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FEDERAL NATIONAL MORTGAGE ASSOCIATION FANNIE MAE - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 21, 2014

You should read this MD&A in conjunction with our consolidated financial statements as of December 31, 2013 and related notes to the consolidated financial statements, and with "Business-Executive Summary." Please also see "Glossary of Terms Used in This Report." This report contains forward-looking statements that are based upon management's current expectations and are subject to significant uncertainties and changes in circumstances. Please review "Business-Forward-Looking Statements" for more information on the forward-looking statements in this report and "Risk Factors" for a discussion of factors that could cause our actual results to differ, perhaps materially, from our forward-looking statements. 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 the 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." 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 four of our accounting policies as critical because they involve 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. These critical accounting policies and estimates are as follows: • Fair Value Measurement • Total Loss Reserves • Other-Than-Temporary Impairment of Investment Securities • Deferred Tax Assets Fair Value Measurement The use of fair value to measure our assets and liabilities is fundamental to our financial statements and our fair value measurement is a critical accounting estimate because we account for and record a portion of our assets and liabilities at fair value. In determining fair value, we use various valuation techniques. We describe the valuation techniques and inputs used to determine the fair value of our assets and liabilities and disclose their carrying value and fair value in "Note 18, Fair Value." The fair value accounting rules provide a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. Each asset or liability is assigned to a level based on the lowest level of any input that is significant to its fair value measurement. The three levels of the fair value hierarchy are described below: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities. Level 3: Unobservable inputs. The majority of the financial instruments that we report at fair value in our consolidated financial statements fall within the Level 2 category and are valued primarily utilizing inputs and assumptions that are observable in the marketplace, that can be derived from observable market data or that can be corroborated by recent trading activity of similar instruments with similar characteristics. For example, we generally request non-binding prices from at least three independent pricing services to estimate the fair value of our trading and available-for-sale securities at an individual security level. We use the average of these prices to determine the fair value. In the absence of such information or if we are not able to corroborate these prices by other available, relevant market information, we estimate their fair values based on single source quotations from brokers or dealers or by using internal 65 -------------------------------------------------------------------------------- calculations or discounted cash flow techniques that incorporate inputs, such as prepayment rates, discount rates and delinquency, default and cumulative loss expectations, that are implied by market prices for similar securities and collateral structure types. Because this valuation technique relies on significant unobservable inputs, the fair value estimation is classified as Level 3. The process for determining fair value using unobservable inputs is generally more subjective and involves a high degree of management judgment and assumptions. These assumptions may have a significant effect on our estimates of fair value, and the use of different assumptions as well as changes in market conditions could have a material effect on our results of operations or financial condition. Fair Value Hierarchy-Level 3 Assets and Liabilities The assets and liabilities that we have classified as Level 3 consist primarily of financial instruments for which there is limited market activity and therefore little or no price transparency. As a result, the valuation techniques that we use to estimate the fair value of Level 3 instruments involve significant unobservable inputs, which generally are more subjective and involve a high degree of management judgment and assumptions. Our Level 3 assets and liabilities consist of certain mortgage-backed securities and residual interests, certain mortgage loans, acquired property, certain long-term debt arrangements and certain highly structured, complex derivative instruments. We provide a detailed discussion of our Level 3 assets and liabilities, including the valuation techniques and significant unobservable inputs used to measure the fair value of these instruments, in "Note 18, Fair Value." Valuation Control Processes We have control processes that are designed to ensure that our fair value measurements are appropriate and reliable, that they are based on observable inputs wherever possible and that our valuation approaches are consistently applied and the assumptions used are reasonable. Our control processes consist of a framework that provides for a segregation of duties and oversight of our fair value methodologies and valuations, as well as validation procedures. We provide a detailed discussion of our valuation control processes in "Note 18, Fair Value." Total Loss Reserves Our total loss reserves consist of the following components: • Allowance for loan losses;



• Allowance for accrued interest receivable;

• Reserve for guaranty losses; and

• Allowance for preforeclosure property tax and insurance receivable.

These components can be further allocated into our single-family and multifamily loss reserves. We maintain an allowance for loan losses and an allowance for accrued interest receivable for loans classified as held for investment, including both loans we hold in our portfolio and loans held in consolidated Fannie Mae MBS trusts. We maintain a reserve for guaranty losses for loans held in unconsolidated Fannie Mae MBS trusts we guarantee and loans we have guaranteed under long-term standby commitments and other credit enhancements we have provided. We also maintain an allowance for preforeclosure property tax and insurance receivable on delinquent loans that is included in "Other assets" in our consolidated balance sheets. These amounts, which we collectively refer to as our total loss reserves, represent probable losses incurred related to loans in our guaranty book of business, including concessions granted to borrowers upon modifications of their loans, as of the balance sheet date. The allowance for loan losses, allowance for accrued interest receivable and allowance for preforeclosure property tax and insurance receivable are valuation allowances that reflect an estimate of incurred credit losses related to our recorded investment in loans held for investment. The reserve for guaranty losses is a liability account in our consolidated balance sheets that reflects an estimate of incurred credit losses related to our guaranty to each unconsolidated Fannie Mae MBS trust that we will supplement amounts received by the Fannie Mae MBS trust as required to permit timely payments of principal and interest on the related Fannie Mae MBS. As a result, the guaranty reserve considers not only the principal and interest due on the loan at the current balance sheet date, but also an estimate of any additional interest payments due to the trust from the current balance sheet date until the point of loan acquisition or foreclosure. Our loss reserves consist 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, benchmarks and management judgment, 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 66 -------------------------------------------------------------------------------- continually monitor delinquency and default trends and make changes in our historically developed assumptions and estimates as necessary to better reflect present conditions, including current trends in borrower risk and/or 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 ("TDRs"), certain nonperforming loans in MBS trusts and acquired credit-impaired loans that have been further impaired subsequent to acquisition. 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. We then allocate a portion of the reserve to interest accrued on the loans as of the balance sheet date. 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 of loans to derive an overall loss reserve estimate given multiple factors such as: origination year, mark-to-market LTV ratio, delinquency status and loan product type. We believe that 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 a look back period to develop our loss severity estimates for all loan categories. We then allocate a portion of the reserve to interest accrued on the loans as of the balance sheet date. We regularly monitor prepayment, default and loss severity trends and periodically make changes in our historically developed assumptions to better reflect present conditions of loan performance. In the second quarter of 2013, we updated the assumptions and data used to estimate our allowance for loan losses for individually impaired single-family loans based on current observable performance trends as well as future expectations of payment behavior. These updates reflect faster prepayment and lower default expectations for these loans, primarily as a result of improvements in loan performance, in part due to increases in home prices. Increases in home prices reduce the mark-to-market LTV ratios on these loans and, as a result, borrowers' equity increases. Faster prepayment and lower default expectations shortened the expected average life of modified loans, which reduced the expected credit losses and lowered concessions on modified loans. This resulted in a decrease to our allowance for loan losses and an incremental benefit for credit losses of approximately $2.2 billion. 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 then allocate a portion of the reserve to interest accrued on the loans as of the balance sheet date. 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 and 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 67 -------------------------------------------------------------------------------- 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, at which time we measure impairment the same way we measure it for other individually impaired multifamily loans. We obtain property appraisals and broker price opinions when we foreclose on a multifamily property. We then allocate a portion of the reserve to interest accrued on the loans as of the balance sheet date. Other-Than-Temporary Impairment of Investment Securities We evaluate available-for-sale securities in an unrealized loss position as of the end of each quarter for other-than-temporary impairment. We recognize other-than-temporary impairment in earnings if one of the following conditions exists: (1) our intent is to sell the security; (2) it is more likely than not that we will be required to sell the security before the impairment is recovered; or (3) we do not expect to recover our amortized cost basis. Our evaluation requires significant management judgment and considers various factors including: the severity and duration of the impairment; recent events specific to the issuer and/or industry to which the issuer belongs; the payment structure of the security; external credit ratings; and the failure of the issuer to make scheduled interest or principal payments. We apply those factors to evaluate debt securities for other-than-temporary impairment using a model that estimates the present value of cash flows to determine if we will recover the amortized cost basis of our available-for-sale securities. We provide more detailed information on our accounting for other-than-temporary impairment in "Note 1, Summary of Significant Accounting Policies." See "Risk Factors" for a discussion of the risks associated with possible future write-downs of our investment securities. Deferred Tax Assets We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We evaluate the recoverability of our deferred tax assets as of the end of each quarter, weighing all positive and negative evidence, and are required to establish or maintain a valuation allowance for these assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary to support a conclusion that a valuation allowance is not needed. Our framework for assessing the recoverability of deferred tax assets requires us to weigh all available evidence, including: • the sustainability of recent profitability required to realize the deferred tax assets; • the cumulative net income or losses in our consolidated statements of operations in recent years;



• unsettled circumstances that, if unfavorably resolved, would adversely

affect future operations and profit levels on a continuing basis in future

years;

• the funding available to us under the senior preferred stock purchase

agreement; and

• the carryforward periods for net operating losses, capital losses and tax

credits.

As of December 31, 2012, we had a valuation allowance against our deferred tax assets of $58.9 billion. After weighing all of the evidence, we determined that the positive evidence in favor of releasing the valuation allowance, particularly the evidence that was objectively verifiable, outweighed the negative evidence against releasing the allowance as of March 31, 2013. Therefore, we concluded that it was more likely than not that our deferred tax assets, except the deferred tax assets relating to capital loss carryforwards, would be realized. As a result, we released the valuation allowance on our deferred tax assets as of March 31, 2013, except for amounts that were expected to be released against income before federal income taxes for the remainder of the year. The positive evidence that weighed in favor of releasing the allowance as of March 31, 2013 and ultimately outweighed the negative evidence against releasing the allowance was the following: • our profitability in 2012 and the first quarter of 2013 and our



expectations regarding the sustainability of these profits;

• our three-year cumulative income position as of March 31, 2013;

• the strong credit profile of the loans we have acquired since 2009;

• the significant size of our guaranty book of business and our contractual

rights for future revenue from this book of business; 68

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• our taxable income for 2012 and our expectations regarding the likelihood

of future taxable income; and • that our net operating loss carryforwards would not expire until 2030 through 2031. We anticipated that we would utilize all of these carryforwards upon filing our 2013 federal income tax return. Releasing the majority of the valuation allowance did not reduce the funding available to us under the senior preferred stock purchase agreement and therefore did not result in regulatory actions that would limit our business operations to ensure our safety and soundness. In addition, we transitioned from a three-year cumulative loss position over the three years ended December 31, 2012 to a three-year cumulative income position over the three years ended March 31, 2013. The change in these conditions during the first quarter of 2013 removed negative evidence that supported maintaining the valuation allowance against our net deferred tax assets as of December 31, 2012. As of December 31, 2013, we continued to conclude that the positive evidence in favor of releasing the allowance outweighed the negative evidence against releasing the allowance and that it was more likely than not that our deferred tax assets, except the deferred tax assets relating to capital loss carryforwards, would be realized. As of December 31, 2013, we had no additional valuation allowance except for the $525 million of the valuation allowance we retained that pertains to our capital loss carryforwards, which we believe will expire unused. We recognized a benefit for federal income taxes of $45.4 billion in our consolidated statement of operations and comprehensive income for the year ended December 31, 2013 due to the release of the valuation allowance, partially offset by our 2013 provision for federal income taxes. The balance of our net deferred tax assets was $47.6 billion as of December 31, 2013, compared with net deferred tax liabilities of $509 million as of December 31, 2012. CONSOLIDATED RESULTS OF OPERATIONS This section provides a discussion of our consolidated results of operations for the periods indicated and should be read together with our consolidated financial statements, including the accompanying notes. Table 7 displays a summary of our consolidated results of operations for the periods indicated. Table 7: Summary of Consolidated Results of Operations For the Year Ended December 31, Variance 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 (Dollars in millions) Net interest income $ 22,404$ 21,501$ 19,281$ 903$ 2,220 Fee and other income 3,930 1,487 1,163 2,443 324 Net revenues $ 26,334$ 22,988$ 20,444$ 3,346$ 2,544 Investment gains, net 1,191 487 506 704 (19 ) Net other-than-temporary impairments (64 ) (713 ) (308 ) 649 (405 ) Fair value gains (losses), net 2,959 (2,977 ) (6,621 ) 5,936 3,644 Administrative expenses (2,545 ) (2,367 ) (2,370 ) (178 ) 3 Credit-related income (expense) Benefit (provision) for credit losses 8,949 852 (26,718 ) 8,097 27,570 Foreclosed property income (expense) 2,839 254 (780 ) 2,585 1,034



Total credit-related income (expense) 11,788 1,106 (27,498 )

10,682 28,604 Other non-interest expenses(1) (1,096 ) (1,304 ) (1,098 ) 208 (206 ) Income (loss) before federal income taxes 38,567 17,220 (16,945 ) 21,347 34,165 Benefit for federal income taxes 45,415 - 90 45,415 (90 ) Net income (loss) $ 83,982$ 17,220$ (16,855 )$ 66,762$ 34,075 Less: Net (income) loss attributable to noncontrolling interest (19 ) 4 - (23 ) 4 Net income (loss) attributable to Fannie Mae $ 83,963$ 17,224$ (16,855 )$ 66,739$ 34,079 Total comprehensive income (loss) attributable to Fannie Mae $ 84,782$ 18,843$ (16,408 )$ 65,939$ 35,251 __________



(1) Consists of debt extinguishment gains (losses), net, TCCA fees and other

expenses, net. 69

-------------------------------------------------------------------------------- Net Interest Income Net interest income represents the difference between interest income and interest expense and is a primary source of our revenue. The amount of interest income and interest expense we recognize in the consolidated statements of operations and comprehensive income (loss) is affected by our investment and debt activity, asset yields (including the impact of loans on nonaccrual status) and our funding costs. Table 8 displays an analysis of our net interest income, average balances, and related yields earned on assets and incurred on liabilities for the periods indicated. 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. Table 9 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. Table 8: Analysis of Net Interest Income and Yield For the Year Ended December 31, 2013 2012 2011 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 $ 326,399$ 12,790 3.92 % $ 370,455$ 14,255 3.85 % $ 392,719$ 14,829 3.78 % Mortgage loans of consolidated trusts 2,710,838 101,448 3.74



2,621,317 110,451 4.21 2,596,816 123,633 4.76 Total mortgage loans(1)

3,037,237 114,238 3.76



2,991,772 124,706 4.17 2,989,535 138,462 4.63 Mortgage-related securities

203,514 9,330 4.58 268,761 12,709 4.73 316,963 14,607 4.61 Elimination of Fannie Mae MBS held in retained mortgage portfolio (133,243 ) (6,236 ) 4.68 (173,933 ) (8,492 ) 4.88 (202,806 ) (10,360 ) 5.11 Total mortgage-related securities, net(2) 70,271 3,094 4.40 94,828 4,217 4.45 114,157 4,247 3.72 Non-mortgage securities(3) 41,484 42 0.10 50,282 71 0.14 71,713 117 0.16 Federal funds sold and securities purchased under agreements to resell or similar arrangements 61,644 68 0.11 38,708 73 0.19 26,045 32 0.12 Advances to lenders 5,115 107 2.09 6,220 123 1.98 3,943 85 2.16 Total interest-earning assets $ 3,215,751$ 117,549 3.66 % $ 3,181,810$ 129,190 4.06 % $ 3,205,393$ 142,943 4.46 % Interest-bearing liabilities: Short-term debt(4) $ 95,098$ 128 0.13 % $ 102,877$ 147 0.14 % $ 160,704$ 301 0.19 % Long-term debt 498,735 10,263 2.06 561,280 11,925 2.12 585,362 14,711 2.51 Total short-term and long-term funding debt 593,833 10,391 1.75 664,157 12,072 1.82 746,066 15,012 2.01 Debt securities of consolidated trusts 2,783,622 90,990 3.27 2,697,592 104,109 3.86 2,651,121 119,010 4.49 Elimination of Fannie Mae MBS held in retained mortgage portfolio (133,243 ) (6,236 ) 4.68 (173,933 ) (8,492 ) 4.88 (202,806 ) (10,360 ) 5.11 Total debt securities of consolidated trusts held by third parties 2,650,379 84,754 3.20



2,523,659 95,617 3.79 2,448,315 108,650 4.44 Total interest-bearing liabilities $ 3,244,212$ 95,145 2.93

% $ 3,187,816$ 107,689 3.38 % $ 3,194,381$ 123,662 3.87 % Net interest income/net interest yield(2) $ 22,404 0.70 % $ 21,501 0.68 % $ 19,281 0.60 % 70

-------------------------------------------------------------------------------- As of December 31, 2013 2012 2011 Selected benchmark interest rates(5) 3-month LIBOR 0.25 % 0.31 % 0.58 % 2-year swap rate 0.49 0.39 0.73 5-year swap rate 1.79 0.86 1.22



30-year Fannie Mae MBS par coupon rate 3.61 2.23 2.88

__________

(1) Average balance includes mortgage loans on nonaccrual status. Interest

income on nonaccrual mortgage loans is recognized when cash is received.

(2) Includes an out-of-period adjustment of $727 million to reduce "Interest

income: Available-for-sale securities" in our consolidated statements of operations and comprehensive income (loss) for the year ended December 31,



2011. Without this adjustment, the average interest rate earned on total

mortgage-related securities would have been 4.36% and the total net interest

yield would have been 0.62% for the year ended December 31, 2011. (3) Includes cash equivalents. (4) Includes federal funds purchased and securities sold under agreements to repurchase. (5) Data from British Bankers' Association, Thomson Reuters Indices and Bloomberg L.P.



Table 9: Rate/Volume Analysis of Changes in Net Interest Income

2013 vs. 2012 2012 vs. 2011 Total Variance Due to:(1) Total Variance Due to:(1) Variance Volume Rate Variance Volume Rate (Dollars in millions) Interest income: Mortgage loans of Fannie Mae $ (1,465 )$ (1,722 )$ 257$ (574 )$ (853 )$ 279 Mortgage loans of consolidated trusts (9,003 ) 3,673 (12,676 ) (13,182 ) 1,156 (14,338 ) Total mortgage loans (10,468 ) 1,951 (12,419 ) (13,756 ) 303 (14,059 ) Total mortgage-related securities, net(2) (1,123 ) (1,085 ) (38 ) (757 ) (846 ) 89 Non-mortgage securities(3) (29 ) (11 ) (18 ) (46 ) (32 ) (14 ) Federal funds sold and securities purchased under agreements to resell or similar arrangements (5 ) 33 (38 ) 41 20 21 Advances to lenders (16 ) (23 ) 7 38 46 (8 ) Total interest income (11,641 ) 865 (12,506 ) (14,480 ) (509 ) (13,971 ) Interest expense: Short-term debt(4) (19 ) (10 ) (9 ) (154 ) (93 ) (61 ) Long-term debt (1,662 ) (1,297 ) (365 ) (2,786 ) (586 ) (2,200 ) Total short-term and long-term funding debt (1,681 ) (1,307 ) (374 ) (2,940 ) (679 ) (2,261 ) Total debt securities of consolidated trusts held by third parties (10,863 ) 5,150 (16,013 ) (13,033 ) 3,479 (16,512 ) Total interest expense (12,544 ) 3,843 (16,387 ) (15,973 ) 2,800 (18,773 ) Net interest income(2) $ 903$ (2,978 )$ 3,881



$ 1,493$ (3,309 )$ 4,802

__________

(1) Combined rate/volume variances are allocated to both rate and volume based

on the relative size of each variance. (2) Excludes an out-of-period adjustment of $727 million that reduced the



interest income on mortgage-related securities for the year ended December

31, 2011. (3) Includes cash equivalents. (4) Includes federal funds purchased and securities sold under agreements to repurchase. 71

-------------------------------------------------------------------------------- The increase in net interest income in 2013, compared with 2012, was due to a decrease in interest expense exceeding a decrease in interest income, which was primarily due to the following: • accelerated net amortization income related to mortgage loans and debt of consolidated trusts driven by prepayments; • higher guaranty fees, primarily due to an average increase in single-family guaranty fees of 10 basis points implemented during the



fourth quarter of 2012 and the 10 basis point increase in single-family

guaranty fees related to the TCCA implementation on April 1, 2012. The incremental TCCA-related guaranty fees are remitted to Treasury and recorded in "TCCA fees" in our consolidated statements of operations and comprehensive income (loss). We recognize almost all of our guaranty fees in net interest income due to the consolidation of the substantial majority of our MBS trusts on our balance sheet; and



• a reduction in the amount of interest income not recognized for nonaccrual

mortgage loans. The balance of nonaccrual loans in our consolidated

balance sheets declined as we continued to complete a high number of loan

workouts and foreclosures, and fewer loans became seriously delinquent.

The factors that drove the increase in net interest income in 2013 were partially offset by lower interest income on mortgage loans and securities held in our retained mortgage portfolio primarily due to a decrease in their average balance, as we continued to reduce our retained mortgage portfolio pursuant to the requirements of our senior preferred stock purchase agreement with Treasury and sold non-agency mortgage-related assets to meet an objective of FHFA's 2013 conservatorship scorecard. See "Business Segment Results-The Capital Markets Group's Mortgage Portfolio" for additional information on our retained mortgage portfolio. Net interest income increased in 2012 compared with 2011, primarily due to the following: • lower interest expense on funding debt due to lower borrowing rates and



lower funding needs, which allowed us to continue to replace higher-cost

debt with lower-cost debt; • higher coupon interest income recognized on mortgage loans due to a



reduction in the amount of interest income not recognized for nonaccrual

mortgage loans. The balance of nonaccrual loans in our consolidated

balance sheets declined as we continued to complete a high number of loan

workouts and foreclosures, and fewer loans became seriously delinquent;

and

• accelerated net amortization income related to mortgage loans and debt of

consolidated trusts driven by a high volume of prepayments due to

declining interest rates.

The factors that drove the increase in net interest income in 2012 were partially offset by: • lower interest income on Fannie Mae mortgage loans due to a decrease in

average balance and new business acquisitions, which continued to replace

higher-yielding loans with loans issued at lower mortgage rates; and • lower interest income on mortgage securities due to a decrease in the



balance of our mortgage securities, as we continued to manage our retained

mortgage portfolio to the requirements of the senior preferred stock

purchase agreement.

We initially recognize mortgage loans and debt of consolidated trusts in our consolidated balance sheets at fair value. We recognize the difference between (1) the initial fair value of the consolidated trust's mortgage loans and debt and (2) the unpaid principal balance as cost basis adjustments in our consolidated balance sheets. We amortize cost basis adjustments, including premiums and discounts on mortgage loans and securities, as a yield adjustment over the contractual or estimated life of the loan or security as a component of net interest income. Net unamortized premiums on debt of consolidated trusts exceeded net unamortized premiums on the related mortgage loans of consolidated trusts by $25.0 billion as of December 31, 2013, compared with $16.8 billion as of December 31, 2012. This net premium position represents deferred revenue, which is amortized within net interest income. This deferred revenue primarily relates to upfront fees we receive from lenders for loans with greater credit risk and upfront payments we receive from lenders to adjust the monthly contractual guaranty fee rate on Fannie Mae MBS so that the pass-through coupon rate on the MBS is in a more easily tradable increment of a whole or half percent. The increase in net unamortized premiums from 2012 to 2013 was primarily due to an increase in upfront fees collected on acquisitions in 2013. We had $14.3 billion in net unamortized discounts and other cost basis adjustments on mortgage loans of Fannie Mae included in our consolidated balance sheets as of December 31, 2013, compared with $15.8 billion as of December 31, 2012. These discounts and other cost basis adjustments were primarily recorded upon the acquisition of credit-impaired loans and the extent to which we may record them as income in future periods will be based on the actual performance of the loans. 72 --------------------------------------------------------------------------------



Table 10 displays the interest income not recognized for loans on nonaccrual status and the resulting reduction in our net interest yield on total interest-earning assets for the periods indicated. Table 10: Impact of Nonaccrual Loans on Net Interest Income

For the Year Ended December 31, 2013 2012 2011 Interest Income Reduction in Net Interest Income Reduction in Interest Income Reduction in not Recognized for Interest not Recognized for Net Interest not Recognized for Net Interest Nonaccrual Loans Yield(1) Nonaccrual Loans Yield(1) Nonaccrual Loans Yield(1) (Dollars in millions) Mortgage loans of Fannie Mae $ (2,415 ) $ (3,403 ) $ (4,666 ) Mortgage loans of consolidated trusts (342 ) (594 ) (896 ) Total mortgage loans $ (2,757 ) (8 ) bps $ (3,997 ) (12 ) bps $ (5,562 ) (18 ) bps __________



(1) Calculated based on interest income not recognized divided by total

interest-earning assets, expressed in basis points.

For a discussion of the interest income from the assets we have purchased and the interest expense from the debt we have issued, see the discussion of our net interest income in "Business Segment Results-Capital Markets Group Results." Fee and Other Income Fee and other income includes transaction fees, technology fees, multifamily fees and other miscellaneous income. Fee and other income increased in 2013 compared with 2012 primarily as a result of funds we received in 2013 pursuant to settlement agreements resolving certain lawsuits relating to private-label mortgage-related securities sold to us. See "Legal Proceedings-FHFA Private-Label Mortgage-Related Securities Litigation" for additional information. In addition, we recognized higher yield maintenance fees in 2013 related to large multifamily loan prepayments during the year. Investment Gains, Net Investment gains, net include gains and losses recognized from the sale of available-for-sale ("AFS") securities and gains and losses recognized on the securitization of loans and securities from our retained mortgage portfolio. Investment gains increased in 2013 compared with 2012 primarily due to a significantly higher volume of sales of non-agency mortgage-related securities in 2013 to meet an objective of FHFA's 2013 conservatorship scorecard. See "Business Segment Results-Capital Markets Group Results-The Capital Markets Group's Mortgage Portfolio" and "Consolidated Balance Sheet Analysis-Investments in Mortgage-Related Securities" for additional information on our mortgage-related securities portfolio and requirements that we reduce our retained mortgage portfolio. Other-Than-Temporary Impairment of Investment Securities Net other-than-temporary impairments decreased in 2013 compared with 2012 and increased in 2012 compared with 2011. In 2013, net other-than-temporary impairments were primarily driven by a change in our intent to sell certain securities. As a result, we recognized the entire difference between the amortized cost basis of these securities and their fair value as net other-than-temporary impairments. In 2012, net other-than-temporary impairments were primarily driven by an update to the assumptions used to project cash flow estimates on our Alt-A and subprime private-label securities, which resulted in a significant decrease in the net present value of projected cash flows on these securities. In 2011, net other-than-temporary impairments were primarily driven by an increase in collateral losses on certain Alt-A private-label securities, which resulted in a decrease in the present value of our cash flow projections on these Alt-A private-label securities, partially offset by an out-of-period adjustment in 2011. 73 --------------------------------------------------------------------------------



Fair Value Gains (Losses), Net Table 11 displays the components of our fair value gains and losses. Table 11: Fair Value Gains (Losses), Net

For the Year Ended December 31, 2013 2012 2011 (Dollars in millions) Risk management derivatives fair value gains (losses) attributable to: Net contractual interest expense accruals on interest rate swaps $ (767 )$ (1,430 )$ (2,185 ) Net change in fair value during the period 3,546



(508 ) (3,954 ) Total risk management derivatives fair value gains (losses), net

2,779 (1,938 ) (6,139 ) Mortgage commitment derivatives fair value gains (losses), net 501 (1,688 ) (423 ) Total derivatives fair value gains (losses), net 3,280 (3,626 ) (6,562 ) Trading securities gains, net 260 1,004 266 Other, net(1) (581 ) (355 ) (325 ) Fair value gains (losses), net $ 2,959$ (2,977 )$ (6,621 ) 2013 2012 2011 5-year swap rate: As of March 31 0.95 % 1.27 % 2.47 % As of June 30 1.57 0.97 2.03 As of September 30 1.54 0.76 1.26 As of December 31 1.79 0.86 1.22 __________



(1) Consists of debt fair value gains (losses), net; debt foreign exchange gains

(losses), net; and mortgage loans fair value gains (losses), net.

We expect volatility from period to period in our financial results due to changes in market conditions that result in periodic fluctuations in the estimated fair value of financial instruments that we mark to market through our earnings. These instruments include derivatives and trading securities. The estimated fair value of our derivatives and trading securities may fluctuate substantially from period to period because of changes in interest rates, credit spreads and interest rate 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 financial statements. Therefore, the accounting volatility resulting from market fluctuations related to our derivatives and trading securities may not be indicative of the economics of these transactions. 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 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 for the years ended December 31, 2013, 2012 and 2011 in "Note 9, Derivative Instruments." 74 -------------------------------------------------------------------------------- The primary factors affecting the fair value of our risk management derivatives include the following: • Changes in interest rates: Our derivatives, in combination with our issuances of debt securities, are intended to offset changes in the fair value of our mortgage assets. Mortgage assets tend to increase in value when interest rates decrease and, conversely, decrease in value when



interest rates rise. 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, the overall

fair value gains and losses of our derivatives are sensitive to flattening

and steepening of the yield curve.

• Implied interest rate volatility: Our derivatives portfolio includes

option-based derivatives, which we purchase to economically hedge the

prepayment option embedded in our mortgage investments and sell to offset

the options obtained through callable debt issuances when those options

are not needed for risk management purposes. A key variable in estimating

the fair value of option-based derivatives is implied volatility, which reflects the market's expectation of the magnitude of future changes in interest rates. Assuming all other factors are held equal, including interest rates, a decrease in implied volatility would reduce the fair value of our purchased options and an increase in implied volatility would increase the fair value of our purchased options, while having the opposite effect on the options that we have sold. • Changes in our derivative activity: As interest rates change, we are



likely to rebalance our portfolio to manage our interest rate exposure. As

interest rates decrease, expected mortgage prepayments are likely to

increase, which reduces the duration of our mortgage investments. In this

scenario, we generally will rebalance our existing portfolio to manage

this risk by adding receive-fixed swaps, which shortens the duration of

our liabilities. Conversely, when interest rates increase and the duration

of our mortgage assets increases, we are likely to add pay-fixed swaps,

which have the effect of extending the duration of our liabilities. We use

derivatives to rebalance our portfolio when the duration of our mortgage

assets changes as the result of mortgage purchases or sales. We also use foreign-currency swaps to manage the foreign exchange impact of our foreign currency-denominated debt issuances.



• Time value of purchased options: Intrinsic value and time value are the

two primary components of an option's price. The intrinsic value is

determined by the amount by which the market rate exceeds or is below the

exercise, or strike rate, such that the option is in-the-money. The time

value of an option is the amount by which the price of an option exceeds

its intrinsic value. Time decay refers to the diminishing value of an option over time as less time remains to exercise the option. We recognized risk management derivative fair value gains in 2013 primarily as a result of increases in the fair value of our pay-fixed derivatives as longer-term swap rates increased during the year. We recognized risk management derivatives fair value losses in 2012 and 2011 primarily as a result of decreases in the fair value of our pay-fixed derivatives due to declines in swap rates during each of these years. Risk management derivative fair value losses in 2011 were greater than the losses in 2012, primarily due to a significant decline in swap rates in 2011 compared with a more modest decline in swap rates in 2012. Because risk management derivatives are an important part of our interest rate risk management strategy, it is important to evaluate the impact of our derivatives in the context of our overall interest rate risk profile and in conjunction with the other mark-to-market gains and losses presented in Table 11. For additional information on our use of derivatives to manage interest rate risk, including the economic objective of our use of various types of derivative instruments, changes in our derivatives activity and the outstanding notional amounts, see "Risk Management-Market Risk Management, Including Interest Rate Risk Management-Interest Rate Risk Management." Mortgage Commitment Derivatives Fair Value Gains (Losses), Net Certain commitments to purchase or sell mortgage-related securities and to purchase single-family mortgage loans are generally accounted for as derivatives. For open mortgage commitment derivatives, we include changes in their fair value in our consolidated statements of operations and comprehensive income (loss). 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. 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. 75 -------------------------------------------------------------------------------- We recognized fair value gains on our mortgage commitments in 2013 primarily due to gains on commitments to sell mortgage-related securities primarily driven by interest rates increasing during the commitment period. We recognized fair value losses on our mortgage commitments in 2012 and 2011 primarily due to losses on commitments to sell mortgage-related securities as a result of interest rates decreasing during the commitment period. Mortgage commitment derivative fair value losses in 2012 were greater than the losses in 2011, primarily as a result of (1) a higher volume of net commitments to sell mortgage-related securities in 2012 and (2) a further increase in prices driven by the Federal Reserve's announcement that it would increase its MBS purchases from financial institutions beginning in September 2012. Trading Securities Gains, Net The estimated fair value of our trading securities may fluctuate substantially from period-to-period primarily due to changes in interest rates and credit spreads. Gains from trading securities in 2013 were primarily driven by higher prices on Alt-A and subprime private-label securities due to narrowing of credit spreads on these securities, as well as improvements in the credit outlook of certain financial guarantors of these securities. These gains were partially offset by losses on commercial mortgage-backed securities ("CMBS") and agency securities due to lower prices resulting from higher interest rates. Gains from our trading securities in 2012 were primarily driven by the narrowing of credit spreads on CMBS. Gains from our trading securities in 2011 were primarily driven by higher prices on our CMBS as a result of significant narrowing of the U.S. Treasury yield curve and swap yield curve spreads offset by widening credit spreads. We provide additional information on our trading and available-for-sale securities in "Consolidated Balance Sheet Analysis-Investments in Mortgage-Related Securities." We disclose the sensitivity of changes in the fair value of our trading securities to changes in interest rates in "Risk Management-Market Risk Management, Including Interest Rate Risk Management-Measurement of Interest Rate Risk." Administrative Expenses Administrative expenses increased in 2013 compared with 2012 driven by costs related to the execution of FHFA's 2013 conservatorship scorecard objectives, as well as costs associated with FHFA's private-label mortgage-related securities litigation. These costs more than offset reductions in our ongoing operating costs. Administrative expenses were flat in 2012 compared with 2011, as continued efforts to reduce ongoing operating costs were offset by additional costs related to the execution of FHFA's strategic goals. We expect that our administrative expenses may increase in 2014 compared with 2013 as we continue to execute on our strategic goals. Credit-Related (Income) Expense We refer to our (benefit) provision for loan losses and guaranty losses collectively as our "(benefit) provision for credit losses." Credit-related (income) expense consists of our (benefit) provision for credit losses and foreclosed property (income) expense. (Benefit) Provision for Credit Losses Our total loss reserves provide for an estimate of credit losses incurred in our guaranty book of business, including concessions we granted borrowers upon modification of their loans, as of each balance sheet date. We establish our loss reserves through our provision for credit losses for losses that we believe have been incurred and will eventually be reflected over time in our charge-offs. When we reduce our loss reserves, we recognize a benefit for credit losses. When we determine that a loan is uncollectible, typically upon foreclosure, we recognize a charge-off against our loss reserves. We record recoveries of previously charged-off amounts as a reduction to charge-offs. Table 12 displays the components of our total loss reserves and our total fair value losses previously recognized on loans purchased out of unconsolidated MBS trusts reflected in our consolidated balance sheets. Because these fair value losses lowered our recorded loan balances, we have fewer inherent losses in our guaranty book of business and consequently require lower total loss reserves. For these reasons, we consider these fair value losses as an "effective reserve," apart from our total loss reserves, to the extent that we expect to realize these amounts as credit losses on the acquired loans in the future. The fair value losses shown in Table 12 represent credit losses we expect to realize in the future or amounts that will eventually be recovered, either through net interest income for loans that cure or through foreclosed property income for loans where the sale of the collateral exceeds our recorded investment in the loan. We exclude these fair value losses from our credit loss calculation as described in "Credit Loss Performance Metrics." 76 --------------------------------------------------------------------------------



Table 12: Total Loss Reserves

As of December 31, 2013 2012 (Dollars in millions) Allowance for loan losses $ 43,846$ 58,795 Reserve for guaranty losses(1) 1,449 1,231 Combined loss reserves 45,295 60,026 Allowance for accrued interest receivable



1,156 1,737 Allowance for preforeclosure property taxes and insurance receivable(2)

839 866 Total loss reserves



47,290 62,629 Fair value losses previously recognized on acquired credit-impaired loans(3)

11,316 13,694 Total loss reserves and fair value losses previously recognized on acquired credit-impaired loans

$



58,606 $ 76,323

__________

(1) Amount included in "Other liabilities" in our consolidated balance sheets.

