FEDERAL NATIONAL MORTGAGE ASSOCIATION You should read this MD&A together with our consolidated financial statements as ofDecember 31, 2019 and the accompanying notes. This MD&A does not discuss 2017 performance or a comparison of 2017 versus 2018 performance for select areas where we have determined the omitted information is not necessary to understand our current period financial condition, changes in our financial condition, or our results. The omitted information may be found in our 2018 Form 10-K, filed with theSEC onFebruary 14, 2019 , in MD&A sections titled "Consolidated Results of Operations," "Single-Family Business," "Multifamily Business," and "Liquidity and Capital Management."Key Market Economic Indicators
Below we discuss how varying macroeconomic conditions can significantly influence our financial results across different business and economic environments. Interest Rates
Selected Benchmark Interest Rates
[[Image Removed: chart-c12901a0118152b9a2fa01.jpg]]
--- 3-month LIBOR(1) --- SOFR(1)(2) --- 10-year swap rate(1)
--- 10-year
par coupon rate(1)
(1) According to Bloomberg.
(2) SOFR began April 2018 .
(3) Refers to the U.S. weekly average fixed-rate mortgage rate according toFreddie 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 ratesdecrease 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 (e.g., parallel, steepening or flattening)
will generate different gains and losses. We are developing
Fannie Mae 2019 Form 10-K 50
--------------------------------------------------------------------------------
MD&A |
capabilities to implement hedge accounting to reduce the impact of interest-rate volatility on our financial results. For additional information on the expected impact of hedge accounting, see "Consolidated Results of Operations-Fair Value Gains (Losses), Net." • 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.
[[Image Removed: chart-3eb3dbf63a4654b69f2a01.jpg]]How home prices can affect our financial
results
•
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. • We expect home price appreciation on a national basis to moderate slightly in 2020, as compared with 2018 and 2019. 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."
(1) Calculated internally using property data on loans purchased by
Freddie Mac, and other third-party home sales data.
index is a weighted repeat transactions index, measuring average price
changes in repeat sales on the same properties.
index excludes prices on properties sold in foreclosure.
price estimates are based on preliminary data and are subject to change as
additional data become available.
[[Image Removed: chart-c73ce8b741285471a9ea01.jpg]]
(1) According to
How housing activity can affect our financial results • Two key aspects of economic activity that can impact supply and demand for
housing and thus mortgage lending are the rate of household formation and
new housing construction.
• Household formation is a key driver of demand for both single-family and
multifamily housing. A newly formed household will either rent or purchase
a home. Thus, changes in the pace of household formation can have
implications for both prices and credit performance as well as the degree
of loss on defaulted loans.
Fannie Mae 2019 Form 10-K 51
--------------------------------------------------------------------------------
MD&A |
• Growth of household formation stimulates homebuilding. Homebuilding has
typically been a cyclical leader of broader economic activity contributing
to the growth of GDP and to employment. Residential construction activity
has historically been a leading indicator, weakening prior to a slowdown
in
the most recent recession was significantly impacted by real estate and
real estate finance. Therefore, various policy responses were targeted to
real estate and real estate finance, potentially altering the cyclical
performance of the real estate sector. There has not been a full housing
cycle since the last recession, so it is possible the sector's future
performance will vary from its historical performance.
• A decline in housing starts results in fewer new homes being available for
purchase and potentially a lower volume of mortgage originations.
Construction activity can also affect credit losses. If the growth of
demand exceeds the growth of supply, prices will appreciate and impact the
risk profile of newly originated home purchase mortgages, depending on
where in the housing cycle the market is. However, a reduced pace of
construction often leads to a broader economic slowdown and signals
expected increases in delinquency and losses on defaulted loans.
GDP, Unemployment Rate and Personal Consumption
[[Image Removed: chart-b4407c02ba2052c9994a01.jpg]]
(1) According to the
(2) Personal consumption growth is the quarterly series calculated by the Bureau
of Economic Analysis and is subject to revision.
(3) GDP growth is the quarterly series calculated by the
Analysis and is subject to revision.
How GDP, the unemployment rate and personal consumption can affect our financial results • Changes in GDP, the unemployment rate and personal consumption can affect
several mortgage market factors, including the demand for both
single-family and multifamily housing and the level of loan delinquencies.
• Economic growth is a key factor for the performance of mortgage-related
assets. In a growing economy, employment and income are rising thus
allowing existing borrowers to meet payment requirements, existing
homeowners to consider purchasing another home, and renters to consider
becoming homeowners. Homebuilding typically increases to meet the rise in
demand. Mortgage delinquencies typically fall in an expanding economy,
thereby decreasing credit losses.
• In a slowing economy, employment and income growth slow and housing
activity slows as an early indicator of reduced economic activity. As the
slowdown intensifies, households become more conservative and debt
repayment takes precedence over consumption, which then falls and
accelerates the slowdown. If the slowdown of economic growth turns torecession, employment losses occur impairing the ability of borrowers to
meet mortgage payments and delinquencies rise. Home sales and mortgage
originations also fall in a slowing economy.
See "Risk Factors-Market and Industry Risk" for further discussion of risks to our business and financial results associated with interest rates, home prices, housing activity and economic conditions.
--------------------------------------------------------------------------------
MD&A | Consolidated Results of Operations
Consolidated Results of Operations
This section discusses our consolidated results of operations and should be read
together with our consolidated financial statements and the accompanying notes.
Summary of Consolidated Results of Operations
For the Year Ended December 31, Variance
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(Dollars in millions)
Net interest income $ 20,962 $ 20,951 $ 20,733 $ 11 $ 218
Fee and other income 1,176 979 2,227 197 (1,248 )
Net revenues 22,138 21,930 22,960 208 (1,030 )
Investment gains, net 1,770 952 1,522 818 (570 )
Fair value gains (losses), net (2,214 ) 1,121 (1,211 ) (3,335 ) 2,332
Administrative expenses (3,023 ) (3,059 ) (2,737 ) 36 (322 )
Credit-related income:
Benefit for credit losses 4,011 3,309 2,041 702 1,268
Foreclosed property expense (515 ) (617 ) (521 ) 102 (96 )
Total credit-related income 3,496 2,692 1,520 804 1,172
TCCA fees (2,432 ) (2,284 ) (2,096 ) (148 ) (188 )
Other expenses, net (2,158 ) (1,253 ) (1,511 ) (905 ) 258
Income before federal income taxes 17,577 20,099 18,447
(2,522 ) 1,652
Provision for federal income taxes (3,417 ) (4,140 ) (15,984 ) 723 11,844
Net income $ 14,160 $ 15,959 $ 2,463 $ (1,799 ) $ 13,496
Total comprehensive income $ 13,969 $ 15,611 $ 2,257 $ (1,642 ) $ 13,354
Net Interest Income
Our primary source of net interest income is guaranty fees we receive for
managing the credit risk on loans underlying Fannie Mae MBS held by third
parties.
Guaranty fees consist of two primary components:
• base guaranty fees that we receive over the life of the loan; and
• upfront fees that we receive at the time of loan acquisition primarily
related to single-family loan-level 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 loans underlying our Fannie
Mae MBS in consolidated trusts in our 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.
--------------------------------------------------------------------------------
MD&A | Consolidated Results of Operations
The table below displays the components of our net interest income from our
guaranty book of business, which we discuss in "Guaranty Book of Business," and
from our portfolios.
Components of Net Interest Income
For the Year Ended December 31, Variance
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(Dollars in millions)
Net interest income from guaranty book
of business:
Base guaranty fee income, net of TCCA $ 9,413 $ 8,615 $ 8,139 $ 798 $ 476
Base guaranty fee income related to
TCCA(1) 2,432 2,284 2,096 148 188
Net amortization income 5,833 5,626 6,158 207 (532 )
Total net interest income from guaranty
book of business 17,678 16,525 16,393 1,153 132
Net interest income from portfolios(2) 3,284 4,426 4,340 (1,142 ) 86
Total net interest income $ 20,962 $ 20,951 $ 20,733 $ 11 $ 218
(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
in 2019, 2018 and 2017, respectively.
Net interest income from base guaranty fees: • Increased in 2019 compared with 2018 and in 2018 compared with 2017 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 interest income from net amortization income: • Increased in 2019 compared with 2018 as a lower interest-rate environment
in 2019 led to increased prepayments on mortgage loans, which accelerated
the amortization of cost basis adjustments on mortgage loans of
consolidated trusts and the related debt. Conversely, higher interest
rates in 2018 compared with 2017 led to a decline in prepayments and net
amortization income in 2018 from 2017.
Net interest income from portfolios:
• Decreased in 2019 compared with 2018 primarily due to sales of
reperforming loans 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-related securities.
Analysis of Deferred Amortization Income We initially recognize mortgage loans and debt of consolidated trusts in our consolidated balance sheet at fair value. We recognize the difference between the initial fair value and the carrying value of these instruments as cost basis adjustments, either as premiums or discounts, in our consolidated balance sheet. We amortize these cost basis adjustments 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 consolidated statements of operations and comprehensive income as amortization income in future periods. Our net premium position on debt of consolidated MBS trusts decreased in 2019 compared with 2018. The low interest-rate environment coupled with a flatter yield curve throughout most of 2019 made it economically attractive to adjust the pass-through rates downward on new MBS issuances, which resulted in recognizing fewer premiums on newly issued MBS debt than in prior periods. In addition, increased refinancing activity in 2019 extinguished MBS debt that had been issued in the past with higher premiums.Fannie Mae 2019 Form 10-K 54
--------------------------------------------------------------------------------
MD&A | Consolidated Results of Operations
Deferred Income Represented by Net Premium Position
on Debt of Consolidated Trusts
(Dollars in billions)
[[Image Removed: chart-81438dedcb215bab913a01.jpg]]
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.
Analysis of Net Interest Income and Yield(1)
For the Year Ended December 31,
2019 2018 2017
Interest Average Interest Average Interest Average
Average Income/ Rates Average Income/ Rates Average Income/ Rates
Balance Expense Earned/Paid Balance Expense Earned/Paid Balance Expense Earned/Paid
(Dollars in millions)
Interest-earning assets:
Mortgage loans of Fannie Mae $ 116,350 $ 4,959 4.26 % 4.15 % Mortgage loans of consolidated trusts 3,181,505 111,805 3.51
3,083,060 107,964 3.50 2,966,541 100,593
3.39
Total mortgage loans(2) 3,297,855 116,764 3.54
3,232,938 114,605 3.54 3,152,757 108,319
3.44
Mortgage-related securities 10,115 421 4.16 10,744 440 4.10 12,984 450 3.47 Non-mortgage-related securities(3) 61,332 1,381 2.22 55,809 1,126 1.99 55,778 591 1.06 Federal funds sold and securities purchased under agreements to resell or similar arrangements 35,891 843 2.32 37,338 742 1.96 37,369 373 1.00 Advances to lenders 5,410 163 2.97 4,102 136 3.27 4,506 123 2.73
Total interest-earning assets
3.37 % Interest-bearing liabilities: Short-term funding debt$ 23,426 $ (501 ) 2.11 %
164,752 (4,115 ) 2.50 200,478 (4,557 ) 2.27 253,138 (5,287 ) 2.09
Connecticut Avenue Securities®
("CAS") 23,630 (1,433 ) 6.06 24,247 (1,391 ) 5.74 19,631 (1,006 ) 5.12
Total debt of Fannie Mae 211,808 (6,049 ) 2.86 250,560 (6,412 ) 2.56 302,420 (6,539 ) 2.16
Debt securities of
consolidated trusts held by
third parties 3,190,070 (92,561 ) 2.90 3,084,846 (89,686 ) 2.91 2,969,238 (82,584 ) 2.78
Total interest-bearing
liabilities $ 3,401,878 $ (98,610 ) 2.90 % $ 3,335,406 $ (96,098 ) 2.88 % $ 3,271,658 $ (89,123 ) 2.72 %
Net interest income/net
interest yield $ 20,962 0.61 % $ 20,951 0.63 % $ 20,733 0.64 %
(1) Includes the effects of discounts, premiums and other cost basis
adjustments.
(2) Average balance includes mortgage loans on nonaccrual status. Typically,
interest income on nonaccrual mortgage loans is recognized when cash is
received. Interest income from the amortization of loan fees, primarily
consisting of upfront cash fees, was
billion for the years ended 2019, 2018, and 2017, respectively.
(3) Consists of cash, cash equivalents and
Fannie Mae 2019 Form 10-K 55
--------------------------------------------------------------------------------
MD&A | Consolidated Results of Operations
The table below 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.
Rate/Volume Analysis of Changes in Net Interest Income
2019 vs. 2018 2018 vs. 2017
Variance Due to:(1) Variance Due to:(1)
Total Variance Volume Rate Total Variance Volume Rate
(Dollars in millions)
Interest income:
Mortgage loans of Fannie Mae $ (1,682 ) $ (1,437 )
3,841 3,458 383 7,371 4,022 3,349
Total mortgage loans 2,159 2,021 138 6,286 2,438 3,848
Mortgage-related securities (19 ) (26 ) 7 (10 ) (86 ) 76
Non-mortgage-related securities(2) 255 118 137 535 - 535
Federal funds sold and securities
purchased under agreements to resell or
similar arrangements 101 (30 ) 131 369 - 369
Advances to lenders 27 40 (13 ) 13 (12 ) 25
Total interest income $ 2,523 $ 2,123
$ (37 ) $ 46
442 864 (422 ) 730 1,168 (438 )
CAS debt (42 ) 36 (78 ) (385 ) (255 ) (130 )
Total debt of Fannie Mae 363 946 (583 ) 127 948 (821 )
Debt securities of consolidated trusts
held by third parties (2,875 ) (3,105 ) 230 (7,102 ) (3,295 ) (3,807 )
Total interest expense $ (2,512 ) $ (2,159 ) $ (353 ) $ (6,975 ) $ (2,347 ) $ (4,628 )
Net interest income $ 11 $ (36 ) $ 47 $ 218 $ (7 ) $ 225 (1) Combined rate/volume variances are allocated between rate and volume based
on the relative size of each variance.
(2) Consists of cash, cash equivalents and
Fee and Other Income Fee and other income includes transaction fees, multifamily fees and other miscellaneous income. Fee and other income increased in 2019 compared with 2018, primarily due to an increase in yield maintenance fees due to increased prepayments on multifamily loans as interest rates decreased during the year. Fee and other income decreased in 2018 compared with 2017, primarily due to$975 million of income in 2017 resulting from a settlement agreement resolving legal claims related to private-label securities we purchased. Investment Gains, Net Investment gains, net primarily includes gains and losses recognized from the sale of available-for-sale ("AFS") securities, sale of loans, gains and losses recognized on the consolidation and deconsolidation of securities, net other-than-temporary impairments recognized on our investments, and lower of cost or fair value adjustments on held for sale ("HFS") loans. Investment gains, net increased during 2019 compared with 2018 primarily driven by an increase in gains on sales of single-family HFS loans. Investment gains, net decreased during 2018 compared with 2017 primarily due to lower gains from the sale of HFS loans driven by a decline in average sales prices. Fair Value Gains (Losses), Net 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 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 consolidated statements of operations and comprehensive income.
--------------------------------------------------------------------------------
MD&A | Consolidated Results of Operations
The table below displays the components of our fair value gains and losses. Fair Value Gains (Losses), Net
For the Year Ended December 31,
2019 2018 2017
(Dollars in millions)
Risk management derivatives fair value gains (losses)
attributable to:
Net contractual interest expense on interest-rate swaps $ (833 ) $ (1,061 ) $ (889 )
Net change in fair value during the period (199 ) 1,133 316 Total risk management derivatives fair value gains (losses), net
(1,032 ) 72 (573 ) Mortgage commitment derivatives fair value gains (losses), net
(1,043 ) 324 (603 ) Credit enhancement derivatives fair value gains (losses), net
(35 ) 26 (9 )
Total derivatives fair value gains (losses), net (2,110 ) 422 (1,185 )
Trading securities gains, net 322 126 190
CAS debt fair value gains (losses), net 145 208 (297 )
Other, net(1) (571 ) 365 81
Fair value gains (losses), net $ (2,214 ) (1) Consists of fair value gains and losses on non-CAS debt and mortgage loans
held at fair value.
Risk Management Derivatives Fair Value Gains (Losses),Net Risk management derivative instruments are an integral part of our interest-rate risk management strategy. We supplement our issuance of debt securities with derivative instruments to further reduce duration risk, which includes prepayment risk. We purchase option-based risk management derivatives to economically hedge prepayment risk. In cases where options obtained through callable debt issuances are not needed for risk management derivative purposes, we may sell options in the over-the-counter ("OTC") derivatives market in order to offset the options obtained in the callable debt. Our principal purpose in using derivatives is to manage our aggregate interest-rate risk profile within prescribed risk parameters. We generally use only derivatives that are relatively liquid and straightforward to value. We consider the cost of derivatives used in our management of interest-rate risk to be an inherent part of the cost of funding and hedging our mortgage investments and economically similar to the interest expense that we recognize on the debt we issue to fund our mortgage investments. We present, by derivative instrument type, the fair value gains and losses on our derivatives in "Note 8, Derivative Instruments." The primary factors that may affect the fair value of our risk management derivatives include the following: • Changes in interest rates: Our primary derivative instruments are
interest-rate swaps, including pay-fixed and receive-fixed interest-rate
swaps. Pay-fixed swaps decrease in value and receive-fixed swaps increase
in value as swap rates decrease (with the opposite being true when swap
rates increase). Because the composition of our pay-fixed and
receive-fixed derivatives varies across the yield curve, different yieldcurve changes (that is, parallel, steepening or flattening) will generate
different gains and losses.
• Changes in our derivative activity: The mix and balance of our derivative
portfolio changes from period to period as we enter into or terminate
derivative instruments to respond to changes in interest rates and changes
in the balances and modeled characteristics of our assets and liabilities.
Changes in the composition of our derivative portfolio affect the
derivative fair value gains and losses we recognize in a given period.
Additional factors that affect the fair value of our risk management derivatives include implied interest-rate volatility and the time value of purchased or sold options, among other factors. We recognized total risk management derivatives fair value losses in 2019, primarily as a result of net interest expense on interest-rate swaps combined with a decrease in the fair value of our interest-rate swaps due to the decline in interest rates during the year. We recognized total risk management derivatives fair value gains in 2018, primarily as a result of an increase in the fair value of our interest-rate swaps due to an increase in interest rates during the year. These gains were partially offset by net interest expense on interest-rate swaps in 2018. For additional information on our use of derivatives to manage interest-rate risk, see "Risk Management-Market Risk Management, Including Interest-Rate Risk Management-Interest-Rate Risk Management."
--------------------------------------------------------------------------------
MD&A | Consolidated Results of Operations
Expected Impact of Hedge Accounting We are developing capabilities to implement fair value hedge accounting to reduce the impact of interest-rate volatility on our financial results. Once implemented, derivative fair value gains and losses resulting from changes in certain benchmark interest rates, such as LIBOR or 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 while fair value gains and losses driven by other factors, such as credit spreads, will remain. Mortgage Commitment Derivatives Fair Value Gains (Losses), Net We generally account for certain commitments to purchase or sell mortgage-related securities and to purchase single-family mortgage loans as derivatives. For open mortgage commitment derivatives, we include changes in their fair value in our consolidated statements of operations and comprehensive income. When derivative purchase commitments settle, we include the fair value of the commitment on the settlement date in the cost basis of the loan or security we purchase. When derivative commitments to sell securities settle, we include the fair value of the commitment on the settlement date in the cost basis of the security we sell. Purchases of securities issued by our consolidated MBS trusts are treated as extinguishments of debt; we recognize the fair value of the commitment on the settlement date as a component of debt extinguishment gains and losses in "Other expenses, net." Sales of securities issued by our consolidated MBS trusts are treated as issuances of consolidated debt; we recognize the fair value of the commitment on the settlement date as a component of debt in the cost basis of the debt issued. We recognized fair value losses on our mortgage commitments in 2019 primarily due to losses on commitments to sell mortgage-related securities driven by increases in prices during commitment periods as interest rates declined throughout most of 2019. We recognized fair value gains on our mortgage commitments in 2018 primarily due to gains on commitments to sell mortgage-related securities driven by decreases in prices during commitment periods as interest rates increased throughout most of 2018. CAS Debt Fair Value Gains (Losses),Net Credit risk transfer transactions, including CAS debt issuances, transfer a portion of credit losses on a reference pool of mortgage loans to investors. CAS debt we issued prior to 2016 is reported at fair value as "Debt ofFannie Mae " in our consolidated balance sheets. CAS debt issued subsequent to 2016 is not accounted for in a manner that generates fair value gains and losses. We expect our exposure to fair value gains and losses on CAS debt to continue to decline as the outstanding balance of this debt declines. We recognized fair value gains on CAS debt reported at fair value in 2019 and 2018 primarily due to paydowns and widening spreads between CAS yields and LIBOR. For further discussion of our credit risk transfer transactions, see "Single-Family Business-Single-Family Mortgage Credit Risk Management-Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk-Credit Risk Transfer Transactions." Fair Value Option Debt of Consolidated Trusts Fair Value Gains (Losses), Net We elected the fair value option for our long-term debt of consolidated trusts that contain embedded derivatives that would otherwise require bifurcation. The fair value of our long-term consolidated trust debt held at fair value is reported as "Debt of Consolidated Trusts" in our consolidated balance sheets. The changes in the fair value of our long-term consolidated trust debt held at fair value are included in "Other, net" in the table above. We recognized fair value losses on our long-term debt of consolidated trusts held at fair value in 2019 due to declines in interest rates. We recognized fair value gains on our long-term debt of consolidated trusts held at fair value in 2018 due to increases in interest rates. Credit-Related Income Credit-related income or expense consists of our benefit or provision for credit losses and foreclosed property income or expense. We record a provision for credit losses and establish loss reserves for losses that we believe have been incurred and will eventually be realized over time in our consolidated financial statements. Our loss reserves, which include our allowance for loan losses and reserve for guaranty losses, provide for an estimate of credit losses incurred in our guaranty book of business, including concessions we granted borrowers upon modification of their loans. When we reduce our loss reserves, we recognize a benefit for credit losses. 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 naturalFannie Mae 2019 Form 10-K 58
--------------------------------------------------------------------------------
MD&A | Consolidated Results of Operations
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 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.
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 each period presented were less than $50 million .
Components of Benefit for Credit Losses
For the Year Ended December 31,
2019 2018 2017
(Dollars in billions)
Single-family benefit for credit losses:
Changes in loan activity(1) $ 0.4 $ 0.8 $ (0.9 )
Redesignation of loans from HFI to HFS 1.4 1.9 1.1
Actual and forecasted home prices 0.9 1.2 1.7
Actual and projected interest rates 0.3 (0.8 ) (0.4 )
Other(2) 1.0 0.2 0.6
Total single-family benefit for credit losses $ 4.0 $
3.3
(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 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"
(the "Advisory Bulletin").
(2) Primarily consists of model enhancements and changes in the reserve forguaranty losses that are not separately included in the other components.
The primary factors that contributed to our benefit for credit losses in 2019 were: • The redesignation of certain reperforming single-family loans from HFI to
HFS as we no longer intend to hold them for the foreseeable 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 allowance for loan
losses for any required write-down. We also reversed amounts in the
allowance relating to these loans prior to the charge-off. For the period,
the amount of allowance that was reversed exceeded the amounts charged
off, which resulted in a net benefit for credit losses.
• During 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 table above.
• An increase in 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 loss reserves and 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 2018 were:
• We recognized a benefit from the redesignation of certain reperforming and
nonperforming single-family loans from HFI to HFS during the year.
• We recognized a benefit for credit losses due to higher actual and
forecasted home prices in the year.
Fannie Mae 2019 Form 10-K 59
--------------------------------------------------------------------------------
MD&A | Consolidated Results of Operations
• The benefit for credit losses was partially offset by the impact of higher
actual and projected mortgage interest rates. As mortgage interest rates
rise, we expect a decrease in future prepayments on single-family
individually impaired loans, including modified loans. Lower expected
prepayments lengthen the expected lives of modified loans, which increases
the impairment relating to term and interest rate concessions provided on
these loans and results in an increase in the provision for credit losses.
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 toTreasury . This TCCA-related revenue is included in "Net interest income" and the expense is recognized as "TCCA fees" in our consolidated financial statements. TCCA fees increased in 2019 compared with 2018 as our book of business subject to the TCCA continued to grow during the year. We expect the guaranty fees collected and expenses incurred under the TCCA to increase in 2020 and 2021 as we acquire more loans subject to these fees. After 2021, we expect our expense for TCCA fees to decline as the loans subject to these fees pay off and we are no longer obligated to remit fees on new loan acquisitions. How this will affect the guaranty fees on loans we acquire after 2021 is uncertain. See "Business-Charter Act and Regulation-GSE Act and Other Legislation-Guaranty Fees and Pricing" for further discussion of the TCCA. 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 2019 compared with 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 costs 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 "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." Federal Income Taxes We recognized a provision for federal income taxes of$3.4 billion in 2019,$4.1 billion in 2018 and$16.0 billion in 2017. Our provision for federal income taxes declined in 2019 compared with 2018 primarily because our income before federal income taxes was lower in 2019 than in 2018. In addition, we recognized a benefit for federal income taxes in 2019 of$205 million as a result of a favorable resolution with the Internal Revenue Service ("IRS") of an uncertain tax position. The decrease in the provision for federal income taxes in 2018 compared with 2017 was primarily the result of the effects of the Tax Cuts and Jobs Act (the "Tax Act"), which reduced the federal corporate income tax rate from 35% to 21% effectiveJanuary 1, 2018 . The provision for federal income taxes in 2017 reflects a charge of$9.9 billion that resulted from the remeasurement of our deferred tax assets in the fourth quarter of 2017 resulting from the enactment of the Tax Act, which significantly increased our effective tax rate for the year. Our effective tax rates were 19.4% in 2019, 20.6% in 2018 and 86.6% in 2017. Our effective tax rates for each of these periods was also impacted by the benefits of our investments in housing projects eligible for low-income housing tax credits. See "Note 9, Income Taxes" for additional information on our income taxes.Fannie Mae 2019 Form 10-K 60
--------------------------------------------------------------------------------
MD&A | Consolidated Balance Sheet Analysis
Consolidated Balance Sheet Analysis
This section discusses our consolidated balance sheets and should be read together with our consolidated financial statements and the accompanying notes. Summary of Consolidated Balance Sheets
As of December 31,
2019 2018 Variance
(Dollars in millions)
Assets
Cash and cash equivalents and federal funds sold
and securities purchased under agreements to
resell or similar arrangements $ 34,762 $ 58,495 $ (23,733 )
Restricted cash 40,223 23,866 16,357
Investments in securities 50,527 45,296 5,231
Mortgage loans:
Of Fannie Mae 101,668 120,717 (19,049 )
Of consolidated trusts 3,241,510 3,142,881 98,629
Allowance for loan losses (9,016 ) (14,203 ) 5,187
Mortgage loans, net of allowance for loan losses 3,334,162 3,249,395 84,767
Deferred tax assets, net 11,910 13,188 (1,278 )
Other assets 31,735 28,078 3,657
Total assets $ 3,503,319 $ 3,418,318 $ 85,001
Liabilities and equity
Debt:
Of Fannie Mae $ 182,247 $ 232,074 $ (49,827 )
Of consolidated trusts 3,285,139 3,159,846 125,293
Other liabilities 21,325 20,158 1,167
Total liabilities 3,488,711 3,412,078 76,633
Fannie Mae stockholders' equity (deficit):
Senior preferred stock 120,836 120,836 -
Other net deficit (106,228 ) (114,596 ) 8,368
Total equity 14,608 6,240 8,368
Total liabilities and equity $ 3,503,319 $ 3,418,318 $ 85,001
Cash, Cash Equivalents and Restricted Cash
For information on changes in our cash, cash equivalents and restricted cash,
see "Liquidity and Capital Management-Liquidity Management-Cash Flows."
