 |
|
| | |
| MD&A | Multifamily Business |
Fair value gains (losses), net
Depending on portfolio activity, our Multifamily business may be in a net buy or net sell position during any given period. Fair value gains in the first nine months of 2019 were primarily driven by gains on commitments to buy multifamily mortgage-related securities as a result of increases in prices as interest rates declined during the commitment periods.
Fair value losses in the third quarter and first nine months of 2018 were primarily driven by losses on commitments to buy multifamily mortgage-related securities as a result of decreases in prices as interest rates rose during the commitment periods.
Multifamily Mortgage Credit Risk Management
This section updates our discussion of multifamily mortgage credit risk management in our 2018 Form 10-K in “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management.”
Multifamily Acquisition Policy and Underwriting Standards
Our standards for multifamily loans specify maximum original LTV ratio and minimum original debt service coverage ratio (“DSCR”) values that vary based on loan characteristics. Our experience has been that original LTV ratio and DSCR values have been reliable indicators of future credit performance.
At underwriting, we evaluate the DSCR based on both actual and underwritten debt service payments. Underwritten debt service payments are based on debt service calculations that include both principal and interest payments. The original DSCR for the loan is calculated using these underwritten debt service payments rather than the actual debt service payments, which, depending on the interest rate of the loan and loan structure, may result in a more conservative estimate of the debt service payments. This approach is used for all loans, including those with full and partial interest-only terms.
The following table displays key risk characteristics of our multifamily guaranty book of business.
|
| | | | | | | | | | | |
| Key Risk Characteristics of Multifamily Guaranty Book of Business |
| | As of |
| | September 30,
2019 | | December 31, 2018 | | September 30,
2018 |
| Weighted average original LTV ratio | | 66 | % | | | 66 | % | | | 67 | % |
| Original LTV ratio greater than 80% | | 1 | | | | 1 | | | | 1 | |
| Original DSCR less than or equal to 1.10 | | 11 |
|
|
| 12 |
|
|
| 13 | |
| Full interest-only loans | | 26 | | | | 24 | | | | 23 | |
Partial interest-only loans(1) | | 50 | | | | 49 | | | | 48 | |
| |
(1) | Consists of mortgage loans that were underwritten with an interest-only term, regardless of whether the loan is currently in its interest-only period. |
We provide additional information on the credit characteristics of our multifamily loans in quarterly financial supplements, which we submit to the SEC with current reports on Form 8-K. Information in our quarterly financial supplements is not incorporated by reference into this report.
Transfer of Multifamily Mortgage Credit Risk
Lender risk-sharing is a cornerstone of our Multifamily business. We primarily transfer risk through our Delegated Underwriting and Servicing (“DUS®”) program, which delegates to DUS lenders the ability to underwrite and service multifamily loans, in accordance with our standards and requirements. DUS lenders receive credit risk-related revenues for their respective portion of credit risk retained, and, in turn, are required to fulfill any loss sharing obligation. This aligns the interests of the lender and Fannie Mae throughout the life of the loan.
Our DUS model typically results in our lenders sharing on a pro-rata or tiered basis approximately one-third of the credit risk on our multifamily loans. In the first nine months of 2019, nearly 100% of our new multifamily business volume had lender risk-sharing. As of September 30, 2019 and December 31, 2018, 98% of the unpaid principal balance of loans in our multifamily guaranty book of business had lender risk-sharing.
To complement our lender risk-sharing program through our DUS model, we engage in multifamily CIRT transactions, pursuant to which we transfer a portion of the mortgage credit risk on multifamily loans in our multifamily guaranty book of business to insurers or reinsurers. As of September 30, 2019, we have completed six multifamily CIRT transactions since the inception of the program, which covered multifamily loans with an unpaid principal balance of approximately $62.0 billion at the time of the transactions. As of September 30, 2019, 18% of the loans in our multifamily guaranty book of business, measured by unpaid principal balance, were covered by a CIRT transaction. We continue to support the growth of the credit risk transfer market and expand the types of loans covered in our credit risk transfer programs.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 42 |
|
| | |
| MD&A | Multifamily Business |
Multifamily Portfolio Diversification and Monitoring
Diversification within our multifamily book of business by geographic concentration, term to maturity, interest rate structure, borrower concentration, loan size and credit enhancement coverage, are important factors that influence credit performance and help reduce our credit risk.
As part of our ongoing credit risk management process, we and our lenders monitor the performance of our multifamily loans and the underlying properties on an ongoing basis throughout the loan term at the asset and portfolio level. We require lenders to provide quarterly and annual financial updates for the loans for which we are contractually entitled to receive such information. We closely monitor loans with an estimated current DSCR below 1.0, as that is an indicator of heightened default risk. The percentage of loans in our multifamily guaranty book of business, calculated based on unpaid principal balance, with a current DSCR less than 1.0 was approximately 2% as of September 30, 2019 and December 31, 2018. Our estimates of current DSCRs are based on the latest available income information for these properties and exclude co-op loans. Although we use the most recently available results from our multifamily borrowers, there is a lag in reporting, which typically can range from three to six months, but in some cases may be longer.
In addition to the factors discussed above, we track the following credit risk characteristics to determine loan credit quality indicators, which are the internal risk categories we use and which are further discussed in “Note 3, Mortgage Loans”:
the physical condition of the property;
delinquency status;
the relevant local market and economic conditions that may signal changing risk or return profiles; and
other risk factors.
The percentage of our multifamily loans categorized as substandard based on these characteristics increased throughout 2018, but decreased as of September 30, 2019 as compared with December 31, 2018 and remains at historically low levels. Substandard loans are loans that have a well-defined weakness that could impact the timely full repayment. While the vast majority of the substandard loans in our multifamily guaranty book of business are currently making timely payments, we continue to monitor the performance of the full substandard loan population.
Multifamily Problem Loan Management and Foreclosure Prevention
The multifamily serious delinquency rate was 0.06% as of September 30, 2019 and December 31, 2018 and 0.07% as of September 30, 2018. We classify multifamily loans as seriously delinquent when payment is 60 days or more past due.
Other Multifamily Credit Information
Multifamily Credit Loss Performance Metrics
The amount of credit loss or income we realize in a given period is driven by foreclosures, pre-foreclosure sales, REO activity and charge-offs, net of recoveries. Our credit loss performance metrics are not defined terms within GAAP and may not be calculated in the same manner as similarly titled measures reported by other companies. We believe our credit loss performance metrics may be useful to investors because they have historically been used by analysts, investors and other companies within the financial services industry.
We had $5 million in multifamily credit losses in the third quarter of 2019 compared with $7 million in the third quarter of 2018. We had $6 million in multifamily credit losses in the first nine months of 2019 compared with $15 million in the first nine months of 2018.
Credit losses in the third quarter of 2019 were primarily driven by foreclosed property expenses. Credit losses in the first nine months of 2019 were primarily driven by charge-off activity in the second quarter.
Multifamily Loss Reserves
The table below summarizes the changes in our multifamily loss reserves, which includes our allowance for loan losses and our reserve for guaranty losses for multifamily loans.
|
| | | | | | | | | | | | | | | | | | |
| Multifamily Loss Reserves | |
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | | 2019 | | 2018 | | | 2019 | | 2018 | |
| | | (Dollars in millions) | |
| Changes in loss reserves: | | | | | | | | | | |
| Beginning balance | | $ | (281 | ) | | $ | (218 | ) | | | $ | (245 | ) | | $ | (245 | ) | |
| Benefit (provision) for credit losses | | 17 |
| | (16 | ) | | | (21 | ) | | 6 |
| |
| Charge-offs | | 3 |
| | 1 |
| | | 7 |
| | 6 |
| |
| Recoveries | | (1 | ) | | (3 | ) | | | (3 | ) | | (3 | ) | |
| Ending balance | | $ | (262 | ) | | $ | (236 | ) | | | $ | (262 | ) | | $ | (236 | ) | |
| | | | | | | | | | | |
| | | | | | As of | |
| | | September 30, 2019 | | December 31, 2018 | |
| Loss reserves as a percentage of multifamily guaranty book of business | | | 0.08 | % | | 0.08 | % | |
Troubled Debt Restructurings and Nonaccrual Loans
The table below displays the multifamily loans classified as TDRs that were on accrual status and multifamily loans on nonaccrual status. The table includes our recorded investment in HFI and HFS multifamily mortgage loans. For information on the impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 3, Mortgage Loans.”
|
| | | | | | | | | |
| Multifamily TDRs on Accrual Status and Nonaccrual Loans |
| | | As of |
| | | September 30, 2019 | | December 31, 2018 | |
| | | (Dollars in millions) |
| TDRs on accrual status | | $ | 33 |
| | $ | 55 |
| |
| Nonaccrual loans | | 608 |
| | 492 |
| |
| Total TDRs on accrual status and nonaccrual loans | | $ | 641 |
| | $ | 547 |
| |
|
| | | | | | | | | |
| | | For the Nine Months Ended September 30, | |
| | | |
| | | 2019 | | 2018 | |
| | | (Dollars in millions) | |
| Interest related to on-balance sheet TDRs on accrual status and nonaccrual loans: | | | | | |
Interest income forgone(1) | | $ | 18 |
| | $ | 20 |
| |
Interest income recognized(2) | | 5 |
| | 2 |
| |
| |
(1) | Represents the amount of interest income we did not recognize, but would have recognized during the period for nonaccrual loans and TDRs on accrual status as of the end of each period had the loans performed according to their original contractual terms. |
| |
(2) | Represents interest income recognized during the period, including the amortization of any deferred cost basis adjustments, for loans classified as either nonaccrual loans or TDRs on accrual status as of the end of each period. Primarily includes amounts accrued while the loans were performing. |
REO Management
The number of multifamily foreclosed properties held for sale was 16 properties with a carrying value of $88 million as of September 30, 2019, compared with 16 properties with a carrying value of $81 million as of December 31, 2018.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 43 |
|
| | |
| | MD&A | Liquidity and Capital Management |
Liquidity and Capital Activity
Each quarter during conservatorship, the Director of FHFA has directed us to make dividend payments to Treasury. Our third quarter 2017 dividend of $3.1 billion was declared by FHFA and subsequently paid by us on September 29, 2017.
The terms of our senior preferred stock provide for quarterly dividends to accumulate at a rate equal to our net worth less an applicable capital reserve amount. The capital reserve amount is $600 million for dividend periods in 2017, and will be reduced to zero on January 1, 2018. We will pay Treasury a dividend for the fourth quarter of 2017 of $3.0 billion by December 31, 2017 if our conservator declares a dividend in this amount before December 31, 2017. To the extent that these quarterly dividends are not paid, they will accumulate and be added to the liquidation preference of the senior preferred stock. This would not affect the amount of available funding from Treasury under the senior preferred stock purchase agreement.
We are effectively unable to raise equity capital from private sources at this time and, therefore, are reliant on the funding available under our senior preferred stock purchase agreement with Treasury to address any net worth deficit. Under the senior preferred stock purchase agreement, Treasury made a commitment to provide funding, under certain conditions, to eliminate deficiencies in our net worth. We have received a total of $116.1 billion from Treasury pursuant to the senior preferred stock purchase agreement as of September 30, 2017. The current aggregate liquidation preference of the senior preferred stock, including the initial aggregate liquidation preference of $1.0 billion, remains at $117.1 billion. Dividend payments we make to Treasury do not reduce the outstanding liquidation preference of the senior preferred stock, although we are permitted to pay down the liquidation preference of the senior preferred stock to the extent of any accumulated and unpaid dividends previously added to the liquidation preference and not previously paid down.
While we had a positive net worth as of September 30, 2017 and have not received funds from Treasury under the agreement since the first quarter of 2012, we will be required to obtain additional funding from Treasury pursuant to the senior preferred stock purchase agreement if we have a net worth deficit in future periods. As of the date of this filing, the amount of remaining available funding under the senior preferred stock purchase agreement is $117.6 billion. If we were to draw additional funds from Treasury under the agreement in a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the agreement.
See “Business—Conservatorship and Treasury Agreements—Treasury Agreements” in our 2016 Form 10-K for more information on the terms of our senior preferred stock and our senior preferred stock purchase agreement with Treasury. See “Risk Factors” in our 2016 Form 10-K for a discussion of the risks relating to our limited and declining capital reserves and the dividend provisions of the senior preferred stock.
|
| | | | |
Off-Balance Sheet Arrangements | | | | |
We enter into certain business arrangements to facilitate our statutory purpose of providingLiquidity Management
This section supplements and updates information regarding liquidity to the secondary mortgage market and to reduce our exposure to interest rate fluctuations. Some of these arrangements are not recordedmanagement in our condensed2018 Form 10-K. See “MD&A—Liquidity and Capital Management—Liquidity Management” and “Risk Factors” in our 2018 Form 10-K for additional information, including discussions of our primary sources and uses of funds, our liquidity and funding risk management practices and contingency planning, factors that influence our debt funding activity, factors that may impact our access to or the cost of our debt funding and factors that could adversely affect our liquidity and funding.
Debt Funding
Outstanding Debt
Total outstanding debt of Fannie Mae includes short-term and long-term debt and excludes debt of consolidated balance sheetstrusts. Short-term debt of Fannie Mae consists of borrowings with an original contractual maturity of one year or may be recordedless and, therefore, does not include the current portion of long-term debt. Long-term debt of Fannie Mae consists of borrowings with an original contractual maturity of greater than one year.
The chart and table below display information on our outstanding short-term and long-term debt based on original contractual maturity. The increase in amounts differentour short-term debt from December 31, 2018 to September 30, 2019 was primarily driven by an increase in our acquisition of mortgage loans through our whole loan conduit as mortgage refinance activity increased during the third quarter of 2019. The decrease in our long-term debt from December 31, 2018 to September 30, 2019 was primarily driven by the decline in the size of our retained mortgage portfolio. We did not issue new debt to replace all of our debt that paid off during the first nine months of 2019.
|
| | | | | | | | |
| Selected Debt Information |
| | | As of |
| | | December 31, 2018 | | September 30, 2019 |
| | | (Dollars in billions) |
Selected Weighted-Average Interest Rates(1) | | | | |
| Interest rate on short-term debt | | 2.29 | % | | 2.04 | % |
| Interest rate on long-term debt, including portion maturing within one year | | 2.83 | % | | 3.14 | % |
| Interest rate on callable long-term debt | | 2.95 | % | | 3.39 | % |
| Selected Maturity Data | | | | |
| Weighted-average maturity of debt maturing within one year (in days) | | 163 |
| | 110 |
|
| Weighted-average maturity of debt maturing in more than one year (in months) | | 63 |
| | 63 |
|
| Other Data | | | | |
| Outstanding callable long-term debt | | $ | 64.3 |
| | $ | 45.7 |
|
Connecticut Avenue Securities debt(2) | | $ | 25.6 |
| | $ | 23.0 |
|
| | | | | |
| | | | | |
| | | | | |
| |
(1) | Outstanding debt amounts and weighted-average interest rates reported in this chart and table include the effects of discounts, premiums, other cost basis adjustments and fair value gains and losses associated with debt that we elected to carry at fair value. Reported amounts include unamortized cost basis adjustments and fair value adjustments of $74 million and $432 million as of September 30, 2019 and December 31, 2018, respectively. |
| |
(2) | Represents CAS debt issued prior to the implementation of our CAS REMIC structure in November 2018. See “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk—Credit Risk Transfer Transactions” in our 2018 Form 10-K and in this report for information regarding our Connecticut Avenue Securities. |
We intend to repay our short-term and long-term debt obligations as they become due primarily through proceeds from the full contractissuance of additional debt securities. We also may use proceeds from our mortgage assets to pay our debt obligations.
For more information on the maturity profile of our outstanding long-term debt, see “Note 7, Short-Term and Long-Term Debt.”
Debt Funding Activity
The table below displays the activity in debt of Fannie Mae. This activity excludes the debt of consolidated trusts and intraday loans. Activity for short-term debt of Fannie Mae relates to borrowings with an original contractual maturity of one year or notionalless while activity for long-term debt of Fannie Mae relates to borrowings with an original contractual maturity of greater than one year. The reported amounts of debt issued and paid off during each period represent the face amount of the transaction. debt at issuance and redemption.
The increase in our debt issued and paid off during the third quarter of 2019 compared with the third quarter of 2018 was primarily driven by an increase in our acquisition of mortgage loans through our whole loan conduit as mortgage refinance activity increased during the third quarter of 2019. The decrease in debt issued and paid off during the first nine months of 2019 compared with the first nine months of 2018 was primarily driven by the decline in the size of our retained mortgage portfolio. We did not issue new debt to replace all of our debt that paid off during the first nine months of 2019.
|
| | | | | | | | | | | | | | | |
| Activity in Debt of Fannie Mae |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (Dollars in millions) |
| Issued during the period: | | | | | | | |
| Short-term: | | | | | | | |
| Amount | $ | 161,434 |
| | $ | 106,520 |
| | $ | 418,202 |
| | $ | 446,914 |
|
| Weighted-average interest rate | 2.13 | % | | 1.90 | % | | 2.27 | % | | 1.52 | % |
Long-term:(1) | | | | | | | |
| Amount | $ | 6,940 |
| | $ | 6,032 |
| | $ | 18,335 |
| | $ | 17,595 |
|
| Weighted-average interest rate | 1.95 | % | | 3.26 | % | | 2.32 | % | | 3.08 | % |
| Total issued: | | | | | | | |
| Amount | $ | 168,374 |
| | $ | 112,552 |
| | $ | 436,537 |
| | $ | 464,509 |
|
| Weighted-average interest rate | 2.12 | % | | 1.97 | % | | 2.27 | % | | 1.58 | % |
Paid off during the period:(2) | | | | | | | |
| Short-term: | | | | | | | |
| Amount | $ | 147,507 |
| | $ | 103,256 |
| | $ | 406,135 |
| | $ | 451,295 |
|
| Weighted-average interest rate | 1.99 | % | | 1.82 | % | | 2.11 | % | | 1.42 | % |
Long-term:(1) | | | | | | | |
| Amount | $ | 23,246 |
| | $ | 12,668 |
| | $ | 48,156 |
| | $ | 42,854 |
|
| Weighted-average interest rate | 1.55 | % | | 1.62 | % | | 1.67 | % | | 1.47 | % |
| Total paid off: | | | | | | | |
| Amount | $ | 170,753 |
| | $ | 115,924 |
| | $ | 454,291 |
| | $ | 494,149 |
|
| Weighted-average interest rate | 1.93 | % | | 1.79 | % | | 2.06 | % | | 1.43 | % |
| |
(1) | Includes credit risk-sharing securities issued as CAS debt prior to the implementation of our CAS REMIC structure in November 2018. For information on our credit risk transfer transactions, see “MD&A—Single Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk—Credit Risk Transfer Transactions” in our 2018 Form 10-K and in this report. |
| |
(2) | Consists of all payments on debt, including regularly scheduled principal payments, payments at maturity, payments resulting from calls and payments for any other repurchases. Repurchases of debt and early retirements of zero-coupon debt are reported at original face value, which does not equal the amount of actual cash payment. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 44 |
|
| | |
| MD&A | Liquidity and Capital Management |
Other Investments Portfolio
The chart below displays information on the composition of our other investments portfolio. The balance of our other investments portfolio fluctuates as a result of changes in our cash flows, liquidity in the fixed-income markets, and our liquidity risk management framework and practices.
Other Investments Portfolio
(Dollars in billions)
Cash Flows
Nine Months EndedSeptember 30, 2019. Cash, cash equivalents and restricted cash increased from $49.4 billion as of December 31, 2018 to $64.5 billion as of September 30, 2019. The increase was primarily driven by cash inflows from (1) proceeds from repayments and sales of loans, (2) the sale of Fannie Mae MBS to third parties, and (3) the net decrease in federal funds sold and securities purchased under agreements to resell or similar agreements.
Partially offsetting these cash inflows were cash outflows primarily from (1) payments on outstanding debt of consolidated trusts, (2) purchases of loans held for investment, and (3) the redemption of funding debt, which outpaced issuances, due to lower funding needs.
Nine Months EndedSeptember 30, 2018. Cash, cash equivalents and restricted cash decreased from $60.3 billion as of December 31, 2017 to $51.0 billion as of September 30, 2018. The decrease was primarily driven by cash outflows from (1) the redemption of funding debt, which outpaced issuances, due to lower funding needs, (2) the purchase of Fannie Mae MBS from third parties, and (3) the acquisition of delinquent loans out of MBS trusts.
Partially offsetting these cash outflows were cash inflows from, among other things, (1) the sale of Fannie Mae MBS to third parties and (2) proceeds from repayments and sales of loans of Fannie Mae.
Credit Ratings
As of September 30, 2019, our credit ratings have not changed since we filed our 2018 Form 10-K. For information on our credit ratings, see “MD&A—Liquidity and Capital Management—Liquidity Management—Credit Ratings” in our 2018 Form 10-K.
Capital Management
Regulatory Capital
The deficit of our core capital over statutory minimum capital was $133.8 billion as of September 30, 2019 and $137.1 billion as of December 31, 2018. For information on our current and proposed capital requirements, see “Business—Charter Act and
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 45 |
|
| | |
| MD&A | Liquidity and Capital Management |
Regulation—GSE Act and Other Regulation” and “Note 12, Regulatory Capital Requirements” in our 2018 Form 10-K and “Legislation and Regulation—Housing Finance Reform” in this report.
Capital Activity
Under the modified dividend provisions of the senior preferred stock described in “Legislation and Regulation—Letter Agreement with Treasury,” effective with the third quarter 2019 dividend period, we are not required to pay further dividends to Treasury until we have accumulated over $25 billion in net worth. Accordingly, no dividends were payable to Treasury for the third quarter of 2019 and none are payable for the fourth quarter of 2019. As of September 30, 2019, our net worth was $10.3 billion.
Under the modified liquidation preference provisions of the senior preferred stock described in “Legislation and Regulation—Letter Agreement with Treasury,” the aggregate liquidation preference of the senior preferred stock increased from $123.8 billion as of June 30, 2019 to $127.2 billion as of September 30, 2019, and will further increase to $131.2 billion as of December 31, 2019.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements result primarily from: from the following:
our guaranty of mortgage loan securitization and resecuritization transactions, and other guaranty commitments, over which we do not have control;
liquidity support transactions; and
partnership interests. For
Since we began issuing UMBS in June 2019, some of the securities we issue are structured securities backed, in whole or in part, by Freddie Mac securities. When we issue a descriptionstructured security, we provide a guaranty that we will supplement amounts received from the underlying mortgage-related security as required to permit timely payment of principal and interest on the certificates related to the resecuritization trust. Accordingly, when we issue structured securities backed in whole or in part by Freddie Mac securities, we extend our guaranty to the underlying Freddie Mac security included in the structured security. Our issuance of structured securities backed in whole or in part by Freddie Mac securities creates additional off-balance sheet exposure as we do not have control over the Freddie Mac mortgage loan securitizations. Because we do not have the power to direct matters (primarily the servicing of mortgage loans) that impact the credit risk to which we are exposed, which constitute control of these securitization trusts, we do not consolidate these trusts in our condensed consolidated balance sheet, giving rise to off-balance sheet exposure.
The total amount of our off-balance sheet arrangements, see “MD&A—Off-Balance Sheet Arrangements”exposure related to unconsolidated Fannie Mae MBS net of any beneficial interest that we retain, and other financial guarantees was $48.5 billion as of September 30, 2019. Approximately $23.0 billion of this amount consisted of the unpaid principal balance of Freddie Mac-issued UMBS backing Fannie Mae-issued Supers. Additionally, off-balance sheet exposure includes approximately $5.9 billion of the unpaid principal balance of Freddie Mac securities backing Fannie Mae-issued REMICs; however, a portion of these Freddie Mac securities may be backed in whole or in part by Fannie Mae MBS. Therefore, our 2016 Form 10-K.
Our maximum potentialtotal exposure to credit losses relatingFreddie Mac securities included in Fannie Mae REMIC collateral may be lower. We expect our off-balance sheet exposure to Freddie Mac securities to increase as we issue more structured securities backed by Freddie Mac securities in the future. The total amount of our outstanding andoff-balance sheet exposure related to unconsolidated Fannie Mae MBS and other financial guarantees is primarily represented by the unpaid principal balance of the mortgage loans underlying outstanding and unconsolidated Fannie Mae MBS and other financial guarantees of $22.3 billion as of September 30, 2017 and $24.3was $21.1 billion as of December 31, 2016. 2018. We did not have any Freddie Mac-issued UMBS backing Fannie Mae structured securities as of December 31, 2018.
We also have off-balance sheet exposure to losses from liquidity support transactions and partnership interests.
Our total outstanding liquidity commitments to advance funds for securities backed by multifamily housing revenue bonds totaled $9.6$7.4 billion as of September 30, 20172019 and $10.4$8.3 billion as of December 31, 2016.2018. These commitments require us to advance funds to third parties that enable them to repurchase tendered bonds or securities that are unable to be remarketed. We hold cash and cash equivalents in our other investments portfolio in excess of these commitments to advance funds.
We make investments in various limited partnerships and similar legal entities, which consist of low-income housing tax credit investments, community investments and other entities. When we do not have a controlling financial interest in those entities, our condensed consolidated balance sheets reflect only our investment rather than the full amount of the partnership’s assets and liabilities.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 5146 |
Risk Management
Our business activities expose us to the following three major categories of risk: credit risk market risk (including interest rate and liquidity risk) and operational risk. We seek to actively manage and monitor these risks by using an established risk management program. We are also exposed to compliance risk, reputational risk and strategic risk, which encompasses the uncertainty regarding the future of our company, including how long we will continue to be in existence, which we discuss in more detail in “Risk Factors” and in “Business—Legislation and Regulation—Housing Finance Reform” in our 2016 Form 10-K.
In this section we provide an update on our management of our major risk categories. For a more complete discussion of the primary risks we face and how we manage credit risk, market risk and operational risk, see “MD&A—Risk Management” and “Risk Factors” in our 2016 Form 10-K.
Credit Risk Management
We are generally subject to two types of credit risk: mortgage credit risk and institutional counterparty credit risk), market risk (including interest rate risk), liquidity and funding risk, and operational risk (including cyber/information security risk, third-party risk and model risk), as well as strategic risk, compliance risk and reputational risk.
Mortgage Credit See “MD&A—Risk Management
Mortgage credit risk is the risk of loss resulting from the failure of a borrower to make required mortgage payments. We are exposed to credit risk onManagement” in our mortgage credit book of business because we either hold mortgage assets, have issued a guaranty in connection with the creation of Fannie Mae MBS backed by mortgage assets or provided other credit enhancements on mortgage assets. For2018 Form 10-K for a discussion of our single-family mortgage creditmanagement of these risks. This section supplements and updates that discussion but does not repeat all of the risk management see “MD&A—Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management”categories described in our 20162018 Form 10-K and in this report. For a discussion of our multifamily credit risk management, see “MD&A—Business Segments—Multifamily Business—Multifamily Mortgage Credit Risk Management” in our 2016 Form 10-K and in this report.10-K.
Institutional Counterparty Credit Risk Management
InstitutionalThis section supplements and updates our discussion of institutional counterparty credit risk is the risk of loss resulting from the failure of an institutional counterparty to fulfill its contractual obligations to us. Defaults by a counterparty with significant obligations to us could resultmanagement in significant financial losses to us.
our 2018 Form 10-K. See “MD&A—Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management” and “Risk Factors”Factors—Credit Risk” in our 20162018 Form 10-K for additional information, aboutincluding our institutional counterparty risk, including counterparty risk we face from mortgage originators, investors and dealers, from debt security dealers, from document custodians and from mortgage fraud.
Mortgage Sellers and Servicers
One of our primary exposuresexposure to institutional counterparty credit risk and our strategy for managing this risk.
Counterparty Credit Risk Exposure arising from the Resecuritization of Freddie Mac-issued Securities
We began resecuritizing Freddie Mac-issued securities in connection with the implementation of the Single Security Initiative in June 2019, which has increased our credit risk exposure and operational risk exposure to Freddie Mac, and our risk exposure to Freddie Mac is with mortgage servicersexpected to increase as we issue more structured securities backed by Freddie Mac securities going forward. Our inclusion of Freddie Mac securities as collateral for the structured securities that servicewe issue increases our counterparty credit risk exposure to Freddie Mac. In the loansevent Freddie Mac were to fail (for credit or operational reasons) to make a payment on a payment date on Freddie Mac securities that we holdhad resecuritized in a Fannie Mae-issued structured security, we would be responsible for making the entire payment on the Freddie Mac securities included in that structured security in order to make payments on any of our retained mortgage portfolio or that back ouroutstanding single-family Fannie Mae MBS to be paid on that payment date. Accordingly, as well as mortgage sellers and servicersthe amount of structured securities we issue that are obligatedbacked by Freddie Mac securities grows, if Freddie Mac were to repurchase loans from us or reimburse us for losses in certain circumstances. We rely on mortgage servicersfail to meet our servicing standards and fulfill their servicing obligations. We also rely on mortgage sellers and servicersits obligations to fulfill their repurchase obligations.
Our five largest single-family mortgage servicers, including their affiliates, serviced approximately 41% of our single-family guaranty book of business as of September 30, 2017, compared with approximately 39% as December 31, 2016. Our largest mortgage servicer is Wells Fargo Bank, N.A., which, together with its affiliates, serviced approximately 17% of our single-family guaranty book of business as of September 30, 2017 and December 31, 2016.
Our five largest multifamily mortgage servicers, including their affiliates, serviced approximately 47% of our multifamily guaranty book of business as of September 30, 2017 and December 31, 2016. Wells Fargo Bank, N.A. and Walker & Dunlop, LLC each serviced over 10% of our multifamily guaranty book of business as of September 30, 2017 and December 31, 2016.
A large portion of our single-family guaranty book is serviced by non-depository servicers. As of September 30, 2017, 18% of our total single-family guaranty book of business, including 33% of our delinquent single-family loans, was serviced by our five largest non-depository servicers, compared with 16% of our total single-family guaranty book of business, including 51% of our delinquent single-family loans, as of December 31, 2016.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 52 |
Compared with depository financial institutions, non-depository servicers pose additional risks to us because non-depository servicers may have a greater reliance on third-party sources of liquidity and may, in the event of significant increases in delinquent loan volumes, have less financial capacity to advance funds on our behalf or satisfy repurchase requests or compensatory fee obligations. In addition, regulatory bodies have been reviewing the activities of some of our largest non-depository servicers. See “Risk Factors” in our 2016 Form 10-K for a discussion of the risks of our reliance on servicers.
Our five largest single-family mortgage sellers, including their affiliates, accounted for approximately 35% of our single-family business acquisition volume in the first nine months of 2017, compared with approximately 28% in the first nine months of 2016. Our largest mortgage seller is Wells Fargo Bank, N.A., which, together with its affiliates, accounted for approximately 16% of our single-family business acquisition volume in the first nine months of 2017, compared with approximately 13% in the first nine months of 2016.
We acquire a portion of our business volume directly from non-depository and smaller depository financial institutions that may not have the same financial strength or operational capacity as our largest mortgage seller counterparties. We could be required to absorb losses on defaulted loans that a failed mortgage seller is obligated to repurchase from us if we determine there was an underwriting eligibility breach.
Credit Guarantors
We use various types of credit guarantors to manage our mortgage credit risk, including mortgage insurers, credit insurance risk transfer counterparties, financial guarantors, and multifamily lenders with risk sharing.
Mortgage Insurers
We are generally required, pursuant to our charter, to obtain credit enhancements on single-family conventional mortgage loans that we purchase or securitize with LTV ratios over 80% at the time of purchase. We use several types of credit enhancements to manage our single-family mortgage credit risk, including primary and pool mortgage insurance coverage. Mortgage insurance does not cover losses if the borrower's default is principally caused by damage to the underlying property, including when the damage is caused by natural disaster, like the hurricanes.
Table 30 displays our risk in force for mortgage insurance coverage on single-family loans in our guaranty book of business and our insurance in force for our mortgage insurer counterparties, excluding insurance coverage provided by federal government entities and credit insurance obtained through CIRT deals. The table includes our top nine mortgage insurer counterparties, which provided over 99% of our total mortgage insurance coverage on single-family loans in our guaranty book of business as of September 30, 2017 and December 31, 2016. In addition, for our mortgage insurer counterparties not approved to write new business, we have provided the percentage of their claims payments the counterparties are currently deferring based on the direction of their state regulators, referred to as their deferred payment obligation. As of September 30, 2017 and December 31, 2016, less than 1% of our total risk in force mortgage insurance coverage was pool insurance. In addition, approximately 1% of our total insurance in force mortgage insurance coverage was pool insurance as of September 30, 2017 and December 31, 2016.
When we estimate the credit losses that are inherent in our mortgage loans and under the terms of these securities, it could have a material adverse effect on our guaranty obligations we also considerearnings and financial condition. We believe the recoveries that we expect to receive on primary mortgage insurance, as mortgage insurance recoveries would reduce the severityrisk of default by Freddie Mac is negligible because of the loss associatedfunding commitment available to Freddie Mac through its senior preferred stock purchase agreement with defaulted loans. The amount by which our estimated benefit from mortgage insurance reduced our total combined loss reserves was $1.0 billion as of September 30, 2017 and $1.4 billion as of December 31, 2016.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 53 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Table 30: Mortgage Insurance Coverage |
| | Risk in Force(1) | | Insurance in Force(2) | | |
| | As of | | As of | | Deferred |
| | September 30, | | December 31, | | September 30, | | December 31, | | Payment |
| | 2017 | | 2016 | | 2017 | | 2016 | | Obligation %(3) |
| | (Dollars in millions) | | | |
Counterparty:(4) | | | | | | | | | | | | | | |
Approved:(5) | | | | | | | | | | | | | | |
Arch Capital Group Ltd.:(6) | | | | | | | | | | | | | | |
| United Guaranty Residential Insurance Co. | $ | 25,818 |
| | | $ | 27,161 |
| | | $ | 98,794 |
| | | $ | 104,418 |
| | | | |
| Arch Mortgage Insurance Co. | 9,202 |
| | | 6,059 |
| | | 36,333 |
| | | 23,998 |
| | | | |
| Total Arch Capital Group Ltd. | 35,020 |
| | | 33,220 |
| | | 135,127 |
| | | 128,416 |
| | | | |
| Radian Guaranty, Inc. | 27,817 |
| | | 25,866 |
| | | 107,960 |
| | | 100,626 |
| | | | |
| Mortgage Guaranty Insurance Corp. | 25,844 |
| | | 24,662 |
| | | 100,269 |
| | | 95,431 |
| | | | |
| Genworth Mortgage Insurance Corp. | 19,914 |
| | | 18,573 |
| | | 78,352 |
| | | 73,075 |
| | | | |
| Essent Guaranty, Inc. | 13,933 |
| | | 11,213 |
| | | 55,834 |
| | | 45,053 |
| | | | |
| National Mortgage Insurance Corp. | 5,977 |
| | | 4,388 |
| | | 27,206 |
| | | 21,209 |
| | | | |
| Others | 305 |
| | | 282 |
| | | 1,867 |
| | | 1,724 |
| | | | |
| Total approved | 128,810 |
| | | 118,204 |
| | | 506,615 |
| | | 465,534 |
| | | | |
Not approved:(5) | | | | | | | | | | | | | | |
PMI Mortgage Insurance Co.(7) | 3,112 |
| | | 3,790 |
| | | 12,434 |
| | | 15,112 |
| | | | 28.5 | % |
Republic Mortgage Insurance Co.(7) | 2,550 |
| | | 3,104 |
| | | 9,888 |
| | | 12,043 |
| | | | — |
|
Triad Guaranty Insurance Corp.(7) | 925 |
| | | 1,106 |
| | | 3,326 |
| | | 3,975 |
| | | | 25.0 | % |
| Others | 10 |
| | | 11 |
| | | 28 |
| | | 34 |
| | | | |
| Total not approved | 6,597 |
| | | 8,011 |
| | | 25,676 |
| | | 31,164 |
| | | | |
| Total | $ | 135,407 |
| | | $ | 126,215 |
| | | $ | 532,291 |
| | | $ | 496,698 |
| | | | |
| Total as a percentage of single-family guaranty book of business | 5 |
| % | | 4 |
| % | | 18 |
| % | | 17 |
| % | | | |
__________
| |
(1)
| Risk in force is generally the maximum potential loss recovery under the applicable mortgage insurance policies in force and is based on the loan level insurance coverage percentage and, if applicable, any aggregate pool loss limit, as specified in the policy. |
| |
(2)
| Insurance in force represents the unpaid principal balance of single-family loans in our guaranty book of business covered under the applicable mortgage insurance policies. |
| |
(3)
| Deferred payment obligation represents the percentage of cash payments on policyholder claims being deferred as directed by the insurer’s respective regulator in its state of domicile. As of September 30, 2017, we had an aggregate unpaid issued deferred payment obligation of $944 million from PMI Mortgage Insurance Co. and Triad Guaranty Insurance Corporation. We reserve for any unpaid amounts for which collectability is uncertain. |
| |
(4)
| Insurance coverage amounts provided for each counterparty may include coverage provided by affiliates and subsidiaries of the counterparty. |
| |
(5)
| “Approved” mortgage insurers are counterparties approved to write new insurance with us. “Not approved” mortgage insurers are counterparties that are no longer approved to write new insurance with us. |
| |
(6)
| In December 2016, Arch Capital Group Ltd., the ultimate parent company of Arch Mortgage Insurance Co., acquired United Guaranty Corporation. United Guaranty Corporation is the ultimate parent company of United Guaranty Residential Insurance Co. |
| |
(7)
| These mortgage insurers are under various forms of supervised control by their state regulators and are in run-off. |
When an insured loan held in our retained mortgage portfolio subsequently goes into foreclosure, we charge off the loan, eliminating any previously-recorded loss reserves, and record REO and a mortgage insurance receivable for the claim proceeds deemed probable of recovery, as appropriate. However, if a mortgage insurer rescinds, cancels or denies insurance coverage, the initial receivable becomes due from the mortgage seller or servicer. We had outstanding receivables of $875 million recorded in “Other assets” in our condensed consolidated balance sheets as of September 30, 2017 and $1.0 billion as of December 31, 2016 related to
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 54 |
amounts claimed on insured, defaulted loans excluding government insured loans. Of this amount, $84 million as of September 30, 2017 and $141 million as of December 31, 2016 was due from our mortgage sellers or servicers. We assessed the total outstanding receivables for collectibility, and they are recorded net of a valuation allowance of $596 million as of September 30, 2017 and $638 million as of December 31, 2016. The valuation allowance reduces our claim receivable to the amount considered probable of collection as of September 30, 2017 and December 31, 2016.
Credit Insurance Risk Transfer Counterparties
In a CIRT transaction, we shift a portion of the credit risk on a reference pool of mortgage loans to credit insurers or reinsurers. As of September 30, 2017, our single-family CIRT counterparties had a maximum liability to us of $5.0 billion. A portion of these counterparties’ obligation is collateralized with highly-rated liquid assets held in a trust account. As of September 30, 2017, $1.3 billion in assets securing these counterparties’ obligations were held in a trust account. Our credit risk exposure to our CIRT counterparties is concentrated. Our top five single-family CIRT counterparties had a maximum liability to us of $2.9 billion (representing 59% of our total CIRT coverage) as of September 30, 2017, compared to $2.1 billion (70% of our total CIRT coverage) as of December 31, 2016. Our single-family CIRT transactions are described in “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk—Credit Risk Transfer Transactions” in our 2016 Form 10-K.
Multifamily Lenders with Risk Sharing
We enter into risk sharing agreements with lenders pursuant to which the lenders agree to bear all or some portion of the credit losses on the covered loans. Our maximum potential loss recovery from lenders under risk sharing agreements on DUS and non-DUS multifamily loans was $60.6 billion as of September 30, 2017, compared with $54.8 billion as of December 31, 2016. As of September 30, 2017 and December 31, 2016, 43% of our maximum potential loss recovery on multifamily loans was from four DUS lenders.
As noted above in “Business Segments—Multifamily Business—Multifamily Mortgage Credit Risk Management—Multifamily Acquisition Policy and Underwriting Standards,” our primary multifamily delivery channel is our DUS program, which is comprised of lenders that range from large depositories to independent non-bank financial institutions. As of September 30, 2017 and December 31, 2016, approximately 35% of the unpaid principal balance of loans in our multifamily guaranty book of business serviced by our DUS lenders was from institutions with an external investment grade credit rating or a guaranty from an affiliate with an external investment grade credit rating. Given the recourse nature of the DUS program, DUS lenders are bound by eligibility standards that dictate, among other items, minimum capital and liquidity levels, and the posting of collateral at a highly rated custodian to secure a portion of the lenders’ future obligations. We actively monitor the financial condition of these lenders to help ensure the level of risk remains within our standards and to ensure required capital levels are maintained and are in alignment with actual and modeled loss projections.
Custodial Depository Institutions
We evaluate our custodial depository institutions to determine whether they are eligible to hold deposits on our behalf based on requirements specified in our Servicing Guide. If a custodial depository institution were to fail while holding remittances of borrower payments of principal and interest due to us in our custodial account, we would be exposed to risk for balances in excess of the deposit insurance protection and might not be able to recover all of the principal and interest payments being held by the depository on our behalf, or there might be a substantial delay in receiving these amounts. If this were to occur, we would be required to replace these amounts with our own funds to make payments that are due to Fannie Mae MBS certificateholders. Accordingly, the insolvency of one of our principal custodial depository institutions could result in significant financial losses to us.
A total of $33.8 billion in deposits for single-family payments were received and held by 256 institutions during the month of September 2017 and a total of $42.3 billion in deposits for single-family payments were received and held by 258 institutions during the month of December 2016. Of these total deposits, 90% as of September 30, 2017, compared with 91% as of December 31, 2016 were held by institutions rated as investment grade by S&P Global Ratings (“S&P”), Moody’s Investors Services (“Moody’s”) and Fitch Ratings Limited (“Fitch”).
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 55 |
During the month of September 2017, a total of $3.7 billion in deposits for multifamily payments were received and held by 28 institutions and $3.1 billion in deposits for multifamily payments were received and held by 27 institutions during the month of December 2016. Of these total deposits, 98% as of September 30, 2017 and December 31, 2016 were held by institutions rated as investment grade by S&P, Moody’s and Fitch.
Our transactions with custodial depository institutions are concentrated. Our six largest single-family custodial depository institutions held 78% of these deposits as of September 30, 2017, compared with 80% as of December 31, 2016. Our six largest multifamily custodial depository institutions held 92% of these deposits as of September 30, 2017, compared with 91% as of December 31, 2016.
Counterparty Credit Exposure of Investments Held in Our Other Investments Portfolio
Our other investments portfolio consists of cash and cash equivalents, securities purchased under agreements to resell or similar arrangements and U.S. Treasury securities. Our other investment counterparties are primarily financial institutions, including clearing organizations, and the Federal Reserve Bank. As of September 30, 2017, we held $5.3 billion in short-term unsecured deposits with four financial institutions compared to $2.0 billion held with two financial institutions as December 31, 2016. The short-term credit ratings for each of these financial institutions by S&P, Moody’s and Fitch, were at least A-1 or the Moody’s or Fitch equivalent of A-1. See “Liquidity and Capital Management—Liquidity Management—Other Investments Portfolio” for more detailed information on our other investments portfolio.
Derivative Counterparty Credit Exposure
Our derivative counterparty credit exposure relates principally to interest rate derivative contracts. We are exposed to the risk that a counterparty in a derivative transaction will default on payments due to us, which may require us to seek a replacement derivative from a different counterparty. This replacement may be at a higher cost, or we may be unable to find a suitable replacement. Historically, our risk management derivative transactions have been made pursuant to bilateral contracts with a specific counterparty governed by the terms of an International Swaps and Derivatives Association Inc. master agreement. Pursuant to regulations implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are required to submit certain categories of new interest rate swaps to a derivatives clearing organization. We refer to our derivative transactions made pursuant to bilateral contracts as our over-the-counter (“OTC”) derivative transactions and our derivative transactions accepted for clearing by a derivatives clearing organization as our cleared derivative transactions.
We manage our derivative counterparty credit exposure relating to our OTC derivative transactions through enforceable master netting arrangements. These arrangements allow us to net derivative assets and liabilities with the same counterparty. We also manage our derivative counterparty exposure relating to our OTC derivative transactions by requiring counterparties to post collateral, which may include cash, U.S. Treasury securities, agency debt and agency mortgage-related securities. Regulations that took effect March 1, 2017 require posting of variation margin without the application of any thresholds for OTC derivative transactions executed after that date.
Our cleared derivative transactions are submitted to derivatives clearing organizations on our behalf through clearing members of the organizations. A contract accepted by a derivatives clearing organization is governed by the terms of the clearing organization’s rules and arrangements between us and the clearing member of the clearing organization. As a result, we are exposed to the institutional credit risk of both the derivatives clearing organizations and the members who are acting on our behalf. We manage our credit exposure relating to our cleared derivative transactions through enforceable master netting arrangements. These arrangements allow us to net our exposure to cleared derivatives by clearing organization and by clearing member.
We will continue to have credit risk exposure to derivatives clearing organizations and certain of their members in the future as cleared derivative contracts comprise a larger percentage of our derivative instruments. We estimate our exposure to credit loss on derivative instruments by calculating the replacement cost, on a present value basis, to settle at current market prices all outstanding derivative contracts in a net gain position at the counterparty level where the right of legal offset exists.
The fair value of derivatives in a gain position is included in our condensed consolidated balance sheets in “Other assets.” Total exposure represents our exposure to credit loss on derivative instruments less the cash and non-cash collateral posted by our counterparties to us. This does not include collateral held in excess of exposure. Our total exposure was $29 million as of September 30, 2017 and $54 million as of December 31, 2016. The majority
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 56 |
of our total exposure as of each date consisted of credit risk transfer transactions and mortgage insurance contracts that we account for as derivatives.Treasury.
As of September 30, 2017, we had thirteen counterparties with which we may transact OTC derivative transactions, all of which2019, approximately $28.9 billion in Freddie Mac securities were subject to enforceable master netting arrangements, compared with sixteen counterparties as of December 31, 2016.backing Fannie Mae-issued structured securities. We had outstanding notional amounts with all of these counterparties,no such transactions or activity in 2018. See “Uniform Mortgage-Backed Securities” and “Risk Factors” in this report for more information on UMBS and the highest concentration by our total outstanding notional amount was approximately 8% as of September 30, 2017 and approximately 9% as of December 31, 2016.
See “Note 8, Derivative Instruments” and “Note 13, Netting Arrangements” for additional information on our derivative contracts as of September 30, 2017 and December 31, 2016.risks associated with the Single Security Initiative.
Market Risk Management, Including Interest Rate Risk Management
We are subject toThis section supplements and updates information regarding market risk which includes interest rate risk, spread riskmanagement in our 2018 Form 10-K. See “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management” and liquidity risk. These risks arise from“Risk Factors” in our mortgage asset investments. Interest rate risk is the risk of loss from adverse changes in the value of our assets or liabilities or our future earnings due to changes in interest rates. Spread risk or basis risk is the resulting impact of changes in the spread between our mortgage assets and our debt and derivatives we use to hedge our position. Liquidity risk is the risk that we will not be able to meet our funding obligations in a timely manner. We describe2018 Form 10-K for additional information, including our sources of interest rate risk exposure, business risks posed by changes in interest rates, and our strategy for managing interest rate risk and spread risk in “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management” and in “Risk Factors” in our 2016 Form 10-K.risk.
Measurement of Interest Rate Risk
Below we present two quantitative metrics that provide estimates of our interest rate risk exposure: (1) fair value sensitivity of our net portfolio to changes in interest rate levels and slope of yield curve; and (2) duration gap. Our net portfolio consists of our retained mortgage portfolio assets; other investments portfolio assets; our outstanding debt of Fannie Mae that is used to fund our retained mortgage portfolio assets and other investments portfolio assets; mortgage commitments; and risk management derivatives. Risk management derivatives along with our debt instruments are used to manage interest rate risk.
The metrics presented are calculated using internal models that require standard assumptions regarding interest rates and future prepayments of principal over the remaining life of our securities. These assumptions are derived based on the characteristics of the underlying structure of the securities and historical prepayment rates experienced at specified interest rate levels, taking into account current market conditions, the current mortgage rates of our existing outstanding loans, loan age and other factors. On a continuous basis, management makes judgments about the appropriateness of the risk assessments and will make adjustments as necessary to properly assess our interest rate exposure and manage our interest rate risk. The methodologies used to calculate risk estimates are periodically changed on a prospective basis to reflect improvements in the underlying estimation process.
Interest Rate Sensitivity to Changes in Interest Rate Level and Slope of Yield Curve
Pursuant to a disclosure commitment with FHFA, we disclose on a monthly basis the estimated adverse impact on the fair value of our net portfolio that would result from the following hypothetical situations:
A 50 basis point shift in interest rates.
A 25 basis point change in the slope of the yield curve.
In measuring the estimated impact of changes in the level of interest rates, we assume a parallel shift in all maturities of the U.S. LIBOR interest rate swap curve.
In measuring the estimated impact of changes in the slope of the yield curve, we assume a constant 7-year rate and a shift of 16.7 basis points for the 1-year rate and 8.3 basis points for the 30-year rate. We believe these interest rate shocks represent moderate movements in interest rates over a one-month period.
Duration Gap
Duration gap measures the price sensitivity of our assets and liabilities in our net portfolio to changes in interest rates by quantifying the difference between the estimated durations of our assets and liabilities. Our duration gap analysis reflects the extent to which the estimated maturity and repricing cash flows for our assets are matched, on average, over time and across interest rate scenarios to those of our liabilities. A positive duration gap
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 57 |
indicates that the duration of our assets exceeds the duration of our liabilities. We disclose duration gap on a monthly basis under the caption “Interest Rate Risk Disclosures” in our Monthly Summary, which is available on our website and announced in a press release.
While our goal is to reduce the price sensitivity of our net portfolio to movements in interest rates, various factors can contribute to a duration gap that is either positive or negative. For example, changes in the market environment can increase or decrease the price sensitivity of our mortgage assets relative to the price sensitivity of our liabilities because of prepayment uncertainty associated with our assets. In a declining interest rate environment, prepayment rates tend to accelerate, thereby shortening the duration and average life of the fixed rate mortgage assets we hold in our net portfolio. Conversely, when interest rates increase, prepayment rates generally slow, which extends the duration and average life of our mortgage assets. Our debt and derivative instrument positions are used to manage the interest rate sensitivity of our retained mortgage portfolio and our investments in non-mortgage securities. As a result, the degree to which the interest rate sensitivity of our retained mortgage portfolio and our investments in non-mortgage securities is offset will depend on, among other factors, the mix of funding and other risk management derivative instruments we use at any given point in time.
The market value sensitivities of our net portfolio are a function of both the duration and the convexity of our net portfolio. Duration provides a measure of the price sensitivity of a financial instrument to changes in interest rates while convexity reflects the degree to which the duration of the assets and liabilities in our net portfolio changes in response to a given change in interest rates. We use convexity measures to provide us with information about how quickly and by how much our net portfolio’s duration may change in different interest rate environments. The market value sensitivity of our net portfolio will depend on a number of factors, including the interest rate environment, modeling assumptions and the composition of assets and liabilities in our net portfolio, which vary over time.
Results of Interest Rate Sensitivity Measures
The interest rate risk measures discussedtable below exclude the impact of changes in the fair value of our guaranty assets and liabilities resulting from changes in interest rates. We exclude our guaranty business from these sensitivity measures based on our current assumption that the guaranty fee income generated from future business activity will largely replace guaranty fee income lost due to mortgage prepayments.
Table 31 displays the pre-tax market value sensitivity of our net portfolio to changes in the level of interest rates and the slope of the yield curve as measured on the last day of each period presented. Table 31The table below also provides the daily average, minimum, maximum and standard deviation values for duration gap and for the most adverse market value impact on the net portfolio to changes in the level of interest rates and the slope of the yield curve for the three months ended September 30, 20172019 and 2016.2018.
The sensitivity measures displayed in Table 31, whichFor information on how we disclose on a quarterly basis pursuant to a disclosure commitment with FHFA, are an extension ofmeasure our monthly sensitivity measures. There are three primary differences between our monthly sensitivity disclosure and the quarterly sensitivity disclosure presented below: (1) the quarterly disclosure is expanded to include the sensitivity results for larger rate level shocks of positive or negative 100 basis points; (2) the monthly disclosure reflects the estimated pre-tax impact on the market value of our net portfolio calculated based on a daily average, while the quarterly disclosure reflects the estimated pre-tax impact calculated based on the estimated financial position of our net portfolio and the market environment as of the last business day of the quarter; and (3) the monthly disclosure shows the most adverse pre-tax impact on the market value of our net portfolio from the hypothetical interest rate shocks, while the quarterly disclosure includes the estimated pre-tax impact of both up and down interest rate shocks.risk, see our 2018 Form 10-K in “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management.”
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 5847 |
| | | Table 31: Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve | |
| Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve | | Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve |
| | As of (1)(2) | As of (1)(2) |
| | September 30, 2017 | | December 31, 2016 | September 30, 2019 | | December 31, 2018 |
| | (Dollars in billions) | (Dollars in millions) |
| Rate level shock: | | | | | | | | | | |
| -100 basis points | | $ | 0.0 |
| | $ | (0.2 | ) | | | $ | 99 |
| | $ | (286 | ) | |
| -50 basis points | | 0.0 |
| | 0.0 |
| | | 24 |
| | (119 | ) | |
| +50 basis points | | 0.0 |
| | 0.0 |
| | | 38 |
| | 48 |
| |
| +100 basis points | | (0.1 | ) | | 0.0 |
| | | 124 |
| | 29 |
| |
| Rate slope shock: | | | | | | | | | | |
| -25 basis points (flattening) | | 0.0 |
| | 0.0 |
| | | (13 | ) | | (7 | ) | |
| +25 basis points (steepening) | | 0.0 |
| | 0.0 |
| | | 12 |
| | 6 |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30,(1)(3) |
| | 2017 | | 2016 |
| | Duration Gap | | Rate Slope Shock 25 bps | | Rate Level Shock 50 bps | | Duration Gap | | Rate Slope Shock 25 bps | | Rate Level Shock 50 bps |
| | | | Exposure | | | | Exposure |
| | (In months) | | (Dollars in billions) | | (In months) | | (Dollars in billions) |
| Average | 0.0 | | | $ | 0.0 |
| | | | $ | 0.0 |
| | | 0.3 | | | $ | 0.0 |
| | | | $ | 0.0 |
| |
| Minimum | (0.4) | | | 0.0 |
| | | | 0.0 |
| | | (0.3) | | | 0.0 |
| | | | 0.0 |
| |
| Maximum | 0.3 | | | 0.0 |
| | | | 0.1 |
| | | 0.9 | | | 0.1 |
| | | | 0.1 |
| |
| Standard deviation | 0.2 | | | 0.0 |
| | | | 0.0 |
| | | 0.3 | | | 0.0 |
| | | | 0.0 |
| |
__________ |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30,(1)(3) |
| | | 2019 | | 2018 |
| | | Duration Gap | | Rate Slope Shock 25 bps | | Rate Level Shock 50 bps | | Duration Gap | | Rate Slope Shock 25 bps | | Rate Level Shock 50 bps |
| | | | | Market Value Sensitivity | | | | Market Value Sensitivity
|
| | | (In years) | | (Dollars in millions) | | (In years) | | (Dollars in millions) |
| Average | | 0.01 | | | $ | (8 | ) | | | | $ | (24 | ) | | | 0.01 | | | $ | (13 | ) | | | | $ | (51 | ) | |
| Minimum | | (0.09) | | | (21 | ) | | | | (100 | ) | | | (0.01) | | | (22 | ) | | | | (119 | ) | |
| Maximum | | 0.09 | | | (2 | ) | | | | 26 |
| | | 0.07 | | | (1 | ) | | | | (30 | ) | |
| Standard deviation | | 0.04 | | | 6 |
| | | | 28 |
| | | 0.02 | | | 6 |
| | | | 17 |
| |
| |
(1) | Computed based on changes in U.S. LIBOR interest rates swap curve. Changes in the level of interest rates assume a parallel shift in all maturities of the U.S. LIBOR interest rate swap curve. Changes in the slope of the yield curve assume a constant 7-year rate, a shift of 16.7 basis points for the 1-year rate (and shorter tenors) and an opposite shift of 8.3 basis points for the 30-year rate. Rate shocks for remaining maturity points are interpolated. |
| |
(2) | Measured on the last business day of each period presented. |
| |
(3) | Computed based on daily values during the period presented. |
The market value sensitivity of our net portfolio varies across a range of interest rate shocks depending upon the duration and convexity profile of our net portfolio. Because the effective duration gap of our net portfolio was close to zero monthsyears in the periods presented, the convexity exposure was the primary driver of the market value sensitivity of our net portfolio as of September 30, 2017.2019. In addition, the convexity exposure may result in similar market value sensitivities for positive and negative interest rate shocks of the same magnitude.
A majority of the interest rate risk associated with our mortgage-related securities and loans is hedged with our debt issuances, which include callable debt. We use derivatives to help manage the residual interest rate risk exposure between our assets and liabilities. Derivatives have enabled us to keep our interest rate risk exposure at consistently low levels in a wide range of interest-rate environments. Table 32The table below displays an example of how derivatives impacted the net market value exposure for a 50 basis point parallel interest rate shock.
|
| | | | | | | | | | | |
| Table 32: Derivative Impact on Interest Rate Risk (50 Basis Points) |
| | As of (1) |
| | September 30, 2017 | | December 31, 2016 |
| | (Dollars in billions) |
| Before derivatives | | $ | (0.6 | ) | | | | $ | (1.0 | ) | |
| After derivatives | | 0.0 |
| | | | 0.0 |
| |
| Effect of derivatives | | 0.6 |
| | | | 1.0 |
| |
__________ |
| | | | | | | | | | | |
| Derivative Impact on Interest Rate Risk (50 Basis Points) |
| | As of (1) |
| | September 30, 2019 | | December 31, 2018 |
| | (Dollars in millions) |
| Before derivatives | | $ | (201 | ) | | | | $ | (535 | ) | |
| After derivatives | | 38 |
| | | | 48 |
| |
| Effect of derivatives | | 239 |
| | | | 583 |
| |
| |
(1) | Measured on the last business day of each period presented. |
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 5948 |
|
| | |
| | MD&A | Risk ManagementCritical Accounting Policies and Estimates |
Liquidity Risk Management
See “MD&A—LiquidityCritical Accounting Policies and Capital Management—Liquidity Management” in our 2016 Form 10-K and in this report for a discussion of how we manage liquidity risk.
Operational Risk Management
See “MD&A—Risk Management—Operational Risk Management” in our 2016 Form 10-K for information on operational risks that we face and our framework for managing operational risk.
|
| | | | |
Critical Accounting Policies and Estimates |
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in theour condensed consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in “Note 1, Summary of Significant Accounting Policies” in this report and in our 20162018 Form 10-K.
We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. ManagementWe previously identified our fair value measurement as a critical accounting estimate due to the subjectivity of the unobservable inputs used to measure Level 3 assets and liabilities recorded at fair value. However, because the amount of Level 3 assets and liabilities that we report at fair value has discussed any significant changes in judgmentscontinued to decline, using reasonably different estimates and assumptions in applyingvaluing these assets and liabilities would not have a material impact on our reported results of operations or financial condition. Consequently, we no longer consider our fair value measurement a critical accounting policies withestimate.
We continue to identify the Audit Committee of our Board of Directors. See “Risk Factors” in our 2016 Form 10-Kallowance for a discussion of the risks associated with the need for management to make judgments and estimates in applying our accounting policies and methods. We have identified two of our accounting policiesloan losses as critical because they involveit involves significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition: fair value measurementcondition. See “MD&A—Critical Accounting Policies and combined loss reserves.
Combined Loss Reserves
Our combined loss reserves consistEstimates” in our 2018 Form 10-K for more discussion of the following components:
Allowance for loan losses
Reserve for guaranty losses
These components can be further allocated into our single-family and multifamily loss reserves.
We maintain an allowance for loan losses for loans classified as held for investment, including both loans we holdlosses. See “Risk Factors” in our portfolio2018 Form 10-K for a discussion of the risks associated with the need for management to make judgments and loans heldestimates in applying our accounting policies and methods.
Impact of Future Adoption of New Accounting Guidance
We identify and discuss the expected impact on our condensed consolidated Fannie Mae MBS trusts. We maintain a reserve for guaranty losses for loans heldfinancial statements of recently issued accounting guidance in unconsolidated Fannie Mae MBS trusts“Note 1, Summary of Significant Accounting Policies.”
Forward-Looking Statements
This report includes statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). In addition, we guarantee and loans we have guaranteed under long-term standby commitments and other credit enhancements we have provided. These amounts, which we collectively referour senior management may from time to as our combined loss reserves, represent probable losses incurred related to loanstime 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:
factors that will affect our future net worth;
our future financial condition and results of operations, and the factors that will affect them;
factors that will affect our long-term financial performance;
trends and the impact of fluctuations in our acquisition volumes, market share, guaranty bookfees, or acquisition credit characteristics;
our business plans and strategies and the impact of such plans and strategies;
continued consideration of housing finance reform by the Administration, FHFA and Congress, including the recommended administrative and legislative reforms in the Treasury plan, efforts and plans to implement such reforms; and the impact of housing finance reform on our conservatorship, our structure, our role in the secondary mortgage market, our capitalization, our business including concessions grantedand our competitive environment;
our dividend payments to borrowers upon modifications of their loans, asTreasury and the liquidation preference of the balance sheet date.senior preferred stock;
The allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related to our loans held for investment. The reserve for guaranty losses is a liability accountvolatility in our consolidated balance sheetsfuture financial results and efforts we may make to address volatility;
the size or composition of our retained mortgage portfolio;
the impact of legislation and regulation on our business or financial results;
our payments to HUD and Treasury funds under the GSE Act;
our plans relating to and the effects of our credit risk transfer transactions;
factors that reflects an estimate of incurredcould affect or mitigate our credit losses related to our guaranty to each unconsolidated Fannie Mae MBS trust that we will supplement amounts received by the Fannie Mae MBS trust as required to permit timely payments of principal and interest on the related Fannie Mae MBS. As a result, the guaranty reserve considers not only the principal and interest due on the loan at the current balance sheet date, but also an estimate of any additional interest payments due to the trust from the current balance sheet date until the point of loan acquisition or foreclosure. Our loss reserves consist of a specific loss reserve for individually impaired loans and a collective loss reserve for all other loans.risk exposure;
We have an established process, using analytical tools, benchmarks and management judgment, to determine our loss reserves. Our process for determining our loss reserves is complex and involves significant management judgment. Although our loss reserve process benefits from extensive historical loan performance data, this process is subject to risks and uncertainties, including a reliance on historical loss information that may not be representative of current conditions. We continually monitor prepayment, delinquency, modification, default and
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 6049 |
|
| | |
| | MD&A | Critical Accounting Policies and EstimatesForward-Looking Statements |
loss severitymortgage market and economic conditions (including home price appreciation rates) and the impact of such conditions on our business or financial results;
the effects on our business, risk profile and financial condition of our issuance of UMBS and of structured securities backed by Freddie Mac-issued UMBS, including the level and impact of our credit and operational risk exposure to Freddie Mac;
the risks to our business;
our loan acquisitions, the credit risk profile of such acquisitions, and the factors that will affect them;
our response to legal and regulatory proceedings and their impact on our business or financial condition; and
the impact of our adoption of the CECL standard on our financial condition and results of operations.
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 periodically makeeconomic factors in the markets in which we are active and that otherwise impact our business plans. Forward-looking statements are not guaranties 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:
the uncertainty of our future;
future legislative and regulatory requirements or changes affecting us, such as the enactment of housing finance reform legislation (including all or any portion of the Treasury plan), including changes that limit our business activities or our footprint;
actions by FHFA, Treasury, HUD, the CFPB or other regulators, or Congress, that affect our business, including new capital requirements that become applicable to us or changes in the ability-to-repay rule to replace the qualified mortgage patch for GSE-eligible loans;
changes in the structure and regulation of the financial services industry;
the timing and level of, as well as regional variation in, home price changes;
changes in interest rates and credit spreads;
developments that may be difficult to predict, including market conditions that result in changes in our historically developed assumptionsnet amortization income from our guaranty book of business, fluctuations in the estimated fair value of our derivatives and estimatesother financial instruments that we mark to market through our earnings, developments that affect our loss reserves such as necessarychanges in interest rates, home prices or accounting standards, or events such as natural disasters;
uncertainties relating to better reflect present conditions,the potential discontinuance of LIBOR, or other market changes that could impact the loans we own or guarantee or our MBS;
credit availability;
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 current trendspopulation growth and household formation;
growth, deterioration and the overall health and stability of the U.S. economy, including the U.S. GDP, unemployment rates, personal income and other indicators thereof;
changes in the fiscal and monetary policies of the Federal Reserve;
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 and quality of our guaranty book of business and retained mortgage portfolio;
the competitive environment in which we operate, including the impact of legislative or other developments on levels of competition in our industry and other factors affecting our market share;
the life of the loans in our guaranty book of business;
challenges we face in retaining and hiring qualified executives and other employees;
our future serious delinquency rates;
the deteriorated credit performance of many loans in our guaranty book of business;
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 50 |
|
| | |
| MD&A | Forward-Looking Statements |
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 potential changes to the terms of the senior preferred stock purchase agreement or senior preferred stock, and its effect on our business, including restrictions imposed on us by the terms of the senior preferred stock purchase agreement, the senior preferred stock, and Treasury’s warrant, as well as the possibility that these or other restrictions on our business and activities may be 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;
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 future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers;
the possibility that future changes in leadership at FHFA or the Administration may result in changes in FHFA’s or Treasury’s willingness to pursue the administrative reform recommendations in the Treasury plan;
a decrease in our credit ratings;
limitations on our ability to access the debt capital markets;
significant changes in modification and foreclosure activity;
the volume and pace of future nonperforming and reperforming loan sales and their impact on our results and serious delinquency rates;
changes in borrower risk, general economic trends, behavior;
the effectiveness of our loss mitigation strategies, management of our 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 risk management practices,GAAP, guidance by the Financial Accounting Standards Board and changes to our accounting policies;
changes in public policythe fair value of our assets and liabilities;
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 increasing interdependence between the single-family mortgage securitization programs of Fannie Mae and Freddie Mac in connection with uniform mortgage-backed securities;
operational control weaknesses;
our reliance on models and future updates we make to our models, including the assumptions used by these models;
domestic and global political risks and uncertainties;
natural disasters, environmental disasters, terrorist attacks, pandemics or other major disruptive events;
cyber attacks or other information security breaches or threats; and
the other factors described in “Risk Factors” in this report and in our 2018 Form 10-K.
