FEDERAL NATIONAL MORTGAGE ASSOCIATION We have been under conservatorship, with the
as conservator, since September 6, 2008 . As conservator, FHFA succeeded to all rights,
titles, powers and privileges of the company, and of any shareholder, officer or director of
the company with respect to the company and its assets. The conservator has since provided
for the exercise of certain authorities by our Board of Directors. Our directors do not have
any fiduciary duties to any person or entity except to the conservator and, accordingly, are
not obligated to consider the interests of the company, the holders of our equity or debt
securities, or the holders of Fannie Mae MBS unless specifically directed to do so by the
conservator.
We do not know when or how the conservatorship will terminate, what further changes to our
business will be made during or following conservatorship, what form we will have and what
ownership interest, if any, our current common and preferred stockholders will hold in us
after the conservatorship is terminated or whether we will continue to exist following
conservatorship. Members of Congress and the Administration continue to express the
importance of housing finance system reform.
We are not currently permitted to pay dividends or other distributions to stockholders. Our
agreements with the U.S. Department of the Treasury ("Treasury") include a commitment from
Treasury to provide us with funds to maintain a positive net worth under specified
conditions; however, the U.S. government does not guarantee our securities or other
obligations. Our agreements with Treasury also include covenants that significantly restrict
our business activities. For additional information on the conservatorship, the uncertainty
of our future, our agreements with Treasury , and recent developments relating to housing
finance reform, see "Business-Conservatorship, Treasury Agreements and Housing Finance
Reform" and "Risk Factors" in our Form 10-K for the year ended December 31, 2020 ("2020 Form
10-K") and "Legislation and Regulation" in this report.
You should read this MD&A in conjunction with our unaudited condensed
consolidated financial statements and related notes in this report and the more
detailed information in our 2020 Form 10-K. You can find a "Glossary of Terms
Used in This Report" in our 2020 Form 10-K.
Forward -looking statements in this report are based on management's current
expectations and are subject to significant uncertainties and changes in
circumstances, as we describe in "Forward-Looking Statements." Future events and
our future results may differ materially from those reflected in our
forward-looking statements due to a variety of factors, including those
discussed in "Risk Factors" and elsewhere in this report and in our 2020
Form 10-K.
Introduction
Fannie Mae Second Quarter 2021 Form 10-Q 1
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MD&A | Executive Summary | Summary of Our Financial Performance
Executive Summary
Summary of Our Financial Performance
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•Net revenues increased
Fannie Mae Second Quarter 2021 Form 10-Q 2
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MD&A | Executive Summary | Summary of Our Financial Performance
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•Net revenues increased
Fannie Mae Second Quarter 2021 Form 10-Q 3
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MD&A | Executive Summary | Liquidity Provided in First Half of 2021
Liquidity Provided in the First Half of 2021
Through our single-family and multifamily business segments, we provided
Fannie Mae Provided $806 Billion in Liquidity in the First Half of 2021
Unpaid Principal Balance Units
$229B 759K
Single-Family Home Purchases
$545B 2.0M
Single-Family Refinancings
$32B 345K
Multifamily Rental Units
We continued our commitment to green financing in the first half of 2021,
issuing a total of
The information in this section updates and supplements information regarding legislative, regulatory, conservatorship and other developments affecting our business set forth in "Business-Conservatorship, Treasury Agreements and Housing Finance Reform" and "Business-Legislation and Regulation" in our 2020 Form 10-K, as well as in "MD&A-Legislation and Regulation" in our Form 10-Q for the quarter endedMarch 31, 2021 ("First Quarter 2021 Form 10-Q"). Also see "Risk Factors" in our 2020 Form 10-K and in this report for discussions of risks relating to legislative and regulatory matters. Resolution Planning Final Rule InMay 2021 , FHFA issued a final rule requiring us to develop a plan for submission to FHFA that would assist FHFA in planning for the rapid and orderly resolution of the company if FHFA is appointed as our receiver. The stated goals in the rule for our resolution plan are to: •minimize disruption in the national housing finance markets by providing for the continued operation of our core business lines in receivership by a newly constituted limited-life regulated entity; •preserve the value of our franchise and assets; •facilitate the