We have been under guardianship, with the
as a curator, since
titles, powers and privileges of the company and of any shareholder, officer or director of
society vis-à-vis society and its heritage. The curator has since provided
for the exercise of certain functions and powers by our Board of Directors. Our
directors owe their fiduciary duties of care and loyalty solely to the custodian. Thereby,
while we are in trusteeship, the Board of Directors owes no fiduciary duty to the Company or its
We don’t know when or how the conservatorship will end, what other changes will be made to our
business will be done during or after guardianship, what form we will have and what
interest, if any, that our current common and preferred shareholders will hold in us
after the conservatorship ends or if we will continue to exist after
guardianship. Members of
the importance of reforming the housing finance system.
We are currently not permitted to pay dividends or other distributions to shareholders. Our
agreements with the
conditions; However, the
obligations. Our agreements with
our business activities. For more information on guardianship, uncertainty
of our future, and our agreements with
Housing Finance Agreements and Reform” and “Risk Factors-GSE and Guardianship Risk” in
our Form 10-K for the fiscal year ended
You should read this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") in conjunction with our unaudited condensed consolidated financial statements and related notes in this report and the more detailed information in our 2021 Form 10-
K. Youcan find a "Glossary of Terms Used in This Report" in our 2021 Form 10-K.
The forward-looking statements contained in this report are based on management’s current expectations and are subject to important uncertainties and changes in circumstances, as described in the “Forward-Looking Statements” section. 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 the “Risk Factors” section and elsewhere in this report and in our 2021 Form 10-K.
Fannie Maeis a leading source of financing for mortgages in the United States, with $4.3 trillionin assets as of September 30, 2022. Organized as a government-sponsored entity, Fannie Maeis a shareholder-owned corporation. Our charter is an act of Congress, which establishes that our purposes are 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 work primarily with lenders who originate loans to borrowers. We securitize those loans into Fannie Maemortgage-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. 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 depends on the rates at which loans in our book of business turn over and new loans are added. Fannie Mae Third Quarter 2022 Form 10-Q 1 --------------------------------------------------------------------------------
MD&A | Executive Summary Executive Summary
Summary of our financial performance
[[Image Removed: fnm-20220930_g1.jpg]]
• Net income increased
•higher portfolio income, primarily due to higher returns on assets in our Other Investments portfolio due to higher interest rates; and
•Higher base guarantee fee income due to an increase in the size of our guarantee portfolio and higher average guarantee fees billed.
These increases were partially offset by lower net amortization income as a result of a higher interest rate environment in the third quarter of 2022, which slowed refinancing activity driving lower prepayment volumes compared with the third quarter of 2021. •Net income decreased
$2.4 billionfor the third quarter of 2022 compared with the third quarter of 2021, driven primarily by shifts to credit-related expense and investment losses in the third quarter of 2022 from credit-related income and investment gains in the third quarter of 2021.
• Credit-related spending in the third quarter of 2022 was driven primarily by lower actual and forecast home prices.
•The shift from investment gains in the third quarter of 2021 to investment losses in the third quarter of 2022 was primarily driven by a significant decrease in the volume of single-family loan sales coupled with lower loan sale prices in the third quarter of 2022.
• Net worth increased to
Fannie Mae Third Quarter 2022 Form 10-Q 2 --------------------------------------------------------------------------------
MD&A | Executive Summary [[Image Removed: fnm-20220930_g2.jpg]]
• Net income increased
•an increase in base guarantee fee income due to an increase in the size of our guarantee portfolio and higher average guarantee fees billed; and
•higher income from portfolios, primarily due to higher yields on assets in our other investments portfolio as a result of increases in interest rates as well as a decrease in interest expense on our funding debt due to a decrease in the average outstanding balance. These increases were partially offset by lower net amortization income as a result of a higher interest rate environment in the first nine months of 2022, which slowed refinancing activity driving lower prepayment volumes compared with the first nine months of 2021. •Net income decreased
$5.5 billionin the first nine months of 2022 compared with the first nine months of 2021, primarily driven by shifts to credit-related expense and investment losses in the first nine months of 2022 from credit-related income and investment gains in the first nine months of 2021, partially offset by higher fair value gains. •Credit-related expense in the first nine months of 2022 was primarily driven by decreases in actual and forecasted home prices in the third quarter of 2022, higher actual and projected interest rates, and provision relating to newly acquired loans. These factors were partially offset by the benefit from actual and forecasted home price growth in the first and second quarters of 2022. •The shift from investment gains in the first nine months of 2021 to investment losses in the first nine months of 2022 was primarily driven by a significant decrease in the volume of single-family loan sales coupled with lower loan sale prices in 2022. •Fair value gains in the first nine months of 2022 were primarily driven by the impact of rising interest rates and widening of the secondary spread on the fair value of our mortgage commitment derivatives and long-term debt of consolidated trusts held at fair value, partially offset by fair value losses on fixed-rate trading securities.