(2) Amount included in "Other assets" in our consolidated balance sheets.



(3) Represents the fair value losses on loans purchased out of unconsolidated

MBS trusts reflected in our consolidated balance sheets.

Table 13 displays changes in the total allowance for loan losses, reserve for guaranty losses and the total combined loss reserves for the periods indicated.

77 -------------------------------------------------------------------------------- Table 13: Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves) For the Year Ended December 31, 2013 2012 2011 2010 2009 (Dollars in millions) Changes in combined loss reserves: Allowance for loan losses: Beginning balance $ 58,795$ 72,156$ 61,556$ 9,925$ 2,772 Adoption of consolidation accounting guidance(1) - - - 43,576 -



(Benefit) provision for loan losses (9,316 ) (1,191 ) 25,914 24,702 9,569 Charge-offs(2)

(8,867 ) (15,139 ) (21,170 ) (22,878 ) (2,245 ) Recoveries 2,626 1,784 5,272 3,077 214 Other(3) 608 1,185 584 3,154 (385 ) Ending balance $ 43,846$ 58,795$ 72,156$ 61,556$ 9,925 Reserve for guaranty losses: Beginning balance $ 1,231$ 994$ 323$ 54,430$ 21,830 Adoption of consolidation accounting guidance(1) - - - (54,103 ) - Provision for guaranty losses 367 339 804 194 63,057 Charge-offs (150 ) (174 ) (138 ) (203 ) (31,142 ) Recoveries 1 72 5 5 685 Ending balance $ 1,449$ 1,231$ 994$ 323$ 54,430 Combined loss reserves: Beginning balance $ 60,026$ 73,150$ 61,879$ 64,355$ 24,602 Adoption of consolidation accounting guidance(1) - - - (10,527 ) - Total (benefit) provision for credit losses (8,949 ) (852 ) 26,718 24,896 72,626 Charge-offs(2) (9,017 ) (15,313 ) (21,308 ) (23,081 ) (33,387 ) Recoveries 2,627 1,856 5,277 3,082 899 Other(3) 608 1,185 584 3,154 (385 ) Ending balance $ 45,295$ 60,026$ 73,150$ 61,879$ 64,355 Attribution of charge-offs: Charge-offs attributable to guaranty book of business $ (8,979 )$ (15,249 )$ (21,192 )$ (22,901 )$ (12,832 ) Charge-offs attributable to fair value losses on acquired credit-impaired and HomeSaver Advance loans (38 ) (64 ) (116 ) (180 ) (20,555 ) Total charge-offs $ (9,017 )$ (15,313 )$ (21,308 )$ (23,081 )$ (33,387 ) Allocation of combined loss reserves: Balance at end of each period attributable to: Single-family $ 44,705$ 58,809$ 71,512$ 60,163$ 62,312 Multifamily 590 1,217 1,638 1,716 2,043 Total $ 45,295$ 60,026$ 73,150$ 61,879$ 64,355 Single-family and multifamily combined loss reserves as a percentage of applicable guaranty book of business: Single-family 1.55 % 2.08 % 2.52 % 2.10 % 2.14 % Multifamily 0.29 0.59 0.84 0.91 1.10 Combined loss reserves as a percentage of: Total guaranty book of business 1.47 % 1.97 % 2.41 % 2.03 % 2.08 % Recorded investment in nonaccrual loans(4) 54.18 52.27 51.10 36.21 30.33 78

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_________

(1) Because we recognized mortgage loans held by newly consolidated trusts upon

adoption of the consolidation accounting guidance on January 1, 2010, we

increased our "Allowance for loan losses" and decreased our "Reserve for

guaranty losses." The impact at the transition date is reported as "Adoption

of consolidation accounting guidance." The decrease in the combined loss

reserves on the adoption date represents a difference in the methodology

used to estimate incurred losses for our allowance for loan losses as

compared with our reserve for guaranty losses and our separate presentation

of the portion of the allowance related to accrued interest as our

"Allowance for accrued interest receivable."

(2) Includes accrued interest of $436 million, $872 million, $1.4 billion, $2.4

billion and $1.5 billion for the years ended December 31, 2013, 2012, 2011,

2010 and 2009, respectively.

(3) Amounts represent the net activity recorded in our allowances for accrued

interest receivable and preforeclosure property taxes and insurance receivable from borrowers. The (benefit) provision for credit losses, charge-offs and recoveries activity included in this table reflects all



changes for both the allowance for loan losses and the valuation allowances

for accrued interest and preforeclosure property taxes and insurance receivable that relate to the mortgage loans.



(4) Includes off-balance sheet loans in unconsolidated Fannie Mae MBS trusts

that would meet our criteria for nonaccrual status if the loans had been

on-balance sheet.

Our benefit or provision for credit losses continues to be a key driver of our results for each period presented. The amount of our benefit or provision for credit losses varies from period to period based on changes in actual and expected home prices, borrower payment behavior, the types and volumes of loss mitigation activities and foreclosures completed, and actual and estimated recoveries from our lender and mortgage insurer counterparties. See "Risk Management-Credit Risk Management-Institutional Counterparty Credit Risk Management" for information on mortgage insurers and outstanding mortgage seller and servicer repurchase obligations. In addition, our benefit or provision for credit losses and our loss reserves can be impacted by updates to the assumptions and data used in determining our allowance for loan losses. We recognized a benefit for credit losses of $8.9 billion in 2013 and $852 million in 2012. The following factors contributed to our benefit for credit losses in 2013: • Home prices increased by 8.8% in 2013 compared with an increase of 4.2% in



2012. Higher home prices decrease the likelihood that loans will default

and reduce the amount of credit loss on loans that default, which reduces

our total loss reserves and provision for credit losses.

• The number of our seriously delinquent single-family loans declined 27% to

approximately 419,000 as of December 31, 2013 from approximately 577,000

as of December 31, 2012 and the number of "early stage" delinquent loans

(loans that are 30 to 89 days past due) declined 18% to approximately

375,000 as of December 31, 2013 from approximately 459,000 as of December

31, 2012. The reduction in the number of delinquent loans was primarily

the result of home retention solutions, foreclosure alternatives and completed foreclosures, and our efforts since 2009 to improve our underwriting standards and the credit quality of our single-family guaranty book of business. A decline in the number of loans becoming delinquent or seriously delinquent reduces our total loss reserves and provision for credit losses. • Sales prices on dispositions of our REO properties improved in 2013 compared with 2012. We received net proceeds from our single-family REO



sales equal to 67% of the loans' unpaid principal balance in 2013 compared

with 59% in 2012. The increase in sales prices contributed to a reduction

in the single-family initial charge-off severity rate to 24.2% for 2013 from 30.7% for 2012. The decrease in our charge-off severity rate indicates a lower amount of expected credit loss at foreclosure and, accordingly, results in a lower provision for credit losses.



• In the second quarter of 2013, we updated the assumptions and data used to

estimate our allowance for loan losses for individually impaired

single-family loans, which resulted in a $2.2 billion decrease to our

allowance for loan losses. For additional information on this update, see

"Critical Accounting Policies and Estimates-Total Loss

Reserves-Single-Family Loss Reserves."

The factors that contributed to our benefit for credit losses in 2013 were partially offset by lower discounted cash flow projections on our individually impaired loans due to increasing mortgage interest rates in 2013. Higher mortgage interest rates lengthen the expected lives of modified loans, which increases the impairment on these loans and results in an increase to the provision for credit losses. Conversely, in 2012, mortgage interest rates declined, causing higher discounted cash flow projections on our individually impaired loans, which resulted from shortened expected lives on modified loans and lower impairment on these loans. We recognized a benefit for credit losses in 2012 compared with a provision for credit losses in 2011 primarily due to: (1) an increase in home prices in 2012 compared with a home price decline in 2011; (2) an increase in sales prices of our REO properties; and (3) a continued reduction in the number of delinquent loans in our single-family guaranty book of business. 79 -------------------------------------------------------------------------------- The improvement in our credit results in 2012 was partially offset by a $3.5 billion increase in our provision for credit losses due to changes in our assumptions and data used in calculating our loss reserves and a $1.1 billion increase in our provision for credit losses due to a change in our accounting for loans to certain borrowers who have received bankruptcy relief, which led to an increase in the number of loans we classify as TDRs. We discuss our expectations regarding our future loss reserves in "Executive Summary-Outlook-Loss Reserves." Loss Reserves Concentration Analysis Certain loan categories have contributed disproportionately to our single-family loss reserves, including loans related to higher-risk product types, such as Alt-A loans, and loans originated in 2005 through 2008. Our Alt-A loans accounted for approximately 26% of our total single-family loss reserves as of December 31, 2013, compared with approximately 27% as of December 31, 2012. Our 2005 to 2008 loan vintages accounted for approximately 84% of our total single-family loss reserves as of December 31, 2013, compared with approximately 85% as of December 31, 2012. See "Note 6, Financial Guarantees" for additional information regarding our Alt-A loans and 2005 to 2008 loan vintages as a percentage of our single-family conventional guaranty book of business. Troubled Debt Restructurings and Nonaccrual Loans Table 14 displays the composition of loans restructured in a TDR that are on accrual status, loans on nonaccrual status and off-balance sheet loans in unconsolidated Fannie Mae MBS trusts which would meet our criteria for nonaccrual status if the loans had been on-balance sheet. The table includes held-for-investment and held-for-sale mortgage 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 activity related to our single-family TDRs, see Table 46 in "MD&A-Risk Management-Credit Risk Management-Single-Family Mortgage Credit Risk Management." Table 14: Troubled Debt Restructurings and Nonaccrual Loans As of December 31, 2013 2012 2011 2010 2009 (Dollars in millions) TDRs on accrual status(1) Single-family $ 140,512$ 135,196$ 107,991$ 81,767$ 9,880 Multifamily 715 868 806 935 - Total TDRs on accrual status $ 141,227$ 136,064$ 108,797$ 82,702$ 9,880 Nonaccrual loans Single-family $ 81,355$ 112,555$ 140,234$ 169,775$ 36,764 Multifamily 2,209 2,206 2,764 1,013 832 Total nonaccrual loans $ 83,564$ 114,761$ 142,998$ 170,788$ 37,596 Other(2) $ 42$ 72$ 154$ 89$ 174,588 Accruing on-balance sheet loans past due 90 days or more(3) $ 719$ 3,580$ 768$ 896$ 612 For the Year Ended December 31, 2013 2012 2011 2010 2009 (Dollars in millions) Interest related to on-balance sheet TDRs and nonaccrual loans: Interest income forgone(4) $ 6,805$ 7,554$ 8,224$ 8,185$ 1,341 Interest income recognized for the period(5) 5,915 6,442 6,598 7,995 1,206 __________



(1) Includes loans to certain borrowers who have received bankruptcy relief and

therefore are classified as TDRs and HomeSaver Advance first-lien loans on

accrual status.

(2) Consists of off-balance sheet loans in unconsolidated Fannie Mae MBS trusts

that would meet our criteria for nonaccrual status if the loans had been

on-balance sheet.

(3) Recorded investment in loans that, as of the end of each period, are 90 days

or more past due and continuing to accrue interest. As of December 31, 2012,

includes loans with a recorded investment of $2.8 billion which were

repurchased in January 2013 pursuant to our resolution agreement with Bank

of America. These loans were returned to accrual status to reflect the change in our assessment of 80

-------------------------------------------------------------------------------- collectibility resulting from this agreement. Also includes loans insured or guaranteed by the U.S. government and loans for which we have recourse against the seller in the event of a default. (4) Represents the amount of interest income we did not record but would have



recorded during the period for on-balance sheet nonaccrual loans and TDRs on

accrual status as of the end of each period had the loans performed

according to their original contractual terms.

(5) Represents interest income recognized during the period for on-balance sheet

loans classified as either nonaccrual loans or TDRs on accrual status as of

the end of each period. Includes primarily amounts accrued while the loans

were performing and cash payments received on nonaccrual loans.

Foreclosed Property (Income) Expense Foreclosed property income increased in 2013 compared with 2012 primarily due to the recognition of compensatory fee income related to servicing matters, gains resulting from resolution agreements reached in 2013 related to representation and warranty matters and an improvement in sales prices on dispositions of our REO properties. Compensatory fees are amounts we charge our primary servicers for servicing delays within their control when they fail to comply with established loss mitigation and foreclosure timelines as required by our Servicing Guide, which sets forth our policies and procedures related to servicing our single-family mortgages. We recognized foreclosed property income in 2012 compared with foreclosed property expense in 2011 primarily due to: (1) improved sales prices on dispositions of our REO properties in 2012, resulting from strong demand in markets with limited REO supply and (2) the recognition of compensatory fee income in 2012. Credit Loss Performance Metrics Our credit-related (income) expense should be considered in conjunction with our credit loss performance metrics. Our credit loss performance metrics, however, are not defined terms within GAAP and may not be calculated in the same manner as similarly titled measures reported by other companies. Because management does not view changes in the fair value of our mortgage loans as credit losses, we adjust our credit loss performance metrics for the impact associated with our acquisition of credit-impaired loans from unconsolidated MBS trusts. We also exclude interest forgone on nonaccrual loans and TDRs, other-than-temporary impairment losses resulting from deterioration in the credit quality of our mortgage-related securities and accretion of interest income on acquired credit-impaired loans from credit losses. We believe that credit loss performance metrics may be useful to investors as the losses are presented as a percentage of our book of business and have historically been used by analysts, investors and other companies within the financial services industry. Moreover, by presenting credit losses with and without the effect of fair value losses associated with the acquisition of credit-impaired loans, investors are able to evaluate our credit performance on a more consistent basis among periods. Table 15 displays the components of our credit loss performance metrics as well as our average single-family and multifamily initial charge-off severity rates. Table 15: Credit Loss Performance Metrics For the Year Ended December 31, 2013 2012 2011 Amount Ratio(1) Amount Ratio(1) Amount Ratio(1) (Dollars in millions) Charge-offs, net of recoveries $ 6,390 20.9 bps $ 13,457 44.2 bps $ 16,031 52.4 bps Foreclosed property (income) expense (2,839 ) (9.3 ) (254 ) (0.8 ) 780 2.6 Credit losses including the effect of fair value losses on acquired credit-impaired loans 3,551 11.6 13,203 43.4 16,811 55.0 Plus: Impact of acquired credit-impaired loans on charge-offs and foreclosed property (income) expense(2) 953 3.1 1,446 4.8 1,926 6.3 Credit losses and credit loss ratio $ 4,504 14.7 bps $ 14,649 48.2 bps $ 18,737 61.3 bps Credit losses attributable to: Single-family $ 4,452$ 14,392$ 18,346 Multifamily 52 257 391 Total $ 4,504$ 14,649$ 18,737 Single-family initial charge-off severity rate (3) 24.22 % 30.71 % 34.82 % Multifamily initial charge-off severity rate (3) 23.56 % 37.43 % 37.10 % 81

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__________

(1) Basis points are based on the amount for each line item presented divided by

the average guaranty book of business during the period. (2) Includes fair value losses from acquired credit-impaired loans. (3) Single-family and multifamily rates exclude fair value losses on credit-impaired loans acquired from MBS trusts and any costs, gains or losses associated with REO after initial acquisition through final disposition. Single-family rate excludes charge-offs from short sales and



third-party sales. Multifamily rate is net of any risk sharing agreements.

Credit losses decreased in 2013 compared with 2012 primarily due to the recognition of compensatory fee income in 2013 related to servicing matters and gains resulting from resolution agreements reached in 2013 related to representation and warranty matters. Also contributing to the decrease in credit losses in 2013 was an improvement in sales prices on dispositions of our REO properties and lower REO acquisitions primarily driven by lower delinquencies. The decrease in credit losses in 2012 compared with 2011 was primarily due to improved actual home prices and sales prices of our REO properties and lower REO acquisitions primarily due to the continued slow pace of foreclosures in 2012. We discuss our expectations regarding our future credit losses in "Executive Summary-Outlook-Credit Losses." Table 16 displays concentrations of our credit losses based on geography, credit characteristics and loan vintages. Table 16: Credit Loss Concentration Analysis Percentage of Single-Family Conventional Guaranty Book of Business Outstanding(1) Percentage of Single-Family Credit Losses(2) As of December 31, For the Year Ended December 31, 2013 2012 2011 2013 2012 2011 Geographical Distribution: California 20 % 19 % 19 % 5 % 18 % 27 % Florida 6 6 6 29 21 11 Illinois 4 4 4 13 10 4 All other states 70 71 71 53 51 58 Select higher-risk product features(3) 23 22 21 55 54 56 Vintages: 2005 - 2008 15 22 31 78 82 83 All other vintages 85 78 69 22 18 17 __________



(1) Calculated based on the unpaid principal balance of loans, where we have

detailed loan-level information, for each category divided by the unpaid

principal balance of our single-family conventional guaranty book of business. (2) Excludes the impact of recoveries resulting from resolution agreements



related to representation and warranty matters and compensatory fee income

related to servicing matters, which have not been allocated to specific

loans.

(3) Includes Alt-A loans, subprime loans, interest-only loans, loans with

original LTV ratios greater than 90% and loans with FICO credit scores less

than 620.

Our new single-family book of business accounted for approximately 10% of our single-family credit losses for 2013, excluding the impact of recoveries resulting from resolution agreements related to representation and warranty matters and compensatory fee income related to servicing matters, which have not been allocated to specific loans. 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. We provide more detailed credit performance information, including serious delinquency rates by geographic region and foreclosure activity, in "Risk Management-Credit Risk Management-Mortgage Credit Risk Management." Regulatory Hypothetical Stress Test Scenario Under a September 2005 agreement with FHFA's predecessor, OFHEO, we are required to disclose on a quarterly basis the present value of the change in future expected credit losses from our existing single-family guaranty book of business from an immediate 5% decline in single-family home prices for the entire United States followed by a return to the average of the 82 -------------------------------------------------------------------------------- possible growth rate paths used in our internal credit pricing models. The sensitivity results represent the difference between future expected credit losses under our base case scenario, which is derived from our internal home price path forecast, and a scenario that assumes an instantaneous nationwide 5% decline in home prices. Table 17 displays the credit loss sensitivities as of the dates indicated for first-lien single-family loans that are in our retained mortgage portfolio or underlying Fannie Mae MBS, before and after consideration of projected credit risk sharing proceeds, such as private mortgage insurance claims and other credit enhancements. Table 17: Single-Family Credit Loss Sensitivity(1) As of December 31, 2013 2012 (Dollars in millions) Gross single-family credit loss sensitivity $ 9,109$ 13,508 Less: Projected credit risk sharing proceeds (1,062 ) (2,206 ) Net single-family credit loss sensitivity $ 8,047



$ 11,302 Single-family loans in our retained mortgage portfolio and loans underlying Fannie Mae MBS

$ 2,828,395



$ 2,765,460 Single-family net credit loss sensitivity as a percentage of outstanding single-family loans in our retained mortgage portfolio and Fannie Mae MBS

0.28 %



0.41 %

__________

(1) Represents total economic credit losses, which consist of credit losses and

forgone interest. Calculations are based on 98% of our total single-family

guaranty book of business as of December 31, 2013 and 2012. The mortgage

loans and mortgage-related securities that are included in these estimates

consist of: (a) single-family Fannie Mae MBS (whether held in our retained

mortgage portfolio or held by third parties), excluding certain whole loan

REMICs and private-label wraps; (b) single-family mortgage loans, excluding

mortgages secured only by second liens, subprime mortgages, manufactured

housing chattel loans and reverse mortgages; and (c) long-term standby

commitments. We expect the inclusion in our estimates of the excluded

products may impact the estimated sensitivities set forth in this table.

The decrease in the projected credit loss sensitivities in 2013 compared with 2012 was the result of the increase in home prices and lower projected default expectations for loans in our single-family guaranty book of business. Because these sensitivities represent hypothetical scenarios, they should be used with caution. Our regulatory stress test scenario is limited in that it assumes an instantaneous uniform 5% nationwide decline in home prices, which is not representative of the historical pattern of changes in home prices. Changes in home prices generally vary on a regional, as well as a local, basis. In addition, these stress test scenarios are calculated independently without considering changes in other interrelated assumptions, such as unemployment rates or other economic factors, which are likely to have a significant impact on our future expected credit losses. Other Non-Interest Expenses Other non-interest expenses decreased in 2013 compared with 2012 primarily due to increased gains from partnership investments and debt extinguishment gains in 2013 compared with debt extinguishment losses in 2012. These decreases in non-interest expenses were partially offset by an increase in TCCA fees in 2013. Gains from partnership investments increased in 2013 compared with 2012 as the continued strength of national multifamily market fundamentals resulted in improved property-level operating performance and increased gains on the sale of investments. Debt extinguishment gains in 2013 were primarily driven by an increase in interest rates in 2013 compared with debt extinguishment losses in 2012 driven by a decrease in interest rates in 2012. See "Fair Value Gains (Losses), Net-Mortgage Commitment Derivatives Fair Value Gains (Losses), Net" for additional information on how the fair value of our commitments impacts debt extinguishments when we purchase securities. TCCA fees increased in 2013 compared with 2012 due to an increase in the volume of loans in our single-family book of business subject to TCCA provisions. We expect the guaranty fees collected and expenses incurred under the TCCA to continue to increase in the future. Other non-interest expenses increased in 2012 compared with 2011 primarily due to our obligation to pay fees to Treasury under the TCCA, which began in 2012. 83 -------------------------------------------------------------------------------- Federal Income Taxes We recognized a benefit for federal income taxes of $45.4 billion in 2013 due to the release of the substantial majority of the valuation allowance against our deferred tax assets, partially offset by our 2013 provision for federal income taxes. We did not recognize a provision or a benefit for federal income taxes in 2012. We recognized a benefit for federal income taxes of $90 million for 2011 because we effectively settled our 2007 and 2008 tax years with the Internal Revenue Service ("IRS") in 2011. We discuss federal income taxes and the factors that led us to release our valuation allowance against our deferred tax assets in "Critical Accounting Policies and Estimates-Deferred Tax Assets" and "Note 10, Income Taxes." BUSINESS SEGMENT RESULTS We provide a more complete description of our business segments in "Business-Business Segments." Results of our three business segments are intended to reflect each segment as if it were a stand-alone business. Under our segment reporting structure, the sum of the results for our three business segments does not equal our consolidated results of operations as we separate the activity related to our consolidated trusts from the results generated by our three segments. In addition, because we apply accounting methods that differ from our consolidated results for segment reporting purposes, we include an eliminations/adjustments category to reconcile our business segment results and the activity related to our consolidated trusts to our consolidated results of operations. We describe the management reporting and allocation process used to generate our segment results in "Note 13, Segment Reporting." In this section, we summarize our segment results for the years ended December 31, 2013, 2012 and 2011 in the tables below and provide a comparative discussion of these results. This section should be read together with our comparative discussion of our consolidated results of operations in "Consolidated Results of Operations." See "Note 13, Segment Reporting" for a reconciliation of our segment results to our consolidated results. 84 --------------------------------------------------------------------------------



Summary

Table 18 displays a summary of our segment results for 2013, 2012 and 2011. Table 18: Business Segment Summary

For the Year Ended December 31, 2013 2012 2011 (Dollars in millions) Net revenues:(1) Single-Family $ 11,303$ 8,120$ 5,675 Multifamily 1,325 1,234 1,064 Capital Markets 11,659 12,667 12,901 Consolidated trusts 5,385 2,024 950 Eliminations/adjustments (3,338 ) (1,057 ) (146 ) Total $ 26,334$ 22,988$ 20,444 Net income (loss) attributable to Fannie Mae: Single-Family $ 48,276$ 6,290$ (23,941 ) Multifamily 10,069 1,511 583 Capital Markets 27,523 14,201 8,999 Consolidated trusts 4,645 1,741 429 Eliminations/adjustments (6,550 ) (6,519 ) (2,925 ) Total $ 83,963$ 17,224$ (16,855 ) As of December 31, 2013 2012 2011 (Dollars in millions) Total assets: Single-Family $ 41,206$ 17,595$ 11,822 Multifamily 10,848 5,182 5,747 Capital Markets 596,436 723,217 836,700 Consolidated trusts 2,812,459 2,749,571 2,676,952 Eliminations/adjustments(2) (190,841 ) (273,143 ) (319,737 ) Total $ 3,270,108$ 3,222,422$ 3,211,484 __________



(1) Includes net interest income (loss), guaranty fee income (expense), and fee

and other income (expense).

(2) Includes the elimination of Fannie Mae MBS in the Capital Markets group's

retained mortgage portfolio that are issued by consolidated trusts. Also

includes the elimination of the allowance for loan losses, allowance for

accrued interest receivable and fair value losses previously recognized on

acquired credit impaired loans as they are not treated as assets for

Single-Family and Multifamily segment reporting purposes because these

allowances and losses relate to loan assets that are held by the Capital

Markets segment and consolidated trusts. 85

-------------------------------------------------------------------------------- Segment Results Table 19 displays our segment results for 2013. Table 19: Business Segment Results For



the Year Ended December 31, 2013

Business Segments Other Activity/Reconciling Items Capital Eliminations/ Single-Family Multifamily Markets

Consolidated Trusts(1) Adjustments(2) Total Results (Dollars in millions) Net interest income (loss) $ 205 $ (74 )$ 9,764$ 10,939$ 1,570 (3) $ 22,404 Benefit for credit losses 8,469 480 - - - 8,949 Net interest income after benefit for credit losses 8,674 406 9,764 10,939 1,570 31,353 Guaranty fee income (expense)(4) 10,468 1,217 (1,115 ) (5,233 ) (5) (5,132 ) (5) 205 (5) Investment gains (losses), net 3 21 4,911 (122 ) (3,622 ) (6) 1,191 Net other-than-temporary impairments - - (64 ) - - (64 ) Fair value (losses) gains, net (10 ) - 3,148 (722 ) 543 (7) 2,959 Debt extinguishment gains, net - - 27 104 - 131 Gains from partnership investments(8) - 498 - - 19 517 Fee and other income (expense) 630 182 3,010 (321 ) 224 3,725 Administrative expenses (1,706 ) (280 ) (559 ) - - (2,545 ) Foreclosed property income 2,736 103 - - - 2,839 TCCA fees(4) (1,001 ) - - - - (1,001 ) Other (expenses) income (628 ) (2 ) 20 - (133 ) (743 ) Income before federal income taxes 19,166 2,145 19,142 4,645 (6,531 ) 38,567 Benefit for federal income taxes(9) 29,110 7,924 8,381 - - 45,415 Net income 48,276 10,069 27,523 4,645 (6,531 ) 83,982 Less: Net income attributable to noncontrolling interest - - - - (19 ) (10) (19 ) Net income attributable to Fannie Mae $ 48,276$ 10,069$ 27,523$ 4,645$ (6,550 )$ 83,963 __________



(1) Represents activity related to the assets and liabilities of consolidated

trusts in our consolidated balance sheets.

(2) Represents the elimination of intercompany transactions occurring between

the three business segments and our consolidated trusts, as well as other

adjustments to reconcile to our consolidated results.

(3) Represents the amortization expense of cost basis adjustments on securities

in the Capital Markets group's retained mortgage portfolio that on a GAAP

basis are eliminated.

(4) Pursuant to the TCCA, effective April 1, 2012, we increased the guaranty fee

on all single-family residential mortgages delivered to us on or after that

date by 10 basis points, and the incremental revenue must be remitted to

Treasury. The resulting revenue is included in guaranty fee income and the

expense is recognized in "TCCA fees." This increase in guaranty fee is also

included in the single-family average charged guaranty fee.

(5) Represents the guaranty fees paid from consolidated trusts to the

Single-Family and Multifamily segments. The adjustment to guaranty fee

income in the Eliminations/Adjustments column represents the elimination of

the amortization of deferred cash fees related to consolidated trusts that

were re-established for segment reporting. Total guaranty fee income related

to unconsolidated Fannie Mae MBS trusts and other credit enhancement arrangements is included in fee and other income in our consolidated statements of operations and comprehensive income (loss). (6) Primarily represents the removal of realized gains and losses on sales of



Fannie Mae MBS classified as available-for-sale securities that are issued

by consolidated trusts and in the Capital Markets group's retained mortgage

portfolio. The adjustment also includes the 86

-------------------------------------------------------------------------------- removal of securitization gains (losses) recognized in the Capital Markets segment relating to portfolio securitization transactions that do not qualify for sale accounting under GAAP. (7) Represents the removal of fair value adjustments on consolidated Fannie Mae



MBS classified as trading that are in the Capital Markets group's retained

mortgage portfolio. (8) Gains from partnership investments are included in other expenses in our consolidated statements of operations and comprehensive income (loss).



(9) Primarily represents the release of the valuation allowance for our deferred

tax assets that generally are directly attributable to each segment based on

the nature of the item.

(10) Represents the adjustment from equity method accounting to consolidation

accounting for partnership investments that are consolidated in our

consolidated balance sheets.

Single-Family Business Results Table 20 displays the financial results of our Single-Family business for the periods indicated. For a discussion of Single-Family credit risk management, including information on serious delinquency rates and loan workouts, see "Risk Management-Credit Risk Management-Single-Family Mortgage Credit Risk Management." The primary source of revenue for our Single-Family business is guaranty fee income. Expenses and other items that impact income or loss primarily include credit-related income (expense), net interest loss, TCCA fees and administrative expenses. Table 20: Single-Family Business Results(1) For the Year Ended December 31, Variance 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 (Dollars in millions) Net interest income (loss)(2) $ 205$ (790 )$ (2,411 )$ 995$ 1,621 Guaranty fee income(3)(4) 10,468 8,151 $ 7,507 2,317 644 Credit-related income (expense)(5) 11,205 919 (27,218 ) 10,286 28,137 TCCA fees(4) (1,001 ) (238 ) - (763 ) (238 ) Other expenses(6) (1,711 ) (1,672 ) (1,925 ) (39 ) 253 Income (loss) before federal income taxes 19,166 6,370 (24,047 ) 12,796 30,417 Benefit (provision) for federal income taxes(7) 29,110 (80 ) 106 29,190 (186 ) Net income (loss) attributable to Fannie Mae $ 48,276$ 6,290$ (23,941 )$ 41,986$ 30,231 Other key performance data: Single-family effective guaranty fee rate (in basis points)(4)(8) 36.7 28.7



26.2

Single-family average charged guaranty fee on new acquisitions (in basis points)(4)(9) 57.4 39.9



28.8

Average single-family guaranty book of business(10) $ 2,855,821$ 2,843,718$ 2,864,919 Single-family Fannie Mae MBS issuances(11) $ 733,111$ 827,749$ 564,606 __________

(1) Certain prior period amounts have been reclassified to conform with the current period presentation.



(2) Includes the cost to reimburse the Capital Markets group for interest income

not recognized for loans in our retained mortgage portfolio on nonaccrual

status, the cost to reimburse MBS trusts for interest income not recognized

for loans in consolidated trusts on nonaccrual status and income from cash

payments received on loans that have been placed on nonaccrual status.



(3) Guaranty fee income related to unconsolidated Fannie Mae MBS trusts and

other credit enhancement arrangements is included in fee and other income in

our consolidated statements of operations and comprehensive income (loss).