division of assets and liabilities between the limited-life regulated entity and the receivership estate; •ensure that investors in our guaranteed mortgage-backed securities and our unsecured debt bear losses in the order of their priority established under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended, including by the Housing and Economic Recovery Act of 2008 (together, the "GSE Act"), while minimizing unnecessary losses and costs to these investors; and •foster market discipline by making clear that no extraordinary government support will be available to indemnify investors against losses or fund the resolution of the company. The rule establishes that our resolution planning process would begin with the identification of our core business lines-those business lines that plausibly would continue to operate in a limited-life regulated entity. Our initial identification of core business lines must be submitted to FHFA byOctober 6, 2021 . The rule requires that we submit our initial resolution plan to FHFA byApril 6, 2023 , and subsequent resolution plans not later than every two years thereafter unless otherwise notified by FHFA. The rule provides a set of required and prohibited assumptions the resolution plan should reflect, including assuming severely adverse economic conditions and the prohibition of assuming extraordinary support by theU.S. government (including support under our senior preferred stock purchase agreement withTreasury ). Fannie Mae Second Quarter 2021 Form 10-Q 4
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MD&A | Legislation and Regulation
Executive Compensation Request for Input
On June 10, 2021 , FHFA issued a request for input on executive compensation at
Fannie Mae , Freddie Mac and the Federal Home Loan Banks. FHFA has significant
oversight and approval rights over our executive compensation arrangements both
as our conservator and as our regulator. The request for input asks for feedback
from the public within 60 days on a number of questions relating to our
executive compensation program covering a variety of topics. Changes in our
executive compensation program could affect our ability to retain and recruit
executive officers. See "Risk Factors-GSE and Conservatorship Risk" in this
report for a discussion of how our business and financial results may be
materially adversely affected if we are unable to retain and recruit
well-qualified executives and other employees.
Supreme Court Decision on Housing and Economic Recovery Act; Change in FHFA
Director
In its opinion in Collins et al. v. Yellen, Secretary of the Treasury , et al.,
issued on June 23, 2021 , the Supreme Court concluded that the for-cause
restriction on the President's power to remove the FHFA Director under the
Housing and Economic Recovery Act of 2008 violates the Constitution's separation
of powers. Accordingly, the Supreme Court's decision confirmed that the
President has the power to remove the Director of FHFA for any reason, not just
for cause.
On June 23, 2021 , President Biden appointed Sandra Thompson as the Acting
Director of FHFA to replace Mark Calabria . Ms. Thompson has served as Deputy
Director of FHFA's Division of Housing Mission and Goals since 2013. Changes in
leadership at FHFA could result in significant changes to the goals FHFA
establishes for us and could have a material impact on our business and
financial results. See "Risk Factors-GSE and Conservatorship Risk" in our 2020
Form 10-K for a discussion of how our business activities are significantly
affected by the conservatorship.
The Supreme Court's opinion in Collins v. Yellen also included an expansive
interpretation of FHFA's authority as conservator under the Housing and Economic
Recovery Act, noting that "when the FHFA acts as a conservator, it may aim to
rehabilitate the regulated entity in a way that, while not in the best interests
of the regulated entity, is beneficial to the Agency and, by extension, the
public it serves." See "Legal Proceedings" for more information about the
Supreme Court's decision in Collins v. Yellen.
Federal Eviction Moratorium
In June 2021 , the Centers for Disease Control and Prevention (the "CDC") further
extended through July 31, 2021 its order prohibiting the eviction of any tenant,
lessee or resident of a residential property for nonpayment of rent, if such
person provides a specified declaration attesting that they meet the
requirements to obtain the protection of the order. In its press release
announcing this extension, the CDC indicated that this is intended to be the
final extension of the moratorium. The requirements to obtain the protection of
the order included a specified income cap and an inability to pay full rent.
While the CDC order did not impose any obligations on Fannie Mae or its
servicers to ensure compliance by borrowers, a borrower's income may have been
impacted by tenants who did not pay their rent while under the protection of the
CDC order. As a result, this eviction moratorium could adversely affect the
ability of some of our borrowers to make payments on their loans.
