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. FHFA established 2021 performance objectives for us that included preparing
for our eventual exit from conservatorship. Congress and the Administration continue to
consider options for reform of the housing finance system, including Fannie Mae .
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").
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 is a leading source of financing for mortgages in the United States ,
with $4.1 trillion in assets as of March 31, 2021 . Organized as a
government-sponsored entity, Fannie Mae is a shareholder-owned corporation. Our
charter is an act of Congress , and we have a mission under that charter to
provide liquidity and stability to the residential mortgage market and to
promote access to mortgage credit. We were initially established in 1938.
Our revenues are primarily driven by guaranty fees we receive for assuming the
credit risk on loans underlying the mortgage-backed securities we issue. We do
not originate loans or lend money directly to borrowers. Rather, we primarily
work with lenders who originate loans to borrowers. We securitize those loans
into Fannie Mae mortgage-backed securities that we guarantee (which we refer to
as Fannie Mae MBS or our MBS).
Effectively managing credit risk is key to our business. In exchange for
assuming credit risk on the loans we acquire, we receive guaranty fees. These
fees take into account the credit risk characteristics of the loans we acquire
and consist of two primary components:
•Loan-level pricing adjustments, which are upfront fees received when we acquire
single-family loans.
•Base guaranty fees, which we receive monthly over the life of the loan.
Guaranty fees are set at the time we acquire loans and do not change over the
life of the loan. How long a loan remains in our guaranty book is heavily
dependent on interest rates. When interest rates decrease, a larger portion of
our book of business turns over as more loans refinance. On the other hand, as
interest rates increase, fewer loans refinance and our book turns over more
slowly. Since guaranty fees are set at the time a loan is originated, the impact
of any change in guaranty fees on future revenues is dependent on the rate at
which newly originated loans replace the existing loans in our book of business.
Fannie Mae First 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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Q1 2021 vs. Q1 2020
•Net revenues increased $1.4 billion in the first quarter of 2021, compared with
the first quarter of 2020, primarily due to an increase in net amortization
income as a result of continued high prepayment volumes from loan refinancings
in the first quarter of 2021 driven by the low interest-rate environment. High
prepayments result in accelerated amortization of cost basis adjustments,
including risk-based pricing adjustments and other upfront fees we received at
the time of loan acquisition. We anticipate net revenues from prepayment
activity will begin to slow in the second half of 2021, as we expect mortgage
interest rates are likely to rise, resulting in fewer borrowers who can benefit
from a refinancing. Lower levels of refinancing will likely slow the accelerated
amortization of cost basis adjustments for loans in our book of business as
loans remain outstanding for longer, and therefore will likely result in lower
amortization income in any one period.
•Net income increased $4.5 billion in the first quarter of 2021 compared with
the first quarter of 2020, primarily driven by a shift from credit-related
expense in the first quarter of 2020 to credit-related income in the first
quarter of 2021. Credit-related expense in the first quarter of 2020 was driven
by economic dislocation caused by the COVID-19 pandemic. Credit-related income
in the first quarter of 2021 was driven by a benefit for credit losses primarily
due to higher actual and forecasted home prices, partially offset by higher
actual and projected interest rates. Additional drivers of increased net income
include the increase in net revenues from higher net amortization income
discussed above and a shift from fair value losses to gains in the first quarter
of 2021 primarily driven by our implementation of hedge accounting in January
2021 .
•Net worth increased to $30.2 billion as of March 31, 2021 from $25.3 billion as
of December 31, 2020 . The increase is attributable to $5.0 billion of
comprehensive income for the first quarter of 2021.
Long-term financial performance. Our long-term financial performance will depend
on many factors, including:
•the size of and our share of the U.S. mortgage market, which in turn will
depend upon population growth, household formation and housing supply;
•borrower performance, the guaranty fees we charge, and changes in macroeconomic
factors, including home prices and interest rates; and
Fannie Mae First Quarter 2021 Form 10-Q 2
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MD&A | Executive Summary | Summary of Our Financial Performance
•actions by FHFA, the Administration and Congress relating to our business and
housing finance reform, including our capital requirements, our ongoing
financial obligations to Treasury , restrictions on our activities and our
business footprint, our competitive environment, requirements to support
borrowers or the mortgage market, and actions we take in light of these
conditions.