Investments in Securities
Investments in U.S. Treasury Securities
Our investments in U.S. Treasury securities are classified in our consolidated
balance sheets as investments in securities when the maturity date at the date
of acquisition exceeds three months. U.S. Treasury securities included in our
other investments portfolio increased to $39.5 billion as of December 31, 2019
from $35.5 billion as of December 31, 2018 . For additional information on our
investments in U.S. Treasury securities, see the "Other Investments Portfolio"
chart in "Liquidity and Capital Management-Liquidity Management-Other
Investments Portfolio" and "Note 5, Investments in Securities."
Investments in Mortgage-Related Securities
Our investments in mortgage-related securities are classified in our
consolidated balance sheets as either trading or available-for-sale and are
measured at fair value. The table below displays the fair value of our
investments in mortgage-related securities, including trading and
available-for-sale securities. We classify private-label securities as Alt-A or
subprime mortgage-backed securities if the securities were labeled as such when
issued. We have also invested in subprime private-
--------------------------------------------------------------------------------
MD&A | Consolidated Balance Sheet Analysis
label mortgage-related securities that we have resecuritized to include our
guaranty, which are included as
As of December 31,
2019 2018
(Dollars in millions)
Mortgage-related securities:
Fannie Mae $ 4,944 $ 3,264
Other agency 4,688 3,759
Alt-A and subprime private-label securities 686 1,897
Mortgage revenue bonds 315
435
Other mortgage-related securities 314 350 Total$ 10,947 $ 9,705 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 ofDecember 31, 2019 and 2018. Mortgage Loans, Net of Allowance for Loan Losses The mortgage loans reported in our consolidated balance sheets are classified as either HFS or HFI and include loans owned byFannie Mae and loans held in consolidated trusts. Mortgage loans, net of allowance for loan losses increased as of 2019 compared with 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 reperforming single-family loans from HFI to HFS
and as a result of an enhancement to the model used to estimate cash flows
for individually impaired single-family loans within our allowance for
loan losses, which incorporated recent loan performance data within the
model.
For additional information on our mortgage loans, see "Note 3, Mortgage Loans," and for additional information on changes in our allowance for loan losses, see "Note 4, Allowance for Loan Losses." Other Assets The increase in other assets fromDecember 31, 2018 toDecember 31, 2019 was primarily driven by an increase in advances to lenders. As interest rates declined during 2019, mortgage activity increased, resulting in higher funding needs by lenders. For information on our accounting policy for advances to lenders, see "Note 1, Summary of Significant Accounting Policies." Debt Debt of consolidated trusts represents the amount of Fannie Mae MBS issued from consolidated trusts and held by third-party certificateholders. Debt ofFannie Mae is the primary means of funding our mortgage purchases. Debt ofFannie Mae also includes CAS debt, which we issued in connection with our transfer of mortgage credit risk. We provide a comparison of the mix between our outstanding short-term and long-term debt and a summary of the activity of the debt ofFannie Mae in "Liquidity and Capital Management-Liquidity Management-Debt Funding." Also see "Note 7, Short-Term and Long-Term Debt" for additional information on our outstanding debt. The decrease in debt ofFannie Mae in 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 ofFannie Mae that was paid off during 2019. The increase in debt of consolidated trusts during 2019 was primarily driven by sales of Fannie Mae MBS, which are accounted for as issuances of debt of consolidated trusts in our consolidated balance sheets, since the MBS certificate ownership is transferred from us to a third party. Stockholders' Equity Our net equity increased as ofDecember 31, 2019 compared withDecember 31, 2018 by the amount of our comprehensive income recognized during 2019, partially offset by our payments of senior preferred stock dividends toTreasury during the first two quarters of 2019. Under the liquidation preference provisions governing the senior preferred stock described in "Business-Conservatorship, Treasury Agreements and Housing Finance Reform-Treasury Agreements-Senior Preferred Stock," the aggregate
--------------------------------------------------------------------------------
MD&A | Consolidated Balance Sheet Analysis
liquidation preference of the senior preferred stock increased from
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. We 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, 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 our MBS trusts.
• Other represents assets that were previously purchased for investment
purposes. More than half of the balance of "Other" as of
consisted of
loans. We expect the amount of assets in "Other" will continue to decline
over time as they liquidate, mature or are sold.
Retained Mortgage Portfolio
(Dollars in billions)
[[Image Removed: chart-28b82908b34e398b7f1a01.jpg]]
The decrease in our retained mortgage portfolio in 2019 compared with 2018 was
due to a decrease in our loss mitigation portfolio driven by portfolio loan
sales as well as a decrease in our legacy investment portfolio due to continued
liquidations of loans and sales of private-label securities from this book. This
decrease was partially offset by an increase in our lender liquidity portfolio
due to an increase in our acquisitions of loans through our whole loan conduit
in 2019 driven by higher mortgage refinance activity.
Fannie Mae 2019 Form 10-K 63
--------------------------------------------------------------------------------
MD&A | Retained Mortgage Portfolio
The table below displays the components of our retained mortgage portfolio,
measured by unpaid principal balance.
Retained Mortgage Portfolio
As of December 31,
2019 2018
(Dollars in millions)
Lender liquidity:
Agency securities(1) $ 38,375 $ 40,528
Mortgage loans 21,152 8,640
Total lender liquidity 59,527 49,168
Loss mitigation mortgage loans(2) 60,731 87,220
Other:
Reverse mortgage loans 17,129 21,856
Mortgage loans 6,546 8,959
Reverse mortgage securities(3) 7,575 7,883
Private-label and other securities 1,250
3,042
Fannie Mae-wrapped private-label securities 581 650 Mortgage revenue bonds 272 375 Total other 33,353 42,765 Total retained mortgage portfolio$ 153,611
Retained mortgage portfolio by segment: Single-family mortgage loans and mortgage-related securities$ 145,179 $ 168,338 Multifamily mortgage loans and mortgage-related securities$ 8,432 $ 10,815 (1) Consists ofFannie Mae , Freddie Mac andGinnie Mae mortgage-related securities, including Freddie Mac securities guaranteed byFannie Mae .
Excludes
Mae-wrapped private-label securities.
(2) Includes single-family loans classified as troubled debt restructurings
("TDRs") that were on accrual status of
of
nonaccrual status of
and 2018, respectively. Includes multifamily loans classified as TDRs that
were on accrual status of
2019 and 2018, respectively, and multifamily loans on nonaccrual status of
respectively.
(3) Consists of
The amount of mortgage assets that we may own is capped at$250 billion by our senior preferred stock purchase agreement withTreasury , 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." TheTreasury plan includes a recommendation thatTreasury 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. InNovember 2019 , FHFA directed us to include 10% of the notional value of interest-only securities in calculating the size of the retained portfolio for the purpose of determining compliance with the senior preferred stock purchase agreement retained portfolio limits and associated FHFA guidance. As ofDecember 31, 2019 , 10% of the notional value of our interest-only securities was$2.0 billion , which is not included in the table above. The directive is effectiveJanuary 31, 2020 . We expect our retained mortgage portfolio to remain below the current$225 billion cap, under FHFA's revised calculation. We also expect the size of our retained mortgage portfolio to fluctuate as a result of our activities to support lender liquidity and to shrink to the extent we sell nonperforming and reperforming loans. Purchases of Loans from Our MBS Trusts 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. The purchase price for these loans is the unpaid principal balance of the loan plus accrued interest. 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: our legal ability to purchase loans under the terms of the trust documents; whether we have agreed to modify the loan; our mission and public policy; our loss mitigation strategies and the exposure to credit losses we face under our guaranty; our cost of funds; the impact on our results of operations; relevant market yields; the accounting impact; the administrative costs associated with purchasing and holding the loans; counterparty exposure to lenders that have agreed to cover losses associated with delinquent loans; and general market conditions. The weight we give
--------------------------------------------------------------------------------
MD&A | Retained Mortgage Portfolio
to these factors changes depending on market circumstances and other factors. The cost of purchasing most delinquent loans from single-family Fannie Mae MBS trusts and holding them in our retained mortgage portfolio is currently less than the cost of advancing delinquent payments to security holders. We generally purchase loans from single-family MBS trusts as they become four or more consecutive monthly payments delinquent. As described in "Business-Mortgage Securitizations-Uniform Mortgage-Backed Securities , or UMBS" we began issuing UMBS and structured securities backed by UMBS inJune 2019 . Accordingly, our resecuritization trusts now include Freddie Mac-issued UMBS. Because the underlying mortgage loans that back Freddie Mac-issued UMBS are not in Fannie Mae MBS trusts, we do not have the right to purchase those mortgage loans upon their becoming delinquent. During 2019, we purchased delinquent loans with an unpaid principal balance of$10.5 billion from our single-family MBS trusts. We expect to continue purchasing loans from single-family MBS trusts as they become four or more consecutive monthly payments delinquent subject to market conditions, economic benefit, servicer capacity and other factors, including the limit on the amount of mortgage assets that we may own pursuant to the senior preferred stock purchase agreement and FHFA's portfolio requirements. For our multifamily MBS trusts, we typically exercise our option to purchase a loan from the trust if the loan is delinquent with respect to four or more consecutive monthly payments, whether those payments were missed in whole or in part. Guaranty Book of Business
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
• other credit enhancements that we provide on mortgage assets.
"TotalFannie 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. InJune 2019 , we began resecuritizing Freddie Mac securities intoFannie Mae -issued structured securities. In these resecuritizations, 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 ofDecember 31, 2019 and 91% of our guaranty book of business as ofDecember 31, 2018 . Composition of Fannie Mae Guaranty Book of Business(1) As of December 31, 2019 2018 Single-Family Multifamily Total Single-Family Multifamily Total (Dollars in millions) Conventional guaranty book of business(2)$ 2,997,475 $ 341,522
27,422 1,079 28,501 34,158 1,205 35,363
Guaranty Book of Business 3,024,897 342,601 3,367,498 2,959,404 309,748 3,269,152
Freddie Mac securities guaranteed
by Fannie Mae(4) 50,100 - 50,100 - - -
Total
(1) Includes other single-family
billion and
other multifamily
principal balance of resecuritized Fannie Mae MBS is included only once in
the reported amount.
(2) Refers to mortgage loans and mortgage-related securities that are not
guaranteed or insured, in whole or in part, by the
(3) Refers to mortgage loans and mortgage-related securities guaranteed or
insured, in whole or in part, by the
(4) Consists of approximately (i)
Freddie Mac-issued UMBS backing
billion in unpaid principal balance of Freddie Mac securities backing Fannie
Mae-issued REMICs, a portion of which 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 is likely lower.
Fannie Mae 2019 Form 10-K 65
--------------------------------------------------------------------------------
MD&A | Guaranty Book of Business
The GSE Act requires us to set aside each year an amount equal to 4.2 basis points of the unpaid principal balance of our new business purchases and to pay this amount to specified HUD andTreasury funds in support of affordable housing. InApril 2019 , we paid$215 million to the funds based on our new business purchases in 2018. For 2019, we recognized an expense of$280 million related to this obligation based on our$666.9 billion in new business purchases during the period. We expect to pay this amount to the funds in 2020. See "Business-Charter Act and Regulation-GSE Act and Other Legislation-Affordable Housing Allocations" for more information regarding this obligation. Business Segments We conduct business in theU.S. residential mortgage markets and the global securities market. According to theFederal Reserve , totalU.S. residential mortgage debt outstanding was estimated to be approximately$12.6 trillion as ofSeptember 30, 2019 (the latest date for which information is available). We owned or guaranteed mortgage assets representing approximately 26% of totalU.S. residential mortgage debt outstanding as ofSeptember 30, 2019 . We have two reportable business segments: Single-Family and Multifamily. The Single-Family business operates in the secondary 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. Net revenues consist of net interest income and fee and other income. Business Segment Net Revenues and Net Income (Dollars in billions) [[Image Removed: chart-d105a822f6425517b65.jpg]] 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 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.
--------------------------------------------------------------------------------
MD&A | Business Segments
In the following sections, we describe each segment's primary business activities, customers, competitive and market conditions, business metrics, and financial results. We also describe how each segment manages mortgage credit risk and its credit metrics. Single-Family Business Single-Family Primary Business Activities Providing Liquidity for Single-Family Mortgage Loans 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. We describe our securitization transactions and the types of Fannie Mae MBS that we issue in "Business-Mortgage Securitizations" above. Our Single-Family business also supports liquidity in the mortgage market and the businesses of our lender customers through other activities, such as issuing structured Fannie Mae MBS backed by single-family mortgage assets and buying and selling single-family agency mortgage-backed securities. A single-family loan is secured by a property with four or fewer residential units. Our Single-Family business securitizes and purchases primarily conventional (not federally insured or guaranteed) single-family fixed-rate or adjustable-rate, first-lien mortgage loans, or mortgage-related securities backed by these types of loans. We also securitize or purchase loans insured by FHA, loans guaranteed by theVA , loans guaranteed by theRural Development Housing and Community Facilities Program of theU.S. Department of Agriculture , manufactured housing mortgage loans and other mortgage-related securities. Single-Family Mortgage Servicing Servicing of the mortgage loans held in our retained mortgage portfolio or backing Fannie Mae MBS is performed by mortgage servicers on our behalf. Some loans are serviced for us by the lenders that initially sold the loans to us. In other cases, our loans are serviced by third-party servicers that did not originate or sell the loans to us. For loans we own or guarantee, the lender or servicer must obtain our approval before selling servicing rights to another servicer. Our mortgage servicers typically collect and deliver principal and interest payments, administer escrow accounts, monitor and report delinquencies, perform default prevention activities, evaluate transfers of ownership interests, respond to requests for partial releases of security, and handle proceeds from casualty and condemnation losses. Our mortgage servicers are the primary point of contact for borrowers and perform a key role in the effective implementation of our homeownership assistance initiatives, negotiation of workouts of troubled loans, and other loss mitigation activities. If necessary, mortgage servicers inspect and preserve properties and process foreclosures and bankruptcies. Because we generally delegate the servicing of our mortgage loans to mortgage servicers and do not have our own servicing function, our ability to actively manage troubled loans that we own or guarantee is limited. For more information on the risks of our reliance on servicers, refer to "Risk Factors-Credit Risk." We compensate servicers primarily by permitting them to retain a specified portion of each interest payment on a serviced mortgage loan as a servicing fee. Servicers also generally retain assumption fees, late payment charges and other similar charges, to the extent they are collected from borrowers, as additional servicing compensation. We also compensate servicers for negotiating workouts on problem loans. Our servicers are required to develop, follow and maintain written procedures relating to loan servicing and legal compliance in accordance with our Servicing Guide. We oversee servicer compliance with our Servicing Guide requirements and execution of our loss mitigation programs by conducting reviews of select servicers. These reviews are designed to test a servicer's quality control processes and compliance with our requirements across key servicing functions. Issues identified through these Servicing Guide compliance reviews are provided to the servicer with prescribed corrective actions and expected resolution due dates, and we monitor servicers' remediation of their compliance issues. Performance management staff measure, monitor and manage overall servicer performance by providing loss mitigation workout goals to targeted servicers, discussing performance against each goal and tracking action items to improve, and following up on remediation of findings identified from compliance reviews. Additionally, we employ a servicer performance management program, called the STARTM Program, which provides our largest servicers a transparent framework of key metrics and operational assessments to recognize strong performance and identify areas of weakness. Repercussions for poor performance by a servicer may include performance improvement plans and servicing transfers, lost incentive income, compensatory fees, monetary and non-monetary remedies, and reduced opportunity for STAR Program recognition.Fannie Mae 2019 Form 10-K 67
--------------------------------------------------------------------------------
MD&A | Single-Family Business
Single-Family Credit Risk and Credit Loss Management Our Single-Family business: • Prices and manages the credit risk on loans in our single-family guaranty
book of business.
• Enters into transactions that transfer a portion of the credit risk on
some of the loans in our single-family guaranty book of business.
• Works to reduce costs of defaulted single-family loans through home
retention solutions and foreclosure alternatives, management of
foreclosures and our REO inventory, selling nonperforming loans, and
pursuing contractual remedies from lenders, servicers and providers of
credit enhancement.
See "Single-Family Mortgage Credit Risk Management" below for discussion of our
strategies for managing credit risk and credit losses on single-family loans.
Single-Family Customers
Our principal single-family customers are lenders that operate within the
primary mortgage market where mortgage loans are originated and funds are loaned
to borrowers. Our customers include mortgage banking companies, savings and loan
associations, savings banks, commercial banks, credit unions, community banks,
specialty servicers, insurance companies, and state and local housing finance
agencies. Lenders originating mortgages in the primary mortgage market often
sell them in the secondary mortgage market in the form of whole loans or in the
form of mortgage-related securities.
During 2019, approximately 1,200 lenders delivered single-family mortgage loans
to us. We acquire a significant portion of our single-family mortgage loans from
several large mortgage lenders. During 2019, our top five lender customers, in
the aggregate, accounted for approximately 44% of our single-family business
volume, compared with approximately 42% in 2018. Wells Fargo Bank, N.A .,
together with its affiliates, and Quicken Loans Inc. , together with its
affiliates, were the only customers that accounted for 10% or more of our
single-family business volume in 2019, with approximately 14% and 10%,
respectively, of our 2019 single-family business volume.
We have a diversified funding base of domestic and international investors.
Purchasers of single-family Fannie Mae MBS include asset managers, commercial
banks, pension funds, insurance companies, Treasury , central banks,
corporations, state and local governments, and other municipal authorities. Our
CAS investors include asset managers, real estate investment trusts, hedge funds
and insurance companies, while our CIRT transaction counterparties are insurers
and reinsurers.
Single-Family Competition
We compete to acquire single-family mortgage assets in the secondary market. We
also compete for the issuance of single-family mortgage-related securities to
investors. Competition in these areas is affected by many factors, including the
number of residential mortgage loans offered for sale in the secondary market by
loan originators and other market participants, the nature of the residential
mortgage loans offered for sale (for example, whether the loans represent
refinancings), the current demand for mortgage assets from mortgage investors,
the interest-rate risk investors are willing to assume and the yields they will
require as a result, and the credit risk and prices associated with available
mortgage investments.
Competition to acquire mortgage assets is significantly affected by both our and
our competitors' pricing and eligibility standards, as well as investor demand
for UMBS and for our and our competitors' other mortgage-related securities. Our
competitive environment also may be affected by many other factors, including
changes in connection with recommendations in the Treasury plan; other new
legislation or regulations applicable to us, our customers or our investors; and
digital innovation and disruption in our markets. The Director of FHFA has
indicated that, during conservatorship, Fannie Mae and Freddie Mac should reduce
competition with each other and FHA. As a result, in order to successfully
acquire loans in the secondary market, we focus on understanding what drives our
customers' execution decisions and identifying how to best deliver value. See
"Business-Conservatorship, Treasury Agreements and Housing Finance Reform,"
"Business-Charter Act and Regulation," and "Risk Factors" for information on
matters that could affect our business and competitive environment.
Our competitors for the acquisition of single-family mortgage assets are
financial institutions and government agencies that manage residential mortgage
credit risk or invest in residential mortgage loans, including Freddie Mac, FHA,
the VA , Ginnie Mae (which primarily guarantees securities backed by FHA-insured
loans and VA -guaranteed loans), the FHLBs, U.S. banks and thrifts, securities
dealers, insurance companies, pension funds, investment funds and other mortgage
investors. Currently, our primary competitors for the issuance of single-family
mortgage-related securities are Freddie Mac and Ginnie Mae , as many private
market competitors dramatically reduced or ceased their activities in the
single-family secondary mortgage market following the 2008 housing crisis.
Competition for investors and counterparties in our credit risk transfer
transactions comes primarily from other issuers of mortgage credit risk
transactions, such as Freddie Mac and private mortgage insurers. We also compete
for investor funds against other credit-related securitized products, such as
private-label residential mortgage-backed securities ("RMBS"), commercial RMBS,
and collateralized loan obligations. As noted above, the nature of our primary
competitors and the overall levels of competition we face could change as a
result of a variety of factors, many of which are outside our control.
--------------------------------------------------------------------------------
MD&A | Single-Family Business
Single-Family Market Share
Single-Family Mortgage Acquisition Market Share
The chart below displays our estimated market share of single-family mortgage
acquisitions in 2019 as compared with that of our primary competitors. Our
market share estimate is based on publicly available data regarding the amount
of single-family first-lien mortgage loans originated and our competitors'
acquisitions. Our share of the single-family acquisition market, including loans
held on lenders' books, may fluctuate from period to period. We exclude our
purchase of delinquent loans from our MBS trusts in the calculation of our
market share.
[[Image Removed: chart-34c53269cd5a5830a62.jpg]]
We estimate our market share of single-family mortgage acquisitions was 25% in
2018 and 27% in 2017.
Single-Family Mortgage-Related Securities Issuances Market Share
Single-family Fannie Mae MBS issuances were $591.1 billion in 2019, compared
with $470.5 billion in 2018 and $514.0 billion in 2017. Based on the latest data
available, the chart below displays our estimated market share of single-family
mortgage-related securities issuances in 2019 as compared with that of our
primary competitors for the issuance of single-family mortgage-related
securities.
[[Image Removed: chart-17e3a85acd4d589da6ca02.jpg]]We estimate our market share of single-family mortgage-related securities issuances was 39% in both 2018 and 2017.
--------------------------------------------------------------------------------
MD&A | Single-Family Business
Single-Family Mortgage Market
Below we present macroeconomic factors that affect the single-family mortgage
market in which our Single-Family business operates. Home sales and the supply
of unsold homes are indicators of the underlying demand for mortgage loans,
which impacts our acquisition volumes.
Total Single-Family Home Sales and Single-Family Mortgage Originations and
Months' Supply of
(Home sales units in thousands) (Dollars in trillions)
[[Image Removed: chart-c81181f9e27952248a7a02.jpg]][[Image Removed: chart-831294a4a7725aabbe0a02.jpg]] (1) Total existing home sales data according to National Association of
REALTORS®. New single-family home sales data according to the
Bureau. Certain previously reported data has changed to reflect revised
historical data from one or both of these organizations.
(2) 2019 information is as of
Reserve's
for which the
single-family residences. Prior period amounts have been changed to reflect
revised historical data from the
(3) We estimate that
debt outstanding was 27% as of the end of both 2019 and 2018, and was 28% as
of the end of 2017.
Additional Factors • The 30-year fixed mortgage rate averaged 3.9% in 2019 compared with 4.5%
in 2018 according to Freddie Mac's Primary Mortgage Market Survey®.
• We forecast that total originations in the
market in 2020 will decrease from 2019 levels by approximately 1.6%, from
an estimated $2.32 trillion in 2019 to $2.28 trillion in 2020, and that
the amount of originations in the U.S. single-family mortgage market that
are refinancings will decrease from an estimated
Fannie Mae 2019 Form 10-K 70
--------------------------------------------------------------------------------
MD&A | 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 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
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 $2,951.9 billion as of
December 31, 2019 , $2,903.3 billion as of December 31, 2018 and $2,858.9 billion
as of December 31, 2017 .
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 conservatorship 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.
Single-Family Guaranty Fees, Acquisition
and Book of Business Metrics
(Dollars in billions)[[Image Removed: chart-97e82e48c785ddf520fa02.jpg]][[Image Removed: chart-10e95ed34bb4e076cfaa02.jpg]] (1) Represents the sum of the average guaranty fee rate for our single-family
conventional guaranty arrangements during the period plus the recognition of
any upfront cash payments relating to these guaranty arrangements over an
estimated average life at the time of acquisition. Excludes the impact of a
10 basis-point guaranty fee increase implemented pursuant to the TCCA, the
incremental revenue from which is remitted to
us.
(2) Our single-family conventional guaranty book of business consists primarily
of single-family conventional mortgage loans underlying Fannie Mae MBS
outstanding. It also includes single-family conventional mortgage loans of
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.
Fannie Mae 2019 Form 10-K 71
--------------------------------------------------------------------------------
MD&A | Single-Family Business
Our average charged guaranty fee on newly acquired conventional single-family
loans, net of TCCA fees, was relatively flat at 47.0 basis points in 2019
compared with 47.2 basis points in 2018.