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 our 2018 Form 10-K and 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.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 51 |
|
| | |
| Financial Statements | Condensed Consolidated Balance Sheets |
Item 1. Financial Statements
FANNIE MAE
(In conservatorship)
Condensed Consolidated Balance Sheets — (Unaudited)
(Dollars in millions)
|
| | | | | | | | | | | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | |
| ASSETS |
| Cash and cash equivalents | | $ | 22,592 |
| | | | $ | 25,557 |
| |
| Restricted cash (includes $35,496 and $17,849, respectively, related to consolidated trusts) | | 41,906 |
| | | | 23,866 |
| |
| Federal funds sold and securities purchased under agreements to resell or similar arrangements | | 23,176 |
| | | | 32,938 |
| |
| Investments in securities: | | | | | | | |
| Trading, at fair value (includes $4,304 and $3,061, respectively, pledged as collateral) | | 44,206 |
| | | | 41,867 |
| |
| Available-for-sale, at fair value | | 2,690 |
| | | | 3,429 |
| |
| Total investments in securities | | 46,896 |
| | | | 45,296 |
| |
| Mortgage loans: | | | | | | | |
| Loans held for sale, at lower of cost or fair value | | 12,289 |
| | | | 7,701 |
| |
| Loans held for investment, at amortized cost: | | | | | | | |
| Of Fannie Mae | | 104,367 |
| | | | 113,039 |
| |
| Of consolidated trusts | | 3,206,856 |
| | | | 3,142,858 |
| |
| Total loans held for investment (includes $8,183 and $8,922, respectively, at fair value) | | 3,311,223 |
| | | | 3,255,897 |
| |
| Allowance for loan losses | | (9,376 | ) | | | | (14,203 | ) | |
| Total loans held for investment, net of allowance | | 3,301,847 |
| | | | 3,241,694 |
| |
| Total mortgage loans | | 3,314,136 |
| | | | 3,249,395 |
| |
| Deferred tax assets, net | | 11,994 |
| | | | 13,188 |
| |
| Accrued interest receivable, net (includes $8,450 and $7,928, respectively, related to consolidated trusts) | | 8,923 |
| | | | 8,490 |
| |
| Acquired property, net | | 2,452 |
| | | | 2,584 |
| |
| Other assets | | 22,361 |
| | | | 17,004 |
| |
| Total assets | | $ | 3,494,436 |
| | | | $ | 3,418,318 |
| |
| LIABILITIES AND EQUITY |
| Liabilities: | | | | | | | |
| Accrued interest payable (includes $9,348 and $9,133, respectively, related to consolidated trusts) | | $ | 10,400 |
| | | | $ | 10,211 |
| |
| Debt: | | | | | | | |
| Of Fannie Mae (includes $6,041 and $6,826, respectively, at fair value) | | 213,522 |
| | | | 232,074 |
| |
| Of consolidated trusts (includes $22,719 and $23,753, respectively, at fair value) | | 3,248,336 |
| | | | 3,159,846 |
| |
| Other liabilities (includes $359 and $356, respectively, related to consolidated trusts) | | 11,836 |
| | | | 9,947 |
| |
| Total liabilities | | 3,484,094 |
| | | | 3,412,078 |
| |
| Commitments and contingencies (Note 13) | | — |
| | | | — |
| |
| Fannie Mae stockholders’ equity: | | | | | | | |
| Senior preferred stock (liquidation preference of $127,201 and $123,836, respectively) | | 120,836 |
| | | | 120,836 |
| |
| Preferred stock, 700,000,000 shares are authorized—555,374,922 shares issued and outstanding | | 19,130 |
| | | | 19,130 |
| |
| Common stock, no par value, no maximum authorization—1,308,762,703 shares issued and 1,158,087,567 shares outstanding | | 687 |
| | | | 687 |
| |
| Accumulated deficit | | (123,141 | ) | | | | (127,335 | ) | |
| Accumulated other comprehensive income | | 230 |
| | | | 322 |
| |
| Treasury stock, at cost, 150,675,136 shares | | (7,400 | ) | | | | (7,400 | ) | |
| Total stockholders’ equity (See Note 1: Senior Preferred Stock Purchase Agreement and Senior Preferred Stock for information on the related dividend obligation and liquidation preference) | | 10,342 |
| | | | 6,240 |
| |
| Total liabilities and equity | | $ | 3,494,436 |
| | | | $ | 3,418,318 |
| |
See Notes to Condensed Consolidated Financial Statements
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 52 |
|
| | |
| Financial Statements | Condensed Consolidated Statements of Operations and Comprehensive Income |
FANNIE MAE
(In conservatorship)
Condensed Consolidated Statements of Operations and Comprehensive Income — (Unaudited)
(Dollars and shares in millions, except per share amounts) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Interest income: | | | | | | | | | | | | | | | |
| Trading securities | | $ | 418 |
| | | | $ | 363 |
| | | | $ | 1,277 |
| | | | $ | 917 |
| |
| Available-for-sale securities | | 40 |
| | | | 54 |
| | | | 138 |
| | | | 175 |
| |
| Mortgage loans (includes $27,610 and $27,058, respectively, for the three months ended and $84,157 and $79,877, respectively, for the nine months ended related to consolidated trusts) | | 28,858 |
| | | | 28,723 |
| | | | 88,005 |
| | | | 85,064 |
| |
| Federal funds sold and securities purchased under agreements to resell or similar arrangements | | 178 |
| | | | 166 |
| | | | 698 |
| | | | 457 |
| |
| Other | | 47 |
| | | | 38 |
| | | | 120 |
| | | | 102 |
| |
| Total interest income | | 29,541 |
| | | | 29,344 |
| | | | 90,238 |
| | | | 86,715 |
| |
| Interest expense: | | | | | | | | | | | | | | | |
| Short-term debt | | (125 | ) | | | | (114 | ) | | | | (369 | ) | | | | (331 | ) | |
| Long-term debt (includes $22,775 and $22,361, respectively, for the three months ended and $70,371 and $65,972, respectively, for the nine months ended related to consolidated trusts) | | (24,187 | ) | | | | (23,861 | ) | | | | (74,757 | ) | | | | (70,406 | ) | |
| Total interest expense | | (24,312 | ) | | | | (23,975 | ) | | | | (75,126 | ) | | | | (70,737 | ) | |
| Net interest income | | 5,229 |
| | | | 5,369 |
| | | | 15,112 |
| | | | 15,978 |
| |
| Benefit for credit losses | | 1,857 |
| | | | 716 |
| | | | 3,732 |
| | | | 2,229 |
| |
| Net interest income after benefit for credit losses | | 7,086 |
| | | | 6,085 |
| | | | 18,844 |
| | | | 18,207 |
| |
| Investment gains, net | | 253 |
| | | | 166 |
| | | | 847 |
| | | | 693 |
| |
| Fair value gains (losses), net | | (713 | ) | | | | 386 |
| | | | (2,298 | ) | | | | 1,660 |
| |
| Fee and other income | | 402 |
| | | | 271 |
| | | | 875 |
| | | | 830 |
| |
| Non-interest income (loss) | | (58 | ) | | | | 823 |
| | | | (576 | ) | | | | 3,183 |
| |
| Administrative expenses: | | | | | | | | | | | | | | | |
| Salaries and employee benefits | | (361 | ) | | | | (355 | ) | | | | (1,123 | ) | | | | (1,101 | ) | |
| Professional services | | (241 | ) | | | | (247 | ) | | | | (699 | ) | | | | (744 | ) | |
| Other administrative expenses | | (147 | ) | | | | (138 | ) | | | | (415 | ) | | | | (400 | ) | |
| Total administrative expenses | | (749 | ) | | | | (740 | ) | | | | (2,237 | ) | | | | (2,245 | ) | |
| Foreclosed property expense | | (96 | ) | | | | (159 | ) | | | | (364 | ) | | | | (460 | ) | |
| Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) fees | | (613 | ) | | | | (576 | ) | | | | (1,806 | ) | | | | (1,698 | ) | |
| Other expenses, net | | (571 | ) | | | | (377 | ) | | | | (1,514 | ) | | | | (946 | ) | |
| Total expenses | | (2,029 | ) | | | | (1,852 | ) | | | | (5,921 | ) | | | | (5,349 | ) | |
| Income before federal income taxes | | 4,999 |
| | | | 5,056 |
| | | | 12,347 |
| | | | 16,041 |
| |
| Provision for federal income taxes | | (1,036 | ) | | | | (1,045 | ) | | | | (2,552 | ) | | | | (3,312 | ) | |
| Net income | | 3,963 |
| | | | 4,011 |
| | | | 9,795 |
| | | | 12,729 |
| |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | |
| Changes in unrealized gains on available-for-sale securities, net of reclassification adjustments and taxes | | 16 |
| | | | (33 | ) | | | | (85 | ) | | | | (349 | ) | |
| Other, net of taxes | | (2 | ) | | | | (3 | ) | | | | (7 | ) | | | | (8 | ) | |
| Total other comprehensive income (loss) | | 14 |
| | | | (36 | ) | | | | (92 | ) | | | | (357 | ) | |
| Total comprehensive income | | $ | 3,977 |
| | | | $ | 3,975 |
| | | | $ | 9,703 |
| | | | $ | 12,372 |
| |
| Net income | | $ | 3,963 |
| | | | $ | 4,011 |
| | | | $ | 9,795 |
| | | | $ | 12,729 |
| |
| Dividends distributed or amounts attributable to senior preferred stock | | (3,977 | ) | | | | (3,975 | ) | | | | (9,703 | ) | | | | (9,372 | ) | |
| Net income (loss) attributable to common stockholders | | $ | (14 | ) | | | | $ | 36 |
| | | | $ | 92 |
| | | | $ | 3,357 |
| |
| Earnings per share: | | | | | | | | | | | | | | | |
| Basic | | $ | 0.00 |
| | | | $ | 0.01 |
| | | | $ | 0.02 |
| | | | $ | 0.58 |
| |
| Diluted | | 0.00 |
| | | | 0.01 |
| | | | 0.02 |
| | | | 0.57 |
| |
| Weighted-average common shares outstanding: | | | | | | | | | | | | | | | |
| Basic | | 5,762 |
| | | | 5,762 |
| | | | 5,762 |
| | | | 5,762 |
| |
| Diluted | | 5,762 |
| | | | 5,893 |
| | | | 5,893 |
| | | | 5,893 |
| |
See Notes to Condensed Consolidated Financial Statements
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 53 |
|
| | |
| Financial Statements | Condensed Consolidated Statements of Cash Flows |
FANNIE MAE
(In conservatorship)
Condensed Consolidated Statements of Cash Flows — (Unaudited)
(Dollars in millions)
|
| | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2019 | | 2018 |
| Net cash provided by (used in) operating activities | | $ | 3,176 |
| | | | $ | (1,796 | ) | |
| Cash flows provided by investing activities: | | | | | | | |
| Proceeds from maturities and paydowns of trading securities held for investment | | 46 |
| | | | 163 |
| |
| Proceeds from sales of trading securities held for investment | | 49 |
| | | | 96 |
| |
| Proceeds from maturities and paydowns of available-for-sale securities | | 364 |
| | | | 564 |
| |
| Proceeds from sales of available-for-sale securities | | 376 |
| | | | 729 |
| |
| Purchases of loans held for investment | | (181,898 | ) | | | | (135,913 | ) | |
| Proceeds from repayments of loans acquired as held for investment of Fannie Mae | | 9,338 |
| | | | 11,651 |
| |
| Proceeds from sales of loans acquired as held for investment of Fannie Mae | | 8,987 |
| | | | 10,637 |
| |
| Proceeds from repayments and sales of loans acquired as held for investment of consolidated trusts | | 377,789 |
| | | | 306,374 |
| |
| Advances to lenders | | (95,636 | ) | | | | (83,643 | ) | |
| Proceeds from disposition of acquired property and preforeclosure sales | | 5,644 |
| | | | 7,090 |
| |
| Net change in federal funds sold and securities purchased under agreements to resell or similar arrangements | | 9,762 |
| | | | (7,128 | ) | |
| Other, net | | (74 | ) | | | | (56 | ) | |
| Net cash provided by investing activities | | 134,747 |
| | | | 110,564 |
| |
| Cash flows used in financing activities: | | | | | | | |
| Proceeds from issuance of debt of Fannie Mae | | 587,659 |
| | | | 636,466 |
| |
| Payments to redeem debt of Fannie Mae | | (606,665 | ) | | | | (666,888 | ) | |
| Proceeds from issuance of debt of consolidated trusts | | 286,126 |
| | | | 278,357 |
| |
| Payments to redeem debt of consolidated trusts | | (385,496 | ) | | | | (364,942 | ) | |
| Payments of cash dividends on senior preferred stock to Treasury | | (5,601 | ) | | | | (5,397 | ) | |
| Proceeds from senior preferred stock purchase agreement with Treasury | | — |
| | | | 3,687 |
| |
| Other, net | | 1,129 |
| | | | 720 |
| |
| Net cash used in financing activities | | (122,848 | ) | | | | (117,997 | ) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | 15,075 |
| | | | (9,229 | ) | |
| Cash, cash equivalents and restricted cash at beginning of period | | 49,423 |
| | | | 60,260 |
| |
| Cash, cash equivalents and restricted cash at end of period | | $ | 64,498 |
| | | | $ | 51,031 |
| |
| Cash paid during the period for: | | | | | | | |
| Interest | | $ | 86,699 |
| | | | $ | 82,010 |
| |
| Income taxes | | 1,250 |
| | | | 460 |
| |
See Notes to Condensed Consolidated Financial Statements
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 54 |
|
| | |
| Financial Statements | Condensed Consolidated Statements of Changes in Equity (Deficit) |
FANNIE MAE
(In conservatorship)
CondensedConsolidated Statements of Changes in Equity (Deficit) —(Unaudited)
(Dollars and shares in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fannie Mae Stockholders’ Equity (Deficit) |
| | | Shares Outstanding | | Senior
Preferred Stock | | Preferred
Stock | | Common
Stock | |
Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Treasury
Stock | | Total
Equity |
| | Senior
Preferred | | Preferred | | Common | |
| Balance as of June 30, 2019 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (127,104 | ) | | $ | 216 |
| | $ | (7,400 | ) | | $ | 6,365 |
|
| Senior preferred stock dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,963 |
| | — |
| | — |
| | 3,963 |
|
| Other comprehensive income, net of tax effect: | | | | | | | | | | | | | | | | | | | | |
| Changes in net unrealized gains on available-for-sale securities (net of taxes of $2) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
|
| Reclassification adjustment for gains included in net income (net of taxes of $1) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6 |
| | — |
| | 6 |
|
| Other (net of taxes of $1) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | 3,977 |
|
| Balance as of September 30, 2019 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (123,141 | ) | | $ | 230 |
| | $ | (7,400 | ) | | $ | 10,342 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fannie Mae Stockholders’ Equity (Deficit) |
| | | Shares Outstanding | | Senior
Preferred Stock | | Preferred
Stock | | Common
Stock | |
Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Treasury
Stock | | Total
Equity |
| | Senior
Preferred | | Preferred | | Common | |
| Balance as of December 31, 2018 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (127,335 | ) | | $ | 322 |
| | $ | (7,400 | ) | | $ | 6,240 |
|
| Senior preferred stock dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,601 | ) | | — |
| | — |
| | (5,601 | ) |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9,795 |
| | — |
| | — |
| | 9,795 |
|
| Other comprehensive income, net of tax effect: | | | | | | | | | | | | | | | | | | | | |
| Changes in net unrealized gains on available-for-sale securities (net of taxes of $7) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 27 |
| | — |
| | 27 |
|
| Reclassification adjustment for gains included in net income (net of taxes of $30) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (112 | ) | | — |
| | (112 | ) |
| Other (net of taxes of $2) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | 9,703 |
|
| Balance as of September 30, 2019 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (123,141 | ) | | $ | 230 |
| | $ | (7,400 | ) | | $ | 10,342 |
|
See Notes to Condensed Consolidated Financial Statements
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 55 |
|
| | |
| Financial Statements | Condensed Consolidated Statements of Changes in Equity (Deficit) |
FANNIE MAE
(In conservatorship)
CondensedConsolidated Statements of Changes in Equity (Deficit) —(Unaudited)
(Dollars and shares in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fannie Mae Stockholders’ Equity (Deficit) |
| | | Shares Outstanding | | Senior
Preferred Stock | | Preferred
Stock | | Common
Stock | |
Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Treasury
Stock | | Total
Equity
(Deficit) |
| | | Senior
Preferred | | Preferred | | Common | |
| Balance as of June 30, 2018 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (126,143 | ) | | $ | 349 |
| | $ | (7,400 | ) | | $ | 7,459 |
|
| Senior preferred stock dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,459 | ) | | — |
| | — |
| | (4,459 | ) |
| Increase to senior preferred stock | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,011 |
| | — |
| | — |
| | 4,011 |
|
| Other comprehensive income, net of tax effect: | | | | | | | | | | | | | | | | | | | | |
| Changes in net unrealized gains on available-for-sale securities (net of taxes of $8) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | — |
| | (31 | ) |
| Reclassification adjustment for gains included in net income (net of taxes of $1) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | 3,975 |
|
Reclassification related to Tax Cuts
and Jobs Act | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance as of September 30, 2018 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (126,591 | ) | | $ | 313 |
| | $ | (7,400 | ) | | $ | 6,975 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fannie Mae Stockholders’ Equity (Deficit) |
| | | Shares Outstanding | | Senior
Preferred Stock | | Preferred
Stock | | Common
Stock | |
Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Treasury
Stock | | Total
Equity (Deficit) |
| | | Senior
Preferred | | Preferred | | Common | |
| Balance as of December 31, 2017 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 117,149 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (133,805 | ) | | $ | 553 |
| | $ | (7,400 | ) | | $ | (3,686 | ) |
| Senior preferred stock dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,397 | ) | | — |
| | — |
| | (5,397 | ) |
| Increase to senior preferred stock | | — |
| | — |
| | — |
| | 3,687 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,687 |
|
| Comprehensive income: | |
| |
| |
| | | | | | | | | | | | | |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,729 |
| | — |
| | — |
| | 12,729 |
|
| Other comprehensive income, net of tax effect: | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
| Changes in net unrealized gains on available-for-sale securities (net of taxes of $22) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (84 | ) | | — |
| | (84 | ) |
| Reclassification adjustment for gains included in net income (net of taxes of $71) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (265 | ) | | — |
| | (265 | ) |
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) |
| Total comprehensive income | |
| |
| |
| | | | | | | | | | | | | | 12,372 |
|
Reclassification related to Tax Cuts
and Jobs Act | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (117 | ) | | 117 |
| | — |
| | — |
|
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
| Balance as of September 30, 2018 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (126,591 | ) | | $ | 313 |
| | $ | (7,400 | ) | | $ | 6,975 |
|
See Notes to Condensed Consolidated Financial Statements
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 56 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
FANNIE MAE
(In conservatorship)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
We are a stockholder-owned corporation organized and existing under the Federal National Mortgage Association Charter Act (the “Charter Act” or our “charter”). We are a government-sponsored enterprise (“GSE”), and we are subject to government oversight and regulation. Our regulators include the Federal Housing Finance Agency (“FHFA”), the U.S. Department of Housing and Urban Development (“HUD”), the U.S. Securities and Exchange Commission (“SEC”), and the regulatory environment. U.S. Department of the Treasury (“Treasury”). The U.S. government does not guarantee our securities or other obligations.
We also considerhave been under conservatorship, with FHFA acting as conservator, since September 6, 2008. See below and “Note 1, Summary of Significant Accounting Policies” in our annual report on Form 10-K for the recoveries that we expectyear ended December 31, 2018 (“2018 Form 10-K”) for additional information on our conservatorship and the impact of U.S. government support of our business.
The unaudited interim condensed consolidated financial statements as of and for the three and nine months ended September 30, 2019 and related notes, should be read in conjunction with our audited consolidated financial statements and related notes included in our 2018 Form 10-K.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the SEC’s instructions to receive on mortgage insuranceForm 10-Q and other loan-specific credit enhancements entered into contemporaneously withArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and in contemplationnote disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments of a guaranty or loan purchase transaction,normal recurring nature considered necessary for a fair presentation have been included. The accompanying condensed consolidated financial statements include our accounts as such recoveries reducewell as the severityaccounts of other entities in which we have a controlling financial interest. All intercompany accounts and transactions have been eliminated. To conform to our current period presentation, we have reclassified certain amounts reported in our prior period condensed consolidated financial statements. Results for the three and nine months ended September 30, 2019 may not necessarily be indicative of the loss associatedresults for the year ending December 31, 2019.
Use of Estimates
Preparing condensed consolidated financial statements in accordance with defaulted loans.
AsGAAP requires management to make estimates and assumptions that affect our reported amounts of September 30, 2017,assets and liabilities, disclosure of contingent assets and liabilities as of the dates of our condensed consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting periods. Management has made significant estimates in a variety of areas including, but not limited to, the allowance for loan losses of $20.2 billion includes an estimate of incurred credit losseslosses. Actual results could be different from these estimates.
Conservatorship
On September 7, 2008, the hurricanes of approximately $1.0 billion. Approximately 80%Secretary of the estimate relatesTreasury and the Director of FHFA announced several actions taken by Treasury and FHFA regarding Fannie Mae, which included: (1) placing us in conservatorship and (2) the execution of a senior preferred stock purchase agreement by our conservator, on our behalf, and Treasury, pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase common stock.
On September 5, 2019, Treasury released its plan to reform the housing finance system. The Treasury Housing Reform Plan (the “Treasury plan”) is far-reaching in scope and could have a significant impact on our structure, our role in the secondary mortgage market, our capitalization, our business and our competitive environment. The Treasury plan includes recommendations relating to ending our conservatorship, amending our senior preferred stock purchase agreement with Treasury, considering additional restrictions and requirements on our business, and many other matters. The Treasury plan recommends that Treasury’s commitment to provide funding under the senior preferred stock purchase agreement should be replaced with legislation that authorizes an explicit, paid-for guarantee backed by the full faith and credit of the Federal Government that is limited to the timely payment of principal and interest on qualifying MBS. The Treasury plan further recommends that, pending legislation, even after conservatorship Treasury should maintain its ongoing commitment to support our single-family mortgage loansand multifamily mortgage-backed securities through the senior preferred stock purchase agreement, as amended as contemplated by the plan.
There continues to be significant uncertainty regarding our future, including how long we will continue to exist in Puerto Ricoour current form, the extent of our role in the market, how long we will be in conservatorship, what form we will have and what ownership
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 57 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
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. Treasury has made a commitment under the senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. We are not aware of any plans of FHFA (1) to fundamentally change our business model, other than changes that might result from recommendations in the Treasury plan, if implemented, or (2) to reduce the aggregate amount available to or held by the company under our capital structure, which includes the senior preferred stock purchase agreement.
Senior Preferred Stock Purchase Agreement and Senior Preferred Stock
Treasury has made a commitment under the senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. Pursuant to the senior preferred stock purchase agreement, we have received a total of $119.8 billion from Treasury as of September 30, 2017, had an unpaid principal balance2019, and the amount of $8.9 billion. Our estimate of incurred credit losses from the hurricanes is based on assumptions about a number of factors, including the probability of borrower default, the hurricanes’ impact on collateral value, and potential insurance recoveries. We used our historical data from past hurricanes as a basis for our assumptions, while taking into account that the recent hurricanes may not be fully comparable to past hurricanes. The accuracy of our assumptions may be significantly impacted by the limited nature of informationremaining funding available to us atunder the agreement was $113.9 billion.
Pursuant to the senior preferred stock purchase agreement, we issued shares of senior preferred stock in 2008. On September 27, 2019, we, through FHFA acting on our behalf in its capacity as our conservator, and Treasury entered into a letter agreement modifying the dividend and liquidation preference provisions of the senior preferred stock. These modifications and other specified provisions of the letter agreement are described below.
| |
| • | Modification to Dividend Provisions—Increase in Applicable Capital Reserve Amount. 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 the applicable capital reserve amount. The letter agreement modified the dividend provisions of the senior preferred stock to increase the applicable capital reserve amount from $3 billion to $25 billion, effective for dividend periods beginning July 1, 2019. |
As a result of this time. For Hurricane Harveychange to the senior preferred stock dividend provisions:
| |
| ◦ | No dividends were payable on the senior preferred stock for the third quarter of 2019, as our net worth of $6.4 billion as of June 30, 2019 was lower than the $25 billion capital reserve amount. |
| |
| ◦ | No dividends will be payable on the senior preferred stock for the fourth quarter of 2019, as our net worth of $10.3 billion as of September 30, 2019 is lower than the $25 billion capital reserve amount. |
| |
| • | Modification to Liquidation Preference Provisions—Increase in Liquidation Preference. The letter agreement provides that, on September 30, 2019, and at the end of each fiscal quarter thereafter, the liquidation preference of the senior preferred stock will increase by an amount equal to the increase in our net worth, if any, during the immediately prior fiscal quarter, until such time as the liquidation preference has increased by $22 billion. |
As a result of this change to the senior preferred stock liquidation preference provisions:
| |
| ◦ | The aggregate liquidation preference of the senior preferred stock increased from $123.8 billion as of June 30, 2019 to $127.2 billion as of September 30, 2019, due to the $3.4 billion increase in our net worth during the second quarter of 2019. |
| |
| ◦ | The aggregate liquidation preference of the senior preferred stock will increase from $127.2 billion as of September 30, 2019 to $131.2 billion as of December 31, 2019, due to the $4.0 billion increase in our net worth during the third quarter of 2019. |
| |
| • | Agreement to Amend Senior Preferred Stock Purchase Agreement to Enhance Taxpayer Protections. The letter agreement provides that we and Treasury agree to negotiate and execute an additional amendment to the senior preferred stock purchase agreement that further enhances taxpayer protections by adopting covenants broadly consistent with recommendations for administrative reform contained in the Treasury plan. |
See “Note 11, Equity (Deficit)” in our 2018 Form 10-K for additional information about the senior preferred stock purchase agreement and Hurricane Irma,the senior preferred stock.
Principles of Consolidation
Our condensed consolidated financial statements include our accounts as well as the accounts of the other entities in which we have initial information on trendsa controlling financial interest. All intercompany balances and transactions have been eliminated. The typical condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. A controlling financial interest may also exist in borrower delinquenciesentities through arrangements that do not involve voting interests, such as a variable interest entity (“VIE”).
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 58 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
Single Security Initiative and UMBS
The Single Security Initiative was a joint initiative among Fannie Mae, Freddie Mac, and our jointly owned limited liability company, Common Securitization Solutions, LLC (“CSS”), under the direction of FHFA, to develop a single common mortgage-backed security issued by both Fannie Mae and Freddie Mac to finance fixed-rate mortgage loans backed by one- to four-unit single-family properties. We and Freddie Mac began issuing uniform mortgage-backed securities (“UMBS”) pursuant to the Single Security Initiative in June 2019. We and Freddie Mac also began resecuritizing UMBS certificates into structured securities in June 2019. The structured securities backed by UMBS that we may issue include Supers, which are single-class resecuritization transactions, and Real Estate Mortgage Investment Conduit securities (“REMICs”) and interest-only and principal-only strip securities (“SMBS”), which are multi-class resecuritization transactions.
Since the implementation of the Single Security Initiative in June 2019, we have been able to preliminarily assessinclude UMBS, Supers and other structured securities issued by Freddie Mac in some of our resecuritization trusts. The mortgage loans that serve as collateral for Freddie Mac-issued UMBS are not held in trusts that are consolidated by Fannie Mae. When we include Freddie Mac securities in our structured securities, we are subject to additional credit risk because we guarantee securities that were not previously guaranteed by Fannie Mae. However, Freddie Mac continues to guarantee the severitypayment of property damage. For Puerto Rico, because Hurricane Maria occurred in late September 2017, soon after Hurricane Irma, there is less information availableprincipal and interest on borrower delinquencies andthe underlying Freddie Mac securities that we have hadresecuritized. We have concluded that this additional credit risk is negligible because of the funding commitment available to Freddie Mac through its senior preferred stock purchase agreement with Treasury. Prior to the implementation of the Single Security Initiative, the vast majority of underlying assets of our resecuritization trusts were limited opportunity to assessFannie Mae securities that were collateralized by mortgage loans held in consolidated trusts.
Single-Class Resecuritization Trusts
Fannie Mae single-class resecuritization trusts are created by depositing mortgage-backed securities (“MBS”) into a new securitization trust for the severitypurpose of property damage. Our estimate will likely changeaggregating multiple mortgage-related securities into a single security. Single-class resecuritization securities pass through directly to the holders of the securities all of the cash flows of the underlying mortgage-backed securities held in the futureresecuritization trust. With the implementation of the Single Security Initiative, these securities can now be collateralized directly or indirectly by cash flows from underlying securities issued by Fannie Mae, Freddie Mac, or a combination of both. Resecuritization trusts backed directly or indirectly only by Fannie Mae MBS are non-commingled resecuritization trusts. Resecuritization trusts collateralized directly or indirectly by cash flows either in part or in whole from Freddie Mac securities are commingled resecuritization trusts.
Securities issued by our non-commingled single-class resecuritization trusts are backed solely by Fannie Mae MBS and the guarantee we provide on the trust does not subject us to additional credit risk because we have already provided a guarantee on the underlying securities. Further, the securities issued by our non-commingled single-class resecuritization trusts pass through all of the cash flows of the underlying Fannie Mae MBS directly to the holders of the securities. Accordingly, these securities are deemed to be substantially the same as the underlying Fannie Mae MBS collateral. Additionally, our involvement with these trusts does not provide us with any incremental rights or powers that would enable us to direct any activities of the trusts. As a result, we have concluded that we are not the primary beneficiaries of, and as a result, we do not consolidate, our non-commingled single-class resecuritization trusts. Therefore, we account for purchases and sales of securities issued by non-commingled single-class resecuritization trusts as extinguishments and issuances of the underlying MBS debt, respectively.
Securities issued by our commingled single-class resecuritization trusts are backed in whole or in part by Freddie Mac securities. The guaranty we provide to the commingled single-class resecuritization trust subjects us to additional information becomes available.credit risk because we are providing a guaranty for the timely payment of principal and interest on the underlying Freddie Mac securities that we have not previously guaranteed. Accordingly, securities issued by our commingled resecuritization trusts are not deemed to be substantially the same as the underlying collateral. We do not have any incremental rights or powers related to commingled single-class resecuritization trusts that would enable us to direct any activities of the underlying trusts. As a result, we have concluded that we are not the primary beneficiary of, and therefore do not consolidate, our commingled single-class resecuritization trusts unless we have the unilateral right to dissolve the trust. We have this right when we hold 100% of the beneficial interests issued by the resecuritization trust. Therefore, we account for purchases and sales of these securities as purchases and sales of investment securities.
Multi-Class Resecuritization Trusts
Multi-class resecuritization trusts are trusts we create to issue multi-class Fannie Mae structured securities, including REMICs and SMBS, in which the cash flows of the underlying mortgage assets are divided, creating several classes of securities, each of which represents a beneficial ownership interest in a separate portion of cash flows. We guarantee to each multi-class resecuritization trust that we will continuesupplement amounts received by the trusts as required to evaluate our assumptionspermit timely payments of principal and any resulting adjustmentsinterest, as applicable, on the related Fannie Mae structured securities. With the implementation of the Single Security Initiative, these multi-class structured securities can now be collateralized, directly or indirectly, by securities issued by Fannie Mae, Freddie Mac, or a combination of both.
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 59 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
The guaranty we provide to our estimate willnon-commingled multi-class resecuritization trusts does not subject us to additional credit risk, because the underlying assets are Fannie Mae-issued securities for which we have already provided a guaranty. However, for commingled multi-class structured securities, we are subject to additional credit risk because we are providing a guaranty for the timely payment of principal and interest on the underlying Freddie Mac securities that we have not previously guaranteed. For both commingled and non-commingled multi-class resecuritization trusts, we may also be exposed to prepayment risk via our ownership of securities issued by these trusts. We do not have the ability via our involvement with a multi-class resecuritization trust to impact either the credit risk or prepayment risk to which we are exposed. Therefore, we have concluded that we do not have the characteristics of a controlling financial interest and do not consolidate multi-class resecuritization trusts unless we have the unilateral right to dissolve the trust as noted below.
Securities issued by multi-class resecuritization trusts do not directly pass through all of the cash flows of the underlying securities and therefore the issued and underlying securities are not considered substantially the same. Accordingly, if a multi-class resecuritization trust is not consolidated, we account for purchases and sales of securities issued by the trust as purchases and sales of investment securities.
Since the implementation of the Single Security Initiative in June 2019, we may now include UMBS, Supers and other structured securities backed by securities issued by Freddie Mac in our allowanceresecuritization trusts. As a result, we adopted a consolidation threshold for loan lossesmulti-class resecuritization trusts that is based on our ability to unilaterally dissolve the resecuritization trust. This ability exists only when we hold 100% of the outstanding beneficial interests issued by the resecuritization trust. This new consolidation threshold was applied prospectively upon implementation of the Single Security Initiative in future periods.the second quarter of 2019 and prior period amounts were not recast. Prior to the implementation of the Single Security Initiative, we consolidated multi-class resecuritization trusts when we held a substantial portion of the outstanding beneficial interests issued by the trust. Our adoption of the new consolidation threshold did not have a material impact on our condensed consolidated financial statements.
Single-Family Loss Reserves
We establish a specific single-family loss reserve for individually impaired loans, which includes loans we restructure in troubled debt restructurings (“TDRs”), certain nonperforming loans in MBS trusts and acquired credit-impaired loans that have been further impaired subsequent to acquisition. The single-family loss reserve for individually impaired loans represents the majority of ourOur single-family loss reserves, due to the high volume of restructured loans. We typically measure impairment based on the difference betweenwhich include our recorded investment in theallowance for loan losses and the present value of the estimated cash flows we expect to receive, which we calculate using the effective interest rate of the original loan or the effective interest rate at acquisitionreserve for guaranty losses, provide for an acquired credit-impaired loan. However, when foreclosure is probable on an individually impaired loan, we measure impairment based on the difference between our recorded investment in the loan and the fair valueestimate of the underlying property, adjusted for the estimated discounted costs to sell the property and estimated insurance or other proceeds we expect to receive. When a loan has been restructured or modified, we measure impairment using a cash flow analysis discounted at the loan’s original effective interest rate.
We establish a collective single-family loss reserve for all other single-family loanscredit losses incurred in our single-family guaranty book of business, using a model that estimatesincluding concessions we granted borrowers upon modification of their loans. The table below summarizes the probability of default of loans to derive a loss reserve estimate given multiple factors such as: origination year, mark-to-market LTV ratio, delinquency status and loan product type. The loss severity estimates we use in determining our loss reserves reflect current available information on actual events and conditions as of each balance sheet date, including current home prices. Our loss severity estimates do not incorporate assumptions about future changes in home prices. We do, however, use recent regional historical sales and appraisal information, including the sales of our own foreclosed properties, to develop oursingle-family loss severity estimates for all loan categories.reserves.
Multifamily Loss ReservesWe establish a collective multifamily loss reserve for all loans in our multifamily guaranty book of business that are not individually impaired using an internal model that applies loss factors to loans in similar risk categories. Our loss factors are developed based on our historical default and loss severity experience. Management may also apply judgment to adjust the loss factors derived from our models, taking into consideration model imprecision and specific, known events, such as current credit conditions, that may affect the credit quality of our multifamily loan portfolio but are not yet reflected in our model-generated loss factors. |
| | | | | | | | | | | | | | | | | |
| Single-Family Loss Reserves |
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, |
| | | 2019 | | 2018 | | | 2019 | | 2018 |
| | | (Dollars in millions) |
| Changes in loss reserves: | | | | | | | | | |
| Beginning balance | | $ | (11,239 | ) | | $ | (16,638 | ) | | | $ | (14,007 | ) | | $ | (19,155 | ) |
| Benefit for credit losses | | 1,840 |
| | 732 |
| | | 3,753 |
| | 2,223 |
|
| Charge-offs | | 274 |
| | 514 |
| | | 1,221 |
| | 1,728 |
|
| Recoveries | | (19 | ) | | (84 | ) | | | (106 | ) | | (255 | ) |
| Other | | (1 | ) | | (2 | ) | | | (6 | ) | | (19 | ) |
| Ending balance | | $ | (9,145 | ) | | $ | (15,478 | ) | | | $ | (9,145 | ) | | $ | (15,478 | ) |
| | | | | | | | | | |
| | | | | | | | As of |
| | | | | | | | September 30, 2019 | | December 31, 2018 |
| Loss reserves as a percentage of: | | | | | | | | | |
| Single-family guaranty book of business | | | | | | | 0.31 | % | | 0.49 | % |
| Recorded investment in nonaccrual loans | | | | | | | 31.48 |
| | 44.24 |
|
We establish a specific multifamily loss reserve for multifamily loans that we determine are individually impaired. We identify multifamily loans for evaluation for impairment through a credit risk assessment process. As part of this assessment process, we stratify multifamily loans into different internal risk categories based on the credit risk inherent in each individual loan and management judgment. We categorize loan credit risk, taking into
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 6138 |
|
| | |
| MD&A | Single-Family Business |
Troubled Debt Restructurings and Nonaccrual Loans
The table below displays the single-family loans classified as TDRs that were on accrual status and single-family loans on nonaccrual status. The table includes our recorded investment in HFI and HFS single-family mortgage loans. For information on the impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 3, Mortgage Loans.”
|
| | | | | | | | | | | |
| Single-Family TDRs on Accrual Status and Nonaccrual Loans | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | (Dollars in millions) |
| TDRs on accrual status | | $ | 89,083 |
| | | | $ | 98,320 |
| |
| Nonaccrual loans | | 29,051 |
| | | | 31,658 |
| |
| Total TDRs on accrual status and nonaccrual loans | | $ | 118,134 |
| | | | $ | 129,978 |
| |
Accruing on-balance sheet loans past due 90 days or more(1) | | $ | 198 |
| | | | $ | 228 |
| |
|
| | | | | | | | | | | |
| | | For the Nine Months Ended September 30, | |
| | | |
| | | 2019 | | | | 2018 | |
| | | (Dollars in millions) | |
| Interest related to on-balance sheet TDRs on accrual status and nonaccrual loans: | | | | | | | |
Interest income forgone(2) | | $ | 1,280 |
| | | | $ | 1,680 |
| |
Interest income recognized(3) | | 3,614 |
| | | | 4,141 |
| |
| |
(1) | Includes loans that, as of the end of each period, are 90 days or more past due and continuing to accrue interest. The majority of these amounts consist of loans insured or guaranteed by the U.S. government and loans for which we have recourse against the seller in the event of a default. |
| |
(2) | Represents the amount of interest income we did not recognize, but would have recognized during the period for nonaccrual loans and TDRs on accrual status as of the end of each period had the loans performed according to their original contractual terms. |
| |
(3) | Includes primarily amounts accrued while the loans were performing and cash payments received on nonaccrual loans. |
Multifamily Business
Our Multifamily business provides mortgage market liquidity primarily for properties with five or more residential units, which may be apartment communities, cooperative properties, seniors housing, dedicated student housing or manufactured housing communities.
This section supplements and updates information regarding our Multifamily business segment in our 2018 Form 10-K. See “MD&A—Multifamily Business” in our 2018 Form 10-K for additional information regarding the primary business activities, customers, competition and market share of our Multifamily business.
Presentation of our multifamily guaranty book of business
For purposes of the information reported in this “Multifamily Business” section, we measure our multifamily guaranty book of business by using the unpaid principal balance of mortgage loans underlying Fannie Mae MBS. By contrast, the multifamily guaranty book of business presented in the “Composition of Fannie Mae Guaranty Book of Business” table in the “Guaranty Book of Business” section is based on the unpaid principal balance of the Fannie Mae MBS outstanding, rather than the unpaid principal balance of the underlying mortgage loans. These amounts differ primarily as a result of payments we receive on underlying loans that have not yet been remitted to the MBS holders. As measured for purposes of the information reported below, the unpaid principal balance of our multifamily guaranty book of business was $329.6 billion as of September 30, 2019 and $305.9 billion as of December 31, 2018.
Multifamily Mortgage Market
National multifamily market fundamentals, which include factors such as vacancy rates and rents, remained steady during the third quarter of 2019, most likely due to ongoing job growth, favorable demographic trends, and renter household formations.
| |
| • | Vacancy rates. Based on preliminary third-party data, the national multifamily vacancy rate for institutional investment-type apartment properties is estimated to have remained at 5.3% at September 30, 2019, which was the same as of June 30, 2019. |
| |
| • | Rents. Effective rents are estimated to have increased during the third quarter of 2019, with national asking rents increasing by an estimated 0.8% in the third quarter of 2019, compared with 1.0% during the second quarter of 2019. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 39 |
|
| | |
| MD&A | Multifamily Business |
Continued demand for multifamily rental units during the third quarter of 2019 was reflected in the estimated positive net absorption (that is, the net change in the number of occupied rental units during the time period) of approximately 33,000 units, according to data from Reis, Inc., compared with approximately 49,000 units during the second quarter of 2019.
Vacancy rates and rents are important to loan performance because multifamily loans are generally repaid from the cash flows generated by the underlying property. Several years of improvement in these fundamentals have helped to increase property values in most metropolitan areas. It is estimated that approximately 424,000 new multifamily units will be completed in 2019. The bulk of this new supply is concentrated in a limited number of metropolitan areas. Although multifamily fundamentals remain positive, we believe increasing supply will result in a continuing slowdown in national net absorption rates and effective rents for the remainder of 2019 compared with recent years.
Multifamily Business Metrics
Through the secondary mortgage market, we support rental housing for the workforce population, for senior citizens and students and for families with the greatest economic need. Over 90% of the multifamily units we financed in the third quarter of 2019 were affordable to families earning at or below 120% of the median income in their area, providing support for both workforce housing and affordable housing.
Multifamily New Business Volume
(Dollars in billions)
| |
(1) | Reflects unpaid principal balance of multifamily Fannie Mae MBS issued, multifamily loans purchased, and credit enhancements provided on multifamily mortgage assets during the period. |
FHFA’s 2019 conservatorship scorecard included an objective to maintain the dollar volume of new multifamily business at or below $35 billion for the year, excluding certain targeted affordable and underserved market business segments such as loans financing energy or water efficiency improvements. Approximately 44% of our multifamily new business volume of $52.1 billion for the first nine months of 2019 counted toward FHFA’s 2019 multifamily volume cap. On September 13, 2019, FHFA announced a revised multifamily business volume cap structure. The new multifamily volume cap, which replaced the prior cap effective October 1, 2019, is $100 billion for the five-quarter period ending December 31, 2020. The new cap applies with no exclusions. In addition, FHFA directed that 37.5% of our multifamily business during that time period must be mission-driven, affordable housing, pursuant to FHFA’s guidelines for mission-driven loans.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 40 |
|
| | |
| MD&A | Multifamily Business |
Multifamily Business Financial Results
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, | | | | For the Nine Months Ended September 30, | | |
| | | 2019 | | 2018 | | Variance | | 2019 | | 2018 | | Variance |
| | | (Dollars in millions) |
| Net interest income | | $ | 745 |
| | $ | 699 |
| | $ | 46 |
| | $ | 2,170 |
| | $ | 2,024 |
| | $ | 146 |
|
| Fee and other income | | 246 |
| | 192 |
| | 54 |
| | 525 |
| | 524 |
| | 1 |
|
| Net revenues | | 991 |
| | 891 |
| | 100 |
| | 2,695 |
| | 2,548 |
| | 147 |
|
| Fair value gains (losses), net | | 6 |
| | (31 | ) | | 37 |
| | 66 |
| | (69 | ) | | 135 |
|
| Administrative expenses | | (115 | ) | | (104 | ) | | (11 | ) | | (338 | ) | | (317 | ) | | (21 | ) |
Credit-related income (expense)(1) | | 14 |
| | (25 | ) | | 39 |
| | (23 | ) | | (6 | ) | | (17 | ) |
Other expenses, net(2) | | (92 | ) | | (75 | ) | | (17 | ) | | (197 | ) | | (209 | ) | | 12 |
|
| Income before federal income taxes | | 804 |
| | 656 |
| | 148 |
| | 2,203 |
| | 1,947 |
| | 256 |
|
| Provision for federal income taxes | | (164 | ) | | (107 | ) | | (57 | ) | | (427 | ) | | (314 | ) | | (113 | ) |
| Net income | | $ | 640 |
| | $ | 549 |
| | $ | 91 |
| | $ | 1,776 |
| | $ | 1,633 |
| | $ | 143 |
|
| |
(1) | Consists of the benefit or provision for credit losses and foreclosed property income or expense. |
| |
(2) | Consists of investment gains, gains or losses from partnership investments and other income or expenses. |
Net interest income
Multifamily net interest income is primarily driven by guaranty fee income. Guaranty fee income increased in the third quarter and first nine months of 2019 as compared with the third quarter and first nine months of 2018 as a result of growth in our multifamily guaranty book of business, partially offset by a decrease in charged guaranty fees on the guaranty book.
| |
(1) | Our multifamily guaranty book of business consists of multifamily mortgage loans underlying Fannie Mae MBS outstanding, multifamily mortgage loans of Fannie Mae held in our retained mortgage portfolio, and other credit enhancements that we provide on multifamily mortgage assets. It excludes non-Fannie Mae multifamily mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty. |
Our average charged guaranty fee has trended downward from 2018 to 2019, driven by competitive market pressure on guaranty fees charged on newly acquired multifamily loans and liquidations of loans with higher guaranty fees.
Fee and other income
Fee and other income in all periods presented was primarily driven by yield maintenance fees resulting from prepayment activity.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 41 |
|
| | |
| MD&A | Multifamily Business |
Fair value gains (losses), net
Depending on portfolio activity, our Multifamily business may be in a net buy or net sell position during any given period. Fair value gains in the first nine months of 2019 were primarily driven by gains on commitments to buy multifamily mortgage-related securities as a result of increases in prices as interest rates declined during the commitment periods.
Fair value losses in the third quarter and first nine months of 2018 were primarily driven by losses on commitments to buy multifamily mortgage-related securities as a result of decreases in prices as interest rates rose during the commitment periods.
Multifamily Mortgage Credit Risk Management
This section updates our discussion of multifamily mortgage credit risk management in our 2018 Form 10-K in “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management.”
Multifamily Acquisition Policy and Underwriting Standards
Our standards for multifamily loans specify maximum original LTV ratio and minimum original debt service coverage ratio (“DSCR”) values that vary based on loan characteristics. Our experience has been that original LTV ratio and DSCR values have been reliable indicators of future credit performance.
At underwriting, we evaluate the DSCR based on both actual and underwritten debt service payments. Underwritten debt service payments are based on debt service calculations that include both principal and interest payments. The original DSCR for the loan is calculated using these underwritten debt service payments rather than the actual debt service payments, which, depending on the interest rate of the loan and loan structure, may result in a more conservative estimate of the debt service payments. This approach is used for all loans, including those with full and partial interest-only terms.
The following table displays key risk characteristics of our multifamily guaranty book of business.
|
| | | | | | | | | | | |
| Key Risk Characteristics of Multifamily Guaranty Book of Business |
| | As of |
| | September 30,
2019 | | December 31, 2018 | | September 30,
2018 |
| Weighted average original LTV ratio | | 66 | % | | | 66 | % | | | 67 | % |
| Original LTV ratio greater than 80% | | 1 | | | | 1 | | | | 1 | |
| Original DSCR less than or equal to 1.10 | | 11 |
|
|
| 12 |
|
|
| 13 | |
| Full interest-only loans | | 26 | | | | 24 | | | | 23 | |
Partial interest-only loans(1) | | 50 | | | | 49 | | | | 48 | |
| |
(1) | Consists of mortgage loans that were underwritten with an interest-only term, regardless of whether the loan is currently in its interest-only period. |
We provide additional information on the credit characteristics of our multifamily loans in quarterly financial supplements, which we submit to the SEC with current reports on Form 8-K. Information in our quarterly financial supplements is not incorporated by reference into this report.
Transfer of Multifamily Mortgage Credit Risk
Lender risk-sharing is a cornerstone of our Multifamily business. We primarily transfer risk through our Delegated Underwriting and Servicing (“DUS®”) program, which delegates to DUS lenders the ability to underwrite and service multifamily loans, in accordance with our standards and requirements. DUS lenders receive credit risk-related revenues for their respective portion of credit risk retained, and, in turn, are required to fulfill any loss sharing obligation. This aligns the interests of the lender and Fannie Mae throughout the life of the loan.
Our DUS model typically results in our lenders sharing on a pro-rata or tiered basis approximately one-third of the credit risk on our multifamily loans. In the first nine months of 2019, nearly 100% of our new multifamily business volume had lender risk-sharing. As of September 30, 2019 and December 31, 2018, 98% of the unpaid principal balance of loans in our multifamily guaranty book of business had lender risk-sharing.
To complement our lender risk-sharing program through our DUS model, we engage in multifamily CIRT transactions, pursuant to which we transfer a portion of the mortgage credit risk on multifamily loans in our multifamily guaranty book of business to insurers or reinsurers. As of September 30, 2019, we have completed six multifamily CIRT transactions since the inception of the program, which covered multifamily loans with an unpaid principal balance of approximately $62.0 billion at the time of the transactions. As of September 30, 2019, 18% of the loans in our multifamily guaranty book of business, measured by unpaid principal balance, were covered by a CIRT transaction. We continue to support the growth of the credit risk transfer market and expand the types of loans covered in our credit risk transfer programs.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 42 |
|
| | |
| MD&A | Multifamily Business |
Multifamily Portfolio Diversification and Monitoring
Diversification within our multifamily book of business by geographic concentration, term to maturity, interest rate structure, borrower concentration, loan size and credit enhancement coverage, are important factors that influence credit performance and help reduce our credit risk.
As part of our ongoing credit risk management process, we and our lenders monitor the performance of our multifamily loans and the underlying properties on an ongoing basis throughout the loan term at the asset and portfolio level. We require lenders to provide quarterly and annual financial updates for the loans for which we are contractually entitled to receive such information. We closely monitor loans with an estimated current DSCR below 1.0, as that is an indicator of heightened default risk. The percentage of loans in our multifamily guaranty book of business, calculated based on unpaid principal balance, with a current DSCR less than 1.0 was approximately 2% as of September 30, 2019 and December 31, 2018. Our estimates of current DSCRs are based on the latest available income information for these properties and exclude co-op loans. Although we use the most recently available results from our multifamily borrowers, there is a lag in reporting, which typically can range from three to six months, but in some cases may be longer.
In addition to the factors discussed above, we track the following credit risk characteristics to determine loan credit quality indicators, which are the internal risk categories we use and which are further discussed in “Note 3, Mortgage Loans”:
the physical condition of the property;
delinquency status;
the relevant local market and economic conditions that may signal changing risk or return profiles; and
other risk factors.
The percentage of our multifamily loans categorized as substandard based on these characteristics increased throughout 2018, but decreased as of September 30, 2019 as compared with December 31, 2018 and remains at historically low levels. Substandard loans are loans that have a well-defined weakness that could impact the timely full repayment. While the vast majority of the substandard loans in our multifamily guaranty book of business are currently making timely payments, we continue to monitor the performance of the full substandard loan population.
Multifamily Problem Loan Management and Foreclosure Prevention
The multifamily serious delinquency rate was 0.06% as of September 30, 2019 and December 31, 2018 and 0.07% as of September 30, 2018. We classify multifamily loans as seriously delinquent when payment is 60 days or more past due.
Other Multifamily Credit Information
Multifamily Credit Loss Performance Metrics
The amount of credit loss or income we realize in a given period is driven by foreclosures, pre-foreclosure sales, REO activity and charge-offs, net of recoveries. Our credit loss performance metrics are not defined terms within GAAP and may not be calculated in the same manner as similarly titled measures reported by other companies. We believe our credit loss performance metrics may be useful to investors because they have historically been used by analysts, investors and other companies within the financial services industry.
We had $5 million in multifamily credit losses in the third quarter of 2019 compared with $7 million in the third quarter of 2018. We had $6 million in multifamily credit losses in the first nine months of 2019 compared with $15 million in the first nine months of 2018.
Credit losses in the third quarter of 2019 were primarily driven by foreclosed property expenses. Credit losses in the first nine months of 2019 were primarily driven by charge-off activity in the second quarter.
Multifamily Loss Reserves
The table below summarizes the changes in our multifamily loss reserves, which includes our allowance for loan losses and our reserve for guaranty losses for multifamily loans.
|
| | | | | | | | | | | | | | | | | | |
| Multifamily Loss Reserves | |
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | | 2019 | | 2018 | | | 2019 | | 2018 | |
| | | (Dollars in millions) | |
| Changes in loss reserves: | | | | | | | | | | |
| Beginning balance | | $ | (281 | ) | | $ | (218 | ) | | | $ | (245 | ) | | $ | (245 | ) | |
| Benefit (provision) for credit losses | | 17 |
| | (16 | ) | | | (21 | ) | | 6 |
| |
| Charge-offs | | 3 |
| | 1 |
| | | 7 |
| | 6 |
| |
| Recoveries | | (1 | ) | | (3 | ) | | | (3 | ) | | (3 | ) | |
| Ending balance | | $ | (262 | ) | | $ | (236 | ) | | | $ | (262 | ) | | $ | (236 | ) | |
| | | | | | | | | | | |
| | | | | | As of | |
| | | September 30, 2019 | | December 31, 2018 | |
| Loss reserves as a percentage of multifamily guaranty book of business | | | 0.08 | % | | 0.08 | % | |
Troubled Debt Restructurings and Nonaccrual Loans
The table below displays the multifamily loans classified as TDRs that were on accrual status and multifamily loans on nonaccrual status. The table includes our recorded investment in HFI and HFS multifamily mortgage loans. For information on the impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 3, Mortgage Loans.”
|
| | | | | | | | | |
| Multifamily TDRs on Accrual Status and Nonaccrual Loans |
| | | As of |
| | | September 30, 2019 | | December 31, 2018 | |
| | | (Dollars in millions) |
| TDRs on accrual status | | $ | 33 |
| | $ | 55 |
| |
| Nonaccrual loans | | 608 |
| | 492 |
| |
| Total TDRs on accrual status and nonaccrual loans | | $ | 641 |
| | $ | 547 |
| |
|
| | | | | | | | | |
| | | For the Nine Months Ended September 30, | |
| | | |
| | | 2019 | | 2018 | |
| | | (Dollars in millions) | |
| Interest related to on-balance sheet TDRs on accrual status and nonaccrual loans: | | | | | |
Interest income forgone(1) | | $ | 18 |
| | $ | 20 |
| |
Interest income recognized(2) | | 5 |
| | 2 |
| |
| |
(1) | Represents the amount of interest income we did not recognize, but would have recognized during the period for nonaccrual loans and TDRs on accrual status as of the end of each period had the loans performed according to their original contractual terms. |
| |
(2) | Represents interest income recognized during the period, including the amortization of any deferred cost basis adjustments, for loans classified as either nonaccrual loans or TDRs on accrual status as of the end of each period. Primarily includes amounts accrued while the loans were performing. |
REO Management
The number of multifamily foreclosed properties held for sale was 16 properties with a carrying value of $88 million as of September 30, 2019, compared with 16 properties with a carrying value of $81 million as of December 31, 2018.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 43 |
|
| | |
| MD&A | Liquidity and Capital Management |
Liquidity and Capital Management
Liquidity Management
This section supplements and updates information regarding liquidity management in our 2018 Form 10-K. See “MD&A—Liquidity and Capital Management—Liquidity Management” and “Risk Factors” in our 2018 Form 10-K for additional information, including discussions of our primary sources and uses of funds, our liquidity and funding risk management practices and contingency planning, factors that influence our debt funding activity, factors that may impact our access to or the cost of our debt funding and factors that could adversely affect our liquidity and funding.
Debt Funding
Outstanding Debt
Total outstanding debt of Fannie Mae includes short-term and long-term debt and excludes debt of consolidated trusts. Short-term debt of Fannie Mae consists of borrowings with an original contractual maturity of one year or less and, therefore, does not include the current portion of long-term debt. Long-term debt of Fannie Mae consists of borrowings with an original contractual maturity of greater than one year.
The chart and table below display information on our outstanding short-term and long-term debt based on original contractual maturity. The increase in our short-term debt from December 31, 2018 to September 30, 2019 was primarily driven by an increase in our acquisition of mortgage loans through our whole loan conduit as mortgage refinance activity increased during the third quarter of 2019. The decrease in our long-term debt from December 31, 2018 to September 30, 2019 was primarily driven by the decline in the size of our retained mortgage portfolio. We did not issue new debt to replace all of our debt that paid off during the first nine months of 2019.
|
| | | | | | | | |
| Selected Debt Information |
| | | As of |
| | | December 31, 2018 | | September 30, 2019 |
| | | (Dollars in billions) |
Selected Weighted-Average Interest Rates(1) | | | | |
| Interest rate on short-term debt | | 2.29 | % | | 2.04 | % |
| Interest rate on long-term debt, including portion maturing within one year | | 2.83 | % | | 3.14 | % |
| Interest rate on callable long-term debt | | 2.95 | % | | 3.39 | % |
| Selected Maturity Data | | | | |
| Weighted-average maturity of debt maturing within one year (in days) | | 163 |
| | 110 |
|
| Weighted-average maturity of debt maturing in more than one year (in months) | | 63 |
| | 63 |
|
| Other Data | | | | |
| Outstanding callable long-term debt | | $ | 64.3 |
| | $ | 45.7 |
|
Connecticut Avenue Securities debt(2) | | $ | 25.6 |
| | $ | 23.0 |
|
| | | | | |
| | | | | |
| | | | | |
| |
(1) | Outstanding debt amounts and weighted-average interest rates reported in this chart and table include the effects of discounts, premiums, other cost basis adjustments and fair value gains and losses associated with debt that we elected to carry at fair value. Reported amounts include unamortized cost basis adjustments and fair value adjustments of $74 million and $432 million as of September 30, 2019 and December 31, 2018, respectively. |
| |
(2) | Represents CAS debt issued prior to the implementation of our CAS REMIC structure in November 2018. See “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk—Credit Risk Transfer Transactions” in our 2018 Form 10-K and in this report for information regarding our Connecticut Avenue Securities. |
We intend to repay our short-term and long-term debt obligations as they become due primarily through proceeds from the issuance of additional debt securities. We also may use proceeds from our mortgage assets to pay our debt obligations.
For more information on the maturity profile of our outstanding long-term debt, see “Note 7, Short-Term and Long-Term Debt.”
Debt Funding Activity
The table below displays the activity in debt of Fannie Mae. This activity excludes the debt of consolidated trusts and intraday loans. Activity for short-term debt of Fannie Mae relates to borrowings with an original contractual maturity of one year or less while activity for long-term debt of Fannie Mae relates to borrowings with an original contractual maturity of greater than one year. The reported amounts of debt issued and paid off during each period represent the face amount of the debt at issuance and redemption.
The increase in our debt issued and paid off during the third quarter of 2019 compared with the third quarter of 2018 was primarily driven by an increase in our acquisition of mortgage loans through our whole loan conduit as mortgage refinance activity increased during the third quarter of 2019. The decrease in debt issued and paid off during the first nine months of 2019 compared with the first nine months of 2018 was primarily driven by the decline in the size of our retained mortgage portfolio. We did not issue new debt to replace all of our debt that paid off during the first nine months of 2019.
|
| | | | | | | | | | | | | | | |
| Activity in Debt of Fannie Mae |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (Dollars in millions) |
| Issued during the period: | | | | | | | |
| Short-term: | | | | | | | |
| Amount | $ | 161,434 |
| | $ | 106,520 |
| | $ | 418,202 |
| | $ | 446,914 |
|
| Weighted-average interest rate | 2.13 | % | | 1.90 | % | | 2.27 | % | | 1.52 | % |
Long-term:(1) | | | | | | | |
| Amount | $ | 6,940 |
| | $ | 6,032 |
| | $ | 18,335 |
| | $ | 17,595 |
|
| Weighted-average interest rate | 1.95 | % | | 3.26 | % | | 2.32 | % | | 3.08 | % |
| Total issued: | | | | | | | |
| Amount | $ | 168,374 |
| | $ | 112,552 |
| | $ | 436,537 |
| | $ | 464,509 |
|
| Weighted-average interest rate | 2.12 | % | | 1.97 | % | | 2.27 | % | | 1.58 | % |
Paid off during the period:(2) | | | | | | | |
| Short-term: | | | | | | | |
| Amount | $ | 147,507 |
| | $ | 103,256 |
| | $ | 406,135 |
| | $ | 451,295 |
|
| Weighted-average interest rate | 1.99 | % | | 1.82 | % | | 2.11 | % | | 1.42 | % |
Long-term:(1) | | | | | | | |
| Amount | $ | 23,246 |
| | $ | 12,668 |
| | $ | 48,156 |
| | $ | 42,854 |
|
| Weighted-average interest rate | 1.55 | % | | 1.62 | % | | 1.67 | % | | 1.47 | % |
| Total paid off: | | | | | | | |
| Amount | $ | 170,753 |
| | $ | 115,924 |
| | $ | 454,291 |
| | $ | 494,149 |
|
| Weighted-average interest rate | 1.93 | % | | 1.79 | % | | 2.06 | % | | 1.43 | % |
| |
(1) | Includes credit risk-sharing securities issued as CAS debt prior to the implementation of our CAS REMIC structure in November 2018. For information on our credit risk transfer transactions, see “MD&A—Single Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk—Credit Risk Transfer Transactions” in our 2018 Form 10-K and in this report. |
| |
(2) | Consists of all payments on debt, including regularly scheduled principal payments, payments at maturity, payments resulting from calls and payments for any other repurchases. Repurchases of debt and early retirements of zero-coupon debt are reported at original face value, which does not equal the amount of actual cash payment. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 44 |
|
| | |
| MD&A | Liquidity and Capital Management |
Other Investments Portfolio
The chart below displays information on the composition of our other investments portfolio. The balance of our other investments portfolio fluctuates as a result of changes in our cash flows, liquidity in the fixed-income markets, and our liquidity risk management framework and practices.
Other Investments Portfolio
(Dollars in billions)
Cash Flows
Nine Months EndedSeptember 30, 2019. Cash, cash equivalents and restricted cash increased from $49.4 billion as of December 31, 2018 to $64.5 billion as of September 30, 2019. The increase was primarily driven by cash inflows from (1) proceeds from repayments and sales of loans, (2) the sale of Fannie Mae MBS to third parties, and (3) the net decrease in federal funds sold and securities purchased under agreements to resell or similar agreements.
Partially offsetting these cash inflows were cash outflows primarily from (1) payments on outstanding debt of consolidated trusts, (2) purchases of loans held for investment, and (3) the redemption of funding debt, which outpaced issuances, due to lower funding needs.
Nine Months EndedSeptember 30, 2018. Cash, cash equivalents and restricted cash decreased from $60.3 billion as of December 31, 2017 to $51.0 billion as of September 30, 2018. The decrease was primarily driven by cash outflows from (1) the redemption of funding debt, which outpaced issuances, due to lower funding needs, (2) the purchase of Fannie Mae MBS from third parties, and (3) the acquisition of delinquent loans out of MBS trusts.
Partially offsetting these cash outflows were cash inflows from, among other things, (1) the sale of Fannie Mae MBS to third parties and (2) proceeds from repayments and sales of loans of Fannie Mae.
Credit Ratings
As of September 30, 2019, our credit ratings have not changed since we filed our 2018 Form 10-K. For information on our credit ratings, see “MD&A—Liquidity and Capital Management—Liquidity Management—Credit Ratings” in our 2018 Form 10-K.
Capital Management
Regulatory Capital
The deficit of our core capital over statutory minimum capital was $133.8 billion as of September 30, 2019 and $137.1 billion as of December 31, 2018. For information on our current and proposed capital requirements, see “Business—Charter Act and
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 45 |
|
| | |
| MD&A | Liquidity and Capital Management |
Regulation—GSE Act and Other Regulation” and “Note 12, Regulatory Capital Requirements” in our 2018 Form 10-K and “Legislation and Regulation—Housing Finance Reform” in this report.
Capital Activity
Under the modified dividend provisions of the senior preferred stock described in “Legislation and Regulation—Letter Agreement with Treasury,” effective with the third quarter 2019 dividend period, we are not required to pay further dividends to Treasury until we have accumulated over $25 billion in net worth. Accordingly, no dividends were payable to Treasury for the third quarter of 2019 and none are payable for the fourth quarter of 2019. As of September 30, 2019, our net worth was $10.3 billion.
Under the modified liquidation preference provisions of the senior preferred stock described in “Legislation and Regulation—Letter Agreement with Treasury,” the aggregate liquidation preference of the senior preferred stock increased from $123.8 billion as of June 30, 2019 to $127.2 billion as of September 30, 2019, and will further increase to $131.2 billion as of December 31, 2019.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements result primarily from the following:
our guaranty of mortgage loan securitization and resecuritization transactions, and other guaranty commitments, over which we do not have control;
liquidity support transactions; and
partnership interests.
Since we began issuing UMBS in June 2019, some of the securities we issue are structured securities backed, in whole or in part, by Freddie Mac securities. When we issue a structured security, we provide a guaranty that we will supplement amounts received from the underlying mortgage-related security as required to permit timely payment of principal and interest on the certificates related to the resecuritization trust. Accordingly, when we issue structured securities backed in whole or in part by Freddie Mac securities, we extend our guaranty to the underlying Freddie Mac security included in the structured security. Our issuance of structured securities backed in whole or in part by Freddie Mac securities creates additional off-balance sheet exposure as we do not have control over the Freddie Mac mortgage loan securitizations. Because we do not have the power to direct matters (primarily the servicing of mortgage loans) that impact the credit risk to which we are exposed, which constitute control of these securitization trusts, we do not consolidate these trusts in our condensed consolidated balance sheet, giving rise to off-balance sheet exposure.