(4) Pursuant to the TCCA, effective April 1, 2012, we increased the guaranty fee

on all single-family residential mortgages delivered to us on or after that

date by 10 basis points, and the incremental revenue must be remitted to

Treasury. The resulting revenue is included in guaranty fee income and the

expense is recognized in "TCCA fees." This increase in guaranty fee is also

included in the single-family average charged guaranty fee.

(5) Consists of the benefit (provision) for credit losses and foreclosed

property income (expense).

(6) Consists of investment gains (losses), net, fair value losses, net, fee and

other income, administrative expenses and other expenses.

(7) The benefit for 2013 primarily represents the release of the substantial

majority of our valuation allowance against the portion of our deferred tax

assets that we attribute to our Single-Family segment based on the nature of

the item. 87

--------------------------------------------------------------------------------



(8) Calculated based on Single-Family segment guaranty fee income divided by the

average single-family guaranty book of business, expressed in basis points.

(9) Calculated based on the average contractual fee rate for our single-family

guaranty arrangements entered into during the period plus the recognition of

any upfront cash payments ratably over an estimated average life, expressed

in basis points.

(10) Our single-family guaranty book of business consists of (a) single-family

mortgage loans of Fannie Mae, (b) single-family mortgage loans underlying

Fannie Mae MBS, and (c) other credit enhancements that we provide on

single-family mortgage assets, such as long-term standby commitments. It

excludes non-Fannie Mae mortgage-related securities held in our retained

mortgage portfolio for which we do not provide a guaranty.

(11) Consists of unpaid principal balance of Fannie Mae MBS issued and

guaranteed by the Single-Family segment during the period.

2013 compared with 2012 Pre-tax income increased in 2013 compared with 2012 primarily due to an increase in credit-related income and increased guaranty fee income combined with net interest income in 2013 compared with a net interest loss in 2012. Our credit results for 2013 and 2012 were positively impacted by increases in home prices, which resulted in reductions in our loss reserves. The improvement in our credit results in 2013 as compared with 2012 was due in part to a decline in the number of delinquent loans in our single-family conventional guaranty book of business, as well as the recognition of compensatory fee income in 2013 related to servicing matters and gains resulting from resolution agreements reached in 2013 related to representation and warranty matters. In addition, in the second quarter of 2013 we updated the assumptions and data used to estimate our allowance for loan losses for individually impaired single-family loans to reflect faster prepayment and lower default expectations for these loans, which resulted in a decrease to our allowance for loan losses. See "Critical Accounting Policies and Estimates-Total Loss Reserves-Single-Family Loss Reserves" for additional information. The positive impact of these factors on our credit-related income in 2013 was partially offset by lower discounted cash flow projections on our individually impaired loans due to increasing mortgage interest rates in 2013. Higher mortgage interest rates lengthen the expected lives of modified loans, which increases the impairment on these loans and results in an increase to the provision for credit losses. Conversely, in 2012, mortgage interest rates decreased, resulting in higher discounted cash flow projections on our individually impaired loans, which resulted from shortened expected lives on modified loans and lower impairment on these loans. Our single-family credit-related income represents the substantial majority of our consolidated activity. We provide a discussion of our credit-related income and credit losses in "Consolidated Results of Operations-Credit-Related (Income) Expense." Guaranty fee income increased in 2013 compared with 2012 due to the cumulative impact of price increases, including a 10 basis point increase on April 1, 2012 mandated by the TCCA and an additional average increase of 10 basis points implemented during the fourth quarter of 2012, and higher amortization income on risk-based fees. In December 2011, Congress enacted the TCCA which, among other provisions, required that we increase our single-family guaranty fees by at least 10 basis points and remit this increase to Treasury, rather than retaining the incremental revenue. This TCCA-related revenue is included in guaranty fee income and the expense is recognized as "TCCA fees." We expect the guaranty fees collected and expenses incurred under the TCCA to continue to increase in the future. We recognized net interest income in 2013 compared with a net interest loss in 2012 primarily due to the reduction in the amount of interest income not recognized for nonaccrual mortgage loans as the population of delinquent loans declined, as well as our resolution agreement with Bank of America, which resulted in the recognition of unamortized cost basis adjustments on the loans repurchased by Bank of America. Net income in 2013 included a benefit for federal income taxes that primarily represents the release of the substantial majority of the valuation allowance against the portion of our deferred tax assets that we attributed to our single-family segment. Those assets primarily related to the allowance for loan losses and guaranty fee income. See "Note 10, Income Taxes" for additional information. The increase in the single-family average charged guaranty fee on new acquisitions in 2013 compared with 2012 was primarily due to price increases implemented during 2012, as discussed above. In addition, our average single-family charged guaranty fee increased due to an increase in total loan level price adjustments charged on our 2013 acquisitions, as the credit profile of these acquisitions included a higher proportion of loans with higher LTV ratios and a higher proportion of loans with lower FICO credit scores than our 2012 acquisitions. In December 2013, FHFA directed us to further increase our base single-family guaranty fees by 10 basis points and to make changes to our single-family loan level price adjustments. In January 2014, however, FHFA directed us to delay implementation of these guaranty fee changes. FHFA Director Melvin L. Watt stated that he intends to conduct a thorough evaluation of the proposed changes and their likely impact as expeditiously as possible. See "Business-Our Charter and Regulation of Our Activities-Potential Changes to Our Single-Family Guaranty Fee Pricing" for more information on the potential changes to our guaranty fee pricing. 88 -------------------------------------------------------------------------------- We remained the largest single issuer of mortgage related securities in the secondary market during 2013, with an estimated market share of new single-family mortgage-related securities issuances, which excludes previously securitized mortgages, of 47% for 2013. Despite our continued high market share, our average single-family guaranty book of business remained relatively flat in 2013 compared with 2012, primarily due to U.S. residential mortgage debt outstanding remaining relatively flat. 2012 compared with 2011 Net income in 2012 compared with a net loss in 2011 was primarily due to credit-related income in 2012 compared with credit-related expense in 2011, increased guaranty fee income in 2012 and a reduction in net interest loss in 2012. Credit-related income in 2012 compared with credit-related expense in 2011 was driven primarily by a significant improvement in the profile of our single-family book of business resulting from an increase in actual home prices. Net interest loss decreased in 2012 compared with 2011 primarily due to a reduction in the amount of interest income not recognized for nonaccrual mortgage loans in our consolidated balance sheet as we continued to complete a high number of loan workouts and foreclosures. In addition, as loans with stronger credit profiles became a larger portion of our single-family guaranty book of business, a smaller percentage of our loans became seriously delinquent in 2012 as compared with 2011. Guaranty fee income increased in 2012 compared with 2011 due to an increase in the amortization of risk-based fees. Additionally, as described above, in December 2011, Congress enacted the TCCA which, among other provisions, required that we increase our single-family guaranty fees by at least 10 basis points and remit this increase to Treasury, rather than retaining the incremental revenue. In addition, single-family net income increased as a result of our resolution agreements with Bank of America related to repurchase requests and compensatory fees. These agreements led to the recognition of $1.3 billion in pre-tax income for 2012. Multifamily Business Results Multifamily business results primarily reflect our multifamily guaranty business. Our multifamily business results also include activity relating to our low-income housing tax credit ("LIHTC") investments and equity investments. Although we are no longer making new LIHTC or equity investments, we continue to make contractually required contributions for our legacy investments. Activity from multifamily products is also reflected in the Capital Markets group results, which include net interest income related to multifamily loans and securities held in our retained mortgage portfolio, gains and losses from the sale of multifamily Fannie Mae MBS, mortgage loans and re-securitizations, and other miscellaneous income. Table 21 displays the financial results of our Multifamily business for the periods indicated. The primary sources of revenue for our Multifamily business are guaranty fee income and fee and other income. Expenses and other items that impact income or loss primarily include credit-related income (expense) and administrative expenses. 89 --------------------------------------------------------------------------------



Table 21: Multifamily Business Results

For the Year Ended December 31, Variance 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 (Dollars in millions) Guaranty fee income(1) $ 1,217$ 1,040$ 884$ 177$ 156 Fee and other income 182 207 218 (25 ) (11 ) Gains from partnership investments(2) 498 123 81 375 42 Credit-related income (expense)(3) 583 187 (280 ) 396 467 Other expenses(4) (335 ) (250 ) (259 ) (85 ) 9 Income before federal income taxes 2,145 1,307 644 838 663 Benefit (provision) for federal income taxes(5) 7,924 204 (61 ) 7,720 265



Net income attributable to Fannie Mae$ 10,069$ 1,511 $

583 $ 8,558$ 928 Other key performance data: Multifamily effective guaranty fee rate (in basis points)(6) 59.6 52.1



46.0

Multifamily credit loss performance ratio (in basis points)(7) 2.5 12.9



20.4

Average multifamily guaranty book of business(8) $ 204,284$ 199,797 $



191,984

Multifamily new business volume(9) $ 28,752$ 33,763$ 24,356 Multifamily units financed from new business volume 507,000 559,000



423,000

Multifamily Fannie Mae MBS issuances(10) $ 31,403$ 37,738$ 34,066 Multifamily Fannie Mae structured securities issuances (issued by Capital Markets group) $ 10,185$ 10,084 $



6,435

Additional net interest income earned on Fannie Mae multifamily mortgage loans and MBS (included in Capital Markets group's results)(11) $ 709$ 827 $



873

Average Fannie Mae multifamily mortgage loans and MBS in Capital Markets group's portfolio(12) $ 74,613$ 98,025$ 110,748 As of December 31, 2013 2012 (Dollars in millions) Multifamily serious delinquency rate 0.10 %



0.24 % Percentage of multifamily guaranty book of business with credit enhancement

91 % 90 %



Fannie Mae percentage of total multifamily mortgage debt outstanding(13)

21 % 22 % Multifamily Fannie Mae MBS outstanding(14) $ 148,724



$ 128,477

__________

(1) Guaranty fee income related to unconsolidated Fannie Mae MBS trusts and

other credit enhancement arrangements is included in fee and other income in

our consolidated statements of operations and comprehensive income (loss).

(2) Gains from partnership investments are included in other expenses in our

consolidated statements of operations and comprehensive income (loss). Gains

from partnership investments are reported using the equity method of

accounting. As a result, net income attributable to noncontrolling interest

from partnership investments is not included in income for the Multifamily

segment. (3) Consists of the benefit (provision) for credit losses and foreclosed property income (expense). (4) Consists of net interest loss, investment gains, net, administrative expenses and other (expenses) income.



(5) The benefit for 2013 primarily represents the release of the substantial

majority of our valuation allowance against the portion of our deferred tax

assets that we attribute to our Multifamily segment based on the nature of

the item. (6) Calculated based on Multifamily segment guaranty fee income divided by the



average multifamily guaranty book of business, expressed in basis points.

(7) Calculated based on Multifamily segment credit losses divided by the average

multifamily guaranty book of business, expressed in basis points. 90

--------------------------------------------------------------------------------



(8) Our Multifamily guaranty book of business consists of (a) multifamily

mortgage loans of Fannie Mae, (b) multifamily mortgage loans underlying

Fannie Mae MBS, and (c) other credit enhancements that we provide on

multifamily mortgage assets. It excludes non-Fannie Mae mortgage-related

securities held in our retained mortgage portfolio for which we do not provide a guaranty. (9) Reflects unpaid principal balance of multifamily Fannie Mae MBS issued



(excluding portfolio securitizations) and multifamily loans purchased during

the period.

(10) Reflects unpaid principal balance of multifamily Fannie Mae MBS issued

during the period. Includes: (a) issuances of new MBS, (b) Fannie Mae portfolio securitization transactions of $2.9 billion, $4.4 billion and $10.0 billion for the years ended December 31, 2013, 2012 and 2011,



respectively, and (c) conversions of adjustable-rate loans to fixed-rate

loans and discount MBS ("DMBS") to MBS of $68 million, $215 million and $241 million for the years ended December 31, 2013, 2012 and 2011, respectively.



(11) Interest expense estimate is based on allocated duration-matched funding

costs. Net interest income was reduced by guaranty fees allocated to Multifamily from the Capital Markets group on multifamily loans in our retained mortgage portfolio. (12) Based on unpaid principal balance.



(13) Includes mortgage loans and Fannie Mae MBS guaranteed by the Multifamily

segment. Information labeled as of December 31, 2013 is as of September 30,

2013 and is based on the Federal Reserve's September 2013 mortgage debt outstanding release, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for multifamily residences. Prior period amounts may have been changed to reflect revised historical data from the Federal Reserve.



(14) Includes $22.4 billion and $28.1 billion of Fannie Mae multifamily MBS held

in the retained mortgage portfolio, the vast majority of which have been

consolidated to loans in our consolidated balance sheets, as of

December 31, 2013 and 2012, respectively, and $1.2 billion and $1.3 billion

of Fannie Mae MBS collateralized by bonds issued by state and local housing

finance agencies as of December 31, 2013 and 2012, respectively.

2013 compared with 2012 Pre-tax income increased in 2013 compared with 2012 primarily due to increased guaranty fee income, increased credit-related income and increased gains from partnership investments. Guaranty fee income increased in 2013 compared with 2012 as we continued to acquire loans with higher guaranty fees. Loans with higher guaranty fees have become a larger part of our multifamily guaranty book of business, while loans with lower guaranty fees continue to liquidate. Credit-related income increased in 2013 compared with 2012, primarily due to improvements in default and loss severity trends and improvements in property valuations. Gains from partnership investments increased in 2013 compared with 2012 as the continued strength of national multifamily market fundamentals resulted in improved property-level operating performance and increased gains on the sale of investments. Net income in 2013 included a benefit for federal income taxes that primarily represents the release of the substantial majority of the valuation allowance against the portion of our deferred tax assets that we attributed to our Multifamily segment. Those assets primarily related to partnership and other equity investment losses and credits. See "Note 10, Income Taxes" for additional information. A benefit for federal income taxes in 2012 was driven by the utilization of tax credits related to LIHTC investments to offset our alternative minimum tax liability resulting from our projected 2012 taxable income. Multifamily new business volume decreased in 2013 compared with 2012. FHFA's 2013 conservatorship scorecard included an objective to reduce the unpaid principal balance of new multifamily business relative to 2012 by at least 10% by tightening underwriting, adjusting pricing and limiting product offerings, while not increasing the proportion of our retained risk. 2012 compared with 2011 Net income increased in 2012 compared with 2011, primarily due to credit-related income in 2012 compared with credit-related expense in 2011, an increase in guaranty fee income and a benefit for federal income taxes in 2012 as compared with a provision for federal income taxes in 2011. Credit-related income in 2012 was primarily due to reductions to our total loss reserves resulting from an improvement in national multifamily market fundamentals. In comparison, credit-related expense in 2011 was primarily due to underperformance of certain local markets and properties due to localized economic conditions. Guaranty fee income increased in 2012 compared with 2011 as we continued to acquire loans with higher guaranty fees. Our acquisitions of loans with higher guaranty fees became a larger part of our multifamily guaranty book of business, while loans with lower guaranty fees continued to liquidate. 91 -------------------------------------------------------------------------------- A benefit for federal income taxes of $204 million in 2012 was primarily driven by the utilization of tax credits related to LIHTC investments to offset our alternative minimum tax liability resulting from our 2012 taxable income. In comparison, a provision for federal income taxes was recognized in 2011, resulting from an effective settlement of issues with the Internal Revenue Service relating to tax years 2007 and 2008, which reduced our total corporate tax liability. However, the reduction in our tax liability also reduced the tax credits we were able to use, resulting in a provision for federal income taxes for the Multifamily segment in 2011. Capital Markets Group Results Table 22 displays the financial results of our Capital Markets group for the periods indicated. Following the table we discuss the Capital Markets group's financial results and describe the Capital Markets group's retained mortgage portfolio. For a discussion of the debt issued by the Capital Markets group to fund its investment activities, see "Liquidity and Capital Management." For a discussion of the derivative instruments that the Capital Markets group uses to manage interest rate risk, see "Risk Management-Market Risk Management, Including Interest Rate Risk Management" and "Note 9, Derivative Instruments." The primary sources of revenue for our Capital Markets group are net interest income and fee and other income. Expenses and other items that impact income or loss primarily include fair value gains and losses, investment gains and losses, other-than-temporary impairments, allocated guaranty fee expense and administrative expenses. Table 22: Capital Markets Group Results For the Year Ended December 31, Variance 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 (Dollars in millions) Net interest income (1) $ 9,764$ 13,241$ 13,920$ (3,477 )$ (679 ) Investment gains, net(2) 4,911 6,217 3,711 (1,306 ) 2,506 Net other-than-temporary impairments (64 ) (711 ) (306 ) 647 (405 ) Fair value gains (losses), net(3) 3,148 (3,041 ) (6,596 ) 6,189 3,555 Fee and other income 3,010 717 478 2,293 239 Other expenses(4) (1,627 ) (2,098 ) (2,253 ) 471 155



Income before federal income taxes 19,142 14,325 8,954

4,817 5,371 Benefit (provision) for federal income taxes(5) 8,381 (124 ) 45 8,505 (169 )



Net income attributable to Fannie Mae$ 27,523$ 14,201$ 8,999$ 13,322$ 5,202

__________

(1) Includes contractual interest income, excluding recoveries, on nonaccrual

loans received from the Single-Family segment of $3.8 billion, $5.2 billion

and $6.6 billion for the years ended December 31, 2013, 2012 and 2011,

respectively. The Capital Markets group's net interest income is reported

based on the mortgage-related assets held in the segment's retained mortgage

portfolio and excludes interest income on mortgage-related assets held by

consolidated MBS trusts that are owned by third parties and the interest

expense on the corresponding debt of such trusts. (2) We include the securities that we own regardless of whether the trust has been consolidated in reporting of gains and losses on securitizations and sales of available-for-sale securities.



(3) Includes fair value gains or losses on derivatives and trading securities

that we own, regardless of whether the trust has been consolidated.

(4) Includes allocated guaranty fee expense, debt extinguishment gains (losses),

net, administrative expenses, and other income (expenses). Gains or losses

related to the extinguishment of debt issued by consolidated trusts are excluded from the Capital Markets group's results because purchases of securities are recognized as such.



(5) The benefit for 2013 primarily represents the release of the substantial

majority of our valuation allowance against the portion of our deferred tax

assets that we attribute to our Capital Markets group based on the nature of

the item. 2013 compared with 2012 Pre-tax income increased in 2013 compared with 2012 primarily due to fair value gains in 2013 compared with fair value losses in 2012, an increase in fee and other income and a decrease in net other-than-temporary impairments. These factors were partially offset by a decrease in net interest income and a decrease in investment gains. Fair value gains in 2013 were primarily driven by fair value gains on our risk management derivatives. The derivatives fair value gains and losses that are reported for the Capital Markets group are consistent with the gains and losses reported in our 92 -------------------------------------------------------------------------------- consolidated statement of operations and comprehensive income (loss). We discuss our derivatives fair value gains and losses in "Consolidated Results of Operations-Fair Value Gains (Losses), Net." Fee and other income increased in 2013 compared with 2012 primarily as a result of funds we received in 2013 pursuant to settlement agreements resolving certain lawsuits relating to private-label mortgage-related securities sold to us. See "Legal Proceedings-FHFA Private-Label Mortgage-Related Securities Litigation" for additional information. In addition, we recognized higher yield maintenance fees in 2013 related to large multifamily loan prepayments during the year. Net other-than-temporary impairments in 2013 decreased compared with 2012. The net other-than-temporary impairments that are reported for the Capital Markets group are consistent with the amounts reported in our consolidated statement of operations and comprehensive income (loss). We discuss our net-other-than-temporary impairment in "Consolidated Results of Operations-Other-Than-Temporary Impairment of Investment Securities." The decrease in net interest income in 2013 compared with 2012 was primarily due to a decrease in the balance of our retained mortgage-related assets as we continued to reduce our retained mortgage portfolio pursuant to the requirements of our senior preferred stock purchase agreement with Treasury. In addition, during 2013, we sold $21.7 billion of non-agency mortgage-related assets to meet an objective of FHFA's 2013 conservatorship scorecard. See "The Capital Markets Group's Mortgage Portfolio" for additional information on our retained mortgage portfolio. We supplement our issuance of debt securities with derivative instruments to further reduce duration risk, which includes prepayment risk. The effect of these derivatives, in particular the periodic net interest expense accruals on interest rate swaps, is not reflected in the Capital Markets group's net interest income but is included in our results as a component of "Fair value gains (losses), net" and is displayed in "Table 11: Fair Value Gains (Losses), Net." If we had included the economic impact of adding the net contractual interest accruals on our interest rate swaps in our Capital Markets group's interest expense, the Capital Markets group's net interest income would have decreased by $767 million in 2013 compared with a decrease of $1.4 billion in 2012. Investment gains decreased in 2013 compared with 2012 primarily due to decreased gains on the sale of Fannie Mae MBS AFS securities and decreased gains on portfolio securitizations due to an increase in mortgage interest rates in 2013. The decrease in gains during 2013 was partially offset by gains on sales of non-agency mortgage-related securities. Net income in 2013 included a benefit for federal income taxes that primarily represents the release of the substantial majority of the valuation allowance against the portion of our deferred tax assets that we attributed to our Capital Markets group. Those assets primarily related to debt and derivative instruments and mortgage-related assets. See "Note 10, Income Taxes" for additional information. 2012 compared with 2011 Net income increased in 2012 compared with 2011, primarily due to a decrease in fair value losses and an increase in investment gains, partially offset by a decrease in net interest income and an increase in net other-than-temporary impairments. Fair value losses decreased in 2012 compared with 2011 primarily due to a decrease in risk management derivatives fair value losses. Investment gains increased in 2012 compared with 2011 primarily due to a higher volume of portfolio securitizations. In 2012, historically low interest rates and continued high acquisitions of HARP loans contributed to elevated portfolio securitization volumes. The Capital Markets Group's Mortgage Portfolio The Capital Markets group's mortgage portfolio, which we also refer to as our retained mortgage portfolio, consists of mortgage loans and mortgage-related securities that we own. Mortgage-related securities held by the Capital Markets group include Fannie Mae MBS and non-Fannie Mae mortgage-related securities. The Fannie Mae MBS that we own are maintained as securities on the Capital Markets group's balance sheets. The portion of assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties are not included in the Capital Markets group's mortgage portfolio. The amount of mortgage assets that we may own is restricted by our senior preferred stock purchase agreement with Treasury. By December 31 of each year, we are required to reduce our mortgage assets to 85% of the maximum allowable amount that we were permitted to own as of December 31 of the immediately preceding calendar year, until the amount of our mortgage assets reaches $250 billion in 2018. Under the agreement, the maximum allowable amount of mortgage assets we were permitted to own as of December 31, 2013 was $552.5 billion. The cap on our mortgage assets will decrease to $469.6 billion as of December 31, 2014. As we reduce the size of our retained mortgage portfolio, our revenues generated by 93 -------------------------------------------------------------------------------- our retained mortgage portfolio will decrease. As of December 31, 2013, we owned $490.7 billion in mortgage assets, compared with $633.1 billion as of December 31, 2012. Additionally, FHFA's 2013 conservatorship scorecard included an objective to sell 5%, or $21.1 billion, of the non-agency mortgage-related assets we held in our retained mortgage portfolio as of December 31, 2012. During 2013, we sold $21.7 billion of non-agency mortgage-related assets in accordance with this objective. For additional information on the terms of the senior preferred stock purchase agreement with Treasury, see "Business-Conservatorship and Treasury Agreements-Treasury Agreements." For additional information on FHFA's 2013 conservatorship scorecard objectives, see "Executive Compensation-Compensation Discussion and Analysis-Determination of 2013 Compensation-Assessment of Corporate Performance on 2013 Conservatorship Scorecard." Table 23 displays our Capital Markets group's mortgage portfolio activity for the periods indicated. Table 23: Capital Markets Group's Mortgage Portfolio Activity(1) For the Year Ended December 31, 2013 2012 (Dollars in millions) Mortgage loans: Beginning balance $ 371,708$ 398,271 Purchases 232,582 261,463 Securitizations (2) (207,437 ) (211,455 ) Liquidations and sales (3) (82,189 ) (76,571 ) Mortgage loans, ending balance 314,664 371,708 Mortgage securities: Beginning balance 261,346 310,143 Purchases (4) 36,848 26,874 Securitizations (2) 207,437 211,455 Sales (278,421 ) (224,208 ) Liquidations (3) (51,173 ) (62,918 )



Mortgage securities, ending balance 176,037 261,346 Total Capital Markets mortgage portfolio $ 490,701$ 633,054

__________

(1) Based on unpaid principal balance.

(2) Includes portfolio securitization transactions that do not qualify for sale

treatment under GAAP.

(3) Includes scheduled repayments, prepayments, foreclosures, and lender

repurchases.

(4) Includes purchases of Fannie Mae MBS issued by consolidated trusts.

94 --------------------------------------------------------------------------------



Table 24 displays the composition of the Capital Markets group's mortgage portfolio as of December 31, 2013 and 2012. Table 24: Capital Markets Group's Mortgage Portfolio Composition(1)

As of December 31, 2013 2012 (Dollars in millions) Capital Markets group's mortgage loans: Single-family loans: Government insured or guaranteed $ 39,399$ 40,886 Conventional: Long-term, fixed-rate 215,945 240,791 Intermediate-term, fixed-rate 8,385 10,460 Adjustable-rate 13,171 18,008 Total single-family conventional 237,501



269,259

Total single-family loans 276,900



310,145

Multifamily loans: Government insured or guaranteed 267 312



Conventional:

Long-term, fixed-rate 2,687



3,245

Intermediate-term, fixed-rate 27,325



45,662

Adjustable-rate 7,485



12,344

Total multifamily conventional 37,497



61,251

Total multifamily loans 37,764



61,563

Total Capital Markets group's mortgage loans 314,664



371,708

Capital Markets group's mortgage-related securities: Fannie Mae 129,841 183,964 Freddie Mac 8,124 11,274 Ginnie Mae 899 1,049 Alt-A private-label securities 11,153



17,079

Subprime private-label securities 12,322 15,093 CMBS 3,983 20,587 Mortgage revenue bonds 6,319 8,486 Other mortgage-related securities 3,396



3,814

Total Capital Markets group's mortgage-related securities(2) 176,037

261,346

Total Capital Markets group's mortgage portfolio $ 490,701



$ 633,054

__________

(1) Based on unpaid principal balance.

(2) The fair value of these mortgage-related securities was $179.5 billion and

$269.9 billion as of December 31, 2013 and 2012, respectively.

The Capital Markets group's mortgage portfolio decreased 22% as of December 31, 2013 compared with as of December 31, 2012, primarily due to a decline in purchases, and an increase in sales activity. Sales activity increased in 2013 compared with 2012, primarily due to our sales of mortgage-related assets to meet FHFA's 2013 conservatorship scorecard objective to sell 5% of the non-agency mortgage-related assets held in our retained mortgage portfolio as of December 31, 2012. Purchases declined due to fewer purchases of delinquent loans from our MBS trusts in 2013 and a decrease in new loan purchases as a result of increases in mortgage interest rates in the second half of the year. 95 -------------------------------------------------------------------------------- We expect to continue to purchase loans from 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 mortgage assets that we may own pursuant to the senior preferred stock purchase agreement with Treasury. We purchased approximately 183,000 delinquent loans with an unpaid principal balance of $27.9 billion from our single-family MBS trusts in 2013. As of December 31, 2013, the total unpaid principal balance of all loans in single-family MBS trusts that were delinquent as to four or more consecutive monthly payments was $2.2 billion. As a result of purchasing these delinquent loans and our retained mortgage portfolio decreasing to meet the requirements of the senior preferred stock purchase agreement and FHFA's scorecard objective, an increasing portion of the Capital Markets group's mortgage portfolio is comprised of loans restructured in a TDR and nonaccrual loans. The total unpaid principal balance of TDRs that were on accrual status was $136.2 billion or 28% of the Capital Markets group's mortgage portfolio as of December 31, 2013, compared with $130.2 billion or 21% of the Capital Markets group's mortgage portfolio as of December 31, 2012. The population of nonaccrual loans was $75.0 billion or 15% of the Capital Markets group's mortgage portfolio as of December 31, 2013, compared with $100.2 billion or 16% of the Capital Markets group's mortgage portfolio as of December 31, 2012. CONSOLIDATED BALANCE SHEET ANALYSIS We seek to structure the composition of our balance sheet and manage its size to comply with our regulatory requirements, to provide adequate liquidity to meet our needs, and to mitigate our interest rate risk and credit risk exposure. The major asset components of our consolidated balance sheets include our mortgage investments and our cash and other investments portfolio. We fund and manage the interest rate risk on these investments through the issuance of debt securities and the use of derivatives. Our debt securities and derivatives represent the major liability components of our consolidated balance sheets. This section provides a discussion of our consolidated balance sheets as of the dates indicated and should be read together with our consolidated financial statements, including the accompanying notes. 96 -------------------------------------------------------------------------------- Table 25 displays a summary of our consolidated balance sheets as of the dates indicated. Table 25: Summary of Consolidated Balance Sheets As of December 31, 2013 2012 Variance (Dollars in millions) Assets Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar arrangements $ 58,203$ 53,617$ 4,586 Restricted cash 28,995 67,919 (38,924 ) Investments in securities(1) 68,939 103,876 (34,937 ) Mortgage loans: Of Fannie Mae 300,508 355,936 (55,428 ) Of consolidated trusts 2,769,578 2,652,265 117,313 Allowance for loan losses (43,846 ) (58,795 ) 14,949 Mortgage loans, net of allowance for loan losses 3,026,240 2,949,406 76,834 Deferred tax assets, net 47,560 - 47,560 Other assets(2) 40,171 47,604 (7,433 ) Total assets $ 3,270,108$ 3,222,422$ 47,686 Liabilities and equity Debt: Of Fannie Mae $ 529,434$ 615,864$ (86,430 ) Of consolidated trusts 2,705,089 2,573,653 131,436 Other liabilities(3) 25,994 25,681 313 Total liabilities 3,260,517 3,215,198 45,319 Senior preferred stock 117,149 117,149 - Other deficit(4) (107,558 ) (109,925 ) 2,367 Total equity 9,591 7,224 2,367 Total liabilities and equity $ 3,270,108$ 3,222,422$ 47,686 __________

(1) Includes $16.3 billion as of December 31, 2013 and $18.0 billion as of December 31, 2012 of non-mortgage-related securities that are included in our other investments portfolio, which we present in "Table 35: Cash and Other Investments Portfolio." (2) Consists of accrued interest receivable, net; acquired property, net; and other assets. (3) Consists of accrued interest payable and other liabilities.



(4) Consists of preferred stock, common stock, accumulated deficit, accumulated

other comprehensive income, treasury stock and noncontrolling interest.