• Net worth increased to
comprehensive income for the first nine months of 2022.
See "Consolidated Results of Operations" for more information on our financial results for the third quarter and first nine months of 2022 compared with the third quarter and first nine months of 2021. Fannie Mae Third Quarter 2022 Form 10-Q 3 --------------------------------------------------------------------------------
MD&A | Executive Summary Financial Performance Outlook Given the amount of credit-related expense we recognized in the first nine months of 2022, we expect significant credit-related expense in 2022 compared with significant credit-related income in 2021. We also expect much lower amortization income in 2022 compared with 2021, driven by significantly less refinancing activity in 2022 due to a higher mortgage interest-rate environment; however, we expect this decline in amortization income to be largely offset by increases in interest income from portfolios and base guaranty fee income. We expect these factors to result in lower net income in 2022 compared with 2021. See "
Key MarketEconomic Indicators" for a discussion of how home prices, interest rates and other macroeconomic factors can affect our financial results.
Liquidity provided in the first nine months of 2022
Through our single-family and multifamily business segments, we provided
$580 billionin liquidity to the mortgage market in the first nine months of 2022, enabling the financing of 2.2 million home purchases, refinancings and rental units. Fannie Mae Provided $580 Billionin Liquidity in the First Nine Months of 2022 Unpaid Principal Balance Units $307B931K Single-Family Home Purchases $222B826K Single-Family Refinancings $51B435K Multifamily Rental Units We continued our commitment to green financing in the first nine months of 2022, issuing a total of $7.3 billionin multifamily green MBS, $1.1 billionin single-family green MBS, and $781 millionin multifamily green resecuritizations. We also issued $8.1 billionin multifamily social MBS and $381 millionin multifamily social resecuritizations in the first nine months of 2022. These green and social bonds were issued in alignment with our Sustainable Bond Framework, which guides our issuances of green and social bonds that support energy and water efficiency and housing affordability.
Legislation and regulations
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 2021 Form 10-K, as well as in "MD&A-Legislation and Regulation" in our Form 10-Q for the quarter ended
March 31, 2022("First Quarter 2022 Form 10-Q") and our Form 10-Q for the quarter ended June 30, 2022("Second Quarter 2022 Form 10-Q"). Also see "Risk Factors" in our 2021 Form 10-K and in this report for discussions of risks relating to legislative and regulatory matters.
Proposed multi-family housing targets for 2023 and 2024
August 18, 2022, FHFA published a proposed rule on the multifamily housing goals for Fannie Maeand Freddie Mac for 2023 and 2024. The proposed rule would establish a new methodology for measuring our multifamily housing goals. Rather than measuring the multifamily housing goals based on a fixed number of units as our 2022 goals require, the proposed rule for our 2023 and 2024 multifamily housing goals would be based on the percentage share of the goal-eligible units in our annual multifamily loan acquisitions that are affordable to each income category. The proposed rule did not include any changes to the underlying criteria that determine which multifamily units qualify for credit under the housing goals. Fannie Mae Third Quarter 2022 Form 10-Q 4
-------------------------------------------------------------------------------- MD&A | Legislation and Regulation The chart below sets forth the multifamily housing goals applicable to
Fannie Maefor 2022, as compared with FHFA's proposed multifamily housing goals for 2023 and 2024. Multifamily Housing Goals Current Goals Proposed Goals 2022 2023 and 2024 (Number of units) (Percentage share of goal-eligible units) Low-Income Goal (? 80% of area median income)(1) 415,000 61 % Very Low-Income Subgoal (? 50% of area median 88,000 12
Small Multifamily (5-50 Units) Low-Income 17,000 2
(1) Affordable to low-income families, defined as families whose income is less than or equal to 80% of the region’s median income.