Single-Family Business Financial Results
For the Year Ended December 31, Variance
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(Dollars in millions)
Net interest income(1) $ 18,013 $ 18,162 $ 18,212 $ (149 ) $ (50 )
Fee and other income 453 450 1,378 3 (928 )
Net revenues 18,466 18,612 19,590 (146 ) (978 )
Investment gains, net 1,589 850 1,352 739 (502 )
Fair value gains (losses), net (2,216 ) 1,210 (1,188 ) (3,426 ) 2,398
Administrative expenses (2,565 ) (2,631 ) (2,391 ) 66 (240 )
Credit-related income(2) 3,515 2,709 1,550 806 1,159
TCCA fees(1) (2,432 ) (2,284 ) (2,096 ) (148 ) (188 )
Other expenses, net(3) (1,661 ) (1,012 ) (1,004 ) (649 ) (8 )
Income before federal income taxes 14,696 17,454 15,813
(2,758 ) 1,641
Provision for federal income taxes (2,859 ) (3,708 ) (14,301 ) 849 10,593
Net income $ 11,837 $ 13,746 $ 1,512 $ (1,909 ) $ 12,234 (1) Reflects the impact of a 10 basis point guaranty fee increase implemented
pursuant to the TCCA, the incremental revenue from which is remitted to
expense is recognized as "TCCA fees."
(2) Consists of the benefit or provision for credit losses and foreclosed
property income or expense.
(3) Consists of credit enhancement and mortgage insurance expenses, debt
extinguishment gains and losses, housing trust fund expenses and loan
subservicing costs.
Net interest income
[[Image Removed: chart-41eaf3db3f3651ebac6a02.jpg]]Single-family net interest income decreased slightly in 2019 compared with 2018, primarily due to a decline in net interest income from portfolios partially offset by an increase in single-family base guaranty fee income. Single-family net interest income decreased in 2018 compared with 2017, primarily due to lower amortization income, partially offset by higher base guaranty fee income.
_____________________________________________________________________________
Investment gains, net
[[Image Removed: chart-e8e74d31f44d5493850a02.jpg]]
Investment gains, net increased during 2019 compared with 2018 primarily driven
by an increase in gains on sales of HFS loans.
Investment gains, net decreased during 2018 compared with 2017 primarily due to
lower gains from the sale of HFS loans driven by a decline in average sales
prices.
_____________________________________________________________________________--------------------------------------------------------------------------------
MD&A | Single-Family Business
Fair value gains (losses), net
[[Image Removed: chart-d64cf4fc7914555786aa02.jpg]]
As we discuss more fully in "Consolidated Results of Operations-Fair Value Gains
(Losses), Net," fair value losses in 2019 were primarily driven by decreases in
the fair value of our pay-fixed risk management derivatives and decreases in the
fair value of our commitments to sell mortgage-related securities as a result of
decreases in interest rates during the year.
Fair value gains in 2018 were primarily driven by increases in the fair value of
our risk management and mortgage commitment derivatives as a result of increases
in interest rates during the year. We also recognized fair value gains on CAS
debt in 2018 as a result of widening spreads between CAS yields and LIBOR during
the year.
As we discuss in "Consolidated Results of Operations-Fair Value Gains (Losses),
Net," we expect that implementing a hedge accounting program will reduce the
volatility of our financial results associated with changes in interest rates,
while fair value gains and losses driven by other factors such as credit spreads
will remain.
_____________________________________________________________________________
Credit-related income
[[Image Removed: chart-1702878eb9a353c09aaa02.jpg]]
Credit-related income in 2019 was primarily driven by the redesignation of
certain single-family loans from HFI to HFS; the result of an enhancement to the
model used to estimate cash flows for individually impaired single-family loans
within our allowance for loan losses, which incorporated recent loan performance
data within the model; and an increase in actual and forecasted home prices.
Credit-related income in 2018 was primarily driven by the redesignation of loans
from HFI to HFS and higher actual home prices, partially offset by higher actual
and projected interest rates.
See "Consolidated Results of Operations-Credit-Related Income" for more
information on our credit-related income.
_____________________________________________________________________________
Other expenses, net
[[Image Removed: chart-7ec19e9e944b4980884a02.jpg]]
Other expenses, net increased in 2019 compared with 2018, primarily due to an
increase in credit enhancement costs resulting from higher outstanding volumes
of loans covered by a credit risk transfer transaction.
_____________________________________________________________________________
Single-Family Mortgage Credit Risk Management
Our strategy for managing single-family mortgage credit risk consists of four
primary components:
• our acquisition and servicing policies along with our underwriting and
servicing standards;
• portfolio diversification and monitoring;
• the transfer of credit risk through risk transfer transactions and the use
of credit enhancements; and
• management of problem loans.
We typically obtain our single-family credit information 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 and we rely on lender representations and warranties regarding the accuracy of the characteristics of loans in our guaranty book of business. See "Risk Factors" for a discussion of the risk that we could
--------------------------------------------------------------------------------
MD&A | Single-Family Business
experience mortgage fraud as a result of this reliance on lender representations
and warranties. 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
Overview
Our Single-Family business, with the oversight of our Enterprise Risk Management
division, is responsible for setting underwriting and servicing standards and
pricing, and managing credit risk relating to our single-family guaranty book of
business.
Underwriting and Servicing Standards
Our Selling Guide sets forth our underwriting and eligibility guidelines, as
well as our policies and procedures related to selling single-family mortgages
to us. Our Servicing Guide sets forth our policies for servicing the
single-family loans in our single-family guaranty book.
Desktop Underwriter
Our proprietary automated underwriting system, Desktop Underwriter ("DU"), is
used by mortgage lenders to evaluate the majority of our single-family loan
acquisitions. DU measures credit risk by assessing the primary risk factors of a
mortgage and provides a comprehensive risk assessment of a borrower's loan
application and eligibility of the loan for sale to us. Risk factors evaluated
by DU include the key loan attributes described under "Single-Family Portfolio
Diversification and Monitoring" below such as borrower credit data, LTV ratio,
loan purpose and occupancy type, as well as other risk factors such as the
borrower's debt-to-income ratio, the amount of the borrower's liquid reserves,
the presence of co-borrowers and whether the borrower is self-employed. DU does
not use a FICO credit score to evaluate the borrower's credit history, but
applies our own assessment of the borrower's credit data, including using
trended credit data when available. DU performs a comprehensive evaluation of
these factors, weighing each factor based on the amount of risk it represents
and its importance to the recommendation. DU analyzes the results of this risk
and eligibility evaluation to arrive at the underwriting recommendation for the
loan case file. As part of our comprehensive risk management approach, we
regularly review DU's underlying risk assessment models and recalibrate these
models to improve DU's ability to effectively analyze risk and avoid excessive
risk layering. Factors we take into account in these evaluations include the
profile of loans delivered to us, loan performance and current market
conditions. We periodically update DU to reflect changes to our underwriting and
eligibility guidelines based on these evaluations.
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 believe this change reduced the proportion of
our loan acquisitions consisting of HomeReady loans in the second half of
2019. HomeReady loans consisted of 6.6% of our single-family conventional
loan acquisitions in 2019, compared with 7.5% in 2018.
• DU eligibility assessment. As part of normal business operations, weregularly 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, weupdated 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 closely monitor loan acquisitions and market conditions and, as appropriate, seek to make changes in our eligibility criteria so that the loans we acquire are consistent with our risk appetite. Other Underwriting Standards DU was used to evaluate over 90% of the single-family loans we acquired in 2019. However, we also purchase and securitize mortgage loans that have been underwritten using other automated underwriting systems, as well as manually underwritten mortgage loans that meet our stated underwriting requirements or meet agreed-upon standards that differ from our standard underwriting and eligibility criteria. The majority of loans we acquired in 2019 that were not underwritten with DU were underwritten through a third-party automated underwriting system, such as Freddie Mac's Loan Product Advisor®. Servicing Policies Our servicing policies establish the requirements our servicers must follow in: • processing and remitting loan payments;
• working with delinquent borrowers on loss mitigation activities;
Fannie Mae 2019 Form 10-K 74
--------------------------------------------------------------------------------
MD&A | Single-Family Business
• managing and protecting
• processing bankruptcies and foreclosures.
Our goal is to ensure that our policies support management of risk over the life of the mortgage loan by enabling default prevention activities, promoting loss mitigation in the event of default and providing for the preservation and protection of the collateral supporting the mortgage loan. See "Single-Family Primary Business Activities-Single-Family Mortgage Servicing" above for more information on the servicing of our single-family mortgage loans. Quality Control Process Our quality control process includes using automated tools to help us determine whether a loan meets our underwriting and eligibility guidelines, performing more in-depth reviews, and selecting random samples of performing loans for quality control review shortly after delivery. Repurchase Requests and Representation and Warranty Framework 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, except as described below, 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. We refer to our demands that mortgage sellers and servicers meet these obligations collectively as repurchase requests. Under our representation and warranty framework, lenders can obtain relief from repurchase liability for violations of certain underwriting representations and warranties. Loans with 36 months of consecutive monthly payments and minimal delinquencies over a specified time period or with satisfactory conclusion of a full-file quality control review are eligible for relief. However, no relief may be granted for violations of "life of loan" representations and warranties, such as those relating to whether a loan was originated in compliance with applicable laws or conforms to our charter requirements. We are able to provide relief from certain loan repurchase requests under our representation and warranty framework because of improvements we made to our quality control process in conjunction with implementing the framework, including moving the primary focus and timing of our loan 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. We implemented our representation and warranty framework discussed above onJanuary 1, 2013 . As ofDecember 31, 2019 , approximately 53% of the outstanding loans in our single-family conventional guaranty book of business that were acquired since that date and are subject to this framework have obtained relief based solely on payment history or the satisfactory conclusion of a full-file quality control review, and an additional 45% remain eligible for relief in the future. In addition, lenders may obtain relief from liability for violations of a more narrow set of representations and warranties through the use of specified underwriting tools. This primarily includes relief for: • borrower income, asset and employment data that has been validated through
DU; and
• appraised property value for appraisals that have received a qualifying
risk score in Collateral Underwriter®, our appraisal review tool.
Fannie Mae 2019 Form 10-K 75
--------------------------------------------------------------------------------
MD&A | Single-Family Business
Single-Family Portfolio Diversification and Monitoring
Overview
The composition of our single-family conventional guaranty book of business is
diversified by product type, loan characteristics and geography, all of which
influence 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.
The profile of our single-family conventional guaranty book of business includes
the following key risk characteristics:
• LTV ratio. LTV ratio is a strong predictor of credit performance. The
likelihood of default and the gross severity of a loss in the event ofdefault are typically lower as the LTV ratio decreases. This also applies
to estimated mark-to-market LTV ratios, particularly those over 100%, as
this indicates that the borrower's mortgage balance exceeds the property
value.
• Product 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, 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.
• Number of units. Mortgages on one-unit properties tend to have lower
credit risk than mortgages on two-, three- or four-unit properties.
• Property 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. Our
underwriting evaluation does not use a credit score directly, but applies
our own assessment of the borrower's credit quality, including using
trended credit data, when available.
• 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 fifth year following
origination; however, this range can vary based on many factors, including
changes in macroeconomic conditions and foreclosure timelines.
Fannie Mae 2019 Form 10-K 76
--------------------------------------------------------------------------------
MD&A | Single-Family Business
The 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 provide additional information on the credit
characteristics of our single-family loans in quarterly financial supplements,
which we furnish 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 Percent of Single-Family
Volume Conventional Guaranty
at Acquisition(2) Book of Business(3)
For the Year Ended December 31, As of December 31,
2019 2018 2017 2019 2018 2017Original LTV ratio:(4) <= 60% 17 % 16 % 18 % 19 % 19 % 20 % 60.01% to 70% 13 12 13 13 13 14 70.01% to 80% 37 37 39 37 38 38 80.01% to 90% 13 13 12 12 12 11 90.01% to 95% 13 15 13 12 11 10 95.01% to 100% 7 7 5 5 4 4 Greater than 100% * * * 2 3 3 Total 100 % 100 % 100 % 100 % 100 % 100 % Weighted average 76 % 77 % 75 % 76 % 75 % 75 % Average loan amount$ 259,897 $ 232,651 $ 226,325 $ 173,804 $ 170,076 $ 166,643 Estimated mark-to-market LTV ratio:(5) <= 60% 54 % 54 % 52 % 60.01% to 70% 17 18 18 70.01% to 80% 16 16 17 80.01% to 90% 8 8 8 90.01% to 100% 5 4 4 Greater than 100% * * 1 Total 100 % 100 % 100 % Weighted average 57 % 57 % 58 % Product type: Fixed-rate:(6) Long-term 89 % 90 % 84 % 85 % 84 % 80 % Intermediate-term 10 8 13 13 14 15 Total fixed-rate 99 98 97 98 98 95 Adjustable-rate 1 2 3 2 2 5 Total 100 % 100 % 100 % 100 % 100 % 100 % Number of property units: 1 unit 98 % 98 % 97 % 97 % 97 % 97 % 2-4 units 2 2 3 3 3 3 Total 100 % 100 % 100 % 100 % 100 % 100 % Property type: Single-family homes 91 % 90 % 90 % 91 % 91 % 91 % Condo/Co-op 9 10 10 9 9 9 Total 100 % 100 % 100 % 100 % 100 % 100 %
--------------------------------------------------------------------------------
MD&A | Single-Family Business
Percent of Single-Family Percent of Single-Family
Conventional Business Volume Conventional Guaranty
at Acquisition(2) Book of Business(3)
For the Year Ended December 31, As of December 31,
2019 2018 2017 2019 2018 2017
Occupancy type:
Primary residence 92 % 89 % 89 % 89 % 89 % 89 %
Second/vacation home 4 5 4 4 4 4
Investor 4 6 7 7 7 7
Total 100 % 100 % 100 % 100 % 100 % 100 %
FICO credit score at
origination:
< 620 * % * % * % 1 % 2 % 2 %
620 to < 660 3 6 5 5 5 5
660 to < 680 4 5 5 5 5 5
680 to < 700 7 9 8 7 7 7
700 to < 740 23 23 23 21 20 20
>= 740 63 57 59 61 61 61
Total 100 % 100 % 100 % 100 % 100 % 100 %
Weighted average 749 743 745 746 746 745
DTI ratio at
origination:(7)
<= 43% 72 % 66 % 77 % 76 % 77 % 79 %
43.01% to 45% 9 9 12 9 9 9
Greater than 45% 19 25 11 15 14 12
Total 100 % 100 % 100 % 100 % 100 % 100 %
Weighted average 36 % 37 % 35 % 35 % 35 % 35 %
Loan purpose:
Purchase 52 % 65 % 56 % 45 % 43 % 39 %
Cash-out refinance 20 22 21 19 20 20
Other refinance 28 13 23 36 37 41
Total 100 % 100 % 100 % 100 % 100 % 100 %
Geographic
concentration:(8)
Midwest 14 % 14 % 14 % 15 % 15 % 15 %
Northeast 13 14 14 17 17 18
Southeast 22 23 23 22 22 22
Southwest 21 21 20 18 18 17
West 30 28 29 28 28 28
Total 100 % 100 % 100 % 100 % 100 % 100 %
Origination year:
2013 and prior 33 % 40 % 48 %
2014 5 6 7
2015 8 10 12
2016 14 16 18
2017 12 15 15
2018 11 13 -
2019 17 - -
Total 100 % 100 % 100 %
* Represents less than 0.5% of single-family conventional business volume or
book of business.
(1) Second-lien mortgage loans held by third parties are not reflected in the
original LTV or 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.
Fannie Mae 2019 Form 10-K 78
--------------------------------------------------------------------------------
MD&A | Single-Family Business
(4) 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.
(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.
(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.
(7) Excludes loans for which this information is not readily available.
(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,
consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX and UT. West consists of AK,
CA, GU, HI, ID,
Characteristics of our New Single-Family Loan Acquisitions The share of our single-family loan acquisitions consisting of refinance loans rather than home purchase loans increased in 2019 compared with 2018, primarily due to a lower interest-rate environment in 2019, which encouraged refinance activity. Typically refinance loans have lower LTV ratios than home purchase loans. This trend contributed to a decrease in the percentage of our single-family loan acquisitions with LTV ratios over 90%-from 22% in 2018 to 20% in 2019. In addition, our acquisitions of loans from first-time home buyers decreased from 27% of our single-family loan acquisitions in 2018 to 23% in 2019. Our share of acquisitions of loans with DTI ratios above 45% decreased in 2019 compared with 2018. This decrease was driven in part by changes in our eligibility guidelines implemented inDecember 2018 andJuly 2019 to further limit risk layering, particularly with respect to loans with DTI ratios above 45%, as well as a higher volume of refinance loan acquisitions. The credit profile of our future acquisitions will depend on many factors, including: • 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, FHA and
• the percentage of loan originations representing refinancings;
• changes in interest rates;
• our future objectives and activities in support of those objectives,
including actions we may take to reach additional underserved creditworthy
borrowers;
• government policy;
• market and competitive conditions;
• the volume and characteristics of high LTV refinance loans we acquire in
the future; and
• our future capital requirements.
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.
We continue to seek new ways to responsibly support access to mortgage credit.
FHFA's 2020 conservatorship scorecard specifies that in 2020 we should support
sustainable homeownership and affordable rental housing, fulfilling our housing
goals and meeting our duty to serve underserved markets through sustainable
mortgage programs and outreach. To the extent we are able to encourage lenders
to support access to mortgage credit, we may acquire a greater number of
single-family loans with higher risk characteristics than we acquired in recent
periods; however, we expect our single-family acquisitions will continue to have
a strong overall credit risk profile given our current underwriting and
eligibility standards and product design.
HARP and Refi Plus Loans
To expand refinancing opportunities for borrowers who may otherwise have been
unable to refinance their mortgage loans due to a decline in home values,
through the end of 2018 we offered our Refi PlusTM initiative. Through Refi
Plus, we also acquired loans under the Home Affordable Refinance Program®
("HARP®"), which allowed Fannie Mae borrowers who had mortgage loans with note
dates prior to June 2009 and current LTV ratios greater than 80% to refinance
their mortgages without obtaining new mortgage insurance in excess of what was
already in place, provided certain other criteria were met.
The loans we acquired under HARP had higher LTV ratios than we would otherwise
permit, greater than 100% in some cases. In addition to the high LTV ratios that
characterize HARP loans, some borrowers for HARP and Refi Plus loans may also
have had lower FICO credit scores and may have provided less documentation than
we would otherwise require.
Because loans we acquired under Refi Plus and HARP represented refinancings of
loans that were already in our guaranty book of business, the credit risk
associated with HARP and Refi Plus loans essentially replaced the credit risk on
the loans that we already held prior to the refinancing. However, we expect
these loans will perform better than the loans they replaced
--------------------------------------------------------------------------------
MD&A | Single-Family Business
because HARP and Refi Plus loans either reduced borrowers' monthly payments or provided more stable terms than the borrowers' old loans. The following table displays key statistics on our HARP loans. Statistics on HARP Loans
As of December 31,
2019 2018
Percentage of single-family conventional guaranty book of business
5 % 6 %
Serious delinquency rate 0.91 % 0.96 %
Estimated mark-to-market LTV ratio 61 % 65 %
Weighted-average FICO credit score at origination 697 700
The HARP program and our Refi Plus initiative ended onDecember 31, 2018 . InDecember 2018 , pursuant to a directive from FHFA, we implemented 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. The new high LTV refinance offering is available for borrowers whose loans were originated on or afterOctober 1, 2017 and who meet other eligibility requirements. Jumbo-Conforming and High-Balance Loans The standard conforming loan limit for a one-unit property was$453,100 for 2018,$484,350 for 2019 and increased to$510,400 for 2020. As we discuss in "Business-Charter Act and Regulation-Charter Act," we are permitted to acquire loans with higher balances in certain areas, which we refer to as jumbo-conforming and high-balance loans. The following table displays the amount of jumbo-conforming and high-balance loans in our single-family conventional guaranty book of business. Single-Family Jumbo-Conforming and High-Balance Loans As of
2019 2018
Unpaid principal balance (in billions)$ 212.0 $ 202.0 Percentage of single-family conventional guaranty book of business 7 % 7 % Reverse Mortgages In 2010, we stopped acquiring newly originated reverse mortgages. The outstanding unpaid principal balance of reverse mortgage loans andFannie Mae MBS backed by reverse mortgage loans in our guaranty book of business was$21.9 billion as ofDecember 31, 2019 and$27.7 billion as ofDecember 31, 2018 . The principal balance of our reverse mortgage loans could increase over time, as each month the scheduled and unscheduled payments, interest, mortgage insurance premium, servicing fee and default-related costs accrue to increase the unpaid principal balance. The majority of these loans are home equity conversion mortgages insured by the federal government through FHA. Mortgage Products with Rate Resets ARMs are mortgage loans with an interest rate that adjusts periodically over the life of the mortgage based on changes in a specified index. We have different types of ARMS including: • Interest-only loans that allow the borrower to pay only the monthly
interest due, and none of the principal, for a fixed term. The majority of
our interest-only loans are ARMs.
• Negative-amortizing loans that allow the borrower to make monthly payments
that are less than the interest actually accrued for the period. The
unpaid interest is added to the principal balance of the loan, which
increases the outstanding loan balance.
ARMs represented approximately 2% of our single-family conventional guaranty
book of business as of December 31, 2019 and 2018.
Rate-reset modifications are mortgage loans we have modified with terms that
include a reduction in the borrowers' interest rate that is fixed for an initial
period and is followed by one or more annual interest rate increases. The
majority of these rate-reset modifications are performing loans that were
modified under the Home Affordable Modification Program ("HAMP®") and have fixed
interest rates for an initial five-year period followed by annual interest rate
increases, of up to 1 percent per year, until the mortgage rate reaches the
prevailing market rate at the time of modification.
--------------------------------------------------------------------------------
MD&A | Single-Family Business
The outstanding unpaid principal balance of rate-reset modifications in our
guaranty book of business was $7.8 billion as of December 31, 2019 . During 2019,
approximately 63% of these modified loans experienced an interest rate reset to
a weighted-average interest rate of 3.48%.
In anticipation of potential financial hardship related to interest rate
increases, we have directed servicers to evaluate rate-reset modifications for a
re-modification, if a loan:
• is at imminent risk of default and the borrower requests a loan
modification; or
• becomes 60 days delinquent within the first 12 months after an interest
rate adjustment.
Additionally, for borrowers with HAMP modifications we extended "pay for
performance" incentives, in the form of principal curtailment, to encourage
borrowers to stay current on their mortgages after the initial interest rate
reset and to reduce their monthly payments in cases where the borrower chooses
to re-amortize their unpaid principal balance following receipt of the
incentive.
The table below displays the unpaid principal balance for ARMs, rate-reset
modifications and fixed-rate interest-only loans in our single-family
conventional guaranty book of business, aggregated by product type and
categorized by the year of their next scheduled contractual reset date. The
contractual reset is either an adjustment to the loan's interest rate or a
scheduled change to the loan's monthly payment to begin to reflect the payment
of principal. The timing of the actual reset dates may differ from those
presented due to a number of factors, including refinancing or exercising of
other provisions within the terms of the mortgage.
Single-Family Adjustable-Rate Mortgage and Rate-Reset Modifications(1)
Reset Year
2020 2021 2022 2023 2024 Thereafter Total
(Dollars in millions)
ARMs-Amortizing $ 17,398 $ 4,144 $ 5,297 $ 4,160 $ 5,579 $ 9,375 $ 45,953
ARMs-Interest-Only and
Negative-Amortizing 8,386 125 264 241 6 - 9,022
Rate-Reset Modifications 4,268 1,022 764 4 1 - 6,059
Fixed-Rate Interest-Only 32 32 13 9 - 1 87
(1) Excludes loans for which there is not an additional reset for the remaining
life of the loan.
We have not observed a materially different performance trend for rate-reset modifications, interest-only loans or negative-amortizing loans that have recently reset as compared to those that are still in the initial period. We believe the current performance trend for interest-only loans and negative-amortizing loans is the result of the historically low interest-rate environment. If interest rates rise significantly, it is uncertain that this trend will continue.Fannie Mae 2019 Form 10-K 81
--------------------------------------------------------------------------------
MD&A | Single-Family Business
Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk
One of the key components of our credit risk management strategy is the transfer
of mortgage credit risk to third parties. The table below displays information
about the 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 discussion of our exposure to and
management of the institutional counterparty credit risk associated with the
providers of these credit enhancements, see "Risk Management-Mortgage Credit
Risk Management-Institutional Counterparty Credit Risk Management" and "Note 13,
Concentrations of Credit Risk."
Single-Family Loans with Credit Enhancement
As of December 31,
2019 2018
Percentage of Percentage of
Single-Family Single-Family
Conventional Conventional
Unpaid Principal Guaranty Book of Unpaid Principal Guaranty Book of
Balance Business Balance Business
(Dollars in billions)
Primary mortgage insurance and other $ 653 22 % $ 618 21 %
Connecticut Avenue Securities 919 31 798 27
CIRT 275 10 243 8
Lender risk-sharing 147 5 102 4
Less: Loans covered by multiple credit
enhancements (438 ) (15 ) (394 ) (13 )
Total single-family loans with credit
enhancement $ 1,556 53 % $ 1,367 47 %
Mortgage Insurance
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% when we acquire it. We generally achieve this through primary mortgage
insurance. Primary mortgage insurance transfers varying portions of the credit
risk associated with a mortgage loan to a third-party insurer. For us to receive
a payment in settlement of a claim under a primary mortgage insurance policy,
the insured loan must be in default and the borrower's interest in the property
securing the loan must have been extinguished, generally in a foreclosure
action. Claims are generally paid three to six months after title to the
property has been transferred.
Credit Risk Transfer Transactions
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 an economic downturn or a stressed
credit environment. We continually evaluate our credit risk transfer
transactions which, in addition to managing our credit risk, also affect our
returns on capital under FHFA's conservatorship capital requirements.
We target over 90% of acquisitions in the following loan categories for credit
risk transfer transactions:
• fixed-rate single-family conventional loans with terms greater than 20
years that meet certain additional, minimum criteria;
• loans that are non-Refi Plus; and
• loans with LTV ratios between 60% and 97%.
This criteria covers over 60% of our recent single-family acquisitions. Loans are generally included in reference pools for CAS and CIRT transactions on a lagged basis. In recent years, we have shortened this lag for a majority of target loans to typically less than six months after we initially acquire the loans. 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. We are also evaluating our seasoned loan portfolio, which includes loans that were initially acquired prior to the start of our CAS and CIRT programs, for inclusion in these transactions. InDecember 2019 we completed our first CAS transaction that transferred credit risk on loans acquired prior to the implementation of our CAS and CIRT programs, including Refi Plus loans. In 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$445 billion at the time of the transactions. As ofDecember 31, 2019 , approximately 46% 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.