Cash and Other Investments Portfolio Our cash and other investments portfolio consists of cash and cash equivalents, federal funds sold and securities purchased under agreements to resell or similar arrangements, and investments in non-mortgage-related securities. See "Liquidity and Capital Management-Liquidity Management-Cash and Other Investments Portfolio" for additional information on our cash and other investments portfolio. Restricted Cash Restricted cash primarily includes unscheduled borrower payments received by the servicer or consolidated trusts due to be remitted to the MBS certificateholders in the subsequent month. Our restricted cash decreased as of December 31, 2013 compared with the balance as of December 31, 2012, resulting from a decrease in unscheduled payments received due to lower payoff volumes in December 2013 compared with December 2012. 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. Table 26 displays the fair value of our investments in mortgage-related securities, 97 -------------------------------------------------------------------------------- including trading and available-for-sale securities, as of the dates indicated. We classify private-label securities as Alt-A, subprime, CMBS or manufactured housing if the securities were labeled as such when issued. We have also invested in subprime private-label mortgage-related securities that we have resecuritized to include our guaranty (which we refer to as "wraps"). Table 26: Summary of Mortgage-Related Securities at Fair Value As of December 31, 2013 2012 2011 (Dollars in millions) Mortgage-related securities: Fannie Mae $ 12,443$ 16,683$ 24,274 Freddie Mac 8,681 12,173 15,555 Ginnie Mae 995 1,188 1,189



Alt-A private-label securities 8,865 12,405 13,032 Subprime private-label securities 8,516

8,766 8,866 CMBS 4,324 22,923 24,437 Mortgage revenue bonds 5,821 8,517 10,978 Other mortgage-related securities 2,988 3,271 3,601 Total $ 52,633$ 85,926$ 101,932 The decrease in mortgage-related securities in 2013 was primarily due to the sale of $20.4 billion of non-agency mortgage-related securities to meet an objective of FHFA's 2013 conservatorship scorecard. In addition, in 2013 we continued to reduce our investments in agency MBS as we managed the portfolio reduction requirement of the senior preferred stock purchase agreement. See "Business Segment Results-Capital Markets Group Results-The Capital Markets Group's Mortgage Portfolio" for additional information related to the reduction in our retained mortgage portfolio. 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 of December 31, 2013 and 2012. Mortgage Loans The mortgage loans reported in our consolidated balance sheets include loans owned by Fannie Mae and loans held in consolidated trusts and are classified as either held for sale or held for investment. The increase in the balance of mortgage loans, net of the allowance for loan losses, as of December 31, 2013 compared with the balance as of December 31, 2012 was primarily driven by an increase in mortgage loans held for investment due to securitization activity from our lender swap and portfolio securitization programs and a decrease in our allowance for loan losses. For additional information on our mortgage loans, see "Note 3, Mortgage Loans" and for changes in our allowance for loan losses, see "Consolidated Results of Operations-Credit-Related (Income) Expense." For additional information on the mortgage loan purchase and sale activities reported by our Capital Markets group, see "Business Segment Results-Capital Markets Group Results." Deferred Tax Assets, Net We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. The increase in our deferred tax assets in 2013 was primarily driven by the release of the substantial majority of the valuation allowance against our deferred tax assets. For additional information on the release of our valuation allowance against our deferred tax assets and our net deferred tax assets, see "Critical Accounting Policies and Estimates-Deferred Tax Assets" and "Note 10, Income Taxes." Debt Debt of Fannie Mae is the primary means of funding our mortgage investments. Debt of consolidated trusts represents the amount of Fannie Mae MBS issued from consolidated trusts and held by third-party certificateholders. We provide a summary of the activity of the debt of Fannie Mae and a comparison of the mix between our outstanding short-term and long- 98 -------------------------------------------------------------------------------- term debt in "Liquidity and Capital Management-Liquidity Management-Debt Funding." Also see "Note 8, Short-Term Borrowings and Long-Term Debt" for additional information on our outstanding debt. The decrease in debt of Fannie Mae in 2013 was primarily driven by lower funding needs, as our retained mortgage portfolio decreased. The increase in the balance of debt of consolidated trusts as of December 31, 2013 compared with the balance as of December 31, 2012 was primarily driven by securitization activity from our lender swap and portfolio securitization programs and sales of Fannie Mae MBS, which are accounted for as reissuances 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 of December 31, 2013 compared with December 31, 2012. See "Table 27: Comparative Measures-GAAP Change in Stockholders' Equity and Non-GAAP Change in Fair Value of Net Assets (Net of Tax Effect)" for details of the change in our net equity. SUPPLEMENTAL NON-GAAP INFORMATION-FAIR VALUE BALANCE SHEETS As part of our disclosure requirements with FHFA, we disclose on a quarterly basis supplemental non-GAAP consolidated fair value balance sheets, which reflect our assets and liabilities at estimated fair value. Table 27 summarizes changes in our stockholders' equity reported in our GAAP consolidated balance sheets and in the estimated fair value of our net assets in our non-GAAP consolidated fair value balance sheets for the year ended December 31, 2013. The estimated fair value of our net assets is calculated based on the difference between the fair value of our assets and the fair value of our liabilities, adjusted for noncontrolling interests. We use various valuation techniques to estimate fair value, some of which incorporate internal assumptions that are subjective and involve a high degree of management judgment. We describe the specific valuation techniques used to determine fair value and disclose the carrying value and fair value of our financial assets and liabilities in "Note 18, Fair Value." Table 27: Comparative Measures-GAAP Change in Stockholders' Equity and Non-GAAP Change in Fair Value of Net Assets (Net of Tax Effect) For Year Ended December 31, 2013 (Dollars in millions) GAAP consolidated balance sheets: Fannie Mae stockholders' equity as of December 31, 2012(1) $



7,183

Total comprehensive income



84,801

Senior preferred stock dividends paid (82,452 ) Other



9

Fannie Mae stockholders' equity as of December 31, 2013(1) $



9,541

Non-GAAP consolidated fair value balance sheets: Estimated fair value of net assets as of December 31, 2012 $ (66,492 ) Senior preferred stock dividends paid (82,452 ) Senior preferred stock dividends payable(2) (7,191 ) Increase in deferred tax assets, net(3)



47,560

Change in estimated fair value of net assets excluding senior preferred stock dividends paid, senior preferred stock dividends payable and the increase in net deferred tax assets

75,207

Increase in estimated fair value of net assets, net



33,124

Estimated fair value of net assets as of December 31, 2013 $



(33,368 )

__________

(1) Our net worth, as defined under the senior preferred stock purchase

agreement, is equivalent to the "Total equity" amount reported in our consolidated balance sheets, which consists of "Total Fannie Mae stockholders' equity" and "Noncontrolling interest."



(2) Represents the dividend payment we will pay Treasury in the first quarter of

2014 under the senior preferred stock purchase agreement, which, for purposes

of our non-GAAP fair value balance sheets, we present as a liability. Under

the terms of the senior preferred stock 99

-------------------------------------------------------------------------------- purchase agreement, starting January 1, 2013, we are required to pay Treasury each quarter a dividend, when, as and if declared, equal to the excess of our net worth as of the end of the immediately preceding fiscal quarter over an applicable capital reserve amount. The capital reserve amount was $3.0 billion for all quarterly dividend periods in 2013, decreased to $2.4 billion for quarterly dividend periods in 2014 and will continue to be reduced by $600 million each year until it reaches zero on January 1, 2018. (3) Represents an increase in the carrying value of our deferred tax assets, net



as of December 31, 2013 compared with December 31, 2012, as we released the

substantial majority of our valuation allowance against our deferred tax

assets in the first quarter of 2013.

During 2013, the estimated fair value of our net assets, (excluding senior preferred stock dividends paid, senior preferred stock dividends payable, and the increase in net deferred tax assets) increased by approximately $75 billion. This increase was primarily driven by an improvement in credit-related items which related to performing and nonperforming loans. The improvement in credit-related items was primarily due to overall improved housing market and economic conditions, including higher actual and expected home prices experienced during 2013. We estimate that home prices increased by 8.8% in 2013. Changes in single-family home prices, regardless of magnitude, may cause volatility in our fair value measurements due to our $2.9 trillion single-family guaranty book of business. The income from the interest spread between our mortgage assets and associated debt and derivatives as well as the revenue we received from single-family guaranty fees during 2013 contributed to the increase in the estimated fair value of our net assets. In addition, the tightening of option-adjusted spreads during 2013 increased the estimated fair value of our retained mortgage portfolio, resulting in an increase in our net assets. The increase in the estimated fair value of our net assets was partially offset by a decrease in the estimated fair value of our mortgage loans. This reflects the change in the fair value of our loan portfolio that is associated with recent increases in the guaranty fees that we charge in the GSE securitization market. As the guaranty fees we charged in the GSE securitization market increased, the fair value of our mortgage loans decreased because the current market rate of compensation for exposure to credit risk is now higher than the compensation that we are receiving for exposure to credit risk on these mortgage loans. Cautionary Language Relating to Supplemental Non-GAAP Financial Measures In reviewing our non-GAAP consolidated fair value balance sheets, there are a number of important factors and limitations to consider. The estimated fair value of our net assets is calculated as of a particular point in time based on our existing assets and liabilities. It does not incorporate other factors that may have a significant impact on our long-term fair value, including revenues generated from future business activities in which we expect to engage, the value from our foreclosure and loss mitigation efforts or the impact that legislation or potential regulatory actions may have on us. As a result, the estimated fair value of our net assets presented in our non-GAAP consolidated fair value balance sheets does not represent an estimate of our net realizable value, liquidation value or our market value as a whole. Amounts we ultimately realize from the disposition of assets or settlement of liabilities may vary materially from the estimated fair values presented in our non-GAAP consolidated fair value balance sheets. In addition, the fair value of our net assets presented in our fair value balance sheet does not represent an estimate of the value we expect to realize from operating the company, primarily because: • The estimated fair value of our guaranty obligations on mortgage loans significantly exceeds the projected credit losses we would expect to incur, as fair value takes into account certain assumptions about liquidity and required rates of return that a market participant may demand in assuming a credit obligation, and



• The fair value of our net assets reflects a point in time estimate of the

fair value of our existing assets and liabilities, and does not incorporate the value associated with new business that may be added in the future. The fair value of our net assets is not a measure defined within GAAP and may not be comparable to similarly titled measures reported by other companies. Supplemental Non-GAAP Consolidated Fair Value Balance Sheets We display our non-GAAP fair value balance sheets as of the dates indicated in Table 28. 100 --------------------------------------------------------------------------------



Table 28: Supplemental Non-GAAP Consolidated Fair Value Balance Sheets

As of December 31, 2013 As of December 31, 2012 GAAP Carrying Fair Value Estimated Fair GAAP Carrying Fair Value Estimated Fair Value Adjustment(1) Value Value Adjustment(1) Value (Dollars in millions) Assets: Cash and cash equivalents $ 48,223 $ - $ 48,223$ 89,036 $ - $ 89,036 Federal funds sold and securities purchased under agreements to resell or similar arrangements 38,975 - 38,975 32,500 - 32,500 Trading securities 30,768 - 30,768 40,695 - 40,695 Available-for-sale securities 38,171 - 38,171 63,181 - 63,181 Mortgage loans: Mortgage loans held for sale 380 - 380 464 11 475 Mortgage loans held for investment, net of allowance for loan losses: Of Fannie Mae 259,638 (13,758 ) 245,880 305,025 (33,837 ) 271,188 Of consolidated trusts 2,766,222 (20,080 ) (2)(9) 2,746,142 2,643,917 118,511 (2) 2,762,428 Total mortgage loans 3,026,240 (33,838 ) 2,992,402 (3) 2,949,406 84,685 3,034,091



(3)

Advances to lenders 3,727 (39 ) 3,688 (4) 7,592 (84 ) 7,508

(4) Derivative assets at fair (4) (4) value 2,073 - 2,073 435 - 435 Guaranty assets and buy-ups, (4) (4) net 267 439 706 327 365 692 Total financial assets 3,188,444 (33,438 ) 3,155,006 (5) 3,183,172 84,966 3,268,138 (5) Credit enhancements 548 984 1,532 (4) 488 997 1,485 (4) Deferred tax assets, net 47,560 - 47,560 (6) - - - Other assets 33,556 (235 ) 33,321 (4) 38,762 (244 ) 38,518 (4) Total assets $ 3,270,108$ (32,689 )$ 3,237,419$ 3,222,422$ 85,719$ 3,308,141 Liabilities: Short-term debt: Of Fannie Mae $ 72,295 $ 9 $ 72,304$ 105,233 $ 20 $ 105,253 Of consolidated trusts 2,154 - 2,154 3,483 - 3,483 Long-term debt: Of Fannie Mae 457,139 8,409 465,548 510,631 24,941 535,572 Of consolidated trusts 2,702,935 (5,349 ) (2) 2,697,586 2,570,170 131,009 (2) 2,701,179 Derivative liabilities at (7) (7) fair value 1,469 - 1,469 705 - 705 Guaranty obligations 485 1,948 2,433 (7) 599 2,514 3,113 (7) Total financial liabilities 3,236,477 5,017 3,241,494 (5) 3,190,821 158,484 3,349,305 (5) Senior preferred stock (8) dividends payable - 7,191 7,191 - - - Other liabilities 24,040 (1,988 ) 22,052 (7) 24,377 910 25,287 (7)(9) Total liabilities 3,260,517 10,220 3,270,737 3,215,198 159,394 3,374,592 Equity (deficit): Fannie Mae stockholders' equity (deficit): Senior preferred(10) 117,149 - 117,149 117,149 - 117,149 Preferred 19,130 (13,004 ) 6,126 19,130 (17,938 ) 1,192 Common (126,738 ) (29,905 ) (156,643 ) (129,096 ) (55,737 ) (184,833 ) Total Fannie Mae stockholders' equity (deficit)/non-GAAP fair value of net assets $ 9,541$ (42,909 )$ (33,368 )$ 7,183$ (73,675 )$ (66,492 ) Noncontrolling interest 50 - 50 41 - 41 Total equity (deficit) 9,591 (42,909 ) (33,318 ) 7,224 (73,675 ) (66,451 ) Total liabilities and equity (deficit) $ 3,270,108$ (32,689 )$ 3,237,419$ 3,222,422$ 85,719$ 3,308,141 101

--------------------------------------------------------------------------------



__________

Explanation and Reconciliation of Non-GAAP Measures to GAAP Measures (1) Each of the amounts listed as a "fair value adjustment" represents the

difference between the carrying value included in our GAAP consolidated

balance sheets and our best judgment of the estimated fair value of the

listed item.

(2) Fair value of consolidated loans is impacted by credit risk, which has no

corresponding impact on the consolidated debt.

(3) Performing loans had a fair value and an unpaid principal balance of $2.9

trillion as of December 31, 2013 compared with a fair value of $2.9 trillion

and an unpaid principal balance of $2.8 trillion as of December 31,

2012. Nonperforming loans, which for the purposes of our non-GAAP fair value

balance sheets consists of loans that are delinquent by one or more

payments, had a fair value of $103.8 billion and an unpaid principal balance

of $149.3 billion as of December 31, 2013 compared with a fair value of

$112.3 billion and an unpaid principal balance of $189.9 billion as

of December 31, 2012. See "Note 18, Fair Value" for additional information

on valuation techniques for performing and nonperforming loans.

(4) "Other assets" include (a) Accrued interest receivable, net and (b) Acquired

property, net as reported in our GAAP consolidated balance sheets. "Other

assets" in our GAAP consolidated balance sheets include the following:

(a) Advances to lenders; (b) Derivative assets at fair value; (c) Guaranty

assets and buy-ups, net; and (d) Credit enhancements. The carrying value of

these items totaled $6.6 billion and $8.8 billion as of December 31, 2013

and 2012, respectively.

(5) We estimated the fair value of these financial instruments in accordance

with the fair value accounting guidance as described in "Note 18, Fair

Value."

(6) The amount included in "estimated fair value" of deferred tax assets, net

represents the GAAP carrying value and does not reflect fair value.

(7) "Other liabilities" include Accrued interest payable as reported in our GAAP

consolidated balance sheets. "Other liabilities" in our GAAP consolidated

balance sheets include the following: (a) Derivative liabilities at fair

value and (b) Guaranty obligations. The carrying value of these items

totaled $2.0 billion and $1.3 billion as of December 31, 2013 and 2012,

respectively.

(8) Represents the dividend payment we will pay to Treasury in the first quarter

of 2014 under the senior preferred stock purchase agreement, which, for

purposes of our non-GAAP fair balance sheets, we present as a liability.

(9) Includes the estimated fair value of our liability to Treasury for

TCCA-related guaranty fee payments over the expected life of the loans. As

of December 31, 2013, the estimated fair value of TCCA-related guaranty fee

payments is included in the line item "Mortgage loans held for investment-Of

consolidated trusts."

(10) The amount included in "estimated fair value" of the senior preferred stock

is the liquidation preference, which is the same as the GAAP carrying

value, and does not reflect fair value.

LIQUIDITY AND CAPITAL MANAGEMENT

Liquidity Management Our business activities require that we maintain adequate liquidity to fund our operations. Our liquidity risk management policy is designed to address our liquidity risk. Liquidity risk is the risk that we will not be able to meet our funding obligations in a timely manner. Liquidity 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. Our treasury function is responsible for implementing our liquidity and contingency planning strategies. See "Liquidity Risk Management Practices and Contingency Planning" for a discussion of our liquidity contingency plans. Also see "Risk Factors" for a description of the risks associated with our liquidity risk and liquidity contingency planning. 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 GSE 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

non-mortgage assets, including proceeds from the sales of foreclosed real

estate assets;

• guaranty fees received on Fannie Mae MBS;

• payments received from mortgage insurance counterparties;

• net receipts on derivative instruments;

• borrowings under secured intraday funding lines of credit we have established with large financial institutions; and



• borrowings against mortgage-related securities and other investment

securities we hold pursuant to repurchase agreements and loan agreements.

Our primary funding needs 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 Treasury pursuant to the senior preferred stock

purchase agreement;

• net payments on derivative instruments;

• the pledging of collateral under derivative instruments;

• administrative expenses; and

• losses incurred in connection with our Fannie Mae MBS guaranty obligations.

Liquidity 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 our conservator, the Federal Reserve, U.S. Treasury or other government agencies; legislation relating to us or our business; a U.S. government payment default on its debt obligations; a downgrade in the credit ratings of our senior unsecured debt or the U.S. 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 the senior preferred stock purchase agreement; loss of demand for our debt, or certain types of our debt, from a major group 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 GSE status. 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. We plan for alternative sources of liquidity that are designed to allow us to meet our cash obligations without relying upon the issuance of unsecured debt. As directed by FHFA, our liquidity management policies and practices require that we: • maintain a portfolio of highly liquid securities to cover a minimum of 30 calendar days of net cash needs, assuming no access to the short- and long-term unsecured debt markets and other assumptions required by FHFA;



• maintain within our cash and other investment portfolio a daily balance of

U.S. Treasury securities and/or cash with the Federal Reserve Bank of New

York that has a redemption amount of at least 50% of the average projected

30-day cash needs over the previous three months (as adjusted in agreement

with FHFA); and

• maintain a liquidity profile that meets or exceeds our projected 365-day

net cash needs by supplementing liquidity holdings with unencumbered

agency mortgage securities.

As of December 31, 2013, we were in compliance with each of the liquidity risk management policies and practices set forth above. In addition to these FHFA requirements, we run routine operational testing of our ability to rely upon mortgage 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 a number of 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 "Risk Factors" for the risks associated with our ability to fund operations. See "Cash and Other Investments Portfolio" and "Unencumbered Mortgage Portfolio" for further discussions of our alternative sources of liquidity if our access to the debt markets were to become limited. 102 -------------------------------------------------------------------------------- While our liquidity contingency planning attempts to address stressed market conditions and our status under conservatorship and Treasury arrangements, we believe that our liquidity contingency plans may be difficult or impossible to execute for a company of our size in our circumstances. See "Risk Factors" for a description of the risks associated with our liquidity contingency planning. 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 and in the debt tables below. Our discussion regarding debt funding in this section focuses on the debt of Fannie Mae. We fund our business primarily through the issuance of short-term and long-term debt securities in the domestic and international capital markets. Because debt issuance is our primary funding source, we are subject to "roll-over," or refinancing, risk on our outstanding debt. 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. Our debt funding needs may vary from quarter to quarter depending on market conditions and are influenced by anticipated liquidity needs, the size of our retained mortgage portfolio and our dividend payment obligations to Treasury. Under the senior preferred stock purchase agreement, we were required to reduce our retained mortgage portfolio to $552.5 billion by December 31, 2013 and, by December 31 of each year thereafter, to 85% of the maximum allowable amount that we were permitted to own as of December 31 of the immediately preceding calendar year, until the amount of our mortgage assets reaches $250 billion. Fannie Mae Debt Funding Activity Table 29 displays the activity in debt of Fannie Mae for the periods indicated. This activity excludes the debt of consolidated trusts and intraday loans. The reported amounts of debt issued and paid off during the period represent the face amount of the debt at issuance and redemption, respectively. Activity for short-term debt of Fannie Mae relates to borrowings with an original contractual maturity of one year or less while activity for long-term debt of Fannie Mae relates to borrowings with an original contractual maturity of greater than one year. 103 --------------------------------------------------------------------------------



Table 29: Activity in Debt of Fannie Mae

For the Year Ended December 31, 2013 2012 2011 (Dollars in millions) Issued during the period: Short-term: Amount $ 216,475$ 246,092$ 424,503 Weighted-average interest rate 0.11 % 0.12 % 0.12 % Long-term: Amount $ 138,404$ 255,902 $



256,670

Weighted-average interest rate 1.07 % 1.26 % 1.72 % Total issued: Amount $ 354,879$ 501,994 $



681,173

Weighted-average interest rate 0.49 % 0.70 % 0.72 % Paid off during the period: (1) Short-term: Amount $ 249,357$ 287,624 $



429,711

Weighted-average interest rate 0.12 % 0.12 % 0.19 % Long-term: Amount $ 192,861$ 334,564 $



302,473

Weighted-average interest rate 1.72 % 1.88 % 2.52 % Total paid off: Amount $ 442,218$ 622,188 $



732,184

Weighted-average interest rate 0.82 % 1.06 % 1.15 %

__________

(1) 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.

Debt issuances decreased in 2013 compared with 2012 primarily due to lower funding needs as our retained mortgage portfolio decreased. Redemptions of callable debt decreased in 2013 compared with 2012 due to increased interest rates. Our debt funding activity is influenced by the size of our retained mortgage portfolio, anticipated liquidity needs and our dividend payment obligations to Treasury. We believe that continued federal government support of our business and the financial markets, as well as our status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in federal government support of our business and the financial markets or our status as a GSE could materially and adversely affect our liquidity, financial condition and results of operations. For more information on GSE reform, see "Business-Housing Finance Reform" and "Risk Factors." In addition, due to our reliance on the U.S. government's support, our access to debt funding or the cost of our debt funding could be materially adversely affected by a change or perceived change in the creditworthiness of the U.S. government. A downgrade in our credit ratings could reduce demand for our debt securities and increase our borrowing costs. See "Risk Factors" and "Credit Ratings" for further discussion of the importance of our credit ratings. Future changes or disruptions in the financial markets could significantly change the amount, mix and cost of funds we obtain, which also could increase our liquidity and roll-over risk and have a material adverse impact on our liquidity, financial condition and results of operations. See "Risk Factors" for a discussion of the risks we face relating to (1) the uncertain future of our company; (2) our reliance on the issuance of debt securities to obtain funds for our operations and the relative cost to obtain these funds; and (3) our liquidity contingency plans. Outstanding Debt Total outstanding debt of Fannie Mae includes short-term and long-term debt, excluding debt of consolidated trusts. 104 -------------------------------------------------------------------------------- Our outstanding short-term debt, based on its original contractual maturity, as a percentage of our total outstanding debt was 14% as of December 31, 2013 and 17% as of December 31, 2012. For information on our outstanding debt maturing within one year, including the current portion of our long-term debt, as a percentage of our total debt, see "Maturity Profile of Outstanding Debt of Fannie Mae." In addition, the weighted-average interest rate on our long-term debt, based on its original contractual maturity, decreased to 2.14% as of December 31, 2013 from 2.25% as of December 31, 2012. 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, which is 120% of the amount of mortgage assets we were allowed to own on December 31 of the immediately preceding calendar year. Our debt limit under the senior preferred stock purchase agreement was reduced to $780.0 billion in 2013. As of December 31, 2013, our aggregate indebtedness totaled $534.2 billion, which was $245.8 billion below our debt limit. 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. Table 30 displays information as of the dates indicated on our outstanding short-term and long-term debt based on its original contractual terms. Table 30: Outstanding Short-Term Borrowings and Long-Term Debt(1) As of December 31, 2013 2012 Weighted- Weighted- Average Average Interest Interest Maturities Outstanding Rate Maturities Outstanding Rate (Dollars in millions) Short-term debt: Fixed-rate: Discount notes - $ 71,933 0.12 % - $ 104,730 0.15 % Foreign exchange discount notes - 362 1.07 - 503 1.61 Total short-term debt of Fannie Mae (2) 72,295 0.13 105,233 0.16 Debt of consolidated trusts - 2,154 0.09 - 3,483 0.15 Total short-term debt $ 74,449 0.13 % $ 108,716 0.16 % Long-term debt: Senior fixed: Benchmark notes and bonds 2014 - 2030 $ 212,234 2.45 % 2013 - 2030 $ 251,768 2.59 % Medium-term notes(3) 2014 - 2023 161,445 1.28 2013 - 2022 172,288 1.35 Foreign exchange notes and bonds 2021 - 2028 682 5.41 2021 - 2028 694 5.44 Other(4)(5) 2014 - 2038 38,444 4.99 2013 - 2038 40,819 4.99 Total senior fixed 412,805 2.24 465,569 2.35 Senior floating: Medium-term notes(3) 2014 - 2019 38,441 0.20 2013 - 2019 38,633 0.27 Other(4)(5) 2020 - 2037 955 5.18 2020 - 2037 365 8.22 Total senior floating 39,396 0.32 38,998 0.33 Subordinated fixed: Qualifying subordinated 2014 1,169 5.27 2013 - 2014 2,522 5.00 Subordinated debentures(6) 2019 3,507 9.92 2019 3,197 9.92 Total subordinated fixed 4,676 8.76 5,719 7.75 Secured borrowings(7) 2021 - 2022 262 1.86 2021 - 2022 345 1.87 Total long-term debt of Fannie Mae(8) 457,139 2.14 510,631 2.25 Debt of consolidated trusts(5) 2014 - 2053 2,702,935 3.26

2013 - 2052 2,570,170 3.36 Total long-term debt $ 3,160,074 3.10 % $ 3,080,801 3.18 % Outstanding callable debt of Fannie Mae(9) $ 168,397 1.59 % $ 177,784 1.64 % 105

--------------------------------------------------------------------------------



__________

(1) Outstanding debt amounts and weighted-average interest rates reported in

this table include the effects of discounts, premiums and other cost basis

adjustments. Reported amounts include fair value gains and losses associated

with debt that we elected to carry at fair value. The unpaid principal balance of outstanding debt of Fannie Mae, which excludes unamortized discounts, premiums and other cost basis adjustments, and debt of consolidated trusts, totaled $534.3 billion and $621.8 billion as of December 31, 2013 and 2012, respectively. (2) 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. Reported amounts include a net

unamortized discount, fair value adjustments and other cost basis

adjustments of $30 million and $33 million as of December 31, 2013 and 2012,

respectively.

(3) Includes long-term debt with an original contractual maturity of greater

than 1 year and up to 10 years, excluding zero-coupon debt.

(4) Includes long-term debt that is not included in other debt categories.

(5) Includes a portion of structured debt instruments that is reported at fair

value.

(6) Consists of subordinated debt with an interest deferral feature.

(7) Represents remaining liability for transfer of financial assets from our

consolidated balance sheets that did not qualify as a sale.

(8) Long-term debt of Fannie Mae consists of borrowings with an original

contractual maturity of greater than one year. Reported amounts include the

current portion of long-term debt that is due within one year, which totaled

$89.8 billion and $103.2 billion as of December 31, 2013 and 2012,

respectively. Reported amounts also include a net unamortized discount, fair

value adjustments and other cost basis adjustments of $4.8 billion and $6.0

billion as of December 31, 2013 and 2012, respectively. The unpaid principal

balance of long-term debt of Fannie Mae, which excludes unamortized

discounts, premiums, fair value adjustments and other cost basis adjustments

and amounts related to debt of consolidated trusts, totaled $462.0 billion

and $516.5 billion as of December 31, 2013 and 2012, respectively. (9) Consists of the unpaid principal balance of long-term callable debt of Fannie Mae that can be paid off in whole or in part at our option or the option of the investor at any time on or after a specified date.



Table 31 below displays additional information for each category of our short-term borrowings. Table 31: Outstanding Short-Term Borrowings(1)

2013 As of December 31 Average During the Year Weighted- Weighted- Average Average Interest Interest Maximum Outstanding Rate Outstanding(2) Rate Outstanding(3) (Dollars in millions) Federal funds purchased and securities sold under agreements to repurchase $ - - % $ 15 - % $ 218 Fixed-rate short-term debt: Discount notes $ 71,933 0.12 % $ 94,697 0.13 % $ 127,916 Foreign exchange discount notes 362 1.07 385 1.43 503 Total short-term debt $ 72,295 0.13 % 106

--------------------------------------------------------------------------------

2012 As of December 31 Average During the Year Weighted- Weighted- Average Average Interest Interest Maximum Outstanding Rate Outstanding(2) Rate Outstanding(3) (Dollars in millions) Federal funds purchased and securities sold under agreements to repurchase $ - - % $ 18 - % $ 490 Fixed-rate short-term debt: Discount notes $ 104,730 0.15 % $ 102,414 0.14 % $ 151,906 Foreign exchange discount notes 503 1.61 412 1.82 516 Other(4) - - 33 0.04 80 Total short-term debt $ 105,233 0.16 % 2011 As of December 31 Average During the Year Weighted- Weighted- Average Average Interest Interest Maximum Outstanding Rate Outstanding(2) Rate Outstanding(3) (Dollars in millions) Federal funds purchased and securities sold under agreements to repurchase $ - - % $ 10 0.11 % $ 829 Fixed-rate short-term debt: Discount notes $ 146,301 0.13 % $ 160,358 0.18 % $ 198,382 Foreign exchange discount notes 371 1.88 327 2.25 401 Other(4) 80 0.04 9 0.06 80 Total short-term debt $ 146,752 0.13 % __________

(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.

(4) Consists of foreign exchange discount notes denominated in U.S. dollars.

Qualifying Subordinated Debt We had $1.2 billion in outstanding qualifying subordinated debt as of December 31, 2013, all of which matured in January 2014. The terms of these securities state that, if our core capital is below 125% of our critical capital requirement (which it was as of December 31, 2013), we will defer interest payments on these securities. FHFA has directed us, however, to continue paying principal and interest on our outstanding qualifying subordinated debt during the conservatorship and thereafter until directed otherwise, regardless of our existing capital levels. Under the senior preferred stock purchase agreement, we are prohibited from issuing additional subordinated debt without the written consent of Treasury. We did not issue any subordinated debt in 2013. Maturity Profile of Outstanding Debt of Fannie Mae Table 32 displays the maturity profile, as of December 31, 2013, of our outstanding debt maturing within one year, including the current portion of our long-term debt and amounts we have announced for early redemption. Our outstanding debt maturing within one year, as a percentage of our total outstanding debt, excluding debt of consolidated trusts, was 31% as of December 31, 2013 and 34% as of December 31, 2012. The weighted-average maturity of our outstanding debt that is maturing within one year was 151 days as of December 31, 2013, compared with 130 days as of December 31, 2012. 107 -------------------------------------------------------------------------------- Table 32: Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year(1) [[Image Removed]]________ (1) Includes unamortized discounts, premiums and other cost basis adjustments of



$195 million as of December 31, 2013. Excludes debt of consolidated trusts

maturing within one year of $3.4 billion as of December 31, 2013.

Table 33 displays the maturity profile, as of December 31, 2013, of the portion of our long-term debt that matures in more than one year, on a quarterly basis for one year and on an annual basis thereafter, excluding amounts we have announced for early redemption within one year. The weighted-average maturity of our outstanding debt maturing in more than one year was approximately 59 months as of December 31, 2013 and approximately 61 months as of December 31, 2012. Table 33: Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year(1) [[Image Removed]] __________ (1) Includes unamortized discounts, premiums and other cost basis adjustments of



$4.7 billion as of December 31, 2013. Excludes debt of consolidated trusts

of $2.7 trillion as of December 31, 2013. 108

-------------------------------------------------------------------------------- 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. We also may use proceeds from our mortgage assets to pay our debt obligations. Contractual Obligations Table 34 displays, by remaining maturity, our future cash obligations related to our long term debt, announced calls, operating leases, purchase obligations and other material noncancelable contractual obligations as of December 31, 2013. Table 34: Contractual Obligations Payment Due by



Period as of December 31, 2013

Less than 1 More than 5 Total Year 1 to <3 Years 3 to 5 Years Years (Dollars in millions) Long-term debt obligations(1) $ 457,139$ 89,844$ 150,911$ 133,994$ 82,390 Contractual interest on long-term obligations(2) 54,239 7,896 12,499 7,745 26,099 Operating lease obligations(3) 138 41 66 28 3 Purchase obligations: Mortgage commitments(4) 29,753 29,753 - - - Other purchase obligations(5) 118 63 53 2 - Other liabilities reflected in the consolidated balance sheet(6) 2,062 1,947 47 53 15



Total contractual obligations $ 543,449$ 129,544$ 163,576$ 141,822$ 108,507

__________

(1) Represents the carrying amount of our long-term debt assuming payments are

made in full at maturity. Amounts exclude $2.7 trillion in long-term debt

from consolidations. Amounts include a net unamortized discount, fair value

adjustments and other cost basis adjustments of $4.8 billion. (2) Excludes contractual interest on long-term debt from consolidations. (3) Includes certain premises and equipment leases.



(4) Includes on- and off-balance sheet commitments to purchase mortgage loans

and mortgage-related securities. (5) Includes only unconditional purchase obligations that are subject to a



cancellation penalty for certain telecom services, software and computer

services, and other agreements. Excludes arrangements that may be canceled

without penalty. Amounts also include off-balance sheet commitments for the

unutilized portion of lending agreements entered into with multifamily

borrowers.

(6) Excludes risk management derivative transactions that may require cash

settlement in future periods and our obligations to stand ready to perform

under our guarantees relating to Fannie Mae MBS and other financial

guarantees, because the amount 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, 2013, see "Off-Balance

Sheet Arrangements." Includes cash received as collateral, unrecognized tax

benefits and future cash payments due under our contractual obligations to

fund LIHTC 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 and Treasury Agreements-Treasury Agreements." Cash and Other Investments Portfolio Our cash and other investments portfolio increased in 2013 compared with 2012. The balance of our cash and other investments portfolio fluctuates based on changes in our cash flows, overall liquidity in the fixed income markets and our liquidity risk management policies and practices. See "Risk Management-Credit Risk Management-Institutional Counterparty Credit Risk Management-Issuers of Investments Held in our Cash and Other Investments Portfolio" for additional information on the risks associated with the assets in our cash and other investments portfolio. 109 --------------------------------------------------------------------------------



Table 35 displays information on the composition of our cash and other investments portfolio as of the dates indicated. Table 35: Cash and Other Investments Portfolio

As of December 31, 2013 2012 2011 (Dollars in millions) Cash and cash equivalents $ 19,228$ 21,117$ 17,539 Federal funds sold and securities purchased under agreements to resell or similar arrangements 38,975 32,500 46,000 Non-mortgage-related securities: U.S. Treasury securities (1) 16,306 17,950 47,737 Asset-backed securities - - 2,111 Total non-mortgage-related securities 16,306 17,950 49,848 Total cash and other investments $ 74,509 $



71,567 $ 113,387

__________

(1) Excludes U.S. Treasury securities that had a maturity at the date of

acquisition of three months or less and would therefore be included in cash

and cash equivalents.