(2) Affordable to very low-income families, defined as families whose income is less than or equal to 50% of the region’s median income.
(3) Units in small multifamily properties (defined as properties with 5 to 50 units) affordable to low-income families, defined as families with incomes less than or equal to 80% of area median income.
The proposed rule indicates that these benchmarks may be adjusted as needed in the final rule based on comments received and new information that becomes available before the final rule is published.
Comments on the proposed rule were due
October 17, 2022. We submitted a comment letter to FHFA relating to the proposed multifamily housing goals on October 14, 2022. As noted in our comment letter, we believe the new percentage share-based methodology of the proposed rule will allow us to provide liquidity that reflects the variable nature of the multifamily mortgage market, and that the proposed benchmarks provide challenging, yet attainable, goals for us to support affordable multifamily housing while maintaining safety and soundness.
As described in “Risk Factors – GSE and Custody Risk” in our 2021 Form 10-K, actions we may take to achieve our housing goals may increase our credit losses and credit-related expenses.
2021 Housing Goals and Duty to Serve Performance
August 2022, FHFA notified us that it had preliminarily determined that we met all of our single-family and multifamily housing goals for 2021. In October 2022, FHFA reported its determination that we complied with our 2021 duty to serve requirements. See "Business-Legislation and Regulation-GSE-Focused Matters" in our 2021 Form 10-K for more information regarding our 2021 housing goals and duty to serve underserved markets.
Pursuant to an FHFA rule implementing a provision of the
Dodd-Frank Wall StreetReform and Consumer Protection Act, each year we are required to conduct a stress test, based on our data as of the prior December 31, using two different scenarios of financial conditions provided by FHFA-baseline and severely adverse-and to publish a summary of our stress test results for the severely adverse scenario by August 15. We publish our stress test results on our website. On August 11, 2022, we and FHFA published our 2022 stress test results for the severely adverse scenario. Refer to our website and the FHFA website for updated stress test information. Fannie Mae Third Quarter 2022 Form 10-Q 5 -------------------------------------------------------------------------------- MD&A | Key MarketEconomic Indicators
Below we discuss how varying macroeconomic conditions can influence our financial results across different business and economic environments. Our forecasts and expectations are based on many assumptions, subject to many uncertainties and may change, perhaps substantially, from our current forecasts and expectations. For further discussion on housing activity, see "Single-Family Business-Single-Family Mortgage Market" and "Multifamily Business-Multifamily Mortgage Market." Selected Benchmark Interest Rates [[Image Removed: fnm-20220930_g3.jpg]]
(1) Refers to the
(2)According to Bloomberg.
(3) Refers to the daily rate according to
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 as borrowers are less incentivized or unable to refinance. We amortize various cost basis adjustments over the life of the mortgage loan, including those relating to loan-level price 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 as borrowers are more likely to refinance, typically resulting in the opposite trend of higher net amortization income from cost basis adjustments on mortgage loans and related debt. Interest rates also affect the amount of interest income we earn on our assets. Our other investments portfolio and certain mortgage-related assets earn more interest income in a higher interest-rate environment and less interest income in a lower interest-rate environment. See "Consolidated Results of Operations-Net Interest Income" for a discussion of how interest rate changes impacted our financial results. •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 a commitment is opened and Fannie Mae Third Quarter 2022 Form 10-Q 6 -------------------------------------------------------------------------------- MD&A |
Key MarketEconomic Indicators when it settles. 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 as borrowers are less likely or unable to refinance, which generally increases the expected impairment and provision for credit losses on loans, particularly those modified in troubled debt restructuring ("TDR") arrangements. Decreases in mortgage interest rates tend to shorten the expected lives of our loans as borrowers are more likely to refinance, which generally reduces the impairment and provision for credit losses on such loans. See "Consolidated Results of Operations-Credit-Related Income (Expense)" and "Note 1, Summary of Significant Accounting Policies" for additional information on our adoption of Accounting Standards Update ("ASU") 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02") on January 1, 2022, resulting in the prospective discontinuation of TDR accounting, and its impact on our financial results. Single-Family Quarterly Home Price Growth (Decline) Rate (1) [[Image Removed: fnm-20220930_g4.jpg]] (1)Calculated internally using property data on loans purchased by Fannie Mae, Freddie Mac and other third-party home sales data. Fannie Mae'shome price index is a weighted repeat-transactions index, measuring average price changes in repeat sales on the same properties. Fannie Mae'shome price index excludes prices on properties sold in foreclosure. Fannie Mae'shome price estimates are based on non-seasonally adjusted preliminary data and are subject to change as additional data becomes available.
