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

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 firstthird quarter of 2020, and none are payable for the secondfourth 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 to $135.4 billion as of March 31,June 30, 2020 to $138.0 billion as of September 30, 2020 due to the $2.5 billion increase in our net worth during the fourthsecond 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 $142.2 billion as of June 30,December 31, 2020 due to the $4.2 billion increase in our net worth during the third 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 and community life have resumed to varying degrees, the future path 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.

We are taking a number of actions to help borrowers, renters, lenders and servicers manage the negative impact of the COVID-19 outbreak, including pandemic, including:

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 help protect the safety and resiliency of our workforce. We haveFrom mid-March through early October 2020, we required nearly all of our workforce to work remotely since mid-March and continueremotely. Beginning in early October, we are now allowing employees, on a voluntary basis, to assess when it will be safe for employeesrequest approval to return to work at some of our office locations and have established mandatory COVID-19 safety protocols for these locations. We expect a significant majority of our employees will continue to work remotely for the office.foreseeable future. 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 quarternine months of 2020, as compared with the first quarternine months of 2019. We significantly increased our allowance for loan losses in the first nine months 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 forexpenses. We are also incurring other costs associated with the quarter.pandemic, such as paying higher fees to servicers to support providing loss mitigation to borrowers. 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 third quarter and first quarternine months of 2020.

The volatile market conditions in recent weeks have also adversely affected our ability to issueWe did not enter into new credit risk transfer securities,transactions in the second quarter of 2020 due to adverse market conditions resulting from the COVID-19 pandemic. Although market conditions improved in the third quarter of 2020, we did not enter into any new credit risk transfer transactions in the third quarter and currently do not have plans to engage in additional new credit risk transfer transactions in the near future, as describedwe evaluate FHFA’s recently proposed capital rule, FHFA’s conservatorship scorecard requirements and other factors. FHFA’s proposed capital rule 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 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 “MD&A—Legislation and Regulation” in our Second Quarter 2020 Form 10-Q 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.”Risk” for more information about our credit-risk transfer activity.

Also see “Retained Mortgage Portfolio,” “Liquidity and Capital Management” and “Risk Management” for discussions of the impact of the COVID-19 outbreakpandemic on our business.

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 and the widespread availability and public acceptance of a COVID-19 vaccine; the extent to which consumers, workers and families feel safe resuming pre-pandemic activities; the nature, extent and extentsuccess of the forbearance, payment deferrals, modifications and modificationother loss mitigation options we offerprovide to borrowers affected by the outbreak;pandemic; 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 or increases in the daily number of new COVID-19 cases 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”) and our Second 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,Under the terms of our MBS trust documents, we have the option or, in some instances, the obligation to purchase mortgage loans that meet specific criteria from an MBS trust. Our current policy is that, except for loans that are in forbearance or that have been granted certain other types of loss mitigation options (such as a repayment plan or payment deferral), we generally purchase loans from single-family MBS trusts when they become four consecutive monthly payments delinquent. In September 2020, FHFA instructed both us and Freddie Mac to extend the Coronavirus Aid, Relief,timeframe for our single-family delinquent loan buyout policy to twenty-four consecutively missed monthly payments (that is, loans that are 24 months past due), with the same exceptions noted above, effective January 1, 2021. Despite this change in policy, we currently anticipate that in most cases we will purchase delinquent loans from single-family MBS trusts prior to the 24-month deadline under one of the exceptions to the general policy, which includes loans that are permanently modified, loans subject to a short-sale or deed-in-lieu of foreclosure, loans that are paid in full and Economic Security Act,loans referred to as the CARES Act, was enacted. The CARES Act is an economic stimulus bill that provides relief for individuals and businesses negatively affected by the COVID-19 outbreak. The CARES Act includes a number of provisions that apply to the loans we guarantee, including provisions requiring that our servicers:

Statetimeframe must be in effect for at least two years from the January 1, 2021 effective date and Local Government Responses to COVID-19that market participants must be provided at least six months advance notice of any change. FHFA’s instruction also provides that we update our requirements to:

We are currently examining updates to our requirements on guaranty fee advances and reimbursement of principal and interest advances to comply with FHFA’s instruction, and expect to communicate additional details and effective dates in the future. See “Retained Mortgage Portfolio” for payment to MBS holders until the loans are purchased from the MBS trusts. Since we typically do not purchasemore information on our purchases of loans from MBS trusts while they are in forbearance, this servicer payment obligation could continue for an extended period of time. To provide servicers with stability and clarity regarding their payment obligations and to align our servicer advance requirement with Freddie Mac, FHFA’s instructions require that, effective August 2020, we cease requiring servicers to advance missed scheduled principal and interest payments after four months of missed borrower payments on a loan. After this time, we will make the missed scheduled principal and interest payments to the MBS trust for payment to MBS holders so long as the loan remains in the MBS trust.trusts.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires certain financial companies to conduct annual stress tests to determine whether the companies have the capital necessary to absorb losses as a result of adverse economic conditions. In March 2020,Under FHFA amended its regulation relating toregulations implementing this requirement. Under the previous version of FHFA’s stress testing regulation,requirement, each year we wereare required to conduct a stress test using threetwo different scenarios of financial conditions provided by FHFA: FHFA—baseline adverse and severely adverse. Consistent with actions taken by other U.S. financial services regulators, FHFA’s amendedadverse—and to publish a summary of our stress testing regulation eliminatedtest results for the severely adverse scenario fromby August 15.