We discuss recent measures to address the economic impact of COVID-19 in the
American Rescue Plan Act of 2021 (the "American Rescue Plan") that may impact us
in "Legislation and Regulation" and recent economic conditions in "Key Market
Economic Indicators" in this report.
Liquidity Provided in the First Quarter of 2021
Through our single-family and multifamily business segments, we provided $422
billion in liquidity to the mortgage market in the first quarter of 2021,
including $211 billion through our whole loan conduit that primarily supports
small- to medium-sized lenders, enabling the financing of approximately
1.7 million home purchases, refinancings or rental units.
Fannie Mae Provided $422 Billion in Liquidity in the First Quarter of 2021
Unpaid Principal Balance Units
$99B 340K
Single-Family Home Purchases
$301B 1.1M
Single-Family Refinancings
$22B 217K
Multifamily Rental Units
We continued our commitment to green financing in the first quarter 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. Also see "Risk Factors" in our 2020 Form 10-K for discussions of risks relating to legislative and regulatory matters. American Rescue Plan InMarch 2021 ,Congress enacted and the President signed the American Rescue Plan to address the economic dislocation and other burdens resulting from the COVID-19 pandemic. The act follows enactment of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") inMarch 2020 and the Consolidated Appropriations Act of 2021 inDecember 2020 . The American Rescue Plan contains many provisions designed to mitigate the negative economic impact of the COVID-19 pandemic, including direct cash payments to eligible taxpayers below specified income limits, extended unemployment insurance benefits, and additional relief designed to prevent layoffs and business closures at small businesses. It also includes emergency rental assistance, emergency housing vouchers and funds to assist struggling homeowners with mortgage payments, property taxes, property insurance, utilities and other housing-related costs. We expect the funding provided under the American Rescue Plan will improve the ability of some single-family and multifamily borrowers to make payments on their loans. Proposed CFPB Rule Regarding Foreclosure OnApril 5, 2021 , theConsumer Financial Protection Bureau (the "CFPB") issued a proposed rule that, if finalized, would generally prohibit servicers from initiating any new foreclosure on a mortgage loan secured by the borrower's principal residence until afterDecember 31, 2021 . TheCFPB is considering providing limited exceptions from this prohibition if the servicer has completed its loss mitigation review and determined the borrower is not eligible for any non-foreclosure Fannie Mae First Quarter 2021 Form 10-Q 3
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MD&A | Legislation and Regulation
option or if the borrower has been unresponsive to servicer outreach. The
proposed effective date of the rule is August 31, 2021 and public comments are
due May 10, 2021 . Fannie Mae has already suspended foreclosures and certain
foreclosure-related activities for single-family properties, other than for
vacant or abandoned properties, through at least June 30, 2021 . If the period
before foreclosures can be initiated is extended, it may impact the timing of
when we realize credit losses from foreclosures and foreclosure-related
activities. It could also increase our expected credit loss reserves, which
could adversely affect our credit-related expenses.
Federal Eviction Moratorium
In March 2021 , the Centers for Disease Control and Prevention (the "CDC")
extended through June 30, 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. The requirements to obtain
the protection of the order include a specified income cap and an inability to
pay full rent. Challenges to the CDC 's eviction moratorium order have been
brought in a number of jurisdictions, and the validity of the CDC 's order
remains subject to further litigation. While the CDC order does not impose any
obligations on Fannie Mae or its servicers to ensure compliance by borrowers, a
borrower's income may be impacted by tenants who do not pay their rent while
under the protection of the CDC order. As a result and as described in "Risk
Factors" in our 2020 Form 10-K, these eviction moratoriums could adversely
affect the ability of some of our borrowers to make payments on their loans.
New Refinance Option
On April 28, 2021 , FHFA announced that it is directing Fannie Mae and Freddie
Mac to implement a new refinance option targeting low-income borrowers with
single-family mortgages backed by Fannie Mae and Freddie Mac. The initiative is
intended to encourage eligible borrowers to take advantage of the current low
interest-rate environment to refinance and lower both their interest rates and
their monthly mortgage payments.