How home prices can affect our bottom line
•Actual and expected real estate prices affect our allowance or earnings for credit losses as well as the growth and size of our collateral portfolio.
•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. •As home prices rise, the principal balance of loans associated with newly acquired purchase money mortgages may increase, causing growth in the size of our guaranty 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 guaranty book. •Following a period of significant home price growth in 2021 and the first half of 2022, home prices declined on a national basis in the third quarter of 2022, driven by elevated mortgage interest rates which reduced affordability. •We expect additional home price declines in the fourth quarter of 2022. As a result, we expect home price growth on a national basis to moderate to 9.0% for full year 2022, compared with 18.7% growth in 2021. We expect home price declines on a national basis of 1.5% for full year 2023 driven by elevated mortgage interest rates, a weakening economy and labor market, and affordability constraints. We also expect regional variation in the timing and rate of home price changes. Fannie Mae Third Quarter 2022 Form 10-Q 7
Key MarketEconomic Indicators New Housing Starts(1) [[Image Removed: fnm-20220930_g5.jpg]]
(1) According to
How the housing business can affect our financial results
•Housing is among the most interest-rate sensitive sectors of the economy. In addition to interest rates, two key aspects of economic activity that can impact supply and demand for housing, and thus our business and financial results, are the rates of household formation and housing construction. •Household formation is a key driver of demand for both single-family and multifamily housing as a newly formed household will either rent or purchase a home. Thus, changes in the pace of household formation can affect home 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 gross domestic product ("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 impact of labor and material availability and cost on the economy and the housing market. •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. •We expect home sales and single-family housing starts through the remainder of 2022 will continue to decline in response to elevated mortgage rates, diminished home purchase affordability, and a stalling economy. Single-family housing starts in the third quarter of 2022 fell in response to anticipated decreases in demand. In 2023, we expect single-family and multifamily housing starts to decline compared with 2022 due to the economic constraints of continued high interest rates and an expected modest recession. Fannie Mae Third Quarter 2022 Form 10-Q 8 --------------------------------------------------------------------------------
Key MarketEconomic Indicators GDP, Unemployment Rate and Personal Consumption [[Image Removed: fnm-20220930_g6.jpg]] (1)Real GDP growth (decline) and personal consumption growth (decline) are based on the quarterly series calculated by the Bureau of Economic Analysisand are subject to revision.
How GDP, unemployment rate and personal consumption can affect our bottom line
•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 impacts 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 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, income growth and housing activity typically slow as an early indicator of reduced economic activity, followed by slowing employment. 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. •While GDP declined in the first half of 2022, GDP grew moderately in the third quarter of 2022. We currently expect a GDP contraction in the fourth quarter of 2022, resulting in essentially flat GDP growth for 2022. We expect that a modest recession is likely to occur beginning in the first quarter of 2023, resulting in an increase in the unemployment rate. We expect our economic outlook will be influenced by a number of factors that are subject to change, such as the persistence of inflationary pressures, the speed at which expected monetary policy tightening is adjusted and the increasing risk of international financial market disruptions. See "Risk Factors" in this report and "Risk Factors-Market and Industry Risk" in our 2021 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 Third Quarter 2022 Form 10-Q 9 -------------------------------------------------------------------------------- MD&A | Consolidated Results of Operations
Consolidated operating results
This section discusses our condensed consolidated results of operations and should be read in conjunction with our condensed consolidated financial statements and accompanying notes.
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