Unencumbered Mortgage Portfolio Another potential source of liquidity in the event our access to the unsecured debt market becomes impaired is the unencumbered mortgage assets in our retained mortgage portfolio, which could be sold or used as collateral for secured borrowing. We believe that the amount of mortgage-related assets that we could successfully sell or borrow against in the event of a liquidity crisis or significant market disruption is substantially lower than the amount of mortgage-related assets we hold. Our ability to sell whole loans from our retained mortgage portfolio is limited due to the credit-related issues of these loans, as well as operational constraints. 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. We cannot predict whether one or more of these ratings agencies will lower our debt ratings in the future. See "Risk Factors" 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. Table 36 displays the credit ratings issued by the three major credit rating agencies as of February 13, 2014. Table 36: Fannie Mae Credit Ratings As of February 13, 2014 S&P Moody's Fitch Long-term senior debt AA+ Aaa AAA Short-term senior debt A-1+ P-1 F1+ Qualifying subordinated debt AA- Aa2 AA- Preferred stock D Ca C/RR6 Rating Watch Outlook Stable Stable Negative (for Long Term (for Long Term (for Long Term Senior Debt and Senior Debt and Senior Debt, Qualifying Preferred Short Term Subordinated Stock) Senior Debt and Debt) Qualifying Subordinated Debt) 110

-------------------------------------------------------------------------------- In June 2013, S&P revised its outlook on the long-term rating on the U.S. from negative to stable. As a result, S&P also revised its outlook on our issue-level rating from negative to stable. In July 2013, Moody's moved the outlook for both the U.S. government's rating and our long-term senior debt rating back to stable, replacing the negative outlook that had been in place since August 2011. Moody's also affirmed the "Aaa" rating of both the U.S. government and our long-term senior debt. In October 2013, Fitch placed our long-term senior debt, short-term senior debt and qualifying subordinated debt ratings on "Rating Watch Negative," following a similar action on the debt ratings of the U.S. government. A rating being placed on Rating Watch is typically event-driven and indicates there is a heightened probability of a rating change. Fitch noted that it placed our long-term debt, short-term debt and qualifying subordinated debt on "Rating Watch Negative" due to our direct financial support from the U.S. government. In November 2013, S&P revised the preferred stock rating to "D" from "C" citing their expectation that Fannie Mae will not resume dividend payments to common and preferred stockholders in the near term. In December 2013, S&P raised the qualifying subordinated debt rating to "AA-" from "A" citing, among other factors, the U.S. government's continued support for Fannie Mae debt instruments. S&P affirmed the long-term senior debt rating of "AA+" and short-term senior debt rating of "A-1+" due to the stable outlook on the U.S. sovereign rating. 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. The amount of additional collateral required depends on the contract and is usually a fixed incremental amount, the market value of the exposure, or both. See "Note 9, Derivative Instruments" and "Risk Factors" for additional information on collateral we would be required to provide to our derivatives counterparties in the event of downgrades in our credit ratings. Cash Flows Year ended December 31, 2013. Cash and cash equivalents decreased by $1.9 billion from $21.1 billion as of December 31, 2012 to $19.2 billion as of December 31, 2013. This decrease in the balance was primarily driven by cash used to (1) acquire mortgage loans and provide advances to lenders; (2) acquire delinquent loans out of MBS trusts; and (3) pay dividends to Treasury. In addition, as we continue to reduce our retained mortgage portfolio, we have lower funding needs which caused funding debt redemptions to outpace funding debt issuances. Partially offsetting these cash outflows were cash inflows from: (1) issuances of long-term debt of consolidated trusts from selling Fannie Mae MBS securities to third parties; (2) proceeds from the sale and liquidation of mortgage-related securities as we reduce our retained mortgage portfolio, including the sale of non-agency mortgage-related assets per FHFA's 2013 conservatorship scorecard objective; and (3) the sale of our REO inventory. In addition, we received proceeds from resolution and settlement agreements in 2013 related to representation and warranty and PLS matters. Year Ended December 31, 2012. Cash and cash equivalents increased by $3.6 billion from $17.5 billion as of December 31, 2011 to $21.1 billion as of December 31, 2012. This increase in the balance was primarily driven by cash provided by (1) issuances of long-term debt of consolidated trusts, from selling Fannie Mae MBS securities to third parties; (2) proceeds from the sale and liquidation of mortgage-related and non-mortgage securities, as we reduced our retained mortgage portfolio and had lower liquidity needs; (3) the sale of our REO inventory and (4) proceeds from the maturities of trading securities. Partially offsetting these cash inflows were cash outflows from: (1) the acquisition of mortgage loans and advances to lenders, (2) funding debt redemptions outpacing debt issuances, due to lower funding needs, and (3) the acquisition of delinquent loans out of MBS trusts. Capital Management Regulatory Capital FHFA has announced that during the conservatorship, our existing statutory and FHFA-directed regulatory capital requirements will not be binding and FHFA will not issue quarterly capital classifications. We submit capital reports to FHFA during the conservatorship and FHFA monitors our capital levels. We report our minimum capital requirement, core capital and GAAP net worth in our periodic reports on Form 10-Q and Form 10-K, and FHFA also reports them on its website. FHFA is not reporting our critical, risk-based capital or subordinated debt levels during the conservatorship. For information on our minimum capital requirements see "Note 15, Regulatory Capital Requirements." 111 -------------------------------------------------------------------------------- Dodd-Frank Act-FHFA Rule Regarding Stress Testing See "Business-Our Charter and Regulation of Our Activities-The Dodd-Frank Act-Stress Testing" for a description of FHFA's final rule implementing the Dodd-Frank Act's stress test requirements for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Capital Activity We are effectively unable to raise equity capital from private sources at this time and, therefore, are reliant on the funding available under the senior preferred stock purchase agreement to address any net worth deficit. Senior Preferred Stock Purchase Agreement As a result of the covenants under the 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 significant uncertainty regarding our future, we effectively no longer have access to equity funding except through draws under the senior preferred stock purchase agreement. Under the senior preferred stock purchase agreement, Treasury made a commitment to provide funding, under certain conditions, to eliminate deficiencies in our net worth. We have received a total of $116.1 billion from Treasury pursuant to the senior preferred stock purchase agreement as of December 31, 2013. The aggregate liquidation preference of the senior preferred stock, including the initial aggregate liquidation preference of $1.0 billion, remains at $117.1 billion. While we had a positive net worth as of December 31, 2013 and have not received funds from Treasury under the agreement since the first quarter of 2012, we would be required to obtain additional funding from Treasury pursuant to the senior preferred stock purchase agreement if we have a net worth deficit in future periods. As of the date of this filing, the amount of remaining available funding under the senior preferred stock purchase agreement is $117.6 billion. For additional information, see "Business-Conservatorship and Treasury Agreements-Treasury Agreements-Senior Preferred Stock Purchase Agreement and Related Issuance of Senior Preferred Stock and Common Stock Warrant-Senior Preferred Stock Purchase Agreement." We are not permitted to redeem the senior preferred stock prior to the termination of Treasury's funding commitment under the senior preferred stock purchase agreement. Moreover, we are not permitted to pay down the liquidation preference of the outstanding shares of senior preferred stock except in limited circumstances. The limited circumstances under which Treasury's funding commitment will terminate and under which we can pay down the liquidation preference of the senior preferred stock are described in "Business-Conservatorship and Treasury Agreements-Treasury Agreements." Dividends Our fourth quarter 2013 dividend of $8.6 billion was declared by FHFA and subsequently paid by us on December 31, 2013, bringing our senior preferred stock dividends paid in 2013 to $82.5 billion. For each dividend period from January 1, 2013 through and including December 31, 2017, when, as and if declared, the dividend amount will be the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. The capital reserve amount was $3.0 billion for dividend periods in 2013, decreased to $2.4 billion for dividend periods in 2014 and will continue to be reduced by $600 million each year until it reaches zero on January 1, 2018. For each dividend period beginning in 2018, the dividend amount will be the entire amount of our net worth, if any, as of the end of the immediately preceding fiscal quarter. Based on the terms of the senior preferred stock purchase agreement, we expect to pay Treasury a dividend for the first quarter of 2014 of $7.2 billion by March 31, 2014. See "Risk Factors" for a discussion of the risks relating to our dividend obligations to Treasury on the senior preferred stock. See "Business-Conservatorship and Treasury Agreements-Treasury Agreements" for more information on the terms of the senior preferred stock and our senior preferred stock purchase agreement with Treasury. 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 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. 112 --------------------------------------------------------------------------------



Our off-balance sheet arrangements result primarily from the following: • our guaranty of mortgage loan securitization and resecuritization

transactions over which we do not have control;

• other guaranty transactions;

• liquidity support transactions; and

• partnership interests.

Our maximum potential exposure to credit losses relating to our outstanding and unconsolidated Fannie Mae MBS and other financial guarantees is primarily represented by the unpaid principal balance of the mortgage loans underlying outstanding and unconsolidated Fannie Mae MBS and other financial guarantees of $44.3 billion as of December 31, 2013 and $53.1 billion as of December 31, 2012. For more information on the mortgage loans underlying both our on- and off-balance sheet Fannie Mae MBS, as well as whole mortgage loans that we own, see "Risk Management-Credit Risk Management." Partnership Investment Interests For partnership investments where we have determined that we are the primary beneficiary, we have consolidated these investments and recorded all of the partnership assets and liabilities in our consolidated balance sheets. Our partnership investments primarily consist of investments in affordable rental and for-sale housing partnerships. The carrying value of our partnership investments, including those we have consolidated, totaled $809 million as of December 31, 2013, compared with $1.2 billion as of December 31, 2012. LIHTC Partnership Interests In most instances, we are not the primary beneficiary of our LIHTC partnership investments, and therefore our consolidated balance sheets reflect only our investment in the LIHTC partnership, rather than the full amount of the LIHTC partnership's assets and liabilities. FHFA informed us that, after consultation with Treasury, generally we are not authorized to sell or transfer our LIHTC partnership interests. Some exceptions to this rule exist in very limited circumstances and, in most cases, only with FHFA consent. In the fourth quarter of 2009, we reduced the carrying value of our LIHTC partnership investments to zero, as we no longer had both the intent and ability to sell or otherwise transfer our LIHTC investments for value. However, we still have an obligation to fund our LIHTC partnership investments and have recorded such obligation as a liability in our financial statements. We did not make any LIHTC investments in 2013, other than pursuant to existing prior commitments. Treasury Housing Finance Agency Initiative During the fourth quarter of 2009, we entered into a memorandum of understanding with Treasury, FHFA and Freddie Mac pursuant to which we agreed to provide assistance to state and local housing finance agencies ("HFAs") through two primary programs, which together comprise what we refer to as the HFA initiative. In November 2011, we entered into an Omnibus Consent to HFA Initiative Program Modifications with Treasury, Freddie Mac and FHFA pursuant to which the parties agreed to specified modifications to the HFA initiative programs, including a three-year extension of the expiration date for the temporary credit and liquidity facilities ("TCLFs") from December 2012 to December 2015. See "Certain Relationships and Related Transactions, and Director Independence-Transactions with Related Persons-Transactions with Treasury-Treasury Housing Finance Agency Initiative" for a discussion of the HFA initiative. Pursuant to the TCLF program that we describe in "Related Parties" in "Note 1, Summary of Significant Accounting Policies," Treasury has purchased participation interests in TCLFs provided by us and Freddie Mac to the HFAs. These facilities create a credit and liquidity backstop for the HFAs. Our outstanding commitments under the TCLF program totaled $821 million as of December 31, 2013 and $1.6 billion as of December 31, 2012. Multifamily Bond Credit Enhancement Liquidity Commitments Our total outstanding liquidity commitments to advance funds for securities backed by multifamily housing revenue bonds totaled $13.0 billion as of December 31, 2013 and $15.3 billion as of December 31, 2012. 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 cash and other investments portfolio in excess of these commitments to advance funds. 113 --------------------------------------------------------------------------------



RISK MANAGEMENT

Our business activities expose us to the following three major categories of financial risk: credit risk, market risk (including interest rate and liquidity risk) and operational risk. We seek to actively monitor and manage these risks by using an established risk management framework. Our risk management framework is intended to provide the basis for the principles that govern our risk management activities. • Credit Risk. Credit risk is the potential for financial loss resulting from



the failure of a borrower or institutional counterparty to honor its

financial or contractual obligations, resulting in a potential loss of

earnings or cash flows. In regards to financial securities or instruments,

credit risk is the risk of not receiving principal, interest or any other

financial obligation on a timely basis, for any reason. Credit risk exists

primarily in our mortgage credit book of business and derivatives portfolio.

• Market Risk. Market risk is the exposure generated by adverse changes in the

value of financial instruments caused by a change in market prices or

interest rates. Two significant market risks we face and actively manage are

interest rate risk and liquidity risk. Interest rate risk is the risk of

changes in our long-term earnings or in the value of our assets due to

fluctuations in interest rates. Liquidity risk is our potential inability to

meet our funding obligations in a timely manner.

• Operational Risk. Operational risk is the loss resulting from inadequate or

failed internal processes, people, systems or from external events.

In addition to our exposure to credit, market and operational risks, there is significant uncertainty regarding the future of our company, including how long we will continue to be in existence, which we discuss in more detail in "Business-Housing Finance Reform" and in "Risk Factors." This uncertainty, along with limitations on our employee compensation arising from our conservatorship, could affect our ability to retain and hire qualified employees. We are also subject to a number of other risks that could adversely impact our business, financial condition, earnings and cash flow, including human capital, legal, regulatory and compliance, reputational, strategic and execution risks. These risks may arise due to a failure to comply with laws, regulations or ethical standards and codes of conduct applicable to our business activities and functions. These risks are typically brought to the attention of our Management Committee, our Board of Directors or one or more of the Board's committees and, in some cases, FHFA for discussion. Another risk that can impact our financial condition, earnings and cash flow is model risk, which is defined as the potential for model errors to adversely affect the company. This occurs because of our use of modeled estimations of future economic environments, borrower behavior or valuation methodologies. See "Risk Factors" for a discussion of the risks associated with our reliance on models. Our risk management framework and governance structure are intended to provide comprehensive controls and ongoing management of the major risks inherent in our business activities. Our ability to identify, assess, mitigate and control, and report and monitor risk is crucial to our safety and soundness. • Risk Identification. Risk identification is the process of finding,



recognizing and describing risk. The identification of risk facilitates

effective risk management by achieving awareness of the sources, impact and

magnitude of risk.

• Risk Assessment. We assess risk using a variety of methodologies, such as

calculation of potential losses from loans and stress tests relating to

interest rate sensitivity. When we assess risk, we look at metrics such as

frequency, severity, concentration, correlation, volatility and loss.

Information obtained from these assessments is reviewed on a regular basis

to ensure that our risk assumptions are reasonable and reflect our current

positions.

• Risk Mitigation & Control. We proactively develop appropriate mitigation

strategies to prevent excessive risk exposure, address risks that exceed

established tolerances and address risks that create unanticipated business

impact. Mitigation strategies and controls can be in the form of reduction,

transference, acceptance or avoidance of the identified risk. We also manage

risk through four control elements that are designed to work in conjunction

with each other: (1) risk policies, (2) risk limits, (3) delegations of authority, and (4) risk committees.



• Risk Reporting & Monitoring. Our business units actively monitor emerging

and identified risks that are taken when executing our strategies. Risks and

concerns are reported to the appropriate level of management to ensure that

the necessary action is taken to mitigate the risk.

We manage risk by using a "three lines of defense" structure. The first line of defense is the active management of risk by the business unit. Each business unit is charged with conforming to the risk guidelines, risk appetite, risk policies and limits 114 -------------------------------------------------------------------------------- approved by the Board of Directors, the Board's Risk Policy & Capital Committee and the executive-level Management Committee. The second line of defense is the Enterprise Risk Management division, which is responsible for ensuring compliance with the risk framework and independently reporting on risk management issues and performance, and the Compliance division, which is responsible for developing policies and procedures to help ensure that Fannie Mae and its employees comply with the law, our code of conduct and all regulatory obligations. The third line of defense is the Internal Audit group, which is responsible for ensuring all parties are performing the actions for which they are accountable and for identifying any omissions or potential process improvements. Enterprise Risk Management reports independently to the Board's Risk Policy & Capital Committee and Internal Audit reports independently to the Board's Audit Committee. Enterprise Risk Governance Our enterprise risk management structure consists of the Board of Directors, executive leadership, including the Chief Risk Officer, Deputy Chief Risk Officer and Chief Credit Officer, and the Enterprise Risk Management division, designated officers responsible for managing our financial risks, business unit chief risk officers and risk management committees. This structure is designed to encourage a culture of accountability within the divisions and promote effective risk management throughout the company. Our organizational structure and risk management framework work in conjunction with each other to identify risk-related trends with respect to customers, products or portfolios and external events and to develop appropriate strategies to mitigate emerging and identified risks. Under our enterprise risk management framework, each business unit is responsible for managing its risks but is subject to a governance and oversight process that includes independent oversight functions, management-level risk committees and Board-level engagement. Board of Directors The Risk Policy & Capital Committee of the Board, pursuant to its Charter, assists the Board in overseeing our management of risk and recommends for Board approval enterprise risk governance policy and limits. In addition, the Audit Committee reviews the system of internal controls that we rely upon to provide reasonable assurance of compliance with our enterprise risk management processes. The Board of Directors delegates day-to-day management responsibilities to the Chief Executive Officer who then further delegates this responsibility among the company's business unit heads, including the Chief Risk Officer and the Chief Compliance Officer. Risk management oversight authority, including responsibility for setting appropriate controls such as limits and policies, is delegated to the Chief Risk Officer, who then delegates certain levels of risk management oversight authority to our Chief Credit Officer and to the chief risk officers of each business unit or functional risk area (for example, model and operational risk). Management-level business risk committees serve in an advisory capacity to those officers to whom risk management authority has been delegated. In addition, certain activities require the approval of our conservator. See "Directors, Executive Officers and Corporate Governance-Corporate Governance-Conservatorship and Delegation of Authority to Board of Directors" for information about these activities. Enterprise Risk Management Division Our Enterprise Risk Management division reports directly to the Chief Risk Officer who reports directly to the Chief Executive Officer. The Chief Risk Officer also reports independently to the Board's Risk Policy & Capital Committee. Enterprise Risk Management is responsible for the identification of emerging risks, the monitoring and reporting of risk within the existing policies and limits, and independent oversight of risk management across the company. Risk Committees We use our management-level risk committees as a forum for discussing emerging risks, risk mitigation strategies and communication across business lines. Risk committees enhance the risk management framework by reinforcing our risk management culture and providing accountability for the resolution of key risk issues and decisions. Each business risk committee is chaired by the head of the business unit. In addition, the business unit chief risk officer can be designated as the committee co-chair or as a member of the committee who is responsible for the oversight of the risks discussed. Committees are also populated with key business and risk leaders from the respective business units. The primary management-level business risk committees include the Asset Liability Committee, the Enterprise Risk Committee, the Model Oversight Committee and the Operational Risk Committee, as well as specific committees for each line of business. Executive-level risk discussions are held primarily by the Operating Committee, which consists of members of our executive management. On a periodic basis, the Chief Risk Officer prepares a detailed summary of current and 115 -------------------------------------------------------------------------------- emerging risks, compliance with risk limits and other risk reports, and reports on these matters to both the Operating Committee and the Risk Policy & Capital Committee of the Board. The Chief Risk Officer also reports periodically on other topics to the Risk Policy & Capital Committee of the Board, as appropriate. Internal Audit Our Internal Audit group, under the direction of the Chief Audit Executive, provides an objective assessment of the design and execution of our internal control system, including our management systems, risk governance and policies and procedures. The Chief Audit Executive reports directly and independently to the Audit Committee of the Board of Directors, and audit personnel are compensated based on objectives set for the group by the Audit Committee rather than corporate financial results or goals. The Chief Audit Executive reports administratively to the Chief Executive Officer and may be removed only upon approval by the Board's Audit Committee. Internal audit activities are designed to provide reasonable assurance that resources are safeguarded; that significant financial, managerial and operating information is complete, accurate and reliable; and that employee actions comply with our policies and applicable laws and regulations. Compliance and Ethics The Compliance and Ethics division, under the direction of the Chief Compliance Officer, is dedicated to developing and maintaining policies and procedures to help ensure that Fannie Mae and its employees comply with the law, our Code of Conduct and all regulatory obligations. The Chief Compliance Officer reports directly to our Chief Executive Officer and independently to the Audit Committee of the Board of Directors, and Compliance and Ethics personnel are compensated on objectives set for the group by the Audit Committee of the Board of Directors rather than corporate financial results or goals. The Chief Compliance Officer may be removed only upon Board approval. The Chief Compliance Officer is responsible for overseeing our compliance activities; developing and promoting a code of ethical conduct; evaluating and investigating any allegations of misconduct; and overseeing and coordinating regulatory reporting and examinations. Credit Risk Management We are generally subject to two types of credit risk: mortgage credit risk and institutional counterparty credit risk. Market conditions as a result of the housing crisis resulted in significant exposure to mortgage and institutional counterparty credit risk. The metrics used to measure credit risk are generated using internal models. 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" for a discussion of the risks associated with our use of models. Mortgage Credit Risk Management We are exposed to credit risk on our mortgage credit 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 provided other credit enhancements on mortgage assets. While our mortgage credit book of business includes all of our mortgage-related assets, both on- and off-balance sheet, our guaranty book of business excludes non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty. See "Glossary of Terms Used in This Report" for more detail. Mortgage Credit Book of Business Table 37 displays the composition of our mortgage credit book of business as of the dates indicated. Our single-family mortgage credit book of business accounted for 93% of our mortgage credit book of business as of December 31, 2013 and 2012. 116 --------------------------------------------------------------------------------



Table 37: Composition of Mortgage Credit Book of Business(1)

As of December 31, 2013 As of December 31, 2012 Single-Family Multifamily Total Single-Family Multifamily Total (Dollars in millions) Mortgage loans and Fannie Mae MBS(2) $ 2,862,306$ 183,891$ 3,046,197$ 2,797,909$ 188,418$ 2,986,327 Unconsolidated Fannie Mae MBS, held by third parties(3) 12,430 1,314 13,744 15,391 1,524 16,915 Other credit guarantees(4) 15,183 15,414 30,597 19,977 16,238 36,215 Guaranty book of business $ 2,889,919$ 200,619



$ 3,090,538$ 2,833,277$ 206,180$ 3,039,457 Agency mortgage-related securities(5)

8,992 32 9,024 12,294 32 12,326 Other mortgage-related securities(6) 27,563 9,640 37,203 37,524 27,535 65,059



Mortgage credit book of business $ 2,926,474$ 210,291

$ 3,136,765$ 2,883,095$ 233,747$ 3,116,842 Guaranty Book of Business Detail: Conventional Guaranty Book of Business(7) $ 2,827,169$ 198,906$ 3,026,075$ 2,764,903$ 204,112$ 2,969,015 Government Guaranty Book of Business(8) $ 62,750 $ 1,713$ 64,463 $ 68,374 $ 2,068$ 70,442 __________



(1) Based on unpaid principal balance.

(2) Consists of mortgage loans and Fannie Mae MBS recognized in our consolidated

balance sheets. The principal balance of resecuritized Fannie Mae MBS is

included only once in the reported amount.

(3) Reflects unpaid principal balance of unconsolidated Fannie Mae MBS, held by

third-party investors. The principal balance of resecuritized Fannie Mae MBS

is included only once in the reported amount.

(4) Consists of single-family and multifamily credit enhancements that we have

provided and that are not otherwise reflected in the table.

(5) Consists of mortgage-related securities issued by Freddie Mac and Ginnie

Mae.

(6) Consists primarily of mortgage revenue bonds, Alt-A and subprime

private-label securities and CMBS.

(7) Refers to mortgage loans and mortgage-related securities that are not

guaranteed or insured, in whole or in part, by the U.S. government or one of

its agencies.

(8) Refers to mortgage loans and mortgage-related securities guaranteed or

insured, in whole or in part, by the U.S. government or one of its agencies.

In the following sections, we discuss the mortgage credit risk of the single-family and multifamily loans in our guaranty book of business. The credit statistics reported below, unless otherwise noted, pertain generally to the portion of our guaranty book of business for which we have access to detailed loan-level information, which constituted approximately 99% of each of our single-family conventional guaranty book of business and our multifamily guaranty book of business, excluding defeased loans, as of December 31, 2013 and 2012. We typically obtain this data 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 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 experience mortgage fraud as a result of this reliance on lender representations. Single-Family Mortgage Credit Risk Management Our strategy in managing single-family mortgage credit risk consists of four primary components: (1) our acquisition and servicing policies along with our underwriting and servicing standards, including the use of credit enhancements; (2) portfolio diversification and monitoring; (3) management of problem loans; and (4) REO management. These approaches may increase our expenses and may not be effective in reducing our credit-related expense or credit losses. We provide information on our credit-related income (expense) and credit losses in "Consolidated Results of Operations-Credit-Related Income (Expense)." In evaluating our single-family mortgage credit risk, we closely monitor changes in housing and economic conditions and the impact of those changes on the credit risk profile and performance of our single-family mortgage credit book of business. We regularly review and provide updates to our underwriting standards and eligibility guidelines that take into consideration changing market conditions. The credit risk profile of our single-family mortgage credit book of business is influenced by, 117 -------------------------------------------------------------------------------- among other things, the credit profile of the borrower, features of the loan, such as the loan product type and the type of property securing the loan, the housing market and the general economy. We focus more on those loans that we believe pose a higher risk of default, which typically have been loans associated with higher mark-to-market LTV ratios, loans to borrowers with lower FICO credit scores and certain higher risk loan product categories, such as Alt-A loans. 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. The single-family credit statistics we focus on and report in the sections below generally relate to our single-family conventional guaranty book of business, which represents the substantial majority of our total single-family guaranty book of business. We provide additional information on non-Fannie Mae mortgage-related securities held in our portfolio, including the impairment that we have recognized on these securities, in "Note 5, Investments in Securities." Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards Our Single-Family business, with the oversight of our Enterprise Risk Management division, is responsible for pricing and managing credit risk relating to the portion of our single-family mortgage credit book of business consisting of single-family mortgage loans and Fannie Mae MBS backed by single-family mortgage loans (whether held in our portfolio or held by third parties). Desktop Underwriter™, our proprietary automated underwriting system which measures credit risk by assessing the primary risk factors of a mortgage, is used to evaluate the majority of the loans we purchase or securitize. As part of our regular evaluation of Desktop Underwriter, we conduct periodic examinations of the underlying risk assessment models and recalibrate the models based on actual loan performance and market assumptions to improve Desktop Underwriter's ability to effectively analyze risk. Subject to our prior approval, we also may 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. We initiated underwriting and eligibility changes that became effective for deliveries in late 2008 and 2009 that focused on strengthening our underwriting and eligibility standards to promote sustainable homeownership. The result of many of these changes is reflected in the substantially improved risk profile of our single-family loan acquisitions since 2009. We periodically make updates to Desktop Underwriter for underwriting and eligibility changes and changes to our Selling Guide, which sets forth our policies and procedures related to selling single-family mortgages to us. Table 38 below displays information regarding the credit characteristics of the loans in our single-family conventional guaranty book of business as of December 31, 2013 by acquisition period, which illustrates the improvement in the credit risk profile of loans we acquired beginning in 2009 compared with loans we acquired in 2005 through 2008. Table 38: Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition Period As of December 31, 2013 % of Single-Family Current Current Conventional Estimated Mark-to-Market Serious Guaranty Book Mark-to-Market LTV Ratio Delinquency of Business(1) LTV Ratio >100%(2) Rate(3) New Single-Family Book of Business 77 % 65 % 4 % 0.33 % Legacy Book of Business: 2005-2008 15 86 27 9.32 2004 and prior 8 50 3 3.52 Total Single-Family Book of Business 100 % 67 % 7 % 2.38 %



__________

(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

December 31, 2013.

(2) The majority of loans in our new single-family book of business as of

December 31, 2013 with mark-to-market LTV ratios over 100% were loans

acquired under the Administration's Home Affordable Refinance Program. See

"HARP and Refi Plus Loans" below for more information on our recent

acquisitions of loans with high LTV ratios.

(3) The serious delinquency rates for loans acquired in more recent years will be

higher after the loans have aged, but we do not expect them to approach the

levels of the December 31, 2013 serious delinquency rates of loans in our

legacy book of business. The serious delinquency rate as of December 31, 2013

for loans we acquired in 2009, the oldest vintage in our new book of business, was 1.05%. 118

-------------------------------------------------------------------------------- As part of our credit risk management process, we conduct reviews on random samples of performing loans soon after acquisition in order to identify loans that may not have met our underwriting or eligibility requirements. Performance for the random sample is measured using a significant findings rate, which represents the proportion of loans in the sample population with significant underwriting defects. The significant findings rate does not necessarily indicate how well the loans will ultimately perform. Instead, we use it to estimate the percentage of loans we acquired that potentially had a significant error in the underwriting process. Based on these reviews, we believe that, over the last three years, the percentage of loans we acquired that have significant underwriting defects has been reduced. Beginning with loans delivered in 2013, and in conjunction with our new representation and warranty framework that is discussed below, we have made changes in our quality control process that move the primary focus of our quality control reviews from the time a loan defaults to shortly after the time the loan is delivered to us. We have implemented new tools to help identify loans delivered to us that may not have met our underwriting or eligibility guidelines and use these tools to help select a discretionary sample of loans for quality control reviews shortly after delivery. Our quality control includes reviewing and recording underwriting defects noted in the file, and determining if the loan sold met our underwriting and eligibility guidelines. We also use these reviews to provide lenders with earlier feedback on underwriting defects. Because of these changes, the significant findings rate for 2013 deliveries, which we will begin to report later in 2014, will not be comparable to prior period reporting. Our representation and warranty framework for conventional loans acquired on or after January 1, 2013, which is part of FHFA's seller-servicer contract harmonization initiative, seeks to provide lenders a higher degree of certainty and clarity regarding their repurchase exposure and liability on future deliveries, as well as consistency around repurchase timelines and remedies. Under the new framework, lenders will be relieved of certain repurchase obligations for loans that meet specific payment history requirements and other eligibility requirements. For example, a lender would not be required to repurchase a mortgage loan in breach of certain underwriting and eligibility representations and warranties if the borrower has made timely payments for 36 months following the acquisition date (or, for Refi Plus loans, for 12 months following the acquisition date), and the loan meets other specified eligibility requirements. Certain representations and warranties are "life of loan" representations and warranties, meaning that no relief from enforcement is available to lenders regardless of the number of payments made by a borrower. Examples of life of loan representations and warranties include, but are not limited to, a lender's representation and warranty that it has originated a loan in compliance with all laws and that the loan conforms to our Charter requirements. As discussed in "Business-Our Charter and Regulation of Our Activities-Charter Act," 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% at the time of purchase. However, under HARP, we allow our borrowers who have mortgage loans with current LTV ratios above 80% to refinance their mortgages without obtaining new mortgage insurance in excess of what was already in place. See "Credit Profile Summary-HARP and Refi Plus Loans" below for more discussion on HARP and its impact on our single-family conventional business volume and guaranty book of business. Borrower-paid primary mortgage insurance is the most common type of credit enhancement in our single-family guaranty book of business. Primary mortgage insurance transfers varying portions of the credit risk associated with a mortgage loan to a third-party insurer. In order 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 that secured the loan must have been extinguished, generally in a foreclosure action. The claims process for primary mortgage insurance typically takes three to six months after title to the property has been transferred. Mortgage insurers may also provide pool mortgage insurance, which is insurance that applies to a defined group of loans. Pool mortgage insurance benefits typically are based on actual loss incurred and are subject to an aggregate loss limit. Under some of our pool mortgage insurance policies, we are required to meet specified loss deductibles before we can recover under the policy. We typically collect claims under pool mortgage insurance three to six months after disposition of the property that secured the loan. For a discussion of our aggregate mortgage insurance coverage as of December 31, 2013 and 2012, see "Risk Management-Credit Risk Management-Institutional Counterparty Credit Risk Management-Mortgage Insurers." Our mortgage servicers are the primary points of contact for borrowers and perform a vital role in our efforts to reduce defaults and pursue foreclosure alternatives. We discuss the actions we have taken to improve the servicing of our delinquent loans below in "Problem Loan Management." FHFA's 2013 conservatorship scorecard included an objective to demonstrate the viability of multiple types of risk transfer transactions involving single-family mortgages with at least $30 billion of unpaid principal balance. In October 2013, we issued our first credit risk sharing securities under our Connecticut Avenue Securities ("C-deal") series. In contrast to our typical Fannie Mae MBS transaction, where we retain all of the credit risk associated with losses on the underlying mortgage 119 -------------------------------------------------------------------------------- loans, our credit risk sharing securities transfer some of this credit risk to the investors in these securities, in exchange for sharing a portion of the guaranty fee payments. We issued $675 million in credit risk sharing securities in 2013, transferring a portion of credit risk on mortgages with an unpaid principal balance of approximately $27 billion. This first C-deal resulted in $25 billion of credit protection and was one of two types of risk transfer transactions that we completed in 2013. We also announced in October 2013 that we entered into a pool insurance policy with National Mortgage Insurance Corporation, which transferred a portion of credit risk on a pool of securitized single-family mortgages with an initial unpaid principal balance of nearly $5.2 billion. In addition, we issued $750 million in credit risk sharing securities in January 2014, transferring a portion of credit risk on residential mortgages with an unpaid principal balance of approximately $29 billion. This second C-deal resulted in approximately $28 billion of credit protection. Single-Family Portfolio Diversification and Monitoring Diversification within our single-family mortgage credit book of business by product type, loan characteristics and geography is an important factor that influences 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 and our 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 guaranty book of business is comprised of the following key loan attributes: • 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 of

default are typically lower as the LTV ratio decreases. This also applies

to the 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 our company, 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.

• 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 six years following

origination; however, this range can vary based on many factors, including

changes in macroeconomic conditions and foreclosure timelines.

Table 39 displays our single-family conventional business volumes and our single-family conventional guaranty book of business for the periods indicated, based on certain key risk characteristics that we use to evaluate the risk profile and credit quality of our single-family loans.