The total amount of our off-balance sheet exposure related to unconsolidated Fannie Mae MBS net of any beneficial interest that we retain, and other financial guarantees was $48.5 billion as of September 30, 2019. Approximately $23.0 billion of this amount consisted of the unpaid principal balance of Freddie Mac-issued UMBS backing Fannie Mae-issued Supers. Additionally, off-balance sheet exposure includes approximately $5.9 billion of the unpaid principal balance of Freddie Mac securities backing Fannie Mae-issued REMICs; however, a portion of these Freddie Mac securities may be backed in whole or in part by Fannie Mae MBS. Therefore, our total exposure to Freddie Mac securities included in Fannie Mae REMIC collateral may be lower. We expect our off-balance sheet exposure to Freddie Mac securities to increase as we issue more structured securities backed by Freddie Mac securities in the future. The total amount of our off-balance sheet exposure related to unconsolidated Fannie Mae MBS and other financial guarantees was $21.1 billion as of December 31, 2018. We did not have any Freddie Mac-issued UMBS backing Fannie Mae structured securities as of December 31, 2018.
We also have off-balance sheet exposure to losses from liquidity support transactions and partnership interests.
Our total outstanding liquidity commitments to advance funds for securities backed by multifamily housing revenue bonds totaled $7.4 billion as of September 30, 2019 and $8.3 billion as of December 31, 2018. These commitments require us to advance funds to third parties that enable them to repurchase tendered bonds or securities that are unable to be remarketed. We hold cash and cash equivalents in our other investments portfolio in excess of these commitments to advance funds.
We make investments in various limited partnerships and similar legal entities, which consist of low-income housing tax credit investments, community investments and other entities. When we do not have a controlling financial interest in those entities, our condensed consolidated balance sheets reflect only our investment rather than the full amount of the partnership’s assets and liabilities.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 46 |
Risk Management
Our business activities expose us to the following major categories of risk: credit risk (including mortgage credit risk and institutional counterparty credit risk), market risk (including interest rate risk), liquidity and funding risk, and operational risk (including cyber/information security risk, third-party risk and model risk), as well as strategic risk, compliance risk and reputational risk. See “MD&A—Risk Management” in our 2018 Form 10-K for a discussion of our management of these risks. This section supplements and updates that discussion but does not repeat all of the risk management categories described in our 2018 Form 10-K.
Institutional Counterparty Credit Risk Management
This section supplements and updates our discussion of institutional counterparty credit risk management in our 2018 Form 10-K. See “MD&A—Risk Management—Institutional Counterparty Credit Risk Management” and “Risk Factors—Credit Risk” in our 2018 Form 10-K for additional information, including our exposure to institutional counterparty credit risk and our strategy for managing this risk.
Counterparty Credit Risk Exposure arising from the Resecuritization of Freddie Mac-issued Securities
We began resecuritizing Freddie Mac-issued securities in connection with the implementation of the Single Security Initiative in June 2019, which has increased our credit risk exposure and operational risk exposure to Freddie Mac, and our risk exposure to Freddie Mac is expected to increase as we issue more structured securities backed by Freddie Mac securities going forward. Our inclusion of Freddie Mac securities as collateral for the structured securities that we issue increases our counterparty credit risk exposure to Freddie Mac. In the event Freddie Mac were to fail (for credit or operational reasons) to make a payment on a payment date on Freddie Mac securities that we had resecuritized in a Fannie Mae-issued structured security, we would be responsible for making the entire payment on the Freddie Mac securities included in that structured security in order to make payments on any of our outstanding single-family Fannie Mae MBS to be paid on that payment date. Accordingly, as the amount of structured securities we issue that are backed by Freddie Mac securities grows, if Freddie Mac were to fail to meet its obligations to us under the terms of these securities, it could have a material adverse effect on our earnings and financial condition. We believe the risk of default by Freddie Mac is negligible because of the funding commitment available to Freddie Mac through its senior preferred stock purchase agreement with Treasury.
As of September 30, 2019, approximately $28.9 billion in Freddie Mac securities were backing Fannie Mae-issued structured securities. We had no such transactions or activity in 2018. See “Uniform Mortgage-Backed Securities” and “Risk Factors” in this report for more information on UMBS and the risks associated with the Single Security Initiative.
Market Risk Management, Including Interest Rate Risk Management
This section supplements and updates information regarding market risk management in our 2018 Form 10-K. See “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management” and “Risk Factors” in our 2018 Form 10-K for additional information, including our sources of interest rate risk exposure, business risks posed by changes in interest rates, and our strategy for managing interest rate risk.
Measurement of Interest Rate Risk
The table below displays the pre-tax market value sensitivity of our net portfolio to changes in the level of interest rates and the slope of the yield curve as measured on the last day of each period presented. The table below also provides the daily average, minimum, maximum and standard deviation values for duration gap and for the most adverse market value impact on the net portfolio to changes in the level of interest rates and the slope of the yield curve for the three months ended September 30, 2019 and 2018.
For information on how we measure our interest rate risk, see our 2018 Form 10-K in “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management.”
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 47 |
|
| | | | | | | | | | | |
| Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve |
| | As of (1)(2) |
| | September 30, 2019 | | December 31, 2018 |
| | (Dollars in millions) |
| Rate level shock: | | | | | | | |
| -100 basis points | | $ | 99 |
| | | | $ | (286 | ) | |
| -50 basis points | | 24 |
| | | | (119 | ) | |
| +50 basis points | | 38 |
| | | | 48 |
| |
| +100 basis points | | 124 |
| | | | 29 |
| |
| Rate slope shock: | | | | | | | |
| -25 basis points (flattening) | | (13 | ) | | | | (7 | ) | |
| +25 basis points (steepening) | | 12 |
| | | | 6 |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30,(1)(3) |
| | | 2019 | | 2018 |
| | | Duration Gap | | Rate Slope Shock 25 bps | | Rate Level Shock 50 bps | | Duration Gap | | Rate Slope Shock 25 bps | | Rate Level Shock 50 bps |
| | | | | Market Value Sensitivity | | | | Market Value Sensitivity
|
| | | (In years) | | (Dollars in millions) | | (In years) | | (Dollars in millions) |
| Average | | 0.01 | | | $ | (8 | ) | | | | $ | (24 | ) | | | 0.01 | | | $ | (13 | ) | | | | $ | (51 | ) | |
| Minimum | | (0.09) | | | (21 | ) | | | | (100 | ) | | | (0.01) | | | (22 | ) | | | | (119 | ) | |
| Maximum | | 0.09 | | | (2 | ) | | | | 26 |
| | | 0.07 | | | (1 | ) | | | | (30 | ) | |
| Standard deviation | | 0.04 | | | 6 |
| | | | 28 |
| | | 0.02 | | | 6 |
| | | | 17 |
| |
| |
(1) | Computed based on changes in U.S. LIBOR interest rates swap curve. Changes in the level of interest rates assume a parallel shift in all maturities of the U.S. LIBOR interest rate swap curve. Changes in the slope of the yield curve assume a constant 7-year rate, a shift of 16.7 basis points for the 1-year rate (and shorter tenors) and an opposite shift of 8.3 basis points for the 30-year rate. Rate shocks for remaining maturity points are interpolated. |
| |
(2) | Measured on the last business day of each period presented. |
| |
(3) | Computed based on daily values during the period presented. |
The market value sensitivity of our net portfolio varies across a range of interest rate shocks depending upon the duration and convexity profile of our net portfolio. Because the effective duration gap of our net portfolio was close to zero years in the periods presented, the convexity exposure was the primary driver of the market value sensitivity of our net portfolio as of September 30, 2019. In addition, the convexity exposure may result in similar market value sensitivities for positive and negative interest rate shocks of the same magnitude.
We use derivatives to help manage the residual interest rate risk exposure between our assets and liabilities. Derivatives have enabled us to keep our interest rate risk exposure at consistently low levels in a wide range of interest-rate environments. The table below displays an example of how derivatives impacted the net market value exposure for a 50 basis point parallel interest rate shock.
|
| | | | | | | | | | | |
| Derivative Impact on Interest Rate Risk (50 Basis Points) |
| | As of (1) |
| | September 30, 2019 | | December 31, 2018 |
| | (Dollars in millions) |
| Before derivatives | | $ | (201 | ) | | | | $ | (535 | ) | |
| After derivatives | | 38 |
| | | | 48 |
| |
| Effect of derivatives | | 239 |
| | | | 583 |
| |
| |
(1) | Measured on the last business day of each period presented. |
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 48 |
|
| | |
| | MD&A | Critical Accounting Policies and Estimates |
consideration available operatingCritical Accounting Policies and EstimatesThe preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and expected cash flows fromassumptions that affect the underlying property,reported amount of assets, liabilities, income and expenses in our condensed consolidated financial statements. Understanding our accounting policies and the estimatedextent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in “Note 1, Summary of Significant Accounting Policies” in this report and in our 2018 Form 10-K.
We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. We previously identified our fair value measurement as a critical accounting estimate due to the subjectivity of the property,unobservable inputs used to measure Level 3 assets and liabilities recorded at fair value. However, because the historicalamount of Level 3 assets and liabilities that we report at fair value has continued to decline, using reasonably different estimates and assumptions in valuing these assets and liabilities would not have a material impact on our reported results of operations or financial condition. Consequently, we no longer consider our fair value measurement a critical accounting estimate.
We continue to identify the allowance for loan payment experiencelosses as critical because it involves significant judgments and current relevant market conditions that may impact credit quality. If we conclude that a multifamily loan is impaired, we measure the impairment based on the difference between our recorded investment in the loanassumptions about highly complex and inherently uncertain matters, and the fair valueuse of the underlying property less the estimated discounted costs to sell the propertyreasonably different estimates and any lender loss sharingassumptions could have a material impact on our reported results of operations or other proceeds we expect to receive. When a multifamily loan is deemed individually impaired because we have modified it, we measure the impairment based on the difference between our recorded investment in the loan and the present value of expected cash flows discounted at the loan’s original interest rate unless foreclosure is probable, at which time we measure impairment the same way we measure it for other individually impaired multifamily loans.
financial condition. See “MD&A—Critical Accounting Policies and Estimates” in our 20162018 Form 10-K for more discussion of our allowance for loan losses. See “Risk Factors” in our 2018 Form 10-K for a discussion of the risks associated with the need for management to make judgments and estimates in applying our fair value measurement critical accounting policies and estimates.methods.
Impact of Future Adoption of New Accounting Guidance
|
| | | | |
Impact of Future Adoption of New Accounting Guidance |
We identify and discuss the expected impact on our condensed consolidated financial statements of recently issued accounting guidance in “Note 1, Summary of Significant Accounting Policies.”
Forward-Looking Statements
|
| | | | |
Forward-Looking Statements |
This report includes statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (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, but are not limited to,among others, statements relating to our expectations regarding the following matters:
factors that will affect our profitabilityfuture net worth;
our future financial condition and financial results of operations, and the factors that will affect our profitability and financial results;them;
our revenues and the factors that will affect our revenues;long-term financial performance;
trends and the composition, quality and sizeimpact of fluctuations in our retained mortgage portfolio;acquisition volumes, market share, guaranty fees, or acquisition credit characteristics;
our business plans and strategies and the impact of such plans and strategies;
continued consideration of housing finance reform by the Administration, FHFA and Congress, including the recommended administrative and legislative reforms in the Treasury plan, efforts and plans to implement such reforms; and the impact of housing finance reform on our capital reservesconservatorship, our structure, our role in the secondary mortgage market, our capitalization, our business and our competitive environment;
our dividend payments to Treasury;Treasury and the liquidation preference of the senior preferred stock;
volatility in our future financial results and efforts we may make to address volatility;
the size or composition of our retained mortgage portfolio;
the impact of legislation and regulation on our business or financial results;
our payments to HUD and Treasury funds under the GSE Act;
the impact of legislation, regulation and accounting guidance on our business or financial results, including the impact of corporate income tax legislation and impairment accounting guidance;
housing and mortgage market conditions (including home price appreciation rates, mortgage origination volumes, changes in interest rates and changes in mortgage spreads) and the impact of such conditions on our financial results;
the risksplans relating to our business;
our credit losses and loss reserves;
our serious delinquency rate and foreclosures;
our engagement in credit risk transfer transactions and the effects of thoseour credit risk transfer transactions;
factors that willcould affect or mitigate our credit risk exposure;
the characteristics and performance of the loans in our book of business and factors that will affect their characteristics and performance;
our single-family loan acquisitions and the credit risk profile of such acquisitions;
factors that will affect our liquidity and ability to meet our debt obligations and factors relating to our liquidity contingency plans; and
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 6249 |
|
| | |
| | MD&A | Forward-Looking Statements |
mortgage market and economic conditions (including home price appreciation rates) and the impact of such conditions on our business or financial results;
the effects on our business, risk profile and financial condition of our issuance of UMBS and of structured securities backed by Freddie Mac-issued UMBS, including the level and impact of our credit and operational risk exposure to Freddie Mac;
the risks to our business;
our loan acquisitions, the credit risk profile of such acquisitions, and the factors that will affect them;
our response to legal and regulatory proceedings and their impact on our business or financial condition.condition; and
the impact of our adoption of the CECL standard on our financial condition and results of operations.
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 factors in the markets in which we are active as well asand that otherwise impact our business plans. TheyForward-looking statements are not guaranteesguaranties of future performance. By their nature, forward-looking statements are subject to significant risks and uncertainties.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 theour forward-looking statements, contained in this report, including, but not limited to,among others, the following:
the uncertainty of our future;
future legislative and regulatory requirements or changes affecting us, such as the enactment of housing finance reform legislation (including all or corporate income tax reform legislation;any portion of the Treasury plan), including changes that limit our business activities or our footprint;
actions by FHFA, Treasury, HUD, the CFPB or other regulators, or Congress, that affect our business;business, including new capital requirements that become applicable to us or changes in the ability-to-repay rule to replace the qualified mortgage patch for GSE-eligible loans;
changes in the structure and regulation of the financial services industry;
the timing and level of, as well as regional variation in, home price changes;
changes in interest rates including negative interest rates;
changes in unemployment rates and other macroeconomic and housing market variables;
the level and volatility of interest rates and credit spreads;
developments that may be difficult to predict, including market conditions that result in changes in our net amortization income from our guaranty book of business, fluctuations in the estimated fair value of our derivatives and other financial instruments that we mark to market through our earnings, developments that affect our loss reserves such as changes in interest rates, home prices or accounting standards, or events such as natural disasters;
uncertainties relating to the potential discontinuance of LIBOR, or other market changes that could impact the loans we own or guarantee or our MBS;
credit availability;
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 the U.S. GDP, unemployment rates, personal income and other indicators thereof;
changes in the fiscal and monetary policies of the Federal Reserve, including implementation of the Federal Reserve’s balance sheet normalization program;Reserve;
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 and quality of our guaranty book of business and retained mortgage portfolio;
the competitive environment in which we operate, including the impact of legislative or other developments on levels of competition in our industry and other factors affecting our market share;
the life of the loans in our guaranty book of business;
challenges we face in retaining and hiring qualified executives and other employees;
our future serious delinquency rates;
the deteriorated credit performance of many loans in our guaranty book of business;
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 50 |
|
| | |
| MD&A | Forward-Looking Statements |
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 potential changes to the terms of the senior preferred stock purchase agreement or senior preferred stock, and its effect on our business;business, including restrictions imposed on us by the terms of the senior preferred stock purchase agreement, the senior preferred stock, and Treasury’s warrant, as well as the possibility that these or other restrictions on our business and activities may be 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;
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 implementationactions relating to UMBS or our resecuritization of the Single Security Initiative for Fannie Mae and Freddie Mac;Mac-issued securities;
limitations on our business imposed by FHFA, in its role as our conservator or as our regulator;
our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers;
the possibility that future changes in leadership at FHFA or the Administration may result in changes in FHFA’s or Treasury’s willingness to pursue the administrative reform recommendations in the Treasury plan;
a decrease in our credit ratings;
limitations on our ability to access the debt capital markets;
significant changes in modification and foreclosure activity;
the volume and pace of future nonperforming and reperforming loan sales and their impact on our results and serious delinquency rates;
changes in borrower behavior;
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 63 |
|
| | |
| MD&A | Forward-Looking Statements |
the effectiveness of our loss mitigation strategies, management of our 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;
GAAP, guidance by the Financial Accounting Standards Board (“FASB”);
futureand changes to our accounting policies;
changes in the fair value of our assets and liabilities;
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 increasing interdependence between the single-family mortgage securitization programs of Fannie Mae and Freddie Mac in connection with uniform mortgage-backed securities;
operational control weaknesses;
our reliance on models and future updates we make to our models, including the assumptions used by these models;
challenges we face in retainingdomestic and hiring qualified executives and other employees;
global political risks;risks and uncertainties;
natural disasters, environmental disasters, terrorist attacks, pandemics or other major disruptive events;
cyber attacks or other information security breaches or threats; and
thosethe other factors described in “Risk Factors” in this report and in our 20162018 Form 10-K.
Readers are cautioned not to unduly rely on the forward-looking statements we make and to place these forward-looking statements in this report or that we make from time to time into proper context by carefully considering the factors discussed in “Risk Factors” in this reportour 2018 Form 10-K and in our 2016 Form 10-K.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.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 6451 |
|
| | |
| | Financial Statements | Condensed Consolidated Balance Sheets |
Item 1. Financial Statements
FANNIE MAE
(In conservatorship)
Condensed Consolidated Balance Sheets — (Unaudited)
(Dollars in millions, except share amounts)millions)
| | | | As of | As of |
| | September 30, | | December 31, | September 30, 2019 | | December 31, 2018 |
| | 2017 | | 2016 | |
ASSETS | | Cash and cash equivalents | | $ | 23,914 |
| | $ | 25,224 |
| | | $ | 22,592 |
| | $ | 25,557 |
| |
| Restricted cash (includes $23,126 and $31,536, related to consolidated trusts) | | 28,137 |
| | 36,953 |
| | |
| Restricted cash (includes $35,496 and $17,849, respectively, related to consolidated trusts) | | | 41,906 |
| | 23,866 |
| |
| Federal funds sold and securities purchased under agreements to resell or similar arrangements | | 23,740 |
| | 30,415 |
| | | 23,176 |
| | 32,938 |
| |
| Investments in securities: | | | | | | | | | | |
| Trading, at fair value (includes $727 and $1,277, respectively, pledged as collateral) | | 36,886 |
| | 40,562 |
| | |
| Available-for-sale, at fair value (includes $92 and $107, respectively, related to consolidated trusts) | | 5,963 |
| | 8,363 |
| | |
| Trading, at fair value (includes $4,304 and $3,061, respectively, pledged as collateral) | | | 44,206 |
| | 41,867 |
| |
| Available-for-sale, at fair value | | | 2,690 |
| | 3,429 |
| |
| Total investments in securities | | 42,849 |
| | 48,925 |
| | | 46,896 |
| | 45,296 |
| |
| Mortgage loans: | | | | | | | | | | |
| Loans held for sale, at lower of cost or fair value | | 4,516 |
| | 2,899 |
| | | 12,289 |
| | 7,701 |
| |
| Loans held for investment, at amortized cost: | | | | | | | | | | |
| Of Fannie Mae | | 170,473 |
| | 204,318 |
| | | 104,367 |
| | 113,039 |
| |
| Of consolidated trusts | | 2,997,964 |
| | 2,896,001 |
| | | 3,206,856 |
| | 3,142,858 |
| |
| Total loans held for investment (includes $11,013 and $12,057, respectively, at fair value) | | 3,168,437 |
| | 3,100,319 |
| | |
| Total loans held for investment (includes $8,183 and $8,922, respectively, at fair value) | | | 3,311,223 |
| | 3,255,897 |
| |
| Allowance for loan losses | | (20,194 | ) | | (23,465 | ) | | | (9,376 | ) | | (14,203 | ) | |
| Total loans held for investment, net of allowance | | 3,148,243 |
| | 3,076,854 |
| | | 3,301,847 |
| | 3,241,694 |
| |
| Total mortgage loans | | 3,152,759 |
| | 3,079,753 |
| | | 3,314,136 |
| | 3,249,395 |
| |
| Deferred tax assets, net | | 30,454 |
| | 33,530 |
| | | 11,994 |
| | 13,188 |
| |
| Accrued interest receivable, net (includes $7,496 and $7,064, respectively, related to consolidated trusts) | | 8,097 |
| | 7,737 |
| | |
| Accrued interest receivable, net (includes $8,450 and $7,928, respectively, related to consolidated trusts) | | | 8,923 |
| | 8,490 |
| |
| Acquired property, net | | 3,581 |
| | 4,489 |
| | | 2,452 |
| | 2,584 |
| |
| Other assets | | 17,228 |
| | 20,942 |
| | | 22,361 |
| | 17,004 |
| |
| Total assets | | $ | 3,330,759 |
| | $ | 3,287,968 |
| | | $ | 3,494,436 |
| | $ | 3,418,318 |
| |
LIABILITIES AND EQUITY | | Liabilities: | | | | | | | | | | |
| Accrued interest payable (includes $8,482 and $8,285, respectively, related to consolidated trusts) | | $ | 9,637 |
| | $ | 9,431 |
| | |
| Accrued interest payable (includes $9,348 and $9,133, respectively, related to consolidated trusts) | | | $ | 10,400 |
| | $ | 10,211 |
| |
| Debt: | | | | | | | | | | |
| Of Fannie Mae (includes $8,491 and $9,582, respectively, at fair value) | | 291,289 |
| | 327,097 |
| | |
| Of consolidated trusts (includes $32,760 and $36,524, respectively, at fair value) | | 3,017,294 |
| | 2,935,219 |
| | |
| Other liabilities (includes $362 and $390, respectively, related to consolidated trusts) | | 8,891 |
| | 10,150 |
| | |
| Of Fannie Mae (includes $6,041 and $6,826, respectively, at fair value) | | | 213,522 |
| | 232,074 |
| |
| Of consolidated trusts (includes $22,719 and $23,753, respectively, at fair value) | | | 3,248,336 |
| | 3,159,846 |
| |
| Other liabilities (includes $359 and $356, respectively, related to consolidated trusts) | | | 11,836 |
| | 9,947 |
| |
| Total liabilities | | 3,327,111 |
| | 3,281,897 |
| | | 3,484,094 |
| | 3,412,078 |
| |
| Commitments and contingencies (Note 15) | | — |
| | — |
| | |
| Stockholders’ equity: | | | | | | |
| Senior preferred stock, 1,000,000 shares issued and outstanding | | 117,149 |
| | 117,149 |
| | |
| Commitments and contingencies (Note 13) | | | — |
| | — |
| |
| Fannie Mae stockholders’ equity: | | | | | | |
| Senior preferred stock (liquidation preference of $127,201 and $123,836, respectively) | | | 120,836 |
| | 120,836 |
| |
| Preferred stock, 700,000,000 shares are authorized—555,374,922 shares issued and outstanding | | 19,130 |
| | 19,130 |
| | | 19,130 |
| | 19,130 |
| |
| Common stock, no par value, no maximum authorization—1,308,762,703 shares issued, 1,158,087,567 and 1,158,082,750 shares outstanding, respectively | | 687 |
| | 687 |
| | |
| Common stock, no par value, no maximum authorization—1,308,762,703 shares issued and 1,158,087,567 shares outstanding | | | 687 |
| | 687 |
| |
| Accumulated deficit | | (126,625 | ) | | (124,253 | ) | | | (123,141 | ) | | (127,335 | ) | |
| Accumulated other comprehensive income | | 707 |
| | 759 |
| | | 230 |
| | 322 |
| |
| Treasury stock, at cost, 150,675,136 and 150,679,953 shares, respectively | | (7,400 | ) | | (7,401 | ) | | |
| Total stockholders’ equity (See Note 1: Senior Preferred Stock for information on our dividend to Treasury) | | 3,648 |
| | 6,071 |
| | |
| Treasury stock, at cost, 150,675,136 shares | | | (7,400 | ) | | (7,400 | ) | |
| Total stockholders’ equity (See Note 1: Senior Preferred Stock Purchase Agreement and Senior Preferred Stock for information on the related dividend obligation and liquidation preference) | | | 10,342 |
| | 6,240 |
| |
| Total liabilities and equity | | $ | 3,330,759 |
| | $ | 3,287,968 |
| | | $ | 3,494,436 |
| | $ | 3,418,318 |
| |
See Notes to Condensed Consolidated Financial Statements
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 6552 |
|
| | |
| | Financial Statements | Condensed Consolidated Statements of Operations and Comprehensive Income |
FANNIE MAE
(In conservatorship)
Condensed Consolidated Statements of Operations and Comprehensive Income — (Unaudited)
(Dollars and shares in millions, except per share amounts)
| | | | For the Three Months | | For the Nine Months | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | Ended September 30, | | Ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
| Interest income: | | | | | | | | | | | | | | | | | | |
| Trading securities | | $ | 195 |
| | $ | 140 |
| | $ | 513 |
| | $ | 388 |
| | | $ | 418 |
| | $ | 363 |
| | $ | 1,277 |
| | $ | 917 |
| |
| Available-for-sale securities | | 77 |
| | 134 |
| | 269 |
| | 507 |
| | | 40 |
| | 54 |
| | 138 |
| | 175 |
| |
| Mortgage loans (includes $25,168 and $23,254, respectively, for the three months ended and $75,155 and $71,746, respectively, for the nine months ended related to consolidated trusts) | | 27,047 |
| | 25,611 |
| | 81,105 |
| | 78,828 |
| | |
| Mortgage loans (includes $27,610 and $27,058, respectively, for the three months ended and $84,157 and $79,877, respectively, for the nine months ended related to consolidated trusts) | | | 28,858 |
| | 28,723 |
| | 88,005 |
| | 85,064 |
| |
| Federal funds sold and securities purchased under agreements to resell or similar arrangements | | | 178 |
| | 166 |
| | 698 |
| | 457 |
| |
| Other | | 142 |
| | 66 |
| | 351 |
| | 160 |
| | | 47 |
| | 38 |
| | 120 |
| | 102 |
| |
| Total interest income | | 27,461 |
| | 25,951 |
| | 82,238 |
| | 79,883 |
| | | 29,541 |
| | 29,344 |
| | 90,238 |
| | 86,715 |
| |
| Interest expense: | | | | | | | | | | | | | | | | | | |
| Short-term debt | | 72 |
| | 56 |
| | 173 |
| | 164 |
| | | (125 | ) | | (114 | ) | | (369 | ) | | (331 | ) | |
| Long-term debt (includes $20,609 and $18,814, respectively, for the three months ended and $61,622 and $58,993, respectively, for the nine months ended related to consolidated trusts) | | 22,115 |
| | 20,460 |
| | 66,443 |
| | 64,229 |
| | |
| Long-term debt (includes $22,775 and $22,361, respectively, for the three months ended and $70,371 and $65,972, respectively, for the nine months ended related to consolidated trusts) | | | (24,187 | ) | | (23,861 | ) | | (74,757 | ) | | (70,406 | ) | |
| Total interest expense | | 22,187 |
| | 20,516 |
| | 66,616 |
| | 64,393 |
| | | (24,312 | ) | | (23,975 | ) | | (75,126 | ) | | (70,737 | ) | |
| Net interest income | | 5,274 |
| | 5,435 |
| | 15,622 |
| | 15,490 |
| | | 5,229 |
| | 5,369 |
| | 15,112 |
| | 15,978 |
| |
| Benefit (provision) for credit losses | | (182 | ) | | 673 |
| | 1,481 |
| | 3,458 |
| | |
| Net interest income after benefit (provision) for credit losses | | 5,092 |
| | 6,108 |
| | 17,103 |
| | 18,948 |
| | |
| Benefit for credit losses | | | 1,857 |
| | 716 |
| | 3,732 |
| | 2,229 |
| |
| Net interest income after benefit for credit losses | | | 7,086 |
| | 6,085 |
| | 18,844 |
| | 18,207 |
| |
| Investment gains, net | | 313 |
| | 467 |
| | 689 |
| | 934 |
| | | 253 |
| | 166 |
| | 847 |
| | 693 |
| |
| Fair value losses, net | | (289 | ) | | (491 | ) | | (1,020 | ) | | (4,971 | ) | | |
| Fair value gains (losses), net | | | (713 | ) | | 386 |
| | (2,298 | ) | | 1,660 |
| |
| Fee and other income | | 1,194 |
| | 175 |
| | 1,796 |
| | 552 |
| | | 402 |
| | 271 |
| | 875 |
| | 830 |
| |
| Non-interest income (loss) | | 1,218 |
| | 151 |
| | 1,465 |
| | (3,485 | ) | | | (58 | ) | | 823 |
| | (576 | ) | | 3,183 |
| |
| Administrative expenses: | | | | | | | | | | | | | | | | | | |
| Salaries and employee benefits | | 331 |
| | 322 |
| | 1,007 |
| | 1,017 |
| | | (361 | ) | | (355 | ) | | (1,123 | ) | | (1,101 | ) | |
| Professional services | | 218 |
| | 237 |
| | 681 |
| | 684 |
| | | (241 | ) | | (247 | ) | | (699 | ) | | (744 | ) | |
| Occupancy expenses | | 51 |
| | 45 |
| | 144 |
| | 136 |
| | |
| Other administrative expenses | | 64 |
| | 57 |
| | 202 |
| | 190 |
| | | (147 | ) | | (138 | ) | | (415 | ) | | (400 | ) | |
| Total administrative expenses | | 664 |
| | 661 |
| | 2,034 |
| | 2,027 |
| | | (749 | ) | | (740 | ) | | (2,237 | ) | | (2,245 | ) | |
| Foreclosed property expense | | 140 |
| | 110 |
| | 391 |
| | 507 |
| | | (96 | ) | | (159 | ) | | (364 | ) | | (460 | ) | |
| Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) fees | | 531 |
| | 465 |
| | 1,552 |
| | 1,358 |
| | | (613 | ) | | (576 | ) | | (1,806 | ) | | (1,698 | ) | |
| Other expenses, net | | 427 |
| | 300 |
| | 1,100 |
| | 818 |
| | | (571 | ) | | (377 | ) | | (1,514 | ) | | (946 | ) | |
| Total expenses | | 1,762 |
| | 1,536 |
| | 5,077 |
| | 4,710 |
| | | (2,029 | ) | | (1,852 | ) | | (5,921 | ) | | (5,349 | ) | |
| Income before federal income taxes | | 4,548 |
| | 4,723 |
| | 13,491 |
| | 10,753 |
| | | 4,999 |
| | 5,056 |
| | 12,347 |
| | 16,041 |
| |
| Provision for federal income taxes | | (1,525 | ) | | (1,527 | ) | | (4,495 | ) | | (3,475 | ) | | | (1,036 | ) | | (1,045 | ) | | (2,552 | ) | | (3,312 | ) | |
| Net income | | 3,023 |
| | 3,196 |
| | 8,996 |
| | 7,278 |
| | | 3,963 |
| | 4,011 |
| | 9,795 |
| | 12,729 |
| |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | |
| Changes in unrealized gains on available-for-sale securities, net of reclassification adjustments and taxes | | 27 |
| | (205 | ) | | (46 | ) | | (478 | ) | | | 16 |
| | (33 | ) | | (85 | ) | | (349 | ) | |
| Other | | (2 | ) | | (2 | ) | | (6 | ) | | (6 | ) | | |
| Other, net of taxes | | | (2 | ) | | (3 | ) | | (7 | ) | | (8 | ) | |
| Total other comprehensive income (loss) | | 25 |
| | (207 | ) | | (52 | ) | | (484 | ) | | | 14 |
| | (36 | ) | | (92 | ) | | (357 | ) | |
| Total comprehensive income | | $ | 3,048 |
| | $ | 2,989 |
| | $ | 8,944 |
| | $ | 6,794 |
| | | $ | 3,977 |
| | $ | 3,975 |
| | $ | 9,703 |
| | $ | 12,372 |
| |
| Net income | | $ | 3,023 |
| | $ | 3,196 |
| | $ | 8,996 |
| | $ | 7,278 |
| | | $ | 3,963 |
| | $ | 4,011 |
| | $ | 9,795 |
| | $ | 12,729 |
| |
| Dividends distributed or available for distribution to senior preferred stockholder (Note 9) | | (3,048 | ) | | (2,977 | ) | | (8,944 | ) | | (6,765 | ) | | |
| Net income (loss) attributable to common stockholders (Note 9) | | $ | (25 | ) | | $ | 219 |
| | $ | 52 |
| | $ | 513 |
| | |
| Earnings (loss) per share: | | | | | | | | | | |
| Dividends distributed or amounts attributable to senior preferred stock | | | (3,977 | ) | | (3,975 | ) | | (9,703 | ) | | (9,372 | ) | |
| Net income (loss) attributable to common stockholders | | | $ | (14 | ) | | $ | 36 |
| | $ | 92 |
| | $ | 3,357 |
| |
| Earnings per share: | | | | | | | | | | |
| Basic | | $ | 0.00 |
| | $ | 0.04 |
| | $ | 0.01 |
| | $ | 0.09 |
| | | $ | 0.00 |
| | $ | 0.01 |
| | $ | 0.02 |
| | $ | 0.58 |
| |
| Diluted | | 0.00 | | 0.04 |
| | 0.01 |
| | 0.09 |
| | | 0.00 |
| | 0.01 |
| | 0.02 |
| | 0.57 |
| |
| Weighted-average common shares outstanding: | | | | | | | | | | | | | | | | | | |
| Basic | | 5,762 |
| | 5,762 |
| | 5,762 |
| | 5,762 |
| | | 5,762 |
| | 5,762 |
| | 5,762 |
| | 5,762 |
| |
| Diluted | | 5,762 |
| | 5,893 |
| | 5,893 |
| | 5,893 |
| | | 5,762 |
| | 5,893 |
| | 5,893 |
| | 5,893 |
| |
See Notes to Condensed Consolidated Financial Statements
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 6653 |
|
| | |
| | Financial Statements | Condensed Consolidated Statements of Cash Flows |
FANNIE MAE
(In conservatorship)
Condensed Consolidated Statements of Cash Flows — (Unaudited)
(Dollars in millions)
| | | | For the Nine Months Ended September 30, | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | 2019 | | 2018 |
| Net cash provided by (used in) operating activities | | $ | 4,123 |
| | $ | (4,749 | ) | | | $ | 3,176 |
| | $ | (1,796 | ) | |
| Cash flows provided by investing activities: | | | | | | | | | | |
| Proceeds from maturities and paydowns of trading securities held for investment | | 1,088 |
| | 1,282 |
| | | 46 |
| | 163 |
| |
| Proceeds from sales of trading securities held for investment | | 149 |
| | 1,405 |
| | | 49 |
| | 96 |
| |
| Proceeds from maturities and paydowns of available-for-sale securities | | 1,671 |
| | 2,355 |
| | | 364 |
| | 564 |
| |
| Proceeds from sales of available-for-sale securities | | 1,207 |
| | 10,481 |
| | | 376 |
| | 729 |
| |
| Purchases of loans held for investment | | (142,565 | ) | | (168,729 | ) | | | (181,898 | ) | | (135,913 | ) | |
| Proceeds from repayments of loans acquired as held for investment of Fannie Mae | | 17,721 |
| | 18,413 |
| | | 9,338 |
| | 11,651 |
| |
| Proceeds from sales of loans acquired as held for investment of Fannie Mae | | 5,399 |
| | 3,209 |
| | | 8,987 |
| | 10,637 |
| |
| Proceeds from repayments and sales of loans acquired as held for investment of consolidated trusts | | 323,424 |
| | 395,561 |
| | | 377,789 |
| | 306,374 |
| |
| Net change in restricted cash | | 8,816 |
| | (12,047 | ) | | |
| Advances to lenders | | (89,348 | ) | | (96,797 | ) | | | (95,636 | ) | | (83,643 | ) | |
| Proceeds from disposition of acquired property and preforeclosure sales | | 9,671 |
| | 12,478 |
| | | 5,644 |
| | 7,090 |
| |
| Net change in federal funds sold and securities purchased under agreements to resell or similar arrangements | | 6,675 |
| | 9,000 |
| | | 9,762 |
| | (7,128 | ) | |
| Other, net | | 344 |
| | (305 | ) | | | (74 | ) | | (56 | ) | |
| Net cash provided by investing activities | | 144,252 |
| | 176,306 |
| | | 134,747 |
| | 110,564 |
| |
| Cash flows used in financing activities: | | | | | | | | | | |
| Proceeds from issuance of debt of Fannie Mae | | 776,380 |
| | 736,239 |
| | | 587,659 |
| | 636,466 |
| |
| Payments to redeem debt of Fannie Mae | | (813,250 | ) | | (772,380 | ) | | | (606,665 | ) | | (666,888 | ) | |
| Proceeds from issuance of debt of consolidated trusts | | 282,433 |
| | 290,146 |
| | | 286,126 |
| | 278,357 |
| |
| Payments to redeem debt of consolidated trusts | | (383,969 | ) | | (406,968 | ) | | | (385,496 | ) | | (364,942 | ) | |
| Payments of cash dividends on senior preferred stock to Treasury | | (11,367 | ) | | (6,647 | ) | | | (5,601 | ) | | (5,397 | ) | |
| Proceeds from senior preferred stock purchase agreement with Treasury | | | — |
| | 3,687 |
| |
| Other, net | | 88 |
| | (62 | ) | | | 1,129 |
| | 720 |
| |
| Net cash used in financing activities | | (149,685 | ) | | (159,672 | ) | | | (122,848 | ) | | (117,997 | ) | |
| Net increase (decrease) in cash and cash equivalents | | (1,310 | ) | | 11,885 |
| | |
| Cash and cash equivalents at beginning of period | | 25,224 |
| | 14,674 |
| | |
| Cash and cash equivalents at end of period | | $ | 23,914 |
| | $ | 26,559 |
| | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | | 15,075 |
| | (9,229 | ) | |
| Cash, cash equivalents and restricted cash at beginning of period | | | 49,423 |
| | 60,260 |
| |
| Cash, cash equivalents and restricted cash at end of period | | | $ | 64,498 |
| | $ | 51,031 |
| |
| Cash paid during the period for: | | | | | | | | | | |
| Interest | | $ | 82,652 |
| | $ | 78,281 |
| | | $ | 86,699 |
| | $ | 82,010 |
| |
| Income taxes | | 1,670 |
| | 1,141 |
| | | 1,250 |
| | 460 |
| |
See Notes to Condensed Consolidated Financial Statements
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 6754 |
|
| | |
| Financial Statements | Condensed Consolidated Statements of Changes in Equity (Deficit) |
FANNIE MAE
(In conservatorship)
CondensedConsolidated Statements of Changes in Equity (Deficit) —(Unaudited)
(Dollars and shares in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fannie Mae Stockholders’ Equity (Deficit) |
| | | Shares Outstanding | | Senior
Preferred Stock | | Preferred
Stock | | Common
Stock | |
Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Treasury
Stock | | Total
Equity |
| | Senior
Preferred | | Preferred | | Common | |
| Balance as of June 30, 2019 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (127,104 | ) | | $ | 216 |
| | $ | (7,400 | ) | | $ | 6,365 |
|
| Senior preferred stock dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,963 |
| | — |
| | — |
| | 3,963 |
|
| Other comprehensive income, net of tax effect: | | | | | | | | | | | | | | | | | | | | |
| Changes in net unrealized gains on available-for-sale securities (net of taxes of $2) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
|
| Reclassification adjustment for gains included in net income (net of taxes of $1) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6 |
| | — |
| | 6 |
|
| Other (net of taxes of $1) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | 3,977 |
|
| Balance as of September 30, 2019 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (123,141 | ) | | $ | 230 |
| | $ | (7,400 | ) | | $ | 10,342 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fannie Mae Stockholders’ Equity (Deficit) |
| | | Shares Outstanding | | Senior
Preferred Stock | | Preferred
Stock | | Common
Stock | |
Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Treasury
Stock | | Total
Equity |
| | Senior
Preferred | | Preferred | | Common | |
| Balance as of December 31, 2018 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (127,335 | ) | | $ | 322 |
| | $ | (7,400 | ) | | $ | 6,240 |
|
| Senior preferred stock dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,601 | ) | | — |
| | — |
| | (5,601 | ) |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9,795 |
| | — |
| | — |
| | 9,795 |
|
| Other comprehensive income, net of tax effect: | | | | | | | | | | | | | | | | | | | | |
| Changes in net unrealized gains on available-for-sale securities (net of taxes of $7) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 27 |
| | — |
| | 27 |
|
| Reclassification adjustment for gains included in net income (net of taxes of $30) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (112 | ) | | — |
| | (112 | ) |
| Other (net of taxes of $2) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | 9,703 |
|
| Balance as of September 30, 2019 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (123,141 | ) | | $ | 230 |
| | $ | (7,400 | ) | | $ | 10,342 |
|
See Notes to Condensed Consolidated Financial Statements
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 55 |
|
| | |
| Financial Statements | Condensed Consolidated Statements of Changes in Equity (Deficit) |
FANNIE MAE
(In conservatorship)
CondensedConsolidated Statements of Changes in Equity (Deficit) —(Unaudited)
(Dollars and shares in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fannie Mae Stockholders’ Equity (Deficit) |
| | | Shares Outstanding | | Senior
Preferred Stock | | Preferred
Stock | | Common
Stock | |
Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Treasury
Stock | | Total
Equity
(Deficit) |
| | | Senior
Preferred | | Preferred | | Common | |
| Balance as of June 30, 2018 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (126,143 | ) | | $ | 349 |
| | $ | (7,400 | ) | | $ | 7,459 |
|
| Senior preferred stock dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,459 | ) | | — |
| | — |
| | (4,459 | ) |
| Increase to senior preferred stock | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,011 |
| | — |
| | — |
| | 4,011 |
|
| Other comprehensive income, net of tax effect: | | | | | | | | | | | | | | | | | | | | |
| Changes in net unrealized gains on available-for-sale securities (net of taxes of $8) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | — |
| | (31 | ) |
| Reclassification adjustment for gains included in net income (net of taxes of $1) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | 3,975 |
|
Reclassification related to Tax Cuts
and Jobs Act | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance as of September 30, 2018 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (126,591 | ) | | $ | 313 |
| | $ | (7,400 | ) | | $ | 6,975 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fannie Mae Stockholders’ Equity (Deficit) |
| | | Shares Outstanding | | Senior
Preferred Stock | | Preferred
Stock | | Common
Stock | |
Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Treasury
Stock | | Total
Equity (Deficit) |
| | | Senior
Preferred | | Preferred | | Common | |
| Balance as of December 31, 2017 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 117,149 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (133,805 | ) | | $ | 553 |
| | $ | (7,400 | ) | | $ | (3,686 | ) |
| Senior preferred stock dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,397 | ) | | — |
| | — |
| | (5,397 | ) |
| Increase to senior preferred stock | | — |
| | — |
| | — |
| | 3,687 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,687 |
|
| Comprehensive income: | |
| |
| |
| | | | | | | | | | | | | |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,729 |
| | — |
| | — |
| | 12,729 |
|
| Other comprehensive income, net of tax effect: | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
| Changes in net unrealized gains on available-for-sale securities (net of taxes of $22) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (84 | ) | | — |
| | (84 | ) |
| Reclassification adjustment for gains included in net income (net of taxes of $71) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (265 | ) | | — |
| | (265 | ) |
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) |
| Total comprehensive income | |
| |
| |
| | | | | | | | | | | | | | 12,372 |
|
Reclassification related to Tax Cuts
and Jobs Act | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (117 | ) | | 117 |
| | — |
| | — |
|
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
| Balance as of September 30, 2018 | | 1 |
| | 556 |
| | 1,158 |
| | $ | 120,836 |
| | $ | 19,130 |
| | $ | 687 |
| | $ | (126,591 | ) | | $ | 313 |
| | $ | (7,400 | ) | | $ | 6,975 |
|
See Notes to Condensed Consolidated Financial Statements
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 56 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
FANNIE MAE
(In conservatorship)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Organization
We are a stockholder-owned corporation organized and existing under the Federal National Mortgage Association Charter Act (the “Charter Act” or our “charter”). We are a government-sponsored enterprise (“GSE”), and we are subject to government oversight and regulation. Our regulators include the Federal Housing Finance Agency (“FHFA”), the U.S. Department of Housing and Urban Development (“HUD”), the U.S. Securities and Exchange Commission (“SEC”), and the U.S. Department of the Treasury (“Treasury”). The U.S. government does not guarantee our securities or other obligations.
Conservatorship
OnWe have been under conservatorship, with FHFA acting as conservator, since September 7, 2008,6, 2008. See below and “Note 1, Summary of Significant Accounting Policies” in our annual report on Form 10-K for the Secretary of the Treasuryyear ended December 31, 2018 (“2018 Form 10-K”) for additional information on our conservatorship and the Directorimpact of FHFA announced several actions taken by Treasury and FHFA regarding Fannie Mae, which included: (1) placing us in conservatorship, and (2) the execution of a senior preferred stock purchase agreement by our conservator, on our behalf, and Treasury, pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase common stock.
Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Federal Housing Finance Regulatory Reform Act of 2008 (together, the “GSE Act”), the conservator immediately succeeded to (1) all rights, titles, powers and privileges of Fannie Mae, and of any stockholder, 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 has since delegated specified authorities to our Board of Directors and has delegated to management the authority to conduct our day-to-day operations. The conservator retains the authority to withdraw its delegations at any time.
The conservatorship has no specified termination date and there continues to be significant uncertainty regarding our future, including how long we will continue to exist in our current form, the extent of our role in the market, how long we will be in conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated, and whether we will continue to exist following conservatorship. Under the GSE Act, FHFA must place us into receivership if the Director of FHFA makes a written determination that our assets are less than our obligations or if we have not been paying our debts, in either case, for a period of 60 days. In addition, the Director of FHFA may place us into receivership at his discretion at any time for other reasons set forth in the GSE Act, including if we are critically undercapitalized or if we are undercapitalized and have no reasonable prospect of becoming adequately capitalized. Should we be placed into receivership, different assumptions would be required to determine the carrying value of our assets, which could lead to substantially different financial results. We are not aware of any plans of FHFA to fundamentally change our business model or capital structure in the near term.
Impact of U.S. Government Support
We continue to rely on support from Treasury to eliminate any net worth deficits we may experience in the future, which would otherwise trigger our being placed into receivership. Based on consideration of all the relevant conditions and events affecting our operations, including our reliance on the U.S. government, we continue to operate as a going concern and in accordance with our delegation of authority from FHFA.
We fund our business primarily through the issuance of short-term and long-term debt securities in the domestic and international capital markets. Because debt issuance is our primary funding source, we are subject to “roll over,” or refinancing, risk on our outstanding debt. Our ability to issue long-term debt has been strong primarily due to actions taken by the federal government to support us.
We believe that continued federal government support of our business,business.
The unaudited interim condensed consolidated financial statements as well asof and for the three and nine months ended September 30, 2019 and related notes, should be read in conjunction with our status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in federal government support of our business without appropriate capitalization of the company could materiallyaudited consolidated financial statements and adversely affect our liquidity, financial condition and results of operations. Changes or perceived changesrelated notes included in our status as a GSE could also materially and adversely affect our liquidity, financial condition and results of operations. In addition,2018 Form 10-K.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 68 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
due to our reliance on the U.S. government’s support, our access to debt funding or the cost of debt funding also could be materially adversely affected by a change or perceived change in the creditworthiness of the U.S. government.
A downgrade in our credit ratings could reduce demand for our debt securities and increase our borrowing costs. Future changes or disruptions in the financial markets could significantly change the amount, mix and cost of funds we obtain, which also could increase our liquidity and “roll over” risk and have a material adverse impact on our liquidity, financial condition and results of operations.
Pursuant to the senior preferred stock purchase agreement, Treasury has committed to provide us with funding to help us maintain a positive net worth thereby avoiding the mandatory receivership trigger described above. As consideration for Treasury’s funding commitment, we issued one million shares of senior preferred stock and a warrant to purchase shares of our common stock to Treasury. As of September 30, 2017, the amount of remaining funding available to us under the senior preferred stock purchase agreement was $117.6 billion.
Senior Preferred Stock
Treasury, as the holder of the senior preferred stock, is entitled to receive quarterly cash dividends, when, as and if declared by our conservator, acting as successor to the rights, titles, powers and privileges of the Board of Directors. 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.
For each quarterly period through and including December 31, 2017, dividends on the senior preferred stock accumulate based on the amount by which our net worth at the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. If our net worth does not exceed the applicable capital reserve amount, then dividends will neither accumulate nor be payable to the shareholder for such period.
Pursuant to the terms of our senior preferred stock, our net worth is the amount 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 in respect of capital stock), in each case as reflected on our balance sheet prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The applicable capital reserve amount was $1.2 billion for 2016, decreased to $600 million for quarterly dividend periods in 2017, and will decrease to zero in the first quarter of 2018.
We recognize a liability on our balance sheet for senior preferred stock dividends only upon their declaration by our conservator, at which point they become payable to the shareholder.
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.
The liquidation preference of the senior preferred stock is subject to adjustment. To the extent that quarterly dividends are not paid, they will accumulate and be added to the liquidation preference of the senior preferred stock. In addition, the liquidation preference of the senior preferred stock will be increased by (1) any amounts Treasury pays to us pursuant to its funding commitment provided in the senior preferred stock purchase agreement and (2) any quarterly commitment fee payments that are payable but not paid in cash or waived by Treasury under the senior preferred stock purchase agreement. As long as the dividend provisions described above remain in effect, however, the periodic commitment fee will neither accrue nor become payable. As of September 30, 2017, we have received a total of $116.1 billion under Treasury’s funding commitment and the aggregate liquidation preference of the senior preferred stock was $117.1 billion. Because the senior preferred stock ranks prior 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, if we are liquidated, the senior preferred stock is entitled to its then-current liquidation preference (which includes any accumulated but unpaid dividends) before any distribution is made to the holders of our common stock or other preferred stock.
On September 29, 2017, we paid Treasury a dividend of $3.1 billion based on our net worth of $3.7 billion as of June 30, 2017, less the applicable capital reserve amount of $600 million. We will pay Treasury a dividend of $3.0 billion by December 31, 2017, calculated based on our net worth of $3.6 billion as of September 30, 2017, less the applicable capital reserve amount of $600 million, if our conservator declares a dividend in this amount before December 31, 2017.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 69 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAPgenerally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the SEC’s instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. The accompanying condensed consolidated financial statements include our accounts as well as the accounts of other entities in which we have a controlling financial interest. All intercompany accounts and transactions have been eliminated. To conform to our current period presentation, we have reclassified certain amounts reported in our prior periods’period condensed consolidated financial statements. Results for the three and nine months ended September 30, 20172019 may not necessarily be indicative of the results for the year ending December 31, 2017. The unaudited interim2019.
Use of Estimates
Preparing condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect our reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of our condensed consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting periods. Management has made significant estimates in a variety of areas including, but not limited to, the allowance for loan losses. Actual results could be different from these estimates.
Conservatorship
On September 7, 2008, the nine months endedSecretary of the Treasury and the Director of FHFA announced several actions taken by Treasury and FHFA regarding Fannie Mae, which included: (1) placing us in conservatorship and (2) the execution of a senior preferred stock purchase agreement by our conservator, on our behalf, and Treasury, pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase common stock.
On September 5, 2019, Treasury released its plan to reform the housing finance system. The Treasury Housing Reform Plan (the “Treasury plan”) is far-reaching in scope and could have a significant impact on our structure, our role in the secondary mortgage market, our capitalization, our business and our competitive environment. The Treasury plan includes recommendations relating to ending our conservatorship, amending our senior preferred stock purchase agreement with Treasury, considering additional restrictions and requirements on our business, and many other matters. The Treasury plan recommends that Treasury’s commitment to provide funding under the senior preferred stock purchase agreement should be replaced with legislation that authorizes an explicit, paid-for guarantee backed by the full faith and credit of the Federal Government that is limited to the timely payment of principal and interest on qualifying MBS. The Treasury plan further recommends that, pending legislation, even after conservatorship Treasury should maintain its ongoing commitment to support our single-family and multifamily mortgage-backed securities through the senior preferred stock purchase agreement, as amended as contemplated by the plan.
There continues to be significant uncertainty regarding our future, including how long we will continue to exist in our current form, the extent of our role in the market, how long we will be in conservatorship, what form we will have and what ownership
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 57 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
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. Treasury has made a commitment under the senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. We are not aware of any plans of FHFA (1) to fundamentally change our business model, other than changes that might result from recommendations in the Treasury plan, if implemented, or (2) to reduce the aggregate amount available to or held by the company under our capital structure, which includes the senior preferred stock purchase agreement.
Senior Preferred Stock Purchase Agreement and Senior Preferred Stock
Treasury has made a commitment under the senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. Pursuant to the senior preferred stock purchase agreement, we have received a total of $119.8 billion from Treasury as of September 30, 2017 should be read2019, and the amount of remaining funding available to us under the agreement was $113.9 billion.
Pursuant to the senior preferred stock purchase agreement, we issued shares of senior preferred stock in conjunction with2008. On September 27, 2019, we, through FHFA acting on our auditedbehalf in its capacity as our conservator, and Treasury entered into a letter agreement modifying the dividend and liquidation preference provisions of the senior preferred stock. These modifications and other specified provisions of the letter agreement are described below.
| |
| • | Modification to Dividend Provisions—Increase in Applicable Capital Reserve Amount. 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 the applicable capital reserve amount. The letter agreement modified the dividend provisions of the senior preferred stock to increase the applicable capital reserve amount from $3 billion to $25 billion, effective for dividend periods beginning July 1, 2019. |
As a result of this change to the senior preferred stock dividend provisions:
| |
| ◦ | No dividends were payable on the senior preferred stock for the third quarter of 2019, as our net worth of $6.4 billion as of June 30, 2019 was lower than the $25 billion capital reserve amount. |
| |
| ◦ | No dividends will be payable on the senior preferred stock for the fourth quarter of 2019, as our net worth of $10.3 billion as of September 30, 2019 is lower than the $25 billion capital reserve amount. |
| |
| • | Modification to Liquidation Preference Provisions—Increase in Liquidation Preference. The letter agreement provides that, on September 30, 2019, and at the end of each fiscal quarter thereafter, the liquidation preference of the senior preferred stock will increase by an amount equal to the increase in our net worth, if any, during the immediately prior fiscal quarter, until such time as the liquidation preference has increased by $22 billion. |
As a result of this change to the senior preferred stock liquidation preference provisions:
| |
| ◦ | The aggregate liquidation preference of the senior preferred stock increased from $123.8 billion as of June 30, 2019 to $127.2 billion as of September 30, 2019, due to the $3.4 billion increase in our net worth during the second quarter of 2019. |
| |
| ◦ | The aggregate liquidation preference of the senior preferred stock will increase from $127.2 billion as of September 30, 2019 to $131.2 billion as of December 31, 2019, due to the $4.0 billion increase in our net worth during the third quarter of 2019. |
| |
| • | Agreement to Amend Senior Preferred Stock Purchase Agreement to Enhance Taxpayer Protections. The letter agreement provides that we and Treasury agree to negotiate and execute an additional amendment to the senior preferred stock purchase agreement that further enhances taxpayer protections by adopting covenants broadly consistent with recommendations for administrative reform contained in the Treasury plan. |
See “Note 11, Equity (Deficit)” in our 2018 Form 10-K for additional information about the senior preferred stock purchase agreement and the senior preferred stock.
Principles of Consolidation
Our condensed consolidated financial statements include our accounts as well as the accounts of the other entities in which we have a controlling financial interest. All intercompany balances and related notes includedtransactions have been eliminated. The typical condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. A controlling financial interest may also exist in entities through arrangements that do not involve voting interests, such as a variable interest entity (“VIE”).
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 58 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
Single Security Initiative and UMBS
The Single Security Initiative was a joint initiative among Fannie Mae, Freddie Mac, and our jointly owned limited liability company, Common Securitization Solutions, LLC (“CSS”), under the direction of FHFA, to develop a single common mortgage-backed security issued by both Fannie Mae and Freddie Mac to finance fixed-rate mortgage loans backed by one- to four-unit single-family properties. We and Freddie Mac began issuing uniform mortgage-backed securities (“UMBS”) pursuant to the Single Security Initiative in June 2019. We and Freddie Mac also began resecuritizing UMBS certificates into structured securities in June 2019. The structured securities backed by UMBS that we may issue include Supers, which are single-class resecuritization transactions, and Real Estate Mortgage Investment Conduit securities (“REMICs”) and interest-only and principal-only strip securities (“SMBS”), which are multi-class resecuritization transactions.
Since the implementation of the Single Security Initiative in June 2019, we have been able to include UMBS, Supers and other structured securities issued by Freddie Mac in some of our resecuritization trusts. The mortgage loans that serve as collateral for Freddie Mac-issued UMBS are not held in trusts that are consolidated by Fannie Mae. When we include Freddie Mac securities in our annual reportstructured securities, we are subject to additional credit risk because we guarantee securities that were not previously guaranteed by Fannie Mae. However, Freddie Mac continues to guarantee the payment of principal and interest on Form 10-Kthe underlying Freddie Mac securities that we have resecuritized. We have concluded that this additional credit risk is negligible because of the funding commitment available to Freddie Mac through its senior preferred stock purchase agreement with Treasury. Prior to the implementation of the Single Security Initiative, the vast majority of underlying assets of our resecuritization trusts were limited to Fannie Mae securities that were collateralized by mortgage loans held in consolidated trusts.
Single-Class Resecuritization Trusts
Fannie Mae single-class resecuritization trusts are created by depositing mortgage-backed securities (“MBS”) into a new securitization trust for the year ended December 31, 2016 (“2016 Form 10-K”), filedpurpose of aggregating multiple mortgage-related securities into a single security. Single-class resecuritization securities pass through directly to the holders of the securities all of the cash flows of the underlying mortgage-backed securities held in the resecuritization trust. With the implementation of the Single Security Initiative, these securities can now be collateralized directly or indirectly by cash flows from underlying securities issued by Fannie Mae, Freddie Mac, or a combination of both. Resecuritization trusts backed directly or indirectly only by Fannie Mae MBS are non-commingled resecuritization trusts. Resecuritization trusts collateralized directly or indirectly by cash flows either in part or in whole from Freddie Mac securities are commingled resecuritization trusts.
Securities issued by our non-commingled single-class resecuritization trusts are backed solely by Fannie Mae MBS and the guarantee we provide on the trust does not subject us to additional credit risk because we have already provided a guarantee on the underlying securities. Further, the securities issued by our non-commingled single-class resecuritization trusts pass through all of the cash flows of the underlying Fannie Mae MBS directly to the holders of the securities. Accordingly, these securities are deemed to be substantially the same as the underlying Fannie Mae MBS collateral. Additionally, our involvement with these trusts does not provide us with any incremental rights or powers that would enable us to direct any activities of the SECtrusts. As a result, we have concluded that we are not the primary beneficiaries of, and as a result, we do not consolidate, our non-commingled single-class resecuritization trusts. Therefore, we account for purchases and sales of securities issued by non-commingled single-class resecuritization trusts as extinguishments and issuances of the underlying MBS debt, respectively.
Securities issued by our commingled single-class resecuritization trusts are backed in whole or in part by Freddie Mac securities. The guaranty we provide to the commingled single-class resecuritization trust subjects us to additional credit risk because we are providing a guaranty for the timely payment of principal and interest on February 17, 2017.the underlying Freddie Mac securities that we have not previously guaranteed. Accordingly, securities issued by our commingled resecuritization trusts are not deemed to be substantially the same as the underlying collateral. We do not have any incremental rights or powers related to commingled single-class resecuritization trusts that would enable us to direct any activities of the underlying trusts. As a result, we have concluded that we are not the primary beneficiary of, and therefore do not consolidate, our commingled single-class resecuritization trusts unless we have the unilateral right to dissolve the trust. We have this right when we hold 100% of the beneficial interests issued by the resecuritization trust. Therefore, we account for purchases and sales of these securities as purchases and sales of investment securities.
Multi-Class Resecuritization Trusts
Multi-class resecuritization trusts are trusts we create to issue multi-class Fannie Mae structured securities, including REMICs and SMBS, in which the cash flows of the underlying mortgage assets are divided, creating several classes of securities, each of which represents a beneficial ownership interest in a separate portion of cash flows. We guarantee to each multi-class resecuritization trust that we will supplement amounts received by the trusts as required to permit timely payments of principal and interest, as applicable, on the related Fannie Mae structured securities. With the implementation of the Single Security Initiative, these multi-class structured securities can now be collateralized, directly or indirectly, by securities issued by Fannie Mae, Freddie Mac, or a combination of both.
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 59 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
The guaranty we provide to our non-commingled multi-class resecuritization trusts does not subject us to additional credit risk, because the underlying assets are Fannie Mae-issued securities for which we have already provided a guaranty. However, for commingled multi-class structured securities, we are subject to additional credit risk because we are providing a guaranty for the timely payment of principal and interest on the underlying Freddie Mac securities that we have not previously guaranteed. For both commingled and non-commingled multi-class resecuritization trusts, we may also be exposed to prepayment risk via our ownership of securities issued by these trusts. We do not have the ability via our involvement with a multi-class resecuritization trust to impact either the credit risk or prepayment risk to which we are exposed. Therefore, we have concluded that we do not have the characteristics of a controlling financial interest and do not consolidate multi-class resecuritization trusts unless we have the unilateral right to dissolve the trust as noted below.
Securities issued by multi-class resecuritization trusts do not directly pass through all of the cash flows of the underlying securities and therefore the issued and underlying securities are not considered substantially the same. Accordingly, if a multi-class resecuritization trust is not consolidated, we account for purchases and sales of securities issued by the trust as purchases and sales of investment securities.
Since the implementation of the Single Security Initiative in June 2019, we may now include UMBS, Supers and other structured securities backed by securities issued by Freddie Mac in our resecuritization trusts. As a result, we adopted a consolidation threshold for multi-class resecuritization trusts that is based on our ability to unilaterally dissolve the resecuritization trust. This ability exists only when we hold 100% of the outstanding beneficial interests issued by the resecuritization trust. This new consolidation threshold was applied prospectively upon implementation of the Single Security Initiative in the second quarter of 2019 and prior period amounts were not recast. Prior to the implementation of the Single Security Initiative, we consolidated multi-class resecuritization trusts when we held a substantial portion of the outstanding beneficial interests issued by the trust. Our adoption of the new consolidation threshold did not have a material impact on our condensed consolidated financial statements.
Regulatory Capital
FHFA stated that, during conservatorship, our existing statutory and FHFA-directed regulatory capital requirements will not be binding and FHFA will not issue quarterly capital classifications. We submit capital reports to FHFA, and FHFAwhich monitors our capital levels. The deficit of core capital over statutory minimum capital was $137.7$133.8 billion as of September 30, 20172019 and $136.2$137.1 billion as of December 31, 2016.2018.
Under the terms of the senior preferred stock, we are required to pay Treasury a dividend each quarter, when, as and if declared, equal to the excess of our net worth as of the end of the preceding quarter over an applicable capital reserve amount. The Director of FHFA has directed us to make dividend payments on the senior preferred stock on a quarterly basis. Therefore, we do not expect to eliminate our deficit of core capital over statutory minimum capital.Related Parties
AsBecause Treasury holds a result of our issuance to Treasury of the warrant to purchase shares of Fannie Mae common stock equal to 79.9% of the total number of shares of Fannie Mae common stock, we and Treasury are deemed related parties. As of September 30, 2017,2019, Treasury held an investment in our senior preferred stock with an aggregate liquidation preference of $117.1 billion. $127.2 billion. See “Senior Preferred Stock Purchase Agreement and Senior Preferred Stock” above for additional information on transactions under this agreement.
FHFA’s control of both usFannie Mae and Freddie Mac has caused us,Fannie Mae, FHFA and Freddie Mac to be deemed related parties. In 2013,Additionally, Fannie Mae and Freddie Mac established Common Securitization Solutions, LLC (“CSS”),jointly own CSS, a jointly owned limited liability company created to operate a common securitization platform; therefore,as such, CSS is deemed a related party.
In the ordinary course of business, Fannie Mae may purchase and sell securities issued by Treasury and Freddie Mac. These transactions occur on the same terms as those prevailing at the time for comparable transactions with unrelated parties. With our implementation of the Single Security Initiative in June 2019, some of the structured securities we issue are backed in whole or in part by Freddie Mac securities. Additionally, we make regular income tax payments to and receive tax refunds from the Internal Revenue Service (“IRS”), a bureau of Treasury.
Transactions with Treasury
Our administrative expenses were reduced by $9$5 million and $32$6 million for the three months ended September 30, 2019 and 2018, respectively, and $15 million and $19 million for the nine months ended September 30, 2017, respectively,2019 and $14 million and $45 million for the three and nine months ended September 30, 2016,2018, respectively, due to reimbursements from Treasury and Freddie Mac for expenses incurred as program administrator for Treasury’s Home Affordable Modification Program (“HAMP”) and other initiatives under Treasury’s Making Home Affordable Program.
We made tax paymentsIn December 2011, Congress enacted the Temporary Payroll Cut Continuation Act of 2011 (“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. Effective April 1, 2012, we increased the Internal Revenue Service (“IRS”), a bureau of Treasury, of $600 million and $1.7 billion during the three and nine months ended September 30, 2017, respectively. We made tax payments of $531 million and $1.1 billion during the three and nine months ended September 30, 2016, respectively.
In 2009, we entered into a memorandum of understanding with Treasury,guaranty fee on all single-family residential mortgages delivered to us by 10 basis points. FHFA and Freddie Mac pursuantTreasury advised us to whichremit this fee increase to Treasury with respect to all loans acquired by us on or after April 1, 2012 and before January 1, 2022, and to continue to remit these amounts to Treasury on and after January 1, 2022 with respect to loans we agreed to provide assistance to state and local housing finance agencies (“HFAs”) through certain programs, including a new issue bond (“NIB”) program. As of September 30, 2017, under the NIB program, Fannie Mae and Freddie Mac had $5.0 billion outstanding of pass-through securities backed by single-family and multifamily housing bonds issued by HFAs, which is less than 35% of the total original principal under the program, the amount of losses that Treasury would bear. Accordingly, we do not have a potential risk of loss under the NIB program.
acquired before this date until those loans are paid off or otherwise liquidated. The resulting fee revenue and expense related to the TCCA are recorded in “Mortgage loans interest income” and “TCCA fees,” respectively, in our condensed consolidated statements of operations and comprehensive income. We recognized $531$613 million and $465$576 million in TCCA fees during the three months ended September 30, 20172019 and 2018, respectively, and $1.8 billion and $1.7 billion for the nine months ended September 30, 2019 and 2018, respectively, of which $613 million had not been remitted to Treasury as of September 30, 2019.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 7060 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
2016, respectively,Under the Federal Housing Enterprises Financial Safety and $1.6 billion and $1.4 billion forSoundness Act of 1992, as amended, including by the nine months ended September 30, 2017 and 2016, respectively,Federal Housing Finance Regulatory Reform Act of which $531 million had not been remitted2008 (together, the “GSE Act”), we are required to Treasury as of September 30, 2017.