FHFA regulation requires that the listscenarios provided by FHFA be generally consistent with and comparable to those established by the Federal Reserve Board. Following the onset of required scenarios.

We are subject to housing goals, which establish specified requirements for our mortgage acquisitions relating to affordability or location. In October 2020, FHFA notified us that it has extended untilhad determined that we met all of our single-family and multifamily housing goals for 2019. See “Business—Charter Act and Regulation—GSE Act and Other Legislation—Housing Goals” in our 2019 Form 10-K for more information regarding our housing goals.

In September 1, 2020, the deadlineFinancial Stability Oversight Council (the “FSOC”) announced that it had completed an activities-based review of the secondary mortgage market, focused in particular on the activities of Fannie Mae and Freddie Mac (the “GSEs”). In assessing potential risks to financial stability, the FSOC applied the framework for an activities-based approach described in its interpretative guidance on nonbank financial company determinations issued in December 2019. This framework provides that the submissionFSOC will consult with relevant financial regulatory agencies, consider the risk profiles and business models of market participants engaging in the activities under evaluation, and take into account existing laws and regulations that may mitigate a potential risk to U.S. financial stability.

The FSOC noted that any distress at the GSEs that affected their secondary mortgage market activities could pose a risk to financial stability if the risks are not properly mitigated. In conducting its analysis on the extent to which FHFA’s regulatory framework would adequately mitigate potential stability risks, the FSOC reviewed FHFA’s recent proposed capital rule (which we describe in “MD&A—Legislation and Regulation” in our draft dutySecond Quarter 2020 Form 10-Q) and additional enhancements FHFA is implementing to serve underserved markets planthe GSEs’ regulatory framework. The FSOC’s announcement provided the following suggestions for 2021-2023.FHFA to consider relating to the proposed capital rule:

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 third quarter and first quarternine months of 2020 compared with the third quarter and first quarternine months 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.

Investment gains, (losses), net primarily includes gains and losses recognized from the sale of loans and available-for-sale (“AFS”) securities, the sale of loans, gains and losses recognized on the consolidation and deconsolidation of securities, net of other-than-temporary impairments recognized on our investments, and the lower of cost or fair value adjustments on single-family loans held-for-sale (“HFS”) loans. We recognized investment losses,.

Investment gains, net increased in the firstthird quarter of 2020, compared with the third quarter of 2019, as a result of the decreasean increase in the fair valueboth volume and gains on sales of HFS loans driven by price decreases during the quarter. We recognized investmentsingle-family reperforming loans. Investment gains netdecreased in the first quarternine months of 2020, compared with the first nine months of 2019, primarily as a result of gains on the salea lower volume of AFS securities.sales of single-family reperforming loans.

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 in the first quarter of 2021 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 first quarter 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.

These losses were partially offset by fair value gains in the first quarternine months 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 third quarter and first quarternine months 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 forbearanceforbearances 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 incomeincome. We suspended new sales of reperforming and nonperforming loans in recent periods, we expect to see a significantly reduced impact from this activity inthe 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. Market conditions for the sale of these loans, particularly reperforming and nonperforming loans.loans, has improved following the second quarter. As a result, we resumed sales of reperforming loans in the third quarter.

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.

As described below, during 2020, our credit-related income or expense and our loss reserves have been significantly affected by our estimates of the COVID-19 outbreak, using an expected lifetime loss methodology. Estimating the impact of the COVID-19 outbreak on our expected credit loss reserves requiredpandemic, which require significant management judgment, includingjudgment. Changes in our estimates of the number of single-family borrowers whothat will ultimately receive forbearance (referred to as our “cumulative forbearance take-up rate”) and any resulting loan modifications that will be provided onceeven more significantly, the loss mitigation outcomes of affected borrowers after the forbearance period ends. Under our CECL methodology, depending onends, remain uncertain and can affect the typeamount of loan modification granted, loss severity estimates vary. In determining our allowance for loan losses as of March 31, 2020,credit-related income or expense we estimated that 15% of our single-family borrowers and 20% of our multifamily borrowers would ultimately receive forbearance due to a COVID-19-related financial hardship. Given the short-term nature of the forbearance period for multifamily borrowers (up to 3 months), the impact of forbearance did not have a material impact on our multifamily allowance as of March 31, 2020.recognize. Although we believe ourthe 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 surroundingrelating to this unprecedented event.