120 --------------------------------------------------------------------------------



Table 39: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1)

Percent of Single-Family



Percent of Single-Family

Conventional Business Volume(2)



Conventional Guaranty Book of Business(3)(4)

For the Year Ended December 31,



As of December 31,

2013 2012 2011 2013 2012 2011 Original LTV ratio:(5) <= 60% 22 % 25 % 29 % 22 % 23 % 24 % 60.01% to 70% 14 15 16 15 15 16 70.01% to 80% 35 35 37 38 39 40 80.01% to 90%(6) 10 9 9 10 10 10 90.01% to 100%(6) 12 8 7 10 10 9 100.01% to 125%(6) 4 5 2 3 2 1 Greater than 125%(6) 3 3 - 2 1 - Total 100 % 100 % 100 % 100 % 100 % 100 % Weighted average 76 % 75 % 69 % 74 % 73 % 71 % Average loan amount $ 204,750$ 213,515$ 209,847$ 160,357$ 157,512$ 156,194 Estimated mark-to-market LTV ratio:(7) <= 60% 38 % 28 % 26 % 60.01% to 70% 19 15 12 70.01% to 80% 19 22 18 80.01% to 90% 11 13 16 90.01% to 100% 6 9 10 100.01% to 125% 5 8 11 Greater than 125% 2 5 7 Total 100 % 100 % 100 % Weighted average 67 % 75 % 79 % Product type: Fixed-rate:(8) Long-term 76 % 74 % 67 % 72 % 72 % 73 % Intermediate-term 22 23 26 18 17 15 Interest-only * * * 1 1 1 Total fixed-rate 98 97 93 91 90 89 Adjustable-rate: Interest-only * * 1 2 3 3 Other ARMs 2 3 6 7 7 8 Total adjustable-rate 2 3 7 9 10 11 Total 100 % 100 % 100 % 100 % 100 % 100 % Number of property units: 1 unit 97 % 98 % 97 % 97 % 97 % 97 % 2-4 units 3 2 3 3 3 3 Total 100 % 100 % 100 % 100 % 100 % 100 % Property type: Single-family homes 90 % 91 % 91 % 91 % 91 % 91 % Condo/Co-op 10 9 9 9 9 9 Total 100 % 100 % 100 % 100 % 100 % 100 % Occupancy type: Primary residence 87 % 89 % 89 % 88 % 89 % 89 % Second/vacation home 4 4 5 4 4 5 Investor 9 7 6 8 7 6 Total 100 % 100 % 100 % 100 % 100 % 100 % 121

--------------------------------------------------------------------------------



Percent of Single-Family

Percent of Single-Family



Conventional Guaranty Book of

Conventional Business Volume(2) Business(3)(4) For the Year Ended December 31, As of December 31, 2013 2012 2011 2013 2012 2011 FICO credit score at origination: < 620 1 % 1 % * % 3 % 3 % 3 % 620 to < 660 4 2 2 5 6 7 660 to < 700 10 7 7 12 12 13 700 to < 740 18 16 16 19 20 20 >= 740 67 74 75 61 59 57 Total 100 % 100 % 100 % 100 % 100 % 100 % Weighted average 753 761 762 744 742 738 Loan purpose: Purchase 30 % 21 % 24 % 28 % 28 % 31 % Cash-out refinance 14 14 17 21 24 27 Other refinance 56 65 59 51 48 42 Total 100 % 100 % 100 % 100 % 100 % 100 % Geographic concentration:(9) Midwest 14 % 16 % 15 % 15 % 15 % 15 % Northeast 17 17 19 19 19 19 Southeast 20 19 19 22 23 24 Southwest 17 16 16 16 16 15 West 32 32 31 28 27 27 Total 100 % 100 % 100 % 100 % 100 % 100 % Origination year: < = 2004 9 % 13 % 18 % 2005 4 5 7 2006 3 5 7 2007 5 7 10 2008 3 5 7 2009 7 11 17 2010 10 13 18 2011 11 15 16 2012 26 26 - 2013 22 - - 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 mark-to-market LTV ratios in this table. Second lien



mortgage loans represented less than 0.5% of our single-family conventional

guaranty book of business as of December 31, 2013, 2012 and 2011.

(2) Calculated based on unpaid principal balance of single-family loans for each

category at time of acquisition. Single-family business volume refers to

both single-family mortgage loans we purchase for our retained mortgage

portfolio and single-family mortgage loans we guarantee.

(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. (4) Our single-family conventional guaranty book of business includes



jumbo-conforming and high-balance loans that represented approximately 5% of

our single-family conventional guaranty book of business as of December 31,

2013, 2012 and 2011. See "Business-Our Charter and Regulation of Our

Activities-Charter Act-Loan Standards" and "Credit Profile

Summary-Jumbo-Conforming and High-Balance Loans" for information on our loan

limits.

(5) 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. 122

--------------------------------------------------------------------------------



(6) We purchase loans with original LTV ratios above 80% to fulfill our mission

to serve the primary mortgage market and provide liquidity to the housing

system. Except as permitted under HARP, our charter generally requires primary mortgage insurance or other credit enhancement for loans that we acquire that have an LTV ratio over 80%.



(7) 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.

(8) 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. Loans with interest-only terms are included in the interest-only category regardless of their maturities.



(9) 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, VA and WV. Southwest

consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX and UT. West consists of AK,

CA, GU, HI, ID, MT, NV, OR, WA and WY.

Credit Profile Summary Although there was a shift in the credit risk profile of our 2013 acquisitions to include a greater proportion of loans with higher LTV ratios and lower FICO credit scores than our 2012 acquisitions, the single-family loans we purchased or guaranteed in 2013 continued to have a strong credit profile with a weighted average original LTV ratio of 76%, a weighted average FICO credit score of 753, and a product mix with a significant percentage of fully amortizing fixed-rate mortgage loans. The average original LTV ratio of single-family loans we acquired in 2013, excluding HARP loans, was 70%, compared with 110% for HARP loans. The weighted-average FICO credit score of the single-family mortgage loans we acquired in 2013, excluding HARP loans, was 757, compared with 722 for HARP loans. The credit profile of our future acquisitions will depend on many factors, including our future pricing and eligibility standards and those of mortgage insurers and FHA, the percentage of loan originations representing refinancings, our future objectives, government policy, market and competitive conditions, and the volume and characteristics of loans we acquire under HARP. 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. Our acquisition of loans with original LTV ratios over 80% increased to 29% in 2013 from 25% in 2012. This increase was primarily due to acquisitions of home mortgage purchase loans. In addition, our acquisitions of other refinance loan types decreased to 56% in 2013 from 65% in 2012, which was primarily due to the increase in mortgage rates in 2013. Our acquisition of loans with FICO credit scores at origination of less than 700 increased to 15% in 2013, compared with 10% in 2012, and the weighted average FICO credit score at origination decreased to 753 in 2013, compared with 761 in 2012. Home prices increased by 8.8% in 2013 and by 4.2% in 2012, resulting in a decrease in the estimated weighted average mark-to-market LTV ratio of our single-family conventional guaranty book of business. As of December 31, 2013, the estimated weighted average mark-to-market LTV ratio of our single-family conventional guaranty book of business was 67% compared with 75% as of December 31, 2012 and 79% as of December 31, 2011. The portion of our single-family conventional guaranty book of business with an estimated mark-to-market LTV ratio greater than 100% was 7% as of December 31, 2013, 13% as of December 31, 2012 and 18% as of December 31, 2011. If home prices were to decline, more loans would have mark-to-market LTV ratios greater than 100%, which increases the risk of delinquency and default. However, as described in "Business -Executive Summary-Outlook," we expect home prices to continue to grow on a national basis in 2014, but at a lower rate than in 2013. HARP and Refi Plus Loans Since 2009, our acquisitions have included a significant number of loans that are refinancings of existing Fannie Mae loans under HARP, which was designed to expand refinancing opportunities for borrowers who may otherwise be unable to refinance their mortgage loans due to a decline in home values. We offer HARP under our Refi Plus initiative, which offers additional refinancing flexibility to eligible borrowers who are current on their loans and whose loans are owned or guaranteed by us and meet certain additional criteria. Under HARP, we allow our borrowers who have mortgage loans with current LTV ratios greater than 80% to refinance their mortgages without obtaining new mortgage insurance in excess of what is already in place. Accordingly, HARP loans have LTV ratios at origination in excess of 80%. HARP loans cannot (1) be an adjustable-rate mortgage loan, if the initial fixed period is less than five years; (2) have an interest only feature, which permits the payment of interest without a payment of principal; (3) be a balloon mortgage loan; or (4) have the potential for negative amortization. Under HARP we were previously authorized to acquire loans only if their current LTV ratios did not exceed 125% for fixed-rate loans or 105% for adjustable-rate mortgages. Changes to HARP implemented in the first half of 2012 extended refinancing flexibility to eligible borrowers with loans that have LTV ratios greater than 125% for fixed-rate loans, which 123 -------------------------------------------------------------------------------- made the benefits of HARP available to a greater number of borrowers. The loans we acquire under HARP have 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 also have lower FICO credit scores and/or may provide less documentation than we would otherwise require. In April 2013, FHFA announced the extension of the ending date for HARP to December 31, 2015. Loans we acquire under Refi Plus and HARP represent refinancings of loans that are already in our guaranty book of business. The credit risk associated with the acquired loans essentially replaces the credit risk that we already held prior to the refinancing. These loans have higher risk profiles and higher serious delinquency rates and may not perform as well as the other loans we have acquired since the beginning of 2009. However, we expect these loans will perform better than the loans they replace, because HARP and Refi Plus loans should either reduce the borrowers' monthly payments or provide more stable terms than the borrowers' old loans (for example, by refinancing into a mortgage with a fixed interest rate instead of an adjustable rate). Although mortgage rates remain low by historical standards, they have increased in recent months. As a result, the percentage of acquisitions that are refinanced loans, including loans acquired under our Refi Plus initiative, which includes HARP, has started to decline. HARP loans constituted approximately 14% of our total single-family acquisitions in 2013, compared with approximately 16% of total single-family acquisitions in 2012 and 10% in 2011. Due to the increase in the volume of HARP loans with higher LTV ratios, the weighted average LTV ratio at origination for our acquisitions in 2013 and 2012 was higher than for our acquisitions in 2011. We expect the volume of refinancings under HARP to continue to decline, due to the increase in interest rates and a decrease in the population of borrowers with loans that have high LTV ratios who are willing to refinance and would benefit from refinancing. Approximately 3% of our total single-family conventional business volume for 2013 consisted of refinanced loans with LTV ratios greater than 125% at the time of acquisition. In addition, approximately 2% of our single-family conventional guaranty book of business consisted of loans with an estimated mark-to-market LTV ratio greater than 125% as of December 31, 2013. Table 40 displays the serious delinquency rates and current mark-to-market LTV ratios as of December 31, 2013 of single-family loans we acquired under HARP and Refi Plus compared with the other single-family loans we acquired since the beginning of 2009. Table 40: Selected Credit Characteristics of Single-Family Conventional Loans Acquired under HARP and Refi Plus As of December 31, 2013 Current Mark-to-Market FICO Credit Serious Percentage of New LTV Ratio Score at Delinquency Book > 100% Origination(1) Rate HARP(2) 15 % 25 % 734 0.84 % Other Refi Plus(3) 10 * 749 0.31 Total Refi Plus 25 14 741 0.58 Non-Refi Plus(4) 75 * 761 0.23 Total new book of business(5) 100 % 4 % 756 0.33 % __________ * Represents less than 0.5%.



(1) In the case of refinancings, represents FICO credit score at the time of the

refinancing.

(2) HARP loans have LTV ratios at origination in excess of 80%. In the fourth

quarter of 2012, we revised our presentation of the data to reflect all

loans under our Refi Plus program with LTV ratios at origination in excess

of 80% as HARP loans. Previously we did not reflect loans that were backed

by second homes or investor properties as HARP loans.

(3) Other Refi Plus includes all other Refi Plus loans that are not HARP loans.

(4) Includes primarily other refinancings and home purchase mortgages.



(5) Refers to single-family mortgage loans we have acquired since the beginning

of 2009. Alt-A and Subprime Loans We classify certain loans as subprime or Alt-A so that we can discuss our exposure to subprime and Alt-A loans in this Form 10-K and elsewhere. However, there is no universally accepted definition of subprime or Alt-A loans. Our single-family conventional guaranty book of business includes loans with some features that are similar to Alt-A loans or subprime loans that we have not classified as Alt-A or subprime because they do not meet our classification criteria. 124 -------------------------------------------------------------------------------- We do not rely solely on our classifications of loans as Alt-A or subprime 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 "Note 3, Mortgage Loans" and "Note 6, Financial Guarantees." Our exposure to Alt-A and subprime loans included in our single-family conventional guaranty book of business, based on the classification criteria described in this section, does not include (1) our investments in private-label mortgage-related securities backed by Alt-A and subprime loans or (2) resecuritizations, or wraps, of private-label mortgage-related securities backed by Alt-A mortgage loans that we have guaranteed. See "Note 5, Investments in Securities" for more information on our exposure to private-label mortgage-related securities backed by Alt-A and subprime loans. As a result of our decision to discontinue the purchase of newly originated Alt-A loans, except for those that represent the refinancing of a loan we acquired prior to 2009, we expect our acquisitions of Alt-A mortgage loans to continue to be minimal in future periods and the percentage of the book of business attributable to Alt-A to continue to decrease over time. We are also not currently acquiring newly originated subprime loans, although we are acquiring refinancings of existing Fannie Mae subprime loans in connection with our Refi Plus initiative. Unlike the loans they replace, these refinancings are not included in our reported subprime loans because they do not meet our classification criteria for subprime loans. We have classified a mortgage loan as Alt-A if and only if the lender that delivered the loan to us classified the loan as Alt-A, based on documentation or other features. We have classified a mortgage loan as subprime if and only if the loan was originated by a lender specializing in subprime business or by a subprime division of a large lender; however, we exclude loans originated by these lenders from the subprime classification if we acquired the loans in accordance with our standard underwriting criteria, which typically require compliance by the seller with our Selling Guide (including standard representations and warranties) and/or evaluation of the loans through our Desktop Underwriter system. The unpaid principal balance of Alt-A loans included in our single-family conventional guaranty book of business of $131.3 billion as of December 31, 2013, represented approximately 5.0% of our single-family conventional guaranty book of business. The unpaid principal balance of subprime loans included in our single-family conventional guaranty book of business of $4.2 billion as of December 31, 2013, represented approximately 0.1% of our single-family conventional guaranty book of business. Jumbo-Conforming and High-Balance Loans The outstanding unpaid principal balance of our jumbo-conforming and high-balance loans was $142.3 billion, or 5.0% of our single-family conventional guaranty book of business, as of December 31, 2013 and $129.0 billion, or 4.7% of our single-family conventional guaranty book of business, as of December 31, 2012. The standard conforming loan limit for a one-unit property was $417,000 in 2013 and 2012. Our loan limits were higher in specified high-cost areas, reaching as high as $729,750 for one-unit properties; however, our loan limits for loans originated after September 30, 2011 decreased in specified high-cost areas to an amount not to exceed $625,500 for one-unit properties. Our current loan limits apply to all new acquisitions; therefore, we cannot refinance any of our existing loans that are above our current loan limits. See "Business-Our Charter and Regulation of Our Activities-Charter Act-Loan Standards" for additional information on our loan limits, including potential future reductions in our loan limits. Reverse Mortgages The outstanding unpaid principal balance of reverse mortgage loans and Fannie Mae MBS backed by reverse mortgage loans in our guaranty book of business was $48.0 billion as of December 31, 2013 and $50.2 billion as of December 31, 2012. Since December 2010, we ceased acquisitions of newly originated reverse mortgages. The 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. Because home equity conversion mortgages are insured by the federal government, we believe that we have limited exposure to losses on these loans. Adjustable-rate Mortgages ("ARMs") and Fixed-rate Interest-only Mortgages ARMs are mortgage loans with an interest rate that adjusts periodically over the life of the mortgage based on changes in a specified index. Interest-only loans 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. Our negative-amortizing loans are ARMs 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 9.0% of our single-family conventional guaranty book of business as of December 31, 2013. Table 41 displays information for ARMs and fixed-rate interest-only loans in our single-family guaranty book of business, aggregated by product type and categorized by the year of their next scheduled contractual reset date. The contractual reset is 125 -------------------------------------------------------------------------------- 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. Table 41: Single-Family Adjustable-Rate Mortgage Resets by Year(1) Reset Year 2014 2015 2016 2017 2018 Thereafter Total (Dollars in millions) ARMs-Amortizing $ 42,492$ 48,898$ 24,882$ 16,505$ 16,255$ 22,666$ 171,698 ARMs-Interest Only 33,246 12,591 5,485 3,522 2,199 3,711 60,754



ARMs-Negative Amortizing 4,797 666 401 183

37 - 6,084 Total $ 80,535$ 62,155$ 30,768$ 20,210$ 18,491$ 26,377$ 238,536 Fixed-Rate Interest Only $ 74$ 666$ 3,716$ 7,135$ 1,512$ 499$ 13,602 __________



(1) Does not include loans we have modified, some of which are subject to higher

interest rates and increased monthly payments in the future. Also 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 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 is the result of the current low interest rate environment and do not expect this trend to continue if interest rates rise significantly. Problem Loan Management Our problem loan management strategies are primarily focused on reducing defaults to avoid losses that would otherwise occur and pursuing foreclosure alternatives to attempt to minimize the severity of the losses we incur. If a borrower does not make required payments, or is in jeopardy of not making payments, we work with the servicers of our loans to offer workout solutions to minimize the likelihood of foreclosure as well as the severity of loss. Our loan workouts reflect our various types of home retention solutions, including loan modifications, repayment plans and forbearances, and foreclosure alternatives, including short sales and deeds-in-lieu of foreclosure. When appropriate, we seek to move to foreclosure expeditiously. We seek to improve the servicing of our delinquent loans through a variety of means, including improving our communications with and training of our servicers, directing servicers to contact borrowers at an earlier stage of delinquency and improve their telephone communications with borrowers, and holding our servicers accountable for following our requirements. In 2011, we issued new standards for mortgage servicers regarding the management of delinquent loans, default prevention and foreclosure time frames under FHFA's directive to align GSE policies for servicing delinquent mortgages. The new standards, reinforced by new incentives and compensatory fees, require servicers to take a more consistent approach for homeowner communications, loan modifications and other workouts, and, when necessary, foreclosures. In addition to the new standards, we took other steps to improve the servicing of our delinquent loans, which included transferring servicing on loan populations that include loans with higher-risk characteristics to special servicers with which we have worked to develop high-touch protocols for servicing these loans. We believe retaining special servicers to service these loans using high-touch protocols will reduce our future credit losses on the transferred loan portfolio. We continue to work with some of our servicers to test and implement high-touch servicing protocols designed for managing higher-risk loans, which include lower ratios of loans per servicer employee, beginning borrower outreach strategies earlier in the delinquency cycle and establishing a single point of contact for distressed borrowers. The efforts of our mortgage servicers are critical in keeping people in their homes and preventing foreclosures. We continue to work with our servicers to implement our foreclosure prevention initiatives effectively and to find ways to enhance our workout protocols and their workflow processes. As of December 31, 2013, we were operating nine Mortgage Help Centers across the nation to accelerate the response time for struggling borrowers with loans owned by us. During 2013, the Mortgage Help Centers assisted borrowers in obtaining nearly 12,000 home retention plans leading to about 9,000 modification trial starts. We have also established partnerships with 14 local non-profit organizations, collectively known as our Mortgage Help Network, providing borrower assistance in 12 local markets and assistance by phone and Internet in all 50 states. The Mortgage Help Network represents a contractual relationship with select not-for-profit counseling agencies located in our top delinquent mortgage markets to provide borrowers foreclosure prevention counseling, documentation and assistance with pending loan workout solutions. We also use direct mail and phone calls to encourage homeowners to pursue 126 -------------------------------------------------------------------------------- home retention solutions and foreclosure alternatives, and have established partnerships with counseling agencies in all 50 states to provide similar services. We established the Short Sale Assistance Desk to assist real estate professionals in handling post-offer short sale issues that may relate to servicer responsiveness, the existence of a second lien or issues involving mortgage insurance. In the following section, we present statistics on our problem loans, describe specific efforts undertaken to manage these loans and prevent foreclosures, and provide metrics regarding the performance of our loan workout activities. Unless otherwise noted, single-family delinquency data is calculated based on number of loans. We include single-family conventional loans that we own and those that back Fannie Mae MBS in the calculation of the single-family delinquency rate. Seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process. Percentage of book outstanding calculations are based on the unpaid principal balance of loans for each category divided by the unpaid principal balance of our total single-family guaranty book of business for which we have detailed loan-level information. Problem Loan Statistics The following table displays the delinquency status of loans in our single-family conventional guaranty book of business (based on number of loans) as of the dates indicated. Table 42: Delinquency Status of Single-Family Conventional Loans As of December 31, 2013 2012 2011 Delinquency status: 30 to 59 days delinquent 1.64 % 1.96 % 2.17 % 60 to 89 days delinquent 0.49 0.66 0.74 Seriously delinquent 2.38



3.29 3.91 Percentage of seriously delinquent loans that have been delinquent for more than 180 days

73 %



72 % 70 %

Our single-family serious delinquency rate has decreased each quarter since the first quarter of 2010. The decrease in our serious delinquency rate is primarily the result of home retention solutions, foreclosure alternatives and completed foreclosures, as well as our acquisition of loans with stronger credit profiles since the beginning of 2009. Our new single-family book of business represented 77% of our single-family guaranty book of business and had a serious delinquency rate of 0.33% as of December 31, 2013. Although our serious delinquency rate has decreased, this rate and the period of time that loans remain seriously delinquent continue to be negatively impacted by the length of time required to complete a foreclosure. High levels of foreclosures, changes in state foreclosure laws, new federal and state servicing requirements imposed by regulatory actions and legal settlements, and the need for servicers to adapt to these changes have lengthened the time it takes to foreclose on a mortgage loan in many states. Longer foreclosure timelines result in these loans remaining in our book of business for a longer time, which has caused our serious delinquency rate to decrease more slowly in the last few years than it would have if the pace of foreclosures had been faster. We believe the slow pace of foreclosures will continue to negatively affect our single-family serious delinquency rates, foreclosure timelines and credit-related income (expense). Other factors such as the pace of loan modifications, changes in home prices, unemployment levels and other macroeconomic conditions also influence serious delinquency rates. We expect the number of our single-family loans in our book of business that are seriously delinquent to remain above pre-2008 levels for years. Table 43 displays a comparison, by geographic region and by loans with and without credit enhancement, of the serious delinquency rates as of the dates indicated for single-family conventional loans in our single-family guaranty book of business. Serious delinquency rates vary by geographic region due to many factors including regional home prices, unemployment, economic conditions and state foreclosure timelines. 127 --------------------------------------------------------------------------------



Table 43: Single-Family Serious Delinquency Rates

As of December 31, 2013 2012 2011 Percentage of Book Percentage of Book Percentage of Book Outstanding Serious Delinquency Rate Outstanding Serious Delinquency Rate Outstanding Serious Delinquency Rate Single-family conventional delinquency rates by geographic region:(1) Midwest 15 % 2.00 % 15 % 2.92 % 15 % 3.73 % Northeast 19 3.88 19 4.40 19 4.43 Southeast 22 3.33 23 4.78 24 5.68 Southwest 16 1.23 16 1.76 15 2.30 West 28 1.40 27 2.28 27 2.87 Total single-family conventional loans 100 % 2.38 % 100 % 3.29 % 100 % 3.91 % Single-family conventional loans: Credit enhanced 15 % 4.75 % 14 % 7.09 % 14 % 9.10 % Non-credit enhanced 85 2.00 86 2.70 86 3.07 Total single-family conventional loans 100 % 2.38 % 100 % 3.29 % 100 % 3.91 % __________



(1) See footnote 9 to "Table 39: Risk Characteristics of Single-Family

Conventional Business Volume and Guaranty Book of Business" for states

included in each geographic region.

Certain higher-risk loan categories, such as Alt-A loans and loans with higher mark-to-market LTV ratios, 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. In addition, loans in certain states such as Florida, Illinois, New Jersey and New York have exhibited higher than average delinquency rates and/or account for a higher share of our credit losses. Table 44 displays the serious delinquency rates and other financial information for our single-family conventional loans with some of these higher-risk characteristics and in some of these higher risk states as of the dates indicated. We also include information for our loans in California, as this state accounts for a large share of our single-family conventional guaranty book of business. The reported categories are not mutually exclusive. 128 -------------------------------------------------------------------------------- Table 44: Single-Family Conventional Serious Delinquent Loan Concentration Analysis As of December 31, 2013 2012 2011 Unpaid Percentage of Serious Estimated Unpaid Percentage of Serious Estimated Unpaid Percentage of Serious Estimated Principal Book Delinquency Mark-to-Market LTV Principal Book Delinquency Mark-to-Market LTV Principal Book Delinquency Mark-to-Market LTV Balance Outstanding Rate Ratio (1) Balance Outstanding Rate Ratio (1) Balance Outstanding Rate Ratio (1) (Dollars in millions) States: California$ 551,376 20 % 0.98 % 58 % $ 523,602 19 % 1.69 % 73 % $ 516,608 19 % 2.46 % 81 % Florida 160,415 6 6.89 80 165,377 6 10.06 96 175,344 6 11.80 108 Illinois 116,318 4 3.12 76 117,111 4 4.70 86 118,682 4 5.77 87 New Jersey 113,088 4 6.25 69 110,409 4 6.92 74 110,432 4 6.65 74 New York 157,310 5 4.42 61 154,990 6 4.70 64 155,822 6 4.59 65 All other states 1,721,819 61 1.85 68 1,685,637 61 2.56 74 1,684,611 61 3.06 77 Product type: Alt-A 131,288 5 9.23 83 155,469 6 11.36 96 182,236 7 12.43 101 Subprime 4,197 * 16.93 95 5,035 * 20.60 107 5,791 * 23.18 111 Vintages: 2005 99,580 4 7.26 78 139,204 5 7.79 90 190,521 7 7.27 95 2006 98,672 3 11.26 92 138,040 5 12.15 105 186,835 7 11.81 111 2007 137,185 5 12.18 94 195,308 7 12.99 107 269,012 10 12.62 112 2008 80,303 3 6.69 77 124,747 5 6.63 88 192,713 7 5.64 92 All other vintages 2,404,586 85 1.02 63 2,159,827 78 1.36 69 1,922,418 69 1.59 69 Estimated mark-to-market LTV ratio: Greater than 100%(1) 202,093 7 12.22 122 374,010 13 13.42 128 493,762 18 13.76 131 Select combined risk characteristics: Original LTV ratio > 90% and FICO score < 620 21,122 1 10.90 103 19,416 1 14.76 113 18,992 1 18.67 115 __________



* Percentage is less than 0.5%.

(1) Second lien mortgage loans held by third parties are not included in the

calculation of the estimated mark-to-market LTV ratios.

Loan Workout Metrics We continue to work with our servicers to implement our home retention and foreclosure prevention initiatives. Loan modifications involve changes to the original mortgage terms such as product type, interest rate, amortization term, maturity date and/or unpaid principal balance. For many of our modifications, we will ultimately collect less than the contractual amount due under the original loan. Other resolutions and modifications may result in our 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. Additionally, we currently offer up to twelve months of forbearance for unemployed homeowners as an additional tool to help them avoid foreclosure. With our implementation of HAMP, a modification initiative under the Making Home Affordable Program that is intended to be uniform across servicers, our aim is to help borrowers whose loan is either currently delinquent or is at imminent risk of default. HAMP modifications can include reduced interest rates, term extensions, and/or principal forbearance to bring the monthly payment down to 31% of the borrower's gross (pre-tax) income. After a servicer determines that the borrower's hardship is not temporary in nature, we require that servicers first evaluate borrowers for eligibility under HAMP or other workout options before considering foreclosure. By design, not all borrowers facing foreclosure will be eligible for a HAMP modification. As a result, we work with servicers to ensure that borrowers who do not qualify for HAMP or who fail to successfully complete the HAMP required trial period are provided with alternative home retention options or a foreclosure prevention alternative. In addition, 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 unemployment or reduced income, divorce, or unexpected issues like medical bills and is therefore no longer able to make the required mortgage payments. Foreclosure alternatives include short sales, where our servicers work with a borrower to sell their home prior to foreclosure, and deeds-in-lieu of foreclosure, where the borrower voluntarily signs 129 -------------------------------------------------------------------------------- over the title to their property to the servicer. These alternatives are designed to reduce our credit losses while helping borrowers avoid foreclosure. We work to obtain the highest price possible for the properties sold in short sales and, in 2013, we received net sales proceeds from our short sale transactions equal to 67% of the loans' unpaid principal balance, compared with 61% in 2012. 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. Table 45 displays statistics on our single-family loan workouts that were completed, by type, for the periods indicated. These statistics include loan modifications but do not include trial modifications, loans to certain borrowers who have received bankruptcy relief that are classified as TDRs, or repayment or forbearance plans that have been initiated but not completed. Table 45: Statistics on Single-Family Loan Workouts



For the Year Ended December 31,

2013 2012 2011 Unpaid Principal Unpaid Principal Unpaid Principal Balance Number of Loans Balance Number of Loans Balance Number of Loans (Dollars in millions) Home retention strategies: Modifications $ 28,801 160,007 $ 30,640 163,412 $ 42,793 213,340 Repayment plans and forbearances completed(1) 1,594 12,022 3,298 23,329 5,042 35,318 Total home retention strategies 30,395 172,029 33,938 186,741 47,835 248,658 Foreclosure alternatives: Short sales 9,786 46,570 15,916 73,528 15,412 70,275 Deeds-in-lieu of foreclosure 2,504 15,379 2,590 15,204 1,679 9,558 Total foreclosure alternatives 12,290 61,949 18,506 88,732 17,091 79,833 Total loan workouts $ 42,685 233,978 $ 52,444 275,473 $ 64,926 328,491 Loan workouts as a percentage of single-family guaranty book of business(2) 1.48 % 1.33 % 1.85 % 1.57 % 2.29 % 1.85 %



__________

(1) 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.

(2) Calculated based on loan workouts during the period as a percentage of our

single-family guaranty book of business as of the end of the period.

The volume of home retention solutions completed in 2013 decreased compared with 2012, primarily due to a decline in the number of delinquent loans in 2013, compared with 2012. During 2013, we initiated approximately 162,000 first time trial modifications, including HAMP and non-HAMP modifications, compared with approximately 184,000 first time trial modifications during 2012. We also initiated other types of workouts, such as repayment plans and forbearances. HAMP guidance directs servicers either to cancel or to convert trial modifications after three or four monthly payments, depending on the borrower's circumstances. As of December 31, 2013, 58% of our HAMP trial modifications had been converted to permanent HAMP modifications since the inception of the program. The conversion rate for HAMP modifications since June 1, 2010, when servicers became required to perform a full verification of a borrower's eligibility prior to offering a HAMP trial modification, was 88% as of December 31, 2013. The average length of a trial period for completed HAMP modifications initiated after June 1, 2010 was four months. We continue to work with our servicers to implement our home retention and foreclosure prevention initiatives. Our approach to workouts continues to focus on the large number of borrowers facing financial hardships. Accordingly, the vast majority of loan modifications we have completed since 2009 have been concentrated on deferring or lowering the borrowers' monthly mortgage payments to allow borrowers to work through their hardships. In March 2013, FHFA announced that we and Freddie Mac would offer a new simplified loan modification solution. Under this streamlined modification initiative, beginning July 1, 2013, our servicers are required to offer loan modifications to eligible borrowers who are at least 90 days delinquent on their mortgages without requiring financial or hardship documentation. Eligible borrowers must demonstrate a 130 -------------------------------------------------------------------------------- willingness and ability to pay by making three on-time trial payments, after which the mortgage will be permanently modified. In May 2013, FHFA announced the extension of HAMP to December 31, 2015; our role as program administrator for HAMP has been extended accordingly. FHFA's announcement was aligned with the extension of the Making Home Affordable Program announced by Treasury and HUD. Previously, the deadline to apply for HAMP eligibility was scheduled for December 31, 2013. The majority of our home retention strategies, including trial modifications and loans to certain borrowers who received bankruptcy relief, are classified as TDRs upon initiation. Table 46 displays activity related to our single-family TDRs for the periods indicated. For more information on the impact of TDRs, see "Note 3, Mortgage Loans." Table 46: Single-Family Troubled Debt Restructuring Activity(1)(2) For the Year Ended December 31, 2013 2012 2011 (Dollars in millions)



Beginning balance, January 1$ 207,405$ 177,484$ 155,564 New TDRs

26,320 54,032 42,088 Foreclosures(2) (13,192 ) (13,752 ) (14,143 ) Payoffs(3) (16,054 ) (6,992 ) (2,801 ) Other(4) (3,972 ) (3,367 ) (3,224 )



Ending balance, December 31$ 200,507$ 207,405$ 177,484

__________

(1) Represents the unpaid principal balance of the loans post-modification.

(2) Consists of foreclosures, deeds-in-lieu of foreclosure, short sales and third-party sales. (3) Consists of full borrower payoffs and repurchases of loans that were



successfully resolved through payment by mortgage sellers and servicers.

(4) Primarily includes monthly principal payments.

Table 47 displays the percentage of our single-family loan modifications completed during 2012 and 2011 that were current or paid off one year after modification, as well as the percentage of our single-family loan modifications completed during 2011 that were current or paid off two years after modification. Table 47: Percentage of Single-Family Loan Modifications That Were Current or Paid Off at One and Two Years Post-Modification(1) 2012 2011 Q4 Q3 Q2 Q1 Q4 Q3 Q2



Q1

One Year Post-Modification HAMP modifications 82 % 82 % 81 % 79 % 78 % 78 % 78 % 77 % Non-HAMP modifications 74 74 72 70 66 68 69 69 Total 76 76 75 73 71 72 75 74 Two Years Post-Modification HAMP modifications 77 % 76 % 75 % 74 % Non-HAMP modifications 67 67 67 67 Total 71 71 73 71 __________



(1) Excludes loans that were classified as subprime ARMs that were modified into

fixed-rate mortgages. Modifications do not reflect loans currently in trial

modifications.