We incurred expenses in connection withset aside certain funding obligations, under the GSE Act, a portion of which is attributable to Treasury’s Capital Magnet and HOPE Reserve Funds.Fund. These expenses,funding obligations, recognized in “Other expenses, net” in our condensed consolidated statements of operations and comprehensive income, wereare measured as the product of 4.2 basis points and the unpaid principal balance of our total new business purchases for the respective period.period, and 35% of this amount is payable to Treasury’s Capital Magnet Fund. We recognized a total of $32 million and $40$20 million in “Other expenses, net” in connection with Treasury’s Capital Magnet and HOPE Reserve Funds for the three months ended September 30, 20172019 and 2016,2018, respectively, and $91$68 million and $96$57 million for the nine months ended September 30, 20172019 and 2016,2018, respectively, of which $91relating to amounts payable to Treasury’s Capital Magnet Fund. In 2020, we expect to pay the $68 million had not been remitted as of September 30, 2017.
In addition to the transactions with Treasury mentioned above, we also purchase and sell Treasury securities in the normal course of business. As of September 30, 2017 and December 31, 2016, we held Treasury securities with a fair value of $30.8 billion and $32.3 billion, respectively, and accrued interest receivable of $74 million and $39 million, respectively. We recognized interest income on these securities held by us of $95 million and $40 million for the three months ended September 30, 2017 and 2016, respectively, and $244 million and $105 million for the nine months ended September 30, 20172019 to Treasury’s Capital Magnet Fund, along with additional amounts based on our new business purchases in the fourth quarter of 2019. In April 2019, we paid $75 million to Treasury’s Capital Magnet Fund based on our new business purchases in 2018.
On September 27, 2019, we, through FHFA acting on our behalf in its capacity as our conservator, and 2016, respectively.
Transactions with Freddie Mac
AsTreasury entered into a letter agreement modifying the dividend and liquidation preference provisions of September 30, 2017 and December 31, 2016, we held Freddie Mac mortgage-related securities with a fair value of $651 million and $1.4 billion, respectively, and accrued interest receivable of $3 million and $5 million, respectively. We recognized interest income on these securitiesthe senior preferred stock held by usTreasury. These modifications and other specified provisions of $8 millionthe letter agreement are described under “Senior Preferred Stock Purchase Agreement and $19 million for the three months ended September 30, 2017 and 2016, respectively, and $31 million and $100 million for the nine months ended September 30, 2017 and 2016, respectively. In addition, Freddie Mac may be an investor in variable interest entities (“VIEs”) that we have consolidated, and we may be an investor in VIEs that Freddie Mac has consolidated. Freddie Mac may also be an investor in our debt securities.Senior Preferred Stock” above.
Transactions with FHFA
The GSE Act authorizes FHFA to establish an annual assessment for regulated entities, including Fannie Mae, which is payable on a semi-annual basis (April and October), for FHFA’s costs and expenses, as well as to maintain FHFA’s working capital. We recognized FHFA assessment fees, which are recorded in “Administrative expenses” in our condensed consolidated statements of operations and comprehensive income, of $26$30 million and $28$26 million for the three months ended September 30, 20172019 and 2016,2018, respectively, and $82$89 million and $84$81 million for the nine months ended September 30, 20172019 and 2016,2018, respectively.
Transactions with CSS
In connection with our jointly owned company with and Freddie Mac we
We contributed capital to CSS, the company we jointly own with Freddie Mac, of $25$22 million and $23$33 million for the three months ended September 30, 20172019 and 2016,2018, respectively, and $78$84 million and $88$109 million for the nine months ended September 30, 20172019 and 2016,2018, respectively. In November 2016,the second quarter of 2019, Fannie Mae, Freddie Mac and CSS entered into a Customer Services Agreementan amendment to the customer services agreement that sets forth the terms under which CSS will provideprovides mortgage securitization services to us and Freddie Mac. NoIn June 2019, we entered into an indemnification agreement with Freddie Mac relating to the commingled structured securities that we and Freddie Mac issue. Under the indemnification agreement, Fannie Mae and Freddie Mac each have agreed to indemnify the other transactions outsideparty for losses caused by: its failure to meet its payment or other specified obligations under the trust agreements pursuant to which the underlying resecuritized securities were issued; its failure to meet its obligations under the customer services agreement; its violations of normal business activities have occurred between uslaws; or with respect to material misstatements or omissions in offering documents, ongoing disclosures and CSSrelated materials relating to the underlying resecuritized securities.
Earnings per Share
Earnings per share (“EPS”) is presented for basic and diluted EPS. We compute basic EPS by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the nineperiod. However, as a result of our conservatorship status and the terms of the senior preferred stock, no amounts would be available to distribute as dividends to common or preferred stockholders (other than to Treasury as the holder of the senior preferred stock). Net income (loss) attributable to common stockholders excludes amounts attributable to the senior preferred stock, which increase the liquidation preference as described above in “Senior Preferred Stock Purchase Agreement and Senior Preferred Stock.” Weighted average common shares includes 4.6 billion shares for the periods ended September 30, 2019 and 2018 that would be issued upon the full exercise of the warrant issued to Treasury from the date the warrant was issued through September 30, 2019 and 2018.
The calculation of diluted EPS includes all the components of basic earnings per share, plus the dilutive effect of common stock equivalents such as convertible securities and stock options. Weighted average shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. For the three months ended September 30, 20172019 convertible preferred stock is not included in the calculation because a net loss attributable to common shareholders was incurred and 2016.
Use of Estimates
Preparing condensed consolidated financial statements in accordance with GAAP requires management to make estimatesit would have an anti-dilutive effect. For the nine months ended September 30, 2019 and assumptions that affect our reported amounts of assets2018 and liabilities, and disclosure of contingent assets and liabilities as of the dates of our condensed consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting periods. Management has made significant estimates in a variety of areas including, but not limited to, valuation of certain financial instruments, other assets and liabilities, and allowance for loan losses. Actual results could be different from these estimates.
Fee and Other Income
Fee and other income includes transaction fees, technology fees, multifamily fees and other miscellaneous income. During the three and nine months ended September 30, 2017, we recognized $9752018, our diluted EPS weighted average shares outstanding includes shares of common stock that would be issuable upon the conversion of 131 million in “Fee and other income” in our condensed consolidated statementshares of operations and comprehensive income resulting from a settlement agreement resolving legal claims related to private-label securities we purchased.convertible preferred stock.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 7161 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies |
New Accounting Guidance
In June 2016,The following updates information about our significant accounting policies that have recently been adopted or are yet to be adopted from the information included in “Note 1, Summary of Significant Accounting Policies” in our 2018 Form 10-K.
The Financial Accounting Standards Board (“FASB”(the “FASB”) issued guidanceAccounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments in June 2016. It was amended by ASU 2019-04, Codification Improvements (to Topic 326), Financial Instruments—Credit Losses in April 2019. These ASUs (the “CECL standard”) replace the incurred loss impairment methodology in current GAAP with a methodology that changes the impairment model for most financial assetsreflects lifetime expected credit losses and certain other instruments. For loans, held-to-maturityrequires consideration of a broader range of reasonable and supportable information to develop credit loss estimates. The amendments in this standard also require credit losses related to available-for-sale (“AFS”) debt securities to be recorded through an allowance for credit losses. We do not expect a material impact for establishing an allowance for credit losses related to our AFS debt securities.
The CECL standard will become effective for our fiscal year beginning January 1, 2020. We are currently performing full integrated testing across all models, accounting systems and other financial assets recorded at amortized cost, entitiesprocesses that will be requiredused to estimate credit losses and record accounting impacts under the CECL standard. All updates to our credit loss models are subject to our model oversight and review governance process. We are managing the implementation of this guidance in accordance with our change management governance standards, which are designed to ensure compliance with GAAP as well as operational readiness at adoption. Senior management and the Audit Committee receive regular updates regarding the status of our implementation plan, results of modeled impacts and any identified key risks.
We will use a new forward-looking “expected loss” modeldiscounted cash flow method to measure expected credit losses on our single-family mortgage loans and an undiscounted loss method to measure expected credit losses on our multifamily mortgage loans. The models we will use to estimate credit losses will incorporate our historical credit loss experience, adjusted for current economic forecasts and the current credit profile of our loan book of business. The models will use reasonable and supportable forecasts for key economic drivers, such as home prices (Single-Family), rental income (Multifamily) and capitalization rates (Multifamily).
Based on the composition of the loans in our book of business as of September 30, 2019 and our current expectations of future economic conditions, we estimate that will replace today’s “incurred loss” model and generallyour adoption of the CECL standard will result in a reduction in our retained earnings of up to $2 billion on an after-tax basis in the earlier recognitionfirst quarter of 2020. Our estimated impact upon adoption has been
refined over the last quarter to incorporate updated economic conditions and the resolution of various implementation items, including the exclusion of certain pre-foreclosure costs from our estimated allowance for loancredit losses. We continue to monitor and will assess the impact of further implementation guidance that may be issued. In addition, we continue to evaluate our modeled loss estimates and may make refinements to our approach and assumptions as a part of our overall integrated testing efforts. The guidance is effectiveimpact of our adoption of the CECL standard on our retained earnings will be further influenced by the credit risk profile of the loans in our book of business as of the January 1, 2020 with early adoption permitted on January 1, 2019. We will recognize the impactdate, as well as changes in economic conditions and our forecasts of the new guidance through a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. We are continuing to evaluate the impact of this guidance on our condensed consolidated financial statements, including the timing of the adoption. We expect the greater impact of the guidance to relate to our accounting for credit losses for loansfuture economic conditions at that are not individually impaired. The adoption of this guidance will decrease, perhaps substantially, our retained earnings and increase our allowance for loan losses.time.
In August 2017, the FASB issued changes to the hedge accounting guidance that is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The revised guidance will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess the effectiveness of hedging relationships. The guidance is effective January 1, 2019 and early adoption is permitted. Hedge accounting is elective and while we do not currently have a hedge accounting program, we are actively considering electing a hedge accounting program in the future.
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 62 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Consolidations and Transfers of Financial Assets |
2. Consolidations and Transfers of Financial Assets
We have interests in various entities that are considered to be VIEs.variable interest entities (“VIEs”). The primary types of entities are securitization and resecuritization trusts, limited partnerships and limited partnerships.special purpose vehicles (“SPVs”). These interests include investments in securities issued by VIEs, such as Fannie Mae MBS created pursuant to our securitization transactions and our guaranty to the entity. We consolidate the substantial majority of our single-class securitization trusts because our role as guarantor and master servicer provides us with the power to direct matters (primarily the servicing of mortgage loans) that impact the credit risk to which we are exposed. In contrast, we do not consolidate single-class securitization trusts when other organizations have the power to direct these activities. Historically, the vast majority of underlying assets of our resecuritization trusts were limited to Fannie Mae securities that were collateralized by mortgage loans held in consolidated trusts. However, beginning with the implementation of the Single Security Initiative in June 2019, we include securities issued by Freddie Mac in some of our resecuritization trusts. The mortgage loans that serve as collateral for Freddie Mac-issued UMBS are not held in trusts that are consolidated by Fannie Mae.
Unconsolidated VIEs
We do not consolidate VIEs when we are not deemed to be the primary beneficiary. Our unconsolidated VIEs include securitization trusts, limited partnerships, and limited partnerships.certain SPVs designed to transfer credit risk. The following table displays the carrying amount and classification of our assets and liabilities that relate to our involvement with unconsolidated securitization and resecuritization trusts.
|
| | | | | | | | | | | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
Assets and liabilities recorded in our condensed consolidated balance sheets related to unconsolidated mortgage-backed trusts:
| (Dollars in millions) |
| Assets: | | | | | | | |
| Trading securities: | | | | | | | |
| Fannie Mae | | $ | 2,733 |
| | | | $ | 1,422 |
| |
| Non-Fannie Mae | | 4,445 |
| | | | 4,809 |
| |
| Total trading securities | | 7,178 |
| | | | 6,231 |
| |
| Available-for-sale securities: | | | | | | | |
| Fannie Mae | | 1,581 |
| | | | 1,704 |
| |
| Non-Fannie Mae | | 771 |
| | | | 1,207 |
| |
| Total available-for-sale securities | | 2,352 |
| | | | 2,911 |
| |
| Other assets | | 57 |
| | | | 66 |
| |
| Other liabilities | | (82 | ) | | | | (101 | ) | |
| Net carrying amount | | $ | 9,505 |
| | | | $ | 9,107 |
| |
|
| | | | | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | (Dollars in millions) |
| Assets: | | | | | | | |
| Trading securities: | | | | | | | |
| Fannie Mae | | $ | 4,026 |
| | | | $ | 4,642 |
| |
| Non-Fannie Mae | | 1,985 |
| | | | 3,473 |
| |
| Total trading securities | | 6,011 |
| | | | 8,115 |
| |
| Available-for-sale securities: | | | | | |
|
| |
| Fannie Mae | | 2,116 |
| | | | 2,447 |
| |
| Non-Fannie Mae | | 3,016 |
| | | | 4,879 |
| |
| Total available-for-sale securities | | 5,132 |
| | | | 7,326 |
| |
| Other assets | | 73 |
| | | | 77 |
| |
| Other liabilities | | (481 | ) | | | | (528 | ) | |
| Net carrying amount | | $ | 10,735 |
| | | | $ | 14,990 |
| |
Our maximum exposure to loss generally represents the greater of our recorded investment in the entity or the unpaid principal balance of the assets covered by our guaranty. However,Our involvement in unconsolidated resecuritization trusts may give rise to additional exposure to loss depending on the type of resecuritization trust. Fannie Mae non-commingled resecuritization trusts refers to our securities issuedresecuritization trusts that are backed entirely by Fannie Mae MBS. These non-commingled single-class and multi-class resecuritization trusts that are not consolidated do not give rise to any additional exposure to loss as we already consolidate the underlying collateral.
Fannie Mae commingled resecuritization trusts refers to our resecuritization trusts that are backed in whole or in part by Freddie Mac securities. The guaranty that we provide to these commingled resecuritization trusts increases our exposure to loss relating to the Freddie Mac securities that serve as the underlying collateral. Our maximum exposure to loss for these unconsolidated trusts is measured by the amount of Freddie Mac securities that back these resecuritization trusts. However, a portion of these Freddie Mac securities may be backed in whole or in part by Fannie Mae MBS. Therefore, to the extent that these Freddie Mac securities are backed by Fannie Mae MBS, it would not give rise to any additional exposure and our total exposure to collateral that is ultimately guaranteed by Freddie Mac may be lower than the disclosed maximum exposure to loss. Our maximum exposure to loss related to unconsolidated securitization and resecuritization trusts was approximately $41 billion and $14 billion as of September 30, 2019 and December 31, 2018, respectively. The total assets of our unconsolidated securitization and resecuritization trusts were approximately $100 billion and $80 billion as of September 30, 2019 and December 31, 2018, respectively.
The maximum exposure to loss for our unconsolidated limited partnerships and similar legal entities, which consist of low-income housing tax credit investments (“LIHTC”), community investments and other entities, was $93 million and the related carrying value was $70 million as of September 30, 2019. As of December 31, 2018, the maximum exposure to loss was $111
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 7263 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Consolidations and Transfers of Financial Assets |
multi-class resecuritization trusts that are not consolidated do not give rise to any additional exposure to loss as we already consolidate the underlying collateral. The maximum exposure to loss related to unconsolidated securitization trusts was approximately $16 billion and $21 billion as of September 30, 2017 and December 31, 2016, respectively. The total assets of our unconsolidated securitization trusts were approximately $90 billion and $150 billion as of September 30, 2017 and December 31, 2016, respectively.
The maximum exposure to loss for our unconsolidated limited partnerships and similar legal entities, which consist of low-income housing tax credit investments, community investments and other entities, was $107 million and the related carrying value was $83 million as of September 30, 2017. As of December 31, 2016, the maximum exposure to loss was $118 million and the related carrying value was $92$89 million. The total assets of these limited partnership investments were $3.2 billion and $3.9$2.3 billion as of September 30, 20172019 and December 31, 2016,2018.
The maximum exposure to loss related to our involvement with unconsolidated SPVs that transfer credit risk represents the unpaid principal balance and accrued interest payable of obligations issued by the Connecticut Avenue Securities (“CAS”) SPVs. The maximum exposure to loss related to these unconsolidated SPVs was $6.5 billion and $920 million as of September 30, 2019 and December 31, 2018, respectively. The total assets related to these unconsolidated SPVs were $6.5 billion and $931 million as of September 30, 2019 and December 31, 2018, respectively.
The unpaid principal balance of our multifamily loan portfolio was $253.0$318.1 billion as of September 30, 2017.2019. As our lending relationship does not provide us with a controlling financial interest in the borrower entity, we do not consolidate these borrowers regardless of their status as either a VIE or a voting interest entity. We have excluded these entities from our VIE disclosures. However, the disclosures we have provided in “Note 3, Mortgage Loans,” “Note 4, Allowance for Loan Losses” and “Note 6, Financial Guarantees” with respect to this population are consistent with the FASB’s stated objectives for the disclosures related to unconsolidated VIEs.
Transfers of Financial Assets
We issue Fannie Mae MBS through portfolio securitization transactions by transferring pools of mortgage loans or mortgage-related securities to one or more trusts or special purpose entities. We are considered to be the transferor when we transfer assets from our own retained mortgage portfolio in a portfolio securitization transaction. For the three months ended September 30, 20172019 and 2016,2018, the unpaid principal balance of portfolio securitizations was $68.1$89.0 billion and $76.1$64.9 billion, respectively. For the nine months ended September 30, 20172019 and 2016,2018, the unpaid principal balance of portfolio securitizations was $194.5$187.7 billion and $188.7$180.8 billion, respectively.
We retain interests from the transfer and sale of mortgage-related securities to unconsolidated single-class and multi-class portfolio securitization trusts. As of September 30, 2017,2019, the unpaid principal balance of retained interests was $4.0$3.1 billion and its related fair value was $5.0$4.2 billion. TheAs of December 31, 2018, the unpaid principal balance of retained interests was $4.4$1.5 billion and its related fair value was $5.8 billion as of December 31, 2016.$2.2 billion. For the three months ended September 30, 20172019 and 2016,2018, the principal, interest and interestother fees received on retained interests was $294$187 million and $284$114 million, respectively. For the nine months ended September 30, 20172019 and 2016,2018, the principal, interest and interestother fees received on retained interests was $854$425 million and $907$468 million, respectively.
Managed Loans
Managed loans are on-balance sheet mortgage loans, as well as mortgage loans that we have securitized in unconsolidated portfolio securitization trusts. The unpaid principal balance of securitized loans in unconsolidated portfolio securitization trusts, which are primarily include loans that are guaranteed or insured, in whole or in part, by the U.S. government,government. For those loans that we have securitized in unconsolidated portfolio securitization trusts, the outstanding unpaid principal balance was $1.3 billion and $1.4$1.1 billion as of September 30, 20172019 and $1.2 billion as of December 31, 2016, respectively.2018. For information on ourregarding on-balance sheet mortgagemanaged loans, see “Note“Note 3, Mortgage Loans.Loans.”
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 64 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Mortgage Loans |
3. Mortgage Loans
We own single-family mortgage loans, which are secured by four or fewer residential dwelling units, and multifamily mortgage loans, which are secured by five or more residential dwelling units. We classify these loans as either held for investment (“HFI”) or held for sale (“HFS”). We report the carrying value of HFI loans at the unpaid principal balance, net of unamortized premiums and discounts, other cost basis adjustments, and an allowance for loan losses. We report the carrying value of HFS loans at the lower of cost or fair value and record valuation changes in “Investment gains, net” in our condensed consolidated statements of operations and comprehensive income. We define the recorded investment of HFI loans as unpaid principal balance, net of unamortized premiums and discounts, other cost basis adjustments, and accrued interest receivable.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 73 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Mortgage Loans |
For purposes of the single-family mortgage loan disclosures below, we define “primary” class as mortgage loans that are not included in other loan classes; “government” class as mortgage loans that are guaranteed or insured, in whole or in part, by the U.S. government, or one of its agencies, and that are not Alt-A; and “other” class as loans with certain higher-risk characteristics, such as interest-only loans and negative-amortizing loans, that are neither government nor Alt-A.
The following table displays the carrying value of our mortgage loans.
|
| | | | | | | | |
| | | As of |
| | | September 30, 2019 | | December 31, 2018 |
| | | (Dollars in millions) |
| Single-family | | $ | 2,962,083 |
| | $ | 2,929,925 |
|
| Multifamily | | 318,106 |
| | 293,858 |
|
| Total unpaid principal balance of mortgage loans | | 3,280,189 |
| | 3,223,783 |
|
| Cost basis and fair value adjustments, net | | 43,323 |
| | 39,815 |
|
| Allowance for loan losses for loans held for investment | | (9,376 | ) | | (14,203 | ) |
| Total mortgage loans | | $ | 3,314,136 |
| | $ | 3,249,395 |
|
|
| | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | (Dollars in millions) |
| Single-family | $ | 2,878,456 |
| | $ | 2,833,750 |
|
| Multifamily | 253,031 |
| | 229,896 |
|
| Total unpaid principal balance of mortgage loans | 3,131,487 |
| | 3,063,646 |
|
| Cost basis and fair value adjustments, net | 41,466 |
| | 39,572 |
|
| Allowance for loan losses for loans held for investment | (20,194 | ) | | (23,465 | ) |
| Total mortgage loans | $ | 3,152,759 |
| | $ | 3,079,753 |
|
During the three and nine months ended September 30, 2017, we redesignated loans with a carrying value of $2.1 billion and $7.5 billion, respectively, from HFI to HFS. During the three and nine months ended September 30, 2016, we redesignated loans with a carrying value of $652 million and $2.3 billion, respectively, from HFI to HFS. During the three and nine months ended September 30, 2017, we redesignated loans with a carrying value of $59 million and $111 million, respectively, from HFS to HFI. We sold loans with an unpaid principal balance of $3.4 billion and $6.5 billion during the three and nine months ended September 30, 2017, respectively. We sold loans with an unpaid balance of $1.6 billion and $4.2 billion during the three and nine months ended September 30, 2016, respectively. |
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (Dollars in millions) |
Carrying value of loans redesignated from HFI to HFS(1) | $ | 4,882 |
| | $ | 4,249 |
| | $ | 14,252 |
| | $ | 17,851 |
|
Carrying value of loans redesignated from HFS to HFI(1) | 10 |
| | 6 |
| | 22 |
| | 36 |
|
| Loans sold - unpaid principal balance | 3,941 |
| | 9,373 |
| | 10,497 |
| | 13,831 |
|
| Realized gains on sale of mortgage loans | 184 |
| | 93 |
| | 504 |
| | 301 |
|
| |
(1) | Represents the carrying value of the loans after redesignation, excluding allowance. |
The recorded investment of single-family mortgage loans for which formal foreclosure proceedings are in process was $14.5$8.2 billion and $18.3$10.1 billion as of September 30, 20172019 and December 31, 2016,2018, respectively. As a result of our various loss mitigation and foreclosure prevention efforts, we expect that a portion of the loans in the process of formal foreclosure proceedings will not ultimately foreclose.
Nonaccrual Loans
We discontinue accruing interest on loans when we believe collectibility of principal or interest is not reasonably assured, which for a single-family loan we have determined, based on our historical experience, to be when the loan becomes two months or more past due according to its contractual terms. Interest previously accrued but not collected is reversed through interest income at the date a loan is placed on nonaccrual status. We return a nonmodifiednon-modified single-family loan to accrual status at the point that the borrower brings the loan current. We return a modified single-family loan to accrual status at the point that the borrower successfully makes all required payments during the trial period (generally three to four months) and the modification is made permanent. We place a multifamily loan on nonaccrual status when the loan becomes three months or more past due according to its contractual terms or is deemed to be individually impaired, unless the loan is well secured such that collectibility of principal and accrued interest is reasonably assured. We return a multifamily loan to accrual status when the borrower cures the delinquency of the loan or we otherwise determine that the loan is well secured such that collectibility is reasonably assured.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 7465 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Mortgage Loans |
Aging Analysis
The following tables display an aging analysis of the total recorded investment in our HFI mortgage loans by portfolio segment and class, excluding loans for which we have elected the fair value option.
| | | As of September 30, 2017 | | As of September 30, 2019 |
| | 30 - 59 Days Delinquent | | 60 - 89 Days Delinquent | | Seriously Delinquent(1) | | Total Delinquent | | Current | | Total | | Recorded Investment in Loans 90 Days or More Delinquent and Accruing Interest | | Recorded Investment in Nonaccrual Loans | | 30 - 59 Days Delinquent | | 60 - 89 Days Delinquent | | Seriously Delinquent(1) | | Total Delinquent | | Current | | Total | | Recorded Investment in Loans 90 Days or More Delinquent and Accruing Interest | | Recorded Investment in Nonaccrual Loans |
| (Dollars in millions) | | (Dollars in millions) |
| Single-family: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary | $ | 34,976 |
| | $ | 7,810 |
| | $ | 18,110 |
| | $ | 60,896 |
| | $ | 2,720,530 |
| | $ | 2,781,426 |
| | $ | 24 |
| | $ | 29,169 |
| | $ | 29,211 |
| | $ | 7,188 |
| | $ | 13,291 |
| | $ | 49,690 |
| | $ | 2,867,330 |
| | $ | 2,917,020 |
| | $ | 26 |
| | $ | 23,840 |
|
Government(2) | 53 |
| | 25 |
| | 212 |
| | 290 |
| | 34,267 |
| | 34,557 |
| | 212 |
| | — |
| | 44 |
| | 20 |
| | 144 |
| | 208 |
| | 17,881 |
| | 18,089 |
| | 144 |
| | — |
|
| Alt-A | 3,460 |
| | 1,060 |
| | 3,381 |
| | 7,901 |
| | 62,863 |
| | 70,764 |
| | 2 |
| | 4,935 |
| | 1,717 |
| | 591 |
| | 1,316 |
| | 3,624 |
| | 40,663 |
| | 44,287 |
| | 1 |
| | 2,228 |
|
| Other | 1,253 |
| | 372 |
| | 1,252 |
| | 2,877 |
| | 20,714 |
| | 23,591 |
| | 2 |
| | 1,793 |
| | 572 |
| | 212 |
| | 485 |
| | 1,269 |
| | 9,836 |
| | 11,105 |
| | 2 |
| | 800 |
|
| Total single-family | 39,742 |
| | 9,267 |
| | 22,955 |
| | 71,964 |
| | 2,838,374 |
| | 2,910,338 |
| | 240 |
| | 35,897 |
| | 31,544 |
| | 8,011 |
| | 15,236 |
| | 54,791 |
| | 2,935,710 |
| | 2,990,501 |
| | 173 |
| | 26,868 |
|
Multifamily(3) | 10 |
| | N/A |
| | 87 |
| | 97 |
| | 254,896 |
| | 254,993 |
| | — |
| | 322 |
| | 32 |
| | N/A |
| | 181 |
| | 213 |
| | 320,984 |
| | 321,197 |
| | — |
| | 604 |
|
| Total | $ | 39,752 |
| | $ | 9,267 |
| | $ | 23,042 |
| | $ | 72,061 |
| | $ | 3,093,270 |
| | $ | 3,165,331 |
| | $ | 240 |
| | $ | 36,219 |
| | $ | 31,576 |
| | $ | 8,011 |
| | $ | 15,417 |
| | $ | 55,004 |
| | $ | 3,256,694 |
| | $ | 3,311,698 |
| | $ | 173 |
| | $ | 27,472 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2018 |
| | | 30 - 59 Days Delinquent | | 60 - 89 Days Delinquent | | Seriously Delinquent(1) | | Total Delinquent | | Current | | Total | | Recorded Investment in Loans 90 Days or More Delinquent and Accruing Interest | | Recorded Investment in Nonaccrual Loans |
| | | (Dollars in millions) |
| Single-family: | | | | | | | | | | | | | | | | |
| Primary | | $ | 30,471 |
| | $ | 7,881 |
| | $ | 14,866 |
| | $ | 53,218 |
| | $ | 2,816,047 |
| | $ | 2,869,265 |
| | $ | 22 |
| | $ | 26,170 |
|
Government(2) | | 57 |
| | 17 |
| | 169 |
| | 243 |
| | 21,887 |
| | 22,130 |
| | 169 |
| | — |
|
| Alt-A | | 2,332 |
| | 821 |
| | 1,844 |
| | 4,997 |
| | 48,274 |
| | 53,271 |
| | 2 |
| | 3,082 |
|
| Other | | 804 |
| | 283 |
| | 713 |
| | 1,800 |
| | 13,038 |
| | 14,838 |
| | 2 |
| | 1,128 |
|
| Total single-family | | 33,664 |
| | 9,002 |
| | 17,592 |
| | 60,258 |
| | 2,899,246 |
| | 2,959,504 |
| | 195 |
| | 30,380 |
|
Multifamily(3) | | 56 |
| | N/A |
| | 171 |
| | 227 |
| | 295,437 |
| | 295,664 |
| | — |
| | 492 |
|
| Total | | $ | 33,720 |
| | $ | 9,002 |
| | $ | 17,763 |
| | $ | 60,485 |
| | $ | 3,194,683 |
| | $ | 3,255,168 |
| | $ | 195 |
| | $ | 30,872 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2016 |
| | 30 - 59 Days Delinquent | | 60 - 89 Days Delinquent | | Seriously Delinquent(1) | | Total Delinquent | | Current | | Total | | Recorded Investment in Loans 90 Days or More Delinquent and Accruing Interest | | Recorded Investment in Nonaccrual Loans |
| (Dollars in millions) |
| Single-family: | | | | | | | | | | | | | | | |
| Primary | $ | 31,631 |
| | $ | 7,910 |
| | $ | 21,761 |
| | $ | 61,302 |
| | $ | 2,654,195 |
| | $ | 2,715,497 |
| | $ | 22 |
| | $ | 33,448 |
|
Government(2) | 56 |
| | 22 |
| | 256 |
| | 334 |
| | 36,814 |
| | 37,148 |
| | 256 |
| | — |
|
| Alt-A | 3,629 |
| | 1,194 |
| | 4,221 |
| | 9,044 |
| | 72,903 |
| | 81,947 |
| | 2 |
| | 6,019 |
|
| Other | 1,349 |
| | 438 |
| | 1,582 |
| | 3,369 |
| | 25,974 |
| | 29,343 |
| | 5 |
| | 2,238 |
|
| Total single-family | 36,665 |
| | 9,564 |
| | 27,820 |
| | 74,049 |
| | 2,789,886 |
| | 2,863,935 |
| | 285 |
| | 41,705 |
|
Multifamily(3) | 44 |
| | N/A |
| | 129 |
| | 173 |
| | 231,708 |
| | 231,881 |
| | — |
| | 403 |
|
| Total | $ | 36,709 |
| | $ | 9,564 |
| | $ | 27,949 |
| | $ | 74,222 |
| | $ | 3,021,594 |
| | $ | 3,095,816 |
| | $ | 285 |
| | $ | 42,108 |
|
__________
| |
(1) | Single-family seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process. Multifamily seriously delinquent loans are loans that are 60 days or more past due. |
| |
(2) | Primarily consists of reverse mortgages, which due to their nature, are not aged and are included in the current column. |
| |
(3) | Multifamily loans 60-89 days delinquent are included in the seriously delinquent column. |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 7566 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Mortgage Loans |
Credit Quality Indicators
The following table displays the total recorded investment in our single-family HFI loans by class and credit quality indicator, excluding loans for which we have elected the fair value option.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of |
| | | September 30, 2019(1) | | December 31, 2018(1) |
| | | Primary | | Alt-A | | Other | | Primary | | Alt-A | | Other |
| | | (Dollars in millions) |
Estimated mark-to-market loan-to-value (“LTV”) ratio:(2) | | | | | | | | | | | | |
| Less than or equal to 80% | | $ | 2,569,771 |
| | $ | 39,710 |
| | $ | 9,694 |
| | $ | 2,521,766 |
| | $ | 45,476 |
| | $ | 12,291 |
|
Greater than 80% and less than or equal to 90% | | 228,868 |
| | 2,365 |
| | 709 |
| | 228,614 |
| | 3,804 |
| | 1,195 |
|
Greater than 90% and less than or equal to 100% | | 113,424 |
| | 1,131 |
| | 337 |
| | 109,548 |
| | 1,997 |
| | 645 |
|
| Greater than 100% | | 4,957 |
| | 1,081 |
| | 365 |
| | 9,337 |
| | 1,994 |
| | 707 |
|
| Total | | $ | 2,917,020 |
| | $ | 44,287 |
| | $ | 11,105 |
| | $ | 2,869,265 |
| | $ | 53,271 |
| | $ | 14,838 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of |
| September 30, 2017(1) | | December 31, 2016(1) |
| Primary | | Alt-A | | Other | | Primary | | Alt-A | | Other |
| (Dollars in millions) |
Estimated mark-to-market loan-to-value (“LTV”) ratio:(2) | | | | | | | | | | | |
| Less than or equal to 80% | $ | 2,447,197 |
| | $ | 54,238 |
| | $ | 17,598 |
| | $ | 2,321,201 |
| | $ | 56,250 |
| | $ | 19,382 |
|
Greater than 80% and less than or equal to 90% | 226,113 |
| | 7,090 |
| | 2,453 |
| | 244,231 |
| | 9,787 |
| | 3,657 |
|
Greater than 90% and less than or equal to 100% | 88,076 |
| | 4,330 |
| | 1,606 |
| | 114,412 |
| | 6,731 |
| | 2,627 |
|
| Greater than 100% | 20,040 |
| | 5,106 |
| | 1,934 |
| | 35,653 |
| | 9,179 |
| | 3,677 |
|
| Total | $ | 2,781,426 |
| | $ | 70,764 |
| | $ | 23,591 |
| | $ | 2,715,497 |
| | $ | 81,947 |
| | $ | 29,343 |
|
__________
| |
(1) | Excludes $34.6$18.1 billion and $37.1$22.1 billion as of September 30, 20172019 and December 31, 2016,2018, respectively, of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies, that are not Alt-A loans. The segment class is primarily reverse mortgages for which we do not calculate an estimated mark-to-market LTV ratio. |
| |
(2) | The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of each reported period divided by the estimated current value of the property as of the end of each reported period, which we calculate using an internal valuation model that estimates periodic changes in home value. |
The following table displays the total recorded investment in our multifamily HFI loans by credit quality indicator, excluding loans for which we have elected the fair value option.
|
| | | | | | | | | | | |
| | As of |
| | September 30, | | December 31, |
| | 2019 | | 2018 |
| | (Dollars in millions) |
| Credit risk profile by internally assigned grade: | | | | | | | |
| Non-classified | | $ | 314,458 |
| | | | $ | 289,231 |
| |
Classified(1) | | 6,739 |
| | | | 6,433 |
| |
| Total | | $ | 321,197 |
| | | | $ | 295,664 |
| |
|
| | | | | | | | | | | |
| As of |
| September 30, | | December 31, |
| | 2017 | | 2016 |
| (Dollars in millions) |
| Credit risk profile by internally assigned grade: | | | | | | | |
| Non-classified | | $ | 252,085 |
| | | | $ | 228,749 |
| |
Classified:(1) | | | | | | | |
| Substandard | | 2,893 |
| | | | 3,129 |
| |
| Doubtful | | 15 |
| | | | 3 |
| |
| Total classified | | 2,908 |
| | | | 3,132 |
| |
| Total | | $ | 254,993 |
| | | | $ | 231,881 |
| |
_________
| |
(1) | A loanIncludes loans classified as “Substandard” hasor “Doubtful.” Loans classified as “Substandard” have a well-defined weakness that jeopardizes the timely full repayment. Loans classified as “Doubtful” refers to a loan with ahave weakness that makes collection or liquidation in full highly questionable and improbable based on existing conditions and values. As of September 30, 2019, we had loans with recorded investment of less than $0.1 million classified as doubtful, compared with $1 million as of December 31, 2018. |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 7667 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Mortgage Loans |
Individually Impaired Loans
Individually impaired loans include troubled debt restructurings (“TDRs”), acquired credit-impaired loans and multifamily loans that we have assessed as probable that we will not collect all contractual amounts due, regardless of whether we are currently accruing interest;interest, excluding loans classified as HFS.HFS and loans for which we have elected the fair value option. The following tables display the total unpaid principal balance, recorded investment, related allowance, average recorded investment and interest income recognized for individually impaired loans.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | Unpaid Principal Balance | | Total Recorded Investment | | Related Allowance for Loan Losses | | Unpaid Principal Balance | | Total Recorded Investment | | Related Allowance for Loan Losses |
| | (Dollars in millions) |
| Individually impaired loans: | | | | | | | | | | | | | | | | | | | | | | |
| With related allowance recorded: | | | | | | |
| | | | | | | | | | | |
| | | | | |
| Single-family: | | | | | | |
| | | | | | | | | | | |
| | | | | |
| Primary | | $ | 93,983 |
| | | | $ | 89,453 |
| | | | $ | 12,102 |
| | | $ | 105,113 |
| | | | $ | 99,825 |
| | | | $ | 14,462 |
| |
| Government | | 283 |
| | | | 286 |
| | | | 58 |
| | | 302 |
| | | | 305 |
| | | | 59 |
| |
| Alt-A | | 24,426 |
| | | | 22,269 |
| | | | 4,327 |
| | | 28,599 |
| | | | 26,059 |
| | | | 5,365 |
| |
| Other | | 9,052 |
| | | | 8,539 |
| | | | 1,602 |
| | | 11,087 |
| | | | 10,465 |
| | | | 2,034 |
| |
| Total single-family | | 127,744 |
| | | | 120,547 |
| | | | 18,089 |
| | | 145,101 |
| | | | 136,654 |
| | | | 21,920 |
| |
| Multifamily | | 242 |
| | | | 245 |
| | | | 35 |
| | | 320 |
| | | | 323 |
| | | | 33 |
| |
| Total individually impaired loans with related allowance recorded | | 127,986 |
| | | | 120,792 |
| | | | 18,124 |
| | | 145,421 |
| | | | 136,977 |
| | | | 21,953 |
| |
With no related allowance recorded:(1) | | | | | | | | | | | | | | | | | | | | | | |
| Single-family: | | | | | | | | | | | | | | | | | | | | | | |
| Primary | | 16,356 |
| | | | 15,438 |
| | | | — |
| | | 15,733 |
| | | | 14,758 |
| | | | — |
| |
| Government | | 67 |
| | | | 62 |
| | | | — |
| | | 63 |
| | | | 59 |
| | | | — |
| |
| Alt-A | | 3,402 |
| | | | 2,992 |
| | | | — |
| | | 3,511 |
| | | | 3,062 |
| | | | — |
| |
| Other | | 1,054 |
| | | | 968 |
| | | | — |
| | | 1,159 |
| | | | 1,065 |
| | | | — |
| |
| Total single-family | | 20,879 |
| | | | 19,460 |
| | | | — |
| | | 20,466 |
| | | | 18,944 |
| | | | — |
| |
| Multifamily | | 338 |
| | | | 340 |
| | | | — |
| | | 266 |
| | | | 266 |
| | | | — |
| |
| Total individually impaired loans with no related allowance recorded | | 21,217 |
| | | | 19,800 |
| | | | — |
| | | 20,732 |
| | | | 19,210 |
| | | | — |
| |
Total individually impaired loans(2) | | $ | 149,203 |
| | | | $ | 140,592 |
| | | | $ | 18,124 |
| | | $ | 166,153 |
| | | | $ | 156,187 |
| | | | $ | 21,953 |
| |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 77 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Mortgage Loans |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, |
| | 2017 | | 2016 |
| | Average Recorded Investment | | Total Interest Income Recognized(3) | | Interest Income Recognized on a Cash Basis | | Average Recorded Investment | | Total Interest Income Recognized(3) | | Interest Income Recognized on a Cash Basis |
| | (Dollars in millions) |
| Individually impaired loans: | | | | | | | | | | | | | | | | | | | | | | | |
| With related allowance recorded: | | | | | | |
| | | | | | | | | | | | |
| | | | | |
| Single-family: | | | | | | |
| | | | | | | | | | | | |
| | | | | |
| Primary | | $ | 90,941 |
| | | | $ | 912 |
| | | | $ | 75 |
| | | | $ | 103,523 |
| | | | $ | 992 |
| | | | $ | 68 |
| |
| Government | | 289 |
| | | | 2 |
| | | | — |
| | | | 310 |
| | | | 3 |
| | | | — |
| |
| Alt-A | | 22,904 |
| | | | 228 |
| | | | 13 |
| | | | 27,115 |
| | | | 250 |
| | | | 10 |
| |
| Other | | 8,817 |
| | | | 78 |
| | | | 4 |
| | | | 11,220 |
| | | | 91 |
| | | | 4 |
| |
| Total single-family | | 122,951 |
| | | | 1,220 |
| | | | 92 |
| | | | 142,168 |
| | | | 1,336 |
| | | | 82 |
| |
| Multifamily | | 232 |
| | | | 1 |
| | | | — |
| | | | 492 |
| | | | 3 |
| | | | — |
| |
| Total individually impaired loans with related allowance recorded | | 123,183 |
| | | | 1,221 |
| | | | 92 |
| | | | 142,660 |
| | | | 1,339 |
| | | | 82 |
| |
With no related allowance recorded:(1) | | | | | | | | | | | | | | | | | | | | | | | |
| Single-family: | | | | | | | | | | | | | | | | | | | | | | | |
| Primary | | 15,402 |
| | | | 273 |
| | | | 24 |
| | | | 15,534 |
| | | | 320 |
| | | | 19 |
| |
| Government | | 61 |
| | | | — |
| | | | — |
| | | | 61 |
| | | | 1 |
| | | | — |
| |
| Alt-A | | 3,008 |
| | | | 65 |
| | | | 5 |
| | | | 3,312 |
| | | | 81 |
| | | | — |
| |
| Other | | 983 |
| | | | 21 |
| | | | 1 |
| | | | 1,115 |
| | | | 27 |
| | | | — |
| |
| Total single-family | | 19,454 |
| | | | 359 |
| | | | 30 |
| | | | 20,022 |
| | | | 429 |
| | | | 19 |
| |
| Multifamily | | 304 |
| | | | 6 |
| | | | — |
| | | | 311 |
| | | | 3 |
| | | | — |
| |
| Total individually impaired loans with no related allowance recorded | | 19,758 |
| | | | 365 |
| | | | 30 |
| | | | 20,333 |
| | | | 432 |
| | | | 19 |
| |
| Total individually impaired loans | | $ | 142,941 |
| | | | $ | 1,586 |
| | | | $ | 122 |
| | | | $ | 162,993 |
| | | | $ | 1,771 |
| | | | $ | 101 |
| |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 78 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Mortgage Loans |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | Average Recorded Investment | | Total Interest Income Recognized(3) | | Interest Income Recognized on a Cash Basis | | Average Recorded Investment | | Total Interest Income Recognized(3) | | Interest Income Recognized on a Cash Basis |
| | (Dollars in millions) |
| Individually impaired loans: | | | | | | | | | | | | | | | | | | | | | | | |
| With related allowance recorded: | | | | | | |
| | | | | | | | | | | | |
| | | | | |
| Single-family: | | | | | | |
| | | | | | | | | | | | |
| | | | | |
| Primary | | $ | 94,594 |
| | | | $ | 2,853 |
| | | | $ | 240 |
| | | | $ | 106,498 |
| | | | $ | 3,028 |
| | | | $ | 243 |
| |
| Government | | 295 |
| | | | 7 |
| | | | — |
| | | | 317 |
| | | | 9 |
| | | | — |
| |
| Alt-A | | 24,233 |
| | | | 717 |
| | | | 42 |
| | | | 27,899 |
| | | | 759 |
| | | | 40 |
| |
| Other | | 9,480 |
| | | | 247 |
| | | | 14 |
| | | | 11,622 |
| | | | 276 |
| | | | 15 |
| |
| Total single-family | | 128,602 |
| | | | 3,824 |
| | | | 296 |
| | | | 146,336 |
| | | | 4,072 |
| | | | 298 |
| |
| Multifamily | | 271 |
| | | | 7 |
| | | | — |
| | | | 555 |
| | | | 21 |
| | | | — |
| |
| Total individually impaired loans with related allowance recorded | | 128,873 |
| | | | 3,831 |
| | | | 296 |
| | | | 146,891 |
| | | | 4,093 |
| | | | 298 |
| |
With no related allowance recorded:(1) | | | | | | | | | | | | | | | | | | | | | | | |
| Single-family: | | | | | | | | | | | | | | | | | | | | | | | |
| Primary | | 15,173 |
| | | | 835 |
| | | | 71 |
| | | | 15,398 |
| | | | 915 |
| | | | 69 |
| |
| Government | | 61 |
| | | | 2 |
| | | | — |
| | | | 59 |
| | | | 3 |
| | | | — |
| |
| Alt-A | | 3,041 |
| | | | 205 |
| | | | 10 |
| | | | 3,350 |
| | | | 224 |
| | | | 8 |
| |
| Other | | 1,023 |
| | | | 65 |
| | | | 3 |
| | | | 1,128 |
| | | | 79 |
| | | | 3 |
| |
| Total single-family | | 19,298 |
| | | | 1,107 |
| | | | 84 |
| | | | 19,935 |
| | | | 1,221 |
| | | | 80 |
| |
| Multifamily | | 294 |
| | | | 16 |
| | | | — |
| | | | 330 |
| | | | 9 |
| | | | — |
| |
| Total individually impaired loans with no related allowance recorded | | 19,592 |
| | | | 1,123 |
| | | | 84 |
| | | | 20,265 |
| | | | 1,230 |
| | | | 80 |
| |
| Total individually impaired loans | | $ | 148,465 |
| | | | $ | 4,954 |
| | | | $ | 380 |
| | | | $ | 167,156 |
| | | | $ | 5,323 |
| | | | $ | 378 |
| |
__________ |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | Unpaid Principal Balance | | Total Recorded Investment | | Related Allowance for Loan Losses | | Unpaid Principal Balance | | Total Recorded Investment | | Related Allowance for Loan Losses |
| | (Dollars in millions) |
| Individually impaired loans: | | | | | | | | | | | | | | | | | | | | | | |
| With related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | |
| Single-family: | | | | | | | | | | | | | | | | | | | | | | |
| Primary | | $ | 67,175 |
| | | | $ | 64,987 |
| | | | $ | (6,141 | ) | | | $ | 81,791 |
| | | | $ | 78,688 |
| | | | $ | (9,406 | ) | |
| Government | | 250 |
| | | | 255 |
| | | | (50 | ) | | | 264 |
| | | | 270 |
| | | | (55 | ) | |
| Alt-A | | 11,956 |
| | | | 11,008 |
| | | | (1,726 | ) | | | 16,576 |
| | | | 15,158 |
| | | | (2,793 | ) | |
| Other | | 3,703 |
| | | | 3,505 |
| | | | (590 | ) | | | 5,482 |
| | | | 5,169 |
| | | | (1,001 | ) | |
| Total single-family | | 83,084 |
| | | | 79,755 |
| | | | (8,507 | ) | | | 104,113 |
| | | | 99,285 |
| | | | (13,255 | ) | |
| Multifamily | | 281 |
| | | | 283 |
| | | | (45 | ) | | | 197 |
| | | | 196 |
| | | | (40 | ) | |
| Total individually impaired loans with related allowance recorded | | 83,365 |
| | | | 80,038 |
| | | | (8,552 | ) | | | 104,310 |
| | | | 99,481 |
| | | | (13,295 | ) | |
With no related allowance recorded:(1) | | | | | | | | | | | | | | | | | | | | | | |
| Single-family: | | | | | | | | | | | | | | | | | | | | | | |
| Primary | | 19,326 |
| | | | 18,463 |
| | | | — |
| | | 15,939 |
| | | | 15,191 |
| | | | — |
| |
| Government | | 65 |
| | | | 61 |
| | | | — |
| | | 61 |
| | | | 56 |
| | | | — |
| |
| Alt-A | | 2,391 |
| | | | 2,141 |
| | | | — |
| | | 2,628 |
| | | | 2,363 |
| | | | — |
| |
| Other | | 624 |
| | | | 571 |
| | | | — |
| | | 718 |
| | | | 666 |
| | | | — |
| |
| Total single-family | | 22,406 |
| | | | 21,236 |
| | | | — |
| | | 19,346 |
| | | | 18,276 |
| | | | — |
| |
| Multifamily | | 368 |
| | | | 369 |
| | | | — |
| | | 343 |
| | | | 346 |
| | | | — |
| |
| Total individually impaired loans with no related allowance recorded | | 22,774 |
| | | | 21,605 |
| | | | — |
| | | 19,689 |
| | | | 18,622 |
| | | | — |
| |
Total individually impaired loans(2) | | $ | 106,139 |
| | | | $ | 101,643 |
| | | | $ | (8,552 | ) | | | $ | 123,999 |
| | | | $ | 118,103 |
| | | | $ | (13,295 | ) | |
| |
(1) | The discounted cash flows or collateral value equals or exceeds the carrying value of the loan and, as such, no valuation allowance is required. |
| |
(2) | Includes single-family loans restructured in a TDR with a recorded investment of $139.5$100.7 billion and $155.0$117.2 billion as of September 30, 20172019 and December 31, 2016,2018, respectively. Includes multifamily loans restructured in a TDR with a recorded investment of $264$126 million and $248$187 million as of September 30, 20172019 and December 31, 2016,2018, respectively. |
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 68 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Mortgage Loans |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, |
| | 2019 | | 2018 |
| | Average Recorded Investment | | Total Interest Income Recognized | | Interest Income Recognized on a Cash Basis | | Average Recorded Investment | | Total Interest Income Recognized | | Interest Income Recognized on a Cash Basis |
| | (Dollars in millions) |
| Individually impaired loans: | | | | | | | | | | | | | | | | | | | | | | | |
| With related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | |
| Single-family: | | | | | | | | | | | | | | | | | | | | | | | |
| Primary | | $ | 69,084 |
| | | | $ | 713 |
| | | | $ | 62 |
| | | | $ | 84,043 |
| | | | $ | 871 |
| | | | $ | 86 |
| |
| Government | | 262 |
| | | | 2 |
| | | | — |
| | | | 276 |
| | | | 3 |
| | | | — |
| |
| Alt-A | | 11,845 |
| | | | 125 |
| | | | 8 |
| | | | 17,034 |
| | | | 179 |
| | | | 13 |
| |
| Other | | 3,904 |
| | | | 37 |
| | | | 4 |
| | | | 6,254 |
| | | | 57 |
| | | | 4 |
| |
| Total single-family | | 85,095 |
| | | | 877 |
| | | | 74 |
| | | | 107,607 |
| | | | 1,110 |
| | | | 103 |
| |
| Multifamily | | 313 |
| | | | 2 |
| | | | — |
| | | | 231 |
| | | | 1 |
| | | | — |
| |
| Total individually impaired loans with related allowance recorded | | 85,408 |
| | | | 879 |
| | | | 74 |
| | | | 107,838 |
| | | | 1,111 |
| | | | 103 |
| |
With no related allowance recorded:(1) | | | | | |
| | | |
| | | | | | | | | | | | | |
| Single-family: | | | | | |
| | | |
| | | | | | | | | | | | | |
| Primary | | 16,422 |
| | | | 262 |
| | | | 39 |
| | | | 15,140 |
| | | | 254 |
| | | | 30 |
| |
| Government | | 56 |
| | | | 1 |
| | | | — |
| | | | 57 |
| | | | 1 |
| | | | — |
| |
| Alt-A | | 2,130 |
| | | | 44 |
| | | | 4 |
| | | | 2,562 |
| | | | 54 |
| | | | 4 |
| |
| Other | | 575 |
| | | | 10 |
| | | | 1 |
| | | | 784 |
| | | | 13 |
| | | | 2 |
| |
| Total single-family | | 19,183 |
| | | | 317 |
| | | | 44 |
| | | | 18,543 |
| | | | 322 |
| | | | 36 |
| |
| Multifamily | | 401 |
| | | | 8 |
| | | | — |
| | | | 335 |
| | | | 8 |
| | | | — |
| |
| Total individually impaired loans with no related allowance recorded | | 19,584 |
| | | | 325 |
| | | | 44 |
| | | | 18,878 |
| | | | 330 |
| | | | 36 |
| |
| Total individually impaired loans | | $ | 104,992 |
| | | | $ | 1,204 |
| | | | $ | 118 |
| | | | $ | 126,716 |
| | | | $ | 1,441 |
| | | | $ | 139 |
| |
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 69 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Mortgage Loans |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2019 | | 2018 |
| | Average Recorded Investment | | Total Interest Income Recognized | | Interest Income Recognized on a Cash Basis | | Average Recorded Investment | | Total Interest Income Recognized | | Interest Income Recognized on a Cash Basis |
| | (Dollars in millions) |
| Individually impaired loans: | | | | | | | | | | | | | | | | | | | | | | | |
| With related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | |
| Single-family: | | | | | | | | | | | | | | | | | | | | | | | |
| Primary | | $ | 73,601 |
| | | | $ | 2,304 |
| | | | $ | 214 |
| | | | $ | 86,842 |
| | | | $ | 2,697 |
| | | | $ | 302 |
| |
| Government | | 267 |
| | | | 8 |
| | | | — |
| | | | 277 |
| | | | 15 |
| | | | — |
| |
| Alt-A | | 13,299 |
| | | | 426 |
| | | | 30 |
| | | | 19,081 |
| | | | 610 |
| | | | 45 |
| |
| Other | | 4,429 |
| | | | 123 |
| | | | 11 |
| | | | 7,140 |
| | | | 201 |
| | | | 15 |
| |
| Total single-family | | 91,596 |
| | | | 2,861 |
| | | | 255 |
| | | | 113,340 |
| | | | 3,523 |
| | | | 362 |
| |
| Multifamily | | 280 |
| | | | 7 |
| | | | — |
| | | | 244 |
| | | | 2 |
| | | | — |
| |
| Total individually impaired loans with related allowance recorded | | 91,876 |
| | | | 2,868 |
| | | | 255 |
| | | | 113,584 |
| | | | 3,525 |
| | | | 362 |
| |
With no related allowance recorded:(1) | | | | | | | | | | | | | | | | | | | | | | | |
| Single-family: | | | | | | | | | | | | | | | | | | | | | | | |
| Primary | | 15,718 |
| | | | 731 |
| | | | 103 |
| | | | 15,039 |
| | | | 740 |
| | | | 88 |
| |
| Government | | 56 |
| | | | 3 |
| | | | — |
| | | | 58 |
| | | | 3 |
| | | | — |
| |
| Alt-A | | 2,203 |
| | | | 127 |
| | | | 11 |
| | | | 2,710 |
| | | | 173 |
| | | | 13 |
| |
| Other | | 611 |
| | | | 28 |
| | | | 3 |
| | | | 848 |
| | | | 44 |
| | | | 4 |
| |
| Total single-family | | 18,588 |
| | | | 889 |
| | | | 117 |
| | | | 18,655 |
| | | | 960 |
| | | | 105 |
| |
| Multifamily | | 377 |
| | | | 16 |
| | | | — |
| | | | 333 |
| | | | 11 |
| | | | — |
| |
| Total individually impaired loans with no related allowance recorded | | 18,965 |
| | | | 905 |
| | | | 117 |
| | | | 18,988 |
| | | | 971 |
| | | | 105 |
| |
| Total individually impaired loans | | $ | 110,841 |
| | | | $ | 3,773 |
| | | | $ | 372 |
| | | | $ | 132,572 |
| | | | $ | 4,496 |
| | | | $ | 467 |
| |
| |
(3)(1)
| Total single-family interest income recognizedThe discounted cash flows or collateral value equals or exceeds the carrying value of $1.5 billion for the three months ended September 30, 2017 consists of $1.3 billion of contractual interestloan and, $216 million of effective yield adjustments. Total single-family interest income recognized of $1.8 billion for the three months ended September 30, 2016 consists of $1.4 billion of contractual interest and $320 million of effective yield adjustments. Total single-family interest income recognized of $4.9 billion for the nine months ended September 30, 2017 consists of $4.2 billion of contractual interest and $713 million of effective yield adjustments. Total single-family interest income recognized of $5.3 billion for the nine months ended September 30, 2016 consists of $4.3 billion of contractual interest and $961 million of effective yield adjustments.as such, no valuation allowance is required. |
Troubled Debt Restructurings
A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial difficulties is considered a TDR. In addition to formal loan modifications, including those modifications in a trial period, we also engage in other loss mitigation activities with troubled borrowers, which include repayment plans and forbearance arrangements, both of which represent informal agreements with the borrower that do not result in the legal modification of the loan’s contractual terms. We account for these informal restructurings as a TDR if we defer more than three missed payments. We also classify loans to certain borrowers who have received bankruptcy relief as TDRs.
The substantial majority of the loan modifications we complete result in term extensions, interest rate reductions or a combination of both. DuringThe average term extension of a single-family modified loan was 164 months and 98 months for the three months ended September 30, 20172019 and 2016,2018, respectively. The average interest rate reduction was 0.15 and 0.14 percentage points, for the three months ended September 30, 2019 and 2018, respectively. During the nine months ended September 30, 2019 and 2018, the average term extension of a single-family modified loan was 156160 months and 153104 months, respectively, and the average interest rate reduction was 0.350.11 and 0.820.23 percentage points, respectively. During the nine months ended September 30, 2017 and 2016, the average term extension of a single-family modified loan was 155 months and 157 months, respectively, and the average interest rate reduction was 0.66 and 0.76 percentage points, respectively.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 7970 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Mortgage Loans |
The following tables display the number of loans and recorded investment in loans restructuredclassified as a TDR. |
| | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, |
| | 2019 | | 2018 |
| | Number of Loans | | Recorded Investment(1) | | Number of Loans | | Recorded Investment(1) |
| | (Dollars in millions) |
| Single-family: | | | | | | | | | | | | | | | |
| Primary | | 11,373 |
| | | | $ | 1,819 |
| | | | 12,291 |
| | | | $ | 1,797 |
| |
| Government | | 16 |
| | | | 1 |
| | | | 21 |
| | | | 3 |
| |
| Alt-A | | 543 |
| | | | 70 |
| | | | 779 |
| | | | 100 |
| |
| Other | | 89 |
| | | | 16 |
| | | | 207 |
| | | | 37 |
| |
| Total single-family | | 12,021 |
| | | | 1,906 |
| | | | 13,298 |
| | | | 1,937 |
| |
| Multifamily | | 3 |
| | | | 4 |
| | | | 2 |
| | | | 7 |
| |
| Total TDRs | | 12,024 |
| | | | $ | 1,910 |
| | | | 13,300 |
| | | | $ | 1,944 |
| |
|
| | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2019 | | 2018 |
| | Number of Loans | | Recorded Investment(1) | | Number of Loans | | Recorded Investment(1) |
| | (Dollars in millions) |
| Single-family: | | | | | | | | | | | | | | | |
| Primary | | 36,126 |
| | | | $ | 5,634 |
| | | | 75,790 |
| | | | $ | 11,469 |
| |
| Government | | 61 |
| | | | 7 |
| | | | 95 |
| | | | 9 |
| |
| Alt-A | | 1,948 |
| | | | 248 |
| | | | 4,499 |
| | | | 583 |
| |
| Other | | 374 |
| | | | 68 |
| | | | 937 |
| | | | 173 |
| |
| Total single-family | | 38,509 |
| | | | 5,957 |
| | | | 81,321 |
| | | | 12,234 |
| |
| Multifamily | | 9 |
| | | | 37 |
| | | | 12 |
| | | | 68 |
| |
| Total TDRs | | 38,518 |
| | | | $ | 5,994 |
| | | | 81,333 |
| | | | $ | 12,302 |
| |
| |
(1) | Based on the nature of our modification programs, which do not include principal or past-due interest forgiveness, there is not a material difference between the recorded investment in our loans pre- and post- modification. Therefore, these amounts represent recorded investment post-modification. |
The decrease in loans classified as a TDR for the three and nine months ended September 30, 2019 compared with the three and nine months ended September 30, 2018 was primarily attributable to a significantly higher number of single-family loan modifications and other forms of loss mitigation in the areas affected by Hurricanes Harvey, Irma and Maria that resulted in a TDR.restructuring of the terms of those loans during the first nine months of 2018.
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 71 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, |
| | 2017 | | 2016 |
| | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
| | (Dollars in millions) |
| Single-family: | | | | | | | | | | | | | | | |
| Primary | | 13,323 |
| | | | $ | 1,847 |
| | | | 13,983 |
| | | | $ | 1,922 |
| |
| Government | | 32 |
| | | | 5 |
| | | | 54 |
| | | | 5 |
| |
| Alt-A | | 1,229 |
| | | | 182 |
| | | | 1,578 |
| | | | 227 |
| |
| Other | | 264 |
| | | | 50 |
| | | | 317 |
| | | | 57 |
| |
| Total single-family | | 14,848 |
| | | | 2,084 |
| | | | 15,932 |
| | | | 2,211 |
| |
| Multifamily | | 5 |
| | | | 82 |
| | | | 2 |
| | | | 5 |
| |
| Total TDRs | | 14,853 |
| | | | $ | 2,166 |
| | | | 15,934 |
| | | | $ | 2,216 |
| |
|
| | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
| | (Dollars in millions) |
| Single-family: | | | | | | | | | | | | | | | |
| Primary | | 44,706 |
| | | | $ | 6,155 |
| | | | 45,987 |
| | | | $ | 6,282 |
| |
| Government | | 138 |
| | | | 15 |
| | | | 136 |
| | | | 14 |
| |
| Alt-A | | 4,122 |
| | | | 600 |
| | | | 5,112 |
| | | | 735 |
| |
| Other | | 844 |
| | | | 149 |
| | | | 1,078 |
| | | | 190 |
| |
| Total single-family | | 49,810 |
| | | | 6,919 |
| | | | 52,313 |
| | | | 7,221 |
| |
| Multifamily | | 8 |
| | | | 99 |
| | | | 6 |
| | | | 50 |
| |
| Total TDRs | | 49,818 |
| | | | $ | 7,018 |
| | | | 52,319 |
| | | | $ | 7,271 |
| |
The |
| | |
| Notes to Condensed Consolidated Financial Statements | Mortgage Loans |
For loans that had a payment default in the period presented and that were classified as a TDR in the twelve months prior to the payment default, the following tables display the number of loans and our recorded investment in these loans at the time of payment default for loans that were restructured in a TDR in the twelve months prior to the payment default. For the purposes of this disclosure, we define loans that had a payment default as: single-family and multifamily loans with completed TDRs that liquidated during the period, either through foreclosure, deed-in-lieu of foreclosure, or a short sale; single-family loans with completed modifications that are two or more months delinquent during the period; or multifamily loans with completed modifications that are one or more months delinquent during the period.
|
| | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, |
| | 2019 | | 2018 |
| | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
| | (Dollars in millions) |
| Single-family: | | | | | | | | | | | | | | | |
| Primary | | 3,780 |
| | | | $ | 585 |
| | | | 3,720 |
| | | | $ | 519 |
| |
| Government | | 28 |
| | | | 2 |
| | | | 8 |
| | | | — |
| |
| Alt-A | | 307 |
| | | | 43 |
| | | | 438 |
| | | | 74 |
| |
| Other | | 87 |
| | | | 16 |
| | | | 143 |
| | | | 29 |
| |
| Total single-family | | 4,202 |
| | | | 646 |
| | | | 4,309 |
| | | | 622 |
| |
| Multifamily | | 1 |
| | | | 13 |
| | | | 1 |
| | | | 2 |
| |
| Total TDRs that subsequently defaulted | | 4,203 |
| | | | $ | 659 |
| | | | 4,310 |
| | | | $ | 624 |
| |
|
| | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, |
| | 2017 | | 2016 |
| | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
| | (Dollars in millions) |
| Single-family: | | | | | | | | | | | | | | | |
| Primary | | 4,900 |
| | | | $ | 684 |
| | | | 5,268 |
| | | | $ | 734 |
| |
| Government | | 25 |
| | | | 3 |
| | | | 31 |
| | | | 4 |
| |
| Alt-A | | 627 |
| | | | 95 |
| | | | 734 |
| | | | 116 |
| |
| Other | | 178 |
| | | | 34 |
| | | | 235 |
| | | | 41 |
| |
| Total TDRs that subsequently defaulted | | 5,730 |
| | | | $ | 816 |
| | | | 6,268 |
| | | | $ | 895 |
| |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 80 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2019 | | 2018 |
| | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
| | (Dollars in millions) |
| Single-family: | | | | | | | | | | | | | | | |
| Primary | | 12,343 |
| | | | $ | 1,864 |
| | | | 12,372 |
| | | | $ | 1,774 |
| |
| Government | | 56 |
| | | | 7 |
| | | | 37 |
| | | | 4 |
| |
| Alt-A | | 1,157 |
| | | | 174 |
| | | | 1,703 |
| | | | 275 |
| |
| Other | | 351 |
| | | | 65 |
| | | | 469 |
| | | | 93 |
| |
| Total single-family | | 13,907 |
| | | | 2,110 |
| | | | 14,581 |
| | | | 2,146 |
| |
| Multifamily | | 2 |
| | | | 19 |
| | | | 2 |
| | | | 4 |
| |
| Total TDRs that subsequently defaulted | | 13,909 |
| | | | $ | 2,129 |
| | | | 14,583 |
| | | | $ | 2,150 |
| |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Mortgage Loans |
|
| | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
| | (Dollars in millions) |
| Single-family: | | | | | | | | | | | | | | | |
| Primary | | 13,617 |
| | | | $ | 1,894 |
| | | | 15,377 |
| | | | $ | 2,174 |
| |
| Government | | 69 |
| | | | 8 |
| | | | 73 |
| | | | 9 |
| |
| Alt-A | | 1,857 |
| | | | 288 |
| | | | 2,342 |
| | | | 376 |
| |
| Other | | 529 |
| | | | 102 |
| | | | 767 |
| | | | 130 |
| |
| Total single-family | | 16,072 |
| | | | 2,292 |
| | | | 18,559 |
| | | | 2,689 |
| |
| Multifamily | | 1 |
| | | | 4 |
| | | | — |
| | | | — |
| |
| Total TDRs that subsequently defaulted | | 16,073 |
| | | | $ | 2,296 |
| | | | 18,559 |
| | | | $ | 2,689 |
| |
4. Allowance for Loan Losses
We maintain an allowance for loan losses for HFI loans held by Fannie Mae and loans backingby consolidated Fannie Mae MBS issued from consolidated trusts.trusts, excluding loans for which we have elected the fair value option. When calculating our allowance for loan losses, we consider our net carrying value of HFI loans at the balance sheet date, which includes unpaid principal balance, net of amortized premiums and discounts, and other cost basis adjustments.adjustments of HFI loans at the balance sheet date. We record charge-offs as a reduction to our allowance for loan losses at the point of foreclosure, completion of a short sale, upon the redesignation of loans from HFI to HFS or when a loan is determined to be uncollectible.