Final CFPB Rule Regarding Foreclosures
On June 28, 2021 , the Consumer Financial Protection Bureau (the "CFPB") issued a
final rule that prohibits servicers from initiating new foreclosures on certain
mortgage loans secured by the borrower's principal residence until after
December 31, 2021 . The CFPB rule provides for limited exceptions to this
foreclosure prohibition, including for abandoned properties and for loans that
were more than 120 days delinquent before March 2020 . The effective date of the
CFPB rule is August 31, 2021 . Fannie Mae had already suspended foreclosures and
certain foreclosure-related activities for single-family properties, other than
for vacant or abandoned properties, through July 31, 2021 . On June 29, 2021 ,
FHFA announced that Fannie Mae servicers will not be permitted to initiate
foreclosures that would be prohibited under the CFPB rule before the rule's
August 31, 2021 effective date. Because the CFPB's rule extends the time period
before certain foreclosures can be initiated by our servicers, it may increase
our costs relating to foreclosures and foreclosure-related activities, which
could adversely affect our credit-related expenses.
FHFA Policy Statement on Fair Lending
On July 1, 2021 , FHFA issued a policy statement on fair lending. FHFA's policy
statement states that FHFA will engage in comprehensive fair lending oversight
of Fannie Mae , Freddie Mac and the Federal Home Loan Banks, and adopts specified
high-level policies to guide its fair lending monitoring, supervision and
enforcement. FHFA requested public comments on the policy statement by September
7, 2021 .
Fannie Mae Second Quarter 2021 Form 10-Q 5
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MD&A | Legislation and Regulation
Elimination of Adverse Market Refinance Fee
In July 2021 , FHFA directed us to eliminate the adverse market refinance fee on
our single-family loans effective August 1, 2021 . The adverse market refinance
fee, which became effective in December 2020 , was a one-time charge of 0.5% of
the loan amount that the lender was required to pay at the time we acquired a
loan. The adverse market refinance fee applied to most of the single-family
refinance loans we acquired from December 2020 through July 2021 and was
intended to help us offset some of the higher projected expenses and risk due to
the COVID-19 pandemic. In its news release announcing the elimination of the
fee, FHFA stated that "the success of FHFA and the Enterprises' COVID-19
policies reduced the impact of the pandemic and were effective enough to warrant
an early conclusion of the Adverse Market Refinance Fee." As described in
"Single-Family Business-Single-Family Business Metrics," we expect our average
charged guaranty fee on new single-family conventional acquisitions to decrease
in the second half of 2021 as a result of the elimination of the adverse market
refinance fee.
Proposed Legislation Extending Guaranty Fee Payments to Treasury
As described in our 2020 Form 10-K, in December 2011 , Congress enacted the
Temporary Payroll Tax Cut Continuation Act of 2011 ("TCCA") under which, at the
direction of FHFA, we increased the guaranty fee on all single-family
residential mortgages delivered to us by 10 basis points effective April 1,
2012 . The revenue generated by this fee increase is paid to Treasury and helps
offset the cost of a two-month extension of the payroll tax cut in early 2012.
In 2012, FHFA advised us to remit this fee increase to Treasury with respect to
all single-family loans acquired by us on or after April 1, 2012 and before
January 1, 2022 , and to continue to remit these amounts to Treasury on and after
January 1, 2022 with respect to loans we acquired before this date until those
loans are paid off or otherwise liquidated.
On August 1, 2021 , the Senate released proposed legislation that would extend
our obligation to pay these fees to Treasury beyond our current obligation. If
enacted in its current form, the Infrastructure Investment and Jobs Act would
amend the Federal Housing Enterprises Financial Safety and Soundness Act of
1992, as amended, to extend the current requirement that we pay to Treasury 10
basis points in fees on single-family residential mortgages delivered to us by
an additional eleven years to October 1, 2032 . The revenue generated by this fee
extension would help offset the cost of infrastructure spending.
Fannie Mae Second Quarter 2021 Form 10-Q 6
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MD&A | Key Market Economic Indicators
Below we discuss how varying macroeconomic conditions can influence our financial results across different business and economic environments. Our forecasts and expectations are subject to many uncertainties, including the pace and nature of economic growth, and may change, perhaps substantially, from our current expectations.