--------------------------------------------------------------------------------
MD&A | Single-Family Business
One way we measure risk is through the conservatorship capital framework, under
which our capital requirements associated with our assets are reduced where we
have reduced the risk on those assets. Because loans are generally included in
credit risk transfer transactions on a lagged basis, we measure the impact of
our 2019 credit risk transfer activity by how much it reduced our capital
requirements on loans we acquired in 2018. Our single-family credit risk
transfer transactions and primary mortgage insurance coverage through December
31, 2019 reduced our conservatorship capital requirement for our covered
single-family business activity during the twelve months ended December 31, 2018
by over 80%. See "Business-Charter Act and Regulation-GSE Act and Other
Legislation-Capital " for more information on our capital requirements.
Categories of our credit risk transfer transactions
Transaction Description Other Key Characteristics
CAS • We transfer to investors a • The principal balance of CAS debt
portion of the mortgage credit decreases as a result of credit
risk associated with losses on a losses on loans in the related
reference pool of mortgage loans. reference pool. These write downs of
• We create a reference pool the principal balance reduce the
consisting of recently acquired total amount of payments we are
single-family mortgage loans obligated to make to investors on
included in our guaranty book of the CAS debt.
business and create a • Credit losses on the loans in thehypothetical securitization reference pool for a CAS transaction
structure with notional credit are first applied to reduce the
risk positions, or tranches (that outstanding principal balance of the
is, first loss, mezzanine and first loss tranche.
senior). • If credit losses on these loans• CAS debt is issued related to exceed the outstanding principal
the first loss, mezzanine and balance of the first loss tranche,
senior loss mezzanine risk losses would then be applied to
positions. reduce the outstanding principal
• We retain the senior loss and balance of the mezzanine loss
all or a portion of the first tranche.
loss tranche in CAS transactions. • Generally issued with a stated
In addition, we retain a pro rata final maturity date of either 10 or
share of risk equal to 12.5 years from issuance.approximately 5% of all notes • After maturity, CAS debt provides
sold in mezzanine tranches. no further credit protection with
• CAS debt is recognized as "debt respect to the remaining loans in
of Fannie Mae " in our the reference pool underlying that
consolidated balance sheets. CAS CAS transaction.
debt issued to investors • Significant lag exists between the
beginning
October 2018 is recognized at for credit losses and when we amortized cost. CAS debt we recognize the related recovery from issued prior to 2016 is the CAS transaction.
recognized at fair value. • Presents minimal counterparty risk
as we receive the proceeds that
• We stopped issuing this form of would reimburse us for certain
CAS in October 2018 . credit events on the related loans
upon the issuance of the CAS.CAS REMIC CAS REMIC® transactions are CAS REMICs have characteristics
similar to CAS transactions, with similar to CAS, with some key
some key differences: differences:
•
structured as notes that qualify real estate investment trusts and
as interests in a REMIC issued by certain international investors.
a non-consolidated trust. We • Aligns the timing of our
obtain credit protection through recognition of credit losses with
arrangements that we execute with the related recovery from CAS REMIC
the trust. transactions. We will continue to
• We recognize the cost of credit record the expected benefit and the
protection in "Other expenses, loss in the same period with our
net" in our consolidated adoption of the CECL standard in
statements of operations and January 2020 .
comprehensive income. • Beginning with our July 2019
issuances: extended the stated final
maturity date from 12.5 to 20 years
from issuance, shortened the call
option from 10 years to 7 years; and
retained a smaller first loss
position. These updates were
primarily designed to further reduce
the capital requirements associated
with loans in the reference pool
under FHFA's conservatorship capital
framework.
• Presents minimal counterparty risk
as the CAS structure receives the
proceeds that would reimburse us for
certain credit events on the related
loans upon the issuance of the CAS
REMIC.
Fannie Mae 2019 Form 10-K 83
--------------------------------------------------------------------------------
MD&A | Single-Family Business
Transaction Description Other KeyCharacteristics
CAS CAS CLN transactions are similar • CAS CLNs do not provide as broad Credit-linked toCAS REMIC transactions, with of a range of investor participation notes ("CLN") some key differences: as CAS REMICs. • InDecember 2019 we began offering CAS CLNs in addition to CAS REMICs. CAS CLNs allow us to obtain credit protection on reference pools containing seasoned loans such as Refi Plus loans. • Since the loans used in our CAS CLNs were not tagged for use in a REMIC transaction at the time of acquisition, CAS CLNs do not qualify as interests in a REMIC. We began taking a REMIC election on the majority of single-family loans beginningMay 2018 . CIRT • Insurance transactions whereby • The insurance layer typically we obtain actual loss coverage on provides coverage for
losses on the
pools of loans either directly pool that are likely to occur only
from an insurance provider that in a stressed economic environment.
retains the risk, or from an • Insurance benefits are received
insurance provider that after the underlying property has
simultaneously cedes all of its been liquidated and all applicable
risk to one or more reinsurers. proceeds, including private mortgage
• In CIRT deals, we generally insurance benefits, have been
retain an initial portion of applied to the loss.
losses on the loans in the pool • A portion of theinsurers' or
(for example the first 0.4% of reinsurers' obligations is
the initial pool unpaid principal collateralized withhighly-rated
balance). Reinsurers cover losses liquid assets held in a trust
above this retention amount up to account initiallydetermined
a detachment point (for example according to the ratings of such
the next 3.0% of the initial pool insurer or reinsurer. Contractual
unpaid principal balance). We provisions requireadditional
retain all losses above this collateral to be posted in the event
detachment point. of adverse developments with the
• We make premium payments on counterparty, such as a ratings
CIRT deals that we recognize in downgrade.
"Other expenses, net" in our • Generally written for 10- or
consolidated statements of 12-1/2 year terms.
operations and comprehensive
income.
Lender • Customized lender risk-sharing • Transactions are generally risk-sharing transactions.
structured so that a portion of the
• In most transactions, lenders credit risk on the underlying
invest directly in a portion of mortgage loans is shared without
the credit risk on mortgage loans increasing our counterparty
they originate and/or service. exposure.
Fannie Mae 2019 Form 10-K 84
--------------------------------------------------------------------------------
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 December 31, 2019
(Dollars in billions)
Senior Fannie Mae (1)
$1,961
Initial
Lender Reference
[[Image Removed: crtarrowsa05.jpg]] Mezzanine
CIRT(2)(3) CAS(2) Risk-Sharing(2)(4) Pool(5)
$2 $10 $39 $4 $2,033
Lender
First Loss Fannie Mae(1) CAS(2)(6) Risk-Sharing(2)(4)
$9 $5 $3
Outstanding as of December 31, 2019
(Dollars in billions)
Senior Fannie Mae(1)
$1,326
Outstanding
Lender Reference
[[Image Removed: crtarrowsa04.jpg]] Mezzanine
CIRT(2)(3) CAS(2) Risk-Sharing(2)(4) Pool(5)(7)
$1 $8 $24 $4 $1,380
Lender
First Loss Fannie Mae(1) CAS(2)(6) Risk-Sharing(2)(4)
$9 $5 $3 (1) Credit risk retained by
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
$3 billion outstanding as ofDecember 31, 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
as of
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 a portion 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 in mezzanine tranches. We have designed our credit risk transfer transactions so that the principal payment and loss performance of the transactions correspond to the performance of the loans in the underlying reference pools. Losses are applied in reverse sequential order starting with the first loss tranche. Principal repayments may be allocated to reduce the mezzanine amounts outstanding;
--------------------------------------------------------------------------------
MD&A | Single-Family Business
however, these payments may be subject to certain lock-out periods and
performance triggers in order to build additional credit protection for the
senior tranches retained by us. For CAS transactions, all principal payments and
losses assigned to the mezzanine tranches are allocated pro rata between the
sold notes and the portion we retain, when performance is above a certain
threshold. We have recognized minimal credit losses on the loans in reference
pools underlying credit risk transfer transactions to date, primarily because
the loans were acquired in recent years, after we implemented improvements in
our credit underwriting practices, and because recent macroeconomic factors such
as unemployment rates and home prices have been favorable.
The decreases in outstanding balances from issuance to December 31, 2019 in the
senior and mezzanine tranches are the result of paydowns. Outstanding balances
from issuance to December 31, 2019 in the first loss tranches decreased only
slightly as the losses allocated to those tranches were insignificant.
The table below displays the approximate cash paid or transferred to investors
for these credit risk transfer transactions. The cash represents the portion of
guaranty fee paid to investors as compensation for taking on a share of the
credit risk. 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 Year Ended December 31,
2019 2018
Cash paid or transferred for: (Dollars in millions)
CAS transactions(1) $ 981 $ 888
CIRT transactions 360 286
Lender risk-sharing transactions 285 141
(1) Consists of cash paid for interest expense net of LIBOR on outstanding CAS
debt and amounts paid for CAS REMIC and CAS CLN transactions.
We continually evaluate loans in our single-family guaranty book of business
without credit enhancement to determine whether it makes economic sense to
include them in a future CAS or CIRT transaction. The following table displays
the primary characteristics of the loans in our single-family conventional
guaranty book of business currently without credit enhancement.
Single-Family Loans Currently without Credit Enhancement
As of December 31, 2019
Percentage of
Single-Family
Conventional
Guaranty Book of
Unpaid Principal Balance Business
(Dollars in billions)
Low LTV ratio or short-term(1) $ 736 25 %
Pre-credit risk transfer program inception(2) 608 20
Recently acquired(3) 287 10
Other(4) 246 8
Less: Loans in multiple categories (481 ) (16 )
Total single-family loans currently without credit enhancement
$ 1,396 47 %
(1) Represents loans with an LTV ratio less than or equal to 60% or loans with
an original maturity of 20 years or less.
(2) Represents loans that were acquired before the inception of our credit risk
transfer programs. Also includes Refi Plus loans.
(3) Represents loans that were recently acquired and have yet to be included in
a reference pool.
(4) Includes ARM loans, loans with a combined LTV ratio greater than 97%,non-Refi Plus loans acquired after the inception of our credit risk transfer
programs that became 30 or more days delinquent prior to inclusion in a
credit risk transfer transaction, and loans that were delinquent as of
December 31, 2019 .
Problem Loan Management
Overview
Our problem loan management strategies are primarily focused on reducing
defaults to avoid losses that would otherwise occur and pursuing foreclosure
alternatives to mitigate the severity of the losses we incur. If a borrower does
not make
Fannie Mae 2019 Form 10-K 86
--------------------------------------------------------------------------------
MD&A | Single-Family Business
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. When appropriate, we seek to move
to foreclosure expeditiously.
Below we describe the following:
• delinquency statistics on our problem loans;
• efforts undertaken to manage our problem loans, including the role of
servicers in loss mitigation, loan workouts, and sales of nonperforming
loans;
• metrics regarding our loan workout activities;
• REO management; and
• other single-family credit-related information, including our credit loss
performance and credit loss concentration metrics, loss reserves and TDRs
resulting from loan modifications.
Delinquency
The table below displays the delinquency status 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. Single-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 December 31,
2019 2018 2017
Delinquency status:
30 to 59 days delinquent 1.27 % 1.37 % 1.63 %
60 to 89 days delinquent 0.35 0.38 0.50
Seriously delinquent ("SDQ") 0.66 0.76 1.24 Percentage of SDQ loans that have been delinquent for more than 180 days
49 % 49 % 43 %
Percentage of SDQ loans that have been delinquent for
more than two years 11 12 13
For the Year Ended December 31,
2019 2018 2017
Single-family SDQ loans (number of loans):
Beginning balance 130,440 212,183 206,549
Additions 199,995 227,199 287,805
Removals:Modifications and other loan workouts (44,853 ) (99,140 ) (76,119 ) Liquidations and sales
(55,472 ) (79,105 ) (84,512 )
Cured or less than 90 days delinquent (117,676 ) (130,697 ) (121,540 )
Total removals (218,001 ) (308,942 ) (282,171 )
Ending balance 112,434 130,440 212,183
Our single-family serious delinquency rate decreased in 2019 primarily driven by
improved loan payment performance and the sale of nonperforming loans. Our
single-family serious delinquency rate was higher in 2017 due to the impact of
the 2017 hurricanes, but resumed its prior downward trend in 2018 because many
delinquent borrowers in the affected areas resolved their loan delinquencies by
obtaining loan modifications or through resuming payments and becoming current
on their loans.
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 states. Other factors that
affect our single-family serious delinquency rate include:
• the pace and effectiveness of loan modifications and other workouts;
• the timing and volume of nonperforming loan sales we make;
• natural disasters; • servicer performance; and
• changes in home prices, unemployment levels and other macroeconomic
conditions.
Fannie Mae 2019 Form 10-K 87
--------------------------------------------------------------------------------
MD&A | Single-Family Business
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
December 31, 2019 , but constituted 33% of our seriously delinquent single-family
loans as of December 31, 2019 and drove 61% of our 2019 single-family credit
losses. 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.
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 amounts present 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. We
also include information for our loans in California because the state accounts
for a large share of our single-family conventional guaranty book of business.
The reported categories are not mutually exclusive.
Single-Family Conventional Seriously Delinquent Loan Concentration Analysis
As of December 31,
2019 2018
Percentage of Percentage of
Percentage of Seriously Serious Percentage of Seriously Serious
Book Delinquent Delinquency Book Delinquent Delinquency
Outstanding Loans(1) Rate Outstanding Loans(1) Rate
States:
California 19 % 6 % 0.32 % 19 % 6 % 0.34 %
Florida 6 8 0.84 6 10 1.16
Illinois 4 6 0.91 4 5 0.98
New Jersey 3 5 1.13 4 5 1.38
New York 5 8 1.18 5 8 1.40
All other states 63 67 0.64 62 66 0.73
Product type:
Alt-A(2) 2 9 2.95 2 11 3.35
Vintages:
2004 and prior 2 20 2.48 3 23 2.69
2005-2008 4 33 4.11 5 39 4.61
2009-2019 94 47 0.35 92 38 0.34
Estimated mark-to-market LTV
ratio:
<= 60% 54 52 0.53 54 48 0.58
60.01% to 70% 17 17 0.80 18 17 0.87
70.01% to 80% 16 14 0.75 16 14 0.90
80.01% to 90% 8 9 1.00 8 10 1.24
90.01% to 100% 5 4 0.86 4 5 1.33
Greater than 100% * 4 10.14 * 6 9.85
Credit enhanced:(3)
Primary MI & other(4) 22 26 0.96 21 26 1.11
Credit risk transfer(5) 45 16 0.27 39 10 0.24
Non-credit enhanced 47 66 0.79 53 69 0.85
* 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 "Glossary
of Terms Used in this Report."
(3) The credit-enhanced categories are not mutually exclusive. A loan withprimary 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
--------------------------------------------------------------------------------
MD&A | Single-Family Business
(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 transfertransactions, including loans in these transactions that are also covered by
primary mortgage insurance. For CAS and some lender risk-sharing
transactions, this represents outstanding unpaid principal balance of the
underlying loans on the single-family mortgage credit book, not theoutstanding reference pool, as of the specified date. Loans included in our
credit risk transfer transactions have all been acquired since 2009.
Role of Servicers in Loss Mitigation
The efforts of our mortgage servicers are critical in keeping people in their
homes and preventing foreclosures. We maintain standards for mortgage servicers
regarding the management of delinquent loans, default prevention, and
foreclosure time frames. These standards, reinforced by incentives and
compensatory fees, require servicers to take a consistent approach to homeowner
communications, loan modifications and other workouts, and when necessary,
foreclosures.
Loan Workout Metrics
Our loan workouts reflect:
• home retention solutions, including loan modifications, repayment plans
and forbearances; and
• foreclosure alternatives, including short sales and deeds-in-lieu of
foreclosure.
We work with our servicers to implement our home retention solution and
foreclosure alternative initiatives, and we emphasize the importance of early
contact with borrowers and early entry into a home retention solution. We
require that servicers first evaluate borrowers for eligibility under a workout
option before considering foreclosure. The existence of a second lien may limit
our ability to provide borrowers with loan workout options, particularly those
that are part of our foreclosure prevention efforts; however, we are not
required to contact a second lien holder to obtain their approval prior to
providing a borrower with a loan modification.
Home Retention Solutions
Loan modifications account for a significant majority of our home retention
solutions. Characteristics of our loan modifications may include:
• changes to the original mortgage terms such as product type, interest
rate, amortization term, maturity date and/or unpaid principal balance;
• collection of less than the contractual amount due under the original loan; or
• receiving the full amount due, or certain installments due, under the loan
over a period of time that is longer than the period of time originally
provided for under the terms of the loan.
Our primary loan modification program is currently the Flex Modification program, which offers payment relief for eligible borrowers, allowing forbearances of principal to an 80% mark-to-market LTV ratio, and targeting a 20% payment reduction. Approximately 32% of our modified loans that are performing included a reduction in the borrower's interest rate that was fixed for an initial period and subject to one or more annual interest rate increases thereafter. See "Single-Family Portfolio Diversification and Monitoring-Mortgage Products with Rate Resets" for information on the timing of these interest rate resets. We also offer forbearance for homeowners experiencing temporary hardship, like natural disasters and unemployment, to avoid delinquency and stay in their homes. Foreclosure Alternatives We continue to focus on foreclosure alternatives for borrowers who are unable to retain their homes. Foreclosure alternatives may be more appropriate if the borrower has experienced a significant adverse change in financial condition due to events such as long-term unemployment or reduced income, divorce, or unexpected issues like medical bills, and is therefore no longer able to make the required mortgage payments. To avoid foreclosure and satisfy the first-lien mortgage obligation, our servicers work with a borrower to: • accept a deed-in-lieu of foreclosure, whereby the borrower voluntarily
signs over the title to their property to the servicer, or
• sell the home prior to foreclosure in a short sale, whereby the borrower
sells the home for less than the full amount owed to
mortgage loan.
These alternatives are designed to reduce our credit losses while helping borrowers avoid having to go through a foreclosure. We work to obtain the highest price possible for the properties sold in short sales.
--------------------------------------------------------------------------------
MD&A | Single-Family Business
The chart below displays the unpaid principal balance of our completed single-family loan workouts by type, as well as the number of loan workouts.
Loan Workout Activity
(Dollars in billions)
[[Image Removed: chart-1b67732cad0855e7bf9a02.jpg]]
(1) Consists of loan modifications and completed repayment plans andforbearances. 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 18,400 loans in a
trial modification period as of
(2) Consists of short sales and deeds-in-lieu of foreclosure.
The decrease in home retention solutions in 2019 compared with 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.
The table below displays the percentage of our single-family closed loan
modifications completed during 2018 and 2017 that were current or paid off one
year after modification and, for modifications completed during 2017, two years
after modification.
Percentage of Single-Family Closed Loan Modifications That Were Current or Paid Off at One and Two Years Post-Modification
2018 2017
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
One Year Post-Modification 72 % 79 % 78 % 64 % 61 % 63 % 65 % 64 %
Two Years Post-Modification 72 71 69 70 Fannie Mae 2019 Form 10-K 90
--------------------------------------------------------------------------------
MD&A | Single-Family Business
Nonperforming Loan Sales
We also undertake efforts to manage our problem loans by selling our
nonperforming loans. This problem loan management strategy is intended to reduce
the number of seriously-delinquent loans, to stabilize neighborhoods and to
reduce the severity of losses incurred on these loans. During 2019, we sold
approximately 7,800 nonperforming loans with an aggregate unpaid principal
balance of $1.4 billion .
REO Management
If a loan defaults, we acquire the home through foreclosure or a deed-in-lieu of
foreclosure. The table below displays our foreclosure activity by region.
Regional REO acquisition trends generally follow a pattern that is similar to,
but lags, that of regional delinquency trends.
Single-Family REO Properties
For the Year Ended December 31,
2019 2018 2017 Single-family REO properties (number of properties): Beginning of period inventory of single-family REO properties(1)
20,156 26,311 38,093
Acquisitions by geographic area:(2)
Midwest 4,881 6,107 8,478
Northeast 4,867 6,460 9,453
Southeast 6,360 7,814 10,860
Southwest 2,892 3,713 5,133
West 1,667 2,001 2,691
Total REO acquisitions (1) 20,667 26,095 36,615
Dispositions of REO (23,322 ) (32,250 ) (48,397 )
End of period inventory of single-family REO
properties(1) 17,501 20,156 26,311
Carrying value of single-family REO properties
(dollars in millions) $ 2,290 $ 2,503 $ 3,112
Single-family foreclosure rate(3) 0.12 % 0.15 % 0.21 %
REO net sales prices to unpaid principal balance(4) 78 % 77 % 75 %
Short sales net sales price to unpaid principal
balance(5) 78 % 77 % 75 %
(1) Includes acquisitions through foreclosure and deeds-in-lieu of foreclosure.
Also includes held for use properties, which are reported in our
consolidated balance sheets as a component of "Other assets."
(2) See footnote 8 to the "Key Risk Characteristics of Single-FamilyConventional Business Volume and Guaranty Book of Business" table for states
included in each geographic region.
(3) Reflects the total number of properties acquired through foreclosure ordeeds-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 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 theaggregate unpaid principal balance of the related loans. Net sales price
includes borrower relocation incentive payments and subordinate lien(s)
negotiated payoffs.
The decrease in single-family REO properties in 2019 compared with 2018 and 2017 was primarily due to a reduction in REO acquisitions from serious delinquencies aged greater than 180 days, driven by improved loan performance and the continued sale of nonperforming loans in 2018 and 2019. We market and sell the majority of our foreclosed properties through local real estate professionals. Our primary objectives are both to minimize the severity of loss toFannie Mae by maximizing sales prices and to stabilize neighborhoods by preventing empty homes from depressing home values. In some cases, we use alternative methods of disposition, including selling homes to municipalities, other public entities or non-profit organizations, and selling properties through public auctions. In some cases, we engage in third party sales at foreclosure, which allow us to avoid maintenance and other REO expenses we would have incurred had we acquired the property.Fannie Mae 2019 Form 10-K 91
--------------------------------------------------------------------------------
MD&A | Single-Family Business
As shown in the chart below, a significant portion of our REO properties are
unable to be marketed at any given time because the properties are occupied,
under repair, or are subject to state or local redemption or confirmation
periods, which delays the marketing and disposition of these properties.
[[Image Removed: chart-467c02db042455a88f6a02.jpg]]
Other Single-Family Credit Information
Single-Family Credit Loss Performance and Credit Loss Concentration Metrics
The amount of credit income or losses 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 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 conventional
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 Year Ended December 31,
2019 2018 2017
Amount Ratio(1) Amount Ratio(1) Amount Ratio(1)
(Dollars in millions)
Charge-offs, net of recoveries $ (1,196 ) 4.1 bps $ (1,853 ) 6.4 bps $ (2,423 ) 8.3 bps
Foreclosed property expense (523 ) 1.8 (604 ) 2.1 (540 ) 1.9
Credit losses and credit loss
ratio $ (1,719 ) 5.9 bps $ (2,457 ) 8.5 bps $ (2,963 ) 10.2 bps
Single-family initial charge-off
severity rate(2) 7.7 % 11.0 % 15.3 %
(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 the charge-off of loans upon redesignation from HFI to HFS or anygains 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 2019 compared with 2018, primarily driven by lower charge-off expenses on lower volumes of reperforming and nonperforming loan redesignations and continued home price appreciation.Fannie Mae 2019 Form 10-K 92
--------------------------------------------------------------------------------
MD&A | Single-Family Business
Our single-family initial charge-off severity rate declined in 2019 compared
with 2018 primarily due to lower LTV ratios on charged-off loans driven by
continued home price appreciation.
The table below displays concentrations of our single-family credit losses based
on geography, credit characteristics and loan vintages.
Single-Family Credit Loss Concentration Analysis
Percentage of Single-Family
Conventional Guaranty
Book of Business Percentage of Single-Family
Outstanding(1) Credit Losses(2)
As of December 31, As of December 31,
2019 2018 2019 2018
Geographical distribution:
California 19% 19% 9 % 11%
Florida 6 6 12 12
Illinois 4 4 10 10
New Jersey 3 4 10 10
New York 5 5 9 8
All other states 63 62 50 49
Select higher-risk products:
Alt-A loans 2 2 17 22
Vintages:(3)
2004 and prior 2 3 12 14
2005 - 2008 4 5 61 66
2009 - 2019 94 92 27 20
(1) 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.
(2) Excludes the impact of recoveries resulting from resolution agreementsrelated to representation and warranty matters and compensatory fee income
related to servicing matters that have not been allocated to specific loans.
(3) 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.
The majority of our credit losses in 2019 continued to be driven by loans originated in 2005 through 2008. However, these loans accounted for the majority of the decrease in our credit losses in 2018 compared with 2019. As a result, the percentage of overall credit losses driven by loans originated in more recent years increased, to 27% in 2019 from 20% in 2018, even as the amount of credit losses from these loans decreased.Fannie Mae 2019 Form 10-K 93
--------------------------------------------------------------------------------
MD&A | Single-Family Business
Single-Family Loss Reserves
Our single-family loss reserves, which includes 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 Year Ended December 31,
2019 2018 2017 2016 2015
(Dollars in millions)
Changes in loss reserves:
Beginning balance $ (14,007 ) $ (19,155 ) $ (23,639 ) $ (28,325 ) $ (36,383 )
Benefit for credit losses 4,038 3,313 2,090 2,092 688
Charge-offs(1) 1,313 2,176 2,868 3,323 9,822
Recoveries (117 ) (323 ) (445 ) (638 ) (1,256 )
Other (6 ) (18 ) (29 ) (91 ) (1,196 )
Ending balance $ (8,779 ) $ (14,007 ) $ (19,155 ) $ (23,639 ) $ (28,325 )
Loss reserves as a percentage of
single-family:
Guaranty book of business 0.30 % 0.49 % 0.65 % 0.83 % 1.00 %
Recorded investment in nonaccrual loans 30.58 44.24 40.80 53.67 58.02
Certain higher risk loan categories as a
percentage of single-family loss
reserves:
2005-2008 loan vintages 72 % 76 % 78 % 81 % 81 %
Alt-A loans 21 20 22 23 23
(1) Our charge-offs for 2015 include
associated with our adoption of the charge-off provisions of the Advisory
Bulletin, as well as $1.1 billion of charge-offs relating to a change in
accounting policy for nonaccrual loans.