We aggregate single-family HFI loans that are not individually impaired based on similar risk characteristics, for purposes of estimating incurred credit losses and establishing a collective single-family loss reserve using an econometric model that derives an overall loss reserve estimate. We base our allowance methodology on historical events and trends, such as loss severity (in event of default), default rates, and recoveries from mortgage insurance contracts and other credit enhancements that provide loan levelloan-level loss coverage and are either contractually attached to a loan or that were entered into contemporaneously with and in contemplation of a guaranty or loan purchase transaction. We use recent regional historical sales and appraisal information, including the sales of our own foreclosed properties, to develop our loss severity estimates for all loan categories. Our allowance calculation also incorporates a loss confirmation period (the anticipated time lag between a credit loss event and the confirmation of the credit loss resulting from that event) to ensure our allowance estimate captures credit losses that have been incurred as of the balance sheet date but have not been confirmed. In addition, management performs a review of the observable data used in its estimate to ensure it is representative of prevailing economic conditions and other events existing as of the balance sheet date.
Individually impaired single-family loans currently include those restructured inclassified as a TDR and acquired credit-impaired loans. We consider a loan to be impaired when, based on current information, it is probable that we will not receive all amounts due,
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 72 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Allowance for Loan Losses |
including interest, in accordance with the contractual terms of the loan agreement. When a loan has been restructured, we measure impairment using a cash flow analysis discounted at the loan’s original effective interest rate. If we expect to recover our recorded investment in an individually impaired loan through probable foreclosure of the underlying collateral, we measure impairment based on the difference between our recorded investment in the loan and the fair value of the collateral, reduced by estimated disposal costs andunderlying property, adjusted for the estimated proceeds from mortgage, flood, or hazardcosts to sell the property and estimated insurance or similar sources.other proceeds we expect to receive. During the three months ended September 30, 2019, we enhanced the model used to estimate cash flows for individually impaired single-family loans within our allowance for loan losses. This enhancement was performed as a part of management’s routine model performance review process. In addition to incorporating recent loan performance data, this model enhancement better captures recent prepayment activity, default rates, and loss severity in the event of default. The enhancement resulted in a decrease to our allowance for loan losses and an incremental benefit for credit losses of approximately $850 million and is included in “Benefit (provision) for loan losses” in the table below.
We establish a collective allowance for all loans in our multifamily guaranty book of business that are not individually impairedmeasured for impairment using an internal model that applies loss factors to loans in similar risk categories. Our loss factors are developed based on our historical default and loss severity experience. We identify multifamily loans for evaluation for impairment through a credit risk assessment process. If we determine that a multifamily loan is individually impaired, we generally measure impairment on that loan based on the fair value of the underlying collateral less estimated costs to sell the property, as we have concluded that such loans are collateral dependent. We evaluate collectively for impairment smaller-balance homogeneous multifamily loans.
As of September 30, 2017, we included an estimate of incurred credit losses from Hurricanes Harvey, IrmaThe following table displays changes in single-family, multifamily and Maria of approximately $1.0 billion in thetotal allowance for loan losses. |
| | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, |
| | | 2019 | | 2018 | | | 2019 | | 2018 |
| | | (Dollars in millions) |
| Single-family allowance for loan losses: | | | | | | | | | |
| Beginning balance | | $ | (11,210 | ) | | $ | (16,602 | ) | | | $ | (13,969 | ) | | $ | (18,849 | ) |
Benefit (provision) for loan losses(1) | | 1,826 |
| | 724 |
| | | 3,712 |
| | 1,916 |
|
| Charge-offs | | 270 |
| | 509 |
| | | 1,209 |
| | 1,705 |
|
| Recoveries | | (8 | ) | | (65 | ) | | | (68 | ) | | (189 | ) |
| Other | | — |
| | (2 | ) | | | (6 | ) | | (19 | ) |
| Ending balance | | $ | (9,122 | ) | | $ | (15,436 | ) | | | $ | (9,122 | ) | | $ | (15,436 | ) |
| Multifamily allowance for loan losses: | | | | | | | | | |
| Beginning balance | | $ | (272 | ) | | $ | (210 | ) | | | $ | (234 | ) | | $ | (235 | ) |
Benefit (provision) for loan losses(1) | | 17 |
| | (14 | ) | | | (23 | ) | | 6 |
|
| Charge-offs | | 2 |
| | — |
| | | 6 |
| | 5 |
|
| Recoveries | | (1 | ) | | (3 | ) | | | (3 | ) | | (3 | ) |
| Ending balance | | $ | (254 | ) | | $ | (227 | ) | | | $ | (254 | ) | | $ | (227 | ) |
| Total allowance for loan losses: | | | | | | | | | |
| Beginning balance | | $ | (11,482 | ) | | $ | (16,812 | ) | | | $ | (14,203 | ) | | $ | (19,084 | ) |
Benefit (provision) for loan losses(1) | | 1,843 |
| | 710 |
| | | 3,689 |
| | 1,922 |
|
| Charge-offs | | 272 |
| | 509 |
| | | 1,215 |
| | 1,710 |
|
| Recoveries | | (9 | ) | | (68 | ) | | | (71 | ) | | (192 | ) |
| Other | | — |
| | (2 | ) | | | (6 | ) | | (19 | ) |
| Ending balance | | $ | (9,376 | ) | | $ | (15,663 | ) | | | $ | (9,376 | ) | | $ | (15,663 | ) |
| |
(1) | Benefit (provision) for loan losses is included in “Benefit for credit losses” in our condensed consolidated statements of operations and comprehensive income. |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 8173 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Allowance for Loan Losses |
The following table displays changes in single-family, multifamily and total allowance for loan losses. |
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
| Single-family allowance for loan losses: | | | | | | | |
| Beginning balance | $ | 20,218 |
| | $ | 23,584 |
| | $ | 23,283 |
| | $ | 27,709 |
|
Provision (benefit) for loan losses(1) | 163 |
| | (609 | ) | | (1,442 | ) | | (2,957 | ) |
| Charge-offs | (434 | ) | | (604 | ) | | (2,163 | ) | | (2,701 | ) |
| Recoveries | 42 |
| | 135 |
| | 273 |
| | 369 |
|
Other(2) | (17 | ) | | 10 |
| | 21 |
| | 96 |
|
| Ending balance | $ | 19,972 |
| | $ | 22,516 |
| | $ | 19,972 |
| | $ | 22,516 |
|
| Multifamily allowance for loan losses: | | | | | | | |
| Beginning balance | $ | 181 |
| | $ | 215 |
| | $ | 182 |
| | $ | 242 |
|
Provision (benefit) for loan losses(1) | 42 |
| | (27 | ) | | 40 |
| | (47 | ) |
| Charge-offs | (3 | ) | | (4 | ) | | (3 | ) | | (12 | ) |
| Recoveries | 2 |
| | 6 |
| | 3 |
| | 7 |
|
| Ending balance | $ | 222 |
| | $ | 190 |
| | $ | 222 |
| | $ | 190 |
|
| Total allowance for loan losses: | | | | | | | |
| Beginning balance | $ | 20,399 |
| | $ | 23,799 |
| | $ | 23,465 |
| | $ | 27,951 |
|
Provision (benefit) for loan losses(1) | 205 |
| | (636 | ) | | (1,402 | ) | | (3,004 | ) |
| Charge-offs | (437 | ) | | (608 | ) | | (2,166 | ) | | (2,713 | ) |
| Recoveries | 44 |
| | 141 |
| | 276 |
| | 376 |
|
Other(2) | (17 | ) | | 10 |
| | 21 |
| | 96 |
|
| Ending balance | $ | 20,194 |
| | $ | 22,706 |
| | $ | 20,194 |
| | $ | 22,706 |
|
__________
| |
(1)
| Provision (benefit) for loan losses is included in “Benefit (provision) for credit losses” in our condensed consolidated statements of operations and comprehensive income. |
| |
(2)
| Amounts represent changes in other loss reserves which are reflected in provision (benefit) for loan losses, charge-offs, and recoveries. |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 82 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Allowance for Loan Losses |
The following table displays the allowance for loan losses and recorded investment in our HFI loans by impairment or allowance methodology and portfolio segment, excluding loans for which we have elected the fair value option, by impairment or allowance methodology and portfolio segment.option.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of |
| | | September 30, 2019 | | December 31, 2018 |
| | | Single-Family | | Multifamily | | Total | | Single-Family | | Multifamily | | Total |
| | | (Dollars in millions) |
| Allowance for loan losses by segment: | | | | | | | | | | | | |
Individually impaired loans(1) | | $ | (8,507 | ) | | $ | (45 | ) | | $ | (8,552 | ) | | $ | (13,255 | ) | | $ | (40 | ) | | $ | (13,295 | ) |
| Collectively reserved loans | | (615 | ) | | (209 | ) | | (824 | ) | | (714 | ) | | (194 | ) | | (908 | ) |
| Total allowance for loan losses | | $ | (9,122 | ) | | $ | (254 | ) | | $ | (9,376 | ) | | $ | (13,969 | ) | | $ | (234 | ) | | $ | (14,203 | ) |
| | | | | | | | | | | | | |
| Recorded investment in loans by segment: | | | | | | | | | | | | |
Individually impaired loans(1) | | $ | 100,991 |
| | $ | 652 |
| | $ | 101,643 |
| | $ | 117,561 |
| | $ | 542 |
| | $ | 118,103 |
|
| Collectively reserved loans | | 2,889,510 |
| | 320,545 |
| | 3,210,055 |
| | 2,841,943 |
| | 295,122 |
| | 3,137,065 |
|
| Total recorded investment in loans | | $ | 2,990,501 |
| | $ | 321,197 |
| | $ | 3,311,698 |
| | $ | 2,959,504 |
| | $ | 295,664 |
| | $ | 3,255,168 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| September 30, 2017 | | December 31, 2016 |
| | Single-Family | | Multifamily | | Total | | Single-Family | | Multifamily | | Total |
| | (Dollars in millions) |
| Allowance for loan losses by segment: | | | | | | | | | | | |
Individually impaired loans(1) | $ | 18,089 |
| | $ | 35 |
| | $ | 18,124 |
| | $ | 21,920 |
| | $ | 33 |
| | $ | 21,953 |
|
| Collectively reserved loans | 1,883 |
| | 187 |
| | 2,070 |
| | 1,363 |
| | 149 |
| | 1,512 |
|
| Total allowance for loan losses | $ | 19,972 |
| | $ | 222 |
| | $ | 20,194 |
| | $ | 23,283 |
| | $ | 182 |
| | $ | 23,465 |
|
| | | | | | | | | | | | |
| Recorded investment in loans by segment: | | | | | | | | | | | |
Individually impaired loans(1) | $ | 140,007 |
| | $ | 585 |
| | $ | 140,592 |
| | $ | 155,598 |
| | $ | 589 |
| | $ | 156,187 |
|
| Collectively reserved loans | 2,770,331 |
| | 254,408 |
| | 3,024,739 |
| | 2,708,337 |
| | 231,292 |
| | 2,939,629 |
|
| Total recorded investment in loans | $ | 2,910,338 |
| | $ | 254,993 |
| | $ | 3,165,331 |
| | $ | 2,863,935 |
| | $ | 231,881 |
| | $ | 3,095,816 |
|
__________
| |
(1) | Includes acquired credit-impaired loans. |
5. Investments in Securities
Trading Securities
Trading securities are recorded at fair value with subsequent changes in fair value recorded as “Fair value losses,gains (losses), net” in our condensed consolidated statements of operations and comprehensive income. The following table displays our investments in trading securities.
| | | | As of | As of |
| | September 30, 2017 | | December 31, 2016 | September 30, 2019 | | December 31, 2018 |
| | (Dollars in millions) | | (Dollars in millions) | |
| Mortgage-related securities: | | | | | | | | | | |
Fannie Mae | | $ | 4,100 |
| | $ | 4,769 |
| | | $ | 3,661 |
| | $ | 1,467 |
| |
Other agency | | 1,428 |
| | 2,058 |
| | | 3,704 |
| | 3,503 |
| |
| Alt-A and subprime private-label securities | | 549 |
| | 636 |
| | |
| Commercial mortgage-backed securities (“CMBS”) | | 9 |
| | 761 |
| | |
| Mortgage revenue bonds | | 1 |
| | 21 |
| | |
| Total mortgage-related securities | | 6,087 |
| | 8,245 |
| | |
| Private-label and other mortgage securities | | | 741 |
| | 1,306 |
| |
| Total mortgage-related securities (includes $922 and $32, respectively, related to consolidated trusts) | | | 8,106 |
| | 6,276 |
| |
| Non-mortgage-related securities: | | | | | | |
| U.S. Treasury securities | | 30,799 |
| | 32,317 |
| | | 36,016 |
| | 35,502 |
| |
| Other securities | | | 84 |
| | 89 |
| |
| Total non-mortgage-related securities | | | 36,100 |
| | 35,591 |
| |
| Total trading securities | | $ | 36,886 |
| | $ | 40,562 |
| | | $ | 44,206 |
| | $ | 41,867 |
| |
| |
(1) | In the second quarter of 2019, we implemented the Single Security Initiative and recognized $1.4 billion in mortgage-related securities that had previously been consolidated. |
| |
(2) | Consists of Freddie Mac and Ginnie Mae mortgage-related securities. |
The following table displays information about our net trading gains and losses.(losses).
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (Dollars in millions) |
| Net trading gains (losses) | $ | 95 |
| | $ | (40 | ) | | $ | 370 |
| | $ | 79 |
|
| Net trading gains (losses) recognized in the period related to securities still held at period end | 82 |
| | (27 | ) | | 298 |
| | 20 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three | | For the Nine |
| | Months Ended | | Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
| Net trading gains | $ | 59 |
| | $ | 38 |
| | $ | 145 |
| | $ | 88 |
|
| Net trading gains (losses) recognized in the period related to securities still held at period end | 51 |
| | 1 |
| | 125 |
| | (34 | ) |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 8374 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Investments in Securities |
Available-for-Sale Securities
We record available-for-sale (“AFS”)AFS securities at fair value with unrealized gains and losses, recorded net of tax, as a component of “Other comprehensive income (loss)” and we recognize realized gains and losses from the sale of AFS securities in “Investment gains, net” in our condensed consolidated statements of operations and comprehensive income.
The following table displays the gross realized gains losses and proceeds on sales of AFS securities.
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (Dollars in millions) |
| Gross realized gains | $ | — |
| | $ | 12 |
| | $ | 171 |
| | $ | 375 |
|
| Total proceeds (excludes initial sale of securities from new portfolio securitizations) | — |
| | 21 |
| | 376 |
| | 662 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions)
|
| Gross realized gains | $ | 30 |
| | $ | 400 |
| | $ | 260 |
| | $ | 845 |
|
| Gross realized losses | — |
| | — |
| | — |
| | 12 |
|
| Total proceeds (excludes initial sale of securities from new portfolio securitizations) | 187 |
| | 2,819 |
| | 1,081 |
| | 10,086 |
|
The following tables display the amortized cost, gross unrealized gains and losses, and fair value by major security type for AFS securities.
| | | | As of September 30, 2017 | As of September 30, 2019 |
| | Total Amortized Cost(1) | | Gross Unrealized Gains | | Gross Unrealized Losses(2) | | | Total Fair Value | Total Amortized Cost(1) | | Gross Unrealized Gains | | Gross Unrealized Losses(2) | | Total Fair Value |
| | (Dollars in millions) | (Dollars in millions) |
| Fannie Mae | | $ | 2,118 |
| | $ | 116 |
| | $ | (26 | ) | | $ | 2,208 |
| | $ | 1,492 |
| | $ | 98 |
| | $ | (8 | ) | | $ | 1,582 |
|
| Other agency | | 361 |
| | 30 |
| | — |
| | 391 |
| | 195 |
| | 18 |
| | — |
| | 213 |
|
| Alt-A and subprime private-label securities | | 1,155 |
| | 879 |
| | — |
| | 2,034 |
| | 102 |
| | 124 |
| | — |
| | 226 |
|
| CMBS | | 182 |
| | — |
| | — |
| | 182 |
| |
| Mortgage revenue bonds | | 736 |
| | 19 |
| | (6 | ) | | 749 |
| | 339 |
| | 10 |
| | (3 | ) | | 346 |
|
| Other mortgage-related securities | | 380 |
| | 19 |
| | — |
| | 399 |
| | 320 |
| | 5 |
| | (2 | ) | | 323 |
|
| Total | | $ | 4,932 |
| | $ | 1,063 |
| | $ | (32 | ) | | $ | 5,963 |
| | $ | 2,448 |
| | $ | 255 |
| | $ | (13 | ) | | $ | 2,690 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | Total Amortized Cost(1) | | Gross Unrealized Gains | | Gross Unrealized Losses(2) | | | Total Fair Value |
| | (Dollars in millions) |
| Fannie Mae | | $ | 2,445 |
| | | | $ | 137 |
| | | | $ | (28 | ) | | | | $ | 2,554 |
|
| Other agency | | 508 |
| | | | 39 |
| | | | — |
| | | | 547 |
|
| Alt-A and subprime private-label securities | | 1,817 |
| | | | 895 |
| | | | (3 | ) | | | | 2,709 |
|
| CMBS | | 815 |
| | | | 4 |
| | | | — |
| | | | 819 |
|
| Mortgage revenue bonds | | 1,245 |
| | | | 36 |
| | | | (9 | ) | | | | 1,272 |
|
| Other mortgage-related securities | | 431 |
| | | | 31 |
| | | | — |
| | | | 462 |
|
| Total | | $ | 7,261 |
| | | | $ | 1,142 |
| | | | $ | (40 | ) | | | | $ | 8,363 |
|
__________ |
| | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2018 |
| | Total Amortized Cost(1) | | Gross Unrealized Gains | | Gross Unrealized Losses(2) | | Total Fair Value |
| | (Dollars in millions) |
| Fannie Mae | | $ | 1,754 |
| | | | $ | 69 |
| | | | $ | (26 | ) | | | $ | 1,797 |
|
| Other agency | | 239 |
| | | | 17 |
| | | | — |
| | | 256 |
|
| Alt-A and subprime private-label securities | | 325 |
| | | | 267 |
| | | | — |
| | | 592 |
|
| Mortgage revenue bonds | | 425 |
| | | | 13 |
| | | | (4 | ) | | | 434 |
|
| Other mortgage-related securities | | 336 |
| | | | 14 |
| | | | — |
| | | 350 |
|
| Total | | $ | 3,079 |
| | | | $ | 380 |
| | | | $ | (30 | ) | | | $ | 3,429 |
|
| |
(1) | Amortized cost consists of unpaid principal balance, unamortized premiums, discounts and other cost basis adjustments, as well as net other-than-temporary impairments (“OTTI”) recognized in “Investment gains, net” in our condensed consolidated statements of operations and comprehensive income. |
| |
(2) | Represents the gross unrealized losses on securities for which we have not recognized OTTI, as well as the noncredit component of OTTI and cumulative changes in fair value of securities for which we previously recognized the credit component of OTTI in “Accumulated other comprehensive income ”income” in our condensed consolidated balance sheets. |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 8475 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Investments in Securities |
The following tables display additional information regarding gross unrealized losses and fair value by major security type for AFS securities in an unrealized loss position.
|
| | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2019 |
| | Less Than 12 Consecutive Months | | 12 Consecutive Months or Longer |
| | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value |
| | (Dollars in millions) |
| Fannie Mae | | $ | — |
| | | $ | — |
| | | $ | (8 | ) | | | $ | 348 |
|
| Mortgage revenue bonds | | — |
| | | — |
| | | (3 | ) | | | 5 |
|
| Other mortgage-related securities | | (2 | ) | | | 273 |
| | | — |
| | | — |
|
| Total | | $ | (2 | ) | | | $ | 273 |
| | | $ | (11 | ) | | | $ | 353 |
|
| | | | | | | | | | | | |
| | As of December 31, 2018 |
| | Less Than 12 Consecutive Months | | 12 Consecutive Months or Longer |
| | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value |
| | (Dollars in millions) |
| Fannie Mae | | $ | — |
| | | $ | — |
| | | $ | (26 | ) | | | $ | 487 |
|
| Mortgage revenue bonds | | (1 | ) | | | 24 |
| | | (3 | ) | | | 19 |
|
| Total | | $ | (1 | ) | | | $ | 24 |
| | | $ | (29 | ) | | | $ | 506 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 |
| | Less Than 12 Consecutive Months | | 12 Consecutive Months or Longer |
| | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value |
| | (Dollars in millions) |
| Fannie Mae | | $ | (2 | ) | | | $ | 150 |
| | | $ | (24 | ) | | | $ | 430 |
|
| Mortgage revenue bonds | | — |
| | | — |
| | | (6 | ) | | | 15 |
|
| Total | | $ | (2 | ) | | | $ | 150 |
| | | $ | (30 | ) | | | $ | 445 |
|
| | | | | | | | | | | | |
| | As of December 31, 2016 |
| | Less Than 12 Consecutive Months | | 12 Consecutive Months or Longer |
| | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value |
| | (Dollars in millions) |
| Fannie Mae | | $ | (2 | ) | | | $ | 139 |
| | | $ | (26 | ) | | | $ | 477 |
|
| Alt-A and subprime private-label securities | | — |
| | | — |
| | | (3 | ) | | | 73 |
|
| Mortgage revenue bonds | | (7 | ) | | | 78 |
| | | (2 | ) | | | 6 |
|
| Total | | $ | (9 | ) | | | $ | 217 |
| | | $ | (31 | ) | | | $ | 556 |
|
Other-Than-Temporary Impairments
The cumulative outstanding balance of the unrealizedrelated to other-than-temporary-impairment (“OTTI”) credit loss component of AFS debt securities held by us andamounts previously recognized in our condensed consolidated statements of operations and comprehensive income was $1.2 billion, $1.8 billion, $1.9 billion, $2.0 billion, $2.2 billionthroughout the life of AFS debt securities held in portfolio were $37 million and $2.4$635 million as of September 30, 2019 and December 31, 2018, respectively. Those amounts were $718 million and $1.1 billion as of September 30, 2017, June 30, 2017, December 31, 2016, September 30, 2016, June 30, 20162018 and December 31, 2015,2017, respectively. The decreases fordecrease in the three andcumulative outstanding balance in the first nine months ended September 30, 2017of 2019 and September 30, 2016 were2018 was primarily driven by securities that we intend to sell or that it is more likely than not we will be required to sell before recoveryno longer hold in portfolio.
The following table displays net unrealized gains on AFS securities and other amounts within accumulated other comprehensive income (“AOCI”), net of our amortized cost basis.tax, by major categories. |
| | | | | | | | | | | |
| | As of |
| | September 30, | | December 31, |
| | 2019 | | 2018 |
| | (Dollars in millions) |
| Net unrealized gains on AFS securities for which we have not recorded OTTI | | $ | 191 |
| | | | $ | 52 |
| |
| Net unrealized gains on AFS securities for which we have recorded OTTI | | — |
| | | | 224 |
| |
| Other | | 39 |
| | | | 46 |
| |
| Accumulated other comprehensive income | | $ | 230 |
| | | | $ | 322 |
| |
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 76 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Investments in Securities |
Maturity Information
The following table displays the amortized cost and fair value of our AFS securities by major security type and remaining contractual maturity, assuming no principal prepayments. The contractual maturity of mortgage-backed securities is not a reliable indicator of their expected life because borrowers generally have the right to prepay their obligations at any time.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2019 |
| | Total Amortized Cost | | Total Fair Value | | One Year or Less | | After One Year Through Five Years | | After Five Years Through Ten Years | | After Ten Years |
| | | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | (Dollars in millions) |
| Fannie Mae | | $ | 1,492 |
| | | $ | 1,582 |
| | | $ | — |
| | | $ | — |
| | | $ | 14 |
| | | $ | 15 |
| | | $ | 101 |
| | | $ | 111 |
| | | $ | 1,377 |
| | | $ | 1,456 |
|
| Other agency | | 195 |
| | | 213 |
| | | — |
| | | — |
| | | 20 |
| | | 21 |
| | | 26 |
| | | 29 |
| | | 149 |
| | | 163 |
|
| Alt-A and subprime private-label securities | | 102 |
| | | 226 |
| | | — |
| | | — |
| | | — |
| | | — |
| | | 1 |
| | | 1 |
| | | 101 |
| | | 225 |
|
| Mortgage revenue bonds | | 339 |
| | | 346 |
| | | 2 |
| | | 2 |
| | | 26 |
| | | 27 |
| | | 36 |
| | | 37 |
| | | 275 |
| | | 280 |
|
| Other mortgage-related securities | | 320 |
| | | 323 |
| | | — |
| | | — |
| | | 2 |
| | | 1 |
| | | 24 |
| | | 27 |
| | | 294 |
| | | 295 |
|
| Total | | $ | 2,448 |
| | | $ | 2,690 |
| | | $ | 2 |
| | | $ | 2 |
| | | $ | 62 |
| | | $ | 64 |
| | | $ | 188 |
| | | $ | 205 |
| | | $ | 2,196 |
| | | $ | 2,419 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 |
| | Total Amortized Cost | | Total Fair Value | | One Year or Less | | After One Year Through Five Years | | After Five Years Through Ten Years | | After Ten Years |
| | | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | (Dollars in millions) |
| Fannie Mae | | $ | 2,118 |
| | | $ | 2,208 |
| | | $ | 4 |
| | | $ | 4 |
| | | $ | 11 |
| | | $ | 11 |
| | | $ | 64 |
| | | $ | 68 |
| | | $ | 2,039 |
| | | $ | 2,125 |
|
| Other agency | | 361 |
| | | 391 |
| | | — |
| | | — |
| | | 22 |
| | | 23 |
| | | 58 |
| | | 62 |
| | | 281 |
| | | 306 |
|
| Alt-A and subprime private-label securities | | 1,155 |
| | | 2,034 |
| | | — |
| | | — |
| | | — |
| | | — |
| | | — |
| | | — |
| | | 1,155 |
| | | 2,034 |
|
| CMBS | | 182 |
| | | 182 |
| | | 182 |
| | | 182 |
| | | — |
| | | — |
| | | — |
| | | — |
| | | — |
| | | — |
|
| Mortgage revenue bonds | | 736 |
| | | 749 |
| | | 14 |
| | | 14 |
| | | 66 |
| | | 66 |
| | | 103 |
| | | 105 |
| | | 553 |
| | | 564 |
|
| Other mortgage-related securities | | 380 |
| | | 399 |
| | | — |
| | | — |
| | | — |
| | | — |
| | | 10 |
| | | 11 |
| | | 370 |
| | | 388 |
|
| Total | | $ | 4,932 |
| | | $ | 5,963 |
| | | $ | 200 |
| | | $ | 200 |
| | | $ | 99 |
| | | $ | 100 |
| | | $ | 235 |
| | | $ | 246 |
| | | $ | 4,398 |
| | | $ | 5,417 |
|
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 85 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Financial Guarantees |
6. Financial Guarantees
We recognize a guaranty obligation for our obligation to stand ready to perform on our guarantees to unconsolidated trusts and other guaranty arrangements. These off-balance sheet guarantees expose us to credit losses onprimarily relating to the mortgage loans or, in the caseunpaid principal balance of mortgage-related securities, the underlying mortgage loans of the related securities.our unconsolidated Fannie Mae MBS and other financial guarantees. The remaining contractual terms of our guarantees range from 1 day to 3533 years; however, the actual term of each guaranty may be significantly less than the contractual term based on the prepayment characteristics of the related mortgage loans.
As the guarantor of structured securities backed in whole or in part by Freddie Mac-issued securities, we extend our guaranty to the underlying Freddie Mac securities in our resecuritization trusts. However, Freddie Mac continues to guarantee the payment of principal and interest on the underlying Freddie Mac securities that we have resecuritized. We do not charge an incremental guaranty fee to include Freddie Mac securities in the structured securities that we issue. Due to the funding commitment available to Freddie Mac through its senior preferred stock purchase agreement with Treasury, we have concluded that the associated credit risk is negligible. As such, we exclude from the following table approximately $28.9 billion of Freddie Mac securities backing unconsolidated Fannie Mae-issued structured securities as of September 30, 2019.
The following table displays our off-balance sheet maximum exposure, guaranty obligation recognized in our condensed consolidated balance sheets and the potential maximum potential recovery from third parties through available credit enhancements and recourse related to our financial guarantees.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | Maximum Exposure(1) | | Guaranty Obligation | | Maximum Recovery(2) | | Maximum Exposure(1) | | Guaranty Obligation | | Maximum Recovery(2) |
| | (Dollars in millions) |
| Unconsolidated Fannie Mae MBS | $ | 11,215 |
| | $ | 129 |
| | $ | 7,469 |
| | $ | 12,607 |
| | $ | 143 |
| | $ | 8,048 |
|
Other guaranty arrangements(3) | 14,489 |
| | 138 |
| | 2,467 |
| | 15,335 |
| | 137 |
| | 2,663 |
|
| Total | $ | 25,704 |
| | $ | 267 |
| | $ | 9,936 |
| | $ | 27,942 |
| | $ | 280 |
| | $ | 10,711 |
|
__________ |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of |
| | | September 30, 2019 | | December 31, 2018 |
| | | Maximum Exposure | | Guaranty Obligation | | Maximum Recovery(1) | | Maximum Exposure | | Guaranty Obligation | | Maximum Recovery(1) |
| | | (Dollars in millions) |
| Unconsolidated Fannie Mae MBS | | $ | 6,603 |
| | $ | 26 |
| | $ | 6,354 |
| | $ | 7,278 |
| | $ | 30 |
| | $ | 6,811 |
|
Other guaranty arrangements(2) | | 12,981 |
| | 135 |
| | 2,609 |
| | 13,847 |
| | 130 |
| | 2,711 |
|
| Total | | $ | 19,584 |
| | $ | 161 |
| | $ | 8,963 |
| | $ | 21,125 |
| | $ | 160 |
| | $ | 9,522 |
|
| |
(1) | Primarily consists of the unpaid principal balance of the underlying mortgage loans. |
| |
(2)
| Recoverability of such credit enhancements and recourse is subject to, among other factors, our mortgage insurers’ and financial guarantors’ ability to meet their obligations to us. For information on our mortgage insurers and financial guarantors, see “Note 15,13, Concentrations of Credit Risk” in our 20162018 Form 10-K.10-K and “Note 10, Concentrations of Credit Risk” in this report. |
| |
(3)(2)
| Primarily consists of credit enhancements and long-term standby commitments. |
The fair value of our guaranty obligations associated with the Fannie Mae MBS included in “Investments in securities” in our condensed consolidated balance sheets was $275 million and $446 million as of September 30, 2017 and December 31, 2016, respectively. These Fannie Mae MBS consist primarily of private-label wraps where our guaranty arrangement is with an unconsolidated MBS trust.
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 77 |
7. |
| | |
| Notes to Condensed Consolidated Financial Statements | Short-Term Borrowings and Long-Term Debt |
7. Short-Term and Long-Term Debt
Short-Term BorrowingsDebt
The following table displays our outstanding short-term borrowings (borrowingsdebt (debt with an original contractual maturity of one year or less) and weighted-average interest rates of these borrowings.this debt.
|
| | | | | | | | | | | | | |
| | As of |
| September 30, 2017 | | December 31, 2016 |
| | Outstanding | | Weighted- Average Interest Rate(1) | | Outstanding | | Weighted- Average Interest Rate(1) |
| | (Dollars in millions) |
Federal funds purchased and securities sold under agreements to repurchase(2) | $ | 81 |
| | 0.25 | % | | $ | — |
| | — | % |
| | | | | | | | |
| Short-term debt of Fannie Mae | $ | 33,332 |
| | 1.03 | % | | $ | 34,995 |
| | 0.49 | % |
| Debt of consolidated trusts | 459 |
| | 0.78 |
| | 584 |
| | 0.48 |
|
| Total short-term debt | $ | 33,791 |
| | 1.02 | % | | $ | 35,579 |
| | 0.49 | % |
__________ |
| | | | | | | | | | | | | | |
| | | As of |
| | | September 30, 2019 | | December 31, 2018 |
| | | Outstanding | | Weighted- Average Interest Rate(1) | | Outstanding | | Weighted- Average Interest Rate(1) |
| | | (Dollars in millions) |
Federal funds purchased and securities sold under agreements to repurchase(2) | | $ | 1,125 |
| | 2.15 | % | | $ | — |
| | — | % |
| | | | | | | | | |
| Short-term debt of Fannie Mae | | $ | 35,812 |
| | 2.04 | % | | $ | 24,896 |
| | 2.29 | % |
| |
(1) | Includes the effects of discounts, premiums and other cost basis adjustments. |
| |
(2) | Represents agreements to repurchase securities for a specified price, with repayment generally occurring on the following day. |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 86 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Short-Term Borrowings and Long-Term Debt |
Intraday Line of Credit
We use a secured intraday funding line of credit provided by a large financial institution. We post collateral which, in some circumstances, the secured party has the right to repledge to third parties. As this line of credit is an uncommitted intraday loan facility, we may be unable to draw on it if and when needed. The line of credit under this facility was $15.0up to $15.0 billion as of September 30, 20172019 and December 31, 2016.2018.
Long-Term Debt
Long-term debt represents borrowingsdebt with an original contractual maturity of greater than one year. The following table displays our outstanding long-term debt.
|
| | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | Maturities | | Outstanding | | Weighted- Average Interest Rate(1) | | Maturities | | Outstanding | | Weighted- Average Interest Rate(1) |
| | (Dollars in millions) |
| Senior fixed: | | | | | | | | | | | |
| Benchmark notes and bonds | 2017 - 2030 | | $ | 133,022 |
| | 2.01 | % | | 2017 - 2030 | | $ | 153,983 |
| | 2.16 | % |
Medium-term notes(2) | 2017 - 2026 | | 78,087 |
| | 1.41 |
| | 2017 - 2026 | | 82,230 |
| | 1.40 |
|
Other(3) | 2017 - 2038 | | 7,852 |
| | 4.83 |
| | 2017 - 2038 | | 12,800 |
| | 6.74 |
|
| Total senior fixed | | | 218,961 |
| | 1.90 |
| | | | 249,013 |
| | 2.14 |
|
| Senior floating: | | | | | | | | | | | |
Medium-term notes(2) | 2017 - 2020 | | 11,424 |
| | 1.26 |
| | 2017 - 2019 | | 21,476 |
| | 0.71 |
|
Connecticut Avenue Securities(4) | 2023 - 2030 | | 22,131 |
| | 5.08 |
| | 2023 - 2029 | | 16,511 |
| | 4.77 |
|
Other(5) | 2020 - 2037 | | 369 |
| | 7.44 |
| | 2020 - 2037 | | 346 |
| | 6.75 |
|
| Total senior floating | | | 33,924 |
| | 3.78 |
| | | | 38,333 |
| | 2.48 |
|
| Subordinated debentures | 2019 | | 4,987 |
| | 9.93 |
| | 2019 | | 4,645 |
| | 9.93 |
|
Secured borrowings(6) | 2021 - 2022 | | 85 |
| | 1.52 |
| | 2021 - 2022 | | 111 |
| | 1.44 |
|
Total long-term debt of Fannie Mae(7) | | | 257,957 |
| | 2.30 |
| | | | 292,102 |
| | 2.31 |
|
| Debt of consolidated trusts | 2017 - 2057 | | 3,016,835 |
| | 2.75 |
| | 2017 - 2056 | | 2,934,635 |
| | 2.57 |
|
| Total long-term debt | | | $ | 3,274,792 |
| | 2.71 | % | | | | $ | 3,226,737 |
| | 2.54 | % |
__________ |
| | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | Maturities | | Outstanding | | Weighted- Average Interest Rate(1) | | Maturities | | Outstanding | | Weighted- Average Interest Rate(1) |
| | (Dollars in millions) |
| Senior fixed: | | | | | | | | | | | |
| Benchmark notes and bonds | 2019 - 2030 | | $ | 91,603 |
| | 2.66 | % | | 2019 - 2030 | | $ | 103,206 |
| | 2.36 | % |
Medium-term notes(2) | 2019 - 2026 | | 40,973 |
| | 1.60 |
| | 2019 - 2026 | | 61,455 |
| | 1.48 |
|
Other(3) | 2019 - 2038 | | 6,142 |
| | 4.84 |
| | 2019 - 2038 | | 6,683 |
| | 4.62 |
|
| Total senior fixed | | | 138,718 |
| | 2.44 |
| | | | 171,344 |
| | 2.13 |
|
| Senior floating: | | | | | | | | | | | �� |
Medium-term notes(2) | 2020 - 2021 | | 9,773 |
| | 2.28 |
| | 2019 - 2020 | | 4,174 |
| | 2.36 |
|
Connecticut Avenue Securities(4) | 2023 - 2031 | | 22,977 |
| | 5.90 |
| | 2023 - 2031 | | 25,641 |
| | 5.97 |
|
Other(5) | 2020 - 2037 | | 422 |
| | 7.79 |
| | 2020 - 2037 | | 351 |
| | 10.19 |
|
| Total senior floating | | | 33,172 |
| | 4.86 |
| | | | 30,166 |
| | 5.52 |
|
| Subordinated debentures | 2019 | | 5,783 |
| | 9.99 |
| | 2019 | | 5,617 |
| | 9.64 |
|
Secured borrowings(6) | 2021 - 2022 | | 37 |
| | 2.24 |
| | 2021 - 2022 | | 51 |
| | 1.96 |
|
Total long-term debt of Fannie Mae(7) | | | 177,710 |
| | 3.14 |
| | | | 207,178 |
| | 2.83 |
|
| Debt of consolidated trusts | 2019 - 2058 | | 3,248,336 |
| | 2.79 |
| | 2019 - 2058 | | 3,159,846 |
| | 3.03 |
|
| Total long-term debt | | | $ | 3,426,046 |
| | 2.81 | % | | | | $ | 3,367,024 |
| | 3.02 | % |
| |
(1) | Includes the effects of discounts, premiums and other cost basis adjustments. |
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 78 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Short-Term and Long-Term Debt |
| |
(2) | Includes long-term debt with an original contractual maturity of greater than 1 year and up to 10 years, excluding zero-coupon debt. |
| |
(3) | Includes other long-term debt with an original contractual maturity of greater than 10 years.years and foreign exchange bonds. |
| |
(4) | Credit risk-sharing securities that transfer a portion of the credit risk on specified pools of single-family mortgage loans to the investors in these securities, a portion of which is reported at fair value. Represents Connecticut Avenue Securities issued prior to the implementation of our CAS REMIC structure in November 2018. See “Note 2, Consolidations and Transfers of Financial Assets” in our 2018 Form 10-K for more information about our CAS REMIC structure. |
| |
(5) | Consists of structured debt instruments that are reported at fair value. |
| |
(6) | Represents our remaining liability resulting from the transfer of financial assets from our condensed consolidated balance sheets that did not qualify as a sale under the accounting guidance for the transfer of financial instruments. |
| |
(7) | Includes unamortized discounts and premiums, other cost basis adjustments and fair value adjustments of $979$30 million and $1.8 billion$413 million as of September 30, 20172019 and December 31, 2016,2018, respectively. |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 87 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Derivative Instruments |
8. Derivative Instruments
Derivative instruments are an integral part of our strategy in managing interest rate risk. Derivative instruments may be privately-negotiated, bilateral contracts, or they may be listed and traded on an exchange. We refer to our derivative transactions made pursuant to bilateral contracts as our over-the-counter (“OTC”) derivative transactions and our derivative transactions accepted for clearing by a derivatives clearing organization as our cleared derivative transactions. We typically do not settle the notional amount of our risk management derivatives; rather, notional amounts provide the basis for calculating actual payments or settlement amounts. The derivativesderivative contracts we use for interest rate risk management purposes consist primarily of interest rate swaps and interest rate options. See “Note 8, Derivative Instruments” in our 2018 Form 10-K for additional information on interest rate risk management.
We enter into various forms of credit risk sharingrisk-sharing agreements including credit risk transfer transactions, swap credit enhancements and mortgage insurance contracts, that we account for as derivatives.derivatives, including some of our credit risk transfer transactions and swap credit enhancements. The majority of our credit-related derivatives are credit risk transfer transactions, whereby a portion of the credit risk associated with losses on a reference pool of mortgage loans is transferred to a third party. Additionally, we enter into derivative transactions that are associated with some of our other credit risk transfer transactions, whereby we manage investment risk to guarantee that certain unconsolidated VIEs have sufficient cash flows to pay their contractual obligations.
We enter into forward purchase and sale commitments that lock in the future delivery of mortgage loans and mortgage-related securities at a fixed price or yield. Certain commitments to purchase mortgage loans and purchase or sell mortgage-related securities meet the criteria of a derivative. We typically settle the notional amount of our mortgage commitments that are accounted for as derivatives.
We recognize all derivatives as either assets or liabilities in our condensed consolidated balance sheets at their fair value on a trade date basis. Fair value amounts, which are netted to the extent a legal right of offset exists and is enforceable by law at the counterparty level and are inclusive of the right or obligation associated with the cash collateral posted or received, are recorded in “Other assets” or “Other liabilities” in our condensed consolidated balance sheets. See “Note 14,12, Fair Value” for additional information on derivatives recorded at fair value. We present cash flows from derivatives as operating activities in our condensed consolidated statements of cash flows.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 8879 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Derivative Instruments |
Notional and Fair Value Position of our Derivatives
The following table displays the notional amount and estimated fair value of our asset and liability derivative instruments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
| | Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives |
| | Notional Amount | | Estimated Fair Value | | Notional Amount | | Estimated Fair Value | | Notional Amount | | Estimated Fair Value | | Notional Amount | | Estimated Fair Value |
| | (Dollars in millions) |
| Risk management derivatives: | | | | | | | | | | | | | | | |
| Swaps: | | | | | | | | | | | | | | | |
| Pay-fixed | $ | 40,400 |
| | $ | 472 |
| | $ | 75,647 |
| | $ | (2,639 | ) | | $ | 29,540 |
| | $ | 660 |
| | $ | 94,584 |
| | $ | (4,396 | ) |
| Receive-fixed | 46,989 |
| | 2,554 |
| | 124,153 |
| | (1,109 | ) | | 30,207 |
| | 2,696 |
| | 135,470 |
| | (1,552 | ) |
| Basis | 6,524 |
| | 129 |
| | 600 |
| | — |
| | 1,624 |
| | 115 |
| | 15,600 |
| | (11 | ) |
| Foreign currency | 232 |
| | 54 |
| | 234 |
| | (64 | ) | | 214 |
| | 40 |
| | 216 |
| | (85 | ) |
| Swaptions: | | | | | | | | | | | | | | | |
| Pay-fixed | 10,250 |
| | 141 |
| | 2,750 |
| | (4 | ) | | 9,600 |
| | 241 |
| | 4,850 |
| | (82 | ) |
| Receive-fixed | 400 |
| | — |
| | 8,350 |
| | (280 | ) | | — |
| | — |
| | 10,100 |
| | (257 | ) |
Other(1) | 24,324 |
| | 23 |
| | — |
| | (1 | ) | | 15,087 |
| | 33 |
| | 655 |
| | (2 | ) |
| Total gross risk management derivatives | 129,119 |
| | 3,373 |
| | 211,734 |
| | (4,097 | ) | | 86,272 |
| | 3,785 |
| | 261,475 |
| | (6,385 | ) |
| Accrued interest receivable (payable) | — |
| | 724 |
| | — |
| | (907 | ) | | — |
| | 785 |
| | — |
| | (937 | ) |
Netting adjustment(2) | — |
| | (4,034 | ) | | — |
| | 4,877 |
| | — |
| | (4,514 | ) | | — |
| | 6,844 |
|
| Total net risk management derivatives | $ | 129,119 |
| | $ | 63 |
| | $ | 211,734 |
| | $ | (127 | ) | | $ | 86,272 |
| | $ | 56 |
| | $ | 261,475 |
| | $ | (478 | ) |
| Mortgage commitment derivatives: | | | | | | | | | | | | | | | |
| Mortgage commitments to purchase whole loans | $ | 1,227 |
| | $ | 2 |
| | $ | 6,808 |
| | $ | (18 | ) | | $ | 4,753 |
| | $ | 28 |
| | $ | 3,039 |
| | $ | (49 | ) |
| Forward contracts to purchase mortgage-related securities | 16,572 |
| | 38 |
| | 55,847 |
| | (137 | ) | | 31,635 |
| | 198 |
| | 27,297 |
| | (388 | ) |
| Forward contracts to sell mortgage-related securities | 77,781 |
| | 181 |
| | 35,790 |
| | (55 | ) | | 34,103 |
| | 405 |
| | 47,645 |
| | (300 | ) |
| Total mortgage commitment derivatives | $ | 95,580 |
| | $ | 221 |
| | $ | 98,445 |
| | $ | (210 | ) | | $ | 70,491 |
| | $ | 631 |
| | $ | 77,981 |
| | $ | (737 | ) |
| Derivatives at fair value | $ | 224,699 |
| | $ | 284 |
| | $ | 310,179 |
| | $ | (337 | ) | | $ | 156,763 |
| | $ | 687 |
| | $ | 339,456 |
| | $ | (1,215 | ) |
__________ |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of September 30, 2019 | | As of December 31, 2018 |
| | | Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives |
| | | Notional Amount | | Estimated Fair Value | | Notional Amount | | Estimated Fair Value | | Notional Amount | | Estimated Fair Value | | Notional Amount | | Estimated Fair Value |
| | | (Dollars in millions) |
| Risk management derivatives: | | | | | | | | | | | | | | | | |
| Swaps: | | | | | | | | | | | | | | | | |
| Pay-fixed | | $ | 35,550 |
| | $ | — |
| | $ | 32,893 |
| | $ | (1,481 | ) | | $ | 71,416 |
| | $ | 438 |
| | $ | 21,253 |
| | $ | (740 | ) |
| Receive-fixed | | 71,372 |
| | 958 |
| | 34,986 |
| | (103 | ) | | 88,799 |
| | 1,113 |
| | 58,399 |
| | (860 | ) |
| Basis | | 273 |
| | 179 |
| | — |
| | — |
| | 250 |
| | 104 |
| | 624 |
| | — |
|
| Foreign currency | | 213 |
| | 27 |
| | 215 |
| | (86 | ) | | 221 |
| | 22 |
| | 223 |
| | (72 | ) |
| Swaptions: | | | | | | | | | | | | | | | | |
| Pay-fixed | | 4,600 |
| | 18 |
| | 6,375 |
| | (270 | ) | | 10,375 |
| | 191 |
| | 1,000 |
| | (4 | ) |
| Receive-fixed | | 2,875 |
| | 203 |
| | 4,600 |
| | (137 | ) | | 500 |
| | 20 |
| | 7,375 |
| | (338 | ) |
Futures(1) | | 47,069 |
| | — |
| | — |
| | — |
| | 16,631 |
| | — |
| | — |
| | — |
|
| Total gross risk management derivatives | | 161,952 |
| | 1,385 |
| | 79,069 |
| | (2,077 | ) | | 188,192 |
| | 1,888 |
| | 88,874 |
| | (2,014 | ) |
| Accrued interest receivable (payable) | | — |
| | 287 |
| | — |
| | (374 | ) | | — |
| | 400 |
| | — |
| | (419 | ) |
Netting adjustment(2) | | — |
| | (1,663 | ) | | — |
| | 2,299 |
| | — |
| | (2,266 | ) | | — |
| | 2,315 |
|
| Total net risk management derivatives | | $ | 161,952 |
| | $ | 9 |
| | $ | 79,069 |
| | $ | (152 | ) | | $ | 188,192 |
| | $ | 22 |
| | $ | 88,874 |
| | $ | (118 | ) |
| Mortgage commitment derivatives: | | | | | | | | | | | | | | | | |
| Mortgage commitments to purchase whole loans | | $ | 7,812 |
| | $ | 20 |
| | $ | 6,258 |
| | $ | (26 | ) | | $ | 4,370 |
| | $ | 29 |
| | $ | 57 |
| | $ | — |
|
| Forward contracts to purchase mortgage-related securities | | 70,120 |
| | 231 |
| | 28,853 |
| | (85 | ) | | 40,650 |
| | 349 |
| | 1,045 |
| | (3 | ) |
| Forward contracts to sell mortgage-related securities | | 57,048 |
| | 170 |
| | 109,229 |
| | (305 | ) | | 292 |
| | 1 |
| | 70,593 |
| | (645 | ) |
| Total mortgage commitment derivatives | | 134,980 |
| | 421 |
| | 144,340 |
| | (416 | ) | | 45,312 |
| | 379 |
| | 71,695 |
| | (648 | ) |
| Credit enhancement derivatives | | 30,407 |
| | 42 |
| | 6,509 |
| | (27 | ) | | 33,431 |
| | 57 |
| | 919 |
| | (11 | ) |
| Derivatives at fair value | | $ | 327,339 |
| | $ | 472 |
| | $ | 229,918 |
| | $ | (595 | ) | | $ | 266,935 |
| | $ | 458 |
| | $ | 161,488 |
| | $ | (777 | ) |
| |
(1) | Includes credit risk transfer transactions, futures, swap credit enhancements and mortgage insurance contracts that we account for as derivatives.Futures have no ascribable fair value because the positions are settled daily. |
| |
(2) | The netting adjustment represents the effect of the legal right to offset under legally enforceable master netting arrangements to settle with the same counterparty on a net basis, including cash collateral posted and received. Cash collateral posted was $1.5$1.3 billion and $2.9 billion$713 million as of September 30, 20172019 and December 31, 2016,2018, respectively. Cash collateral received was $690$684 million and $535$664 million as of September 30, 20172019 and December 31, 2016,2018, respectively. |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 8980 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Derivative Instruments |
We record all derivative gains and losses, including accrued interest, in “Fair value losses,gains (losses), net” in our condensed consolidated statements of operations and comprehensive income. The following table displays, by type of derivative instrument, the fair value gains and losses, net on our derivatives.
|
| | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| | | (Dollars in millions) |
| Risk management derivatives: | | | | | | | | |
| Swaps: | | | | | | | | |
| Pay-fixed | | $ | (1,414 | ) | | $ | 1,034 |
| | $ | (4,913 | ) | | $ | 4,784 |
|
| Receive-fixed | | 966 |
| | (524 | ) | | 4,131 |
| | (3,508 | ) |
| Basis | | 24 |
| | (5 | ) | | 75 |
| | (31 | ) |
| Foreign currency | | (11 | ) | | (10 | ) | | (9 | ) | | (35 | ) |
| Swaptions: | | | | | | | | |
| Pay-fixed | | (110 | ) | | 67 |
| | (430 | ) | | 232 |
|
| Receive-fixed | | 209 |
| | (34 | ) | | 309 |
| | (72 | ) |
| Futures | | 42 |
| | — |
| | 296 |
| | (3 | ) |
| Net accrual of periodic settlements | | (190 | ) | | (285 | ) | | (698 | ) | | (786 | ) |
| Total risk management derivatives fair value gains (losses), net | | (484 | ) | | 243 |
| | (1,239 | ) | | 581 |
|
| Mortgage commitment derivatives fair value gains (losses), net | | (177 | ) | | 118 |
| | (946 | ) | | 606 |
|
| Credit enhancement derivatives fair value losses, net | | (7 | ) | | (1 | ) | | (31 | ) | | (2 | ) |
| Total derivatives fair value gains (losses), net | | $ | (668 | ) | | $ | 360 |
| | $ | (2,216 | ) | | $ | 1,185 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months | | For the Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
| Risk management derivatives: | | | | | | | |
| Swaps: | | | | | | | |
| Pay-fixed | $ | 300 |
| | $ | 1,386 |
| | $ | 300 |
| | $ | (6,044 | ) |
| Receive-fixed | (202 | ) | | (1,020 | ) | | 120 |
| | 3,338 |
|
| Basis | 1 |
| | 2 |
| | 24 |
| | 51 |
|
| Foreign currency | 13 |
| | (6 | ) | | 36 |
| | (37 | ) |
| Swaptions: | | | | | | | |
| Pay-fixed | (40 | ) | | (3 | ) | | (88 | ) | | 26 |
|
| Receive-fixed | (8 | ) | | 10 |
| | (34 | ) | | (126 | ) |
| Other | 11 |
| | (7 | ) | | 6 |
| | 153 |
|
| Net accrual of periodic settlements | (223 | ) | | (295 | ) | | (702 | ) | | (855 | ) |
| Total risk management derivatives fair value gains (losses), net | $ | (148 | ) | | $ | 67 |
| | $ | (338 | ) | | $ | (3,494 | ) |
| Mortgage commitment derivatives fair value losses, net | (248 | ) | | (216 | ) | | (520 | ) | | (945 | ) |
| Total derivatives fair value losses, net | $ | (396 | ) | | $ | (149 | ) | | $ | (858 | ) | | $ | (4,439 | ) |
Derivative Counterparty Credit Exposure
Our derivative counterparty credit exposure relates principally to interest rate derivative contracts. We are exposed to the risk that a counterparty in a derivative transaction will default on payments due to us, which may require us to seek a replacement derivative from a different counterparty. This replacement may be at a higher cost, or we may be unable to find a suitable replacement. We manage our derivative counterparty credit exposure relating to our risk management derivative transactions mainly through enforceable master netting arrangements, which allow us to net derivative assets and liabilities with the same counterparty or clearing organization and clearing member. For our OTC derivative transactions, we require counterparties to post collateral, which may include cash, U.S. Treasury securities, agency debt and agency mortgage-related securities.
See “Note 13,11, Netting Arrangements” for information on our rights to offset assets and liabilities.
9. Earnings (Loss) Per Share
The calculation of income available to common stockholders and earnings per share is based on the underlying premise that all income after payment of dividends on preferred shares is available to and will be distributed to common stockholders. However, as a result of our conservatorship status and the terms of the senior preferred stock, no amounts are available to distribute as dividends to common or preferred stockholders (other than to Treasury as holder of the senior preferred stock).
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 9081 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Earnings Per ShareSegment Reporting |
The following table displays the computation of basic and diluted earnings (loss) per share of common stock.
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars and shares in millions, except per share amounts) |
| Net income | $ | 3,023 |
| | $ | 3,196 |
| | $ | 8,996 |
| | $ | 7,278 |
|
Dividends distributed or available for distribution to senior preferred stockholder(1) | (3,048 | ) | | (2,977 | ) | | (8,944 | ) | | (6,765 | ) |
| Net income (loss) attributable to common stockholders | $ | (25 | ) | | $ | 219 |
| | $ | 52 |
| | $ | 513 |
|
Weighted-average common shares outstanding—Basic(2) | 5,762 |
| | 5,762 |
| | 5,762 |
| | 5,762 |
|
| Convertible preferred stock | — |
| | 131 |
| | 131 |
| | 131 |
|
Weighted-average common shares outstanding—Diluted(2) | 5,762 |
| | 5,893 |
| | 5,893 |
| | 5,893 |
|
| Earnings (loss) per share: | | | | | | | |
| Basic | $ | 0.00 |
| | $ | 0.04 |
| | $ | 0.01 |
| | $ | 0.09 |
|
| Diluted | 0.00 |
| | 0.04 |
| | 0.01 |
| | 0.09 |
|
__________
| |
(1)
| Dividends distributed or available for distribution were calculated based on our net worth as of the end of the fiscal quarters, less the applicable capital reserve amount. See “Note 1, Summary of Significant Accounting Policies” in this report and in our 2016 Form 10-K for additional information on our senior preferred stock agreement and our payment of dividends to Treasury. |
| |
(2)
| Includes 4.6 billion of weighted-average shares of common stock that would be issued upon the full exercise of the warrant issued to Treasury from the date the warrant was issued through September 30, 2017 and 2016. |
10.9. Segment Reporting
We have two2 reportable business segments: Single-Family and Multifamily. Previously, we had a third reportable business segment, Capital Markets, which was incorporated into the Single-Family and Multifamily segments in the fourth quarter of 2016. Results of our two2 business segments are intended to reflect each segment as if it were a stand-alone business. We have revisedThe sum of the presentationresults for our 2 business segments equals our condensed consolidated results of operations.
Segment Allocations and Results
The majority of our revenues and expenses are directly associated with either our single-family or our multifamily business segment results forand are included in determining that segment’s operating results. Other revenues and expenses, including administrative expenses, that are not directly attributable to a particular business segment are allocated based on the prior periodssize of each segment’s guaranty book of business. The substantial majority of the gains and losses associated with our risk management derivatives are allocated to be consistent with the current period presentation.our single-family business segment.
The following table displays our segment results.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, |
| | | 2019 | | 2018 |
| | | Single-Family | | Multifamily | | Total | | Single-Family | | Multifamily | | Total |
| | | (Dollars in millions) |
Net interest income(1) | | $ | 4,484 |
| | $ | 745 |
| | $ | 5,229 |
| | $ | 4,670 |
| | $ | 699 |
| | $ | 5,369 |
|
Fee and other income(2) | | 156 |
| | 246 |
| | 402 |
| | 79 |
| | 192 |
| | 271 |
|
| Net revenues | | 4,640 |
| | 991 |
| | 5,631 |
| | 4,749 |
| | 891 |
| | 5,640 |
|
Investment gains, net(3) | | 198 |
| | 55 |
| | 253 |
| | 146 |
| | 20 |
| | 166 |
|
Fair value gains (losses), net(4) | | (719 | ) | | 6 |
| | (713 | ) | | 417 |
| | (31 | ) | | 386 |
|
| Administrative expenses | | (634 | ) | | (115 | ) | | (749 | ) | | (636 | ) | | (104 | ) | | (740 | ) |
Credit-related income (expense)(5) | | | | | | | | | | | | |
| Benefit (provision) for credit losses | | 1,840 |
| | 17 |
| | 1,857 |
| | 732 |
| | (16 | ) | | 716 |
|
| Foreclosed property expense | | (93 | ) | | (3 | ) | | (96 | ) | | (150 | ) | | (9 | ) | | (159 | ) |
| Total credit-related income (expense) | | 1,747 |
| | 14 |
| | 1,761 |
| | 582 |
| | (25 | ) | | 557 |
|
TCCA fees(6) | | (613 | ) | | — |
| | (613 | ) | | (576 | ) | | — |
| | (576 | ) |
| Other expenses, net | | (424 | ) | | (147 | ) | | (571 | ) | | (282 | ) | | (95 | ) | | (377 | ) |
| Income before federal income taxes | | 4,195 |
| | 804 |
| | 4,999 |
| | 4,400 |
| | 656 |
| | 5,056 |
|
| Provision for federal income taxes | | (872 | ) | | (164 | ) | | (1,036 | ) | | (938 | ) | | (107 | ) | | (1,045 | ) |
| Net income | | $ | 3,323 |
| | $ | 640 |
| | $ | 3,963 |
| | $ | 3,462 |
| | $ | 549 |
| | $ | 4,011 |
|
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 9182 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Segment Reporting |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Nine Months Ended September 30, |
| | | 2019 | | 2018 |
| | | Single-Family | | Multifamily | | Total | | Single-Family | | Multifamily | | Total |
| | | (Dollars in millions) |
Net interest income(1) | | $ | 12,942 |
| | $ | 2,170 |
| | $ | 15,112 |
| | $ | 13,954 |
| | $ | 2,024 |
| | $ | 15,978 |
|
Fee and other income(2) | | 350 |
| | 525 |
| | 875 |
| | 306 |
| | 524 |
| | 830 |
|
| Net revenues | | 13,292 |
| | 2,695 |
| | 15,987 |
| | 14,260 |
| | 2,548 |
| | 16,808 |
|
Investment gains, net(3) | | 709 |
| | 138 |
| | 847 |
| | 640 |
| | 53 |
| | 693 |
|
Fair value gains (losses), net(4) | | (2,364 | ) | | 66 |
| | (2,298 | ) | | 1,729 |
| | (69 | ) | | 1,660 |
|
| Administrative expenses | | (1,899 | ) | | (338 | ) | | (2,237 | ) | | (1,928 | ) | | (317 | ) | | (2,245 | ) |
Credit-related income (expense)(5) | | | | | | | | | | | | |
| Benefit (provision) for credit losses | | 3,753 |
| | (21 | ) | | 3,732 |
| | 2,223 |
| | 6 |
| | 2,229 |
|
| Foreclosed property expense | | (362 | ) | | (2 | ) | | (364 | ) | | (448 | ) | | (12 | ) | | (460 | ) |
| Total credit-related income (expense) | | 3,391 |
| | (23 | ) | | 3,368 |
| | 1,775 |
| | (6 | ) | | 1,769 |
|
TCCA fees(6) | | (1,806 | ) | | — |
| | (1,806 | ) | | (1,698 | ) | | — |
| | (1,698 | ) |
| Other expenses, net | | (1,179 | ) | | (335 | ) | | (1,514 | ) | | (684 | ) | | (262 | ) | | (946 | ) |
| Income before federal income taxes | | 10,144 |
| | 2,203 |
| | 12,347 |
| | 14,094 |
| | 1,947 |
| | 16,041 |
|
| Provision for federal income taxes | | (2,125 | ) | | (427 | ) | | (2,552 | ) | | (2,998 | ) | | (314 | ) | | (3,312 | ) |
| Net income | | $ | 8,019 |
| | $ | 1,776 |
| | $ | 9,795 |
| | $ | 11,096 |
| | $ | 1,633 |
| | $ | 12,729 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, |
| | 2017 | | 2016 |
| | Single-Family | | Multifamily | | Total | | Single-Family | | Multifamily | | Total |
| | (Dollars in millions) |
Net interest income(1) | $ | 4,627 |
| | $ | 647 |
| | $ | 5,274 |
| | $ | 4,857 |
| | $ | 578 |
| | $ | 5,435 |
|
Fee and other income(2) | 1,005 |
| | 189 |
| | 1,194 |
| | 77 |
| | 98 |
| | 175 |
|
| Net revenues | 5,632 |
| | 836 |
| | 6,468 |
| | 4,934 |
| | 676 |
| | 5,610 |
|
Investment gains, net(3) | 286 |
| | 27 |
| | 313 |
| | 399 |
| | 68 |
| | 467 |
|
Fair value gains (losses), net(4) | (300 | ) | | 11 |
| | (289 | ) | | (499 | ) | | 8 |
| | (491 | ) |
| Administrative expenses | (580 | ) | | (84 | ) | | (664 | ) | | (582 | ) | | (79 | ) | | (661 | ) |
Credit-related income(5) | | | | | | | | | | | |
| Benefit (provision) for credit losses | (137 | ) | | (45 | ) | | (182 | ) | | 646 |
| | 27 |
| | 673 |
|
| Foreclosed property income (expense) | (157 | ) | | 17 |
| | (140 | ) | | (114 | ) | | 4 |
| | (110 | ) |
| Total credit-related income (expense) | (294 | ) | | (28 | ) | | (322 | ) | | 532 |
| | 31 |
| | 563 |
|
TCCA fees(6) | (531 | ) | | — |
| | (531 | ) | | (465 | ) | | — |
| | (465 | ) |
| Other expenses, net | (320 | ) | | (107 | ) | | (427 | ) | | (275 | ) | | (25 | ) | | (300 | ) |
| Income before federal income taxes | 3,893 |
| | 655 |
| | 4,548 |
| | 4,044 |
| | 679 |
| | 4,723 |
|
| Provision for federal income taxes | (1,361 | ) | | (164 | ) | | (1,525 | ) | | (1,399 | ) | | (128 | ) | | (1,527 | ) |
| Net income | $ | 2,532 |
| | $ | 491 |
| | $ | 3,023 |
| | $ | 2,645 |
| | $ | 551 |
| | $ | 3,196 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | Single-Family | | Multifamily | | Total | | Single-Family | | Multifamily | | Total |
| | (Dollars in millions) |
Net interest income(1) | $ | 13,749 |
| | $ | 1,873 |
| | $ | 15,622 |
| | $ | 13,832 |
| | $ | 1,658 |
| | $ | 15,490 |
|
Fee and other income(2) | 1,192 |
| | 604 |
| | 1,796 |
| | 222 |
| | 330 |
| | 552 |
|
| Net revenues | 14,941 |
| | 2,477 |
| | 17,418 |
| | 14,054 |
| | 1,988 |
| | 16,042 |
|
Investment gains, net(3) | 557 |
| | 132 |
| | 689 |
| | 735 |
| | 199 |
| | 934 |
|
Fair value gains (losses), net(4) | (997 | ) | | (23 | ) | | (1,020 | ) | | (5,028 | ) | | 57 |
| | (4,971 | ) |
| Administrative expenses | (1,781 | ) | | (253 | ) | | (2,034 | ) | | (1,788 | ) | | (239 | ) | | (2,027 | ) |
Credit-related income(5) | | | | | | | | | | | |
| Benefit (provision) for credit losses | 1,518 |
| | (37 | ) | | 1,481 |
| | 3,405 |
| | 53 |
| | 3,458 |
|
| Foreclosed property income (expense) | (405 | ) | | 14 |
| | (391 | ) | | (510 | ) | | 3 |
| | (507 | ) |
| Total credit-related income (expense) | 1,113 |
| | (23 | ) | | 1,090 |
| | 2,895 |
| | 56 |
| | 2,951 |
|
TCCA fees(6) | (1,552 | ) | | — |
| | (1,552 | ) | | (1,358 | ) | | — |
| | (1,358 | ) |
| Other expenses, net | (731 | ) | | (369 | ) | | (1,100 | ) | | (773 | ) | | (45 | ) | | (818 | ) |
| Income before federal income taxes | 11,550 |
| | 1,941 |
| | 13,491 |
| | 8,737 |
| | 2,016 |
| | 10,753 |
|
| Provision for federal income taxes | (4,014 | ) | | (481 | ) | | (4,495 | ) | | (3,042 | ) | | (433 | ) | | (3,475 | ) |
| Net income | $ | 7,536 |
| | $ | 1,460 |
| | $ | 8,996 |
| | $ | 5,695 |
| | $ | 1,583 |
| | $ | 7,278 |
|
__________
| |
(1) | Net interest income primarily consists of guaranty fees received as compensation for assuming and managing the credit risk on loans underlying Fannie Mae MBS held by third parties for the respective business segment, and the difference between the interest income earned on the respective business segment’s mortgage assets in our retained mortgage portfolio and the interest expense associated with the debt funding those assets. Revenues from single-family guaranty fees include revenues generated by the 10 basis point increase in guaranty fees we implemented in 2012 pursuant to TCCA.the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us. |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 92 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Segment Reporting |
| |
(2) | Single-Family fee and other income primarily consists of compensation for engaging in structured transactions and providing other lender services, and income resulting from settlement agreements resolving legalcertain claims relatedrelating to private-label securities we purchased or that we have guaranteed. Multifamily fee and other income consists of fees associated with multifamilyMultifamily business activities, including yield maintenance income. |
| |
(3) | Investment gains and losses primarily consistsconsist of gains and losses on the sale of mortgage assets for the respective business segment. |
| |
(4) | Single-Family fair value gains and losses primarily consist of fair value gains and losses on risk management and mortgage commitment derivatives, trading securities and other financial instruments associated with our single-family mortgage creditguaranty book of business. Multifamily fair value gains and losses primarily consist of fair value gains and losses on MBS commitment derivatives, trading securities and other financial instruments associated with our multifamily mortgage creditguaranty book of business. |
| |
(5) | Credit-related income or expense is based on the guaranty book of business of the respective business segment and consists of the applicable segment’s benefit or provision for credit losses and foreclosed property income or expense on loans underlying the segment’s guaranty book of business. |
| |
(6) | Consists of the portion of our single-family guaranty fees that is remitted to Treasury pursuant to the TCCA. |
11. Equity
The following table displays the activity in other comprehensive income (loss), net of tax, by major categories. |
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
| Net income | $ | 3,023 |
| | $ | 3,196 |
| | $ | 8,996 |
| | $ | 7,278 |
|
| Other comprehensive income (loss), net of tax effect: | | | | | | | |
| Changes in net unrealized gains (losses) on AFS securities (net of tax of $25 and $18, respectively, for the three months ended and net of tax of $36 and $3, respectively, for the nine months ended) | 47 |
| | 33 |
| | 67 |
| | (6 | ) |
| Reclassification adjustment for OTTI recognized in net income (net of tax of $1 and $1, respectively, for the three months ended and net of tax of $1 and $12, respectively, for the nine months ended) | 1 |
| | 2 |
| | 2 |
| | 22 |
|
| Reclassification adjustment for gains on AFS securities included in net income (net of tax of $11 and $129, respectively, for the three months ended and net of tax of $62 and $266, respectively, for the nine months ended) | (21 | ) | | (240 | ) | | (115 | ) | | (494 | ) |
| Other | (2 | ) | | (2 | ) | | (6 | ) | | (6 | ) |
| Total other comprehensive income (loss) | 25 |
| | (207 | ) | | (52 | ) | | (484 | ) |
| Total comprehensive income | $ | 3,048 |
| | $ | 2,989 |
| | $ | 8,944 |
| | $ | 6,794 |
|
The following table displays our accumulated other comprehensive income, net of tax, by major categories. |
| | | | | | | | | | | |
| | As of |
| | September 30, | | December 31, |
| | 2017 | | 2016 |
| | (Dollars in millions) |
| Net unrealized gains on AFS securities for which we have not recorded OTTI | | $ | 102 |
| | | | $ | 135 |
| |
| Net unrealized gains on AFS securities for which we have recorded OTTI | | 568 |
| | | | 581 |
| |
| Other | | 37 |
| | | | 43 |
| |
| Accumulated other comprehensive income | | $ | 707 |
| | | | $ | 759 |
| |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 9383 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | EquityConcentrations of Credit Risk |
The table below displays changes in accumulated other comprehensive income, net of tax. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | AFS(1) | | Other | | Total | | AFS(1) | | Other | | Total | | AFS(1) | | Other | | Total | | AFS(1) | | Other | | Total |
| | (Dollars in millions) |
| Beginning balance | $ | 643 |
| | $ | 39 |
| | $ | 682 |
| | $ | 1,085 |
| | $ | 45 |
| | $ | 1,130 |
| | $ | 716 |
| | $ | 43 |
| | $ | 759 |
| | $ | 1,358 |
| | $ | 49 |
| | $ | 1,407 |
|
| Other comprehensive income (loss) before reclassifications | 47 |
| | — |
| | 47 |
| | 33 |
| | — |
| | 33 |
| | 67 |
| | — |
| | 67 |
| | (6 | ) | | — |
| | (6 | ) |
| Amounts reclassified from other comprehensive income (loss) | (20 | ) | | (2 | ) | | (22 | ) | | (238 | ) | | (2 | ) | | (240 | ) | | (113 | ) | | (6 | ) | | (119 | ) | | (472 | ) | | (6 | ) | | (478 | ) |
| Net other comprehensive income (loss) | 27 |
| | (2 | ) | | 25 |
| | (205 | ) | | (2 | ) | | (207 | ) | | (46 | ) | | (6 | ) | | (52 | ) | | (478 | ) | | (6 | ) | | (484 | ) |
| Ending balance | $ | 670 |
| | $ | 37 |
| | $ | 707 |
| | $ | 880 |
| | $ | 43 |
| | $ | 923 |
| | $ | 670 |
| | $ | 37 |
| | $ | 707 |
| | $ | 880 |
| | $ | 43 |
| | $ | 923 |
|
__________
| |
(1)
| The amounts reclassified from accumulated other comprehensive income represent the gain or loss recognized in earnings due to a sale of an AFS security or the recognition of a net impairment recognized in earnings, which are recorded in “Investment gains, net” in our condensed consolidated statements of operations and comprehensive income. |
12.10. Concentrations of Credit Risk
Risk Characteristics of our Guaranty Book of Business
One of the key measures by which we gauge our performance risk under our guaranty is the delinquency status of the mortgage loans we hold in our retained mortgage portfolio, or in the caseguaranty book of mortgage-backed securities, the mortgage loans underlying the related securities.