We began changing the structure of our non-HAMP modifications in 2010 to lower borrowers' monthly mortgage payments to a greater extent, which improved the performance of our non-HAMP modifications overall. In addition, because post- modification performance was greater for our HAMP modifications than for our non-HAMP modifications, we began in September 2010 to include trial periods for our non-HAMP modifications. There is significant uncertainty regarding the ultimate long term success of our current modification efforts. We believe the performance of our workouts will be highly dependent on economic factors, such as unemployment rates, household wealth and income and home prices. Modifications, even those with reduced monthly payments, may also not be sufficient to help borrowers with second liens and other significant non-mortgage debt obligations. FHFA, other agencies of the U.S. government or Congress may ask us to undertake new initiatives to support the housing and mortgage markets should our current modification efforts ultimately not perform in a manner that results in the stabilization of these markets. See "Risk Factors" for a discussion of efforts we may be required or asked to undertake and their potential effect on us. REO Management Foreclosure and REO activity affect the amount of credit losses we realize in a given period. Table 48 displays our foreclosure activity, by region, for the periods indicated. Regional REO acquisition and charge-off trends generally follow a pattern that is similar to, but lags, that of regional delinquency trends. Table 48: Single-Family Foreclosed Properties For the Year



Ended December 31,

2013 2012 2011 Single-family foreclosed properties (number of properties): Beginning of period inventory of single-family foreclosed properties (REO)(1) 105,666 118,528 162,489 Acquisitions by geographic area:(2) Midwest 39,113 50,583 45,167 Northeast 13,235 12,008 9,858 Southeast 57,090 58,411 51,153 Southwest 18,923 28,541 44,675 West 16,023 24,936 48,843 Total properties acquired through foreclosure(1) 144,384 174,479 199,696 Dispositions of REO (146,821 )



(187,341 ) (243,657 ) End of period inventory of single-family foreclosed properties (REO)(1)

103,229



105,666 118,528 Carrying value of single-family foreclosed properties (dollars in millions)(3)

$ 10,334$ 9,505$ 9,692 Single-family foreclosure rate(4) 0.82 %



0.99 % 1.13 %

__________

(1) Includes acquisitions through 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 9 to "Table 39: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business" for states included in each geographic region. (3) Excludes foreclosed property claims receivables, which are reported in our



consolidated balance sheets as a component of "Acquired property, net."

(4) Estimated based on the total number of properties acquired through

foreclosure or deeds-in-lieu of foreclosure as a percentage of the total

number of loans in our single-family guaranty book of business as of the end

of each respective period.

The continued decrease in the number of our seriously delinquent single-family loans, as well as the slower pace of completed foreclosures we are experiencing due to lengthy foreclosure timelines in a number of states, have resulted in a reduction in the number of REO acquisitions in 2013 compared with 2012 and 2011. Neighborhood stabilization is a core principle in our approach to managing our REO inventory. As a result, we seek to keep properties in good condition and, where appropriate, repair them to make them more marketable. Our goal is to obtain the highest price possible for the properties we sell. We repaired approximately 66,000 properties from our single-family REO inventory at an average cost of approximately $6,700 per property during 2013 and repaired approximately 84,000 properties at an average cost of approximately $6,100 per property during 2012 compared with repairs of approximately 90,000 properties at an average cost of approximately $6,200 per property during 2011. Repairing REO properties increases sales to owner occupants and increases financing options for REO buyers. In addition, we encourage homeownership through our First Look™ marketing period. During this First Look period, owner occupants, 131 -------------------------------------------------------------------------------- some nonprofit organizations and public entities may submit offers and purchase properties without competition from investors. Approximately 81,000 of the 147,000 single-family properties we sold in 2013 were purchased by owner occupants, nonprofit organizations or public entities. We currently lease properties to tenants who occupied the properties before we acquired them into our REO inventory and to eligible borrowers who executed a deed-in-lieu of foreclosure, which can minimize disruption by providing additional time to find alternate housing, help stabilize local communities, provide us with rental income, and support our compliance with federal and state laws protecting tenants in foreclosed properties. As of December 31, 2013, over 2,000 tenants leased our REO properties. We continue to manage our REO inventory to minimize costs and maximize sales proceeds. However, we are unable to market and sell a large portion of our inventory, primarily due to occupancy and state or local redemption or confirmation periods, which extends the amount of time it takes to bring our properties to a marketable state and eventually dispose of them. This results in higher foreclosed property expenses, which include costs related to maintaining the property and ensuring that the property is vacant. Table 49 displays the current status of our single-family foreclosed property inventory, including the percentage of our inventory that we are unable to market, as of the dates indicated. Table 49: Single-Family Foreclosed Property Status Percent of Single-Family Foreclosed Properties As of December 31, 2013 2012 2011 Available-for-sale 33 % 28 % 28 % Offer accepted(1) 14 17 17 Appraisal stage(2) 17 10 8 Unable to market: Occupied status(3) 10 14 15 Redemption status(4) 9 11 12 Properties being repaired 9 7 6 Rental property(5) 3 5 7 Other 5 8 7 Total unable to market 36 45 47 Total 100 % 100 % 100 % __________

(1) Properties for which an offer has been accepted, but the property has not yet been sold. (2) Properties that are pending appraisals and being prepared to be listed for sale. (3) Properties that are still occupied, and for which the eviction process is not yet complete. (4) Properties that are within the period during which state laws allow the former mortgagor and second lien holders to redeem the property. (5) Properties with a tenant living in the home under our tenant in place or deed for lease programs. 132

-------------------------------------------------------------------------------- Table 50 displays the proportionate share of foreclosures as compared with their share of our single-family guaranty book of business for the states that have a higher concentration of foreclosures. Table 50 also displays this information for California, as this state accounts for a large share of our single-family conventional guaranty book of business. Table 50: Single-Family Acquired Property Concentration Analysis As of For the Year Ended As of For the Year Ended As of For the Year Ended December 31, 2013 December 31, 2012 December 31, 2011 Percentage of Percentage of Percentage of Properties Properties Properties Percentage of Book Acquired by Percentage of Book Acquired by Percentage of Book Acquired by Outstanding(1) Foreclosure(2) Outstanding(1)

Foreclosure(2) Outstanding(1) Foreclosure(2) States: Florida 6 % 21 % 6 % 14 % 6 % 7 % Illinois 4 9 4 8 4 3 California 20 4 19 9 19 14 __________



(1) Calculated based on the aggregate unpaid principal balance of single-family

conventional loans, where we have detailed loan-level information, for each

category divided by the aggregate unpaid principal balance of our

single-family conventional guaranty book of business.

(2) Calculated based on the number of properties acquired through foreclosure or

deed-in-lieu of foreclosure during the period for each category divided by

the total number of properties acquired through foreclosure during the same

period.

Multifamily Mortgage Credit Risk Management The credit risk profile of our multifamily mortgage credit book of business is influenced by the structure of the financing, the type and location of the property, the condition and value of the property, the financial strength of the borrower, market and sub-market trends and growth, the current and anticipated cash flows from the property, as well as the financial strength of the lender. 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. We provide information on our credit-related income (expense) and credit losses in "Business Segment Results-Multifamily Business Results." Multifamily Acquisition Policy and Underwriting Standards Our Multifamily business, together with our Enterprise Risk Management division, which provides independent risk oversight of the Multifamily business, is responsible for pricing and managing the credit risk on multifamily mortgage loans we purchase and on Fannie Mae MBS backed by multifamily loans (whether held in our retained mortgage portfolio or held by third parties). Our primary multifamily delivery channel is the Delegated Underwriting and Servicing, or DUSฎ, program, which is comprised of large financial institutions and independent mortgage lenders. Multifamily loans that we purchase or that back Fannie Mae MBS are either underwritten by a Fannie Mae-approved lender or subject to our underwriting review prior to closing, depending on the product type and/or loan size. Loans delivered to us by DUS lenders and their affiliates represented 93% of our multifamily guaranty book of business as of December 31, 2013, compared with 88% as of December 31, 2012 and 86% as of December 31, 2011. We use various types of credit enhancement arrangements for our multifamily loans, including lender risk-sharing, lender repurchase agreements, pool insurance, subordinated participations in mortgage loans or structured pools, cash and letter of credit collateral agreements, and cross-collateralization/cross-default provisions. The most prevalent form of credit enhancement on multifamily loans is lender risk-sharing. Lenders in the DUS program typically share in loan-level credit losses in one of two ways: (1) they bear losses up to the first 5% of the unpaid principal balance of the loan and share in remaining losses up to a prescribed limit; or (2) they share up to one-third of the credit losses on an equal basis with us. Non-DUS lenders typically share or absorb credit losses based on a negotiated percentage of the loan or the pool balance. Table 51 displays the percentage of the unpaid principal balance of loans in our multifamily guaranty book of business with lender risk-sharing and with no recourse to the lender as of the dates indicated. 133 --------------------------------------------------------------------------------



Table 51: Multifamily Lender Risk-Sharing

As of December 31, 2013 2012 Lender risk-sharing DUS 80 % 73 % Non-DUS negotiated 5 8 No recourse to the lender 15 19 At the time of our purchase or guarantee of multifamily mortgage loans, we and our lenders rely on sound underwriting standards, which often include third-party appraisals and cash flow analysis. 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. Our experience has been that original LTV ratio and DSCR values have been reliable indicators of future credit performance. Table 52 displays original LTV ratio and DSCR metrics for our multifamily guaranty book of business as of the dates indicated. Table 52: Multifamily Guaranty Book of Business Key Risk Characteristics As of December 31, 2013 2012 2011



Weighted average original LTV ratio 66 % 66 % 66 % Original LTV ratio greater than 80%

3 4 5



Original DSCR less than or equal to 1.10 7 8 8

Multifamily Portfolio Diversification and Monitoring Diversification within our multifamily mortgage credit book of business by geographic concentration, term to maturity, interest rate structure, borrower concentration, and credit enhancement coverage are important factors that influence credit performance and help reduce our credit risk. We and our lenders monitor the performance and risk concentrations of our multifamily loans and the underlying properties on an ongoing basis throughout the life of the loan: at the loan, property and portfolio levels. We track credit risk characteristics to determine the loan credit quality indicator, which are the internal risk categories and are further discussed in "Note 3, Mortgage Loans." The credit risk characteristics we use to help determine the internal risk categories include 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, in addition to capitalization rates, we closely monitor the rental payment trends and vacancy levels in local markets to identify loans that merit closer attention or loss mitigation actions. We are managing 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 loans maturing in the near term. The primary asset management responsibilities for our multifamily loans are performed by our DUS and other multifamily lenders. We periodically evaluate these lenders' and our other third party service providers' performance for compliance with our asset management criteria. As part of our ongoing credit risk management process, we require lenders to provide quarterly and annual financial updates for the loans where 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 with a current DSCR less than 1.0 was approximately 4% as of December 31, 2013 and 5% as of December 31, 2012. Our estimates of current DSCRs are based on the latest available income information for these properties. Although we use the most recently available results from our multifamily borrowers, there is a lag in reporting, which typically can range from 3 to 6 months. Multifamily Problem Loan Management and Foreclosure Prevention In general the number of multifamily loans at risk of becoming seriously delinquent has continued to decrease as early-stage delinquencies have declined significantly since the housing crisis. Since delinquency rates are a lagging indicator, we expect to continue to incur additional credit losses. We periodically refine our underwriting standards in response to market 134 -------------------------------------------------------------------------------- conditions and implement proactive portfolio management and monitoring which are each designed to keep credit losses to a low level relative to our multifamily guaranty book of business. Multifamily Problem Loan Statistics We classify multifamily loans as seriously delinquent when payment is 60 days or more past due. We include the unpaid principal balance of multifamily loans that we own or that back Fannie Mae MBS and any housing bonds for which we provide credit enhancement in the calculation of the multifamily serious delinquency rate. Table 53 displays a comparison of our multifamily serious delinquency rates for loans acquired through our DUS program versus loans not acquired through our DUS program. Table 53: Multifamily Concentration Analysis As of December 31, 2013 2012 2011



Percentage of Multifamily Credit Losses For the Years

Percentage of Book Serious Percentage of Book Serious Percentage of Book Serious Ended December 31, Outstanding Delinquency Rate



Outstanding Delinquency Rate Outstanding Delinquency Rate 2013(1)

2012 2011 DUS small balance loans (2) 8 % 0.24 % 8 % 0.32 % 8 % 0.45 % 5 % 7 % 9 % DUS non small balance loans (3) 82 0.06 76 0.17 72 0.51 (26 ) 71 72 Non-DUS small balance loans (2) 5 0.50 7 1.02 9 1.38 43 16 12 Non-DUS non small balance loans (3) 5 0.17 9 0.21 11 0.57 78 6 7 Total multifamily loans 100 % 0.10 % 100 % 0.24 % 100 % 0.59 % 100 % 100 % 100 % __________



(1) The percentage of credit losses may be negative as a result of recoveries

on previously charged off amounts.

(2) Loans with original unpaid principal balances of up to $3 million as well

as loans in high cost markets with original unpaid principal balances up to

$5 million. (3) Loans with original unpaid principal balances greater than $3 million as



well as loans in high cost markets with original unpaid principal balances

greater than $5 million.

The multifamily serious delinquency rate decreased as of December 31, 2013 compared with December 31, 2012 as national multifamily market fundamentals continued to improve. The DUS loans in our guaranty book of business have lower delinquency rates when compared with the non-DUS loans in our guaranty book primarily due to the DUS model, which has several features that more closely align our interests with those of the lenders. Multifamily loans with an original balance of up to $3 million nationwide or $5 million in high cost markets, which we refer to as small balance loans, not acquired through our DUS program, continue to represent a larger share of delinquencies, but they are generally covered by loss sharing arrangements that limit the credit losses we incur. REO Management Foreclosure and REO activity affect the level of our credit losses. Table 54 displays our held for sale multifamily REO activity for the periods indicated. Table 54: Multifamily Foreclosed Properties For the



Year Ended December 31,

2013 2012 2011



Multifamily foreclosed properties held for sale (number of properties): Beginning of period inventory of multifamily foreclosed properties (REO)

128 260 222 Total properties acquired through foreclosure 105 164 257 Transfers to (from) held for sale(1) 43 (44 ) (27 ) Dispositions of REO (158 )



(252 ) (192 ) End of period inventory of multifamily foreclosed properties (REO)

118 128 260 Carrying value of multifamily foreclosed properties (dollars in millions) $ 632$ 331$ 577 135

--------------------------------------------------------------------------------



__________

(1) Represents the transfer of properties between held for use and held for

sale. Held-for-use properties are reported in our consolidated balance

sheets as a component of "Other assets."

The decrease in our multifamily properties acquired through foreclosure reflects the stability of national multifamily market fundamentals in 2013. The increase in carrying value of multifamily foreclosed properties in 2013 was due to properties with higher values being acquired through foreclosure, as well as properties with higher values being reclassified from held for use to held for sale. Institutional Counterparty Credit Risk Management We rely on our institutional counterparties to provide services and credit enhancements, risk sharing agreements with lenders and financial guaranty contracts that are critical to our business. Institutional counterparty credit risk is the risk that these institutional counterparties may fail to fulfill their contractual obligations to us, including mortgage sellers and servicers who are obligated to repurchase loans from us or reimburse us for losses in certain circumstances and service our loans based on established guidelines. Defaults by a counterparty with significant obligations to us could result in significant financial losses to us. We have exposure primarily to the following types of institutional counterparties: • mortgage sellers and servicers that sell the loans to us or service the



loans we hold in our retained mortgage portfolio or that back our Fannie Mae

MBS;

• third-party providers of credit enhancements on the mortgage assets that we

hold in our retained mortgage portfolio or that back our Fannie Mae MBS,

including mortgage insurers, financial guarantors and lenders with risk

sharing arrangements;

• custodial depository institutions that hold principal and interest payments

for Fannie Mae portfolio loans and MBS certificateholders, as well as collateral posted by derivatives counterparties, mortgage sellers and mortgage servicers;



• issuers of investments held in our cash and other investments portfolio;

• derivatives counterparties;

• mortgage originators, investors and dealers;

• debt security dealers; and

• document custodians.

We routinely enter into a high volume of transactions with counterparties in the financial services industry, including brokers and dealers, mortgage lenders and commercial banks, and mortgage insurers, resulting in a significant credit concentration with respect to this industry. We also have significant concentrations of credit risk with particular counterparties. Many of our institutional counterparties provide several types of services for us. For example, many of our lender customers or their affiliates act as mortgage sellers, mortgage servicers, derivatives counterparties, custodial depository institutions or document custodians on our behalf. The liquidity and financial condition of some of our institutional counterparties continued to improve in 2013. However, there is still significant risk to our business of defaults by these counterparties due to bankruptcy or receivership, lack of liquidity, insufficient capital, operational failure or other reasons. As described in "Risk Factors," the financial difficulties that our institutional counterparties are experiencing may negatively affect their ability to meet their obligations to us and the amount or quality of the products or services they provide to us. In the event of a bankruptcy or receivership of one of our counterparties, we may be required to establish our ownership rights to the assets these counterparties hold on our behalf to the satisfaction of the bankruptcy court or receiver, which could result in a delay in accessing these assets causing a decline in their value. In addition, if we are unable to replace a defaulting counterparty that performs services that are critical to our business with another counterparty, it could materially adversely affect our ability to conduct our operations. Mortgage Sellers and Servicers One of our primary exposures to institutional counterparty risk is with mortgage servicers that service the loans we hold in our retained mortgage portfolio or that back our Fannie Mae MBS, as well as mortgage sellers and servicers that are obligated to repurchase loans from us or reimburse us for losses in certain circumstances. We rely on mortgage servicers to meet our servicing standards and fulfill their servicing obligations. We also rely on mortgage sellers and servicers to fulfill their repurchase obligations. 136 -------------------------------------------------------------------------------- Mortgage servicers collect mortgage and escrow payments from borrowers, pay taxes and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required activities on our behalf. We have minimum standards and financial requirements for mortgage servicers. For example, we require mortgage servicers to collect and retain a sufficient level of servicing fees to reasonably compensate a replacement mortgage servicer in the event of a servicing contract breach. In addition, we perform periodic on-site and financial reviews of our mortgage servicers and monitor their financial and portfolio performance as compared to peers and internal benchmarks. We work with our largest mortgage servicers to establish performance goals and monitor performance against the goals, and our servicing consultants work with mortgage servicers to improve servicing results and compliance with our Servicing Guide. We likely would incur costs and potential increases in servicing fees and could also face operational risks if we decide to replace a mortgage servicer. If a significant mortgage servicer counterparty fails, and its mortgage servicing obligations are not transferred to a company with the ability and intent to fulfill all of these obligations, we could incur penalties for late payment of taxes and insurance on the properties that secure the mortgage loans serviced by that mortgage servicer. Our business with our mortgage servicers remains concentrated but our concentration with our top servicers continues to decline. Our five largest single-family mortgage servicers, including their affiliates, serviced approximately 49% of our single-family guaranty book of business as of December 31, 2013, compared with approximately 57% as of December 31, 2012. Our largest mortgage servicer is Wells Fargo Bank, N.A., which, together with its affiliates, serviced approximately 19% of our single-family guaranty book of business as of December 31, 2013, compared with approximately 18% as of December 31, 2012. As of December 31, 2013, one additional mortgage servicer, JPMorgan Chase Bank, N.A., with its affiliates, serviced over 10% of our single-family guaranty book of business. In addition to Wells Fargo Bank, N.A., as of December 31, 2012, two other mortgage servicers, Bank of America, N.A. and JPMorgan Chase Bank, N.A., with their affiliates, each serviced over 10% of our single-family guaranty book of business. In addition to the decline in single-family servicer concentration, we have seen an increasing shift in our servicing book from depository financial institution servicers to non-depository servicers. This shift poses additional potential risks to us because non-depository servicers may have a greater reliance on third-party sources of liquidity and in the event of significant increases in delinquent loan volumes may have less financial capacity to advance funds on our behalf or satisfy repurchase requests or compensatory fee obligations. In addition, some of our non-depository mortgage servicer counterparties have grown significantly in recent years. As with any party experiencing such growth, there is increased operational risk, which could negatively impact their ability to effectively manage their servicing portfolios. Our ten largest multifamily mortgage servicers, including their affiliates, serviced approximately 65% of our multifamily guaranty book of business as of December 31, 2013, compared with approximately 67% as of December 31, 2012. In addition, Wells Fargo Bank, N.A. serviced over 10% of our multifamily guaranty book of business as of December 31, 2013 and 2012. Because we delegate the servicing of our mortgage loans to mortgage servicers and do not have our own servicing function, mortgage servicers' lack of appropriate process controls or the loss of business from a significant mortgage servicer counterparty could pose significant risks to our ability to conduct our business effectively. Many of our largest mortgage servicer counterparties continue to reevaluate the effectiveness of their process controls. Many mortgage servicers are also subject to federal and state regulatory actions and legal settlements that require the mortgage servicers to correct foreclosure process deficiencies and improve their servicing and foreclosure practices. This has resulted in extended foreclosure timelines and, therefore, additional holding costs for us, such as property taxes and insurance, repairs and maintenance, and valuation adjustments due to home price changes. See "Risk Factors" for a discussion of changes in the foreclosure environment. Although our business with our mortgage sellers is concentrated, a number of our largest single-family mortgage seller counterparties have reduced or eliminated their purchases of mortgage loans from mortgage brokers and correspondent lenders. As a result, we are acquiring an increasing portion of our business volume directly from smaller financial institutions that may not have the same financial strength or operational capacity as our largest mortgage seller counterparties. We could also be required to absorb losses on defaulted loans that a failed mortgage servicer is obligated to repurchase from us if we determine there was an underwriting or eligibility breach. Our five largest single-family mortgage sellers, including their affiliates, accounted for approximately 42% of our single-family business acquisition volume in 2013, compared with approximately 46% in 2012 and approximately 60% in 2011. Our largest mortgage seller is Wells Fargo Bank, N.A., which, together with its affiliates, accounted for approximately 20% of our single-family business acquisition volume in 2013, compared with approximately 23% in 2012. In addition to the decline in single-family mortgage seller concentration, we are acquiring an increasing portion of our business volume from non-depository sellers rather than depository financial institutions. This shift poses additional risks to us because non-depository sellers are likely to have less required liquidity and 137 -------------------------------------------------------------------------------- financial capacity to satisfy repurchase requests. See "Risk Factors" for more information on the impact to our business due to changes in the mortgage industry. Risk management steps we have taken or may take to mitigate our risk to mortgage sellers and servicers with whom we have material counterparty exposure include guaranty of obligations by higher-rated entities, reduction or elimination of exposures, reduction or elimination of certain business activities, transfer of exposures to third parties, receipt of collateral and suspension or termination of the selling and servicing relationship. We are exposed to the risk that a mortgage seller and servicer or another party involved in a mortgage loan transaction will engage in mortgage fraud by misrepresenting the facts about the loan. We have experienced significant financial losses in the past and may experience significant financial losses and reputational damage in the future as a result of mortgage fraud. See "Risk Factors" for additional discussion on risks of mortgage fraud to which we are exposed. 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 our mortgage sellers and/or servicers are obligated to either repurchase the loan or foreclosed property, or reimburse us for our losses. If the collateral property relating to such a loan has been foreclosed upon and we have accepted an offer from a third party to purchase the property, or if a loan is in the process of being liquidated or has been liquidated, we require the mortgage seller or servicer to reimburse us for our losses. We may consider additional facts and circumstances when determining whether to require a mortgage seller or servicer to reimburse us for our losses instead of repurchasing the related loan or foreclosed property. On an economic basis, we are made whole for our losses regardless of whether the mortgage seller or servicer repurchases the loan or reimburses us for our losses. We consider the anticipated benefits from these types of recoveries when we establish our allowance for loan losses. We refer to our demands that mortgage sellers and servicers meet these obligations collectively as "repurchase requests." In addition, we charge our primary mortgage servicers a compensatory fee for servicing delays within their control when they fail to comply with established loss mitigation and foreclosure timelines in our Servicing Guide. Compensatory fees are intended to compensate us for damages attributed to such servicing delays and to emphasize the importance of the mortgage servicer's performance. 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. 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 a significant increase in our credit losses and credit-related expense, and have a material adverse effect on our results of operations and financial condition. In addition, actions we take to pursue our contractual remedies could increase our costs, reduce our revenues, or otherwise have an adverse effect on our results of operations or financial condition. As of December 31, 2013 and 2012, in estimating our allowance for loan losses, we assumed no benefit from repurchase demands due to us from mortgage sellers or servicers that, in our view, lacked the financial capacity to honor their contractual obligations. As of December 31, 2013, we have completed loan reviews for potential underwriting defects on loans we acquired through our standard whole loan and MBS acquisitions between 2005 and 2008. We will continue to enforce certain lifetime representations and warranties such as mortgage insurance rescissions, title, fraud and legal compliance. Throughout the year, we entered into a number of resolution agreements with some of our largest mortgage sellers and servicers resolving outstanding repurchase requests and other matters, including agreements with Bank of America, N.A., CitiMortgage, Inc., JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. As a result of the agreements, we have collected and/or settled on significant amounts related primarily to loans in our legacy book that did not meet our underwriting standards or where the mortgage seller or servicer violated our representations and warranties. As a result of these efforts, the unpaid principal balance of our outstanding repurchase requests declined substantially to $1.5 billion as of December 31, 2013, compared with $16.0 billion as of December 31, 2012. These efforts also satisfied FHFA's 2013 conservatorship scorecard objective for us to complete our demands for remedies for breaches of representations and warranties related to pre-conservatorship loan activity. Table 55 displays repurchase request activity, measured by unpaid principal balance, during 2013 and 2012. The dollar amounts of our outstanding repurchase requests provided below are based on the unpaid principal balance of the loans underlying the repurchase request issued, not the actual amount we have requested from the lenders. In some cases, we allow lenders to remit payment equal to our loss, including imputed interest, on the loan after we have disposed of the REO, which is less than the unpaid principal balance of the loan. As a result, we expect our actual cash receipts relating to these outstanding repurchase requests to be significantly lower than the unpaid principal balance of the loan. Amounts relating to repurchase requests originating from missing documentation or loan files are excluded from the total requests outstanding until we receive the missing documentation or loan files and a full underwriting review is completed. 138 --------------------------------------------------------------------------------



Table 55: Repurchase Request Activity

For the Year Ended December 31, 2013 2012 (Dollars in millions) Beginning outstanding repurchase requests $ 16,013$ 10,400 Issuances 18,478 23,764 Collections (17,930 ) (1) (8,657 ) Other resolutions(2) (14,301 ) (1) (8,425 ) Total successfully resolved (32,231 ) (17,082 ) Cancellations (761 ) (1,069 ) Ending outstanding repurchase requests $ 1,499 $



16,013

__________

(1) Includes the impact of our January 6, 2013 resolution agreement with Bank of

America, which addressed $11.3 billion of the total outstanding repurchase

request balance as of December 31, 2012. Includes the impact of our June 28,

2013 resolution agreement with CitiMortgage, which addressed $739 million of

the total outstanding repurchase request balance that was outstanding before

the resolution agreement. Includes the impact of our December 23, 2013

resolution agreement with Wells Fargo, which addressed $1.6 billion of the

total outstanding repurchase request balance that was outstanding before the

resolution agreement.

(2) Primarily includes repurchase requests that were successfully resolved

through negotiated settlements and the lender taking corrective action with

or without a pricing adjustment. Also includes resolutions that were included in bulk indemnification and/or repurchase agreements with a mortgage seller or servicer. The increase in "Total successfully resolved" activity during 2013 compared with 2012 was primarily due to the execution of resolution agreements with some of our largest counterparties, including Bank of America, N.A., CitiMortgage, Inc., JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. This reflects our continued effort in pursuing reimbursement for loss and other remedies on breaches of selling representations and warranties on delivered loans. As of December 31, 2013, less than 0.25% of the loans in our new single-family book of business that were acquired between 2009 and 2012, had been subject to a repurchase request, compared with approximately 3.7% of the single-family loans acquired between 2005 and 2008. We continue to actively pursue our contractual rights associated with outstanding repurchase requests. Failure by a mortgage seller or servicer to repurchase a loan or to otherwise make us whole for our losses may result in the imposition of certain sanctions including, but not limited to: • requiring the posting of collateral,



• denying transfer of servicing requests or denying pledged servicing

requests, • modifying or suspending any contract or agreement with a lender, or



• suspending or terminating a lender or imposing some other formal sanction

on a lender.

If we are unable to resolve these matters to our satisfaction, we may seek additional remedies. If we are unable to resolve our repurchase requests, either through collection or additional remedies, we will not recover the losses we have recognized on the associated loans. As described in "Mortgage Credit Risk Management-Single-Family Mortgage Credit Risk Management," we implemented a new representation and warranty framework on January 1, 2013. With the implementation of these changes, we will review a larger sample of loans near the time of acquisition for compliance with our underwriting and eligibility requirements. As a result, a greater proportion of our repurchase requests in the future may be issued on performing loans, as compared with our currently outstanding repurchase requests, the substantial majority of which relate to loans that are either nonaccrual or have been foreclosed upon. 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. Table 56 displays our risk in force for the primary and pool mortgage insurance coverage on single-family loans in our guaranty book of business and our insurance in force for our mortgage insurer counterparties as of December 31, 2013 and 2012. The table includes our top ten mortgage insurer counterparties, which provided over 99% of our total mortgage 139 -------------------------------------------------------------------------------- insurance coverage on single-family loans in our guaranty book of business as of December 31, 2013 and 2012. Both our risk in force and our insurance in force increased in 2013 primarily due to the increase in our acquisition of loans with LTV ratios greater than 80%, which generally are required to carry mortgage insurance, as well as our execution of a risk transfer transaction with National Mortgage Insurance Corporation pursuant to a FHFA 2013 conservatorship scorecard objective. Table 56: Mortgage Insurance Coverage Risk in Force(1) Insurance in Force(2) As of As of As of December 31, 2013 December 31, As of December 31, 2013 December 31, Primary Pool Total 2012 Primary Pool Total 2012 (Dollars in millions) Counterparty:(3) Radian Guaranty, Inc. $ 22,308$ 127$ 22,435$ 18,126$ 89,000$ 644$ 89,644$ 73,746 United Guaranty Residential Insurance Co. 22,049 47 22,096 17,182 86,717 219 86,936 69,185 Mortgage Guaranty Insurance Corp. 20,709 291 21,000 20,089 80,887 1,936 82,823 82,346 Genworth Mortgage Insurance Corp. 14,574 28 14,602 13,626 58,367 108 58,475 54,764 PMI Mortgage Insurance Co.(4) 7,061 62 7,123 8,901 28,382 652 29,034 36,743 Republic Mortgage Insurance Co.(4) 5,571 230 5,801 7,142 21,923 2,047 23,970 30,402 Essent Guaranty, Inc. 4,394 - 4,394 1,724 17,748 - 17,748 7,148 Arch Mortgage Insurance Co.(5) 2,868 - 2,868 2,340 11,825 - 11,825 9,823 Triad Guaranty Insurance Corp.(4) 1,687 221 1,908

2,368 6,263 1,260 7,523 9,895 National Mortgage Insurance Corp. 16 93 109 - 72 5,070 5,142 - Others 180 - 180 197 1,032 - 1,032 1,118 Total $ 101,417$ 1,099$ 102,516$ 91,695$ 402,216$ 11,936$ 414,152$ 375,170 Total as a percentage of single-family guaranty book of business 4 % 3 % 14 % 13 % __________



(1) Risk in force is generally the maximum potential loss recovery under the

applicable mortgage insurance policies in force and is based on the loan

level insurance coverage percentage and, if applicable, any aggregate pool

loss limit, as specified in the policy.

(2) Insurance in force represents the unpaid principal balance of single-family

loans in our guaranty book of business covered under the applicable mortgage

insurance policies. (3) Insurance coverage amounts provided for each counterparty may include coverage provided by consolidated affiliates and subsidiaries of the counterparty. (4) These mortgage insurers are under various forms of supervised control by their state regulators and are in run-off. (5) In January 2014, we approved the acquisition of CMG Mortgage Insurance Company ("CMG") and its affiliates by Arch U.S. MI Holdings, Inc. CMG has



since changed its name to Arch Mortgage Insurance Company in Wisconsin, its

state of domicile.