Selected Benchmark Interest Rates
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(1)Refers to the U.S. weekly average fixed-rate mortgage rate according to
Freddie Mac's Primary Mortgage Market Survey®. These rates are reported using
the latest available data for a given period.
(2)According to Bloomberg.
(3)Refers to the daily rate per the Federal Reserve Bank of New York .
How interest rates can affect our financial results
•Net interest income. In a rising interest-rate environment, our mortgage loans
tend to prepay more slowly. We amortize various cost basis adjustments over the
life of the mortgage loan, including those relating to loan-level pricing
adjustments we receive as upfront fees at the time we acquire single-family
loans. As a result, any prepayment of a loan results in an accelerated
realization of those upfront fees as income. Therefore, as loan prepayments
slow, the accelerated realization of amortization income also slows. Conversely,
in a declining interest-rate environment, our mortgage loans tend to prepay
faster, typically resulting in the opposite trend of 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 mortgage
commitment derivatives and risk management derivatives, which we mark to market
through earnings. Fair value gains and losses on our mortgage commitment
derivatives fluctuate depending on how interest rates and prices move between
the time the commitment is opened and settled. The net position and composition
across the yield curve of our risk management derivatives changes over time. As
a result, interest rate changes (increases or decreases) and yield curve changes
(parallel, steepening or flattening shifts) will generate varying amounts of
fair value gains or losses in a given period.
•Credit-related income (expense). Increases in mortgage interest rates tend to
lengthen the expected lives of our loans, which generally increases the expected
impairment and provision for credit losses on such loans. Decreases in mortgage
interest rates tend to shorten the expected lives of our loans, which reduces
the impairment and provision for credit losses on such loans.
Fannie Mae Second Quarter 2021 Form 10-Q 7
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MD&A | Key Market Economic Indicators
•In
Single-Family Quarterly Home Price Growth Rate(1)
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(1)Calculated internally using property data on loans purchased by Fannie Mae ,
Freddie Mac and other third-party home sales data. Fannie Mae's home price index
is a weighted repeat-transactions index, measuring average price changes in
repeat sales on the same properties. Fannie Mae's home price index excludes
prices on properties sold in foreclosure. Fannie Mae's home price estimates are
based on preliminary data and are subject to change as additional data becomes
available.
Home prices and how they 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. Declines in home prices increase the
losses we incur on defaulted loans.
•Home prices also impact the growth and size of our guaranty book of business.
As home prices rise, the principal balance of loans associated with purchase
money mortgages may increase, which affects the size of our book. Additionally,
rising home prices can increase the amount of equity borrowers have in their
home, which may lead to an increase in origination volumes for cash-out
refinance loans with higher principal balances than the existing loan. Replacing
existing loans with newly acquired cash-out refinances can affect the growth and
size of our book.
•Home price growth in the first half of 2021 was 10.5%, the highest six-month
home price growth rate in the history of the Fannie Mae national home price
index, driven by continued low interest rates and low levels of housing supply
relative to the level of demand.
•We currently expect home price growth on a national basis in 2021 of 14.8%,
which is a significant increase compared to our prior forecast for the year and
higher than the strong home price growth realized in 2020 of 10.5%. We expect
significant regional variation in the timing and rate of home price growth and
expect home price growth to moderate next year.
•Our forecasts and expectations are subject to many uncertainties and may
change, perhaps substantially, from our current forecasts and expectations. For
example, home price growth could slow if growth in gross domestic product
("GDP") is weaker than we currently expect, if unemployment, particularly among
existing homeowners and potential new home buyers, is higher than we expect, or
if the housing market is more sensitive to economic and labor-market weaknesses
than we expect. For further discussion on housing activity, see "Single-Family
Business-Single-Family Mortgage Market" and "Multifamily Business-Multifamily
Mortgage Market."
Fannie Mae Second Quarter 2021 Form 10-Q 8
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MD&A | Key Market Economic Indicators
New Housing Starts(1)
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(1)According to U.S. Census Bureau and subject to revision.
How housing activity can affect our financial results
•Two key aspects of economic activity that can impact supply and demand for
housing and thus mortgage lending are the rates of household formation and
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 affect prices and
credit performance as well as the degree of loss on defaulted loans.