For single-family loans, management monitors the serious delinquency rate, which is the percentage of single-family loans 90 days or more past due or in the foreclosure process, and loans that have higher risk characteristics, such as high mark-to-market LTV ratios.
For multifamily loans, management monitors the serious delinquency rate, which is the percentage of loans, based on unpaid principal balance, that are 60 days or more past due, and other loans that have higher risk characteristics, to determine our overall credit quality indicator. Higher risk characteristics include, but are not limited to, current debt service coverage ratio (“DSCR”) below 1.0 and high original LTV ratios. We stratify multifamily loans into different internal risk categories based on the credit risk inherent in each individual loan.business.
For single-family and multifamily loans, we use this information, in conjunction with housing market and economic conditions, to structure our pricing and our eligibility and underwriting criteria to reflect the current risk of loans with these higher-risk characteristics, and in some cases we decide to significantly reduce our participation in riskier loan product categories. Management also uses this data together with other credit risk measures to identify key trends that guide the development of our loss mitigation strategies.
Single-Family credit risk characteristics
For single-family loans, management monitors the serious delinquency rate, which is the percentage of single-family loans, based on the number of loans that are 90 days or more past due or in the foreclosure process, and loans that have higher risk characteristics, such as high mark-to-market LTV ratios.
The following tables display the delinquency status and serious delinquency rates for specified loan categories of our single-family conventional and total multifamily guaranty book of business.
|
| | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2019(1) | | December 31, 2018(1) |
| | 30 Days Delinquent | | 60 Days Delinquent | | Seriously Delinquent(2) | | 30 Days Delinquent | | 60 Days Delinquent | | Seriously Delinquent(2) |
Percentage of single-family conventional guaranty book of business(3) | 1.11 | % | | 0.29 | % | | 0.61 | % | | 1.17 | % | | 0.32 | % | | 0.69 | % |
Percentage of single-family conventional loans(4) | 1.28 |
| | 0.35 |
| | 0.68 |
| | 1.37 |
| | 0.38 |
| | 0.76 |
|
|
| | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2017(1) | | December 31, 2016(1) |
| | 30 Days Delinquent | | 60 Days Delinquent | | Seriously Delinquent(2) | | 30 Days Delinquent | | 60 Days Delinquent | | Seriously Delinquent(2) |
Percentage of single-family conventional guaranty book of business(3) | 1.42 | % | | 0.34 | % | | 0.95 | % | | 1.30 | % | | 0.36 | % | | 1.18 | % |
Percentage of single-family conventional loans(4) | 1.63 |
| | 0.40 |
| | 1.01 |
| | 1.51 |
| | 0.41 |
| | 1.20 |
|
|
| | | | | | | | | |
| | As of |
| | September 30, 2019(1) | | December 31, 2018(1) |
| | Percentage of Single-Family Conventional Guaranty Book of Business(3) | | Seriously Delinquent Rate(2) | | Percentage of Single-Family Conventional Guaranty Book of Business(3) | | Seriously Delinquent Rate(2) |
| Estimated mark-to-market LTV ratio: | | | | | | | |
| Greater than 100% | * | | 10.62 | % | | * | | 9.85 | % |
| Geographical distribution: | | | | | | | |
| California | 19 | | 0.32 |
| | 19 | | 0.34 |
|
| Florida | 6 | | 0.87 |
| | 6 | | 1.16 |
|
| New Jersey | 3 | | 1.21 |
| | 4 | | 1.38 |
|
| New York | 5 | | 1.24 |
| | 5 | | 1.40 |
|
| All other states | 67 | | 0.67 |
| | 66 | | 0.75 |
|
| Product distribution: | | | | | | | |
| Alt-A | 2 | | 3.09 |
| | 2 | | 3.35 |
|
| Vintages: | | | | | | | |
| 2004 and prior | 2 | | 2.53 |
| | 3 | | 2.69 |
|
| 2005-2008 | 4 | | 4.24 |
| | 5 | | 4.61 |
|
| 2009-2019 | 94 | | 0.33 |
| | 92 | | 0.34 |
|
| |
| * | Represents less than 0.5% of single-family conventional business volume or book of business. |
| |
(1) | Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan-level information, which constituted more than 99% of our single-family conventional guaranty book of business as of September 30, 2019 and December 31, 2018. |
| |
(2) | Consists of single-family conventional loans that were 90 days or more past due or in the foreclosure process as of September 30, 2019 or December 31, 2018. |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 9484 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Concentrations of Credit Risk |
|
| | | | | | | | | | | |
| | As of |
| | September 30, 2017(1) | | December 31, 2016(1) |
| | Percentage of Single-Family Conventional Guaranty Book of Business(3) | | Seriously Delinquent Rate(2) | | Percentage of Single-Family Conventional Guaranty Book of Business(3) | | Seriously Delinquent Rate(2) |
| Estimated mark-to-market loan-to-value ratio: | | | | | | | |
| Greater than 100% | 1 | % | | 10.73 | % | | 2 | % | | 10.44 | % |
| Geographical distribution: | | | | | | | |
| California | 19 |
| | 0.43 |
| | 19 |
| | 0.50 |
|
| Florida | 6 |
| | 1.50 |
| | 6 |
| | 1.89 |
|
| New Jersey | 4 |
| | 2.36 |
| | 4 |
| | 3.07 |
|
| New York | 5 |
| | 2.13 |
| | 5 |
| | 2.65 |
|
| All other states | 66 |
| | 0.94 |
| | 66 |
| | 1.11 |
|
| Product distribution: | | | | | | | |
| Alt-A | 3 |
| | 4.54 |
| | 3 |
| | 5.00 |
|
| Vintages: | | | | | | | |
| 2004 and prior | 4 |
| | 2.75 |
| | 5 |
| | 2.82 |
|
| 2005-2008 | 7 |
| | 5.83 |
| | 8 |
| | 6.39 |
|
| 2009-2017 | 89 |
| | 0.33 |
| | 87 |
| | 0.36 |
|
__________
| |
(1)
| Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan level information, which constituted approximately 99% of our total single-family conventional guaranty book of business as of September 30, 2017 and December 31, 2016. |
| |
(2)
| Consists of single-family conventional loans that were 90 days or more past due or in the foreclosure process as of September 30, 2017 and December 31, 2016. |
| |
(3) | Calculated based on the aggregate unpaid principal balance of single-family conventional loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business. |
| |
(4) | Calculated based on the number of single-family conventional loans that were delinquent divided by the total number of loans in our single-family conventional guaranty book of business. |
Multifamily credit risk characteristics |
| | | | | | | | | | | |
| | As of |
| | September 30, 2017(1)(2) | | December 31, 2016(1)(2) |
| | 30 Days Delinquent | | Seriously Delinquent(3) | | 30 Days Delinquent | | Seriously Delinquent(3) |
| Percentage of multifamily guaranty book of business | 0.02 | % | | 0.03 | % | | 0.02 | % | | 0.05 | % |
The following tables display the delinquency status and serious delinquency rates for specified loan categories of our multifamily guaranty book of business.
|
| | | | | | | | | | |
| | As of |
| | September 30, 2019(1) | | December 31, 2018(1) |
| | 30 Days Delinquent | | Seriously Delinquent(2) | | 30 Days Delinquent | | Seriously Delinquent(2) |
| Percentage of multifamily guaranty book of business | * | | 0.06 | % | | 0.02 | % | | 0.06 | % |
|
| | | | | | | | | | | |
| | As of |
| | September 30, 2017(1) | | December 31, 2016(1) |
| | Percentage of Multifamily Guaranty Book of Business(2) | | Percentage Seriously Delinquent(3)(4) | | Percentage of Multifamily Guaranty Book of Business(2) | | Percentage Seriously Delinquent(3)(4) |
| Original LTV ratio: | | | | | | | |
| Greater than 80% | 2 | % | | 0.09 | % | | 2 | % | | 0.22 | % |
| Less than or equal to 80% | 98 |
| | 0.03 |
| | 98 |
| | 0.05 |
|
Current DSCR less than 1.0(5) | 1 |
| | 1.36 |
| | 2 |
| | 1.96 |
|
__________ |
| | | | | | | | | | | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | Percentage of Multifamily Guaranty Book of Business(1) | | Percentage Seriously Delinquent(2)(3) | | Percentage of Multifamily Guaranty Book of Business(1) | | Percentage Seriously Delinquent(2)(3) |
| Original LTV ratio: | | | | | | | |
| Greater than 80% | 1 | % | | — | % | | 1 | % | | — | % |
| Less than or equal to 80% | 99 |
| | 0.06 |
| | 99 |
| | 0.06 |
|
Current DSCR below 1.0(4) | 2 |
| | 0.44 |
| | 2 |
| | 1.38 |
|
| |
(1)
* | ConsistsRepresents less than 0.01% of the portion of our multifamily guarantybusiness volume or book of business for which we have detailed loan level information, which constituted approximately 99% of our total multifamily guaranty book of business as of September 30, 2017 and December 31, 2016, excluding loans that have been defeased.
business. |
| |
(2)(1)
| Calculated based on the aggregate unpaid principal balance of multifamily loans for each category divided by the aggregate unpaid principal balance of loans in our multifamily guaranty book of business. |
| |
(3)(2)
| Consists of multifamily loans that were 60 days or more past due as of the dates indicated. |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 95 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Concentrations of Credit Risk |
| |
(4)(3)
| Calculated based on the unpaid principal balance of multifamily loans that were seriously delinquent divided by the aggregate unpaid principal balance of multifamily loans for each category included in our multifamily guaranty book of business. |
| |
(5)(4)
| Our estimates of current DSCRs are based on the latest available income information for these properties. Although we use the most recently available results of our multifamily borrowers, there is a lag in reporting, which typically can range from 3 to 6 months but in some cases may be longer. |
Other Concentrations
Mortgage Sellers and Servicers. Mortgage servicers collect mortgage and escrow payments from borrowers, pay taxes and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required activities on our behalf. Our mortgage sellers and servicers may also be obligated to repurchase loans or foreclosed properties, reimburse us for losses or provide other remedies under certain circumstances, such as if it is determined that the mortgage loan did not meet our underwriting or eligibility requirements, if certain loan representations and warranties are violated or if mortgage insurers rescind coverage. However, under our revised representation and warranty framework, we no longer require repurchase for loans that have breaches of certain selling representations and warranties if they have met specified criteria for relief. Our business with mortgage servicers is concentrated. Our five largest single-family mortgage servicers, including their affiliates, serviced approximately 41% of our single-family guaranty book of business as of September 30, 2017, compared with approximately 39% as of December 31, 2016. Our five largest multifamily mortgage servicers, including their affiliates, serviced approximately 47% of our multifamily guaranty book of business as of September 30, 2017 and December 31, 2016.
If a significant mortgage seller or servicer counterparty, or a number of mortgage sellers or servicers, fails to meet their obligations to us, it could increase our credit losses and credit-related expense, and adversely affect our results of operations and financial condition.
Mortgage Insurers. Mortgage insurance “risk in force” generally representsrefers to our maximum potential loss recovery under the applicable mortgage insurance policies. We hadpolicies in force and is generally based on the loan-level insurance coverage percentage and, if applicable, any aggregate pool loss limit, as specified in the policy.
The following table displays our total mortgage insurance coverage risk in force of $135.4 billionby primary and $126.2 billion onpool insurance, as well as the total risk in force mortgage insurance coverage as a percentage of the single-family mortgage loans in our guaranty book of business asbusiness.
|
| | | | | | | | | | | | |
| | | As of |
| | | September 30, 2019 | | December 31, 2018 |
| | | Risk in Force | | Percentage of Single-Family Guaranty Book of Business | | Risk in Force | | Percentage of Single-Family Guaranty Book of Business |
| | | (Dollars in millions) |
| Mortgage insurance risk in force: | | | | | | | | |
| Primary mortgage insurance | | $ | 162,339 |
| | | | $ | 152,379 |
| | |
| Pool mortgage insurance | | 379 |
| | | | 409 |
| | |
| Total mortgage insurance risk in force | | $ | 162,718 |
| | 6% | | $ | 152,788 |
| | 5% |
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 85 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Concentrations of Credit Risk |
The table below displays our mortgage insurer counterparties that provided approximately 10% or more of September 30, 2017 and December 31, 2016, respectively, which represented 5% and 4% ofthe risk in force mortgage insurance coverage on mortgage loans in our single-family guaranty book of business as of September 30, 2017 and December 31, 2016, respectively. Our primary mortgage insurance coverage risk in force was $134.9 billion and $125.6 billion as of September 30, 2017 and December 31, 2016, respectively. Our pool mortgage insurance coverage risk in force was $540 million and $617 million as of September 30, 2017 and December 31, 2016, respectively. Our top three mortgage insurance companies provided 65%business.
|
| | | | | | |
| | | Percentage of Risk in Force Coverage by Mortgage Insurer |
| | | As of |
| | | September 30, 2019 | | December 31, 2018 |
Counterparty:(1) | | |
| Arch Capital Group Ltd. | | 24 | % | | 25 | % |
| Radian Guaranty, Inc. | | 20 |
| | 21 |
|
| Mortgage Guaranty Insurance Corp. | | 18 |
| | 18 |
|
Genworth Mortgage Insurance Corp.(2) | | 15 |
| | 15 |
|
| Essent Guaranty, Inc. | | 13 |
| | 12 |
|
| Others | | 10 |
| | 9 |
|
| Total | | 100 | % | | 100 | % |
| |
(1) | Insurance coverage amounts provided for each counterparty may include coverage provided by affiliates and subsidiaries of the counterparty. |
| |
(2) | Genworth Financial, Inc., the ultimate parent company of Genworth Mortgage Insurance Corp., is in the process of being acquired by China Oceanwide Holdings Group Co., Ltd. We have approved the acquisition subject to specified conditions, including Genworth Financial, Inc. receiving all required and outstanding regulatory approvals. Upon acquisition, Genworth Mortgage Insurance Corp. will continue to be subject to our ongoing review of financial and operational eligibility requirements. |
Three of our mortgage insurance coverage riskinsurer counterparties that are currently not approved to write new business are in force as of September 30, 2017 and 66% of our mortgage insurance coverage risk in force as of December 31, 2016. Mortgage insurance does not cover losses if the borrower's default is principally caused by damage to the underlying property, including when the damage is caused by natural disaster, like the recent hurricanes.
Of our largest primary mortgage insurers,run-off: PMI Mortgage Insurance Co. (“PMI”), Triad Guaranty Insurance Corporation (“Triad”) and Republic Mortgage Insurance Company are under various forms of supervised control by their state regulators and are in run-off.(”RMIC”). Entering run-off may close off a source of profits and liquidity that may have otherwise assisted a mortgage insurer in paying claims under insurance policies, and could also cause the quality and speed of its claims processing to deteriorate. These three mortgage insurers provided a combined $6.6$3.7 billion,, or 5%2%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of September 30, 2017.2019.
PMI and Triad have been paying only a portion of policyholder claims and deferring the remaining portion. PMI is currently paying 74.5% of claims under its mortgage insurance policies in cash and is deferring the remaining 25.5%, and Triad is currently paying 75% of claims in cash and deferring the remaining 25%. It is uncertain whether PMI or Triad will be permitted in the future to pay any remaining deferred policyholder claims and/or increase or decrease the amount of cash they pay on claims. RMIC is no longer deferring payments on policyholder claims and has paid us its previously outstanding deferred payment obligations as well as interest on those obligations; however, RMIC remains in run-off.
We have counterparty credit risk relating to the potential insolvency of, or non-performance by, mortgage insurers that insure single-family loans we purchase or guarantee. There is risk that these counterparties may fail to fulfill their obligations to pay our claims under insurance policies. On at least a quarterly basis, we assess our mortgage insurer counterparties’ respective abilities to fulfill their obligations to us. Our assessment includes financial reviews and analyses of the insurers’ portfolios and capital adequacy. If we determine that it is probable that we will not collect all of our claims from one or more of our mortgage insurer counterparties, it could increase our loss reserves, which could adversely affect our results of operations, liquidity, financial condition and net worth.
When we estimate the credit losses that are inherent in our mortgage loans and under the terms of our guaranty obligations, we also consider the recoveries that we will receive on primary mortgage insurance, as mortgage insurance recoveries would reduce the severity of the loss associated with defaulted loans. We evaluate the financial condition of our mortgage insurer counterparties and adjust the contractually due recovery amounts to ensure that only probable losses as of the balance sheet date are included in our loss reserve estimate. As a result, if our assessment of one or more of our mortgage insurer counterparties’ ability to fulfill their respective obligations to us worsens, it could increase our combined loss reserves. As of September 30, 20172019 and December 31, 2018, our estimated benefit from mortgage insurance reduced our loss reserves by $398 million and $691 million, respectively.
As of September 30, 2019 and December 31, 2018, we had outstanding receivables of $669 million and $745 million, respectively, recorded in “Other assets” in our condensed consolidated balance sheets related to amounts claimed on insured, defaulted loans excluding government-insured loans. As of September 30, 2019 and December 31, 2018, we assessed these outstanding receivables for collectibility, and established a valuation allowance of $545 million and $564 million, respectively, which reduces our claim receivable to the amount considered probable of collection.
Mortgage Servicers and Sellers. Mortgage servicers collect mortgage and escrow payments from borrowers, pay taxes and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required activities on our behalf. Our mortgage servicers and sellers may also be obligated to repurchase loans or foreclosed properties, reimburse us for losses or provide other remedies under certain circumstances, such as if it is determined that the mortgage loan did not meet
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 9686 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Concentrations of Credit Risk |
December 31, 2016,our underwriting or eligibility requirements, if certain loan representations and warranties are violated or if mortgage insurers rescind coverage. Our representation and warranty framework does not require repurchase for loans that have breaches of certain selling representations and warranties if they have met specified criteria for relief.
Our business with mortgage servicers is concentrated. The table below displays the amountpercentage of our single-family guaranty book of business serviced by which our estimated benefit fromtop five depository single-family mortgage insurance reducedservicers and top five non-depository single-family mortgage servicers, and identifies one servicer that serviced more than 10% of our combined loss reservessingle-family guaranty book of business based on unpaid principal balance.
|
| | | | | | |
| | | Percentage of Single-Family Guaranty Book of Business |
| | | As of |
| | | September 30, 2019 | | December 31, 2018 |
| Wells Fargo Bank, N.A. (together with its affiliates) | | 17 | % | | 18 | % |
| Remaining top five depository servicers | | 15 |
| | 16 |
|
| Top five non-depository servicers | | 25 |
| | 22 |
|
| Total | | 57 | % | | 56 | % |
There was $1.0 billion and $1.4 billion, respectively.
We had outstanding receivablesan increase in the portion of $875 million recorded in “Other assets” in our condensed consolidated balance sheets as of September 30, 2017 and $1.0 billion as of December 31, 2016 relatedsingle-family guaranty book serviced by our top five non-depository servicers, particularly for our delinquent single-family loans. Compared with depository financial institutions, these institutions pose additional risks to amounts claimed on insured, defaulted loans excluding government-insured loans. Of this amount, $84 million as of September 30, 2017 and $141 million as of December 31, 2016 was due from our mortgage sellersus because they may not have the same financial strength or servicers. We assessed the total outstanding receivables for collectibility, and they are recorded net of a valuation allowance of $596 million as of September 30, 2017 and $638 million as of December 31, 2016. The valuation allowance reduces our claim receivableoperational capacity, or be subject to the amountsame level of regulatory oversight, as our largest mortgage servicer counterparties, which is considered probableare mostly depository institutions.
The table below displays the percentage of collectionour multifamily guaranty book of business serviced by our top five multifamily mortgage servicers, and identifies two servicers that serviced 10% or more of our multifamily guaranty book of business based on unpaid principal balance.
|
| | | | | | |
| | | Percentage of Multifamily Guaranty Book of Business |
| | | As of |
| | | September 30, 2019 | | December 31, 2018 |
| Wells Fargo Bank, N.A. (together with its affiliates) | | 13 | % | | 14 | % |
| Walker & Dunlop, Inc. | | 12 |
| | 12 |
|
| Remaining top five servicers | | 23 |
| | 22 |
|
| Total | | 48 | % | | 48 | % |
If a significant mortgage servicer or seller counterparty, or a number of mortgage servicers or sellers, fails to meet their obligations to us, it could adversely affect our results of operations and financial condition. We mitigate these risks in several ways, including:
establishing minimum standards and financial requirements for our servicers;
monitoring financial and portfolio performance as compared with peers and internal benchmarks; and
for our largest mortgage servicers, conducting periodic on-site and financial reviews to confirm compliance with servicing guidelines and servicing performance expectations.
We may take one or more of September 30, 2017the following actions to mitigate our credit exposure to mortgage servicers that present a higher risk:
require a guaranty of obligations by higher-rated entities;
transfer exposure to third parties;
require collateral;
establish more stringent financial requirements;
work on-site with underperforming major servicers to improve operational processes; and December 31, 2016.
suspend or terminate the selling and servicing relationship if deemed necessary.
Derivative Counterparties. For information on credit risk associated with our derivative transactions and repurchase agreements refer tosee “Note 8, Derivative Instruments” and “Note 13,“Note 11, Netting Arrangements.Arrangements.”
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 87 |
13. |
| | |
| Notes to Condensed Consolidated Financial Statements | Netting Arrangements |
11. Netting Arrangements
We use master netting arrangements, which allow us to offset certain financial instruments and collateral with the same counterparty, to minimize counterparty credit exposure. The tables below display information related to derivatives, securities purchased under agreements to resell or similar arrangements, and securities sold under agreements to repurchase or similar arrangements, which are subject to an enforceable master netting arrangement or similar agreement that are either offset or not offset in our condensed consolidated balance sheets.
| | | | As of September 30, 2017 | | As of September 30, 2019 |
| | | | | | Net Amount Presented in our Condensed Consolidated Balance Sheets | | Amounts Not Offset in our Condensed Consolidated Balance Sheets | | | | | | Gross Amount Offset(1) | | Net Amount Presented in our Condensed Consolidated Balance Sheets | | Amounts Not Offset in our Condensed Consolidated Balance Sheets | | |
| | Gross Amount | | Gross Amount Offset(1) | | Financial Instruments(2) | | Collateral(3) | | Net Amount | | Gross Amount | | Financial Instruments(2) | | Collateral(3) | | Net Amount |
| | (Dollars in millions) | | (Dollars in millions) |
| Assets: | | | | | | | | | | | | | | | | | | | | | | | |
| OTC risk management derivatives | $ | 2,504 |
| | $ | (2,478 | ) | | $ | 26 |
| | $ | — |
| | $ | — |
| | $ | 26 |
| | $ | 1,672 |
| | $ | (1,667 | ) | | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
| Cleared risk management derivatives | 1,570 |
| | (1,556 | ) | | 14 |
| | — |
| | — |
| | 14 |
| | — |
| | 4 |
| | 4 |
| | — |
| | — |
| | 4 |
|
| Mortgage commitment derivatives | 221 |
| | — |
| | 221 |
| | (154 | ) | | (11 | ) | | 56 |
| | 421 |
| | — |
| | 421 |
| | (368 | ) | | (7 | ) | | 46 |
|
| Total derivative assets | 4,295 |
| | (4,034 | ) | | 261 |
| (4) | | (154 | ) | | (11 | ) | | 96 |
| | 2,093 |
| | (1,663 | ) | | 430 |
| (4) | | (368 | ) | | (7 | ) | | 55 |
|
Securities purchased under agreements to resell or similar arrangements(5) | 40,490 |
| | — |
| | 40,490 |
| | — |
| | (40,490 | ) | | — |
| | 36,051 |
| | — |
| | 36,051 |
| | — |
| | (36,051 | ) | | — |
|
| Total assets | $ | 44,785 |
| | $ | (4,034 | ) | | $ | 40,751 |
| | $ | (154 | ) | | $ | (40,501 | ) | | $ | 96 |
| | $ | 38,144 |
| | $ | (1,663 | ) | | $ | 36,481 |
| | $ | (368 | ) | | $ | (36,058 | ) | | $ | 55 |
|
| Liabilities: | | | | | | | | | | | | | | | | | | | | | | | |
| OTC risk management derivatives | $ | (3,292 | ) | | $ | 3,181 |
| | $ | (111 | ) | | $ | — |
| | $ | — |
| | $ | (111 | ) | | $ | (2,451 | ) | | $ | 2,332 |
| | $ | (119 | ) | | $ | — |
| | $ | — |
| | $ | (119 | ) |
| Cleared risk management derivatives | (1,711 | ) | | 1,696 |
| | (15 | ) | | — |
| | 15 |
| | — |
| | — |
| | (33 | ) | | (33 | ) | | — |
| | 33 |
| | — |
|
| Mortgage commitment derivatives | (210 | ) | | — |
| | (210 | ) | | 154 |
| | — |
| | (56 | ) | | (416 | ) | | — |
| | (416 | ) | | 368 |
| | 4 |
| | (44 | ) |
| Total derivative liabilities | (5,213 | ) | | 4,877 |
| | (336 | ) | (4) | | 154 |
| | 15 |
| | (167 | ) | | (2,867 | ) | | 2,299 |
| | (568 | ) | (4) | | 368 |
| | 37 |
| | (163 | ) |
| Securities sold under agreements to repurchase or similar arrangements | (81 | ) | | — |
| | (81 | ) | | — |
| | 81 |
| | — |
| | (1,125 | ) | | — |
| | (1,125 | ) | | — |
| | 1,123 |
| | (2 | ) |
| Total liabilities | $ | (5,294 | ) | | $ | 4,877 |
| | $ | (417 | ) | | $ | 154 |
| | $ | 96 |
| | $ | (167 | ) | | $ | (3,992 | ) | | $ | 2,299 |
| | $ | (1,693 | ) | | $ | 368 |
| | $ | 1,160 |
| | $ | (165 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2018 |
| | | | | Gross Amount Offset(1) | | Net Amount Presented in our Condensed Consolidated Balance Sheets | | Amounts Not Offset in our Condensed Consolidated Balance Sheets | | |
| | | Gross Amount | | | | Financial Instruments(2) | | Collateral(3) | | Net Amount |
| | | (Dollars in millions) |
| Assets: | | | | | | | | | | | | | | | | | | |
| OTC risk management derivatives | | $ | 2,288 |
| | $ | (2,273 | ) | | | $ | 15 |
| | | | $ | — |
| | | | $ | — |
| | | $ | 15 |
|
| Cleared risk management derivatives | | — |
| | 7 |
| | | 7 |
| | | | — |
| | | | — |
| | | 7 |
|
| Mortgage commitment derivatives | | 379 |
| | — |
| | | 379 |
| | | | (153 | ) | | | | (7 | ) | | | 219 |
|
| Total derivative assets | | 2,667 |
| | (2,266 | ) | | | 401 |
| (4) | | | (153 | ) | | | | (7 | ) | | | 241 |
|
Securities purchased under agreements to resell or similar arrangements(5) | | 48,288 |
| | — |
| | | 48,288 |
| | | | — |
| | | | (48,288 | ) | | | — |
|
| Total assets | | $ | 50,955 |
| | $ | (2,266 | ) | | | $ | 48,689 |
| | | | $ | (153 | ) | | | | $ | (48,295 | ) | | | $ | 241 |
|
| Liabilities: | | | | | | | | | | | | | | | | | | |
| OTC risk management derivatives | | $ | (2,433 | ) | | $ | 2,342 |
| | | $ | (91 | ) | | | | $ | — |
| | | | $ | — |
| | | $ | (91 | ) |
| Cleared risk management derivatives | | — |
| | (27 | ) | | | (27 | ) | | | | — |
| | | | 23 |
| | | (4 | ) |
| Mortgage commitment derivatives | | (648 | ) | | — |
| | | (648 | ) | | | | 153 |
| | | | 466 |
| | | (29 | ) |
| Total derivative liabilities | | (3,081 | ) | | 2,315 |
| | | (766 | ) | (4) | | | 153 |
| | | | 489 |
| | | (124 | ) |
| Total liabilities | | $ | (3,081 | ) | | $ | 2,315 |
| | | $ | (766 | ) | | | | $ | 153 |
| | | | $ | 489 |
| | | $ | (124 | ) |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 9788 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Netting Arrangements |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | | | | | Net Amount Presented in our Condensed Consolidated Balance Sheets | | Amounts Not Offset in our Condensed Consolidated Balance Sheets | | |
| | Gross Amount | | Gross Amount Offset(1) | | | Financial Instruments(2) | | Collateral(3) | | Net Amount |
| | (Dollars in millions) |
| Assets: | | | | | | | | | | | | | | | |
| OTC risk management derivatives | $ | 3,688 |
| | $ | (3,667 | ) | | | $ | 21 |
| | | | $ | — |
| | | $ | — |
| | $ | 21 |
|
| Cleared risk management derivatives | 849 |
| | (847 | ) | | | 2 |
| | | | — |
| | | — |
| | 2 |
|
| Mortgage commitment derivatives | 631 |
| | — |
| | | 631 |
| | | | (357 | ) | | | (22 | ) | | 252 |
|
| Total derivative assets | 5,168 |
| | (4,514 | ) | | | 654 |
| (4) | | | (357 | ) | | | (22 | ) | | 275 |
|
Securities purchased under agreements to resell or similar arrangements(5) | 51,115 |
| | — |
| | | 51,115 |
| | | | — |
| | | (51,115 | ) | | — |
|
| Total assets | $ | 56,283 |
| | $ | (4,514 | ) | | | $ | 51,769 |
| | | | $ | (357 | ) | | | $ | (51,137 | ) | | $ | 275 |
|
| Liabilities: | | | | | | | | | | | | | | | |
| OTC risk management derivatives | $ | (4,905 | ) | | $ | 4,520 |
| | | $ | (385 | ) | | | | $ | — |
| | | $ | — |
| | $ | (385 | ) |
| Cleared risk management derivatives | (2,415 | ) | | 2,324 |
| | | (91 | ) | | | | — |
| | | 91 |
| | — |
|
| Mortgage commitment derivatives | (737 | ) | | — |
| | | (737 | ) | | | | 357 |
| | | 16 |
| | (364 | ) |
| Total derivative liabilities | (8,057 | ) | | 6,844 |
| | | (1,213 | ) | (4) | | | 357 |
| | | 107 |
| | (749 | ) |
| Total liabilities | $ | (8,057 | ) | | $ | 6,844 |
| | | $ | (1,213 | ) | | | | $ | 357 |
| | | $ | 107 |
| | $ | (749 | ) |
__________
| |
(1) | Represents the effect of the right to offset under legally enforceable master netting arrangements to settle with the same counterparty on a net basis, including cash collateral posted and received and accrued interest. |
| |
(2) | Mortgage commitment derivative amounts reflect where we have recognized both an asset and a liability with the same counterparty under an enforceable master netting arrangement but we have not elected to offset the related amounts in our condensed consolidated balance sheets. |
| |
(3) | Represents collateral received that has not been recognized and is not offset in our condensed consolidated balance sheets as well as collateral posted which has been recognized but not offset in our condensed consolidated balance sheets. Does not include collateral held or posted in excess of our exposure. The fair value of non-cash collateral we pledged was $808 million$3.1 billion and $1.3$1.9 billion as of September 30, 20172019 and December 31, 2016,2018, respectively, which the counterparty was permitted to sell or repledge. The fair value of non-cash collateral received was $40.5$36.1 billion and $51.2$48.4 billion, of which $38.3$34.3 billion and $45.5$45.7 billion could be sold or repledged as of September 30, 20172019 and December 31, 2016,2018, respectively. NoneNaN of the underlying collateral was sold or repledged as of September 30, 2017 and2019 or December 31, 2016.2018. |
| |
(4) | Excludes derivative assets of $23$42 million and $33$57 million as of September 30, 20172019 and December 31, 2016,2018, respectively, and derivative liabilities of $1$27 million and $2$11 million recognized in our condensed consolidated balance sheets as of September 30, 20172019 and December 31, 2016,2018, respectively, that are not subject to enforceable master netting arrangements. |
| |
(5) | Includes $16.8$12.9 billion and $20.7$15.4 billion of in securities purchased under agreements to resell classified as “Cash and cash equivalents” in our condensed consolidated balance sheets as of September 30, 20172019 and December 31, 2016,2018, respectively. |
Derivative instruments are recorded at fair value and securities purchased under agreements to resell or similar arrangements are recorded at amortized cost in our condensed consolidated balance sheets.
We For how we determine our rights to offset the assets and liabilities presented above with the same counterparty, including collateral posted or received, based on the contractual arrangements entered into withsee “Note 14, Netting Arrangements” in our individual counterparties and various rules and regulations that would govern the insolvency of a derivative counterparty. The following is a description, under various agreements, of the nature of those rights and their effect or potential effect on our financial position.
The terms of the majority of our contracts for OTC risk management derivatives are governed under master agreements of the International Swaps and Derivatives Association Inc. (“ISDA”). These agreements provide that all transactions entered into under the agreement with the counterparty constitute a single contractual relationship. An event of default by the counterparty allows the early termination of all outstanding transactions
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 98 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Netting Arrangements |
under the same ISDA agreement and we may offset all outstanding amounts related to the terminated transactions including collateral posted or received.
The terms of our contracts for cleared derivatives are governed under the rules of the clearing organization and the agreement between us and the clearing member of that clearing organization. In the event of a clearing organization default, all open positions at the clearing organization are closed and a net position (on a clearing member by clearing member basis) is calculated. Unless otherwise transferred, in the event of a clearing member default, all open positions cleared through that clearing member are closed and a net position is calculated.
The terms of our contracts for mortgage commitment derivatives are primarily governed by the Fannie Mae Single-Family Selling Guide (“Guide”), for Fannie Mae-approved lenders, or Master Securities Forward Transaction Agreements (“MSFTA”), for counterparties that are not Fannie Mae-approved lenders. In the event of default by the counterparty, both the Guide and the MSFTA allow us to terminate all outstanding transactions under the applicable agreement and offset all outstanding amounts related to the terminated transactions including collateral posted or received. Under the Guide, upon a lender event of default, we generally may offset any amounts owed to a lender against any amounts a lender may owe us under any other existing agreement, regardless of whether or not such other agreements are in default or payments are immediately due.
The terms of our contracts for securities purchased under agreements to resell and securities sold under agreements to repurchase are governed by Master Repurchase Agreements, which are based on the guidelines prescribed by the Securities Industry and Financial Markets Association. Master Repurchase Agreements provide that all transactions under the agreement constitute a single contractual relationship. An event of default by the counterparty allows the early termination of all outstanding transactions under the same agreement and we may offset all outstanding amounts related to the terminated transactions including collateral posted or received.
We also have securities purchased under agreements to resell which we transact through the Fixed Income Clearing Corporation (“FICC”). Under the rules of the FICC, all agreements for securities purchased under agreements to resell that are submitted to the FICC for clearing become transactions with the FICC that are subject to FICC clearing rules. In the event of a FICC default, all open positions at the FICC are closed and a net position is calculated.2018 Form 10-K.
14.12. Fair Value
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain assets and liabilities on a recurring or nonrecurring basis.
Fair Value Measurement
Fair value measurement guidance defines fair value, establishes a framework for measuring fair value, and sets forth disclosures around fair value measurements. This guidance applies whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value. The guidance establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority, Level 1, to measurements based on unadjusted quoted prices in active markets for identical assets or liabilities. The next highest priority, Level 2, is given to measurements of assets and liabilities based on limited observable inputs or observable inputs for similar assets and liabilities. The lowest priority, Level 3, is given to measurements based on unobservable inputs.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 99 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Fair Value |
Recurring Changes in Fair Value
The following tables display our assets and liabilities measured in our condensed consolidated balance sheets at fair value on a recurring basis subsequent to initial recognition, including instruments for which we have elected the fair value option.
| | | | Fair Value Measurements as of September 30, 2017 | Fair Value Measurements as of September 30, 2019 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Netting Adjustment(1) | | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Netting Adjustment(1) | | Estimated Fair Value |
| | (Dollars in millions) | (Dollars in millions) |
| Recurring fair value measurements: | | | | | | | | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | | | | | |
| Trading securities: | | | | | | | | |
| | | | | | | | | | | | | | |
| Mortgage-related securities: | | | | | | | | |
| | | | | | | | | | | | | | |
| Fannie Mae | | $ | — |
| | $ | 2,214 |
| | $ | 1,886 |
| | $ | — |
| | $ | 4,100 |
| | | $ | — |
| | $ | 3,539 |
| | $ | 122 |
| | $ | — |
| | $ | 3,661 |
| |
| Other agency | | — |
| | 1,428 |
| | — |
| | — |
| | 1,428 |
| | | — |
| | 3,702 |
| | 2 |
| | — |
| | 3,704 |
| |
| Alt-A and subprime private-label securities | | — |
| | 296 |
| | 253 |
| | — |
| | 549 |
| | |
| CMBS | | — |
| | 9 |
| | — |
| | — |
| | 9 |
| | |
| Mortgage revenue bonds | | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | |
| Private-label and other mortgage securities | | | — |
| | 741 |
| | — |
| | — |
| | 741 |
| |
| Non-mortgage-related securities: | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | 30,799 |
| | — |
| | — |
| | — |
| | 30,799 |
| | | 36,016 |
| | — |
| | — |
| | — |
| | 36,016 |
| |
| Other securities | | | — |
| | 84 |
| | — |
| | — |
| | 84 |
| |
| Total trading securities | | 30,799 |
| | 3,947 |
| | 2,140 |
| | — |
| | 36,886 |
| | | 36,016 |
| | 8,066 |
| | 124 |
| | — |
| | 44,206 |
| |
| Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related securities: | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | — |
| | 2,012 |
| | 196 |
| | — |
| | 2,208 |
| | | — |
| | 1,408 |
| | 174 |
| | — |
| | 1,582 |
| |
| Other agency | | — |
| | 391 |
| | — |
| | — |
| | 391 |
| | | — |
| | 213 |
| | — |
| | — |
| | 213 |
| |
| Alt-A and subprime private-label securities | | — |
| | 1,854 |
| | 180 |
| | — |
| | 2,034 |
| | | — |
| | 226 |
| | — |
| | — |
| | 226 |
| |
| CMBS | | — |
| | 182 |
| | — |
| | — |
| | 182 |
| | |
| Mortgage revenue bonds | | — |
| | — |
| | 749 |
| | — |
| | 749 |
| | | — |
| | — |
| | 346 |
| | — |
| | 346 |
| |
| Other | | — |
| | 29 |
| | 370 |
| | — |
| | 399 |
| | | — |
| | 8 |
| | 315 |
| | — |
| | 323 |
| |
| Total available-for-sale securities | | — |
| | 4,468 |
| | 1,495 |
| | — |
| | 5,963 |
| | | — |
| | 1,855 |
| | 835 |
| | — |
| | 2,690 |
| |
| Mortgage loans | | — |
| | 9,923 |
| | 1,090 |
| | — |
| | 11,013 |
| | | — |
| | 7,457 |
| | 726 |
| | — |
| | 8,183 |
| |
| Other assets: | | | | | | | | | | | | | | | | | | | | | | |
| Risk management derivatives: | | | | | | | | | | | | | | | | | | | | | | |
| Swaps | | — |
| | 3,790 |
| | 143 |
| | — |
| | 3,933 |
| | | — |
| | 1,267 |
| | 184 |
| | — |
| | 1,451 |
| |
| Swaptions | | — |
| | 141 |
| | — |
| | — |
| | 141 |
| | | — |
| | 221 |
| | — |
| | — |
| | 221 |
| |
| Other | | — |
| | — |
| | 23 |
| | — |
| | 23 |
| | |
| Netting adjustment | | — |
| | — |
| | — |
| | (4,034 | ) | | (4,034 | ) | | | — |
| | — |
| | — |
| | (1,663 | ) | | (1,663 | ) | |
| Mortgage commitment derivatives | | — |
| | 221 |
| | — |
| | — |
| | 221 |
| | | — |
| | 421 |
| | — |
| | — |
| | 421 |
| |
| Credit enhancement derivatives | | | — |
| | — |
| | 42 |
| | — |
| | 42 |
| |
| Total other assets | | — |
| | 4,152 |
| | 166 |
| | (4,034 | ) | | 284 |
| | | — |
| | 1,909 |
| | 226 |
| | (1,663 | ) | | 472 |
| |
| Total assets at fair value | | $ | 30,799 |
| | $ | 22,490 |
| | $ | 4,891 |
| | $ | (4,034 | ) | | $ | 54,146 |
| | | $ | 36,016 |
| | $ | 19,287 |
| | $ | 1,911 |
| | $ | (1,663 | ) | | $ | 55,551 |
| |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 10089 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Fair Value |
| | | | Fair Value Measurements as of September 30, 2017 | Fair Value Measurements as of September 30, 2019 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Netting Adjustment(1) | | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Netting Adjustment(1) | | Estimated Fair Value |
| | (Dollars in millions) | | | (Dollars in millions) | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | | | |
| Long-term debt: | | | | | | | | | | | | | | | | | | | | | | |
| Of Fannie Mae: | | | | | | | | | | | | | | | | | | | | | | |
| Senior floating | | $ | — |
| | $ | 8,122 |
| | $ | 369 |
| | $ | — |
| | $ | 8,491 |
| | | $ | — |
| | $ | 5,619 |
| | $ | 422 |
| | $ | — |
| | $ | 6,041 |
| |
| Total of Fannie Mae | | — |
| | 8,122 |
| | 369 |
| | — |
| | 8,491 |
| | | — |
| | 5,619 |
| | 422 |
| | — |
| | 6,041 |
| |
| Of consolidated trusts | | — |
| | 32,055 |
| | 705 |
| | — |
| | 32,760 |
| | | — |
| | 22,631 |
| | 88 |
| | — |
| | 22,719 |
| |
| Total long-term debt | | — |
| | 40,177 |
| | 1,074 |
| | — |
| | 41,251 |
| | | — |
| | 28,250 |
| | 510 |
| | — |
| | 28,760 |
| |
| Other liabilities: | | | | | | | | | | | | | | | | | | | | | | |
| Risk management derivatives: | | | | | | | | | | | | | | | | | | | | | | |
| Swaps | | — |
| | 4,695 |
| | 24 |
| | — |
| | 4,719 |
| | | — |
| | 2,043 |
| | 1 |
| | — |
| | 2,044 |
| |
| Swaptions | | — |
| | 284 |
| | — |
| | — |
| | 284 |
| | | — |
| | 407 |
| | — |
| | — |
| | 407 |
| |
| Other | | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | |
| Netting adjustment | | — |
| | — |
| | — |
| | (4,877 | ) | | (4,877 | ) | | | — |
| | — |
| | — |
| | (2,299 | ) | | (2,299 | ) | |
| Mortgage commitment derivatives | | — |
| | 194 |
| | 16 |
| | — |
| | 210 |
| | | — |
| | 416 |
| | — |
| | — |
| | 416 |
| |
| Credit enhancement derivatives | | | — |
| | — |
| | 27 |
| | — |
| | 27 |
| |
| Total other liabilities | | — |
| | 5,173 |
| | 41 |
| | (4,877 | ) | | 337 |
| | | — |
| | 2,866 |
| | 28 |
| | (2,299 | ) | | 595 |
| |
| Total liabilities at fair value | | $ | — |
| | $ | 45,350 |
| | $ | 1,115 |
| | $ | (4,877 | ) | | $ | 41,588 |
| | | $ | — |
| | $ | 31,116 |
| | $ | 538 |
| | $ | (2,299 | ) | | $ | 29,355 |
| |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 10190 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Fair Value |
| | | | Fair Value Measurements as of December 31, 2016 | Fair Value Measurements as of December 31, 2018 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Netting Adjustment(1) | | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Netting Adjustment(1) | | Estimated Fair Value |
| | | (Dollars in millions) | | | (Dollars in millions) | |
| Recurring fair value measurements: | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | | | | | |
Cash equivalents(2) | | | $ | 748 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 748 |
| |
| Trading securities: | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related securities: | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | — |
| | $ | 3,934 |
| | $ | 835 |
| | $ | — |
| | $ | 4,769 |
| | | — |
| | 1,435 |
| | 32 |
| | — |
| | 1,467 |
| |
| Other agency | | — |
| | 2,058 |
| | — |
| | — |
| | 2,058 |
| | | — |
| | 3,503 |
| | — |
| | — |
| | 3,503 |
| |
| Alt-A and subprime private-label securities | | — |
| | 365 |
| | 271 |
| | — |
| | 636 |
| | |
| CMBS | | — |
| | 761 |
| | — |
| | — |
| | 761 |
| | |
| Mortgage revenue bonds | | — |
| | — |
| | 21 |
| | — |
| | 21 |
| | |
| Private-label and other mortgage securities | | | — |
| | 1,305 |
| | 1 |
| | — |
| | 1,306 |
| |
| Non-mortgage-related securities: | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | 32,317 |
| | — |
| | — |
| | — |
| | 32,317 |
| | | 35,502 |
| | — |
| | — |
| | — |
| | 35,502 |
| |
| Other securities | | | — |
| | 89 |
| | — |
| | — |
| | 89 |
| |
| Total trading securities | | 32,317 |
| | 7,118 |
| | 1,127 |
| | — |
| | 40,562 |
| | | 35,502 |
| | 6,332 |
| | 33 |
| | — |
| | 41,867 |
| |
| Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related securities: | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | — |
| | 2,324 |
| | 230 |
| | — |
| | 2,554 |
| | | — |
| | 1,645 |
| | 152 |
| | — |
| | 1,797 |
| |
| Other agency | | — |
| | 542 |
| | 5 |
| | — |
| | 547 |
| | | — |
| | 256 |
| | — |
| | — |
| | 256 |
| |
| Alt-A and subprime private-label securities | | — |
| | 2,492 |
| | 217 |
| | — |
| | 2,709 |
| | | — |
| | 568 |
| | 24 |
| | — |
| | 592 |
| |
| CMBS | | — |
| | 819 |
| | — |
| | — |
| | 819 |
| | |
| Mortgage revenue bonds | | — |
| | — |
| | 1,272 |
| | — |
| | 1,272 |
| | | — |
| | — |
| | 434 |
| | — |
| | 434 |
| |
| Other | | — |
| | 33 |
| | 429 |
| | — |
| | 462 |
| | | — |
| | 8 |
| | 342 |
| | — |
| | 350 |
| |
| Total available-for-sale securities | | — |
| | 6,210 |
| | 2,153 |
| | — |
| | 8,363 |
| | | — |
| | 2,477 |
| | 952 |
| | — |
| | 3,429 |
| |
| Mortgage loans | | — |
| | 10,860 |
| | 1,197 |
| | — |
| | 12,057 |
| | | — |
| | 7,985 |
| | 937 |
| | — |
| | 8,922 |
| |
| Other assets: | | | | | | | | | | | | | | | | | | | | | | |
| Risk management derivatives: | | | | | | | | | | | | | | | | | | | | | | |
| Swaps | | — |
| | 4,159 |
| | 137 |
| | — |
| | 4,296 |
| | | — |
| | 1,962 |
| | 115 |
| | — |
| | 2,077 |
| |
| Swaptions | | — |
| | 241 |
| | — |
| | — |
| | 241 |
| | | — |
| | 211 |
| | — |
| | — |
| | 211 |
| |
| Other | | — |
| | — |
| | 33 |
| | — |
| | 33 |
| | |
| Netting adjustment | | — |
| | — |
| | — |
| | (4,514 | ) | | (4,514 | ) | | | — |
| | — |
| | — |
| | (2,266 | ) | | (2,266 | ) | |
| Mortgage commitment derivatives | | — |
| | 619 |
| | 12 |
| | — |
| | 631 |
| | | — |
| | 342 |
| | 37 |
| | — |
| | 379 |
| |
| Credit enhancement derivatives | | | — |
| | — |
| | 57 |
| | — |
| | 57 |
| |
| Total other assets | | — |
| | 5,019 |
| | 182 |
| | (4,514 | ) | | 687 |
| | | — |
| | 2,515 |
| | 209 |
| | (2,266 | ) | | 458 |
| |
| Total assets at fair value | | $ | 32,317 |
| | $ | 29,207 |
| | $ | 4,659 |
| | $ | (4,514 | ) | | $ | 61,669 |
| | | $ | 36,250 |
| | $ | 19,309 |
| | $ | 2,131 |
| | $ | (2,266 | ) | | $ | 55,424 |
| |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 10291 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Fair Value |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 2016 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Netting Adjustment(1) | | Estimated Fair Value |
| | | (Dollars in millions) | |
| Liabilities: | | | | | | | | | | | | | | | | | | | |
| Long-term debt: | | | | | | | | | | | | | | | | | | | |
| Of Fannie Mae: | | | | | | | | | | | | | | | | | | | |
| Senior floating | | $ | — |
| | | | $ | 9,235 |
| | | | $ | 347 |
| | | | $ | — |
| | | | $ | 9,582 |
| |
| Total of Fannie Mae | | — |
| | | | 9,235 |
| | | | 347 |
| | | | — |
| | | | 9,582 |
| |
| Of consolidated trusts | | — |
| | | | 36,283 |
| | | | 241 |
| | | | — |
| | | | 36,524 |
| |
| Total long-term debt | | — |
| | | | 45,518 |
| | | | 588 |
| | | | — |
| | | | 46,106 |
| |
| Other liabilities: | | | | | | | | | | | | | | | | | | | |
| Risk management derivatives: | | | | | | | | | | | | | | | | | | | |
| Swaps | | — |
| | | | 6,933 |
| | | | 48 |
| | | | — |
| | | | 6,981 |
| |
| Swaptions | | — |
| | | | 339 |
| | | | — |
| | | | — |
| | | | 339 |
| |
| Other | | — |
| | | | — |
| | | | 2 |
| | | | — |
| | | | 2 |
| |
| Netting adjustment | | — |
| | | | — |
| | | | — |
| | | | (6,844 | ) | | | | (6,844 | ) | |
| Mortgage commitment derivatives | | — |
| | | | 649 |
| | | | 88 |
| | | | — |
| | | | 737 |
| |
| Total other liabilities | | — |
| | | | 7,921 |
| | | | 138 |
| | | | (6,844 | ) | | | | 1,215 |
| |
| Total liabilities at fair value | | $ | — |
| | | | $ | 53,439 |
| | | | $ | 726 |
| | | | $ | (6,844 | ) | | | | $ | 47,321 |
| |
__________ |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 2018 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Netting Adjustment(1) | | Estimated Fair Value |
| | | (Dollars in millions) | |
| Liabilities: | | | | | | | | | | | | | | | | | | | |
| Long-term debt: | | | | | | | | | | | | | | | | | | | |
| Of Fannie Mae: | | | | | | | | | | | | | | | | | | | |
| Senior floating | | $ | — |
| | | | $ | 6,475 |
| | | | $ | 351 |
| | | | $ | — |
| | | | $ | 6,826 |
| |
| Total of Fannie Mae | | — |
| | | | 6,475 |
| | | | 351 |
| | | | — |
| | | | 6,826 |
| |
| Of consolidated trusts | | — |
| | | | 23,552 |
| | | | 201 |
| | | | — |
| | | | 23,753 |
| |
| Total long-term debt | | — |
| | | | 30,027 |
| | | | 552 |
| | | | — |
| | | | 30,579 |
| |
| Other liabilities: | | | | | | | | | | | | | | | | | | | |
| Risk management derivatives: | | | | | | | | | | | | | | | | | | | |
| Swaps | | — |
| | | | 2,089 |
| | | | 2 |
| | | | — |
| | | | 2,091 |
| |
| Swaptions | | — |
| | | | 342 |
| | | | — |
| | | | — |
| | | | 342 |
| |
| Netting adjustment | | — |
| | | | — |
| | | | — |
| | | | (2,315 | ) | | | | (2,315 | ) | |
| Mortgage commitment derivatives | | — |
| | | | 646 |
| | | | 2 |
| | | | — |
| | | | 648 |
| |
| Credit enhancement derivatives | | — |
| | | | — |
| | | | 11 |
| | | | — |
| | | | 11 |
| |
| Total other liabilities | | — |
| | | | 3,077 |
| | | | 15 |
| | | | (2,315 | ) | | | | 777 |
| |
| Total liabilities at fair value | | $ | — |
| | | | $ | 33,104 |
| | | | $ | 567 |
| | | | $ | (2,315 | ) | | | | $ | 31,356 |
| |
| |
(1) | Derivative contracts are reported on a gross basis by level. The netting adjustment represents the effect of the legal right to offset under legally enforceable master netting arrangements to settle with the same counterparty on a net basis, including cash collateral posted and received. |
| |
(2) | Cash equivalents are comprised of U.S. Treasuries that have a maturity at the date of acquisition of three months or less. |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 10392 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Fair Value |
The following tables display a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The tables also display gains and losses due to changes in fair value, including realized and unrealized gains and losses, recognized in our condensed consolidated statements of operations and comprehensive income for Level 3 assets and liabilities. When assets and liabilities are transferred between levels, we recognize the transfer as of the end of the period. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | | For the Three Months Ended September 30, 2019 |
| | | | | Total Gains (Losses) (Realized/Unrealized) | | | | | | | | | | | | | | | | Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of September 30, 2019(4)(5) | | Net Unrealized Gains (Losses) Included in OCI Related to Assets and Liabilities Still Held as of September 30, 2019(1) |
| | | Balance, June 30, 2019 | | Included in Net Income | | Included in Total OCI Gain/(Loss)(1) | | Purchases(2) | | Sales(2) | | Issues(3) | | Settlements(3) | | Transfers out of Level 3 | | Transfers into Level 3 | | Balance, September 30, 2019 | |
| | | (Dollars in millions) |
| Trading securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | 74 |
| | $ | 2 |
| | $ | — |
| | | $ | 77 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (31 | ) | | $ | — |
| | $ | 122 |
| | $ | 1 |
| | $ | — |
|
| Other agency | | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | — |
| | — |
|
| Total trading securities | | $ | 74 |
| | $ | 2 |
| (5)(6) | $ | — |
| | | $ | 77 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (31 | ) | | $ | 2 |
| | $ | 124 |
| | $ | 1 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | 132 |
| | $ | — |
| | $ | 3 |
| | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 40 |
| | $ | 174 |
| | $ | — |
| | $ | 3 |
|
| Mortgage revenue bonds | | 364 |
| | 1 |
| | (1 | ) | | | — |
| | — |
| | — |
| | (18 | ) | | — |
| | — |
| | 346 |
| | — |
| | — |
|
| Other | | 326 |
| | (1 | ) | | (1 | ) | | | — |
| | — |
| | — |
| | (9 | ) | | — |
| | — |
| | 315 |
| | — |
| | (2 | ) |
| Total available-for-sale securities | | $ | 822 |
| | $ | — |
| (6)(7) | $ | 1 |
| | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (28 | ) | | $ | — |
| | $ | 40 |
| | $ | 835 |
| | $ | — |
| | $ | 1 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage loans | | $ | 770 |
| | $ | 14 |
| (5)(6) | $ | — |
| | | $ | — |
| | $ | (27 | ) | | $ | — |
| | $ | (35 | ) | | $ | (41 | ) | | $ | 45 |
| | $ | 726 |
| | $ | 10 |
| | $ | — |
|
| Net derivatives | | 183 |
| | 21 |
| (5) | — |
| | | — |
| | — |
| | — |
| | (6 | ) | | — |
| | — |
| | 198 |
| | 15 |
| | — |
|
| Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Of Fannie Mae: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Senior floating | | (398 | ) | | (24 | ) | | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (422 | ) | | (24 | ) | | — |
|
| Of consolidated trusts | | (102 | ) | | (3 | ) | | — |
| | | — |
| | — |
| | (2 | ) | | 6 |
| | 20 |
| | (7 | ) | | (88 | ) | | (1 | ) | | — |
|
| Total long-term debt | | $ | (500 | ) | | $ | (27 | ) | (5) | $ | — |
| | | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | 6 |
| | $ | 20 |
| | $ | (7 | ) | | $ | (510 | ) | | $ | (25 | ) | | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | For the Three Months Ended September 30, 2017 |
| | | | | | | | | | | | | | | | | | | Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of September 30, 2017(5)(6) |
| | | | Total Gains (Losses) (Realized/Unrealized) | | | | | | | | | | | | | | |
| | Balance, June 30, 2017 | | Included in Net Income | | Included in Total Other Comprehensive Income (Loss)(1) | | Purchases(2) | | Sales(2) | | Issues(3) | | Settlements(3) | | Transfers out of Level 3 | | Transfers into Level 3(4) | | Balance, September 30, 2017 | |
| | (Dollars in millions) |
| Trading securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | $ | 1,871 |
| | $ | 16 |
| | | $ | — |
| | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (8 | ) | | $ | 7 |
| | $ | 1,886 |
| | | $ | 27 |
| |
| Alt-A and subprime private-label securities | 264 |
| | (2 | ) | | | — |
| | | — |
| | — |
| | — |
| | (9 | ) | | — |
| | — |
| | 253 |
| | | (1 | ) | |
| Mortgage revenue bonds | 1 |
| | — |
| | | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | | — |
| |
| Total trading securities | $ | 2,136 |
| | $ | 14 |
| (6)(7) | | $ | — |
| | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (9 | ) | | $ | (8 | ) | | $ | 7 |
| | $ | 2,140 |
| | | $ | 26 |
| |
| Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | $ | 206 |
| | $ | — |
| | | $ | — |
| | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | (16 | ) | | $ | 8 |
| | $ | 196 |
| | | $ | — |
| |
| Alt-A and subprime private-label securities | 178 |
| | — |
| | | 10 |
| | | — |
| | — |
| | — |
| | (8 | ) | | — |
| | — |
| | 180 |
| | | — |
| |
| Mortgage revenue bonds | 873 |
| | 5 |
| | | (3 | ) | | | — |
| | (59 | ) | | — |
| | (67 | ) | | — |
| | — |
| | 749 |
| | | — |
| |
| Other | 380 |
| | — |
| | | 4 |
| | | — |
| | — |
| | — |
| | (14 | ) | | — |
| | — |
| | 370 |
| | | — |
| |
| Total available-for-sale securities | $ | 1,637 |
| | $ | 5 |
| (7)(8) | | $ | 11 |
| | | $ | — |
| | $ | (59 | ) | | $ | — |
| | $ | (91 | ) | | $ | (16 | ) | | $ | 8 |
| | $ | 1,495 |
| | | $ | — |
| |
| Mortgage loans | $ | 1,119 |
| | $ | 9 |
| (6)(7) | | $ | — |
| | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (58 | ) | | $ | (6 | ) | | $ | 26 |
| | $ | 1,090 |
| | | $ | 6 |
| |
| Net derivatives | 124 |
| | 18 |
| (6) | | — |
| | | — |
| | — |
| | — |
| | (16 | ) | | — |
| | (1 | ) | | 125 |
| | | (14 | ) | |
| Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Of Fannie Mae: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Senior floating | $ | (365 | ) | | $ | (4 | ) | | | $ | — |
| | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (369 | ) | | | $ | (4 | ) | |
| Of consolidated trusts | (760 | ) | | (2 | ) | | | — |
| | | — |
| | — |
| | — |
| | 33 |
| | 141 |
| | (117 | ) | | (705 | ) | | | (5 | ) | |
| Total long-term debt | $ | (1,125 | ) | | $ | (6 | ) | (6) | | $ | — |
| | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 33 |
| | $ | 141 |
| | $ | (117 | ) | | $ | (1,074 | ) | | | $ | (9 | ) | |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 10493 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Fair Value |
| | | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, 2017 | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | | | | | | | | | | | | | | | | | | Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of September 30, 2017(5)(6) | | For the Nine Months Ended September 30, 2019 |
| | | | Total Gains (Losses) (Realized/Unrealized) | | | | | | | | | | | | | | | | | | Total Gains (Losses) (Realized/Unrealized) | | | | | | | | | | | | | | | | Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of September 30, 2019(4)(5) | | Net Unrealized Gains (Losses) Included in OCI Related to Assets and Liabilities Still Held as of September 30, 2019(1) |
| | Balance, December 31, 2016 | | Included in Net Income | | Included in Total Other Comprehensive Income (Loss)(1) | | Purchases(2) | | Sales(2) | | Issues(3) | | Settlements(3) | | Transfers out of Level 3 | | Transfers into Level 3(4) | | Balance, September 30, 2017 | | | Balance, December 31, 2018 | | Included in Net Income | | Included in Total OCI Gain/(Loss)(1) | | Purchases(2) | | Sales(2) | | Issues(3) | | Settlements(3) | | Transfers out of Level 3 | | Transfers into Level 3 | | Balance, September 30, 2019 | |
| | (Dollars in millions) | | (Dollars in millions) |
| Trading securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | $ | 835 |
| | $ | 20 |
| | $ | — |
| | $ | 63 |
| | $ | — |
| | $ | — |
| | $ | (5 | ) | | $ | (30 | ) | | $ | 1,003 |
| | $ | 1,886 |
| | $ | 3 |
| | | $ | 32 |
| | $ | 5 |
| | $ | — |
| | $ | 77 |
| | $ | (14 | ) | | $ | — |
| | $ | (16 | ) | | $ | (31 | ) | | $ | 69 |
| | $ | 122 |
| | $ | 4 |
| | $ | — |
|
| Alt-A and subprime private-label securities | 271 |
| | 9 |
| | — |
| | — |
| | — |
| | — |
| | (27 | ) | | — |
| | — |
| | 253 |
| | 10 |
| | |
| Mortgage revenue bonds | 21 |
| | 3 |
| | — |
| | — |
| | (21 | ) | | — |
| | (2 | ) | | — |
| | — |
| | 1 |
| | — |
| | |
| Other agency | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | — |
| | — |
|
| Private-label and other mortgage securities | | | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Total trading securities | $ | 1,127 |
| | $ | 32 |
| (6)(7) | | $ | — |
| | $ | 63 |
| | $ | (21 | ) | | $ | — |
| | $ | (34 | ) | | $ | (30 | ) | | $ | 1,003 |
| | $ | 2,140 |
| | $ | 13 |
| | | $ | 33 |
| | $ | 5 |
| (5)(6) | $ | — |
| | $ | 77 |
| | $ | (14 | ) | | $ | — |
| | $ | (17 | ) | | $ | (31 | ) | | $ | 71 |
| | $ | 124 |