Troubled Debt Restructurings
We modify loans as part of our home retention strategy. The majority of these
loans, including trial modifications and loans to certain borrowers who received
bankruptcy relief, are classified as TDRs. Such TDRs and other single-family
loans that have been individually evaluated for impairment generally have a
higher associated loan loss reserve than loans that have been collectively
evaluated for impairment. The table below displays the unpaid principal balance
of single-family HFI loans classified as TDRs.
Single-Family TDR Activity on HFI Loans
For the Year Ended December 31,
2019 2018 2017
(Dollars in millions)
Beginning balance $ 123,951 $ 143,843 $ 165,960
New TDRs 8,319 14,867 9,847
Foreclosures(1) (1,794 ) (2,446 ) (3,519 )Payoffs and other reductions (28,538 ) (32,313 ) (28,445 ) Ending balance
$ 101,938 $ 123,951 $ 143,843
(1) Consists of foreclosures, deeds-in-lieu of foreclosure, short sales and
third-party sales.
The decrease in new TDRs in 2019 compared with 2018 was primarily driven by improved loan performance and a decrease in the volume of modifications and other forms of loss mitigation which were elevated in 2018 due to the number of borrowers affected by hurricanes in 2017. In addition, we had single-family HFS loans classified as TDRs with an unpaid principal balance of$2.0 billion as ofDecember 31, 2019 ,$2.1 billion as ofDecember 31, 2018 and$2.6 billion as ofDecember 31, 2017 .
--------------------------------------------------------------------------------
MD&A | Single-Family Business
The tables below display the single-family loans classified as TDRs that were on
accrual status and single-family loans on nonaccrual status. The tables include
the recorded investment in our single-family HFI and HFS mortgage loans, as well
as interest income forgone and recognized for on-balance sheet TDRs on accrual
status and nonaccrual loans. For information on the impact of TDRs and other
individually impaired loans on our allowance for loan losses, see "Note 3,
Mortgage Loans." For information related to our accounting policy for nonaccrual
loans, see "Note 1, Summary of Significant Accounting Policies."
Single-Family TDRs on Accrual Status and Nonaccrual Loans
As of December 31,
2019 2018 2017 2016 2015
(Dollars in millions)
TDRs on accrual status $ 81,634 $ 98,320 $ 110,043 $ 127,353 $ 140,588
Nonaccrual loans 28,708 31,658 46,945 44,047 48,821
Total TDRs on accrual status and
nonaccrual loans $ 110,342 $ 129,978 $ 156,988 $ 171,400 $ 189,409
Accruing on-balance sheet loans past due
90 days or more(1) $ 191 $ 228 $ 353 $ 402 $ 499
For the Year Ended December 31,
2019 2018 2017 2016 2015
(Dollars in millions)
Interest related to on-balance sheet
TDRs on accrual status and nonaccrual
loans:
Interest income forgone(2) $ 1,524 $ 2,000 $ 3,009 $ 4,102 $ 5,193
Interest income recognized(3) 4,513 5,292 5,705 5,996 6,493
(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
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 Multifamily Primary Business Activities Providing Liquidity for Multifamily Mortgage Loans 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. Our Multifamily business works with our lender customers to provide funds to the mortgage market primarily by securitizing multifamily mortgage loans acquired from these lenders into Fannie Mae MBS, which are sold to investors or dealers. We also purchase multifamily mortgage loans and provide credit enhancement for bonds issued by state and local housing finance authorities to finance multifamily housing. Our Multifamily business also supports liquidity in the mortgage market through other activities, such as issuing structured MBS backed byFannie Mae multifamily MBS and buying and selling multifamily agency mortgage-backed securities. We also continue to invest in LIHTC projects to help support and preserve the supply of affordable housing. Key Characteristics of the Multifamily Business The Multifamily business has a number of key characteristics that distinguish it from our Single-Family business. • Collateral: Multifamily loans are collateralized by properties that
generate cash flows and effectively operate as businesses, such as garden
and high-rise apartment complexes, seniors housing communities,
cooperatives, dedicated student housing and manufactured housing
communities.
• Borrowers and sponsors: Multifamily borrowers are entities that are
typically owned, directly or indirectly, by for-profit corporations,limited liability companies, partnerships, real estate investment trusts
and individuals who invest in real estate for cash flow and expected
returns in excess of their original contribution of equity. Borrowers are
typically single-asset entities, with the property as their only asset.
The ultimate owners of a multifamily borrower are referred to as the
borrower's "sponsors." We evaluate both the borrowing entity and its
sponsor when considering a new
Fannie Mae 2019 Form 10-K 95
--------------------------------------------------------------------------------
MD&A | Multifamily Business
transaction or managing our business. In this report, we refer to both the borrowing entities and their sponsors as "borrowers." When considering a multifamily borrower, creditworthiness is evaluated through a combination of quantitative and qualitative data including liquid assets, net worth, number of units owned, experience in a market and/or property type, multifamily portfolio performance, access to additional liquidity, debt maturities, asset/property management platform, senior management experience, reputation, and exposures to lenders andFannie Mae . • Recourse: Multifamily loans are generally non-recourse to the borrowers.
• Lenders: During 2019, we executed multifamily transactions with 30
lenders. Of these, 25 lenders delivered loans to us under our DUS program
described below. In determining whether to partner with a multifamily
lender, we consider the lender's financial strength, multifamily
underwriting and servicing experience, portfolio performance and
willingness and ability to share in the risk of loss associated with the
multifamily loans they originate.
• Loan size: The average size of a loan in our multifamily guaranty book of
business is
• Underwriting process: Multifamily loans require detailed underwriting of
the property's operating cash flow. Our underwriting includes an
evaluation of the property's ability to support the loan, property
quality, market and submarket factors, and ability to exit at maturity.
• Term and lifecycle: In contrast to the standard 30-year single-family
residential loan, multifamily loans typically have terms of 5, 7 or 10
years, with balloon payments due at maturity.
• Prepayment terms: To protect against prepayments, most multifamily Fannie
Mae loans and MBS impose prepayment premiums, primarily yield maintenance,
consistent with standard commercial investment terms. This is in contrast
to single-family loans, which typically do not have prepayment protection.
Delegated Underwriting and ServicingFannie Mae's DUS program, which was initiated in 1988, is a unique business model in the commercial mortgage industry. Our DUS model aligns the interests of the lender andFannie Mae . Our current 25-member DUS lender network, which is comprised of large financial institutions and independent mortgage lenders, continues to be our principal source of multifamily loan deliveries. DUS lenders are pre-approved and delegated the authority to underwrite and service loans on behalf ofFannie Mae in accordance with our standards and requirements. Delegation permits lenders to respond to customers more rapidly, as the lender generally has the authority to approve a loan within prescribed parameters. Based on a given loan's unique characteristics andFannie Mae's pre-published delegation criteria, lenders assess whether a loan must be reviewed byFannie Mae . If review is required,Fannie Mae's internal credit team will assess the loan's risk profile to determine if it meets our risk tolerances. DUS lenders are required to share with us the risk of loss over the life of the loan, as discussed in more detail in "Multifamily Mortgage Credit Risk Management." Since DUS lenders share in the credit risk, the servicing fee to the lenders includes compensation for credit risk. Multifamily Mortgage Servicing Multifamily mortgage servicing is typically performed by the lenders who sell mortgages to us. Because of our loss-sharing arrangements with our multifamily lenders, transfers of multifamily servicing rights are infrequent, and we monitor our servicing relationships and enforce our right to approve servicing transfers. As a seller-servicer, the lender is responsible for ongoing evaluation of the financial condition of properties and property owners, administering various types of loan and property-level agreements (including agreements covering replacement reserves, completion or repair, and operations and maintenance), as well as conducting routine property inspections. Multifamily Credit Risk and Credit Loss Management Our Multifamily business: • Prices and manages the credit risk on loans in our multifamily guaranty book of business. Lenders retain a portion of the credit risk in most multifamily transactions.
• Enters into transactions that transfer an additional portion of Fannie
Mae's credit risk on some of the loans in our multifamily guaranty book of
business through our back-end credit risk transfer transactions.
• Works to maintain the credit quality of the multifamily book of business,
prevent foreclosures, reduce costs of defaulted multifamily loans, manage
our REO inventory, and pursue contractual remedies from lenders,
servicers, borrowers, and providers of credit enhancement.
See "Multifamily Mortgage Credit Risk Management" for discussion of our strategies for managing credit risk and credit losses on multifamily loans. The Multifamily Markets in Which We Operate In the multifamily mortgage market, we aim to address the rental housing needs of a wide range of the population in all markets across the country, with the substantial majority of our focus on supporting rental housing that is affordable to families earning at or below the median income in their area. We serve the market steadily, rather than moving in and out depending
--------------------------------------------------------------------------------
MD&A | Multifamily Business
on market conditions. 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 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. Our Multifamily business is organized and operated as an integrated commercial real estate finance business, addressing the spectrum of multifamily housing finance needs, including the need for smaller multifamily property financing and financing that serves low- and very low-income households. • To meet the growing need for smaller multifamily property financing, we
focus on the acquisition of small multifamily loans. Through
we focused on loans of up to
In February 2019 , we expanded our parameters for small multifamily loans
to cover loans of up to $6 million in any area. As of December 31, 2019 ,small loans represented 48% of our multifamily guaranty book of business
by loan count and 8% based on unpaid principal balance.
• To serve low- and very low-income households, we have a team that focuses
exclusively on relationships with lenders financing privately-owned
multifamily properties that receive public subsidies in exchange for
maintaining long-term affordable rents. We enable borrowers to leverage
housing programs and subsidies provided by local, state and federal
agencies. These public subsidy programs are largely targeted to provide
housing to families earning less than 60% of area median income (as
defined by HUD) and are structured to ensure that the low- and very
low-income households who benefit from the subsidies pay no more than 30%
of their gross monthly income for rent and utilities. As of
2019, affordable loans represented approximately 11% of our multifamily
guaranty book of business, based on unpaid principal balance, including
Multifamily Customers Our multifamily lenders are principally mortgage banking companies, large diversified financial institutions, and banks. During 2019, we executed multifamily transactions with 30 lenders. During 2019, our top five multifamily lender customers, in the aggregate, accounted for approximately 48% of our multifamily business volume, compared with approximately 49% in 2018. Two of our customers each accounted for 10% or more of our multifamily business volume in 2019. Walker & Dunlop accounted for 12% andCBRE Multifamily Capital accounted for 10% of our 2019 multifamily business volume. We have a diversified funding base of domestic and international investors. Purchasers of multifamily Fannie Mae MBS include fund managers, commercial banks, pension funds, insurance companies, corporations, state and local governments, and other municipal authorities. Our MCAS investors include fund managers, hedge funds and insurance companies, while we engage in multifamily CIRT transactions with insurers and reinsurers.Multifamily Competition Our primary competitors for the acquisition of multifamily mortgage assets and issuance of multifamily mortgage-related securities are Freddie Mac, life insurers,U.S. banks and thrifts, other institutional investors,Ginnie Mae and private-label issuers of commercial mortgage-backed securities. Competition to acquire mortgage assets is significantly affected by both our and our competitors' pricing, credit standards and loan structures, as well as investor demand for our and our competitors' mortgage-related securities. Our competitive environment also may be affected by many other factors, including changes in connection with recommendations in theTreasury plan; new legislation or regulations applicable to us, our customers or investors; and digital innovation and disruption in our markets. The Director of FHFA has indicated that, during conservatorship,Fannie Mae and Freddie Mac should reduce competition with each other and FHA. As a result, our ability to compete depends on our pricing and on our ability to address and adapt to changing lender and borrower preferences. See "Business-Conservatorship, Treasury Agreements and Housing Finance Reform," "Business-Charter Act and Regulation," and "Risk Factors" for information on matters that could affect our business and competitive environment.Fannie Mae 2019 Form 10-K 97
--------------------------------------------------------------------------------
MD&A | Multifamily Business
Multifamily Market Share We remained a continuous source of liquidity in the multifamily market in 2019. We owned or guaranteed approximately 20% of the outstanding debt on multifamily properties as ofSeptember 30, 2019 (the latest date for which information is available). Multifamily Mortgage Debt Outstanding(1) (Dollars in trillions) [[Image Removed: chart-359bd6d7b7495367941a02.jpg]] (1) The mortgage debt outstanding as ofSeptember 30, 2019 is based on theFederal Reserve's December 2019 mortgage debt outstanding release, the latest date for which theFederal Reserve has estimated mortgage debt outstanding for multifamily residences. Prior period amounts have been updated to reflect revised historical data from theFederal Reserve . Multifamily Mortgage Market National multifamily market fundamentals, primarily vacancy rates and rents, remained positive throughout 2019, most likely due to ongoing job growth, favorable demographic trends, and renter household formations. • Vacancy rates. According to preliminary third-party data, the estimated
national multifamily vacancy rate for institutional investment-type
apartment properties was 5.5% as of
as of
national multifamily vacancy rate remains below its average rate of about
6.0% over the last 10 years.
• Rents. Effective rents continued to increase during most of 2019. National
asking rents increased by an estimated 2.5% in 2019 and by an estimated
0.3% during the fourth quarter of 2019, compared with an estimated
increase of 0.8% in the third quarter of 2019.
An estimated 377,000 multifamily units were added to the nation's inventory in 2019 and demand remained positive for much of the year. Continued demand for multifamily rental units was reflected in the estimated positive net absorption (that is, the net change in the number of occupied rental units during the time period) of approximately 178,000 units in 2019, according to data fromReis, Inc. , compared with approximately 236,000 units in 2018. 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 helped to increase property values in most metropolitan areas in 2019. It is estimated that approximately 476,000 new multifamily units will be completed in 2020. The bulk of this new supply is concentrated in a limited number of metropolitan areas. Although multifamily fundamentals remain positive, we believe an increase in supply will result in a slowdown in national net absorption rates and effective rents in 2020 compared with recent years. Multifamily Business Metrics The multifamily loans we acquired in 2019 had a strong overall credit risk profile, consistent with our acquisition policy and standards, which we describe in "Multifamily Mortgage Credit Risk Management-Multifamily Acquisition Policy and Underwriting Standards." For the three-month period startingOctober 1, 2019 throughDecember 31, 2019 , our multifamily business volume was$18.1 billion , which contributed to overall 2019 business volume of$70.2 billion . Multifamily new business volume increased in 2019 compared with 2018 driven by positive multifamily mortgage market fundamentals.
--------------------------------------------------------------------------------
MD&A | Multifamily Business
Multifamily New Business Volume
(Dollars in billions)
[[Image Removed: chart-cd430effa6bc53fe945a02.jpg]](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. Excludes a transaction backed by a pool
of single-family rental properties financed in the amount of
during the second quarter of 2017.
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. OnSeptember 13, 2019 , FHFA announced a revised multifamily business volume cap structure. The new multifamily volume cap, which replaced the prior cap effectiveOctober 1, 2019 , is$100 billion for the five-quarter period endingDecember 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. Our multifamily business securitizes the vast majority of mortgage loans we acquire through lender swap transactions. We also support liquidity in the market through issuing structured MBS backed by Fannie Mae MBS. Multifamily Fannie Mae MBS Issuances (Dollars in billions) [[Image Removed: chart-b0ce3d27eacc5b2e95ca02.jpg]]
(1) Excludes a transaction backed by a pool of single-family rental properties
financed in the amount of
(2) A portion of structured securities issuances may be backed by Fannie Mae MBS
issued during the same period and held by
backed by Fannie Mae MBS held by a third party are not included in the
multifamily Fannie Mae MBS structured security issuance amounts.
Fannie Mae 2019 Form 10-K 99
--------------------------------------------------------------------------------
MD&A | 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 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 following chart displays our multifamily
guaranty book of business.
Multifamily Guaranty Book of Business
(Dollars in billions)
[[Image Removed: chart-325554ed4a02de0786ea02.jpg]]
Our average charged multifamily guaranty fee trended downward in 2018 and 2019
driven by competitive market pressure on guaranty fees charged on newly acquired
multifamily loans.
Multifamily Business Financial Results
For the Year Ended December 31, Variance
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(Dollars in millions)
Net interest income $ 2,949 $ 2,789 $ 2,521 $ 160 $ 268
Fee and other income 723 529 849 194 (320 )
Net revenues 3,672 3,318 3,370 354 (52 )
Fair value gains (losses), net 2 (89 ) (23 ) 91 (66 )
Administrative expenses (458 ) (428 ) (346 ) (30 ) (82 )
Credit-related expense(1) (19 ) (17 ) (30 ) (2 ) 13
Other expenses, net(2) (316 ) (139 ) (337 ) (177 ) 198
Income before federal income taxes 2,881 2,645 2,634 236 11
Provision for federal income taxes (558 ) (432 ) (1,683 ) (126 ) 1,251
Net income $ 2,323 $ 2,213 $ 951 $ 110 $ 1,262 (1) Consists of the benefit or provision for credit losses and foreclosed
property income or expense.
(2) Consists of investment gains or losses, gains or losses from partnership
investments and other income or expenses.
--------------------------------------------------------------------------------
MD&A | Multifamily Business
Net interest income
[[Image Removed: chart-2bdf7b7623815aafb67.jpg]]
Multifamily net interest income increased in 2019 compared with 2018 primarily
due to an increase in guaranty fee income as a result of growth in the size of
our multifamily guaranty book of business, partially offset by a decrease in
average charged guaranty fees on the multifamily guaranty book.
Multifamily net interest income increased in 2018 compared with 2017 primarily
due to increases in guaranty fee income driven by an increase in the average
guaranty book of business.
_____________________________________________________________________________
Fee and other income
[[Image Removed: chart-d287e9b17f94507a81ba02.jpg]]
Fee and other income increased in 2019 primarily driven by yield maintenance
fees resulting from increased prepayment activity.
Variation in yield maintenance fee income from period to period is driven by the
volume of prepayments, current interest rates, as well as the timing of the
prepayment relative to the loan's contractual maturity date. All of these
factors impact the fee due to us at the time of prepayment, which is recognized
in fee and other income. If Fannie Mae is not the holder of the security, the
portion of yield maintenance paid out to the investor is recognized as an
expense in other expenses, net.
_____________________________________________________________________________
Fair value gains (losses), net
[[Image Removed: chart-3c08003c5a8352fda28.jpg]]
Depending on portfolio activity, our multifamily mortgage commitment derivatives
may be in a net buy or net sell position during any given period. Fair value
gains in 2019 were flat as a result of offsetting gains and losses on
commitments to buy or to sell multifamily mortgage-related securities.
Fair value losses in 2018 were primarily driven by losses on commitments to buy
multifamily mortgage-related securities due to increasing interest rates
resulting in decreasing prices during the commitment periods.
_____________________________________________________________________________
Credit-related expense
[[Image Removed: chart-97a2165d8ff653bfa88.jpg]]
We recognized higher credit-related expense in 2019 compared with 2018 primarily
driven by an increase in the allowance for loan losses in 2019. Credit-related
expense in 2018 was driven by expenses on previously charged-off loans.
_____________________________________________________________________________--------------------------------------------------------------------------------
MD&A | Multifamily Business
Multifamily Mortgage Credit Risk Management The credit risk profile of our multifamily book of business is influenced by: • the current and anticipated cash flows from the property;
• the type and location of the property;
• the condition and value of the property;
• the financial strength of the borrower;
• market trends; and
• the structure of the financing.
These and other factors affect both the amount of expected credit loss on a given loan and the sensitivity of that loss to changes in the economic environment. Multifamily Acquisition Policy and Underwriting Standards Our Multifamily business is responsible for pricing and managing the credit risk on our multifamily guaranty book of business, with oversight from our Enterprise Risk Management division. Multifamily loans that we purchase or that back Fannie Mae MBS are underwritten by aFannie Mae -approved lender and may be subject to our underwriting review prior to closing, depending on the product type, loan size, market and/or other factors. Our underwriting standards generally include, among other things, property cash flow analysis and third-party appraisals. Additionally, 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. At underwriting, we evaluate the DSCR based on both actual and underwritten debt service payments. The original DSCR is calculated using the underwritten debt service payments for the loan, which assumes both principal and interest payments, rather than the actual debt service payments. Depending on the loan's interest rate and structure, using the underwritten debt service payments may result in a more conservative estimate of the debt service payments (for example, loans with an interest-only period). This approach is used for all loans, including those with full and partial interest-only terms. Our experience has been that original LTV ratio and DSCR values have been reliable indicators of future credit performance. Key Risk Characteristics of Multifamily Guaranty Book of Business As ofDecember 31, 2019 2018
2017
Weighted-average original LTV ratio 66 % 66 % 67 % Original LTV ratio greater than 80% 1 % 1 % 2 % Original DSCR less than or equal to 1.10 11 % 12 % 14 % Full interest-only loans 27 % 24 % 21 % Partial interest-only loans(1) 51 % 49 % 46 %
(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 furnish to theSEC 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 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 andFannie Mae throughout the life of the loan. Our DUS model typically results in our lenders sharing approximately one-third of the credit risk on our multifamily loans. Lenders in the DUS program typically share in loan-level credit losses in one of two ways: • they share one-third of the losses on a pro rata basis with us; or
• they bear all losses up to the first 5% of the unpaid principal balance of
the loan and then share with us any remaining losses up to a prescribed
limit.
Loans serviced by DUS lenders and their affiliates represented 99% of our multifamily guaranty book of business as ofDecember 31, 2019 , 2018 and 2017. In certain situations, to effectively manage our counterparty risk, we do not allow the lender to fully share in one-third of the credit risk, but have them share in a smaller portion.Fannie Mae 2019 Form 10-K 102
--------------------------------------------------------------------------------
MD&A | Multifamily Business
While not a large portion of our multifamily guaranty book of business, our non-DUS lenders typically also have lender risk-sharing, where the lenders typically share or absorb losses based on a negotiated percentage of the loan or the pool balance. These risk-sharing agreements not only transfer credit risk, but also better align our interests with those of the lenders. 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 ofDecember 31, 2019 and as ofDecember 31, 2018 .
Percentage of Multifamily Guaranty Book of Business with Front-End Lender Risk
Sharing
[[Image Removed: chart-d99ef6182f645d7d9c9a01.jpg]]
To complement our front-end lender-risk sharing program through our DUS model,
we engage in back-end credit risk transfer transactions through our multifamily
CIRT and Multifamily Connecticut Avenue Securities ("MCAS") transactions. In our
multifamily CIRT transactions we transfer a portion of Fannie Mae's mortgage
credit risk on multifamily loans in our multifamily guaranty book of business to
insurers or reinsurers. We retain an initial portion of losses on the loans in
the pool and reinsurers cover losses above this retention amount up to a
detachment point. We retain all losses above this detachment point. The
insurance layer typically provides coverage for losses on the pool that are
likely to occur only in a stressed economic environment. We completed three
multifamily CIRT transactions in 2019, which covered multifamily loans with an
unpaid principal balance of $32.3 billion at the time of the transactions.
In the fourth quarter of 2019, we issued our first MCAS, which used a
credit-linked note structure to transfer a portion of the mortgage credit risk
associated with Fannie Mae losses on a reference pool of multifamily mortgage
loans. MCAS are issued with a stated final maturity date less than or equal to
12 years. Similar to CIRT transactions, we retained the exposure from senior
loss and the first loss tranches in this transaction. In addition, we retained a
pro rata share of risk equal to approximately 5% of all notes sold in the
mezzanine tranches. Similar to our single-family CAS REMIC and CAS CLNs, MCAS
aligns the timing of our recognition of provisions for credit losses with the
related recovery. With our adoption of the CECL standard in January 2020 , we
continue to record the expected benefit and the loss in the same period.
The table below displays the total unpaid principal balance and percentage of
loans in our multifamily guaranty book of business that are covered by a
back-end credit risk transfer transaction. The table does not reflect front-end
lender risk-sharing arrangements.
Multifamily Loans in Back-End Credit Risk Transfer Transactions
As of December 31,
2019 2018
Percentage of Percentage of
Unpaid Multifamily Unpaid Multifamily
Principal Guaranty Book Principal Guaranty Book
Balance of Business Balance of Business
(Dollars in millions)
Credit Insurance Risk Transfer $ 66,851 20 % $ 37,456 12 %
Multifamily Connecticut Avenue
Securities 17,077 5 - -
Total unpaid principal balance of
multifamily loans in back-end credit
risk transfer transactions $ 83,928 25 % $ 37,456 12 %
The enhancements to our multifamily credit-risk sharing transactions were
primarily designed to further reduce the capital requirements associated with
loans in the reference pool under FHFA's conservatorship capital framework with
the associated benefit of additional credit risk protection in the event of a
stress environment. We transfer multifamily credit risk through lender risk
sharing at the time of acquisition, but our multifamily back-end credit risk
transfer activity occurs later, typically up to a year or more after
acquisition. Accordingly, we measure the impact of our 2019 credit risk transfer
activity by how much it
Fannie Mae 2019 Form 10-K 103
--------------------------------------------------------------------------------
MD&A | Multifamily Business
reduced our capital requirements on loans we acquired in 2018. Our multifamily front-end lender risk sharing and back-end credit risk transfer transactions throughDecember 31, 2019 reduced our conservatorship capital requirement for our multifamily business acquisitions during the twelve months endedDecember 31, 2018 by over 70%. See "Business-Charter Act and Regulation-GSE Act andOther Legislation-Capital " for more information on our capital requirements. We plan to continue to transfer credit risk through multifamily CIRT and MCAS transactions in the future and to explore other multifamily credit risk transfer options. 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 may help reduce our credit risk. As 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 2% as ofDecember 31, 2019 and 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 described above, we track credit risk characteristics to determine the loan credit quality indicators, which are the internal risk categories we use and 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.
For example, we closely monitor the rental payment trends and vacancy levels in local markets, as well as capitalization rates, to identify loans that merit closer attention or loss mitigation actions. We manage our exposure to refinancing risk for multifamily loans maturing in the next several years. We have a team that proactively manages upcoming loan maturities to minimize losses on maturing loans. This team assists lenders and borrowers with timely and appropriate refinancing of maturing loans with the goal of reducing defaults and foreclosures related to these loans. The primary asset management responsibilities for our multifamily loans are performed by our DUS and other multifamily lenders. We periodically evaluate these lenders' performance for compliance with our asset management criteria. The percentage of our multifamily loans categorized as substandard based on these characteristics remained at historically low levels and decreased as ofDecember 31, 2019 compared withDecember 31, 2018 . 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 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. Delinquency Statistics on our Problem Loans The multifamily serious delinquency rate remained at low levels of 0.04% as ofDecember 31, 2019 and 0.06% as ofDecember 31, 2018 . Our multifamily seriously delinquent rate consists of multifamily loans that were 60 days or more past due based on unpaid principal balance expressed as a percentage of our multifamily guaranty book of business. 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.