•Growth of household formation stimulates homebuilding. Homebuilding has
typically been a cyclical leader, weakening prior to a slowdown in U.S. economic
activity and accelerating prior to a recovery, which contributes to the growth
of GDP and employment. However, the housing sector's performance may vary from
its historical precedent due to the many uncertainties surrounding future
economic or housing policy as well as the continued impact of the COVID-19
pandemic on the economy and the housing market.
•With regard to housing construction, a decline in housing starts results in
fewer new homes being available for purchase and potentially a lower volume of
mortgage originations. Construction activity can also affect credit losses
through its impact on home prices. If the growth of demand exceeds the growth of
supply, prices will appreciate and impact the risk profile of newly originated
home purchase mortgages, depending on where in the housing cycle the market is.
A reduced pace of construction is often associated with a broader economic
slowdown and may signal expected increases in delinquency and losses on
defaulted loans.
•Home sales fell in the second quarter of 2021, declining from the high pace
seen at the end of 2020, due in part to a lack of available homes for sale,
along with the associated surge in home prices, which reduced housing
affordability. We expect a continued lack of inventory for both new and existing
homes will likely continue to constrain sales into the third quarter. Due to the
current strength in housing demand and low supply of homes for sale, we expect
single-family housing starts to be higher in 2021 than in 2020. Despite the
constraints on home sales, we continue to expect housing activity to remain
solid throughout 2021.
•Construction demand in the multifamily sector strengthened in the first half of
2021, with multifamily starts posting a solid increase during the period. While
we expect multifamily starts to decline in the second half of 2021, we expect
they will increase overall in 2021 on annual basis.
Fannie Mae Second Quarter 2021 Form 10-Q 9
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MD&A | Key Market Economic Indicators
GDP, Unemployment Rate and Personal Consumption
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(1)Real GDP growth (decline) and real personal consumption growth (decline) are
based on the quarterly series calculated by the Bureau of Economic Analysis and
are subject to revision.
(2)According to the U.S. Bureau of Labor Statistics and subject to revision.
How GDP, the unemployment rate and personal consumption can affect our financial
results
•Changes in GDP, the unemployment rate and personal consumption can affect
several mortgage market factors, including the demand for both single-family and
multifamily housing and the level of loan delinquencies, which in turn can lead
to credit losses.
•Economic growth is a key factor for the performance of mortgage-related assets.
In a growing economy, employment and income are typically rising, thus allowing
existing borrowers to meet payment requirements, existing homeowners to consider
purchasing and moving to another home, and renters to consider becoming
homeowners. Homebuilding typically increases to meet the rise in demand.
Mortgage delinquencies typically fall in an expanding economy, thereby
decreasing credit losses.
•In a slowing economy, employment, income growth and housing activity typically
slow as an early indicator of reduced economic activity. Typically, as an
economic slowdown intensifies, households reduce their spending. This reduction
in consumption then accelerates the slowdown. An economic slowdown can lead to
employment losses, impairing the ability of borrowers and renters to meet
mortgage and rental payments, thus causing loan delinquencies to rise. Home
sales and mortgage originations also typically fall in a slowing economy.
•The economic recovery from the impact of the COVID-19 pandemic began in the
second half of 2020 and continued its momentum through the first half of 2021,
with the second quarter 2021 GDP number pushing GDP above its pre-pandemic
level. The pace of vaccinations, along with the lifting of business restrictions
across the country, has led to further strength in consumer spending and GDP
growth. While GDP has surpassed its pre-pandemic level, the pace and strength of
economic expansion remains uncertain and will depend on a number of factors,
including current labor market shortages, recovery of economic activity outside
the U.S. , global supply chain disruptions, the impact of the highly
transmissible Delta variant of the coronavirus or the emergence of other new,
more infectious variants of the coronavirus, COVID-19 vaccination rates, and the
potential for higher inflation.
Fannie Mae Second Quarter 2021 Form 10-Q 10
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MD&A | Key Market Economic Indicators
See "Risk Factors" in this report and in our 2020 Form 10-K for further discussion of risks to our business and financial results associated with interest rates, home prices, housing activity and economic conditions, as well as the COVID-19 pandemic.
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