2020 Housing Goals Performance
We are subject to housing goals, which establish specified requirements for our
mortgage acquisitions relating to affordability or location. We believe we met
all of our single-family and multifamily housing goals for 2020. Final
performance results will be determined and published by FHFA sometime after the
release later this year of 2020 data reported by primary mortgage market
originators under the Home Mortgage Disclosure Act. For more information on our
housing goals, see "Business-Legislation and Regulation-GSE Act and Other
Legislative and Regulatory Matters-Housing Goals" in our 2020 Form 10-K.
The Qualified Mortgage Patch
In December 2020 , the CFPB published a final rule that eliminates the qualified
mortgage patch and replaces the 43% debt-to-income ("DTI") ratio limit and
certain other requirements for a standard qualified mortgage with a pricing and
underwriting framework. The final qualified mortgage rule went into effect in
March 2021 , with lenders required to comply beginning in July 2021 . In April
2021 , the CFPB published a final rule extending the mandatory compliance date to
October 2022 and thereby also extending the qualified mortgage patch. The CFPB
has indicated that it will consider changes to the final rule during the
extended implementation timeframe. Although the rule's implementation is
delayed, the terms of our senior preferred stock purchase agreement with
Treasury require that after July 2021 most single-family loans we purchase be
qualified mortgages under the terms of the final rule that went into effect in
March 2021 . We do not expect the final qualified mortgage rule, as published, to
impact our business significantly, but it may increase competition. See "Risk
Factors-GSE and Conservatorship Risk" and "Risk Factors-Legal and Regulatory
Risk" in our 2020 Form 10-K for more information on risks presented by
regulatory changes in the financial services industry.
Fannie Mae First Quarter 2021 Form 10-Q 4
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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.
The COVID-19 pandemic has had a significant adverse effect on both the
Selected Benchmark Interest Rates
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(1)According to Bloomberg.
(2)Refers to the U.S. weekly average fixed-rate mortgage rate according to
Freddie Mac's Primary Mortgage Market Survey®. These rates are reported using
the latest available data for a given period.
How interest rates can affect our financial results
•Net interest income. In a rising interest-rate environment, our mortgage loans
tend to prepay more slowly. 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 trends 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 First Quarter 2021 Form 10-Q 5
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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 quarter of 2021 was unseasonably strong, 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 8.8%,
which is a significant increase compared with our prior forecast but lower than
the exceptionally strong home price growth of 10.6% in 2020. However, a
higher-than-expected supply of homes available for sale or weaker-than-expected
demand could lead to slower growth in home prices. We also expect significant
regional variation in the timing and rate of home price growth.
•Our forecasts and expectations are subject to many uncertainties and may
change, perhaps substantially, from our current forecasts and expectations,
including any continued impact from the COVID-19 pandemic. For example, home
price growth could slow if GDP growth 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 First Quarter 2021 Form 10-Q 6
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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. New housing starts
for the first quarter of 2021 are based on Fannie Mae's forecast.
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 first quarter of 2021, declining from the high pace seen
at the end of 2020. We expect a continued lack of new and existing homes
available for sale will likely continue to constrain sales into the second
quarter.
•Strong pricing, given both the current strength in demand and low supply of
existing and new homes available for sale, should support construction and we
expect single-family housing starts in 2021 to exceed 2020 levels by 23.8%. We
also expect housing activity to remain strong throughout 2021.
•Construction demand in the multifamily sector strengthened at the beginning of
2021, with multifamily starts posting a solid increase in the first quarter. We
expect a modest pullback in the second quarter before multifamily starts remain
mostly flat for the second half of 2021; we project multifamily starts to edge
up about 1.0% on an annual basis in 2021.
Fannie Mae First Quarter 2021 Form 10-Q 7
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MD&A | Key Market Economic Indicators
GDP, Unemployment Rate and Personal Consumption
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(1)GDP growth (decline) and 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 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 and income growth slow and housing activity
slows 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 in the first quarter of 2021 as
additional government stimulus measures were passed with the American Rescue
Plan, vaccination rates increased, and many lockdown measures began to be
lifted. This led to strong consumer spending and GDP growth. The pace and
strength of economic recovery remains uncertain and will depend on a number of
factors, including consumers' eagerness to return to previously restricted
activities, recovery of economic activity outside the U.S. , global supply chain
disruptions, the path of the COVID-19 pandemic, and the potential for higher
inflation.
See "Risk Factors-Market and Industry Risk" 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.
Fannie Mae First Quarter 2021 Form 10-Q 8
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