--------------------------------------------------------------------------------
MD&A | Multifamily Business
The table below displays the components of our multifamily credit loss
performance metrics, as well as our multifamily initial charge-off severity
rate. Our multifamily guaranty book of business has experienced very low levels
of charge-offs in the past several years, which in some periods has resulted in
credit income rather than losses, and drives variability in our charge-off
severity rate.
Multifamily Credit Loss Performance Metrics
For the Year Ended December 31,
2019 2018 2017
(Dollars in millions)
Credit income (losses)(1) $ 4 $ (17 ) $ 19
Credit (income) loss ratio(1)(2) (0.1 ) bps 0.6 bps (0.7 ) bps
Multifamily initial charge-off severity rate(3) 21.6 % 17.1 % 4.5 %
Multifamily loan charge-off count 5 11 9
(1) Credit income and credit income ratios are the result of recoveries on
previously charged-off amounts.
(2) Basis points are calculated based on the amount of credit income (losses)
divided by the average multifamily guaranty book of business during the
period.
(3) Rate is calculated as the initial charge-off amount divided by the average
defaulted unpaid principal balance. The rate includes charge-offs pursuant
to the provisions of the Advisory Bulletin and excludes any costs, gains or
losses associated with REO after initial acquisition through final
disposition. Charge-offs are net of lender loss sharing agreements.
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 Year Ended December 31,
2019 2018 2017 2016 2015
(Dollars in millions)
Changes in loss reserves:
Beginning balance $ (245 ) $ (245 ) $ (196 ) $ (265 ) $ (404 )
Benefit (provision) for credit losses (27 ) (4 ) (49 ) 63 107
Charge-offs 8 4 3 11 42
Recoveries (4 ) - (3 ) (6 ) (4 )
Other - - - 1 (6 )
Ending balance $ (268 ) $ (245 ) $ (245 ) $ (196 ) $ (265 )
Loss reserves as a percentage of multifamily
guaranty book of business 0.08 % 0.08 % 0.09 % 0.08 % 0.12 %
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, as well as
interest income forgone and recognized for on-balance sheet TDRs on accrual
status and nonaccrual 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 December 31,
2019 2018 2017 2016 2015
(Dollars in millions)
TDRs on accrual status $ 66 $ 55 $ 87 $ 141 $ 376
Nonaccrual loans 439 492 424 403 591
Total TDRs on accrual status and nonaccrual loans $ 505 $ 547 $ 511 $ 544 $ 967
Fannie Mae 2019 Form 10-K 105
--------------------------------------------------------------------------------
MD&A | Multifamily Business
For the Year Ended December 31,
2019 2018 2017 2016 2015
(Dollars in millions)
Interest related to on-balance sheet TDRs
on accrual status and nonaccrual loans:
Interest income forgone(1) $ 16 $ 22 $ 17 $ 21 $ 34
Interest income recognized(2) 3 3 7 9 18
(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 theamortization 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 12
properties with a carrying value of $72 million as of December 31, 2019,
compared with 16 properties with a carrying value of $81 million as of December
31, 2018.
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 and funding risk, which is the risk that we will not be able to meet
our obligations when they come due, including the risk associated with the
inability to access funding sources or manage fluctuations in funding levels.
Liquidity and funding 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.
Primary Sources and Uses of Funds
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
government-sponsored enterprise and federal government support of our business
continue to be essential to maintaining our access to the unsecured debt
markets.
In addition to funding we obtain from the issuance of debt securities, our other
sources of cash include:
• principal and interest payments received on mortgage loans,
mortgage-related securities and non-mortgage investments we own;
• proceeds from the sale of mortgage-related securities, mortgage loans and
other investments portfolio, including proceeds from sales of foreclosed
real estate assets;
• funds from
• guaranty fees received on Fannie Mae MBS, including the TCCA fees
collected by us on behalf of Treasury ;
• payments received from mortgage insurance counterparties and other
providers of credit enhancement;
• net receipts on derivative instruments;
• receipt of cash collateral;
• borrowings we may make under a secured intraday funding line of credit or
against mortgage-related securities and other investment securities we
hold pursuant to repurchase agreements and loan agreements; and
• tax refunds from the
Our primary uses of funds include:
• the repayment of matured, redeemed and repurchased debt;
• the purchase of mortgage loans (including delinquent loans from MBS
trusts), mortgage-related securities and other investments;
• interest payments on outstanding debt;
• dividend payments made to
• net payments on derivative instruments;
Fannie Mae 2019 Form 10-K 106
--------------------------------------------------------------------------------
MD&A | Liquidity and Capital Management
• the pledging of collateral under derivative instruments;
• administrative expenses;
• losses incurred in connection with our Fannie Mae MBS guaranty obligations;
• payments of federal income taxes;
• payments to specified HUD and
• payments of TCCA fees to
• payments associated with our credit risk transfer programs.
Liquidity and Funding Risk Management Practices and Contingency Planning
Our liquidity position could be adversely affected by many factors, both
internal and external to our business, including:
• actions taken by FHFA, the
agencies;
• legislation relating to us or our business;
• a
• a downgrade in the credit ratings of our senior unsecured debt or the
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 or changes to the senior preferred stock purchase agreement;
• loss of demand for our debt, or certain types of our debt from a
significant number 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 status as a government-sponsored enterprise.
See "Risk Factors" for a discussion of factors that could adversely affect our
liquidity.
We conduct liquidity contingency planning to prepare for an event in which our
access to the unsecured debt markets becomes limited.
Our liquidity management framework and practices require that we maintain:
• a portfolio of highly liquid securities to cover a minimum of 30 calendar
days of expected net cash needs, assuming no access to the short- and
long-term unsecured debt markets;
• within our other investments portfolio a daily balance of
securities and/or cash with the
a redemption amount of at least 50% of our average projected 30-day cash
needs over the previous three months; and
• a liquidity profile that meets or exceeds our projected 365-day net cash
needs with liquidity holdings and unencumbered agency mortgage securities.
As of December 31, 2019, we were in compliance with our liquidity risk management framework and practices set forth above. We run routine operational testing of our ability to rely upon mortgage andU.S. Treasury collateral to obtain financing. We enter into relatively small repurchase agreements in order to confirm that we have the operational and systems capability to do so. In addition, we have provided collateral in advance to clearing banks in the event we seek to enter into repurchase agreements in the future. We do not, however, have committed repurchase agreements with specific counterparties, as historically we have not relied on this form of funding. As a result, our use of such facilities and our ability to enter into them in significant dollar amounts may be challenging in a stressed market environment. See "Other Investments Portfolio" for further discussions of our alternative sources of liquidity if our access to the debt markets were to become limited. While our liquidity contingency planning attempts to address stressed market conditions and our status in conservatorship, we believe those plans could be difficult or impossible to execute under stressed conditions for a company of our size in our circumstances. See "Risk Factors-Liquidity and Funding Risk" for a description of the risks associated with our ability to fund operations and our liquidity contingency planning.
--------------------------------------------------------------------------------
MD&A | Liquidity and Capital Management
Debt Funding
We separately present the debt from consolidations ("debt of consolidated
trusts") and the debt issued by us ("debt of Fannie Mae ") in our consolidated
balance sheets. This discussion regarding debt funding focuses on the debt of
Fannie Mae . In addition to MBS issuances, we fund our business through the
issuance of a variety of short-term and long-term debt securities in the
domestic and international capital markets. Accordingly, we are subject to "roll
over," or refinancing, risk on our outstanding debt.
Our debt securities are actively traded in the over-the-counter market. We have
a diversified funding base of domestic and international investors. Purchasers
of our debt securities are geographically diversified and include fund managers,
commercial banks, pension funds, insurance companies, foreign central banks,
corporations, state and local governments, and other municipal authorities. We
compete for low-cost debt funding with institutions that hold mortgage
portfolios, including Freddie Mac and the FHLBs.
Our debt funding needs and debt funding activity may vary from period to period
depending on market conditions and are influenced by anticipated liquidity
needs, our capital management, the size of our retained mortgage portfolio and
our dividend payment obligations to Treasury . See "Retained Mortgage Portfolio"
for information about our retained mortgage portfolio and limits on its size.
Pursuant to the terms 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 debt limit. Prior
to 2019, our debt limit under the senior preferred stock purchase agreement was
subject to annual reductions. However, beginning in 2019, the limit is fixed at
$300 billion. As of December 31, 2019, our aggregate indebtedness totaled $182.2
billion. The calculation of our indebtedness for purposes of complying with our
debt limit reflects the unpaid principal balance and excludes debt basis
adjustments and debt of consolidated trusts. Because of our debt limit, we may
be restricted in the amount of debt we issue to fund our operations.
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 outstanding short-term and
long-term debt of Fannie Mae based on original contractual maturity. The total
amount of debt of Fannie Mae decreased during 2019 primarily due to 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 2019.
[[Image Removed: chart-9ad64227ee3055a6ba6a01.jpg]]
Selected Debt Information
As of December 31,
2018 2019
(Dollars in billions)
Selected Weighted-Average Interest Rates(1)
Interest rate on short-term debt 2.29 % 1.56 % Interest rate on long-term debt, including portion maturing within one year
2.83 % 2.86 %
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) 163 137
Weighted-average maturity of debt maturing in more
than one year (in months) 63 66
Other Data
Outstanding callable debt $ 64.3 $ 38.5
Connecticut Avenue Securities debt(2) $ 25.6 $ 21.4
Fannie Mae 2019 Form 10-K 108
--------------------------------------------------------------------------------
MD&A | Liquidity and Capital Management
(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 $28 million and $432 million
as of December 31, 2019 and 2018, respectively.
(2) Represents CAS debt issued prior to November 2018. See "Single-FamilyBusiness-Single-Family Mortgage Credit Risk Management-Single-Family Credit
Enhancement and Transfer of Mortgage Credit Risk-Credit Risk Transfer
Transactions" 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, proceeds from our mortgage asset sales, and cash from business operations. For information on the maturity profile of our outstanding long-term debt for each of the years 2020 through 2024 and thereafter, see "Note 7, Short-Term and Long-Term Debt." Debt Funding Activity The table below displays the activity in debt ofFannie Mae . This activity excludes the debt of consolidated trusts and intraday loans. Activity for short-term debt ofFannie Mae relates to borrowings with an original contractual maturity of one year or less while activity for long-term debt ofFannie 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 short-term debt issued and paid off during 2019 compared with 2018 was primarily driven by higher utilization of short-term notes with overnight maturities throughout 2019. The increase in long-term debt that was paid off in 2019 was due to an increase in maturities of non-callable debt over the prior year. The decrease in our debt issued and paid off during 2018 compared with 2017 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 2019 and 2018. Activity in Debt ofFannie Mae For the Year Ended December 31, 2019 2018 2017 (Dollars in millions) Issued during the period: Short-term: Amount $ 562,189 $ 540,686 $ 707,834
Weighted-average interest rate 2.13 % 1.63 % 0.85 % Long-term:(1) Amount
$ 21,545 $ 22,014 $ 30,746
Weighted-average interest rate 2.20 % 3.07 % 2.47 % Total issued: Amount
$ 583,734 $ 562,700 $ 738,580
Weighted-average interest rate 2.13 % 1.68 % 0.92 %
Paid off during the period:(2) Short-term: Amount $ 559,938 $ 549,184 $ 709,446
Weighted-average interest rate 1.99 % 1.51 % 0.79 % Long-term:(1) Amount
$ 73,547 $ 58,497 $ 80,513
Weighted-average interest rate 2.38 % 1.48 % 2.44 % Total paid off: Amount
$ 633,485 $ 607,681 $ 789,959
Weighted-average interest rate 2.04 % 1.51 % 0.96 %
(1) Includes credit risk-sharing securities issued as CAS debt prior to November
2018. For information on our credit risk transfer transactions, see
"Single-Family Business-Single-Family Mortgage Credit Risk
Management-Single-Family Credit Enhancement and Transfer of Mortgage Credit
Risk-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 2019 Form 10-K 109
--------------------------------------------------------------------------------
MD&A | Liquidity and Capital Management
Many factors could influence our debt activity, affect the amount, mix and cost of our debt funding, reduce demand for our debt securities, increase our liquidity or roll over risk, or otherwise have a material adverse impact on our liquidity, including: • changes or perceived changes in federal government support of our business
or our debt securities;
• changes in our status as a government-sponsored enterprise;
• future changes or disruptions in the financial markets;
• a change or perceived change in the creditworthiness of the
government, due to our reliance on the
• a downgrade in our credit ratings.
We believe that continued federal government support of our business, as well as our status as a government-sponsored enterprise, are essential to maintaining our access to debt funding. See "Risk Factors" for a discussion of the risks we face relating to: • the uncertain future of our company;
• our reliance on the issuance of debt securities to obtain funds for our
operations and the relative cost to obtain these funds;
• our liquidity contingency plans;
• our credit ratings; and
• other factors that could adversely affect our ability to obtain adequate
debt funding or otherwise negatively impact our liquidity, including the
factors listed above.
Also see "Business-Conservatorship, Treasury Agreements and Housing Finance
Reform-Housing Finance Reform" for a description of recent actions and
statements relating to housing finance reform by the Administration, Congress
and FHFA.
The table below displays additional information for each category of our
short-term debt based on original contractual terms.
Outstanding Short-Term Debt(1)
2019 2018 2017
(Dollars in millions)
Federal funds purchased and securities sold under agreements to repurchase: Amount outstanding, as of December 31 $ 478 $ - $ - Weighted-average interest rate 1.67 % - % - % Average outstanding, during the year(2) $ 234 $ 83 $ 106 Weighted-average interest rate 1.95 % 1.08 % 0.34 % Maximum outstanding, during the year(3) $ 1,726 $ 1,500
$ 1,138
Total short-term debt ofFannie Mae : Amount outstanding, as of December 31 $ 26,662 $ 24,896 $ 33,377 Weighted-average interest rate 1.56 % 2.29 % 1.18 % Average outstanding, during the year(2) $ 18,547 $ 23,237 $ 29,545 Weighted-average interest rate 2.08 % 1.73 % 0.85 % Maximum outstanding, during the year(3) $ 33,461 $ 37,446
$ 39,317
(1) Includes the effects of discounts, premiums and other cost basis
adjustments.
(2) Average amount outstanding has been calculated using daily balances.
(3) Maximum outstanding represents the highest daily outstanding balance during
the year.
Contractual Obligations
The table below displays, by remaining maturity, our future cash obligations
related to our long-term debt, announced calls, operating leases, purchase
obligations and other material non-cancelable contractual obligations. This
table excludes certain contractual obligation transactions that could
significantly affect our short- and long-term liquidity and capital resource
needs. These transactions, which are listed below, are excluded because they
involve future cash payments that are considered uncertain and may vary based
upon future conditions.
• Future payments of principal and interest related to debt securities of
consolidated trusts;
Fannie Mae 2019 Form 10-K 110
--------------------------------------------------------------------------------
MD&A | Liquidity and Capital Management
• Future payments associated with our CIRT,CAS REMIC , and CAS CLN transactions, because the amount and timing of such payments are
contingent upon the occurrence of future credit and prepayment events on
the related reference pool of mortgage loans and are therefore uncertain;
• Future payments related to our interest-rate risk management derivatives
that may require cash settlement in future periods, because the amount and
timing of such payments are dependent upon items such as changes in
interest rates; and
• Future payments on our obligations to stand ready to perform under ourguarantees relating to Fannie Mae MBS and other financial guarantees,
including
and timing of payments under these arrangements are generally contingent
upon the occurrence of future events. For a description of the amount of
our on- and off-balance sheet Fannie Mae MBS and other financial
guarantees as of December 31, 2019, see "Guaranty Book of Business" and
"Off-Balance Sheet Arrangements."
Contractual Obligations
Payment Due by Period as of December 31, 2019
Less than 1 1 to < 3 More than 5
Total Year Years 3 to 5 Years Years
(Dollars in millions)
Long-term debt obligations(1) $ 155,585 $ 47,427 $ 44,612 $ 19,645 $ 43,901
Contractual interest on long-term
obligations 28,286 4,293 6,563 5,488 11,942
Operating lease obligations(2) 744 59 111 99 475
Purchase obligations:
Mortgage commitments(3) 74,283 74,283 - - -
Other purchase obligations(4) 155 109 46 - -
Other liabilities reflected in our
consolidated balance sheets(5) 1,559 960 556 20 23
Total contractual obligations $ 260,612 $ 127,131 $ 51,888 $ 25,252 $ 56,341
(1) Represents the carrying amount of our long-term debt assuming payments are
made in full at maturity. Includes the effects of discounts, premiums and
other cost basis adjustments.
(2) Includes amounts related to office buildings and equipment leases.
(3) Includes on- and off-balance sheet commitments to purchase mortgage loans
and mortgage-related securities.
(4) Includes unconditional purchase obligations that are subject to a
cancellation penalty for certain telecommunications services, software and
computer services, and other agreements.
(5) Includes cash received as collateral and future cash payments due under our
contractual obligations to fund low-income housing tax credit partnership
investments and other partnerships that are unconditional and legally
binding, which are included in our consolidated balance sheets under "Other
liabilities."
Equity Funding
As a result of the covenants under the senior preferred stock purchase
agreement, Treasury's ownership of the warrant to purchase up to 79.9% of the
total shares of our common stock outstanding and the uncertainty regarding our
future, we effectively no longer have access to equity funding except through
draws under the senior preferred stock purchase agreement. For a description of
the funding available and the covenants under the senior preferred stock
purchase agreement, see "Business-Conservatorship, Treasury Agreements and
Housing Finance Reform-Treasury Agreements."
--------------------------------------------------------------------------------
MD&A | Liquidity and Capital Management
Other Investments Portfolio
The chart below displays information on the composition of our other investments
portfolio. Consistent with our liquidity framework and practices, we hold highly
liquid investments in our other investments portfolio, which we use to manage
our exposure to liquidity disruptions. 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)
[[Image Removed: chart-cbcf0b85ea2f557487da01.jpg]]
(1) Cash equivalents are comprised of overnight repurchase agreements and
Treasuries that have a maturity at the date of acquisition of three months
or less.
Credit Ratings
Our credit ratings from the major credit ratings organizations, as well as the
credit ratings of the U.S. government, are primary factors that could affect our
ability to access the capital markets and our cost of funds. In addition, our
credit ratings are important when we seek to engage in certain long-term
transactions, such as derivative transactions. S&P, Moody's and Fitch have all
indicated that, if they were to lower the sovereign credit ratings on the U.S. ,
they would likely lower their ratings on the debt of Fannie Mae and certain
other government-related entities. In addition, actions by governmental entities
impacting Treasury's support for our business or our debt securities could
adversely affect the credit ratings of our senior unsecured debt. See "Risk
Factors-Liquidity and Funding Risk" for a discussion of the risks to our
business relating to a decrease in our credit ratings, which could include an
increase in our borrowing costs, limits on our ability to issue debt, and
additional collateral requirements under our derivatives contracts.
The table below displays the credit ratings issued by the three major credit
rating agencies.
Fannie Mae Credit Ratings(1)
December 31, 2019
S&P Moody's Fitch
Long-term senior debt AA+ Aaa AAA
Short-term senior debt A-1+ P-1 F1+
Preferred stock D Ca C/RR6
Outlook Stable Stable Stable
(for Long-Term (for Long-Term (for AAA rated
Senior Debt) Senior Debt and Long-Term Issuer
Preferred Stock) Default Ratings)
Fannie Mae 2019 Form 10-K 112
--------------------------------------------------------------------------------
MD&A | Liquidity and Capital Management
(1) As of December 31, 2019, all outstanding subordinated debt has matured. As a result, there are no longer ratings on that instrument. One Rating Agency, Moody's Investors Service, maintains a rating on the Subordinate Shelf of (P)Aa2. We have no covenants in our existing debt agreements that would be violated by a downgrade in our credit ratings. However, in connection with certain derivatives counterparties, we could be required to provide additional collateral to or terminate transactions with certain counterparties in the event that our senior unsecured debt ratings are downgraded. Cash Flows Year Ended December 31, 2019. Cash, cash equivalents and restricted cash increased from $49.4 billion as of December 31, 2018 to $61.4 billion as of December 31, 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. Year Ended December 31, 2018. Cash, cash equivalents and restricted cash decreased from $60.3 billion as of December 31, 2017 to $49.4 billion as of December 31, 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, (3) the acquisition of delinquent loans out of our MBS trusts, and (4) the net increase in federal funds sold and securities purchased under agreements to resell or similar arrangements. Partially offsetting these cash outflows were primarily cash inflows from (1) the sale of Fannie Mae MBS to third parties, (2) proceeds from repayments and sales of loans ofFannie Mae , and (3) the sale of our REO inventory. Capital Management Regulatory Capital FHFA stated that, during conservatorship, our existing statutory and FHFA-directed regulatory capital requirements will not be binding and that FHFA will not issue quarterly capital classifications. We report GAAP net worth and the deficit of our core capital over statutory minimum capital in our periodic reports on Form 10-Q and Form 10-K. As we discuss in "Business-Charter Act and Regulation-GSE Act and Other Legislation-Capital," we expect FHFA, in its capacity as our regulator, to propose new capital requirements for the GSEs this year, which would be suspended while we remain in conservatorship. Capital Activity Under the terms governing the senior preferred stock, effective with the third quarter 2019 dividend period, we will not owe dividends toTreasury until we have accumulated over $25 billion in net worth; and the aggregate liquidation preference of the senior preferred stock increases at the end of each quarter by the increase, if any, in our net worth during the immediately prior fiscal quarter, until the liquidation preference has increased by $22 billion pursuant to this provision. Accordingly, no dividends were payable toTreasury for the fourth quarter of 2019 and none are payable for the first quarter of 2020. Also, the aggregate liquidation preference of the senior preferred stock increased to $131.2 billion as of December 31, 2019 and will further increase to $135.4 billion as of March 31, 2020. As of December 31, 2019, our net worth was $14.6 billion. See "Business-Conservatorship, Treasury Agreements and Housing Finance Reform-Treasury Agreements" for more information on the terms of our senior preferred stock and our senior preferred stock purchase agreement withTreasury . See "Risk Factors-GSE and Conservatorship Risk" for a discussion of the risks associated with the limit on our capital reserves. Off-Balance Sheet Arrangements We enter into certain business arrangements to facilitate our statutory purpose of providing liquidity to the secondary mortgage market and to reduce our exposure to interest rate fluctuations. Some of these arrangements are not recorded in our consolidated balance sheets or may be recorded in amounts different from the full contract or notional amount of the transaction, depending on the nature or structure of, and the accounting required to be applied to, the arrangement. These arrangements are commonly referred to as "off-balance sheet arrangements" and expose us to potential losses in excess of the amounts recorded in our consolidated balance sheets. 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.Fannie Mae 2019 Form 10-K 113
--------------------------------------------------------------------------------
MD&A | Off-Balance Sheet Arrangements
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 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 $68.6 billion as of December 31, 2019. Approximately $37.8 billion of this amount consisted of the unpaid principal balance of Freddie Mac-issued UMBS backingFannie Mae -issued Supers. Additionally, off-balance sheet exposure includes approximately $12.3 billion of the unpaid principal balance of Freddie Mac securities backingFannie 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 is likely 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 backingFannie Mae structured securities as of December 31, 2018. See "Note 6, Financial Guarantees" for more information regarding our maximum exposure to loss on unconsolidatedFannie Mae MBS and Freddie Mac securities. 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 $7.2
billion as of December 31, 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 legalentities, 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 consolidated balance
sheets reflect only our investment rather than the full amount of the
partnership's assets and liabilities. See "Note 2, Consolidations and
Transfers of Financial Assets-Unconsolidated VIEs" for information
regarding our limited partnerships and similar legal entities.
Risk Management
We manage the risks that arise from our business activities through our
enterprise risk management program. Our risk management activities are based on
principles aligned with the principles set forth by the Committee of Sponsoring
Organizations of the Treadway Commission's ("COSO") Enterprise Risk Management
("ERM"): Integrating with Strategy and Performance framework.
We are exposed to the following major risk categories:
• Credit Risk. Credit risk is the risk of loss arising from another party's
failure to meet its contractual obligations. For financial securities or
instruments, credit risk is the risk of not receiving principal, interest or
other financial obligation on a timely basis. Our credit risk exposure
exists primarily in connection with our guaranty book of business and our
institutional counterparties.
• Market Risk. Market risk is the risk of loss resulting from changes in the
economic environment. Market risk arises from fluctuations in interest
rates, exchange rates, and other market rates and prices. Market risk
includes interest-rate risk, which is the risk that movements in interest
rates will adversely affect the value of our assets or liabilities or our
future earnings. Market risk also includes spread risk, which can result in
losses from changes in the spreads between our mortgage assets and our debt
and derivatives we use to hedge our position.
• Liquidity and Funding Risk. Liquidity and funding risk is the risk to our
financial condition and resilience arising from an inability to meet
obligations when they come due, including the risk associated with the
inability to access funding sources or manage fluctuations in funding
levels.
• Operational Risk. Operational risk is the risk of loss resulting from
inadequate or failed internal processes, people and systems, or disruptions
from external events. Operational risk includes cyber/information security
risk, third-party risk and model risk.
Fannie Mae 2019 Form 10-K 114
--------------------------------------------------------------------------------
MD&A | Risk Management
We are also exposed to these additional risk categories: • Strategic Risk. Strategic risk is the risk of loss resulting from poor
business decisions, poor implementation of business decisions or the failure
to respond appropriately to changes in the industry or external environment.
• Compliance Risk. Compliance risk is the risk to our company, including the
risk of exposure to adverse legal proceedings, arising from violations of
laws or regulations; from nonconformance with requirements or guidance from
a regulator, MBS trust terms or disclosure obligations, or our ethical
standards or Code of Conduct.
• Reputational Risk. Reputational risk is the risk that substantial negative
publicity may cause a decline in public perception of us, a decline in our
customer base, costly litigation, revenue reductions, or losses.
For a more detailed discussion of these and other risks that could materially
adversely affect our business, results of operations, financial condition,
liquidity and net worth, see "Risk Factors."