| | $ | 4 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | $ | 230 |
| | $ | 1 |
| | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (8 | ) | | $ | (63 | ) | | $ | 38 |
| | $ | 196 |
| | $ | — |
| | | $ | 152 |
| | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (8 | ) | | $ | (103 | ) | | $ | 124 |
| | $ | 174 |
| | $ | — |
| | $ | 8 |
|
| Other agency | 5 |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (4 | ) | | — |
| | — |
| | — |
| | |
| Alt-A and subprime private-label securities | 217 |
| | — |
| | (5 | ) | | — |
| | — |
| | — |
| | (32 | ) | | — |
| | — |
| | 180 |
| | — |
| | | 24 |
| | 5 |
| | (5 | ) | | — |
| | (23 | ) | | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Mortgage revenue bonds | 1,272 |
| | 40 |
| | (15 | ) | | — |
| | (383 | ) | | — |
| | (165 | ) | | — |
| | — |
| | 749 |
| | — |
| | | 434 |
| | 1 |
| | (2 | ) | | — |
| | (4 | ) | | — |
| | (83 | ) | | — |
| | — |
| | 346 |
| | — |
| | (1 | ) |
| Other | 429 |
| | — |
| | (10 | ) | | — |
| | — |
| | — |
| | (49 | ) | | — |
| | — |
| | 370 |
| | — |
| | | 342 |
| | 11 |
| | (11 | ) | | — |
| | — |
| | — |
| | (26 | ) | | (2 | ) | | 1 |
| | 315 |
| | — |
| | (9 | ) |
| Total available-for-sale securities | $ | 2,153 |
| | $ | 41 |
| (7)(8) | | $ | (32 | ) | | $ | — |
| | $ | (384 | ) | | $ | — |
| | $ | (254 | ) | | $ | (67 | ) | | $ | 38 |
| | $ | 1,495 |
| | $ | — |
| | | $ | 952 |
| | $ | 17 |
| (6)(7) | $ | (9 | ) | | $ | — |
| | $ | (27 | ) | | $ | — |
| | $ | (118 | ) | | $ | (105 | ) | | $ | 125 |
| | $ | 835 |
| | $ | — |
| | $ | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage loans | $ | 1,197 |
| | $ | 41 |
| (6)(7) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (175 | ) | | $ | (73 | ) | | $ | 100 |
| | $ | 1,090 |
| | $ | 21 |
| | | $ | 937 |
| | $ | 45 |
| (5)(6) | $ | — |
| | $ | — |
| | $ | (40 | ) | | $ | — |
| | $ | (105 | ) | | $ | (228 | ) | | $ | 117 |
| | $ | 726 |
| | $ | 28 |
| | $ | — |
|
| Net derivatives | 44 |
| | 118 |
| (6) | | — |
| | — |
| | — |
| | — |
| | (40 | ) | | 5 |
| | (2 | ) | | 125 |
| | 3 |
| | | 194 |
| | 139 |
| (5) | — |
| | — |
| | — |
| | — |
| | (126 | ) | | (9 | ) | | — |
| | 198 |
| | 39 |
| | — |
|
| Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Of Fannie Mae: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Senior floating | $ | (347 | ) | | $ | (22 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (369 | ) | | $ | (22 | ) | | | (351 | ) | | (71 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (422 | ) | | (71 | ) | | — |
|
| Of consolidated trusts | (241 | ) | | (6 | ) | | — |
| | — |
| | — |
| | (2 | ) | | 52 |
| | 229 |
| | (737 | ) | | (705 | ) | | (6 | ) | | | (201 | ) | | (7 | ) | | — |
| | — |
| | — |
| | (2 | ) | | 16 |
| | 189 |
| | (83 | ) | | (88 | ) | | (3 | ) | | — |
|
| Total long-term debt | $ | (588 | ) | | $ | (28 | ) | (6) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | 52 |
| | $ | 229 |
| | $ | (737 | ) | | $ | (1,074 | ) | | $ | (28 | ) | | | $ | (552 | ) | | $ | (78 | ) | (5) | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | 16 |
| | $ | 189 |
| | $ | (83 | ) | | $ | (510 | ) | | $ | (74 | ) | | $ | — |
|
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 10594 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Fair Value |
| | | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2016 | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | | | | | | | | | | | | | | | | | | Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of September 30, 2016(5)(6) | | For the Three Months Ended September 30, 2018 |
| | | | Total Gains (Losses) (Realized/Unrealized) | | | | | | | | | | | | | | | | | | Total Gains (Losses) (Realized/Unrealized) | | | | | | | | | | | | | | | | Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of September 30, 2018(4)(5) | | Net Unrealized Gains (Losses) Included in OCI Related to Assets and Liabilities Still Held as of September 30, 2018(1) |
| | Balance, June 30, 2016 | | Included in Net Income | | Included in Total Other Comprehensive Income (Loss)(1) | | Purchases(2) | | Sales(2) | | Issues(3) | | Settlements(3) | | Transfers out of Level 3 | | Transfers into Level 3 | | Balance, September 30, 2016 | | | Balance, June 30, 2018 | | Included in Net Income | | Included in Total OCI (Loss)(1) | | Purchases(2) | | Sales(2) | | Issues(3) | | Settlements(3) | | Transfers out of Level 3 | | Transfers into Level 3 | | Balance, September 30, 2018 | |
| | (Dollars in millions) | | (Dollars in millions) |
| Trading securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Alt-A and subprime private-label securities | $ | 303 |
| | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (12 | ) | | $ | — |
| | $ | — |
| | $ | 299 |
| | $ | 8 |
| | |
| Mortgage revenue bonds | 193 |
| | 5 |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | — |
| | 191 |
| | 4 |
| | |
| Fannie Mae | | | $ | 79 |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 76 |
| | $ | 2 |
| | $ | — |
|
| Private-label and other mortgage securities | | | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
|
| Total trading securities | $ | 496 |
| | $ | 13 |
| (6)(7) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (19 | ) | | $ | — |
| | $ | — |
| | $ | 490 |
| | $ | 12 |
| | | $ | 80 |
| | $ | (3 | ) | (5)(6)
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 77 |
| | $ | 2 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other agency | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | |
| Fannie Mae | | | $ | 204 |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | 200 |
| | $ | — |
| | $ | (1 | ) |
| Alt-A and subprime private-label securities | 348 |
| | 80 |
| | (76 | ) | | — |
| | (123 | ) | | — |
| | (7 | ) | | — |
| | — |
| | 222 |
| | — |
| | | 26 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | 24 |
| | — |
| | — |
|
| Mortgage revenue bonds | 2,029 |
| | 35 |
| | (23 | ) | | — |
| | (201 | ) | | — |
| | (115 | ) | | — |
| | — |
| | 1,725 |
| | — |
| | | 506 |
| | 1 |
| | (3 | ) | | — |
| | (4 | ) | | — |
| | (36 | ) | | — |
| | — |
| | 464 |
| | — |
| | (2 | ) |
| Other | 450 |
| | — |
| | 6 |
| | — |
| | — |
| | — |
| | (20 | ) | | — |
| | — |
| | 436 |
| | — |
| | | 357 |
| | 7 |
| | (7 | ) | | — |
| | — |
| | — |
| | (9 | ) | | — |
| | — |
| | 348 |
| | — |
| | (6 | ) |
| Total available-for-sale securities | $ | 2,828 |
| | $ | 115 |
| (7)(8) | | $ | (93 | ) | | $ | — |
| | $ | (324 | ) | | $ | — |
| | $ | (142 | ) | | $ | — |
| | $ | 1 |
| | $ | 2,385 |
| | $ | — |
| | | $ | 1,093 |
| | $ | 8 |
| (6)(7) | $ | (11 | ) | | $ | — |
| | $ | (4 | ) | | $ | — |
| | $ | (50 | ) | | $ | — |
| | $ | — |
| | $ | 1,036 |
| | $ | — |
| | $ | (9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage loans | $ | 1,280 |
| | $ | 23 |
| (6)(7) | | $ | — |
| | $ | 4 |
| | $ | (72 | ) | | $ | — |
| | $ | (60 | ) | | $ | (17 | ) | | $ | 15 |
| | $ | 1,173 |
| | $ | 6 |
| | | $ | 1,018 |
| | $ | 7 |
| (5)(6) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (47 | ) | | $ | (44 | ) | | $ | 31 |
| | $ | 965 |
| | $ | 2 |
| | $ | — |
|
| Net derivatives | 248 |
| | 11 |
| (6) | | — |
| | — |
| | — |
| | (1 | ) | | (43 | ) | | — |
| | 1 |
| | 216 |
| | (18 | ) | | | 117 |
| | (18 | ) | (5) | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 98 |
| | (27 | ) | | — |
|
| Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Of Fannie Mae: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Senior floating | $ | (410 | ) | | $ | (9 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (419 | ) | | $ | (9 | ) | | | (354 | ) | | 7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (347 | ) | | 7 |
| | — |
|
| Of consolidated trusts | (326 | ) | | (2 | ) | | — |
| | — |
| | — |
| | (16 | ) | | 11 |
| | 95 |
| | (64 | ) | | (302 | ) | | — |
| | | (319 | ) | | 2 |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 172 |
| | (22 | ) | | (163 | ) | | — |
| | — |
|
| Total long-term debt | $ | (736 | ) | | $ | (11 | ) | (6) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (16 | ) | | $ | 11 |
| | $ | 95 |
| | $ | (64 | ) | | $ | (721 | ) | | $ | (9 | ) | | | $ | (673 | ) | | $ | 9 |
| (5) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | 172 |
| | $ | (22 | ) | | $ | (510 | ) | | $ | 7 |
| | $ | — |
|
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 10695 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Fair Value |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | | For the Nine Months Ended September 30, 2018 |
| | | | | Total Gains (Losses) (Realized/Unrealized) | | | | | | | | | | | | | | | | Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of September 30, 2018(4)(5) | | Net Unrealized Gains (Losses) Included in OCI Related to Assets and Liabilities Still Held as of September 30, 2018(1) |
| | | Balance, December 31, 2017 | | Included in Net Income | | Included in Total OCI (Loss)(1) | | Purchases(2) | | Sales(2) | | Issues(3) | | Settlements(3) | | Transfers out of Level 3 | | Transfers into Level 3 | | Balance, September 30, 2018 | |
| | | (Dollars in millions) |
| Trading securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related: | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | 971 |
| | $ | 163 |
| | $ | — |
| | $ | 1 |
| | $ | (1,060 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 76 |
| | $ | 2 |
| | $ | — |
|
| Other agency | | 35 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (33 | ) | | — |
| | — |
| | — |
| | — |
|
| Private-label and other mortgage securities | | 195 |
| | (85 | ) | | — |
| | — |
| | — |
| | — |
| | (5 | ) | | (104 | ) | | — |
| | 1 |
| | — |
| | — |
|
| Total trading securities | | $ | 1,201 |
| | $ | 77 |
| (5)(6)
| $ | — |
| | $ | 1 |
| | $ | (1,060 | ) | | $ | — |
| | $ | (6 | ) | | $ | (137 | ) | | $ | 1 |
| | $ | 77 |
| | $ | 2 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related: | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | 208 |
| | $ | 1 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (8 | ) | | $ | — |
| | $ | — |
| | $ | 200 |
| | $ | — |
| | $ | (1 | ) |
Alt-A and subprime private-label securities
| | 77 |
| | — |
| | (45 | ) | | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) | | — |
| | 24 |
| | — |
| | 1 |
|
| Mortgage revenue bonds | | 671 |
| | 1 |
| | (6 | ) | | — |
| | (22 | ) | | — |
| | (180 | ) | | — |
| | — |
| | 464 |
| | — |
| | (3 | ) |
| Other | | 357 |
| | 21 |
| | 1 |
| | — |
| | — |
| | — |
| | (31 | ) | | — |
| | — |
| | 348 |
| | — |
| | 3 |
|
| Total available-for-sale securities | | $ | 1,313 |
| | $ | 23 |
| (6)(7) | $ | (51 | ) | | $ | — |
| | $ | (22 | ) | | $ | — |
| | $ | (223 | ) | | $ | (4 | ) | | $ | — |
| | $ | 1,036 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage loans | | $ | 1,116 |
| | $ | 35 |
| (5)(6) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (174 | ) | | $ | (131 | ) | | $ | 119 |
| | $ | 965 |
| | $ | 17 |
| | $ | — |
|
| Net derivatives | | 134 |
| | (104 | ) | (5) | — |
| | — |
| | — |
| | — |
| | 15 |
| | 53 |
| | — |
| | 98 |
| | (56 | ) | | — |
|
| Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | |
| Of Fannie Mae: | | | | | | | | | | | | | | | | | | | | | | | | |
| Senior floating | | (376 | ) | | 29 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (347 | ) | | 29 |
| | — |
|
| Of consolidated trusts | | (582 | ) | | 9 |
| | — |
| | — |
| | — |
| | 1 |
| | 35 |
| | 503 |
| | (129 | ) | | (163 | ) | | (3 | ) | | — |
|
| Total long-term debt | | $ | (958 | ) | | $ | 38 |
| (5) | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 35 |
| | $ | 503 |
| | $ | (129 | ) | | $ | (510 | ) | | $ | 26 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | For the Nine Months Ended September 30, 2016 |
| | | | | | | | | | | | | | | | | | | Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of September 30, 2016(5)(6) |
| | | | Total Gains (Losses) (Realized/Unrealized) | | | | | | | | | | | | | | |
| | Balance, December 31, 2015 | | Included in Net Income | | Included in Total Other Comprehensive Income (Loss)(1) | | Purchases(2) | | Sales(2) | | Issues(3) | | Settlements(3) | | Transfers out of Level 3(4) | | Transfers into Level 3 | | Balance, September 30, 2016 | |
| | (Dollars in millions) |
| Trading securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | $ | — |
| | $ | — |
| | | $ | — |
| | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | (24 | ) | | $ | 25 |
| | $ | — |
| | | $ | — |
| |
| Other agency | — |
| | — |
| | | — |
| | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | 1 |
| | — |
| | | — |
| |
| Alt-A and subprime private-label securities | 949 |
| | (56 | ) | | | — |
| | | — |
| | (187 | ) | | — |
| | (44 | ) | | (363 | ) | | — |
| | 299 |
| | | (32 | ) | |
| Mortgage revenue bonds | 449 |
| | 34 |
| | | — |
| | | — |
| | (279 | ) | | — |
| | (13 | ) | | — |
| | — |
| | 191 |
| | | 14 |
| |
| Total trading securities | $ | 1,398 |
| | $ | (22 | ) | (6)(7) | | $ | — |
| | | $ | — |
| | $ | (466 | ) | | $ | — |
| | $ | (58 | ) | | $ | (388 | ) | | $ | 26 |
| | $ | 490 |
| | | $ | (18 | ) | |
| Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-related: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | $ | — |
| | $ | — |
| | | $ | — |
| | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | 1 |
| | $ | — |
| | | $ | — |
| |
| Other agency | 4 |
| | — |
| | | — |
| | | — |
| | — |
| | — |
| | — |
| | (3 | ) | | 1 |
| | 2 |
| | | — |
| |
| Alt-A and subprime private-label securities | 4,322 |
| | 184 |
| | | (235 | ) | | | — |
| | (998 | ) | | — |
| | (212 | ) | | (2,839 | ) | | — |
| | 222 |
| | | — |
| |
| Mortgage revenue bonds | 2,701 |
| | 115 |
| | | 25 |
| | | — |
| | (812 | ) | | — |
| | (304 | ) | | — |
| | — |
| | 1,725 |
| | | — |
| |
| Other | 1,404 |
| | — |
| | | (20 | ) | | | — |
| | (605 | ) | | — |
| | (59 | ) | | (284 | ) | | — |
| | 436 |
| | | — |
| |
| Total available-for-sale securities | $ | 8,431 |
| | $ | 299 |
| (7)(8) | | $ | (230 | ) | | | $ | — |
| | $ | (2,415 | ) | | $ | — |
| | $ | (575 | ) | | $ | (3,127 | ) | | $ | 2 |
| | $ | 2,385 |
| | | $ | — |
| |
| Mortgage loans | $ | 1,477 |
| | $ | 139 |
| (6)(7) | | $ | — |
| | | $ | 29 |
| | $ | (392 | ) | | $ | — |
| | $ | (199 | ) | | $ | (101 | ) | | $ | 220 |
| | $ | 1,173 |
| | | $ | 24 |
| |
| Net derivatives | 157 |
| | 243 |
| (6) | | — |
| | | — |
| | — |
| | (8 | ) | | (176 | ) | | (2 | ) | | 2 |
| | 216 |
| | | 41 |
| |
| Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Of Fannie Mae: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Senior floating | $ | (369 | ) | | $ | (50 | ) | | | $ | — |
| | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (419 | ) | | | $ | (50 | ) | |
| Of consolidated trusts | (496 | ) | | (77 | ) | | | — |
| | | — |
| | — |
| | (70 | ) | | 329 |
| | 140 |
| | (128 | ) | | (302 | ) | | | (9 | ) | |
| Total long-term debt | $ | (865 | ) | | $ | (127 | ) | (6) | | $ | — |
| | | $ | — |
| | $ | — |
| | $ | (70 | ) | | $ | 329 |
| | $ | 140 |
| | $ | (128 | ) | | $ | (721 | ) | | | $ | (59 | ) | |
__________
| |
(1) | Gains (losses) included in other comprehensive income (loss)loss are included in “Changes in unrealized gains on AFSavailable-for-sale securities, net of reclassification adjustments and taxes” in our condensed consolidated statements of operations and comprehensive income. |
| |
(2) | Purchases and sales include activity related to the consolidation and deconsolidation of assets of securitization trusts. For the nine months ended September 30, 2018, this includes the dissolution of a Fannie Mae-wrapped private-label securities trust. |
| |
(3) | Issues and settlements include activity related to the consolidation and deconsolidation of liabilities of securitization trusts. |
| |
(4) | Transfers into Level 3 during the first nine months of 2017 consisted primarily of a Fannie Mae security backed by private-label mortgage-related securities. Prices for this security were based on inputs that were not readily available. Transfers out of Level 3 during the first nine months of 2016 consisted primarily of private-label mortgage-related securities backed by Alt-A loans and subprime loans. Prices for these securities were available from multiple third-party vendors and demonstrated an increased and sustained level of observability over time. |
| |
(5)
| Amount represents temporary changes in fair value. Amortization, accretion and OTTI are not considered unrealized and are not included in this amount. |
| |
(6)(5)
| Gains (losses) are included in “Fair value losses,gains (losses), net” in our condensed consolidated statements of operations and comprehensive income. |
| |
(7)(6)
| Gains (losses) are included in “Net interest income” in our condensed consolidated statements of operations and comprehensive income. |
| |
(8)(7)
| Gains (losses) are included in “Investment gains, net” in our condensed consolidated statements of operations and comprehensive income. |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 10796 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Fair Value |
The following tables display valuation techniques and the range and the weighted average of significant unobservable inputs for our Level 3 assets and liabilities measured at fair value on a recurring basis.basis, excluding instruments for which we have elected the fair value option. Changes in these unobservable inputs can result in significantly higher or lower fair value measurements of these assets and liabilities as of the reporting date.
| | | | Fair Value Measurements as of September 30, 2017 | | Fair Value Measurements as of September 30, 2019 |
| | Fair Value | | Significant Valuation Techniques | | Significant Unobservable Inputs(1) | | Range(1) | | Weighted - Average(1) | | Fair Value | | Significant Valuation Techniques | | Significant Unobservable Inputs(1) | | Range(1) | | Weighted - Average(1)(2) |
| | (Dollars in millions) | | (Dollars in millions) |
| Recurring fair value measurements: | | | | | | | | |
| Trading securities: | | | | | | | | |
| Mortgage-related securities: | | | | | | | | |
Agency(2) | $ | 902 |
| | Single Vendor | | Prepayment Speed (%) | | 0.0 | - | 188.0 | | 163.2 | |
Agency(3) | | | $ | 124 |
| | Various | | | | |
| | | | Spreads (bps) | | 47.8 | - | 395.0 | | 201.6 | | | | | | |
| | 943 |
| | Consensus | | Prepayment Speed (%) | | 177.0 | | 177.0 | |
| | | | Spreads (bps) | | 150.0 | | 150.0 | |
| Available-for-sale securities: | | | | | | | |
| Mortgage-related securities: | | | | | | | |
Agency(3) | | | $ | 118 |
| | Consensus | | | | |
| | 41 |
| | Various | | | 56 |
| | Various | | | | |
| Total agency | 1,886 |
| | | 174 |
| | | | |
| Alt-A and subprime private-label securities | 156 |
| | Consensus | | |
| | 97 |
| | Various | | |
| Total Alt-A and subprime private-label securities | 253 |
| | |
| Mortgage revenue bonds | 1 |
| | Various | | |
| Total trading securities | $ | 2,140 |
| | |
| Available-for-sale securities: | | | |
| Mortgage-related securities: | | | |
Agency(2) | $ | 196 |
| | Various | | |
| Alt-A and subprime private-label securities | 180 |
| | Various | | |
| Mortgage revenue bonds | 594 |
| | Single Vendor | | Spreads (bps) | | 2.5 | - | 360.5 | | 60.0 | | 232 |
| | Single Vendor | | Spreads(bps) | | 22.5 |
| - | 204.5 | | 70.3 |
|
| | 155 |
| | Various | | | 114 |
| | Various | | | | |
| Total mortgage revenue bonds | 749 |
| | | 346 |
| | | | |
| Other | 330 |
| | Discounted Cash Flow | | Default Rate (%) | | 1.6 | - | 3.5 | | 3.4 | | 274 |
| | Discounted Cash Flow | | Default Rate(%) | | 0.8 | | 0.8 |
|
| | | | Prepayment Speed (%) | | 0.5 | - | 2.5 | | 2.4 | | | | Prepayment Speed(%) | | 8.7 | | 8.7 |
|
| | | | Severity (%) | | 50.0 | - | 100.0 | | 98.1 | | | | Severity(%) | | 84.0 | | 84.0 |
|
| | | | Spreads (bps) | | 102.9 | - | 608.0 | | 579.9 | | | | Spreads(bps) | | 77.5 |
| - | 300.0 | | 299.4 |
|
| | 40 |
| | Various | | | 41 |
| | Various | | | | |
| Total other | 370 |
| | | 315 |
| | | | |
| Total available-for-sale securities | $ | 1,495 |
| | | $ | 835 |
| | | | |
| Net derivatives | | | $ | 183 |
| | Dealer Mark | | | | |
| | | | 15 |
| | Various | | | | |
| Total net derivatives | | | $ | 198 |
| | | | |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 10897 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Fair Value |
|
| | | | | | | | | | | | | | |
| | Fair Value Measurements as of September 30, 2017 |
| | Fair Value | | Significant Valuation Techniques | | Significant Unobservable Inputs(1) | | Range(1) | | Weighted - Average(1) |
| | (Dollars in millions) |
| Mortgage loans: | | | | | | | | | | | |
| Single-family | $ | 434 |
| | Build-Up | | | | | | | | |
| | 100 |
| | Consensus | | Default Rate (%) | | 1.7 | - | 8.4 | | 3.3 |
| | | | | | Prepayment Speed (%) | | 3.3 | - | 16.5 | | 11.4 |
| | | | | | Severity (%) | | 38.0 | - | 95.0 | | 72.3 |
| | | | | | Spreads (bps) | | 113.7 |
| - | 140.0 | | 129.7 |
| | 300 |
| | Consensus | | | | | | | | |
| | 96 |
| | Various | | | | | | | | |
| Total single-family | 930 |
| | | | | | | | | | |
| Multifamily | 160 |
| | Build-Up | | Spreads (bps) | | 45.0 |
| - | 286.2 | | 124.3 |
| Total mortgage loans | $ | 1,090 |
| | | | | | | | | | |
| | | | | | | | | | | | |
| Net derivatives | $ | 119 |
| | Dealer Mark | | | | | | | | |
| | 6 |
| | Various | | | | | | | | |
| Total net derivatives | $ | 125 |
| | | | | | | | | | |
| Long-term debt: | | | | | | | | | | | |
| Of Fannie Mae: | | | | | | | | | | | |
| Senior floating | $ | (369 | ) | | Discounted Cash Flow | | | | | | | | |
Of consolidated trusts(3) | (500 | ) | | Discounted Cash Flow | | Default Rate (%) | | 2.4 | - | 5.9 | | 4.6 |
| | | | | | Prepayment Speed (%) | | 5.1 | - | 100.0 | | 99.5 |
| | | | | | Severity (%) | | 29.0 | - | 69.0 | | 56.4 |
| | | | | | Spreads (bps) | | 40.0 |
| - | 239.3 | | 88.0 |
| | (205 | ) | | Various | | | | | | | | |
| Total of consolidated trusts | (705 | ) | | | | | | | | | | |
| Total long-term debt | $ | (1,074 | ) | | | | | | | | | | |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 109 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Fair Value |
|
| | | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 2016 |
| | Fair Value | | Significant Valuation Techniques | | Significant Unobservable Inputs(1) | | Range(1) | | Weighted - Average(1) |
| | (Dollars in millions) |
| Recurring fair value measurements: | | | | | | | | | | | |
| Trading securities: | | | | | | | | | | | |
| Mortgage-related securities: | | | | | | | | | | | |
Agency(2) | $ | 809 |
| | Consensus | | | | | | | | |
| | 26 |
| | Various | | | | | | | | |
| Total agency | 835 |
| | | | | | | | | | |
| Alt-A and subprime private-label securities | 232 |
| | Consensus | | Default Rate (%) | | 0.4 |
| - | 10.9 | | 8.2 |
| | | | | | Prepayment Speed (%) | | 4.3 |
| - | 7.4 | | 6.6 |
| | | | | | Severity (%) | | 71.0 |
| - | 95.0 | | 88.9 |
| | | | | | Spreads (bps) | | 244.6 |
| - | 253.9 | | 251.5 |
| | 39 |
| | Consensus | | | | | | | | |
| Total Alt-A and subprime private-label securities | 271 |
| | | | | | | | | | |
| Mortgage revenue bonds | 19 |
| | Discounted Cash Flow | | Spreads (bps) | | 13.0 |
| - | 268.2 | | 252.2 |
| | 2 |
| | Various | | | | | | | | |
| Total mortgage revenue bonds | 21 |
| | | | | | | | | | |
| Total trading securities | $ | 1,127 |
| | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | | | |
| Mortgage-related securities: | | | | | | | | | | | |
Agency(2) | $ | 129 |
| | Single Vendor | | Prepayment Speed (%) | | 124.8 | - | 165.5 | | 142.4 |
| | | | | | Spreads (bps) | | 175.0 |
| - | 210.0 | | 182.5 |
| | 72 |
| | Consensus | | | | | | | | |
| | 34 |
| | Various | | | | | | | | |
| Total agency | 235 |
| | | | | | | | | | |
| Alt-A and subprime private-label securities | 93 |
| | Single Vendor | | Default Rate (%) | | 2.5 | - | 8.0 | | 3.8 |
| | | | | | Prepayment Speed (%) | | 3.0 | - | 11.0 | | 4.9 |
| | | | | | Severity (%) | | 38.0 | - | 80.0 | | 48.1 |
| | | | | | Spreads (bps) | | 266.1 |
| - | 306.8 | | 297.1 |
| | 45 |
| | Discounted Cash Flow | | Spreads (bps) | | 361.0 |
| - | 450.0 |
| 406.0 |
| | 79 |
| | Various | | | | | | | | |
| Total Alt-A and subprime private-label securities | 217 |
| | | | | | | | | | |
| Mortgage revenue bonds | 684 |
| | Single Vendor | | Spreads (bps) | | (16.8 | ) | - | 336.9 | | 44.3 |
| | 126 |
| | Single Vendor | | | | | | | | |
| | 435 |
| | Discounted Cash Flow | | Spreads (bps) | | (16.8 | ) | - | 391.1 | | 260.0 |
| | 27 |
| | Various
| | | | | | | | |
| Total mortgage revenue bonds | 1,272 |
| | | | | | | | | | |
| Other | 47 |
| | Consensus | | Default Rate (%) | | 0.5 | - | 3.5 | | 3.5 |
| | | | | | Prepayment Speed (%) | | 2.5 | - | 6.0 | | 2.5 |
| | | | | | Severity (%) | | 20.0 | - | 88.0 | | 87.5 |
| | | | | | Spreads (bps) | | 221.6 |
| - | 300.2 | | 237.7 |
| | 348 |
| | Discounted Cash Flow | | Default Rate (%) | | 2.3 | | 2.3 |
| | | | | | Prepayment Speed (%) | | 0.5 | | 0.5 |
| | | | | | Severity (%) | | 95.0 | | 95.0 |
| | | | | | Spreads (bps) | | 190.0 |
| - | 450.0 | | 449.1 |
| | 34 |
| | Various
| | | | | | | | |
| Total other | 429 |
| | | | | | | | | | |
| Total available-for-sale securities | $ | 2,153 |
| | | | | | | | | | |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 110 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Fair Value |
|
| | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 2016 |
| | Fair Value | | Significant Valuation Techniques | | Significant Unobservable Inputs(1) | | Range(1) | | Weighted - Average(1) |
| | (Dollars in millions) |
| Mortgage loans: | | | | | | | | | | | |
| Single-family | $ | 516 |
| | Build-Up | | | | | | | | |
| | 300 |
| | Consensus | | | | | | | | |
| | 218 |
| | Various | | | | | | | | |
| Total single-family | 1,034 |
| | | | | | | | | | |
| Multifamily | 163 |
| | Build-Up | | Spreads (bps) | | 55.0 | - | 305.2 | | 140.2 |
| Total mortgage loans | $ | 1,197 |
| | | | | | | | | | |
| Net derivatives | $ | 10 |
| | Internal Model | | | | | | | | |
| | 89 |
| | Dealer Mark | | | | | | | | |
| | 21 |
| | Discounted Cash Flow | | | | | | | | |
| | (76 | ) | | Various | | | | | | | | |
| Total net derivatives | $ | 44 |
| | | | | | | | | | |
| Long-term debt: | | | | | | | | | | | |
| Of Fannie Mae: | | | | | | | | | | | |
| Senior floating | $ | (347 | ) | | Discounted Cash Flow | | | | | | | | |
| Of consolidated trusts | (241 | ) | | Various | | | | | | | | |
| Total long-term debt | $ | (588 | ) | | | | | | | | | | |
_________ |
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of December 31, 2018 |
| | | Fair Value | | Significant Valuation Techniques | | Significant Unobservable Inputs(1) | | Range(1) | | Weighted - Average(1)(2) |
| | | (Dollars in millions) |
| Recurring fair value measurements: | | | | | | | | | | | | |
| Trading securities: | | | | | | | | | | | | |
| Mortgage-related securities: | | | | | | | | | | | | |
Agency(3) | | $ | 32 |
| | Various | | | | | | | | |
Private-label securities and other mortgage securities
| | 1 |
| | Various | | | | | | | | |
| Total trading securities | | $ | 33 |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | | | | |
| Mortgage-related securities: | | | | | | | | | | | | |
Agency(3) | | $ | 152 |
| | Various | | | | | | | | |
| | | | | | | | |
|
| |
| |
|
| Alt-A and subprime private-label securities | | 24 |
| | Various | | | | | | | | |
| Mortgage revenue bonds | | 349 |
| | Single Vendor | | Spreads(bps) | | (0.5 | ) | - | 332.8 | | 59.0 |
|
| | | 85 |
| | Various | | | | | | | | |
| Total mortgage revenue bonds | | 434 |
| | | | | | | | | | |
| Other | | 294 |
| | Discounted Cash Flow | | Default Rate(%) | | 4.7 | | 4.7 |
|
| | | | | | | Prepayment Speed(%) | | 8.2 | | 8.2 |
|
| | | | | | | Severity(%) | | 70.0 | | 70.0 |
|
| | | | | | | Spreads(bps) | | 75.4 |
| - | 390.0 | | 389.1 |
|
| | | 48 |
| | Various | | | | | | | | |
| Total other | | 342 |
| | | | | | | | | | |
| Total available-for-sale securities | | $ | 952 |
| | | | | | | | | | |
| Net derivatives | | $ | 113 |
| | Dealers Mark | | | | | | | | |
| | | 81 |
| | Various | | | | | | | | |
| Total net derivatives | | $ | 194 |
| | | | | | | | | | |
| |
(1) | Valuation techniques for which no unobservable inputs are disclosed generally reflect the use of third-party pricing services or dealers, and the range of unobservable inputs applied by these sources is not readily available or cannot be reasonably estimated. Where we have disclosed unobservable inputs for consensus and single vendor techniques, those inputs are based on our validations performed at the security level using discounted cash flows. The prepayment speed used for trading agency securities and available-for-sale agency securities is the Public Securities Association prepayment speed, which can be greater than 100%. For all other securities, the Conditional Prepayment Rate is used as the prepayment speed, which can be between 0% and 100%. |
| |
(2) | Unobservable inputs were weighted by the relative fair value of the instruments. |
| |
(3) | Includes Fannie Mae and Freddie Mac securities. |
|
| | |
(3)
Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | Includes instruments for which the prepayment speed represents the estimated annualized rate of prepayment after all prepayment penalty provisions have expired and also instruments for which prepayment speed represents the estimated rate of prepayment over the remaining life of the instrument.98 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Fair Value |
In our condensed consolidated balance sheets, certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when we evaluate loans for impairment). We did not have anyhad 0 Level 1 assets or liabilities held as of September 30, 20172019 or December 31, 20162018 that were measured at fair value on a nonrecurring basis. We held $149$620 million and $250$91 million in Level 2 assets as of September 30, 2019 and December 31, 2018, respectively, comprised of mortgage loans held for sale and nomortgage loans held for investment that were individually impaired. We had 0 Level 2 liabilities that were measured at fair value on a nonrecurring basis as of September 30, 20172019 and December 31, 2016, respectively.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 111 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Fair Value |
2018.
The following table displays valuation techniques for our Level 3 assets measured at fair value on a nonrecurring basis. The significant unobservable inputs related to these techniques primarily relate to collateral dependent valuations. The related ranges and weighted averages are not meaningful when aggregated as they vary significantly from property to property.
|
| | | | | | | | | | |
| | | | | Fair Value Measurements as of |
| | | Valuation Techniques | | September 30, 2019 | | December 31, 2018 |
| | | (Dollars in millions)
|
| Nonrecurring fair value measurements: | | | | | | |
| Mortgage loans held for sale, at lower of cost or fair value | | Consensus | | $ | 2,067 |
| | $ | 631 |
|
| | | Single Vendor | | 780 |
| | 1,119 |
|
| | | Various | | 1 |
| | — |
|
| Total mortgage loans held for sale, at lower of cost or fair value | | | | 2,848 |
| | 1,750 |
|
| | | | | | | |
| Single-family mortgage loans held for investment, at amortized cost | | Internal Model | | 543 |
| | 818 |
|
| Multifamily mortgage loans held for investment, at amortized cost | | Asset Manager Estimate | | 70 |
| | 102 |
|
| | | Various | | 13 |
| | 40 |
|
| Total multifamily mortgage loans held for investment, at amortized cost | | | | 83 |
| | 142 |
|
Acquired property, net:(1) | | | | | | |
| Single-family | | Accepted Offers | | 100 |
| | 151 |
|
| | | Appraisals | | 386 |
| | 419 |
|
| | | Walk Forwards | | 190 |
| | 181 |
|
| | | Internal Model | | 152 |
| | 219 |
|
| | | Various | | 32 |
| | 41 |
|
| Total single-family | | | | 860 |
| | 1,011 |
|
| Multifamily | | Various | | — |
| | 50 |
|
| Total nonrecurring assets at fair value | | | | $ | 4,334 |
| | $ | 3,771 |
|
|
| | | | | | | | | | | | | |
| | | | Fair Value Measurements as of |
| | Valuation Techniques | | September 30, 2017 | | December 31, 2016 |
| | | | (Dollars in millions) |
| Nonrecurring fair value measurements: | | | | | | | | | |
| Mortgage loans held for sale, at lower of cost or fair value | Consensus | | | $ | 2,235 |
| | | | $ | 1,025 |
| |
| | Single Vendor | | | 89 |
| | | | 54 |
| |
| | Various | | | — |
| | | | 9 |
| |
| Total mortgage loans held for sale, at lower of cost or fair value | | | | 2,324 |
| | | | 1,088 |
| |
| Single-family mortgage loans held for investment, at amortized cost | Internal Model | | | 1,846 |
| | | | 2,816 |
| |
| Multifamily mortgage loans held for investment, at amortized cost | Broker Price Opinions | | | 24 |
| | | | 25 |
| |
| | Asset Manager Estimate | | | 139 |
| | | | 170 |
| |
| | Various | | | 4 |
| | | | 3 |
| |
| Total multifamily mortgage loans held for investment, at amortized cost | | | | 167 |
| | | | 198 |
| |
Acquired property, net:(1) | | | | | | | | | |
| Single-family | Accepted Offers | | | 221 |
| | | | 340 |
| |
| | Appraisals | | | 429 |
| | | | 571 |
| |
| | Walk Forwards | | | 190 |
| | | | 306 |
| |
| | Internal Model | | | 308 |
| | | | 476 |
| |
| | Various | | | 161 |
| | | | 99 |
| |
| Total single-family | | | | 1,309 |
| | | | 1,792 |
| |
| Multifamily | Broker Price Opinions | | | 29 |
| | | | — |
| |
| Other assets | Various | | | 2 |
| | | | 12 |
| |
| Total nonrecurring assets at fair value | | | | $ | 5,677 |
| | | | $ | 5,906 |
| |
__________
| |
(1) | The most commonly used techniques in our valuation of acquired property are a proprietary home price model and third-party valuations (both current and walk forward). Based on the number of properties measured as of September 30, 2017,2019, these methodologies comprised approximately 76%83% of our valuations, while accepted offers comprised approximately 19%13% of our valuations. Based on the number of properties measured as of December 31, 2016,2018, these methodologies comprised approximately 75%82% of our valuations, while accepted offers comprised approximately 19%15% of our valuations. |
We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. See “Note 17,15, Fair Value” in our 20162018 Form 10-K for information on the valuation control processes and the valuation techniques we use for fair value measurement and disclosure as well as our basis for classifying these measurements as Level 1, Level 2 or Level 3 of the valuation hierarchy in more specific situations. There wereWe made no significantmaterial changes made to the valuation control processes andor the valuation techniques for the nine months ended September 30, 2017.2019.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 11299 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Fair Value |
Fair Value of Financial Instruments
The following table displays the carrying value and estimated fair value of our financial instruments. The fair value of financial instruments we disclose includes commitments to purchase multifamily and single-family mortgage loans that we do not record in our condensed consolidated balance sheets. The fair values of these commitments are included as “Mortgage loans held for investment, net of allowance for loan losses.” The disclosure excludes all non-financial instruments; therefore, the fair value of our financial assets and liabilities does not represent the underlying fair value of our total consolidated assets and liabilities.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of September 30, 2019 |
| | | Carrying
Value | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) | | Netting Adjustment | | Estimated
Fair Value |
| | | (Dollars in millions) |
| Financial assets: | | | | | | | | | | | | |
| Cash and cash equivalents and restricted cash | | $ | 64,498 |
| | $ | 51,623 |
| | $ | 12,875 |
| | $ | — |
| | $ | — |
| | $ | 64,498 |
|
| Federal funds sold and securities purchased under agreements to resell or similar arrangements | | 23,176 |
| | — |
| | 23,176 |
| | — |
| | — |
| | 23,176 |
|
| Trading securities | | 44,206 |
| | 36,016 |
| | 8,066 |
| | 124 |
| | — |
| | 44,206 |
|
| Available-for-sale securities | | 2,690 |
| | — |
| | 1,855 |
| | 835 |
| | — |
| | 2,690 |
|
| Mortgage loans held for sale | | 12,289 |
| | — |
| | 4,783 |
| | 8,672 |
| | — |
| | 13,455 |
|
| Mortgage loans held for investment, net of allowance for loan losses | | 3,301,847 |
| | — |
| | 3,241,129 |
| | 134,732 |
| | — |
| | 3,375,861 |
|
| Advances to lenders | | 6,937 |
| | — |
| | 6,935 |
| | 2 |
| | — |
| | 6,937 |
|
| Derivative assets at fair value | | 472 |
| | — |
| | 1,909 |
| | 226 |
| | (1,663 | ) | | 472 |
|
| Guaranty assets and buy-ups | | 149 |
| | — |
| | — |
| | 319 |
| | — |
| | 319 |
|
| Total financial assets | | $ | 3,456,264 |
| | $ | 87,639 |
| | $ | 3,300,728 |
| | $ | 144,910 |
| | $ | (1,663 | ) | | $ | 3,531,614 |
|
| | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | | | |
| Federal funds purchased and securities sold under agreements to repurchase | | $ | 1,125 |
| | $ | — |
| | $ | 1,125 |
| | $ | — |
| | $ | — |
| | $ | 1,125 |
|
| Short-term debt: | | | | | | | | | | | | |
| Of Fannie Mae | | 35,812 |
| | — |
| | 35,818 |
| | — |
| | — |
| | 35,818 |
|
| Long-term debt: | | | | | | | | | | | | |
| Of Fannie Mae | | 177,710 |
| | — |
| | 186,489 |
| | 847 |
| | — |
| | 187,336 |
|
| Of consolidated trusts | | 3,248,336 |
| | — |
| | 3,273,846 |
| | 33,667 |
| | — |
| | 3,307,513 |
|
| Derivative liabilities at fair value | | 595 |
| | — |
| | 2,866 |
| | 28 |
| | (2,299 | ) | | 595 |
|
| Guaranty obligations | | 161 |
| | — |
| | — |
| | 102 |
| | — |
| | 102 |
|
| Total financial liabilities | | $ | 3,463,739 |
| | $ | — |
| | $ | 3,500,144 |
| | $ | 34,644 |
| | $ | (2,299 | ) | | $ | 3,532,489 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 |
| | Carrying
Value | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) | | Netting Adjustment | | Estimated
Fair Value |
| | (Dollars in millions) |
| Financial assets: | | | | | | | | | | | |
| Cash and cash equivalents and restricted cash | $ | 52,051 |
| | $ | 35,301 |
| | $ | 16,750 |
| | $ | — |
| | $ | — |
| | $ | 52,051 |
|
| Federal funds sold and securities purchased under agreements to resell or similar arrangements | 23,740 |
| | — |
| | 23,740 |
| | — |
| | — |
| | 23,740 |
|
| Trading securities | 36,886 |
| | 30,799 |
| | 3,947 |
| | 2,140 |
| | — |
| | 36,886 |
|
| Available-for-sale securities | 5,963 |
| | — |
| | 4,468 |
| | 1,495 |
| | — |
| | 5,963 |
|
| Mortgage loans held for sale | 4,516 |
| | — |
| | 2,389 |
| | 2,780 |
| | — |
| | 5,169 |
|
| Mortgage loans held for investment, net of allowance for loan losses | 3,148,243 |
| | — |
| | 2,869,318 |
| | 318,453 |
| | — |
| | 3,187,771 |
|
| Advances to lenders | 4,771 |
| | — |
| | 4,769 |
| | 2 |
| | — |
| | 4,771 |
|
| Derivative assets at fair value | 284 |
| | — |
| | 4,152 |
| | 166 |
| | (4,034 | ) | | 284 |
|
| Guaranty assets and buy-ups | 155 |
| | — |
| | — |
| | 444 |
| | — |
| | 444 |
|
| Total financial assets | $ | 3,276,609 |
| | $ | 66,100 |
| | $ | 2,929,533 |
| | $ | 325,480 |
| | $ | (4,034 | ) | | $ | 3,317,079 |
|
| Financial liabilities: | | | | | | | | | | | |
| Federal funds purchased and securities sold under agreements to repurchase | $ | 81 |
| | $ | — |
| | $ | 81 |
| | $ | — |
| | $ | — |
| | $ | 81 |
|
| Short-term debt: | | | | | | | | | | | |
| Of Fannie Mae | 33,332 |
| | — |
| | 33,334 |
| | — |
| | — |
| | 33,334 |
|
| Of consolidated trusts | 459 |
| | — |
| | — |
| | 458 |
| | — |
| | 458 |
|
| Long-term debt: | | | | | | | | | | | |
| Of Fannie Mae | 257,957 |
| | — |
| | 265,390 |
| | 824 |
| | — |
| | 266,214 |
|
| Of consolidated trusts | 3,016,835 |
| | — |
| | 2,995,046 |
| | 40,075 |
| | — |
| | 3,035,121 |
|
| Derivative liabilities at fair value | 337 |
| | — |
| | 5,173 |
| | 41 |
| | (4,877 | ) | | 337 |
|
| Guaranty obligations | 267 |
| | — |
| | — |
| | 489 |
| | — |
| | 489 |
|
| Total financial liabilities | $ | 3,309,268 |
| | $ | — |
| | $ | 3,299,024 |
| | $ | 41,887 |
| | $ | (4,877 | ) | | $ | 3,336,034 |
|
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 113100 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Fair Value |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2018 |
| | | Carrying
Value | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) | | Netting Adjustment | | Estimated
Fair Value |
| | | (Dollars in millions) |
| Financial assets: | | | | | | | | | | | | |
| Cash and cash equivalents and restricted cash | | $ | 49,423 |
| | $ | 34,073 |
| | $ | 15,350 |
| | $ | — |
| | $ | — |
| | $ | 49,423 |
|
| Federal funds sold and securities purchased under agreements to resell or similar arrangements | | 32,938 |
| | — |
| | 32,938 |
| | — |
| | — |
| | 32,938 |
|
| Trading securities | | 41,867 |
| | 35,502 |
| | 6,332 |
| | 33 |
| | — |
| | 41,867 |
|
| Available-for-sale securities | | 3,429 |
| | — |
| | 2,477 |
| | 952 |
| | — |
| | 3,429 |
|
| Mortgage loans held for sale | | 7,701 |
| | — |
| | 238 |
| | 7,856 |
| | — |
| | 8,094 |
|
| Mortgage loans held for investment, net of allowance for loan losses | | 3,241,694 |
| | — |
| | 2,990,104 |
| | 216,404 |
| | — |
| | 3,206,508 |
|
| Advances to lenders | | 3,356 |
| | — |
| | 3,354 |
| | 2 |
| | — |
| | 3,356 |
|
| Derivative assets at fair value | | 458 |
| | — |
| | 2,515 |
| | 209 |
| | (2,266 | ) | | 458 |
|
| Guaranty assets and buy-ups | | 147 |
| | — |
| | — |
| | 356 |
| | — |
| | 356 |
|
| Total financial assets | | $ | 3,381,013 |
| | $ | 69,575 |
| | $ | 3,053,308 |
| | $ | 225,812 |
| | $ | (2,266 | ) | | $ | 3,346,429 |
|
| | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | | | |
| Short-term debt: | | | | | | | | | | | | |
| Of Fannie Mae | | $ | 24,896 |
| | $ | — |
| | $ | 24,901 |
| | $ | — |
| | $ | — |
| | $ | 24,901 |
|
| Long-term debt: | | | | | | | | | | | | |
| Of Fannie Mae | | 207,178 |
| | — |
| | 211,403 |
| | 771 |
| | — |
| | 212,174 |
|
| Of consolidated trusts | | 3,159,846 |
| | — |
| | 3,064,239 |
| | 39,043 |
| | — |
| | 3,103,282 |
|
| Derivative liabilities at fair value | | 777 |
| | — |
| | 3,077 |
| | 15 |
| | (2,315 | ) | | 777 |
|
| Guaranty obligations | | 160 |
| | — |
| | — |
| | 121 |
| | — |
| | 121 |
|
| Total financial liabilities | | $ | 3,392,857 |
| | $ | — |
| | $ | 3,303,620 |
| | $ | 39,950 |
| | $ | (2,315 | ) | | $ | 3,341,255 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | Carrying
Value | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) | | Netting Adjustment | | Estimated
Fair Value |
| | (Dollars in millions) |
| Financial assets: | | | | | | | | | | | |
| Cash and cash equivalents and restricted cash | $ | 62,177 |
| | $ | 41,477 |
| | $ | 20,700 |
| | $ | — |
| | $ | — |
| | $ | 62,177 |
|
| Federal funds sold and securities purchased under agreements to resell or similar arrangements | 30,415 |
| | — |
| | 30,415 |
| | — |
| | — |
| | 30,415 |
|
| Trading securities | 40,562 |
| | 32,317 |
| | 7,118 |
| | 1,127 |
| | — |
| | 40,562 |
|
| Available-for-sale securities | 8,363 |
| | — |
| | 6,210 |
| | 2,153 |
| | — |
| | 8,363 |
|
| Mortgage loans held for sale | 2,899 |
| | — |
| | 509 |
| | 2,751 |
| | — |
| | 3,260 |
|
| Mortgage loans held for investment, net of allowance for loan losses | 3,076,854 |
| | — |
| | 2,767,813 |
| | 316,742 |
| | — |
| | 3,084,555 |
|
| Advances to lenders | 7,494 |
| | — |
| | 7,156 |
| | 352 |
| | — |
| | 7,508 |
|
| Derivative assets at fair value | 687 |
| | — |
| | 5,019 |
| | 182 |
| | (4,514 | ) | | 687 |
|
| Guaranty assets and buy-ups | 158 |
| | — |
| | — |
| | 432 |
| | — |
| | 432 |
|
| Total financial assets | $ | 3,229,609 |
| | $ | 73,794 |
| | $ | 2,844,940 |
| | $ | 323,739 |
| | $ | (4,514 | ) | | $ | 3,237,959 |
|
| Financial liabilities: | | | | | | | | | | | |
| Short-term debt: | | | | | | | | | | | |
| Of Fannie Mae | $ | 34,995 |
| | $ | — |
| | $ | 34,998 |
| | $ | — |
| | $ | — |
| | $ | 34,998 |
|
| Of consolidated trusts | 584 |
| | — |
| | — |
| | 584 |
| | — |
| | 584 |
|
| Long-term debt: | | | | | | | | | | | |
| Of Fannie Mae | 292,102 |
| | — |
| | 298,980 |
| | 770 |
| | — |
| | 299,750 |
|
| Of consolidated trusts | 2,934,635 |
| | — |
| | 2,901,316 |
| | 36,668 |
| | — |
| | 2,937,984 |
|
| Derivative liabilities at fair value | 1,215 |
| | — |
| | 7,921 |
| | 138 |
| | (6,844 | ) | | 1,215 |
|
| Guaranty obligations | 280 |
| | — |
| | — |
| | 710 |
| | — |
| | 710 |
|
| Total financial liabilities | $ | 3,263,811 |
| | $ | — |
| | $ | 3,243,215 |
| | $ | 38,870 |
| | $ | (6,844 | ) | | $ | 3,275,241 |
|
For a detailed description and classification of our financial instruments, see “Note 17,15, Fair Value” in our 20162018 Form 10-K.
Fair Value Option
We elected the fair value option for our credit risk sharing debt securities issued under our CAS series issued prior to January 1, 2016 and certain loans and debt that contain embedded derivatives that would otherwise require bifurcation. Additionally, we elected the fair value option for our credit risk-sharing securities accounted for as debt of Fannie Mae issued under our CAS series prior to January 1, 2016. Under the fair value option, we elected to carry these instruments at fair value instead of bifurcating the embedded derivative from such instruments.
We elected the fair value option for all long-term structured debt instruments that are issued in response to specific investor demand and have interest rates that are based on a calculated index or formula and are economically hedged with derivatives at the time of issuance. By electing the fair value option for these instruments, we are able to eliminate the volatility in our results of operations that would otherwise result from the accounting asymmetry created by recording these structured debt instruments at cost while recording the related derivatives at fair value.
We elected the fair value option for the financial assets and liabilities of the consolidated senior-subordinate trust structures. By electing the fair value option for these instruments, we are able to eliminate the volatility in our results of operations that would otherwise result from different accounting treatment between loans at cost and debt at cost.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 114 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Fair Value |
Interest income for the mortgage loans is recorded in “Interest income—Mortgage loans” and interest expense for the debt instruments is recorded in “Interest expense—Long-term debt” in our condensed consolidated statements of operations and comprehensive income.
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 101 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Fair Value |
The following table displays the fair value and unpaid principal balance of the financial instruments for which we have made fair value elections.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | Loans(1) | | Long-Term Debt of Fannie Mae | | Long-Term Debt of Consolidated Trusts | | Loans(1) | | Long-Term Debt of Fannie Mae | | Long-Term Debt of Consolidated Trusts |
| | (Dollars in millions) |
| Fair value | | $ | 11,013 |
| | | | $ | 8,491 |
| | | | $ | 32,760 |
| | | | $ | 12,057 |
| | | | $ | 9,582 |
| | | | $ | 36,524 |
| |
| Unpaid principal balance | | 10,596 |
| | | | 7,758 |
| | | | 29,560 |
| | | | 11,688 |
| | | | 9,090 |
| | | | 33,055 |
| |
__________ |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | Loans(1) | | Long-Term Debt of Fannie Mae | | Long-Term Debt of Consolidated Trusts | | Loans(1) | | Long-Term Debt of Fannie Mae | | Long-Term Debt of Consolidated Trusts |
| | (Dollars in millions) |
| Fair value | | $ | 8,183 |
| | | | $ | 6,041 |
| | | | $ | 22,719 |
| | | | $ | 8,922 |
| | | | $ | 6,826 |
| | | | $ | 23,753 |
| |
| Unpaid principal balance | | 7,866 |
| | | | 5,541 |
| | | | 20,380 |
| | | | 8,832 |
| | | | 6,241 |
| | | | 22,080 |
| |
| |
(1) | Includes nonaccrual loans with a fair value of $181$127 million and $200$161 million as of September 30, 20172019 and December 31, 2016,2018, respectively. The difference between unpaid principal balance and the fair value of these nonaccrual loans as of September 30, 20172019 and December 31, 20162018 was $35$11 million and $34$19 million, respectively. Includes loans that are 90 days or more past due with a fair value of $133$76 million and $152$102 million as of September 30, 20172019 and December 31, 2016,2018, respectively. The difference between unpaid principal balance and the fair value of these 90 or more days past due loans as of September 30, 20172019 and December 31, 20162018 was $26$9 million and $25$14 million, respectively. |
Changes in Fair Value under the Fair Value Option Election
The following tables display fair valueWe recorded gains of $95 million and $334 million for the three and nine months ended September 30, 2019, respectively, and losses net, includingof $63 million and $239 million for the three and nine months ended September 30, 2018, respectively, from changes attributable to instrument-specific credit risk, for loans and debt for whichin the fair value election was made. Amounts areof loans recorded as a component ofat fair value in “Fair value losses,gains (losses), net” in our condensed consolidated statements of operations and comprehensive income.
We recorded losses of $245 million and $797 million for the three and nine months ended September 30, 2019, respectively, and gains of $128 million and $629 million for the three and nine months ended September 30, 2018, respectively, from changes in the fair value of long-term debt recorded at fair value in “Fair value gains (losses), net” in our condensed consolidated statements of operations and comprehensive income. |
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, |
| | 2017 | | 2016 |
| | Loans | | Long-Term Debt | | Total Gains (Losses) | | Loans | | Long-Term Debt | | Total Gains (Losses) |
| | (Dollars in millions) |
| Changes in instrument-specific credit risk | $ | (6 | ) | | $ | 113 |
| | $ | 107 |
| | $ | 14 |
| | $ | (389 | ) | | $ | (375 | ) |
| Other changes in fair value | 36 |
| | (78 | ) | | (42 | ) | | 48 |
| | (65 | ) | | (17 | ) |
| Fair value gains (losses), net | $ | 30 |
| | $ | 35 |
| | $ | 65 |
| | $ | 62 |
| | $ | (454 | ) | | $ | (392 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | Loans | | Long-Term Debt | | Total Gains (Losses) | | Loans | | Long-Term Debt | | Total Gains (Losses) |
| | (Dollars in millions) |
| Changes in instrument-specific credit risk | $ | 47 |
| | $ | (226 | ) | | $ | (179 | ) | | $ | 46 |
| | $ | (610 | ) | | $ | (564 | ) |
| Other changes in fair value | 119 |
| | (196 | ) | | (77 | ) | | 392 |
| | (511 | ) | | (119 | ) |
| Fair value gains (losses), net | $ | 166 |
| | $ | (422 | ) | | $ | (256 | ) | | $ | 438 |
| | $ | (1,121 | ) | | $ | (683 | ) |
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 115102 |
|
| | |
| | Notes to Condensed Consolidated Financial Statements | Fair ValueCommitments and Contingencies |
In determining the changes in the instrument-specific credit risk for loans, the changes in the associated credit-related components of these loans, primarily the guaranty obligation, were taken into consideration with the change in the fair value of the loans for which we elected the fair value option for financial instruments. In determining the changes in the instrument-specific credit risk for debt, the changes in Fannie Mae debt spreads to LIBOR that occurred during the period were taken into consideration with the change in the fair value of the debt for which we elected the fair value option for financial instruments. Specifically, cash flows are evaluated taking into consideration any derivatives through which Fannie Mae has swapped out of the structured features of the notes and thus created a floating-rate LIBOR-based debt instrument. The change in value of these LIBOR-based cash flows based on the Fannie Mae yield curve at the beginning and end of the period represents the instrument-specific credit risk.
15.13. Commitments and Contingencies
We are party to various types of legal actions and proceedings, including actions brought on behalf of various classes of claimants. We also are subject to regulatory examinations, inquiries and investigations, and other information gathering requests. In some of the matters, indeterminate amounts are sought. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. This variability in pleadings, together with our and our counsel’s actual experience in litigating or settling claims, leads us to conclude that the monetary relief that may be sought by plaintiffs bears little relevance to the merits or disposition value of claims.
On a quarterly basis, we review relevant information about all pending legal actions and proceedings for the purpose of evaluating and revising our contingencies, accruals and disclosures.
We have substantial and valid defenses to the claims in the proceedings described below and intend to defend these matters vigorously. However, legal actions and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. Accordingly, the outcome of any given matter and the amount or range of potential loss at particular points in time is frequently difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how courts will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel may view the evidence and applicable law.
On a quarterly basis, we review relevant information about all pending legal actions and proceedings for the purpose of evaluating and revising our contingencies, accruals and disclosures. We establish an accrual only for matters when a loss is probable and we can reasonably estimate the amount of such loss. For legal actions or proceedings where there is only a reasonable possibility that a loss may be incurred, or where we are not currently able to estimate the reasonably possible loss or range of loss, we do not establish an accrual. We are often unable to estimate the possible losses or ranges of losses, particularly for proceedings that are in their early stages of development, where plaintiffs seek indeterminate or unspecified damages, where there may be novel or unsettled legal questions relevant to the proceedings, or where settlement negotiations have not occurred or progressed.
Given the uncertainties involved in any action or proceeding, regardless of whether we have established an accrual, the ultimate resolution of certain of these matters may be material to our operating results for a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of our net income or loss for that period.
In addition to the matters specifically described below, we are involved in a number of 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. We have also advanced fees and expenses of certain current and former officers and directors in connection with various legal proceedings pursuant to our bylaws and indemnification agreements.
Senior Preferred Stock Purchase Agreements Litigation
A number ofconsolidated putative class action (“In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations”) and two non-class action lawsuits were filed by Fannie Mae and Freddie Mac shareholders against us, FHFA as our conservator, and Freddie Mac are pending in the U.S. District Court for the District of Columbia against us, FHFA as our conservator, Treasury and Freddie Mac from July through September 2013 by shareholders of Fannie Mae and/or Freddie Mac challengingColumbia. The lawsuits challenge the August 2012 amendment to each company’s senior preferred stock purchase agreement with Treasury. These lawsuits were consolidated and, on December 3, 2013, plaintiffs (preferred and common shareholders of Fannie Mae and/or Freddie Mac) filed a
In the consolidated class action complaint inand two of the U.S. District Court for the District of Columbia against us,non-class action suits, Arrowood Indemnity Company v. Fannie Mae and Fairholme Funds v. FHFA, as our conservator, Treasury and Freddie Mac (“In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action
|
| | |
Fannie Mae (In conservatorship) Third Quarter 2017 Form 10-Q | 116 |
|
| | |
| Notes to Condensed Consolidated Financial Statements | Commitments and Contingencies |
Litigations”). The preferred shareholder plaintiffs allegefiled amended complaints on November 1, 2017 alleging that the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendments to the senior preferred stock purchase agreements nullified certain of the shareholders’ rights, particularly the right to receive dividends. The common shareholder plaintiffs allege thatPlaintiffs seek unspecified damages, equitable and injunctive relief, and costs and expenses, including attorneys’ fees. Plaintiffs in the August 2012 amendments constituted a taking of their property by requiring that all future profits of Fannie Mae and Freddie Mac be paid to Treasury. Plaintiffs allege claims for breach of contract and breach of the implied covenant of good faith and fair dealing against us, FHFA and Freddie Mac, a takings claim against FHFA and Treasury, and a breach of fiduciary duty claim derivatively on our and Freddie Mac’s behalf against FHFA and Treasury. Plaintiffsclass action seek to represent several classes of preferred and/or common shareholders of Fannie Mae and/or Freddie Mac who held stock as of the public announcement of the August 2012 amendments. Plaintiffs seek unspecified damages, equitableOn September 28, 2018, the court dismissed all of the plaintiffs’ claims except for their claims for breach of an implied covenant of good faith and injunctivefair dealing. On October 15, 2018, defendants filed a motion for partial reconsideration. On May 16, 2019, the court denied this motion.
On May 21, 2018, aplaintiff in a non-class action case, Angel v. Federal Home Loan Mortgage Corporation, filed a complaint for declaratory relief and costscompensatory damages against Fannie Mae (including certain members of its Board of Directors), Freddie Mac (including certain members of its Board of Directors) and expenses, including attorneys’ fees.
A non-class action suit, Arrowood Indemnity Company v. Fannie Mae, was filedFHFA, as conservator, in the U.S. District Court for the District of Columbia on September 20, 2013 by preferred shareholders against us, FHFA as our conservator, the Director of FHFA (in his official capacity), Treasury, the Secretary of the Treasury (in his official capacity) and Freddie Mac. Plaintiffs bringColumbia. Plaintiff in that case asserts claims for breach of contract, and breach of the implied covenantcovenants of good faith and fair dealing, against us, FHFA and Freddie Mac,aiding and claims for violationabetting the federal government in avoiding an alleged implicit guarantee of dividend payments. On March 6, 2019, the court granted defendants’ motion to dismiss and on March 18, 2019, plaintiff moved to alter or amend the judgment and to file an amended complaint. On May 24, 2019, the court denied this motion. On June 19, 2019, plaintiff filed a notice of appeal of the Administrative Procedure Act against the FHFAcourt’s dismissal and Treasury defendants, alleging that the net worth sweep dividend provisions nullified certain rights of the preferred shareholders, particularly the right to receive dividends. Plaintiffs seek damages, equitable and injunctive relief, and costs and expenses, including attorneys’ fees.
On September 30, 2014, the court dismissed both lawsuits and plaintiffs in both suits filed timely notices of appeal. On February 21, 2017,related orders with the U.S. Court of Appeals for the D.C. Circuit affirmed the district court’s dismissal of the claims alleging violation of the Administrative Procedure Act, but reversed the district court’s dismissal of the claims alleging breach of the implied covenant of good faith and fair dealing and one of the breach of contract claims. The court also ruled that the class-action plaintiffs could seek leave in the district court to amend their claim for breach of fiduciary duty from a derivative to a direct claim. On July 17, 2017, the Court of Appeals issued a revised opinion allowing certain plaintiffs to continue to maintain their breach of the implied covenant of good faith and fair dealing and breach of contract claims that the original opinion had found not properly preserved, and modifying its discussion of the standard that applies to the breach of implied covenant claim. On October 16, 2017, the plaintiffs filed petitions for certiorari with the United States Supreme Court seeking review of the Court of Appeals’ ruling upholding the district court’s dismissal of claims alleging violation of the Administrative Procedure Act.
