Through our single-family and multifamily business segments, we provided $204.6$575.4 billion in liquidity to the mortgage market in the first quarterhalf of 2020, which enabled the financing of approximately 854,0002.3 million home purchases, refinancings or rental units.

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

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

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

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

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

The aggregate liquidation preference of the senior preferred stock increased from $131.2 billion as of December 31, 2019 towas $135.4 billion as of June 30, 2020, unchanged from March 31, 2020 due toas a result of the increasedecrease in our net worth during the fourth quarter of 2019. Because our net worth did not increase during the first quarter of 2020, the2020. The aggregate liquidation preference of the senior preferred stock will remain at $135.4increase to $138.0 billion as of JuneSeptember 30, 2020 due to the $2.5 billion increase in our net worth during the second quarter of 2020.

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

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

OnIn March 11, 2020, the World Health Organization characterized COVID-19, a new respiratory disease caused by a novel coronavirus, as a pandemic, and on March 13, 2020, President Trump declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 outbreakpandemic in the United States has expanded in recent weeks, and has resulted in stay-at-home orders, school closures and widespread business shutdowns across the country. Although business activity has begun to resume to varying degrees, the speed and nature of the resumption of economic activity remains highly uncertain.

The COVID-19 outbreak hadpandemic continues to have a significant impact on our business and on our financial results in the first quarter of 2020, and we expect that it will continue to do so.results. We provide a brief overview below of the economic impact of the outbreak,pandemic, our response to the outbreak,it, and the outbreak'spandemic’s impact on our business and financial results, with references to where these items are discussed in more detail in this report. We also highlight below the many uncertainties relating to the impact of the COVID-19 outbreak.pandemic on Fannie Mae and the housing market.

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

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

We are taking a number of actions to help borrowers, renters, lenders and servicers manage the negative impact of the COVID-19 outbreak,pandemic, including providing payment forbearance (that is, a temporary suspension of the borrower’s monthly mortgage payments) to single-family and multifamily borrowers with COVID-19-related financial hardships, suspending foreclosure-related activities, providing lenders and servicers temporary flexibilities for certain of our Selling Guide and Servicing Guide requirements, and providing liquidity to lenders by purchasing a higher-than-usual volume of loans through our whole loan conduit. We have also taken steps to mitigate the risk to Fannie Mae from the impacts of the pandemic. See “Single-Family Business—Single-Family Mortgage Credit Risk Management” and “Multifamily Business—Multifamily Mortgage Credit Risk Management” for more information on the actions we are taking to help borrowers, renters, lenders and servicers in response to the COVID-19 outbreak. Also see “Legislation and Regulation” for a discussion of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which contains a number of provisions aimed at providing relief for borrowers and renters experiencing financial hardship caused by the COVID-19 outbreak that apply to the loans we guarantee, and for a discussion of a change to our Single-Family Servicing Guide to provide stability and clarity to mortgage servicers regarding their obligations to advance missed borrower payments.pandemic.

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

The economic dislocation caused by the COVID-19 outbreakpandemic was the primary driver of the decline in our net income in the first quarterhalf of 2020, as compared with the first quarterhalf of 2019. We significantly increased our allowance for loan losses in the first quarter of 2020 to reflect theour expected loan losses we currently expect as a result of the outbreak,pandemic, which resulted in substantial credit-related expenses for the quarter.expenses. We expect the impact of the outbreakpandemic to continue to negatively affect our financial results, and contributecontributing to lower net income in 2020 than in 2019. We could also have a net losslosses in one or more future periods or possibly could have a net worth deficit that requires a draw from Treasuryperiods. In addition, we expect the pandemic to negatively affect our returns on capital under the senior preferred stock purchase agreement.FHFA’s conservatorship capital requirements. See “Consolidated Results of Operations,” “Single-Family Business” and “Multifamily Business” for more information on our financial results for the second quarter and first quarterhalf of 2020.