Components of Risk Management
Our risk management program is comprised of five inter-related components that
are designed to work together as a comprehensive risk management system aimed at
enhancing our performance.
[[Image Removed: imageupdate12720a01.jpg]]--------------------------------------------------------------------------------
MD&A | Risk Management
Risk Management Governance
We manage risk by using the industry standard "three lines of defense"
structure. Our Board of Directors and management-level risk committees are also
integral to our risk management program.
[[Image Removed: imageupdate12020a03.jpg]]
Mortgage Credit Risk Management
Overview
Mortgage credit risk arises from the risk of loss resulting from the failure of
a borrower to make required mortgage payments. We are exposed to credit risk on
our 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 have provided other credit enhancements on mortgage assets. For a
discussion of our single-family credit risk management, see "Single-Family
Business-Single-Family Mortgage Credit Risk Management." For a discussion of our
multifamily mortgage credit risk management, see "Multifamily
Business-Multifamily Mortgage Credit Risk Management."
Weather, Climate and Natural Disaster Risk Management
Major weather events or other natural disasters expose us to credit risk in a
variety of ways, including by damaging properties that secure mortgage loans in
our book of business and by negatively impacting the ability of borrowers to
make payments on their mortgage loans. The amount of losses we incur as a result
of a major weather event or natural disaster depends significantly on the extent
to which the resulting property damage is covered by hazard or flood insurance
and whether borrowers are able and willing to continue making payments on their
mortgages. The amount of losses we incur can also be affected by the extent that
a disaster impacts the region, especially if it depresses the local economy, and
by the availability of federal, state, or local assistance to borrowers affected
by a disaster.
For multifamily DUS loans, our DUS model results in lenders sharing the losses
resulting from a disaster. However, other forms of credit enhancement and risk
transfer we establish typically have not been designed to reduce our weather and
disaster-related losses. For example, our credit risk transfer transactions are
not designed to shield us from all losses because
--------------------------------------------------------------------------------
MD&A | Risk Management
we retain a portion of the risk of loss, including all or a portion of the first loss risk in most transactions. If aggregate losses from future disasters exceed the amount of our retained first loss position, our credit risk transfer transactions will cover disaster-related losses, similar to other credit losses. As a result, to the extent we transfer a greater portion of the risk of loss in future transactions, or in the event that our potential losses from future disasters are greater than they have been for past disasters, our credit risk transfer transactions may reduce the amount of losses we incur. In addition, mortgage insurance does not protect us from default risk for properties that suffer damages not covered by the hazard or flood insurance we require. In general, we require borrowers to obtain property insurance to cover the risk of damage to their property resulting from hazards such as fire, wind and, for properties in areas identified byFEMA as Special Flood Hazard Areas, flooding. At the time of origination, a borrower is required to provide proof of such insurance, and our servicers have the right and the obligation to obtain such insurance, at the borrower's cost, if the borrower allows the policy to lapse. We do not generally require property insurance to cover damages from flooding in areas outside a SpecialFlood Hazard Area , or to cover earthquake damage to single-family properties outside ofPuerto Rico and to multifamily properties unless required by a seismic-risk assessment. In the event of a natural or other disaster, our servicers work with affected borrowers to develop a plan that addresses the borrower's specific situation. Depending on the circumstances, the plan may include one or more of the following: a payment forbearance plan; a repayment or reinstatement plan; loan modification; coordination with insurance companies and administration of insurance proceeds; and, if necessary, loss mitigation or other property non-retention options. We have also establishedFannie Mae's Disaster Response NetworkTM to offer our eligible single-family borrowers free support from HUD-approved housing advisors, including help in developing a recovery assessment and action plan, filing claims, working with mortgage servicers, and identifying and navigating sources of federal, state and local assistance. These activities are designed to assist borrowers affected by disasters and thereby help reduce our losses, and we continue to evaluate their impact and seek new options and resources to deploy in response to disasters. Recent years have seen frequent and severe natural disasters in theU.S. , including hurricanes, wildfires and floods. There are concerns that the frequency and severity of major weather-related events is indicative of changing weather patterns and that these patterns could persist or intensify. Population growth and an increase in people living in high-risk areas, such as coastal areas vulnerable to severe storms and flooding, has also increased the impact of these events. We recognize that the increased frequency, severity and unpredictability of major natural disasters poses risks for all stakeholders in the housing system, including borrowers, renters, lenders, investors, insurers, and us. We are exploring the role we, along with FHFA and others, can play in helping to address some of these risks. For example, we are currently examining flood risk and insurance beyond our current requirements and considering how we can help develop solutions to address this risk, especially solutions that would not merely transfer risk away from us, but that would reduce the risks for all involved. Developing solutions to these challenges is complicated by the range and diversity of affected stakeholders, the possible need for legislative or regulatory action, industry insurance capacity, and the need to balance risk mitigation, affordability and sustainability. See "Risk Factors-Credit Risk" for additional information on the risks we face from the occurrence of major natural or other disasters, including additional ways that such events could negatively impact our business, results and liquidity. Institutional Counterparty Credit Risk Management Overview Institutional counterparty credit risk is the risk of loss resulting from the failure of an institutional counterparty to fulfill its contractual obligations to us. Our primary exposure to institutional counterparty credit risk exists with our: • credit guarantors, including mortgage insurers, reinsurers and multifamily
lenders with risk sharing arrangements;
• mortgage sellers and servicers;
• financial institutions that issue investments included in our other
investments portfolio; and
• derivatives counterparties.
We routinely enter into a high volume of transactions with counterparties in the financial services industry resulting in a significant credit concentration with respect to this industry. We also may have multiple exposures to particular counterparties, as many of our institutional counterparties perform several types of services for us. Accordingly, if one of these counterparties were to default on its obligations to us, it could harm our business and financial results in a variety of ways. Our overall objective in managing institutional counterparty credit risk is to maintain individual and portfolio-level counterparty exposures within acceptable ranges based on our risk-based rating system. We achieve this objective through the following: • establishment and observance of counterparty eligibility standards
appropriate to each exposure type and level;
• establishment of risk limits;
• requiring collateralization of exposures where appropriate; and
• exposure monitoring and management.
Fannie Mae 2019 Form 10-K 117
--------------------------------------------------------------------------------
MD&A | Risk Management
See "Risk Factors-Credit Risk" for additional discussion of the risks to our business if one or more of our institutional counterparties fails to fulfill their contractual obligations to us. Establishment and Observance of Counterparty Eligibility Standards The institutions with which we do business vary in size, complexity and geographic footprint. Because of this, counterparty eligibility criteria vary depending upon the type and magnitude of the risk exposure incurred. We use a risk-based approach to assess the credit risk of our counterparties through regular examination of their financial statements, confidential communication with the management of those counterparties and regular monitoring of publicly available credit rating information. This and other information is used to develop proprietary credit rating metrics that we use to assess credit quality. Factors including corporate or third-party support or guaranties, our knowledge of the counterparty and its management, reputation, quality of operations and experience are also important in determining the initial and continuing eligibility of a counterparty. Establishment of Risk Limits Institutions are assigned a risk limit to ensure that our risk exposure is maintained at a level appropriate for the institution's credit assessment and the time horizon for the exposure, as well as to diversify exposure so that we adequately manage our concentration risk. A corporate risk limit is first established at the counterparty level for the aggregate of all activity and then is divided among our individual business units. Our business units may further subdivide limits among products or activities. Collateralization of Exposures We may require collateral, letters of credit or investment agreements as a condition to approving exposure to a counterparty. Collateral requirements are determined after a comprehensive review of the credit quality and the level of risk exposure of each counterparty. We may require that a counterparty post collateral in the event of an adverse event such as a ratings downgrade. Collateral requirements are monitored and adjusted daily. Exposure Monitoring and Management The risk management functions of the individual business units are responsible for managing the counterparty exposures associated with their activities within risk limits. An oversight team that reports to ourChief Risk Officer is responsible for establishing and enforcing corporate policies and procedures regarding counterparties, establishing corporate limits, and aggregating and reporting institutional counterparty exposure. We regularly update exposure limits for individual institutions and communicate changes to the relevant business units. We regularly report exposures against the risk limits to the Risk Policy and Capital Committee of the Board of Directors. 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. Our primary exposure associated with mortgage insurers is that they will fail to fulfill their obligations to reimburse us for claims under our insurance policies. Actions we take to manage this risk include: • Maintaining financial and operational eligibility requirements that an insurer must meet to become and remain a qualified mortgage insurer. • Regularly monitoring our exposure to individual mortgage insurers and mortgage insurer credit ratings. Our monitoring of mortgage insurers includes in-depth financial reviews and analyses of the insurers' portfolios and capital adequacy under hypothetical stress scenarios. • Requiring certification and supporting documentation annually from each mortgage insurer.
• Performing periodic reviews of mortgage insurers to confirm compliance
with eligibility requirements and to evaluate their management, control
and underwriting practices.
In describing our mortgage insurance coverage, "insurance in force" refers to the unpaid principal balance of single-family loans in our conventional guaranty book of business covered under the applicable mortgage insurance policies. Our total mortgage insurance in force was $638.8 billion, or 22% of our single-family conventional guaranty book of business, as of December 31, 2019, compared with $598.7 billion, or 21% of our single-family conventional guaranty book of business, as of December 31, 2018. "Risk in force" refers to the maximum potential loss recovery under the applicable mortgage insurance policies 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. As of December 31, 2019, our total mortgage insurance risk in force was $163.2 billion, or 6% of our single-family conventional guaranty book of business, compared with $152.8 billion, or 5% of our single-family conventional guaranty book of business, as of December 31, 2018.Fannie Mae 2019 Form 10-K 118
--------------------------------------------------------------------------------
MD&A | Risk Management
Our total mortgage insurance in force and risk in force excludes insurance
coverage provided by federal government entities and credit insurance obtained
through CIRT deals.
The charts below display our mortgage insurer counterparties that provided
approximately 10% or more of the risk in force mortgage insurance coverage on
the single-family loans in our conventional guaranty book of business.
Mortgage Insurer Concentration(1)[[Image Removed: chart-fc276697b9f4598795da01.jpg]][[Image Removed: chart-4c001023c091531b8baa01.jpg]]
Arch Capital Group Ltd. Radian Mortgage Guaranty
Guaranty, Inc. Insurance Corp.
Genworth Mortgage Essent Others
Insurance Corp.(2) Guaranty, Inc.
(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. Upon acquisition,
will continue to be subject to our ongoing review and private mortgage
insurer eligibility requirements.
Of our total risk in force coverage, 2% as of December 31, 2019, compared with
3% as of December 31, 2018, was held with three mortgage insurers that are in
run-off, and therefore are no longer approved to write new insurance with us.
See "Risk Factors-Credit Risk" for a discussion of the risks to our business of
claims under our mortgage insurance policies not being paid in full or at all,
including the risks associated with our three mortgage insurance counterparties
that are in run-off.
Mortgage insurers must meet and maintain compliance with private mortgage
insurer eligibility requirements ("PMIERs") to be eligible to write mortgage
insurance on loans acquired by Fannie Mae . The PMIERs are designed to ensure
that mortgage insurers have sufficient liquid assets to pay all claims under a
hypothetical future stress scenario. At FHFA's direction, we and Freddie Mac
published revised PMIERs in September 2018, which became effective immediately
for new mortgage insurer applicants and in March 2019 for existing approved
private mortgage insurers. The revised PMIERs changed the PMIERs risk-based
asset requirements, enhanced the treatment of approved risk transfer
transactions and adjusted risk-transfer credit arising from counterparty risk
associated with reinsurance transactions.
Reinsurers
We use CIRT deals to transfer credit risk on a pool of loans to an insurance
provider that retains the risk, or to an insurance provider that simultaneously
cedes all of its risk to one or more reinsurers. In CIRT transactions, we select
the insurance providers and approve the allocation of coverage that may be
simultaneously transferred to reinsurers by a direct provider of our CIRT
insurance coverage. We take certain steps to increase the likelihood that we
will recover on the claims we file with the insurers, including the following:
• In our approval and selection of CIRT insurers and reinsurers, we take
into account the financial strength of those companies and the
concentration risk that we have with those counterparties.
• We monitor the financial strength of CIRT insurers and reinsurers to
confirm compliance with our requirements and to minimize potentialexposure. Changes in the financial strength of an insurer or reinsurer may
impact our future allocation of new CIRT insurance coverage to those
providers. In addition, a material deterioration of the financial strength
of a CIRT insurer or reinsurer may permit us to terminate existing CIRT
coverage pursuant to terms of the CIRT insurance policy.
Fannie Mae 2019 Form 10-K 119
--------------------------------------------------------------------------------
MD&A | Risk Management
• We require a portion of the insurers' or reinsurers' obligations in a CIRT
transaction to be collateralized with highly-rated liquid assets held in a
trust account. The required amount of collateral is initially determined
according to the ratings of the insurer or reinsurer. Contractual
provisions require additional collateral to be posted in the event of
adverse developments with the counterparty, such as a ratings downgrade.
The charts below display the concentration of our credit risk exposure to our
top five CIRT counterparties, measured by maximum liability to us, excluding the
benefit of collateral we hold to secure the counterparties' obligations.
CIRT Counterparty Concentration[[Image Removed: chart-0fdcf54554825c4f8b5a01.jpg]][[Image Removed: chart-a6445ed40f4c5e43974a01.jpg]]
Top 5 Others
• As of December 31, 2019, our CIRT counterparties had a maximum liability
to us of $9.9 billion.
• As of December 31, 2019, $2.9 billion in liquid assets securing CIRT
counterparties' obligations were held in trust accounts.
• Our top five CIRT counterparties had a maximum liability to us of $4.1billion as of December 31, 2019, compared with $3.7 billion as of December
31, 2018.
Our CIRT counterparty credit concentration decreased in 2019 as we attracted and expanded participation with additional approved reinsurers that wrote us new CIRT coverage. For information on our credit risk transfer transactions, see "Single-Family Business-Single-Family Mortgage Credit Risk Management-Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk-Single-Family Credit Risk Transfer Transactions" and "Multifamily Business-Multifamily Mortgage Credit Risk Management-Transfer of Multifamily Mortgage Credit Risk." Multifamily Lenders with Risk Sharing We enter into risk sharing agreements with multifamily lenders, primarily through the DUS program, 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 multifamily loans was $81.4 billion as of December 31, 2019, compared with $71.8 billion as of December 31, 2018. As of both December 31, 2019 and December 31, 2018, 44% of our maximum potential loss recovery on multifamily loans was from four DUS lenders. As noted above in "Multifamily Business-Multifamily Mortgage Credit Risk Management-Transfer of Multifamily Mortgage Credit Risk," 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 December 31, 2019, approximately 37% 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, compared with approximately 33% as of December 31, 2018. 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.
--------------------------------------------------------------------------------
MD&A | Risk Management
Mortgage Servicers and Sellers Mortgage Servicers The primary risk associated with mortgage servicers that service the loans in our guaranty book of business is that they will fail to fulfill their servicing obligations. See "Single-Family Business-Single-Family Primary Business Activities-Single-Family Mortgage Servicing" and "Multifamily Business-Multifamily Primary Business Activities-Multifamily Mortgage Servicing" for more discussion on the services performed by our mortgage servicers. A servicing contract breach could result in credit losses for us or could cause us to incur the cost of finding a replacement servicer. We likely would incur costs and potential increases in servicing fees and could also face operational risks if we replace a mortgage servicer. If a mortgage servicer defaults, it could result in a temporary disruption in servicing and loss mitigation activities relating to the loans serviced by that mortgage servicer, particularly if there is a loss of experienced servicing personnel. See "Risk Factors-Credit Risk" for a discussion of additional risks to our business and financial results associated with mortgage servicers. 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 the 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
• suspend or terminate the selling and servicing relationship if deemed
necessary.
A large portion of our single-family guaranty book is serviced by non-depository
servicers, particularly our delinquent single-family loans. Compared with
depository financial institutions, these institutions pose additional risks to
us because they may not have the same financial strength or operational
capacity, or be subject to the same level of regulatory oversight, as our
largest mortgage servicer counterparties, which are mostly depository
institutions.
The charts below display the percentage of our single-family guaranty book of
business serviced by our top five depository single-family mortgage servicers
and top five non-depository single-family mortgage servicers.
Single-Family Mortgage Servicer Concentration[[Image Removed: chart-b34e3f88378e5ed7be6a01.jpg]][[Image Removed: chart-ace858502c5358728fca01.jpg]]
Top 5 depository servicers Top 5 non-depository servicers Others
Fannie Mae 2019 Form 10-K 121
--------------------------------------------------------------------------------
MD&A | Risk Management
• As of December 31, 2019,Wells Fargo Bank, N.A ., together with its affiliates, serviced approximately 17% of our single-family guaranty book of business, compared with 18% as of December 31, 2018.
The charts below display the percentage of our multifamily guaranty book of business serviced by our top five multifamily mortgage servicers.
Multifamily Mortgage Servicer Concentration[[Image Removed: chart-ed9f67bbe71c5d5e978a01.jpg]][[Image Removed: chart-7710c797a28659c3863a01.jpg]]
Top 5 Others
• As of December 31, 2019 and 2018, Wells Fargo Bank, N.A ., together with
its affiliates, and Walker & Dunlop, LLC each serviced over 10% of our
multifamily guaranty book of business.
Repurchase Requests
Mortgage sellers and servicers may not meet the terms of their repurchase
obligations, and we may be unable to recover on all outstanding loan repurchase
obligations resulting from their breaches of contractual obligations. In
addition, 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. Failure by a significant mortgage seller or servicer, or
a number of mortgage sellers or servicers, to fulfill repurchase obligations to
us could result in an increase in our credit losses and credit-related expense,
and have an adverse effect on our results of operations and financial condition.
See "Single-Family Business-Single-Family Mortgage Credit Risk
Management-Single-Family Acquisition and Servicing Policies and Underwriting and
Servicing Standards-Repurchase Requests and Representation and Warranty
Framework," for additional information regarding repurchase requests.
Counterparty Credit Exposure of Investments Held in our Other Investments
Portfolio
The primary credit exposure associated with investments held in our other
investments portfolio is that issuers will not repay principal and interest in
accordance with the contractual terms. If one of these counterparties fails to
meet its obligations to us under the terms of the investments, it could result
in financial losses to us and have a material adverse effect on our earnings,
liquidity, financial condition and net worth. We believe the risk of default is
low because our other investments portfolio consists of instruments that are
broadly traded in the financial markets including: cash and cash equivalents,
securities purchased under agreements to resell or similar arrangements, and
U.S. Treasury securities.
As of December 31, 2019, our other investments portfolio totaled $74.3 billion
and included $39.5 billion of U.S. Treasury securities. As of December 31, 2018,
our other investments portfolio totaled $94.0 billion and included $35.5 billion
of U.S. Treasury securities. We mitigate our risk by monitoring the credit risk
position of our other investments portfolio. As of December 31, 2019, we held
$8.7 billion in overnight unsecured deposits with seven financial institutions,
compared with $8.0 billion held with six financial institutions as of December
31, 2018. 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 information on our other investments portfolio.
--------------------------------------------------------------------------------
MD&A | Risk Management
Derivative Counterparty Credit Exposure The primary credit exposure that we have on a derivative transaction is that a counterparty will default on payments due, which could result in us having to acquire a replacement derivative from a different counterparty at a higher cost or we may be unable to find a suitable replacement. Our derivative counterparty credit exposure relates principally to interest-rate derivative contracts. 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 Act, we are required to submit certain categories of interest-rate swaps to a derivatives clearing organization. We refer to our derivative transactions made pursuant to bilateral contracts as our OTC derivative transactions and our derivative transactions accepted for clearing by a derivatives clearing organization as our cleared derivative transactions. Actions we take to manage our derivative counterparty credit exposure relating to our OTC derivative transactions include: • entering into enforceable master netting arrangements with these
counterparties, which allow us to net derivative assets and liabilities
with the same counterparty; and
• requiring counterparties to post collateral, which includes cash, U.S. 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. Our cleared derivative transactions are submitted to a derivatives clearing organization on our behalf through a clearing member of the organization. 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 organization and the member who is acting on our behalf. 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. As of December 31, 2019 and 2018, we had thirteen counterparties with which we may transact OTC derivative transactions, all of which were subject to enforceable master netting arrangements. We had outstanding notional amounts with all of these OTC counterparties, and the highest concentration by total outstanding notional amount was approximately 7% as of December 31, 2019 compared with 8% as of December 31, 2018. 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 to credit loss on derivative instruments was $40 million as of December 31, 2019 and $57 million as of December 31, 2018. See "Note 8, Derivative Instruments" and "Note 14, Netting Arrangements" for additional information on our derivative contracts as of December 31, 2019 and 2018. Other Counterparties Counterparty Credit Risk Exposure Arising from the Resecuritization of Freddie Mac-Issued Securities We began resecuritizing Freddie Mac-issued securities in June 2019 when we began issuing UMBS, 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 aFannie 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 withTreasury . As of December 31, 2019, approximately $50.1 billion in Freddie Mac securities were backingFannie Mae -issued structured securities. We had no such transactions or activity in 2018. See "Business-Mortgage Securitizations-Uniform Mortgage-Backed Securities, or UMBS" and "Risk Factors-GSE and Conservatorship Risk" for more information on risks associated with our issuance of UMBS.
--------------------------------------------------------------------------------
MD&A | Risk Management
Custodial Depository Institutions Our mortgage servicer counterparties are required by our Servicing Guide to use custodial depository institutions to hold remittances of borrower payments of principal and interest on our behalf. If a custodial depository institution were to fail while holding such remittances, 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. To mitigate these risks, our Servicing Guide requires our mortgage servicer counterparties to use custodial depository institutions that are insured, that are rated as "well capitalized" by their regulator and that meet certain minimum financial ratings from third-party agencies. Mortgage Originators, Investors and Dealers We are routinely exposed to pre-settlement risk through the purchase or sale of mortgage loans and mortgage-related securities with mortgage originators, mortgage investors and mortgage dealers. The risk is the possibility that the counterparty will be unable or unwilling to either deliver mortgage assets or compensate us for the cost to cancel or replace the transaction. We manage this risk by determining position limits with these counterparties, based upon our assessment of their creditworthiness, and by monitoring and managing these exposures. Debt Security Dealers The credit risk associated with dealers that commit to place our debt securities is that they will fail to honor their contracts to take delivery of the debt, which could result in delayed issuance of the debt through another dealer. We manage these risks by establishing approval standards, monitoring our exposure positions and monitoring changes in the credit quality of dealers. Document Custodians We use third-party document custodians to provide loan document certification and custody services for some of the loans that we purchase and securitize. In many cases, our lender customers or their affiliates also serve as document custodians for us. Our ownership rights to the mortgage loans that we own or that back our Fannie Mae MBS could be challenged if a lender intentionally or negligently pledges or sells the loans that we purchased or fails to obtain a release of prior liens on the loans that we purchased, which could result in financial losses to us. When a lender or one of its affiliates acts as a document custodian for us, the risk that our ownership interest in the loans may be adversely affected is increased, particularly in the event the lender were to become insolvent. We mitigate these risks through legal and contractual arrangements with these custodians that identify our ownership interest, as well as by establishing qualifying standards for document custodians and requiring removal of the documents to our possession or to an independent third-party document custodian if we have concerns about the solvency or competency of the document custodian. The MERS System The MERS® System is an electronic registry that is widely used by participants in the mortgage finance industry to track servicing rights and ownership of loans inthe United States . A large portion of the loans we own or guarantee are registered and tracked in the MERS System. If we are unable to use the MERS System, or if our use of the MERS System adversely affects our ability to enforce our rights with respect to our loans registered and tracked in the MERS System, it could create operational and legal risks for us and increase the costs and time it takes to record loans or foreclose on loans. Market Risk Management, Including Interest-Rate Risk Management We are subject to market risk, which includes interest-rate risk and spread risk. These risks arise from our mortgage asset investments. Interest-rate risk is the risk that movements in interest rates will adversely affect the value of our assets or liabilities or our future earnings. Spread risk can result from changes in the spread between our mortgage assets and our debt and derivatives we use to hedge our position. Interest-Rate Risk Management Our goal is to manage market risk to be neutral to movements in interest rates and volatility, subject to model constraints and prevailing market conditions. We employ an integrated interest-rate risk management strategy that allows for informed risk taking within pre-defined corporate risk limits. Decisions regarding our strategy in managing interest-rate risk are based upon our corporate market risk policy and limits that are approved by our Board of Directors. We have actively managed the interest-rate risk of our "net portfolio", which is defined below, through the following techniques: • asset selection and structuring (that is, by identifying or structuring
mortgage assets with attractive prepayment and other risk
characteristics);
• issuing a broad range of both callable and non-callable debt instruments; and
• using interest-rate derivatives.