On August 2, 2017, shareholder David J. Voacolo filed a lawsuit, Voacolo v. Fannie Mae, in the U.S. District Court for the District of New Jersey against Fannie Mae and the United States alleging that the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendments to the senior preferred stock purchase agreements were a violation of due process and an illegal exaction. Plaintiff seeks damages only.Columbia Circuit.
Given the stage of these lawsuits, the substantial and novel legal questions that remain, and our substantial defenses, we are currently unable to estimate the reasonably possible loss or range of loss arising from this litigation.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 117103 |
|
| | |
| | Quantitative and Qualitative Disclosures about Market Risk |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information about market risk is set forth in “MD&A—Risk Management—Market Risk Management, Includingincluding Interest Rate Risk Management.”
Item 4. Controls and Procedures
Overview
We are required under applicable laws and regulations to maintain controls and procedures, which include disclosure controls and procedures as well as internal control over financial reporting, as further described below.
Evaluation of Disclosure Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures refer to controls and other procedures designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as in effect as of September 30, 2017,2019, the end of the period covered by this report. As a result of management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of September 30, 20172019 or as of the date of filing this report.
Our disclosure controls and procedures were not effective as of September 30, 20172019 or as of the date of filing this report because they did not adequately ensure the accumulation and communication to management of information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws. As a result, we were not able to rely upon the disclosure controls and procedures that were in place as of September 30, 20172019 or as of the date of this filing, and we continue to have a material weakness in our internal control over financial reporting. This material weakness is described in more detail below under “Description of Material Weakness.” Based on discussions with FHFA and the structural nature of this material weakness, we do not expect to remediate this material weakness while we are under conservatorship.
DescriptionSenior Preferred Stock Purchase Agreements Litigation
A consolidated putative class action (“In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations”) and two non-class action lawsuits filed by Fannie Mae and Freddie Mac shareholders against us, FHFA as our conservator, and Freddie Mac are pending in the U.S. District Court for the District of Material WeaknessColumbia. The lawsuits challenge the August 2012 amendment to each company’s senior preferred stock purchase agreement with Treasury.
The Public Company Accounting Oversight Board’s Auditing Standard 2201 defines a material weakness as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatementIn the consolidated class action and two of the company’s annual non-class action suits, Arrowood Indemnity Company v. Fannie Mae and Fairholme Funds v. FHFA, plaintiffs filed amended complaints on November 1, 2017 alleging that the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendments nullified certain of the shareholders’ rights, particularly the right to receive dividends. Plaintiffs seek unspecified damages, equitable and injunctive relief, and costs and expenses, including attorneys’ fees. Plaintiffs in the class action seek to represent several classes of preferred and/or interim financial statements will not be prevented common shareholders of Fannie Mae and/or detected on a timely basis.
Management has determined that we continued to have the following material weakness as of September 30, 2017 andFreddie Mac who held stock as of the datepublic announcement of filingthe August 2012 amendments. On September 28, 2018, the court dismissed all of the plaintiffs’ claims except for their claims for breach of an implied covenant of good faith and fair dealing. On October 15, 2018, defendants filed a motion for partial reconsideration. On May 16, 2019, the court denied this report:motion.
Disclosure ControlsOn May 21, 2018, aplaintiff in a non-class action case, Angel v. Federal Home Loan Mortgage Corporation, filed a complaint for declaratory relief and Procedures. We have been undercompensatory damages against Fannie Mae (including certain members of its Board of Directors), Freddie Mac (including certain members of its Board of Directors) and FHFA, as conservator, in the conservatorshipU.S. District Court for the District of FHFA since SeptemberColumbia. Plaintiff in that case asserts claims for breach of contract, breach of implied covenants of good faith and fair dealing, and aiding and abetting the federal government in avoiding an alleged implicit guarantee of dividend payments. On March 6, 2008. Under2019, the GSE Act, FHFA iscourt granted defendants’ motion to dismiss and on March 18, 2019, plaintiff moved to alter or amend the judgment and to file an independent agencyamended complaint. On May 24, 2019, the court denied this motion. On June 19, 2019, plaintiff filed a notice of appeal of the court’s dismissal and related orders with the U.S. Court of Appeals for the District of Columbia Circuit.
Given the stage of these lawsuits, the substantial and novel legal questions that currently functions as both our conservatorremain, and our regulator with respectsubstantial defenses, we are currently unable to our safety, soundness and mission. Becauseestimate the reasonably possible loss or range of the nature of the conservatorship under the GSE Act, which places us under the “control” of FHFA (as that term is defined by securities laws), 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
loss arising from this litigation.
|
| | |
Fannie Mae (In conservatorship) Third Quarter 20172019 Form 10-Q | 118103 |
|
| | |
| | | ControlsQuantitative and ProceduresQualitative Disclosures about Market Risk |
without our knowledge that could be materialItem 3. Quantitative and Qualitative Disclosures about Market Risk
Information about market risk is set forth in “MD&A—Risk Management—Market Risk Management, including Interest Rate Risk Management.”
Item 4. Controls and Procedures
Overview
We are required under applicable laws and regulations to our shareholders and other stakeholders, and could significantly affect our financial performance or our continued existence as an ongoing business. Although we and FHFA attempted to design and implement disclosure policiesmaintain controls and procedures, that would account for the conservatorship and accomplish the same objectives as awhich include disclosure controls and procedures policyas well as internal control over financial reporting, as further described below.
Evaluation of a typical reporting company, there are inherent structural limitations on our ability to design, implement, test or operate effective disclosure controlsDisclosure Controls and procedures. As both our regulatorProcedures
Disclosure Controls and our conservator under the GSE Act, FHFA is limited in its ability to design and implement a complete set of disclosureProcedures
Disclosure controls and procedures relatingrefer to Fannie Mae, particularly with respectcontrols and other procedures designed to current reporting pursuantprovide reasonable assurance that information required to Form 8-K. Similarly, as a regulated entity,be disclosed in the reports we are limitedfile or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in our ability to design, implement, operatethe rules and testforms of the SEC. Disclosure controls and procedures for which FHFAinclude, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is responsible.
Dueaccumulated and communicated to these circumstances, we have not been ablemanagement, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to updateallow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as in effect as of September 30, 2019, the end of the period covered by this report. As a mannerresult of management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of September 30, 2019 or as of the date of filing this report.
Our disclosure controls and procedures were not effective as of September 30, 2019 or as of the date of filing this report because they did not adequately ensuresensure 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 condensed consolidated financial statements.laws. As a result, we didwere not maintain effectiveable to rely upon the disclosure controls and procedures designed to ensure complete and accurate disclosure as required by GAAPthat were in place as of September 30, 20172019 or as of the date of this filing, this report.and we continue to have a material weakness in our internal control over financial reporting. This material weakness is described in more detail below under “Description of Material Weakness.” Based on discussions with FHFA and the structural nature of this material weakness, we do not expect to remediate this material weakness while we are under conservatorship.
Mitigating Actions Related to Material Weakness
As described above under “Description of Material Weakness,” we continue to have a material weakness in our internal control over financial reporting relating to our disclosure controls and procedures. However, we and FHFA have engaged in the following practices intended to permit accumulation and communication to management of information needed to meet our disclosure obligations under the federal securities laws:
FHFA has established the Division of Conservatorship, which is intended to facilitate operation of the company with the oversight of the conservator.
We have provided drafts of our SEC filings to FHFA personnel for their review and comment prior to filing. We also have provided drafts of external press releases, statements and speeches to FHFA personnel for their review and comment prior to release.
FHFA personnel, including senior officials, have reviewed our SEC filings prior to filing, including this quarterly report on Form 10-Q for the quarter ended September 30, 2017 (“Third Quarter 2017 Form 10-Q”), and engaged in discussions regarding issues associated with the information contained in those filings. Prior to filing our Third Quarter 2017 Form 10-Q, FHFA provided Fannie Mae management with a written acknowledgment that it had reviewed the Third Quarter 2017 Form 10-Q, and it was not aware of any material misstatements or omissions in the Third Quarter 2017 Form 10-Q and had no objection to our filing the Third Quarter 2017 Form 10-Q.
The Director of FHFA and our Chief Executive Officer have been in frequent communication and meet on a regular basis.
FHFA representatives attend meetings frequently with various groups within the company to enhance the flow of information and to provide oversight on a variety of matters, including accounting, credit and market risk management, external communications and legal matters.
Senior officials within FHFA’s Office of the Chief Accountant have met frequently with our senior finance executives regarding our accounting policies, practices and procedures.
Changes in Internal Control over Financial Reporting
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There have been no changes in our internal control over financial reporting since June 30, 2017 that management believes have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 119 |
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
The information in this item supplements and updates information regarding certain legal proceedings set forth in “Legal Proceedings” in our 2016 Form 10-K, our First Quarter 2017 Form 10-Q and our Second Quarter 2017 Form 10-Q. We also provide information regarding material legal proceedings in “Note 15, 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 a number of legal and regulatory proceedings that arise in the ordinary course of business that do not have a material impact on our business. Litigation claims and proceedings of all types are subject to many factors that generally cannot be predicted accurately.
We record accruals for legal claims when losses associated with those claims become probable and the amounts can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims. For matters where the likelihood or extent of a loss is not probable or cannot be reasonably estimated, we do not recognize in our condensed consolidated financial statements the potential liability that may result from these matters. Except for matters that have been settled, we presently cannot determine the ultimate resolution of the matters described below or incorporated by reference into this item or in our 2016 Form 10-K, our First Quarter 2017 Form 10-Q or our Second Quarter 2017 Form 10-Q. 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.
FHFA Private-Label Mortgage-Related Securities Litigation
In September 2011, FHFA, in its role as conservator of Fannie Mae and Freddie Mac, filed a lawsuit against The Royal Bank of Scotland Group plc and certain related entities and individuals (collectively, “RBS”) in the U.S. District Court for the District of Connecticut alleging violations of federal and state securities laws in connection with private-label mortgage-backed securities RBS sold to Fannie Mae and Freddie Mac. At the same time, FHFA also filed a lawsuit in the U.S. District Court for the Southern District of New York against Nomura Holdings Inc., RBS Securities Inc. and certain related entities and individuals (collectively “Nomura”) alleging similar violations of federal and state securities laws in connection with Nomura related private-label mortgage-backed securities sold to Fannie Mae and Freddie Mac. On July 12, 2017, FHFA, on behalf of Fannie Mae and Freddie Mac as our conservator, entered into a $5.5 billion settlement agreement with RBS resolving all claims in the RBS lawsuit. RBS paid us approximately $975 million of the settlement amount in August 2017. On September 28, 2017, the U.S. Court of Appeals for the Second Circuit affirmed the district court’s May 15, 2015 judgment in favor of FHFA in the Nomura case.
Senior Preferred Stock Purchase Agreements Litigation
A consolidated putative class action (“In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations”) and two non-class action lawsuits filed by Fannie Mae and Freddie Mac shareholders against us, FHFA as our conservator, and Freddie Mac are pending in the U.S. District Court for the District of Columbia. The lawsuits challenge the August 2012 amendment to each company’s senior preferred stock purchase agreement with Treasury.
In the consolidated class action and two of the non-class action suits, Arrowood Indemnity Company v. Fannie Mae and Fairholme Funds v. FHFA, plaintiffs filed amended complaints on November 1, 2017 alleging that the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendments nullified certain of the shareholders’ rights, particularly the right to receive dividends. Plaintiffs seek unspecified damages, equitable and injunctive relief, and costs and expenses, including attorneys’ fees. Plaintiffs in the class action seek to represent several classes of preferred and/or common shareholders of Fannie Mae and/or Freddie Mac who held stock as of the public announcement of the August 2012 amendments. On September 28, 2018, the court dismissed all of the plaintiffs’ claims except for their claims for breach of an implied covenant of good faith and fair dealing. On October 15, 2018, defendants filed a motion for partial reconsideration. On May 16, 2019, the court denied this motion.
On May 21, 2018, aplaintiff in a non-class action case, Angel v. Federal Home Loan Mortgage Corporation, filed a complaint for declaratory relief and compensatory damages against Fannie Mae (including certain members of its Board of Directors), Freddie Mac (including certain members of its Board of Directors) and FHFA, as conservator, in the U.S. District Court for the District of Columbia. Plaintiff in that case asserts claims for breach of contract, breach of implied covenants of good faith and fair dealing, and aiding and abetting the federal government in avoiding an alleged implicit guarantee of dividend payments. On March 6, 2019, the court granted defendants’ motion to dismiss and on March 18, 2019, plaintiff moved to alter or amend the judgment and to file an amended complaint. On May 24, 2019, the court denied this motion. On June 19, 2019, plaintiff filed a notice of appeal of the court’s dismissal and related orders with the U.S. Court of Appeals for the District of Columbia Circuit.
Given the stage of these lawsuits, the substantial and novel legal questions that remain, and our substantial defenses, we are currently unable to estimate the reasonably possible loss or range of loss arising from this litigation.
|
| | |
| Fannie Mae (In conservatorship) Third Quarter 2019 Form 10-Q | 103 |
|
| | |
| Quantitative and Qualitative Disclosures about Market Risk |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information about market risk is set forth in “MD&A—Risk Management—Market Risk Management, including Interest Rate Risk Management.”
Item 4. Controls and Procedures
Overview
We are required under applicable laws and regulations to maintain controls and procedures, which include disclosure controls and procedures as well as internal control over financial reporting, as further described below.
Evaluation of Disclosure Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures refer to controls and other procedures designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as in effect as of September 30, 2019, the end of the period covered by this report. As a result of management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of September 30, 2019 or as of the date of filing this report.
Our disclosure controls and procedures were not effective as of September 30, 2019 or as of the date of filing this report because they did not adequately ensure the accumulation and communication to management of information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws. As a result, we were not able to rely upon the disclosure controls and procedures that were in place as of September 30, 2019 or as of the date of this filing, and we continue to have a material weakness in our internal control over financial reporting. This material weakness is described in more detail below under “Description of Material Weakness.” Based on discussions with FHFA and the structural nature of this material weakness, we do not expect to remediate this material weakness while we are under conservatorship.
Description of Material Weakness
The Public Company Accounting Oversight Board’s Auditing Standard 2201 defines a material weakness as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Management has determined that we continued to have the following material weakness as of September 30, 2019 and as of the date of filing this report:
| |
| • | Disclosure Controls and Procedures. We have been under the conservatorship of FHFA since September 6, 2008. Under the GSE Act, FHFA is an independent agency that currently functions as both our conservator and our regulator with respect to our safety, soundness and mission. Because of the nature of the conservatorship under the GSE Act, which places us under the “control” of FHFA (as that term is defined by securities laws), 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. Although we and FHFA attempted to design and implement disclosure policies and procedures that would account for the conservatorship and accomplish the same objectives as a disclosure controls and procedures policy of a typical reporting company, there are inherent structural limitations on our ability to design, implement, test or operate |
effective disclosure controls and procedures. As both our regulator and our conservator under the GSE Act, FHFA is limited in its ability to design and implement a complete set of disclosure controls and procedures relating to Fannie Mae, particularly with respect to current reporting pursuant to Form 8-K. Similarly, as a regulated entity, we are limited in our ability to design, implement, operate and test the controls and procedures for which FHFA is responsible.
Due to these circumstances, 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 condensed consolidated financial statements. As a result, we did not maintain effective controls and procedures designed to ensure complete and accurate disclosure as required by GAAP as of September 30, 2019 or as of the date of filing this report. Based on discussions with FHFA and the structural nature of this weakness, we do not expect to remediate this material weakness while we are under conservatorship.
Mitigating Actions Related to Material Weakness
As described above under “Description of Material Weakness,” we continue to have a material weakness in our internal control over financial reporting relating to our disclosure controls and procedures. However, we and FHFA have engaged in the following practices intended to permit accumulation and communication to management of information needed to meet our disclosure obligations under the federal securities laws:
FHFA has established the Division of Conservatorship, which is intended to facilitate operation of the company with the oversight of the conservator.
We have provided drafts of our SEC filings to FHFA personnel for their review and comment prior to filing. We also have provided drafts of external press releases, statements and speeches to FHFA personnel for their review and comment prior to release.
FHFA personnel, including senior officials, have reviewed our SEC filings prior to filing, including this quarterly report on Form 10-Q for the quarter ended September 30, 2019 (“Third Quarter 2019 Form 10-Q”), and engaged in discussions regarding issues associated with the information contained in those filings. Prior to filing our Third Quarter 2019 Form 10-Q, FHFA provided Fannie Mae management with written acknowledgment that it had reviewed the Third Quarter 2019 Form 10-Q, and it was not aware of any material misstatements or omissions in the Third Quarter 2019 Form 10-Q and had no objection to our filing the Third Quarter 2019 Form 10-Q.
Our senior management meets regularly with senior leadership at FHFA, including, but not limited to, the Director.
FHFA representatives attend meetings frequently with various groups within the company to enhance the flow of information and to provide oversight on a variety of matters, including accounting, credit and market risk management, external communications and legal matters.
Senior officials within FHFA’s Office of the Chief Accountant have met frequently with our senior finance executives regarding our accounting policies, practices and procedures.
Changes in Internal Control Over Financial Reporting
Overview
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Below we describe changes in our internal control over financial reporting since June 30, 2019 that management believes have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In the ordinary course of business, we review our system of internal control over financial reporting and make changes that we believe will improve these controls and increase efficiency, while continuing to ensure that we maintain effective internal controls. Changes may include implementing new, more efficient systems, automating manual processes and updating existing systems. For example, we are currently implementing changes to various financial system applications in stages across the company. As we continue to implement these changes, each implementation may become a significant component of our internal control over financial reporting.
Treasury Cash Management System
In July 2019, we consolidated our treasury systems used for cash activities, liquidity management and bank account administration into a fully integrated new treasury cash management system. In connection with this implementation and related business process changes, we redesigned or replaced multiple existing controls that were previously considered effective with new or modified controls and, in some cases, removed controls that are no longer applicable. We will continue to monitor and test these new and modified controls for adequate design and operating effectiveness. This new system was
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 104 |
operating during the third quarter of 2019 and was used to prepare our third quarter 2019 condensed consolidated financial statements included in this report.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
The information in this item supplements and updates information regarding certain legal proceedings set forth in “Legal Proceedings” in our 2018 Form 10-K, our First Quarter 2019 Form 10-Q and our Second Quarter 2019 Form 10-Q. We also provide information regarding material legal proceedings in “Note 13, 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 a number of 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
Between June 2013 and June 2017, several lawsuits were filed byAugust 2018, 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 the 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 in order to pay dividends to Treasury prior to the August 2012 amendments. Some of the lawsuits also challenge the constitutionality of FHFA’s structure. The plaintiffs seek various forms of equitable and injunctive relief, including rescission of the August 2012 amendments, as well as damages. The cases that remain pending or were terminated after June 30, 20172019 are as follows:
District of Columbia. On September 30, 2014,Fannie Mae is a defendant in three cases pending in the U.S. District Court for the District of ColumbiaColumbia—a consolidated putative class action and two additional cases. In all three cases, Fannie Mae and Freddie Mac stockholders filed amended complaints on November 1, 2017 against us, FHFA as our conservator and Freddie Mac. On September 28, 2018, the court dismissed all but one of the plaintiffs’ claims in these cases, then pending before that court. The plaintiffs in eachexcept for their claims for breach of an implied covenant of good faith and fair dealing, and on May 16, 2019, the dismissed cases filedcourt denied defendants’ motion for partial reconsideration. In a notice of appeal. The plaintiffs in thefourth case that was not dismissed by the court voluntarily dismissed their lawsuit on October 31, 2014. On February 21, 2017, the Court of Appeals for the District of Columbia Circuit affirmed in part and reversed in part the district court’s dismissal of the cases filed in the U.S. District Court for the District of Columbia.Columbia on May 21, 2018, the court granted defendants’ motion to dismiss on March 6, 2019, and on March 18, 2019, plaintiff moved to alter or amend the judgment and to file an amended complaint. On July 17, 2017,May 24, 2019, the Court of Appeals issued a revised opinion allowing certain plaintiffs to continue to maintain certain claims the original opinion had found not properly preserved, and modifying its discussion of the standard that applies to one of those claims.court denied this motion. On October 16, 2017, the plaintiffs filed petitions for certiorari with the United States Supreme Court seeking review of the Court of Appeals' ruling upholding the district court's
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 120 |
dismissal of certain claims. Fannie Mae is a defendant in this action, which is described in “Note 15, Commitments and Contingencies.”
Eastern District of Kentucky. On September 9, 2016, the U.S. District Court for the Eastern District of Kentucky dismissed the case pending before it. TheJune 19, 2019, plaintiff in that case filed a notice of appeal of the court’s dismissal and related orders with the appeal was docketed on November 17, 2016.
NorthernU.S. Court of Appeals for the District of Illinois. On March 20, 2017, the U.S. District Court for the Northern District of Illinois dismissed the case pending before it. The plaintiffColumbia Circuit. All four cases are described in that case filed a notice of appeal“Note 13, Commitments and the appeal was docketed on April 27, 2017. Oral argument was held in the appeal on October 30, 2017.Contingencies.”
Northern District of Iowa. On March 27, 2017, the U.S. District Court for the Northern District of Iowa dismissed the case pending before it. The plaintiff in that case filed a notice of appeal and the appeal was docketed on April 4, 2017.
Southern District of Texas. On May 22, 2017,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 TexasTexas. On May 22, 2017, the court dismissed the case pending before it.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. The plaintiffcourt held that plaintiffs could pursue their claim that FHFA exceeded its statutory powers as conservator when it implemented the net worth sweep provisions of the senior preferred stock purchase agreements in August 2012. The court also held that case filed a noticethe provision of appealthe Housing and Economic Recovery Act that insulates the FHFA Director from removal without cause violates constitutional separation of powers principles and, thus, that the FHFA Director may be removed by the president for any reason. The court held that the appropriate remedy for this violation is to declare the provision severed from the statute. Plaintiffs have requested that the Supreme Court review the constitutional claim, arguing that the relief granted by Fifth Circuit is insufficient, and the appeal was docketed on May 30, 2017.government has requested review of the decision to allow the plaintiffs’ statutory claims to go forward.
Western District of Michigan and District of Minnesota.Michigan. On June 1, 2017 and June 22, 2017, preferred and common stockholders of Fannie Mae and Freddie Mac filed complaintsa complaint for declaratory and injunctive relief against FHFA and Treasury in the U.S. District Court for the Western District of MichiganMichigan. FHFA and Treasury moved to dismiss the case on September 8, 2017, and plaintiffs filed a motion for summary judgment on October 6, 2017.
District of Minnesota. 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 complaints, which also askcourt dismissed the courts to set asidecase on July 6, 2018, and plaintiffs filed a notice of appeal with the net worth sweep dividend provisionsU.S. Court of Appeals for the senior preferred stock purchase agreements, allege that FHFA’s structure violates constitutional requirements, including: presidential removal authority; separation of powers; the appointments clause; the nondelegation doctrine; and the private nondelegation doctrine.Eighth Circuit on July 10, 2018.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 105 |
Eastern District of New Jersey. Pennsylvania. On August 2, 2017, shareholder David J. Voacolo filed a lawsuit against16, 2018, common stockholders of Fannie Mae and the United StatesFreddie Mac filed a complaint for declaratory and injunctive relief against FHFA and Treasury in the U.S. District Court for the Eastern District of New Jersey alleging thatPennsylvania. FHFA and Treasury moved to dismiss the net worth sweep dividend provisions of the senior preferred stock that were implemented in August 2012 werecase on November 16, 2018, and plaintiffs filed a violation of due process and an illegal exaction. Plaintiff seeks damages only.motion for summary judgment on December 21, 2018.
U.S. Court of Federal Claims. Fannie Mae is a nominal defendant in two actions filed Numerous cases are pending against the United States in the U.S. Court of Federal Claims: Claims. Fannie Mae is a nominal defendant in three of these cases: Fisher v. United States of America, filed on December 2, 2013, and 2013; Rafter v. United States of America, filed on August 14, 2014.2014; and Perry Capital LLC v. United States of America, filed on August 15, 2018. Plaintiffs in these cases allege that the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendment to the senior preferred stock purchase agreement constitute a taking of Fannie Mae’s property without just compensation in violation of the U.S. Constitution. The Fisher plaintiffs are pursuing this claim derivatively on behalf of Fannie Mae, while the Rafter and Perry Capital plaintiffs are pursing the claim both derivatively and directly against the United States. Plaintiffs in Rafter also allege adirect and derivative claim thatbreach of contract claims against the government breached an impliedgovernment. The Perry Capital plaintiffs allege similar breach of contract with Fannie Mae’s Boardclaims, as well as breach of Directors by implementingfiduciary duty claims against the net worth sweep dividend provisions.government. Plaintiffs in Fisher request just compensation to Fannie Mae in an unspecified amount. Plaintiffs in Rafter and Perry Capital seek just compensation for themselves on their constitutional claimdirect claims and payment of damages to Fannie Mae on their derivative claim for breach of an implied contract.claims. The United States filed a motion to dismiss the Fisher case and Rafter cases on January 23, 2014; however, the court has stayed proceedingsAugust 1, 2018.
LIBOR Lawsuit
As described further in this case until discoveryour 2018 Form 10-K, in a related case, Fairholme Funds v. United States, is complete. The plaintiffs in Fisher, Rafter and the other cases pending before the court have 45 days after completion of discovery in Fairholme Funds to file amended complaints. The United States must file an omnibus motion to dismiss all cases within 120 days after the deadline for filing amended complaints.
District of Delaware.October 2013, Fannie Mae is alsofiled a nominal defendant in a case filed against FHFA and Treasurylawsuit in the U.S. District Court for the Southern District of Delaware: Jacobs v. FHFA, filed on August 17, 2015. The plaintiffs allege that the net worth sweep dividend provisionsNew York against a number of banks and other defendants alleging they manipulated LIBOR. On July 22, 2019, we entered into an agreement resolving our claims against two of the senior preferred stock that were implemented pursuantdefendants in this lawsuit: Citigroup Inc. and Citibank, N.A. The financial impact of the settlement was not material to the August 2012 amendments to the agreements violate Delaware law. The plaintiffs are pursuing this claim derivatively on behalf of Fannie Mae and directly against the government. The plaintiffs amended their complaint on March 16, 2017 to add unjust enrichment claims against FHFA and Treasury. The defendants filed motions to dismiss on April 17, 2017.our financial statements.
Item 1A. Risk Factors
In addition to the information in this report, you should carefully consider the risks relating to our business that we identify in “Risk Factors” in our 20162018 Form 10-K. This section supplements and updates that discussion. Please
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 121 |
alsodiscussion but does not repeat all of the risk factors described in our 2018 Form 10-K. Also refer to “MD&A—Risk Management”Management,” “MD&A—Single-Family Business” and “MD&A—Multifamily Business” in our 2018 Form 10-K and in this report and in our 2016 Form 10-K 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 containedwe make. We believe the risks described in the sections of this report. However,report and our 2018 Form 10-K identified above are the most significant we face; however, these are not the only risks we face. In addition to the risks we discuss belowin this report and in our 20162018 Form 10-K, we face 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.
There continues to be significant uncertainty regarding the future of our company, including how long the company will continue to exist in its current form, the extent of our role in the market, how long we will be in conservatorship, what form we will have, and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated, and whether we will continue to exist following conservatorship. The conservatorship 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.
On September 5, 2019, Treasury released its plan to reform the housing finance system. The previous Administration endorsedTreasury plan, which is described in “MD&A—Legislation and Regulation—Housing Finance Reform,” is far-reaching in scope and could have a significant impact on our structure, our role in the wind downsecondary mortgage market, our capitalization, our business and our competitive environment. For example:
Some of Fannie Maethe recommendations in the Treasury plan, if implemented, could significantly restrict our business activities, increase the competition we face, affect the credit risk of our mortgage acquisitions, affect our pricing, impose additional requirements on our business, increase our costs or have other impacts that could negatively affect our financial results and condition. For example, the plan includes recommendations that we and Freddie Mac throughshould each be required to operate a responsible transitioncash window for smaller lenders, should be prohibited from offering volume-based pricing discounts or similar incentives, and should be required to maintain a nationwide presence.
The Treasury plan also contains recommendations for administrative and legislative reforms to limit our single-family activities and restrict our multifamily footprint. The plan recommends that FHFA assess whether each of our current single-family products, services and other activities, including our support for cash-out refinancings, investor loans,
and higher principal balance loans, should continue to benefit from support under our senior preferred stock purchase agreement. It also recommends that FHFA and Treasury consider amendments to the enactmentsenior preferred stock purchase agreement to further limit the type and volume of comprehensivemultifamily loans we guarantee.
Regulatory capital requirements that become applicable to us as contemplated by the Treasury plan, depending on their terms, may substantially constrain our business and activities or adversely affect our financial results. For example, if the final capital rule requires us to hold more capital than FHFA’s proposed capital framework, we may be required to increase our pricing or take other actions to maintain appropriate risk-adjusted returns, which may in turn adversely affect our competitive position and financial results. This effect may be more pronounced in a stressed economic environment.
While the Treasury plan contemplates FHFA ending our conservatorship, implementing the plan will take time and a great deal of effort, and a number of factors may keep us from meeting the preconditions for exiting conservatorship, otherwise prevent our exiting conservatorship, or delay any exit from conservatorship as contemplated under the plan, including the following:
| |
| ◦ | we may be unable to retain or raise sufficient capital; |
| |
| ◦ | we may be unable to meet additional requirements FHFA determines are necessary for us to operate in a safe and sound manner; |
| |
| ◦ | possible future changes in leadership at FHFA or the Administration may result in changes in FHFA’s or Treasury’s willingness to pursue the administrative reform recommendations in the Treasury plan; |
| |
| ◦ | legislation may pass that prevents the Treasury plan from being implemented; |
| |
| ◦ | our exit from conservatorship may be delayed because we need to address operational challenges or the loss of regulatory exemptions or protections resulting from an exit from conservatorship. |
The Treasury plan indicates one potential approach to recapitalizing us would be to place us in receivership to facilitate a restructuring of our capital structure. In the event of such a receivership, existing holders of our preferred and common stock would have no further ownership interest in us.
We expect the Administration, FHFA and Congress to continue to consider housing finance reform, legislation. The current Administration has not articulated a formal position on housing finance reform or the future of the GSEs; however, the Secretary of the Treasury has publicly stated that he is focused on housing finance reform and a solution to the current status of Fannie Mae and Freddie Mac.
We expect that Congress will continue to consider legislation thatwhich could result in significant changes in our structure and role in the future, including proposals that would resultas well as other changes to our business and competitive environment.
In addition to or in Fannie Mae’s liquidation or dissolution.connection with the recommendations set forth in the Treasury plan, Congress, FHFA or other agencies may also consider legislation, regulation or regulationadministrative actions aimed at or having the effect of increasing the competition we face, reducing our market share, expanding our obligations to provide funds to Treasury, constraining our business operations, or subjecting us to new obligations such as the Freedom of Information Act, that could impose substantial burdens or adversely affect our results of operations or financial condition. We cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation or other legislation, regulations or administrative actions related to our activities. See “Business—Legislation and Regulation—Housing Finance Reform” in our 2016 Form 10-K and “MD&A—Legislation and Regulation—Housing Finance Reform” in our First Quarter 2017 Form 10-Q for more information about recentactivities, nor can we predict the impact any such enacted legislation, regulations or administrative actions and statements relating to housing finance reform from Congress, as well as actions our conservator has been taking to further housing finance reform.
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 disruptwould have on our business or result in the disclosure or misuse of confidential information, which could damage our reputation, increase our costs and cause losses.
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 and telecommunications technologies to conduct or automate financial transactions. There have been several recent, highly publicized cases involving financial services companies, consumer-based companies and other organizations reporting the unauthorized disclosure of client, customer or other confidential 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 cases where hackers have requested “ransom” payments in exchange for not disclosing customer information or for not making the targets’ computer systems unavailable.condition.
We may not have been, and likely will continuesufficient capital reserves to be, the target of attempted cyber attacks, computer viruses, malicious code, phishing attacks, denial of service attacks and other information security threats. To date, cyber attacks have not hadavoid a material impact on our financial condition, results, or business; however,net worth deficit if we could suffer material financial or otherexperience comprehensive losses in the future. If we have a net worth deficit in a future quarter, we will be required to draw funds from Treasury to avoid being placed into receivership.
The recently amended dividend provisions of the senior preferred stock permit us to retain only up to $25 billion as capital reserves, provided our conservator directs us to declare and pay senior preferred stock dividends that become payable in the future. As of September 30, 2019, our net worth was only $10.3 billion. As a result, we may not have sufficient capital reserves to avoid a net worth deficit if we have comprehensive losses in the future.
For any quarter for which we have a net worth deficit, we would need to draw funds from Treasury under the senior preferred stock purchase agreement to avoid being placed into receivership. 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 amount of remaining funding under the agreement would be reduced by the amount of our draw. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the agreement. Accordingly, if we experience multiple quarters of net worth deficits, the amount of remaining funding available under the senior preferred stock purchase agreement could be significantly reduced from its current level.
Our business and results of operations may be materially adversely affected if we are unable to retain and recruit well-qualified senior executives and other employees. The conservatorship, the uncertainty of our future and welimitations on our executive and employee compensation put us at a disadvantage compared to many other companies in attracting and retaining these employees.
Our business processes are not ablehighly dependent on the talents and efforts of our senior executives and other employees. The conservatorship, the uncertainty of our future and limitations on executive and employee compensation have had, and are likely to predictcontinue to have, an adverse effect on our ability to retain and recruit well-qualified executives and other employees. Turnover in key management positions and challenges in integrating new management could harm our ability to manage our business effectively and successfully implement our and FHFA’s current 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 severityfuture, have had, and may continue to have, an adverse effect on our retention and recruitment of these attacks. Our risksenior executives and other
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 122106 |
exposureemployees. We are subject to these matters remains heightened becausesignificant restrictions on the amount and type of amongcompensation we may pay our executives and other things,employees while under conservatorship. For example:
The Equity in Government Compensation Act of 2015 caps the evolving natureannual direct compensation payable to our chief executive officer to no more than $600,000 while we are in conservatorship or receivership.
The STOCK Act prohibits our senior executives from receiving bonuses during any period of these threats,conservatorship.
In April 2019, legislation was introduced in the current global economicU.S. Senate that would prohibit either Fannie Mae or Freddie Mac from transferring or delegating any duty or responsibility, as of November 25, 2015, of its chief executive officer to any other position. The legislation would also provide that the Director of FHFA may be removed for cause for approving the compensation of any chief executive officer of Fannie Mae or Freddie Mac at a level greater than that permitted under the Equity in Government Compensation Act of 2015.
As our conservator, FHFA has the authority to approve the terms and political environment,amount of our prominent sizeexecutive compensation, and scalemay require us to make changes to our executive compensation program. For example:
| |
| ◦ | In August 2019, FHFA directed us, for so long as we are in conservatorship, to: |
| |
| ▪ | increase the mandatory deferral period for at-risk deferred salary received by senior vice presidents and above from one year to two years, effective January 1, 2022 for executives hired before January 1, 2020 and effective January 1, 2020 for executives hired on or after January 1, 2020; and |
| |
| ▪ | limit base salaries for all of our employees to $600,000. (We do not currently pay any of our employees, including our named executive officers, a base salary of more than $600,000.) |
| |
| ◦ | In September 2019, FHFA directed us to submit for conservator decision any compensation arrangement for a newly hired employee where the proposed total target direct compensation is $600,000 or above, or any increase in total target direct compensation for an existing employee where the proposed total target direct compensation is $600,000 or above. This directive became effective in October 2019 and continues for so long as we are in 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, which effectively eliminates our ability to offer equity-based compensation to our employees.
As a result of the restrictions on our compensation practices, 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 uncertainty of potential action by Congress or the Administration with respect to housing finance reform, which may result in the wind-down or significant restructuring of the company, and with respect to the compensation and role of our executives, also negatively affects our ability to retain and recruit executives and other employees.
Our inability to offer market-based compensation to our chief executive officer also makes retention and succession planning for this position difficult. We believe the limit applicable to our chief executive officer compensation negatively affected our ability to retain our former Chief Executive Officer, who left the company in October 2018.
We face competition from the financial services industry,and technology industries, and from businesses outside of these industries, for qualified executives and other employees. If we are unable to retain, promote and attract executives and other employees with the outsourcingnecessary skills and talent, we would face increased risks for operational failures. If there were several high-level departures at approximately the same time, our ability to conduct our business would likely be materially adversely affected, which could have a material adverse effect on our results of someoperations and financial condition.
Our business activities are significantly affected by the conservatorship and the senior preferred stock purchase agreement and could be significantly impacted by Treasury’s September 2019 Housing Reform Plan.
We are currently under the control of our business operations, the ongoing shortage of qualified cyber security professionals,conservator, FHFA, and the interconnectivity and interdependence of third parties to our systems.
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. We routinely identify cyber threats as well as vulnerabilities in our systems and work to address them, but these efforts may be insufficient. 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. Third parties may also attempt to induce employees, clients 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 cyber security event could jeopardize or result in the unauthorized disclosure, gathering, monitoring, misuse, corruption, loss or destruction of confidential and other information that belongs to us, our customers, 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 customers’, our counterparties’ or third parties’ operations. This could result in significant losses, loss of customers and business opportunities, reputational damage, litigation, regulatory fines, penalties or intervention, reimbursement or other compensatory costs, or otherwise adversely affect our business, financial condition or results of operations.
A cyber attack could occur and persist for an extended period of time without detection. We expect that any investigation of a cyber attack would be inherently unpredictable and that it would take time before the completion of any investigation and before there is availability of full and reliable information. During such time we would not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered and remediated. 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.
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.
Because we are interconnected with and dependent on third-party vendors, exchanges, clearing houses, fiscal and paying agents, and other financial institutions, we could be adversely impacted if any of them is subject to a successful cyber attack or other information security event. For example, if a data breach compromises the integrity of borrower data that we or our customers rely on, it could adversely affect our operations or financial results. 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 customer, 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 with increased costs and consequences to us such as those described above.
We routinely transmit and receive personal, confidential and proprietary information by electronic means. We have discussed and worked with clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and protect against cyber attacks, but we do not know when or how the conservatorship will terminate. 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. In addition, our directors have andno fiduciary duties to any person or entity except to the conservator. Accordingly, our directors are not obligated to consider the interests of the company, the holders of our equity or debt securities, or the holders of Fannie Mae MBS in making or approving a decision unless specifically directed to do so by the conservator.
We are subject to significant restrictions on our business activities during conservatorship. We may be unableprevented by our conservator from engaging in business activities or transactions that we believe would benefit our business and financial results. For example, because FHFA must approve changes to put in place, secure capabilities with allthe national loan level price adjustments we charge and can direct us to make other changes to our guaranty fee pricing, our ability to address changing market conditions, pursue certain strategic objectives, or manage the mix of our clients, vendors, service providers, counterparties and other third parties andloans lenders choose to deliver to us is constrained. We publish national risk-based loan level price adjustment grids that specify the additional cash fees we may not be able to ensure that these third parties have appropriate controls in place to protectcharge at the confidentialitytime we acquire a loan based on the credit characteristics of the information. An interception, misuse or mishandlingloan. These fees allow us to price appropriately for the credit risk we assume in providing our guaranty on the loans. We do not have the ability to implement changes to these pricing grids without the approval of personal, confidential or proprietary information being sent to or received from a client, vendor, service provider, counterparty or other third party could result in legal liability, regulatory action and reputational harm.FHFA. If
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 123107 |
the mix of our single-family loan acquisitions changes, and FHFA does not approve requested changes to our pricing grids in response to these changes, it could adversely affect our financial results and condition. In addition, if FHFA directs us to change our pricing in any manner—including increases or decreases in our base guaranty fees or our loan level price adjustments—it could result in a decrease in our guaranty fee revenues in future periods, a decrease in our single-family business volume or a negative impact on the credit risk profile of our new single-family acquisitions, any of which could adversely affect our financial results and condition.
Because we are under the control of our conservator, our business objectives may not be consistent with the investment objectives of our investors. We are devoting significant resources to meeting FHFA’s goals for our conservatorship and expect to continue to do so. We may be required by our conservator to engage in activities that are operationally difficult, costly to implement or unprofitable, or that may adversely affect our financial results or the credit risk profile of our book of business. In addition, actions we take to meet FHFA’s strategic goals and objectives for our conservatorship could adversely affect our financial results. FHFA has changed our business objectives significantly since we entered conservatorship and could make additional changes at any time, any of which could materially affect our results of operations and financial condition.
Even if we are released from conservatorship, we remain subject to the terms of the senior preferred stock purchase agreement, senior preferred stock and warrant, which can only be canceled or modified with the consent of Treasury. Moreover, restrictions on our business and activities imposed by the terms of the senior preferred stock and the senior preferred stock purchase agreement may be applied to us through regulation or legislation even if we cease to be subject to these agreements and instruments. The senior preferred stock purchase agreement with Treasury includes a number of covenants that significantly restrict our business activities. We cannot, without the prior written consent of Treasury: pay dividends (except on the senior preferred stock); sell, issue, purchase or redeem Fannie Mae equity securities; sell, transfer, lease or otherwise dispose of assets except in specified situations; engage in transactions with affiliates other than on arm’s-length terms or in the ordinary course of business; issue subordinated debt; incur indebtedness that would result in our aggregate indebtedness exceeding $300 billion; or seek or permit the termination of our conservatorship (other than in connection with receivership). In deciding whether to consent to any request for approval it receives from us under the agreement, Treasury has the right to withhold its consent for any reason and is not required by the agreement to consider any particular factors, including whether or not management believes that the transaction would benefit the company. Pursuant to the senior preferred stock purchase agreement, the amount of mortgage assets that we may own is limited to $250 billion. In addition, FHFA has directed that we further cap our mortgage assets at $225 billion.
Given FHFA’s control over Fannie Mae as our conservator and its authority as our regulator, and given the restrictions and obligations that apply to Fannie Mae as a result of our senior preferred stock purchase agreement with Treasury, the senior preferred stock and the warrant, possible future changes in leadership at FHFA or the Administration could result in significant changes in our goals, our business and our financial results.
As described in “MD&A—Legislation and Regulation” in this report, Treasury recently released its plan to reform the housing finance system. The Treasury plan includes recommendations for administrative reforms that would impose additional restrictions on our business activities, including further limits on the size of our retained mortgage portfolio and potential limits on our current products, services, and other single-family activities and on our multifamily footprint. Our letter agreement with Treasury of September 27, 2019, contemplates the negotiation and execution of an amendment to the senior preferred stock purchase agreement to adopt covenants broadly consistent with these recommendations. Limitations on our business activities could restrict our potential sources of revenue, impose additional costs on us, negatively impact our ability to compete, or otherwise negatively affect our business, results and financial condition.
Actions taken by the conservator, the restrictions set forth in the senior preferred stock purchase agreement, including those contemplated by the letter agreement with Treasury, and some of the recommendations in the Treasury plan, if implemented, could adversely affect our business, results of operations, financial condition, liquidity and net worth.
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 13, 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.
We may undertake efforts that adversely affect our business, results of operations, financial condition, liquidity and net worth.
In conservatorship our business has not been managed with a strategy to maximize shareholder returns while fulfilling our mission. In pursuit of FHFA’s previous strategic goals for our conservatorship, which are described in our 2018 Form 10-K in “Business—Conservatorship, Treasury Agreements and Housing Finance Reform—Housing Finance Reform—Conservator Developments and Strategic Goals,” we have been taking a variety of actions that could adversely affect our economic returns, possibly significantly, such as modifying loans to help struggling borrowers; expanding our underwriting and eligibility requirements to increase access to mortgage credit; increasing our use of credit risk transfer transactions, which effectively reduces the guaranty fee income we retain on the covered loans; and issuing structured securities backed by Freddie Mac-issued securities. On October 28, 2019, FHFA released new strategic goals and key priorities for our conservatorship, which are discussed in “MD&A—Legislation and Regulation—New FHFA Strategic Plan for Conservatorships and 2020 Scorecard.” Efforts we take in support of our conservator’s new or future goals may have short- and long-term adverse effects on our business and competitive position, results of operations, financial condition, liquidity and net worth.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 108 |
Other agencies of the U.S. government or Congress also may ask us to take actions to support the housing and mortgage markets or in support of other goals. These actions may adversely affect our financial results and condition. For example, in December 2011 Congress enacted the TCCA under which, 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 revenue generated by this fee increase is paid to Treasury and helps offset the cost of a two-month extension of the payroll tax cut in 2012.
We are also required by the GSE Act to undertake efforts in support of the housing market that could adversely affect our financial results and condition. For example, we are subject to housing goals under the GSE Act that require that a portion of the mortgage loans we acquire must be for low- and very low-income families, families in low-income census tracts and moderate-income families in minority census tracts or designated disaster areas. In addition, in December 2016, FHFA issued a final rule to implement our new duty to serve very low-, low- and moderate-income families in three underserved markets: manufactured housing, affordable housing preservation and rural areas. We may take actions to meet our housing goals and duty to serve obligations that could adversely affect our profitability. For example, we may acquire loans that offer lower expected returns on our investment than our other loan acquisitions and that may potentially increase our credit losses and credit-related expenses. 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 that could require us to take additional steps that could have an adverse 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—Charter Act and Regulation—GSE Act and Other Regulation” in our 2018 Form 10-K for more information on our housing goals and duty to serve underserved markets.
The conservatorship and agreements with Treasury have had, and will continue to have, a material adverse effect on our common and preferred shareholders.
The material adverse effects of the conservatorship and our agreements with Treasury include the following:
No voting rights during conservatorship. The rights and powers of our shareholders are suspended 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 on Treasury’s senior preferred stock and, once they exceed our capital reserve amount, will be payable to Treasury as dividends. 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 (which includes any accumulated but unpaid dividends), before any distribution is made to the holders of our common stock or other preferred stock. The liquidation preference on the senior preferred stock was $127.2 billion as of September 30, 2019. Effective September 30, 2019, the liquidation preference of the senior preferred stock increases at the end of each quarter by an amount equal to the increase in our net worth, if any, during the immediately prior fiscal quarter, until such time as the liquidation preference has increased by $22 billion. The liquidation preference would increase further if we draw on Treasury’s funding commitment with respect to any future quarters or if we do not pay dividends owed on the senior preferred stock. If we are liquidated, it is uncertain that there would be sufficient funds remaining after payment of amounts to our creditors and to Treasury as holder of the senior preferred stock to make any distribution to holders of our common stock and other preferred stock.
Pursuant to the dividend provisions of the senior preferred stock and quarterly directives from our conservator, we are obligated to pay Treasury each quarter any dividends declared consisting of the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds the $25 billion capital reserve amount.
As a result, our net income is not available to common shareholders or preferred shareholders other than Treasury as holder 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, and we would thereafter have a controlling shareholder.
No longer managed for the benefit of shareholders. Because we are in conservatorship, we are no longer 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, Treasury Agreements and Housing Finance Reform” in our 2018 Form 10-K and “MD&A—Legislation and Regulation—Housing Finance Reform” in this report.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 109 |
The issuance of UMBS and structured securities backed by Freddie Mac-issued securities may have an adverse effect on the liquidity or market value of our MBS. The issuance of UMBS and our reliance on the common securitization platform also increase our counterparty credit risk and operational risk.
On June 3, 2019, we and Freddie Mac began issuing UMBS. We also began using the common securitization platform operated by CSS to perform certain aspects of the securitization process for our single-family Fannie Mae MBS issuances beginning in May 2019. The issuance of UMBS and use of the common securitization platform represent significant changes for the mortgage market and for our securitization operations and business.
Historically, single-family Fannie Mae MBS had a trading advantage over comparable Freddie Mac single-family mortgage-backed securities. The Single Security Initiative has eliminated this trading advantage. We believe this has contributed, and will continue to contribute, to competitive pressure on our single-family guaranty fee pricing.
Uncertainty in connection with UMBS could contribute to declines in the liquidity or market value of Fannie Mae MBS or otherwise adversely affect our financial condition or results of operations. 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. However, these alignment efforts may not be successful and the prepayment rates on Fannie Mae-issued UMBS and Freddie Mac-issued UMBS could diverge. If investors stop accepting the fungibility of Fannie Mae-issued UMBS and Freddie Mac-issued UMBS, or if investors prefer Freddie Mac-issued UMBS over Fannie Mae-issued UMBS, it could adversely affect the volume of our UMBS issuances and the liquidity and market value of Fannie Mae MBS, which could have a significant adverse impact on our business, liquidity, financial condition, net worth and results of operations.
The continued support of FHFA, Treasury, the Securities Industry and Financial Markets Association, and certain other regulatory bodies is critical to the success of the Single Security Initiative. 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 exit conservatorship in the future, 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.
The Single Security Initiative has also resulted in increased credit risk exposure and operational risk exposure to Freddie Mac. 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. Our risk exposure to Freddie Mac is expected to increase as we issue more structured securities backed directly or indirectly by Freddie Mac-issued securities going forward. 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. Our pricing does not currently reflect any incremental credit, liquidity or operational risk associated with our guaranty of resecuritized Freddie Mac securities. As a result, any 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.
The implementation of the Single Security Initiative created significant interdependence between the single-family mortgage securitization programs of Fannie Mae and Freddie Mac. Accordingly, the market value of single-family Fannie Mae MBS could be affected by events relating to Freddie Mac, even if those events do not directly relate to Fannie Mae or Fannie Mae MBS. For example, any actual or perceived change in Freddie Mac’s financial performance or condition, mortgage credit quality, or systems and data reliability could adversely affect the market value of single-family 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.
We no longer use our individual proprietary securitization function for our single-family MBS issuances. In addition to using the common securitization platform for our newly issued UMBS issuances, we are also now using the common securitization platform for certain ongoing administrative functions for our previously issued and outstanding single-family Fannie Mae MBS. Accordingly, we are reliant on the common securitization platform and CSS for the operation of several of our single-family securitization activities. These 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, liquidity, financial condition, net worth and results of operations, 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. See “Risk Factors” in our 2018 Form 10-K for a discussion of other operational risks associated with our implementation of the Single Security Initiative and related internal infrastructure upgrades.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 110 |
Credit Risk
We may suffer losses if borrowers are unable to obtain property or flood insurance, if their claims under insurance policies are not paid, or if they suffer property damage as a result of a hazard for which we do not require insurance.
In general, we require borrowers to obtain property insurance to cover the risk of damage to their homes resulting from hazards such as fire, wind and, for properties in a Special Flood Hazard Area, flooding. For flood insurance, borrowers generally rely on the National Flood Insurance Program (“NFIP”), which is due to expire on November 21, 2019. While Congress has passed a series of short-term extensions of NFIP since late 2017, if Congress does not extend or re-authorize the program again, the Federal Emergency Management Agency 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, the maximum limit of coverage available under NFIP for a single-family residential property is limited to $250,000, which may not be sufficient to cover all losses. If borrowers are unable to obtain property or flood insurance and suffer property damage, if their claims under insurance policies are not paid, or if they suffer property damage as a result of a hazard for which we do not require insurance, such as earthquake damage or flood damage on a property located outside a special flood hazard area, they may not pay their mortgage loans, which would negatively impact our credit losses and credit-related expenses.
Market and Industry Risk
Uncertainty relating to the potential discontinuance of LIBOR after 2021 may adversely affect our results of operations, financial condition, liquidity and net worth.
We routinely engage in transactions involving financial instruments that reference LIBOR, including acquiring loans and securities, selling securities and entering into derivative transactions that reference LIBOR. In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced its intention to stop persuading or compelling the group of major banks that sustain LIBOR to submit rate quotations after 2021. As a result, it is uncertain whether LIBOR will continue to be quoted after 2021.
Efforts are underway to identify and transition to a set of alternative reference rates. The transition may lead to disruption, including yield volatility on LIBOR-based securities. The Federal Reserve convened a group of private-market participants, known as the Alternative Reference Rate Committee (the “ARRC”), to identify a set of alternative U.S. dollar reference interest rates and an adoption plan for those alternative rates. We are a voting member of the ARRC and participate in its working groups. In 2017, the ARRC recommended an alternative reference rate referred to as the Secured Overnight Financing Rate (“SOFR”) and the Federal Reserve Bank of New York began publishing SOFR in 2018. However, SOFR is calculated based on different criteria than LIBOR. Accordingly, SOFR and LIBOR may diverge, particularly in times of macroeconomic stress. Since the initial publication of SOFR in 2018, daily changes in SOFR have at times been more volatile than daily changes in comparable benchmark or market rates, and SOFR may be subject to direct influence by activities of the Federal Reserve and the Federal Reserve Bank of New York in ways that other rates may not be. For example, at the direction of the Federal Reserve, in late September 2019, the Federal Reserve Bank of New York began conducting a series of overnight and term repurchase agreement (“repo”) operations to help maintain the federal funds rate within a target range. In October 2019, the Federal Reserve Bank of New York announced that this activity would continue at least through January 2020. These activities directly impact prevailing SOFR rates.
We continue to analyze potential risks associated with the LIBOR transition, including financial, operational, legal, reputational and compliance risks. We have created an enterprise program office focused on this transition, including identifying and monitoring our exposure to LIBOR, updating our infrastructure (including models and systems) to prepare for the transition, and monitoring the market adoption of alternative reference rates and industry-standard contractual fallback provisions.
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. There is considerable uncertainty as to how the financial services industry will address the discontinuance of LIBOR in financial instruments. This uncertainty could result in disputes and litigation with counterparties and borrowers surrounding the implementation of alternative reference rates in our financial instruments that reference LIBOR. If LIBOR ceases or changes in a manner that causes regulators or market participants to question its viability, financial instruments indexed to LIBOR could experience disparate outcomes based on their contractual terms, ability to amend those terms, market or product type, legal or regulatory jurisdiction, and a host of other factors. There can be no assurance that legislative or regulatory actions will dictate what happens if LIBOR ceases or is no longer viable, or what those actions might be. In addition, while the ARRC was created to ensure a successful transition from LIBOR, there can be no assurance that the ARRC will endorse practices that create a smooth transition and minimize value transfers between market participants, or that its endorsed practices will be broadly adopted by market participants. Divergent industry or market participant actions could result after LIBOR is no longer available or viable. It is uncertain what effect any divergent industry practices will have on the performance of financial instruments, including those that we own or have issued. 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. The LIBOR transition could result in our paying higher interest rates on our current LIBOR-indexed obligations, adversely affect the yield on and fair value of the loans and securities we hold or guarantee that reference LIBOR, and increase the costs of or affect our ability to effectively use derivative instruments to manage interest rate risk.
In addition, we cannot anticipate how long it will take to develop the systems and processes necessary to adopt SOFR or other benchmark replacements, which may delay and contribute to uncertainty and volatility surrounding the LIBOR transition.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 111 |
These developments could have a material impact on us, adjustable-rate mortgage borrowers, investors, and our customers and counterparties. This could result in losses, reputational damage, litigation or costs, or otherwise adversely affect our business, financial condition, liquidity, net worth or results of operations.
Our business and financial results are affected by general economic conditions, particularly home prices and employment trends, and a deterioration of economic conditions or the financial markets may 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, particularly home prices and employment trends. A prolonged period of slow growth in the U.S. economy or any deterioration in general economic conditions or the financial markets could materially adversely affect our results of operations, net worth and financial condition. In general, if home prices decrease, or the unemployment rate increases, it could result in significantly higher levels of credit losses and credit-related expense.
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. A slowdown in economic growth around the world remains a concern for policy makers and financial markets. 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 political conditions also can significantly affect U.S. economic conditions and financial markets. Currently, there is elevated uncertainty around several unresolved global political events, including the United Kingdom’s exit from the European Union and ongoing international trade negotiations, that could impact global growth and financial markets. See “Risk Factors” in our 2018 Form 10-K for a description of the risks to our business posed by changes in interest rates and changes in spreads. In addition, as described in “Risk Factors” in our 2018 Form 10-K, 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.
A decline in activity in the U.S. housing market, increasing interest rates, or changes inlonger-term effects of tax lawslaw changes could lower our business volumes or otherwise adversely affect our results of operations, net worth and financial condition.
Our business volume is affected by the rate of growth in total U.S. residential mortgage debt outstanding and the size of the U.S. residential mortgage market. A decline in mortgage debt outstanding reduces the unpaid principal balance of mortgage loans available for us to acquire, which in turn could reduce our net interest income. Even if we were able to increase our share of the secondary mortgage market, it may not be sufficient to make up for a decline in the rate of growth in mortgage originations.
Mortgage interest rates also affect our business volume. Rising interest rates generally result in fewer mortgage originations, particularly for refinances. An increase in interest rates, particularly if the increase is sudden and steep, could significantly reduce our business volume. Significant reductions in our business volume could adversely affect our results of operations and financial condition.
The Federal Reserve raisedcap on mortgage interest deductions, the target range for the federal funds rate in December 2015, December 2016, March 2017 and June 2017. In September 2017, the Federal Reserve stated that it expects economic conditions will evolve in a manner that will warrant gradual increasesincrease in the federal funds rate; however, the actual pathamount of the federal funds rate will depend on the economic outlook as informed by incoming data. The Federal Reserve may increase rates at a faster rate than it is currently expecting. Moreover, the Federal Reserve’s federal funds rate path is not the only factor that affects long-term interest rates. Accordingly, our business remains subject to the risk of suddenstandard deduction and steep interest rate increases.
Changesother changes in tax laws may also adversely affect housing demand, home prices or other housing or mortgage market conditions, which could impact our business volumes and adversely affect our results of operations, net worth and financial condition.
The continued run-off of mortgage-backed securities from the Federal Reserve’s balance sheet normalization programportfolio could adversely affect our business, results of operations, financial condition, liquidity and net worth.
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 January 2014 and concluded its asset purchase program in October 2014. From October 2014 through September 2017, the Federal Reserve maintained a policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities; therefore, it continued to purchase a significant amount of agency mortgage-backed securities. In October 2017, the Federal Reserve initiated thea balance sheet normalization program to reduce its holdings of Treasury securities and mortgage-backed securities. While the Federal Open Market Committee describedReserve stopped the run-off of U.S. Treasury securities from its portfolio in June 2017. Under this program,September 2019, it continued to allow its mortgage-backed securities to run-off, replacing the Federal Reserve’s securities holdings will be gradually reduced by decreasing reinvestment of principal payments from those securities. We expectbalance with U.S. Treasuries and thus holding the Federal Reserve’s balance sheet normalization program likely will result, in the longer term, in increases inportfolio constant. This may create upward pressure on mortgage interest rates and a widening of mortgage spreads, which could adversely affect our business volume and reduce demand for Fannie Mae MBS. If this occurs, itmortgage-backed securities, which could adversely affect our business, results of operations, financial condition, liquidity and net worth.
Legal, Regulatory and Other Risks
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. Examples of regulatory changes that have affected us or may affect us in the future include: rules requiring the clearing of certain derivatives transactions and margin and capital rules for uncleared derivative trades, which impose additional costs on us; and the development of single-counterparty credit limit regulations, which could cause our customers to change their business practices.
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 112 |
Our business and results may be adversely affected by changes in the CFPB’s “ability-to-repay” rule to replace the “qualified mortgage patch,” pursuant to which a special class of conventional mortgage loans are considered “qualified mortgages” under the Truth in Lending Act if they (1) meet certain qualified mortgage requirements generally and (2) are eligible for sale to Fannie Mae or Freddie Mac. The qualified mortgage patch is scheduled to expire on the earlier of January 10, 2021 or when Fannie Mae and Freddie Mac cease to be in conservatorship or receivership. In July 2019, the CFPB issued an advance notice of proposed rulemaking relating to the expiration of the qualified mortgage patch, and in September 2019, in the Treasury plan, Treasury recommended that the CFPB establish a bright-line safe harbor to replace the qualified mortgage patch. Although the ability-to-repay rule does not apply directly to us, the rule applies to the lenders from which we acquire single-family mortgage loans. And because FHFA has directed that Fannie Mae and Freddie Mac shall only acquire loans that are qualified mortgages under the ability-to-repay rule, changes in the rule may reduce the number of loans that are eligible for delivery to us, and may increase the competition we face for the acquisition and guaranty of such loans.
Changes to financial regulations could affect our business directly or indirectly if they affect our customers and counterparties. Changes in regulations applicable to U.S. banks could also affect our business, 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 demand by those banks for our debt securities and MBS in the future.
The actions of Treasury, the Commodity Futures Trading Commission, 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 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. For example, we could be affected by:
Legislation designed to affect how we and Freddie Mac manage our business. For example, legislation introduced in the U.S. Senate in April 2019 would prohibit either Fannie Mae or Freddie Mac from transferring or delegating any duty or responsibility, as of November 25, 2015, of its chief executive officer to any other position. If enacted, this legislation could negatively impact our business by requiring us to change our current management structure and limiting our ability to determine the roles and responsibilities of our executives in response to evolving business needs.
Designation as a systemically important financial institution. The Senate Committee on Banking, Housing, and Urban Affairs held a hearing in June 2019 on whether we should be regulated as a systemically important financial institution, which would result in our becoming subject to additional regulation and oversight by the Federal Reserve Board.
Legislative or regulatory changes that expand our, or our servicers’, responsibility and liability for securing, maintaining or otherwise overseeing vacant properties prior to foreclosure, which could increase our costs.
State laws and court decisions granting new or expanded priority rights over our mortgages to homeowners associations or through initiatives that provide a lien priority to loans used to finance energy efficiency or similar improvements, which could adversely affect our ability to recover our losses on affected loans.
State and local laws and regulations expanding rent control and other tenant protections, such as New York’s Housing Stability and Tenant Protection Act of 2019, which could negatively affect the housing market in the applicable areas and increase our credit risk on the loans we guarantee in those areas.
In addition, our business could be materially adversely affected by legislative and regulatory actions relating to housing finance reform or the financial services industry, or by legal or regulatory proceedings. We describe many of these actions and proceedings in these risk factors and in “Risk Factors” in our 2018 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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, other than as required by (and pursuant to) the terms of a binding agreement in effect on September 7, 2008, without the prior written consent of Treasury. During the quarter ended September 30, 2017,2019, 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, we report our incurrence of these types of obligations either in offering circulars or prospectuses (or supplements thereto) that
|
| | |
Fannie Mae Third Quarter 2017 Form 10-Q | 124 |
we post on our website or in a current report on Form 8-K that we file with the SEC, in accordance with a “no-action” letter we received from the SEC staff in 2004. In cases where the information is disclosed in a prospectus or offering circular posted on our website, the document will be posted 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.
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 some of 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.
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 third quarter of 2017.2019.
Dividend Restrictions
Our payment of dividends is subject to the following restrictions:
Restrictions Relating to Conservatorship. Our conservator announced on September 7, 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. In addition, FHFA’s regulations relating to conservatorship and receivership operations prohibit us from paying any dividends while in conservatorship unless authorized by the Director of FHFA. The Director of FHFA has directed us to make dividend payments on the senior preferred stock on a quarterly basis.basis for every dividend period for which dividends were payable.
Restrictions Under Senior Preferred Stock Purchase Agreement. Agreement and Senior Preferred Stock. The senior preferred stock purchase agreement prohibits us from declaring or paying any dividends on Fannie Mae equity securities (other than the senior preferred stock) without the prior written consent of Treasury. In addition, in 2012pursuant to the termsdividend provisions of the senior preferred stock purchase agreement and the senior preferred stock were amendedquarterly directives from our conservator, we are obligated to require that we pay Treasury each quarter any dividends declared consisting of the amount, if any, by which our net worth as of the end of the immediately preceding fiscal
|
| | |
| Fannie Mae Third Quarter 2019 Form 10-Q | 113 |
quarter exceeds an applicable capital reserve amount, which will decrease to zero in the first quarter of 2018.$25 billion. As a result, our net income is not available to common stockholders. For more information on the terms of the senior preferred stock purchase agreement and senior preferred stock, see “Business—Conservatorship, Treasury Agreements and Treasury Agreements—Treasury Agreements—Senior Preferred Stock Purchase Agreement and Related Issuance of Senior Preferred Stock and Common Stock Warrant”Housing Finance Reform” in our 20162018 Form 10-K.10-K and “MD&A—Legislation and Regulation—Letter Agreement with Treasury” in this report.
Additional Restrictions Relating to Preferred Stock. Payment of dividends on our common stock is also subject to the prior payment of dividends on our preferred stock and our senior preferred stock. Payment of dividends on all outstanding preferred stock, other than the senior preferred stock, is also subject to the prior payment of dividends on the senior preferred stock.
Statutory Restrictions. Under the GSE Act, FHFA has authority to prohibit capital distributions, including payment of dividends, if we fail to meet our capital requirements. If FHFA classifies us as significantly undercapitalized, approval of the Director of FHFA is required for any dividend payment. Under the Charter Act and the GSE Act, we are not permitted to make a capital distribution if, after making the distribution, we would be undercapitalized. The Director of FHFA, however, may permit us to repurchase shares if the repurchase is made in connection with the issuance of additional shares or obligations in at least an equivalent amount and will reduce our financial obligations or otherwise improve our financial condition.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 125114 |
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits listed below are being filed or furnished with or incorporated by reference into this report.
|
| | |
| Item | | Description |
| 3.1 | | |
| 3.2 | | |
| 4.1 | | |
| 4.2 | | |
| 10.1 | |
|
| 31.1 | | |
| 31.2 | | |
| 32.1 | | |
| 32.2 | | |
| 101. INS | | Inline XBRL Instance Document* - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| 101. SCH | | Inline XBRL Taxonomy Extension Schema* |
| 101. CAL | | Inline XBRL Taxonomy Extension Calculation* |
| 101. DEF | | Inline XBRL Taxonomy Extension Definition* |
| 101. LAB | | Inline XBRL Taxonomy Extension Label* |
| 101. PRE | | Inline XBRL Taxonomy Extension Presentation* |
| 104 | | Cover Page Interactive Data File* - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document included as Exhibit 101 |
__________
| |
| * | The financial information contained in these XBRL documents is unaudited. |
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 126115 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| Federal National Mortgage Association |
| | | |
| | By: | /s/ Timothy J. MayopoulosHugh R. Frater
|
| | | Timothy J. Mayopoulos
President and Hugh R. Frater
Chief Executive Officer |
Date: November 2, 2017October 31, 2019
|
| | |
| | By: | /s/ David C. BensonCeleste M. Brown |
| | | David C. BensonCeleste M. Brown
Executive Vice President and Chief Financial Officer |
Date: November 2, 2017October 31, 2019
|
| | |
Fannie Mae Third Quarter 20172019 Form 10-Q | 127116 |