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

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

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

On March 27,May 20, 2020, FHFA released a proposed new regulatory capital framework for the Coronavirus Aid, Relief, and Economic Security Act, referredGSEs. The proposed framework is expected to asrequire us to hold significantly more capital than the CARES Act, was enacted.rule FHFA first proposed in June 2018. The CARES Act is an economic stimulus bill that provides relief for individuals and businesses negatively affected byproposed rule includes a mortgage-risk-sensitive framework, similar to the COVID-19 outbreak. The CARES Act includes2018 proposal, but differs from the 2018 proposal in a number of provisions that apply toways, including the loans we guarantee, including provisions requiring that our servicers:following:

To slow the spread of the COVID-19 outbreak, manyMany states and localities have issued stay-at-home orders requiring non-essential businesses to close. Across the nation, states are following different practices in determining which mortgage-related businesses, title companies, courts, county recording offices, and other such operations are essential and should remain open, which is contributing to uncertainty and delays in some mortgage refinances and originations.

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

Also in response to the disruption and uncertainty caused by the pandemic, in July 2020 FHFA approved temporary adjustments to our duty-to-serve obligations. As a result, the duty-to-serve plan we submit in September 2020 will extend our current plan by one year, so that it has extended until September 1,covers 2018 to 2021, rather than covering 2021 to 2023 in a new plan. FHFA expects our next proposed three-year plan, which will be due to FHFA in May 2021, will cover 2022 to 2024. In addition, FHFA provided guidance clarifying how FHFA will take into account market conditions when evaluating our 2020 the deadline for the submission ofand 2021 achievements under our draft duty to serve underserved markets plan for 2021-2023.duty-to-serve plan.

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

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

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

Our primary source of net interest income is guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties.

Guaranty fees consist of two primary components:

We recognize almost all of our guaranty fee revenue in net interest income because we consolidate the substantial majority of loans underlying our Fannie Mae MBS in consolidated trusts in our condensed consolidated balance sheets. 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.

The timing of when we recognize amortization income can vary based on a number of factors, the most significant of which is a change in mortgage interest rates. In a rising interest-rate environment, our mortgage loans tend to prepay more slowly, which typically results in lower net amortization income. Conversely, in a declining interest-rate environment, our mortgage loans tend to prepay faster, typically resulting in higher net amortization income.

We also recognize net interest income on the difference between interest income earned on the assets in our retained mortgage portfolio and our other investments portfolio (collectively, our “portfolios”) and the interest expense associated with the debt that funds those assets. See “Retained Mortgage Portfolio” and “Liquidity and Capital Management—Liquidity Management—Other Investments Portfolio” for more information about our portfolios.

Net interest income increased in the second quarter and first quarterhalf of 2020 compared with the second quarter and first quarterhalf of 2019, driven by higher net amortization income and higher base guaranty fee income, partially offset by lower income from portfolios.

We initially recognize mortgage loans and debt of consolidated trusts in our condensed consolidated balance sheetsheets at fair value. The difference between the initial fair value and the carrying value of these instruments is recorded as a cost basis adjustments,adjustment, either as premiumsa premium or discounts,a discount, in our condensed consolidated balance sheets. We amortize these cost basis 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.

The estimated fair value of our derivatives, 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 implied volatility, as well as activity related to these financial instruments. While the estimated fair value of our derivatives that 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 preparing to implement fair value hedge accounting to reduce the impact of interest-rate volatility on our financial results. Once implemented, for derivatives in designated hedges, fair value gains and losses attributable to changes in certain benchmark interest rates, such as the London Inter-bank Offered Rate (“LIBOR”)LIBOR or the Secured Overnight Financing Rate (“SOFR”),SOFR, may be reduced by offsetting gains and losses in the fair value of designated hedged mortgage loans or debt. Therefore, we expect the volatility of our financial results associated with changes in interest rates will be reduced substantially whilesubstantially. We expect fair value gains and losses driven by other factors, such as credit spreads, will remain.

The table below displays the components of our fair value gains and losses.

Fair value losses, net decreased in the first quarter of 2020 compared with the first quarter of 2019, due to gains on our trading securities and CAS debt. Our fair value gains and losses in the second quarter and first quarterhalf of 2020 were impacted by market disruptions due to the COVID-19 outbreak that resulted in lower interest rates and widened spreads between debt and U.S. Treasury yields.rates.

Fair value losses in the firstsecond quarter of 2020 were primarily driven by:

These losses were partially offset by fair value gains in the first quarterhalf of 2020 on trading securities and CAS debt, primarily driven by declines in U.S. Treasury yieldsinterest rates and widened spreads between CAS debt yields and U.S. Treasury yields,LIBOR, which resulted in gains on fixed-rate securities held in our other investments portfolio and our CAS debt held at fair value.