Fannie Mae 2019 Form 10-K 124
--------------------------------------------------------------------------------
MD&A | Risk Management
We have not actively managed or hedged our spread risk, which would include the impact of changes in the spread between our mortgage assets and debt (referred to as mortgage-to-debt spreads) after we purchase mortgage assets, other than through asset monitoring and disposition. For mortgage assets in our portfolio that we intend to hold to maturity to realize the contractual cash flows, we accept period-to-period volatility in our financial performance attributable to changes in mortgage-to-debt spreads that occur after our purchase of mortgage assets. See "Risk Factors-Market and Industry Risk" for a discussion of the risks to our business posed by changes in interest rates and changes in spreads. We monitor current market conditions, including the interest-rate environment, to assess the impact of these conditions on individual positions and our interest-rate risk profile. In addition to qualitative factors, we use various quantitative risk metrics in determining the appropriate composition of our retained mortgage portfolio, our investments in non-mortgage securities and relative mix of debt and derivatives positions in order to remain within pre-defined risk tolerance levels that we consider acceptable. We regularly disclose two interest-rate risk metrics that estimate our interest-rate exposure: (1) fair value sensitivity to changes in interest-rate levels and the slope of the yield curve and (2) duration gap. The metrics used to measure our interest-rate exposure are generated using internal models. Our internal models, consistent with standard practice for models used in our industry, require numerous assumptions. There are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. The reliability of our prepayment estimates and interest-rate risk metrics depends on the availability and quality of historical data for each of the types of securities in our net portfolio. When market conditions change rapidly and dramatically, as they did during the financial market crisis of late 2008, the assumptions of our models may no longer accurately capture or reflect the changing conditions. On a continuous basis, management makes judgments about the appropriateness of the risk assessments indicated by the models. See "Risk Factors-Market and Industry Risk" for a discussion of the risks associated with our reliance on models to manage risk. Sources of Interest-Rate Risk Exposure The primary source of our interest-rate risk is the composition of our net portfolio. Our net portfolio consists of our retained mortgage portfolio assets; other investments portfolio; our outstanding debt ofFannie Mae that is used to fund the retained mortgage portfolio assets and other investments portfolio; mortgage commitments and risk management derivatives. Risk management derivatives along with our debt instruments are used to manage interest-rate risk. Our performing mortgage assets consist mainly of single-family and multifamily mortgage loans. For single-family loans, borrowers have the option to prepay at any time before the scheduled maturity date or continue paying until the stated maturity. Given this prepayment option held by the borrower, we are exposed to uncertainty as to when or at what rate prepayments will occur, which affects the length of time our mortgage assets will remain outstanding and the timing of the cash flows related to these assets. This prepayment uncertainty results in a potential mismatch between the timing of receipt of cash flows related to our assets and the timing of payment of cash flows related to our liabilities. Changes in interest rates, as well as other factors, influence mortgage prepayment rates and duration and also affect the value of our mortgage assets. When interest rates decrease, prepayment rates on fixed-rate mortgages generally accelerate because borrowers usually can pay off their existing mortgages and refinance at lower rates. Accelerated prepayment rates have the effect of shortening the duration and average life of the fixed-rate mortgage assets we hold in our net portfolio. In a declining interest-rate environment, existing mortgage assets held in our net portfolio tend to increase in value or price because these mortgages are likely to have higher interest rates than new mortgages, which are being originated at the then-current lower interest rates. Conversely, when interest rates increase, prepayment rates generally slow, which extends the duration and average life of our mortgage assets and results in a decrease in value. Interest-Rate Risk Management Strategy Our goal for managing the interest-rate risk of our net portfolio is to be neutral to movements in interest rates and volatility. This involves asset selection and structuring of our liabilities to match and offset the interest-rate characteristics of our retained mortgage portfolio and our investments in non-mortgage securities. Our strategy consists of the following principal elements: • Debt Instruments. We issue a broad range of both callable and non-callable
debt instruments to manage the duration and prepayment risk of expected
cash flows of the mortgage assets we own.
• Derivative Instruments. We supplement our issuance of debt with derivative
instruments to further reduce duration and prepayment risks.
• Monitoring and Active Portfolio Rebalancing. We continually monitor our
risk positions and actively rebalance our portfolio of interest
rate-sensitive financial instruments to maintain a close match between the
duration of our assets and liabilities.
Debt Instruments Historically, the primary tool we have used to fund the purchase of mortgage assets and manage the interest-rate risk implicit in our mortgage assets is the variety of debt instruments we issue. The debt we issue is a mix that typically consists of short- and long-term, non-callable and callable debt. The varied maturities and flexibility of these debt combinations help us in reducing the mismatch of cash flows between assets and liabilities in order to manage the duration risk associated with an investment in long-term fixed-rate assets. Callable debt helps us manage the prepayment risk associated with fixed-rateFannie Mae 2019 Form 10-K 125
--------------------------------------------------------------------------------
MD&A | Risk Management
mortgage assets because the duration of callable debt changes when interest rates change in a manner similar to changes in the duration of mortgage assets. See "Liquidity and Capital Management-Liquidity Management-Debt Funding" for additional information on our debt activity. Derivative Instruments Derivative instruments also are an integral part of our strategy in managing interest-rate risk. Derivative instruments may be privately negotiated contracts, which are often referred to as over-the-counter derivatives, or they may be listed and traded on an exchange. When deciding whether to use derivatives, we consider a number of factors, such as cost, efficiency, the effect on our liquidity and results of operations, and our interest-rate risk management strategy. The derivatives we use for interest-rate risk management purposes fall into these broad categories: • Interest-rate swap contracts. An interest-rate swap is a transaction
between two parties in which each agrees to exchange, or swap, interest
payments. The interest payment amounts are tied to different interest
rates or indices for a specified period of time and are generally based on
a notional amount of principal. The types of interest-rate swaps we use
include pay-fixed swaps, receive-fixed swaps and basis swaps.
• Interest-rate option contracts. These contracts primarily include
pay-fixed swaptions, receive-fixed swaptions, cancelable swaps and
interest-rate caps. A swaption is an option contract that allows us or a
counterparty to enter into a pay-fixed or receive-fixed swap at some point
in the future.
• Foreign currency swaps. These swaps convert debt that we issue in foreign
denominated currencies into
swaps only to the extent that we hold foreign currency debt.
• Futures. These are standardized exchange-traded contracts that either
obligate a buyer to buy an asset or a seller to sell an asset, in each
case at a predetermined date and price. The types of futures contracts we
enter into include SOFR and
We use interest-rate swaps, interest-rate options and futures, in combination with our issuance of debt securities, to better match the duration of our assets with the duration of our liabilities. We are generally an end-user of derivatives; our principal purpose in using derivatives is to manage our aggregate interest-rate risk profile within prescribed risk parameters. We generally only use derivatives that are relatively liquid and straightforward to value. We use derivatives for four primary purposes: • as a substitute for notes and bonds that we issue in the debt markets;
• to achieve risk management objectives not obtainable with debt market
securities;
• to quickly and efficiently rebalance our portfolio; and
• to hedge foreign currency exposure.
Decisions regarding the repositioning of our derivatives portfolio are based upon current assessments of our interest-rate risk profile and economic conditions, including the composition of our retained mortgage portfolio, our investments in non-mortgage securities and relative mix of our debt and derivative positions, the interest-rate environment and expected trends. 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. 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; and
• 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 theU.S. LIBOR interest-rate swap curve.
--------------------------------------------------------------------------------
MD&A | Risk Management
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 shorter tenors and an opposite shift of 8.3 basis points for the 30-year rate. Rate shocks for remaining maturity points are interpolated. We believe the aforementioned interest-rate shocks for our monthly disclosures 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 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 be dependent upon, 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 discussed 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. 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 December 31, 2019 and 2018. The sensitivity measures displayed in the table below, which we disclose on a quarterly basis pursuant to a disclosure commitment with FHFA, are an extension of our monthly sensitivity measures. There are three primary differences between our monthly sensitivity disclosure and the quarterly sensitivity disclosure presented below: • the quarterly disclosure is expanded to include the sensitivity results
for larger rate level shocks of positive or negative 100 basis points;
• 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
• 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.
Fannie Mae 2019 Form 10-K 127
--------------------------------------------------------------------------------
MD&A | Risk Management
Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve
As of December 31,(1)(2)
2019 2018
(Dollars in millions)
Rate level shock:
-100 basis points $ 57 $ (286 )
-50 basis points 11 (119 )
+50 basis points 51 48
+100 basis points 160 29
Rate slope shock:
-25 basis points (flattening) (20 ) (7 )
+25 basis points (steepening) 22 6
For the Three Months Ended December 31,(1)(3)
2019 2018
Rate Slope Shock 25 Rate Level Shock 50
Duration Gap bps Rate Level Shock 50 bps Duration Gap Rate Slope Shock 25 bps bps
Market Value Sensitivity Market Value Sensitivity
(In years) (Dollars in millions) (In years) (Dollars in millions)
Average (0.02) $ (19 ) $ 5 (0.01) $ (8 ) $ (65 )
Minimum (0.05) (27 ) (20 ) (0.07) (18 ) (119 )
Maximum 0.04 (12 ) 34 0.05 (1 ) (40 )
Standard deviation 0.02 4 13 0.02 4 17
(1) Computed based on changes in
(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 December 31,
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 December 31,(1)
2019 2018
(Dollars in millions)
Before derivatives $ (197 ) $ (535 )
After derivatives 51 48
Effect of derivatives 248 583
(1) Measured on the last business day of each period presented.
Liquidity and Funding Risk Management See "Liquidity and Capital Management" for a discussion of how we manage liquidity and funding risk.
--------------------------------------------------------------------------------
MD&A | Risk Management
Operational Risk Management
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people or systems, or from external events. Our corporate
operational risk framework aligns with our Enterprise Risk policy, as well as
the COSO Enterprise Risk Management framework, and has evolved based on the
changing needs of our businesses and FHFA regulatory guidance. The Operational
Risk Management group is responsible for overseeing and monitoring compliance
with our operational risk program's requirements. Operational Risk Management
works in conjunction with other second line of defense teams, such as Compliance
and Ethics, to oversee and aggregate the full range of operational risks,
including fraud, resiliency, business interruptions, processing errors, damage
to physical assets, workplace safety, and employment practices. To quantify our
operational risk exposure, we rely on the Basel Standardized Approach, which is
based on a percentage of gross income. In addition, where appropriate, we
purchase insurance policies to mitigate the impact of operational losses.
See "Risk Factors-Operational Risk" for more information regarding our
operational risk and "Risk Management" for more information regarding our
governance of operational risk management.
Cybersecurity Risk Management
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 and from time to time we have been, and
likely will continue to be, the target of attempted cyber attacks and other
information security threats. These risks are an unavoidable result of being in
business, and managing these risks is part of our business activities.
We have developed and continue to enhance our cybersecurity risk management
program to protect the security of our computer systems, software, networks and
other technology assets against unauthorized attempts to access confidential
information or to disrupt or degrade business operations. Our cybersecurity risk
management program aligns to the COSO Enterprise Risk Management framework, the
National Institute of Standards and Technology Framework for Improving Critical
Infrastructure Cybersecurity, and has evolved based on the changing needs of our
business, the evolving threat environment and FHFA regulatory guidance. Our
cybersecurity risk management program extends to oversight of third parties that
could be a source of cybersecurity risk, including customers that use our
systems and third-party service providers. We examine the effectiveness and
maturity of our cyber defenses through various means, including internal audits,
targeted testing, incident response exercises, maturity assessments and industry
benchmarking. We continue to strengthen our partnerships with the appropriate
government and law enforcement agencies and with other businesses and
cybersecurity services in order to understand the full spectrum of cybersecurity
risks in the environment, enhance our defenses and improve our resiliency
against cybersecurity threats. We also have obtained insurance coverage relating
to cybersecurity risks. To date, we have not experienced any material losses
relating to cyber attacks. For a discussion of our Board of Directors' role in
overseeing the company's cybersecurity risk management, see "Directors,
Executive Officers and Corporate Governance-Corporate Governance-Risk Management
Oversight-Board's Role in Cybersecurity Risk Oversight."
Despite our efforts to ensure the integrity of our software, computers, systems
and information, we may not be able to anticipate, detect or recognize threats
to our systems and assets, or to implement effective preventive measures against
all cyber threats, especially because the techniques used are increasingly
sophisticated, change frequently, are complex, and are often not recognized
until launched. In addition, we have discussed and worked with customers,
vendors, service providers, counterparties and other third parties to develop
secure transmission capabilities and protect against cyber attacks, but we do
not have, and may be unable to put in place, secure capabilities with all of our
clients, vendors, service providers, counterparties and other third parties, and
we may not be able to ensure that these third parties have appropriate controls
in place to prevent cyber attacks. See "Risk Factors-Operational Risk" for
additional discussion of cybersecurity risks to our business.
Model Risk Management
Our internal models require numerous assumptions and there are inherent
limitations in any methodology used to estimate macroeconomic factors such as
home prices, unemployment and interest rates, and their impact on borrower
behavior. When market conditions change rapidly and dramatically, the
assumptions of our models may no longer accurately capture or reflect the
changing conditions. Management periodically makes judgments about the
appropriateness of the risk assessments indicated by the models. See "Risk
Factors-Operational Risk" for a discussion of the risks associated with our use
of models.
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
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."
Fannie Mae 2019 Form 10-K 129
--------------------------------------------------------------------------------
MD&A | Critical Accounting Policies and Estimates
We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. Management has discussed any significant changes in judgments and assumptions in applying our critical accounting policies with the Audit Committee of our Board of Directors. See "Risk Factors" 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 one of our accounting policies, 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. Allowance for Loan Losses We maintain an allowance for loan losses for loans classified as held for investment, including both loans held in our portfolio and loans held in consolidated Fannie Mae MBS trusts. This amount represents probable losses incurred related to loans in our consolidated balance sheets, including concessions granted to borrowers upon modifications of their loans, as of the balance sheet date. The allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related to our loans held for investment. Our allowance for loan losses consists of a specific loss reserve for individually impaired loans and a collective loss reserve for all other loans. We have an established process, using analytical tools and benchmarks, 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 loss severity trends and periodically make changes in our historically developed assumptions and estimates as necessary to better reflect present conditions, including current trends in borrower risk, general economic trends, changes in risk management practices, and changes in public policy and the regulatory environment. We also consider the recoveries that we expect to receive on mortgage insurance and other loan-specific credit enhancements entered into contemporaneously with and in contemplation of a guaranty or loan purchase transaction, as such recoveries reduce the severity of the loss associated with defaulted loans. We provide more detailed information on our accounting for the allowance for loan losses in "Note 1, Summary of Significant Accounting Policies." 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. The single-family loss reserve for individually impaired loans represents the majority of our single-family loss reserves due to the high volume of restructured loans. We typically measure impairment based on the difference between our recorded investment in the loan 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 acquisition 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 value 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 loans in our single-family guaranty book of business using a model that estimates the probability of default on these 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 our loss severity estimates for all loan categories. Multifamily Loss Reserves We 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. 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 andFannie Mae 2019 Form 10-K 130
--------------------------------------------------------------------------------
MD&A | Critical Accounting Policies and Estimates
management judgment. We categorize loan credit risk, taking into consideration available operating statements and expected cash flows from the underlying property, the estimated value of the property, the historical loan payment experience 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 loan and the fair value of the underlying property less the estimated discounted costs to sell the property and any lender loss sharing 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, in which case we measure impairment the same way we measure it for other individually impaired multifamily loans. Impact of Adopting the CECL Standard The CECL standard became effective for our fiscal year beginning January 1, 2020. We have changed our accounting policies and implemented system, model and process changes to adopt the standard, which will be reflected in our financial statements for the quarter ending March 31, 2020. Upon adoption we used a discounted 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 used to estimate credit losses incorporated our historical credit loss experience, adjusted for current economic forecasts and the current credit profile of our loan book of business. The models used reasonable and supportable forecasts for key economic drivers, such as home prices (single-family), rental income (multifamily) and capitalization rates (multifamily). Our process for determining the impact upon adoption of the new standard is complex and involves significant management judgment, including a reliance on historical loss information and current economic forecasts that may not be representative of credit losses we ultimately realize. Impact of Future Adoption of New Accounting Guidance As discussed above, we adopted the CECL standard on January 1, 2020. Our adoption of the CECL standard will reduce our retained earnings by $1.1 billion on an after-tax basis, which will be reflected in our financial statements for the quarter ending March 31, 2020. We further identify and discuss the expected impact on our consolidated financial statements of recently issued accounting guidance in "Note 1, Summary of Significant Accounting Policies." Glossary of Terms Used in This Report Terms used in this report have the following meanings, unless the context indicates otherwise. "Acquired credit-impaired loans" refers to loans we have acquired for which there is evidence of credit deterioration since origination and for which it is probable we will not be able to collect all of the contractually due cash flows. We record our net investment in such loans at the lower of the acquisition cost of the loan or the estimated fair value of the loan at the date of acquisition. Typically, loans we acquire from our unconsolidated MBS trusts pursuant to our option to purchase upon default meet these criteria. Because we acquire these loans from our MBS trusts at par value plus accrued interest, to the extent the par value of a loan exceeds the estimated fair value at the time we acquire the loan, we record the related fair value loss as a charge against the "Reserve for guaranty losses." "Advisory Bulletin" refers to FHFA's Advisory Bulletin AB 2012-02, "Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention." "Agency mortgage-related securities" refers to mortgage-related securities issued byFannie Mae , Freddie Mac andGinnie Mae . "Alt-A mortgage loan" or "Alt-A loan" generally refers to a mortgage loan originated under a lender's program offering reduced or alternative documentation than that required for a full documentation mortgage loan but may also include other alternative product features. As a result, Alt-A mortgage loans have a higher risk of default than non-Alt-A mortgage loans. We classify certain loans as Alt-A so that we can discuss our exposure to Alt-A loans in this report and elsewhere. However, there is no universally accepted definition of Alt-A loans. In reporting our Alt-A exposure, we have classified mortgage loans as Alt-A if and only if the lenders that delivered the mortgage loans to us classified the loans as Alt-A, based on documentation or other product features. We have loans with some features that are similar to Alt-A mortgage loans that we have not classified as Alt-A because they do not meet our classification criteria. We do not rely solely on our classifications of loans as Alt-A to evaluate the credit risk exposure relating to these loans in our single-family conventional guaranty book of business. For more information about the credit risk characteristics of loans in our single-family guaranty book of business, see "Single-Family Business-Single-Family Mortgage Credit Risk Management," "Note 3, Mortgage Loans." We have classified private-label mortgage-related securities held in our retained mortgage portfolio as Alt-A if the securities were labeled as such when issued. "Amortization income" refers to income resulting from the amortization of 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. These basisFannie Mae 2019 Form 10-K 131
--------------------------------------------------------------------------------
MD&A | Glossary of Terms Used in This Report
adjustments often result from upfront fees that we receive at the time of loan
acquisition primarily related to single-family loan-level pricing adjustments or
other fees we receive from lenders, which are amortized over the contractual
life of the loan.
"Business volume" refers to the sum in any given period of the unpaid principal
balance of: (1) the mortgage loans and mortgage-related securities we purchase
for our retained mortgage portfolio; (2) the mortgage loans we securitize into
Fannie Mae MBS that are acquired by third parties; and (3) credit enhancements
that we provide on our mortgage assets. It excludes mortgage loans we securitize
from our portfolio and the purchase of Fannie Mae MBS for our retained mortgage
portfolio.
"CECL standard" refers to Accounting Standards Update 2016-13, Financial
Instruments-Credit Losses, Measurement of Credit Losses on Financial Instruments
and related amendments.
"Charge-off" refers to loan amounts written off as uncollectible bad
debts. These loan amounts are removed from our consolidated balance sheet and
charged against our loss reserves when the balance is deemed uncollectible,
which is generally at foreclosure or other liquidation events (such as
deed-in-lieu of foreclosure or a short-sale). Also includes charge-offs related
to the redesignation of loans from held for investment ("HFI") to held for sale
("HFS") and charge-offs related to the Advisory Bulletin.
"Connecticut Avenue Securities" or "CAS" refers to a type of security that
allows Fannie Mae to transfer a portion of the credit risk from loan reference
pools, consisting of certain mortgage loans in our guaranty book of business, to
third-party investors.
"Connecticut Avenue Securities Credit-Linked Notes" or "CAS CLNs" refers to
Connecticut Avenue Securities that are structured as securities issued by trusts
that do not qualify as REMICs.
"Connecticut Avenue Securities REMICs" or "CAS REMICs" refers to Connecticut
Avenue Securities that are structured as notes issued by trusts that qualify as
REMICs.
"Conventional mortgage" refers to a mortgage loan that is not guaranteed or
insured by the U.S. government or its agencies, such as the VA , the FHA or the
Rural Development Housing and Community Facilities Program of the Department of
Agriculture .
"Credit enhancement" refers to an agreement used to reduce credit risk by
requiring collateral, letters of credit, mortgage insurance, corporate
guarantees, inclusion in a credit risk transfer transaction reference pool, 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.
"FHFA" refers to the Federal Housing Finance Agency . FHFA is an independent
agency of the federal government with general supervisory and regulatory
authority over Fannie Mae , Freddie Mac and the Federal Home Loan Banks. FHFA is
our safety and soundness regulator and our mission regulator. FHFA also has been
acting as our conservator since September 6, 2008. For more information on
FHFA's authority as our conservator and as our regulator, see
"Business-Conservatorship, Treasury Agreements and Housing Finance Reform" and
"Business-Charter Act and Regulation-GSE Act and Other Legislation."
"GSE Act" refers to the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended, including by the Federal Housing Finance
Regulatory Reform Act of 2008. We are subject to regulation applicable to us
pursuant to the GSE Act, as described in "Business-Charter Act and Regulation."
"Guaranty book of business" refers to the sum of the unpaid principal balance
of: (1) Fannie Mae MBS outstanding (excluding the portions of any structured
securities Fannie Mae issues that are backed by Freddie Mac securities);
(2) mortgage loans of Fannie Mae held in our retained mortgage portfolio; and
(3) other credit enhancements that we provide on mortgage assets. It also
excludes non-Fannie Mae mortgage-related securities held in our retained
mortgage portfolio for which we do not provide a guaranty.
"HARP loans" refer to loans we acquired through the Home Affordable Refinance
Program ("HARP"), which allowed eligible Fannie Mae borrowers with high LTV
ratio loans to refinance into more sustainable loans.
"HFI loans" or "held-for-investment loans" refer to mortgage loans we acquire
for which we have the ability and intent to hold for the foreseeable future or
until maturity.
"HFS loans" or "held-for-sale loans" refer to mortgage loans we acquire that we
intend to sell or securitize via trusts that will not be consolidated.
"Intermediate-term loans" are loans with maturities at origination equal to or
less than 15 years.
"Loans," "mortgage loans" and "mortgages" refer to both whole loans and loan
participations, secured by residential real estate, cooperative shares or by
manufactured housing units.
"Loss reserves" consists of our allowance for loan losses and our reserve for
guaranty losses. Through December 31, 2019, loss reserves reflect our estimate
of the probable losses we have incurred in our guaranty book of business,
including concessions we granted borrowers upon modification of their loans.
Since our adoption of the CECL standard on January 1, 2020, which will impact
our financial statements for periods beginning on or after that date, our loss
reserves reflect our estimate of lifetime expected credit losses rather than
solely incurred losses.
"Mortgage assets," when referring to our assets, refers to both mortgage loans
and mortgage-related securities we hold in our retained mortgage portfolio. For
purposes of the senior preferred stock purchase agreement, the definition of
mortgage assets for 2019 and prior periods is based on the unpaid principal
balance of such assets and does not reflect market valuation
--------------------------------------------------------------------------------
MD&A | Glossary of Terms Used in This Report
adjustments, allowance for loan losses, impairments, unamortized premiums and discounts and the impact of our consolidation of variable interest entities. For periods after 2019, at FHFA's direction our mortgage asset calculation will also include 10% of the notional value of interest-only securities we hold. We disclose the amount of our mortgage assets for purposes of the senior preferred stock purchase agreement on a monthly basis in the "Endnotes" to our Monthly Summaries, which are available on our website and announced in a press release. "Mortgage-backed securities" or "MBS" refers generally to securities that represent beneficial interests in pools of mortgage loans or other mortgage-related securities. These securities may be issued byFannie Mae or by others. "Multifamily Connecticut Avenue Securities" or "MCAS" refers to Connecticut Avenue Securities that are structured as notes issued by trusts to transfer credit risk on our multifamily guaranty book of business to third-party investors. "Multifamily mortgage loan" refers to a mortgage loan secured by a property containing five or more residential dwelling units. "New business purchases" refers to 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. "Notional amount" refers to the hypothetical dollar amount in an interest rate swap transaction on which exchanged payments are based. The notional amount in an interest rate swap transaction generally is not paid or received by either party to the transaction, or generally perceived as being at risk. The notional amount is typically significantly greater than the potential market or credit loss that could result from such transaction. "Outstanding Fannie Mae MBS" refers to the total unpaid principal balance of any type of mortgage-backed security that we issue, including UMBS, Supers, REMICs and other types of single-family or multifamily mortgage-backed securities that are held by third-party investors or in our retained mortgage portfolio. For securities held by third-party investors, it excludes the portions of any structured securities Fannie Mae issues that are backed by Freddie Mac-issued securities. "Private-label securities" or "PLS" refers to mortgage-related securities issued by entities other than agency issuers Fannie Mae, Freddie Mac or Ginnie Mae. "Refi Plus loans" refers to loans we acquired under our Refi Plus initiative, which offered refinancing flexibility to eligible Fannie Mae borrowers who were current on their loans and who applied prior to the initiative's December 31, 2018 sunset date. Refi Plus had no limits on maximum LTV ratio and provided mortgage insurance flexibilities for loans with LTV ratios greater than 80%. "REMIC" or "Real Estate Mortgage Investment Conduit" refers to a type of mortgage-related security in which interest and principal payments from mortgages or mortgage-related securities are structured into separately traded securities. "REO" refers to real-estate owned by Fannie Mae because we have foreclosed on the property or obtained the property through a deed-in-lieu of foreclosure. "Representations and warranties" refers to a lender's assurance that a mortgage loan sold to us complies with the standards outlined in our Mortgage Selling and Servicing Contract, which incorporates the Selling and Servicing Guides, including underwriting and documentation. Violation of any representation or warranty is a breach of the lender contract, including the warranty that the loan complies with all applicable requirements of the contract, which provides us with certain rights and remedies. "Retained mortgage portfolio" refers to the mortgage-related assets we own (excluding the portion of assets that back mortgage-related securities owned by third parties). "Single-family mortgage loan" refers to a mortgage loan secured by a property containing four or fewer residential dwelling units. "Structured Fannie Mae MBS" refers to Fannie Mae securitizations that are resecuritizations of UMBS or previously-issued structured securities. As described in "Business-Mortgage Securitizations-Uniform Mortgage-Backed Securities, or UMBS," structured securities can be commingled-that is, they can include both Fannie Mae securities and Freddie Mac securities as the underlying collateral for the security "Subprime private-label mortgage securities" generally refers to private-label mortgage-related securities held in our retained mortgage portfolio that were labeled as subprime when issued. "TCCA fees" refers to the expense recognized as a result of the 10 basis point increase in guaranty fees on all single-family residential mortgages delivered to us on or after April 1, 2012 and before January 1, 2022 pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011, which we remit to Treasury on a quarterly basis. "TDR" or "troubled debt restructuring" refers to a modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial difficulties. "Uniform Mortgage-Backed Securities" or "UMBS" refers to the securities each of Fannie Mae and Freddie Mac issues and guarantees that are directly backed by mortgage loans it has acquired as described in "Business-Mortgage Securitizations-Uniform Mortgage-Backed Securities, or UMBS."
Fannie Mae 2019 Form 10-K 133
--------------------------------------------------------------------------------
© Edgar Online, source