Fair value losses in the second quarter and first quarterhalf of 2019 were primarily driven by:

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 forecasted home prices or property valuations, fluctuations in actual and forecasted interest rates, borrower payment behavior, events such as natural disasters or pandemics, the types and volume of our loss mitigation activities, including forbearance and loan modifications, the volume of foreclosures completed, and the redesignation of loans from held for investment (“HFI”) to held for sale (“HFS”). WhileHFS. In recent periods, the redesignation of certain reperforming and nonperforming single-family loans has been a significant driver of credit-related income in recent periods, weincome. We expect this activity to seehave a significantly reduced impact from this activity in 2020. We suspended new sales of nonperforming and reperforming loans in the second quarter of 2020, as market disruptions due to the COVID-19 outbreak have decreased investor interest in purchasing these loans was severely impacted by the COVID-19 pandemic and its effects. Investor interest in purchasing reperforming loans has recently returned, and therefore we are considering resuming sales of reperforming loans. As investor interest in purchasing nonperforming loans.loans has not returned, we do not anticipate entering into new contracts for sales of these loans in the near future.

Our credit-related income or expense and our loss reserves can also be impacted by updates to the models, assumptions and data used in determining our allowance for loan losses. The January 1, 2020 CECL standard implementation introducesintroduced additional volatility in our financial results as credit-related income or expense now includes expected lifetime losses on our loans and thus are sensitive to fluctuations in the factors detailed above.

The primary driver of credit-related expense forIn the first quarter of 2020, was an increase inwe increased our allowance for loan losses due to our estimate of loan losses we expect to incur as a result of the COVID-19 outbreak,pandemic, using an expected lifetime loss methodology. This increase was the primary driver of credit-related expense in the first half of 2020. An increase in our estimate of multifamily credit losses and an offsetting decrease in our estimate of single-family credit losses, contributed to modest credit-related expense in the second quarter of 2020.

Estimating the impact of the COVID-19 outbreakpandemic on our expected credit loss reserves required significant management judgment including estimatesas we continue to observe uncertainty in our economic forecast caused by elevated levels of unemployment, the impact of fiscal stimulus actions, and variability surrounding the continued spread of COVID-19; thereby impacting projected borrower behavior. We applied management judgment in estimating the number of single-family borrowers who will receive forbearance and any resulting repayment plans, deferrals, or loan modifications that will be provided once the forbearance period ends. Under our CECL methodology, depending on the type of loan modification granted, loss severity estimates vary. In determining our allowance for loan losses as of March 31,June 30, 2020, we estimated that 15%up to 12.5% of our single-family borrowers based on loan count and 20%up to 10% of our multifamily borrowersguaranty book of business based on unpaid principal balance would ultimately receive forbearance due to a COVID-19-related financial hardship. Given the short-term natureThis represents a downward revision from our March 31, 2020 estimate of the forbearance period for multifamilyup to 15% of single-family borrowers (upand up to 3 months), the impact20% of forbearance did not have a material impact on our multifamily allowance asguaranty book of March 31,business and is based on recent economic data and actual forbearance activity observed in the second quarter of 2020. Although we believe our estimates underlying our allowance determination are reasonable, we may observe future volatility in these estimates as we continue to observe actual loan performance data and update our models and assumptions surrounding this unprecedented event. See “Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management—Single-Family Loans in Forbearance” and “Multifamily Business—Multifamily Mortgage Credit Risk Management—-Multifamily Problem Loan Management and Foreclosure Prevention” for information on our loans in forbearance.

The table below provides a quantitative analysis of the drivers for the second quarter and first quarterhalf of 2020 of our single-family and multifamily provision for credit losses and the increase in expected benefit from freestanding credit enhancements. The provision for credit losses includes our provision for loan losses and the related accrued interest receivable on our loan book of business as well as our provision for our guaranty loss reserves. It excludes the transition impact of adopting the CECL standard, which was recorded as an adjustment to beginning retained earnings.earnings as of January 1, 2020. Many of the drivers that contribute to our provision for credit losses overlap or are interdependent. The attribution shown below is based on internal allocation estimates.