The continued high level of mortgage insurance claims due to higher defaults and credit losses in recent periods have adversely affected the financial results and condition of mortgage insurers. All of our mortgage insurer counterparties that are rated by S&P, Fitch and/or Moody's have a current insurer financial strength rating below the "AA-" level that we require under our qualified mortgage insurer approval requirements to be considered qualified as a "Type 1" mortgage insurer. Due to these low credit ratings, we primarily rely on our internal credit ratings when assessing our exposure to a counterparty. Our risk assessments involve in-depth credit reviews of each mortgage insurer, a comprehensive analysis of the mortgage insurance sector, analyses of the insurer's portfolio, discussions with the insurer's management, the insurer's plans to maintain capital within the insuring entity and our views on macroeconomic variables which impact a mortgage insurer's estimated future paid losses, such as changes in home prices and changes in interest rates. From time to time, we may also discuss a counterparty's situation with the rating agencies. We evaluate each of our mortgage insurer counterparties individually to determine whether or under what conditions it will remain eligible to insure new mortgages sold to us. Based on our evaluation, we may impose additional terms and conditions of approval on a mortgage insurer, including: (1) limiting the volume and types of loans it may insure for us; (2) requiring it to obtain our consent prior to entering into risk sharing arrangements; (3) requiring it to meet certain financial conditions, such as maintaining a minimum level of policyholders' surplus, a maximum risk-to-capital ratio, a maximum combined ratio, or a minimum amount of acceptable liquid assets; or (4) requiring that it secure a parental or other capital support agreement. 140 -------------------------------------------------------------------------------- Pursuant to FHFA's 2013 conservatorship scorecard and at FHFA's direction, we worked with FHFA, Freddie Mac and the approved mortgage insurers to update the required terms of our mortgage insurance coverage for new acquisitions. In December 2013, we approved new master primary policies and related forms for use by each Fannie Mae-approved mortgage insurer when insuring loans that are intended for purchase or securitization by Fannie Mae. These policies provide the terms of coverage under which loans having LTV ratios greater than 80% are insured. Once these policies are approved by the state insurance regulators, we will require their use for loans closed and delivered to us after a date to be determined in 2014. Among other things, these new master policies provide specific timelines for mortgage insurers to review and pay claims, and also include terms for when mortgage insurers must sunset certain rescission rights. Also pursuant to FHFA's 2013 conservatorship scorecard and at FHFA's direction, we worked with both FHFA and Freddie Mac to develop a draft of updated eligibility standards for approved private mortgage insurers including risk-based and minimum financial strength, business performance and operational requirements. These proposed eligibility requirements are currently under consideration by FHFA. Although the financial condition of our primary mortgage insurer counterparties currently approved to write new business continued to improve during 2013, there is still risk that these counterparties may fail to fulfill their obligations to pay our claims under insurance policies. If we determine that it is probable that we will not collect all of our claims from one or more of these mortgage insurer counterparties, or if we have already made that determination but our estimate of the shortfall increases, it could result in an increase in our loss reserves, which could adversely affect our earnings, liquidity, financial condition and net worth. PMI, RMIC and Triad are under various forms of supervised control by their state regulators and are in run-off. A mortgage insurer that is in run-off continues to collect renewal premiums and process claims on its existing insurance business, but no longer writes new insurance, which increases the risk that the mortgage insurer will pay claims only in part or fail to pay claims at all under existing insurance policies. Entering run-off may close off a source of profits and liquidity that may have otherwise assisted a mortgage insurer in paying claims under insurance policies, and could also cause the quality and speed of its claims processing to deteriorate. These three mortgage insurers provided a combined $14.8 billion, or 14%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of December 31, 2013. PMI and RMIC have been paying only a portion of policyholder claims and deferring the remaining portion. Currently, PMI is paying 55% of claims under its mortgage insurance policies in cash and is deferring the remaining 45%, and RMIC is paying 60% of claims in cash and deferring the remaining 40%. It is uncertain when, or if, PMI or RMIC will be permitted to begin paying deferred policyholder claims and/or increase or decrease the amount of cash they pay on claims. Effective December 1, 2013, Triad increased its cash payments on policyholder claims from 60% to 75%, and paid sufficient amounts of its outstanding deferred payment obligations to bring payment on those claims to 75%. It is uncertain whether Triad will be permitted in the future to pay any remaining deferred policyholder claims and/or increase or decrease the amount of cash they pay on claims. See "Risk Factors" for more information on losses we may incur under our mortgage insurance policies. Some mortgage insurers explored corporate restructurings designed to provide relief from risk-to-capital limits in certain states through the use of subsidiaries. We approved several subsidiaries to write new business. By their terms, those subsidiaries' approvals have expired as of December 31, 2013. The primary entities continue to retain Fannie Mae approval to write new business. In January 2014, we approved the acquisition of CMG Mortgage Insurance Company ("CMG") and its affiliates by Arch U.S. MI Holdings, Inc. CMG has since changed its name to Arch Mortgage Insurance Company in Wisconsin, its state of domicile. The number of mortgage loans for which our mortgage insurer counterparties have rescinded coverage decreased but remained high in 2013. In those cases where the mortgage insurer has rescinded coverage, we require the mortgage seller and/or servicer to repurchase the loan or indemnify us against loss. The table below displays cumulative rescission rates as of December 31, 2013 by the period in which the claim was filed and also displays the percentage of claims resolved by the period in which the claims were filed. We do not present information for claims filed in the most recent two quarters to allow sufficient time for a substantial percentage of the claims filed to be resolved. 141 --------------------------------------------------------------------------------



Table 57: Rescission Rates and Claims Resolution of Mortgage Insurance

As of



December 31, 2013

Cumulative Rescission Cumulative Claims Rate(1) Resolution Percentage(2) Primary mortgage insurance claims filed in: First six months of 2013 2 % 57 % 2012 4 77 2011 8 85 Pool mortgage insurance claim filed in: First six months of 2013 6 % 73 % 2012 10 91 2011 10 97 __________



(1) Represents claims filed during the period where coverage was rescinded as of

December 31, 2013, divided by total claims filed during the same period.

Denied claims are excluded from the rescinded population (numerator) but included in the population of total claims (denominator).



(2) Represents claims filed during the period that were resolved as of December

31, 2013, divided by the total claims filed during the same period. Claims

resolved primarily consist of settled claims, claims for which coverage has

been rescinded by the mortgage insurer, and denied claims for which we have

determined that the mortgage insurer's objection cannot be addressed. When we estimate the credit losses that are inherent in our mortgage loans and under the terms of our guaranty obligations we also consider the recoveries that we will receive on primary mortgage insurance, as mortgage insurance recoveries would reduce the severity of the loss associated with defaulted loans. We evaluate the financial condition of our mortgage insurer counterparties and adjust the contractually due recovery amounts to ensure that only probable losses as of the balance sheet date are included in our loss reserve estimate. As a result, if our assessment of one or more of our mortgage insurer counterparties' ability to fulfill their respective obligations to us worsens, it could result in an increase in our loss reserves. The following table displays the amount by which our estimated benefit from mortgage insurance as of December 31, 2013 and 2012 reduced our total loss reserves as of those dates. Table 58: Estimated Mortgage Insurance Benefit As of December 31, 2013 2012 (Dollars in millions) Contractual mortgage insurance benefit $ 6,751 $



9,993

Less: Collectibility adjustment(1) 431



708

Estimated benefit included in total loss reserves $ 6,320$ 9,285

__________

(1) Represents an adjustment that reduces the contractual benefit for our assessment of our mortgage insurer counterparties' inability to fully pay the contractual mortgage insurance claims. During 2013, we experienced an improvement in the profile of our single-family book of business, which resulted in a decrease in the contractual benefit we expect to receive from mortgage insurers. The collectibility adjustment to the estimated mortgage insurance benefit for probable losses also decreased as of December 31, 2013 compared with December 31, 2012, primarily driven by lower projected claims that we will submit to our mortgage insurance counterparties due to lower expected defaults. We expect lower defaults primarily as a result of higher actual and forecasted home prices and better observed performance of high mark-to-market LTV loans. For loans that are collectively evaluated for impairment, we estimate the portion of our loss that we expect to recover from each of our mortgage insurance counterparties, the contractual mortgage insurance coverage, and an estimate of each counterparty's resources available to pay claims to us. An analysis by our Counterparty Risk division determines whether, based on all the information available to us, any counterparty is considered probable to fail to meet their obligations in the next 30 months. This period is consistent with the amount of time over which claims related to losses incurred today are expected to be paid in the normal course of business. If this analysis finds a failure of a counterparty is probable, we then reserve for the shortfall between projected claims and estimated resources available to pay claims to us. For loans with delayed foreclosure timelines, where we expect the counterparty to 142 -------------------------------------------------------------------------------- meet its obligations beyond 30 months, we extend the time frame used to evaluate the mortgage insurer's claims-paying ability to a long-term forecast and use that long-term expected claims-paying ability to determine the reserve amount, if any. For loans that have been determined to be individually impaired and measured for impairment using a cash flow analysis, we calculate a net present value of the expected cash flows for each loan to determine the level of impairment, which is included in our allowance for loan losses. These expected cash flow projections include proceeds from mortgage insurance, that are based on the expected ability of the counterparties to pay the claims as incurred through time, including those counterparties that are operating under deferred payment obligation arrangements. For loans that have been determined to be individually impaired and are deemed probable of foreclosure, the reserve is determined using the process for loans that are collectively evaluated for impairment and we expect the claims to be paid in the normal course of business. As described above, our methodologies for individually and collectively impaired loans differ as required by GAAP, but both consider the ability of our counterparties to pay their obligations in a manner that is consistent with each impairment methodology. As the loans individually assessed for impairment using a cash flow analysis considers the life of the loan, we use the expected claims-paying ability of counterparties through time to adjust the loss severity in our estimates of future cash flows. As the loans collectively assessed for impairment only look to the probable payments we would receive associated with our probable losses, we use the noted shortfall, or haircut, to adjust the loss severity. For counterparties under deferred payment obligation arrangements, the estimated mortgage insurance benefits are determined based on the long-term claims-paying ability of each counterparty. When an insured loan held in our retained mortgage portfolio subsequently goes into foreclosure, we charge off the loan, eliminating any previously-recorded loss reserves, and record REO and a mortgage insurance receivable for the claim proceeds deemed probable of recovery, as appropriate. However, if a mortgage insurer rescinds, cancels or denies insurance coverage, the initial receivable becomes due from the mortgage seller or servicer. We had outstanding receivables of $2.1 billion as of December 31, 2013 and $3.7 billion as of December 31, 2012 related to amounts claimed on insured, defaulted loans excluding government insured loans. Of this amount, $402 million as of December 31, 2013 and $1.1 billion as of December 31, 2012 was due from our mortgage sellers or servicers. We assessed the total outstanding receivables for collectibility, and they were recorded net of a valuation allowance of $655 million as of December 31, 2013 and $551 million as of December 31, 2012 in "Other assets." The valuation allowance reduces our claim receivable to the amount that we consider probable of collection. We received proceeds from private mortgage insurers (and, in cases where policies were rescinded or canceled or coverage was denied by the mortgage insurer, from mortgage sellers or servicers) for single-family loans of $5.7 billion in 2013, $5.1 billion in 2012 and $5.8 billion in 2011. Financial Guarantors We are the beneficiary of non-governmental financial guarantees on non-agency securities held in our retained mortgage portfolio and on non-agency securities that have been resecuritized to include a Fannie Mae guaranty and sold to third parties. Table 59 displays the total unpaid principal balance of guaranteed non-agency securities in our retained mortgage portfolio as of December 31, 2013 and 2012. Table 59: Unpaid Principal Balance of Financial Guarantees As of December 31, 2013 2012 (Dollars in millions)



Alt-A private-label securities $ 511$ 928 Subprime private-label securities

868 1,264 Mortgage revenue bonds 3,911 4,374 Other mortgage-related securities 264 292 Total $ 5,554$ 6,858 With the exception of Ambac Assurance Corporation ("Ambac"), which is operating under a deferred payment obligation and is making cash payments equal to 25% of the claim, none of our remaining non-governmental financial guarantor counterparties has failed to repay us for claims under guaranty contracts. However, based on the stressed financial condition of many of these counterparties, we are expecting full cash payment from only two of the non-governmental financial guarantors and we are uncertain of the level of payments we will ultimately receive from the remaining counterparties. Ambac provided coverage on $2.5 billion, or 46%, of our total non-governmental financial guarantees as of December 31, 2013. When assessing our securities for impairment, we consider the benefit of non-governmental financial guarantees from those guarantors that we determine are creditworthy, although we continue to seek collection of any amounts due to us from 143 -------------------------------------------------------------------------------- all counterparties. See "Note 5, Investments in Securities" for a further discussion of our model methodology and key inputs used to determine other-than-temporary impairments. We are also the beneficiary of financial guarantees included in securities issued by Freddie Mac, the federal government and its agencies that totaled $22.5 billion as of December 31, 2013 and $27.3 billion as of December 31, 2012. Lenders with Risk Sharing We enter into risk sharing agreements with lenders 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 these risk sharing agreements on single-family loans was $10.7 billion as of December 31, 2013, compared with $11.9 billion as of December 31, 2012. As of December 31, 2013, 52% of our maximum potential loss recovery on single-family loans was from three lenders, compared with 55% as of December 31, 2012. Our maximum potential loss recovery from lenders under risk sharing agreements on DUS and non-DUS multifamily loans was $39.4 billion as of December 31, 2013, compared with $36.4 billion as of December 31, 2012. As of December 31, 2013, 32% of our maximum potential loss recovery on multifamily loans was from three DUS lenders, compared with 35% as of December 31, 2012. Although market conditions have improved, unfavorable market conditions prior to 2012 adversely affected the liquidity and financial condition of our lender counterparties. The percentage of single-family recourse obligations from lenders with investment grade credit ratings (based on the lower of S&P, Moody's and Fitch ratings) was 55% as of December 31, 2013, compared with 51% as of December 31, 2012. The recourse obligations from lender counterparties rated below investment grade was 21% as of December 31, 2013, compared with 22% as of December 31, 2012. The remaining recourse obligations were from lender counterparties that were not rated by rating agencies, which was 24% as of December 31, 2013, compared with 27% as of December 31, 2012. Given the stressed financial condition of some of our single-family lenders, we expect in some cases we will recover less than the amount the lender is obligated to provide us under our risk sharing arrangement with them. Depending on the financial strength of the counterparty, we may require a lender to pledge collateral to secure its recourse obligations. As noted above in "Mortgage Credit Risk Management-Multifamily Mortgage Credit Risk Management," 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, 2013, 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 40% as of December 31, 2012. Given the recourse nature of the DUS program, the 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. Custodial Depository Institutions A total of $34.6 billion in deposits for single-family payments were received and held by 284 institutions during the month of December 2013 and a total of $74.0 billion in deposits for single-family payments were received and held by 292 institutions during the month of December 2012. Of these total deposits, 94% as of December 31, 2013, compared with 93% as of December 31, 2012, were held by institutions rated as investment grade by S&P, Moody's and Fitch. Our transactions with custodial depository institutions are concentrated. Our six largest custodial depository institutions held 86% of these deposits as of December 31, 2013, compared with 87% as of December 31, 2012. We evaluate our custodial depository institutions to determine whether they are eligible to hold deposits on our behalf based on requirements specified in our Servicing Guide. If a custodial depository institution were to fail while holding remittances of borrower payments of principal and interest due to us in our custodial account, we would be an unsecured creditor of the depository 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 counterparties could result in significant financial losses to us. During the month of December 2013, approximately $1.7 billion, or 5%, of our total deposits for single-family payments received and held by these institutions was in excess of the deposit insurance protection limit compared with approximately $7.2 billion, or 10%, during the month of December 2012. These amounts can vary as they are calculated based on individual payments of mortgage borrowers and we must estimate which borrowers are paying their regular principal and interest payments and other types of payments, such as prepayments from refinancing or sales. 144 -------------------------------------------------------------------------------- Issuers of Investments Held in our Cash and Other Investments Portfolio Our cash and other investments portfolio consists of cash and cash equivalents, federal funds sold and securities purchased under agreements to resell or similar arrangements and U.S. Treasury securities. Our cash and other investment counterparties are primarily financial institutions and the Federal Reserve Bank. See "Liquidity and Capital Management-Liquidity Management-Cash and Other Investments Portfolio" for more detailed information on our cash and other investments portfolio. As of December 31, 2013, our cash and other investments portfolio totaled $74.5 billion and included $16.3 billion of U.S. Treasury securities. As of December 31, 2012, our cash and other investments portfolio totaled $71.6 billion and included $19.1 billion of U.S. Treasury securities. As of December 31, 2013, we held a $1.0 billion short-term unsecured deposit with a financial institution that had a short-term credit rating of A-1 from S&P (or its equivalent), based on the lowest credit rating issued by S&P, Moody's and Fitch, and no other unsecured positions other than U.S. Treasury securities. We held no unsecured positions other than U.S. Treasury securities with financial institutions as of December 31, 2012. The remaining amounts in our cash and other investment portfolio other than U.S. Treasury securities were primarily composed of securities purchased under agreements to resell or similar arrangements. We monitor the credit risk position of our cash and other investments portfolio by term and rating level. In addition, we monitor the financial position and any downgrades of these counterparties. 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. Derivative Counterparty Credit Exposure Our derivative counterparty credit exposure relates principally to interest rate derivative contracts. We are exposed to the risk that a counterparty in a derivative transaction will default on payments due to us, which may require us to seek a replacement derivative from a different counterparty. This replacement may be at a higher cost, or we may be unable to find a suitable replacement. 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. ("ISDA") master agreement. Pursuant to new regulations implementing the Dodd-Frank Act, effective June 10, 2013, we are required to submit certain categories of new interest rate swaps to a derivatives clearing organization. Once a contract is accepted by a derivatives clearing organization, such contract is not governed by the terms of an ISDA master agreement. We refer to our derivative transactions made pursuant to bilateral contracts as our over-the-counter ("OTC") derivative transactions and our derivative transactions accepted for clearing by a derivatives clearing organization as our OTC-cleared derivative transactions. We manage our derivative counterparty credit exposure relating to our OTC derivative transactions through master netting arrangements. These arrangements allow us to net derivative assets and liabilities with the same counterparty. We also manage our derivative counterparty exposure relating to our OTC derivative transactions by requiring counterparties to post collateral, which includes cash, U.S. Treasury securities, agency debt and agency mortgage-related securities. Our OTC-cleared derivative transactions are submitted to a derivatives clearing organization on our behalf through a member of the 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. Our institutional credit risk exposure to derivatives clearing organizations and certain of their members will increase substantially in the future as OTC-cleared derivative contracts will comprise a larger percentage of our derivative instruments. Our agreements relating to our OTC-cleared derivative transactions are not master netting arrangements. 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. For derivative instruments where the right of legal offset does not exist (such as our OTC-cleared derivative transactions), we calculate the replacement cost of the outstanding derivative contracts in a gain position at the instrument level. 145 -------------------------------------------------------------------------------- The fair value of derivatives in a gain position is included in our consolidated balance sheets in "Other assets." Table 60 below displays our counterparty credit exposure on outstanding risk management derivative instruments in a gain position as of December 31, 2013 and 2012. For our OTC derivative transactions, the table displays our exposure by counterparty credit ratings and number of counterparties. Our counterparty credit exposure to our OTC-cleared derivative transactions is shown in the "Exchange-Traded/Cleared" column. Also displayed below are the notional amounts outstanding for all risk management derivatives for the periods indicated. Table 60: Credit Loss Exposure of Risk Management Derivative Instruments As of December 31, 2013 Credit Rating(1) AA+/AA/AA- A+/A/A-



BBB+/BBB/BBB- Subtotal(2) Exchange- Traded/Cleared(3) Other(4) Total

(Dollars in millions) Credit loss exposure(5) $ 79 $ 1,008 $ - $ 1,087 $ 1,475 $ 28$ 2,590 Less: Collateral held(6) 66 972 - 1,038 1,382 - 2,420 Exposure net of collateral $ 13 $ 36 $ - $ 49 $ 93 $ 28$ 170 Additional information: Notional amount - $ 25,005$ 338,905$ 78,799$ 442,709 $ 109,740 $ 281$ 552,730 Number of counterparties(7) 4 10 2 16 As of December 31, 2012 Credit Rating(1) AA+/AA/AA- A+/A/A-



BBB+/BBB/BBB- Subtotal(2) Exchange-Traded/Cleared (3) Other(4) Total

(Dollars in millions) Credit loss exposure(5) $ - $ 48 $ - $ 48 $ 171 $ 27$ 246 Less: Collateral held(6) - 48 - 48 163 - 211 Exposure net of collateral $ - $ - $ - $ - $ 8 $ 27$ 35 Additional information: Notional amount $ 22,703$ 600,028$ 40,350$ 663,081 $ 38,426 $ 447$ 701,954 Number of counterparties(7) 4 11 1 16 __________

(1) We manage collateral requirements based on the lower credit rating of the legal entity, as issued by S&P and Moody's. The credit rating reflects the equivalent S&P rating for any ratings based on Moody's scale.



(2) We had credit loss exposure to seven counterparties with a notional balance

of $227.7 billion as of December 31, 2013 and one counterparty with a notional balance of $5.9 billion as of December 31, 2012.



(3) Represents contracts entered through an agent on our behalf with derivatives

clearing organizations.

(4) Includes mortgage insurance contracts and swap credit enhancements accounted

for as derivatives.

(5) Represents the exposure to credit loss on derivative instruments, which we

estimate using the fair value of all outstanding derivative contracts in a

gain position. We net derivative gains and losses with the same counterparty

where a legal right of offset exists under an enforceable master netting

agreement. This table excludes mortgage commitments accounted for as derivatives.



(6) Represents cash and non-cash collateral posted by our counterparties to us.

Does not include collateral held in excess of exposure. We reduce the value

of non-cash collateral in accordance with the counterparty agreements to ensure recovery of any loss through the disposition of the collateral.



(7) Represents counterparties with which we have an enforceable master netting

arrangements.

OTC derivative transactions with our ten largest counterparties accounted for approximately 74% of our total outstanding notional amount of our total derivative transactions as of December 31, 2013, with each of these counterparties accounting for between approximately 3% and 14% of that total outstanding notional amount. OTC derivative transactions with our ten largest counterparties accounted for approximately 90% of our total outstanding notional amount of our total derivative 146 -------------------------------------------------------------------------------- transactions as of December 31, 2012, with each of these counterparties accounting for between approximately 6% and 14% of that total outstanding notional amount. See "Note 9, Derivative Instruments" and "Note 17, Netting Arrangements" for additional information on our derivative contracts as of December 31, 2013 and 2012. Mortgage Originators, Investors and Dealers We are routinely exposed to pre-settlement risk through the purchase or sale of closed 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 and limits on exposure and monitoring both our exposure positions and 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. Other We filed claims as a creditor in the bankruptcy case of Lehman Brothers Holdings, Inc. ("Lehman Brothers"), which filed for bankruptcy in September 2008. These claims include securities law claims related to Lehman Brothers private-label securities and notes and mortgage loan repurchase obligations. On January 23, 2014, we resolved our outstanding bankruptcy claims against Lehman Brothers for an allowed amount of $2.15 billion. The court approved the settlement on January 31, 2014. We expect to receive only a portion of this amount under the terms of the Lehman Plan of Reorganization. To date, claims similar to ours have received approximately 19% of the allowed amount, although we anticipate additional distributions in the future. Market Risk Management, Including Interest Rate Risk Management We are subject to market risk, which includes interest rate risk, spread risk and liquidity risk. These risks arise from our mortgage asset investments. Interest rate risk is the risk of loss in value or expected future earnings that may result from changes to interest rates. Spread risk or basis risk is the resulting impact of changes in the spread between our mortgage assets and our debt and derivatives we use to hedge our position. Liquidity risk is the risk that we will not be able to meet our funding obligations in a timely manner. 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 established by our Chief Market Risk Officer and our Chief Risk Officer and are subject to review and approval by our Board of Directors. Our Capital Markets Group has primary responsibility for executing our interest rate risk management strategy. We have actively managed the interest rate risk of our "net portfolio," which is defined below, through the following techniques: (1) asset selection and structuring (that is, by identifying or structuring mortgage assets with attractive prepayment and other risk characteristics); (2) issuing a broad range of both callable and non-callable debt instruments; and (3) using interest-rate derivatives. We have not actively managed or hedged our spread risk or basis risk, which would include 147 -------------------------------------------------------------------------------- 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. For more information on the impact that changes in spreads have on the value of the fair value of our net assets, see "Supplemental Non-GAAP Information-Fair Value Balance Sheets." See "Risk Factors" for a discussion of the risks to our business posed by changes in interest rates or the loss of our ability to successfully manage interest risk. We monitor current market conditions, including the interest rate environment, to assess the impact of these conditions on individual positions and our overall 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 overall 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" 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, our investments in non-mortgage securities, our outstanding debt of Fannie Mae used to fund those assets and 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. Although the fair value of our guaranty assets and our guaranty obligations is highly sensitive to changes in interest rates and the market's perception of future credit performance, we do not actively manage the change in the fair value of our guaranty business that is attributable to changes in interest rates. We do not believe that periodic changes in fair value due to movements in interest rates are the best indication of the long-term value of our guaranty business because these changes do not take into account future guaranty business activity. 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. 148

--------------------------------------------------------------------------------



• 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-rate 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, results of operations and our overall 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 U.S. dollars. We enter into foreign currency

swaps only to the extent that we issue foreign currency debt.

• Futures. These are standardized exchange-traded contracts that either

obligate a buyer to buy an asset at a predetermined date and price or a seller to sell an asset at a predetermined date and price. The types of futures contracts we enter into include Eurodollar, U.S. Treasury and swaps. 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: (1) As a substitute for notes and bonds that we issue in the debt markets;



(2) To achieve risk management objectives not obtainable with debt market

securities;

(3) To quickly and efficiently rebalance our portfolio; and

(4) 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 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 149 -------------------------------------------------------------------------------- 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 As part of our disclosure commitments 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.



• 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 the U.S. LIBOR interest rate swap curve. 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 8.3 basis points for the 30-year rate. 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. The sensitivity measures presented in Table 61, which we disclose on a quarterly basis as part of our disclosure commitments 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: (1) the quarterly disclosure is expanded to include the sensitivity results for larger rate level shocks of plus or minus 100 basis points; (2) 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 (3) 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. 150 -------------------------------------------------------------------------------- Results of Interest Rate Sensitivity Measures Table 61 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. In addition, Table 61 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, 2013 and 2012. Table 61: Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve(1) As of December 31, (2) 2013 2012 (Dollars in billions) Rate level shock: -100 basis points $ 0.1$ 0.8 -50 basis points - 0.2 +50 basis points (0.1 ) 0.1 +100 basis points (0.5 ) - Rate slope shock: -25 basis points (flattening) - - +25 basis points (steepening) - - For the Three Months Ended December 31, 2013(3) Duration Rate Slope Shock Rate Level Shock 50 Gap 25 bps bps Exposure (In months) (Dollars in billions) Average (0.2) $ - $ 0.2 Minimum (0.6) - 0.1 Maximum 0.3 0.1 0.2 Standard deviation 0.2 - - For the Three Months Ended December 31, 2012(3) Duration Rate Slope Shock Rate Level Shock 50 Gap 25 bps bps Exposure (In months) (Dollars in billions) Average (0.1) $ - $ 0.1 Minimum (0.8) - - Maximum 0.4 - 0.2 Standard deviation 0.3 - 0.1 __________



(1) Computed based on changes in U.S. LIBOR interest rates swap curve.

(2) Measured on the last 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. The average duration gap was (0.2) months for the last three months of 2013, which is consistent with the average duration gap for the last three months of 2012. Because the effective duration gap of our net portfolio was close to zero months in the periods presented, convexity risk was the primary driver of the market value sensitivity of our net portfolio in those periods. 151 -------------------------------------------------------------------------------- A majority of the interest rate risk associated with our mortgage-related securities and loans is hedged with our debt issuances, which include callable debt. 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. Table 62 displays an example of how derivatives impacted the net market value exposure for a 50 basis point parallel interest rate shock. Table 62: Derivative Impact on Interest Rate Risk (50 Basis Points)(1) As of December 31, 2013 2012 (Dollars in billions) Before Derivatives $ (0.3 )$ (0.5 ) After Derivatives (0.1 ) 0.1 Effect of Derivatives 0.1 0.6 __________



(1) Measured on the last day of each period presented.

Other Interest Rate Risk Information The interest rate risk measures discussed above 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. We provide additional interest rate sensitivities below in Table 63 including separate disclosure of the potential impact on the fair value of our trading assets and our other financial instruments for the periods indicated, from the same hypothetical changes in the level of interest rates as displayed above in Table 61. We assume a parallel shift in all maturities along the interest rate swap curve in calculating these sensitivities. We believe these interest rate changes represent reasonably possible near-term changes in interest rates over the next twelve months. Table 63: Interest Rate Sensitivity of Financial Instruments



As of December 31, 2013

Pre-Tax Effect on Estimated Fair Value

Change in Interest Rates (in basis points)

Estimated Fair Value -100 -50 +50 +100 (Dollars in billions) Trading financial instruments $ 30.8$ 0.5$ 0.2$ (0.2 )$ (0.4 ) Other financial instruments, net(1) (117.3 ) (3.6 ) (1.2 ) 0.3 (0.2 ) As of December 31, 2012



Pre-Tax Effect on Estimated Fair Value

Change in Interest Rates (in basis points)

Estimated Fair Value -100 -50 +50 +100 (Dollars in billions) Trading financial instruments $ 40.7$ 0.7$ 0.3$ (0.3 )$ (0.7 ) Other financial instruments, net(1) (121.9 )



(3.9 ) (3.8 ) (2.7 ) (2.4 )

__________

(1) Includes all financial assets less all Trading securities less all financial

liabilities reported in "Note 18, Fair Value-Fair Value of Financial

Instruments."

Liquidity Risk Management See "Liquidity and Capital Management-Liquidity Management" for a discussion on how we manage liquidity risk. 152 -------------------------------------------------------------------------------- Operational Risk Management Operational risk is the risk resulting from a failure in our operational systems or infrastructure, or those of third parties, including as a result of cyber attacks that could materially adversely affect our business, impair our liquidity, cause financial losses and harm our reputation. Our operations rely on the secure processing, storage and transmission of confidential or personal information that is subject to privacy laws, regulations or customer-imposed controls. 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 breaches. We take measures to protect the security of our computer systems, software and networks. These risks are an unavoidable result of being in business, and managing these risks is a central part of our business activities. We continue to enhance our risk-conscious culture, in which all employees are expected to identify, discuss, manage and remediate potential and actual operational risk. To date, we have not experienced any material losses relating to cyber attacks or other information security breaches. Our corporate operational risk framework is based on the OFHEO/FHFA Enterprise Guidance on Operational Risk Management, published September 23, 2008. We have made a number of enhancements to our operational risk management efforts including our business process focus, policies and framework. Our framework is intended to provide a methodology to identify, assess, mitigate, control and monitor operational risks by embedding the concepts of operational risk in the day-to-day activities of individuals across the company. Included in this framework is a requirement for a system to track and report operational risk incidents. The framework also includes a methodology for business owners to conduct risk and control self assessments to self identify potential operational risks and points of execution failure, the effectiveness of associated controls, and document corrective action plans to close identified deficiencies. The success of our operational risk effort will depend on the consistent execution of the operational risk programs and the timely remediation of high operational risk issues. To quantify our operational risk exposure, we rely on the Basel Standardized approach, which is based on a percentage of gross income. While each business unit is responsible for managing its operational risk, our Operational Risk Management group provides the business units and process owners with the tools, techniques, expertise and guiding principles to assist them in prudent management of their operational risk exposure. Operational risk lead teams, comprised of centralized resources within our Enterprise Risk Management division, are aligned with each of our primary business units as well as with our corporate functions such as finance and legal. Each risk lead reports to the Vice President and Chief Risk Officer of Operational Risk, who reports directly to the Executive Vice President and Chief Risk Officer. The Operational Risk Committee provides an additional governance forum for managing operational risk. See "Risk Factors" for more information regarding our operational risk and "Risk Management" for more information regarding our governance of operational risk management. Management of Business Resiliency Our business resiliency program is designed to provide reasonable assurance for continuity of critical business operations in the event of disruptions caused by the loss of facilities, technology or personnel. We are currently building an out-of-region data center for disaster recovery in order to increase the geographic diversity of our business continuity plans. This data center is expected to be operational later in 2014. Despite the planning, testing and preparation of back up venues that we engage in, a catastrophic event may still result in a significant business disruption and financial losses. See "Risk Factors" for a discussion of the risks to our business relating to a catastrophic event that could disrupt our business. Non-Mortgage Related Fraud Risk Our anti-fraud program provides a framework for managing non-mortgage related fraud risk. The program is designed to provide reasonable assurance for the prevention and detection of non-mortgage related fraudulent activity. However, because fraudulent activity requires the intentional circumvention of the internal control structure, the efforts of the program may not always prevent, or immediately detect, instances of such activity. IMPACT OF FUTURE ADOPTION OF NEW ACCOUNTING GUIDANCE



We identify and discuss the expected impact on our consolidated financial statements of recently issued accounting guidance in "Note 1, Summary of Significant Accounting Policies."

153 --------------------------------------------------------------------------------



GLOSSARY OF TERMS USED IN THIS REPORT

Terms used in this report have the following meanings, unless the context indicates otherwise. An "Acquired credit-impaired loan" refers to a loan 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." "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 Form 10-K 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 "Risk Management-Credit Risk Management-Mortgage Credit Risk Management-Single-Family Mortgage Credit Risk Management," "Note 3, Mortgage Loans" and "Note 6, Financial Guarantees." 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. For more information on the Alt-A loans and securities in our mortgage credit book of business, see "Note 16, Concentrations of Credit Risk." "Business volume" or "new business acquisitions" 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. "Buy-ups" refer to upfront payments we make to lenders to adjust the monthly contractual guaranty fee rate on a Fannie Mae MBS so that the pass-through coupon rate on the MBS is in a more easily tradable increment of a whole or half percent. "Buy-downs" refer to upfront payments we receive from lenders to adjust the monthly contractual guaranty fee rate on a Fannie Mae MBS so that the pass-through coupon rate on the MBS is in a more easily tradable increment of a whole or half percent. "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. "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, 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. "Duration" refers to the sensitivity of the value of a financial instrument to changes in interest rates. The duration of a financial instrument is the expected percentage change in its value in the event of a change in interest rates of 100 basis points. "Guaranty book of business" refers to the sum of the unpaid principal balance of: (1) mortgage loans of Fannie Mae; (2) mortgage loans underlying Fannie Mae MBS; and (3) other credit enhancements that we provide on mortgage assets. It excludes non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty. 154 -------------------------------------------------------------------------------- "HomeSaver Advance loan" refers to a 15-year unsecured personal loan in an amount equal to all past due payments relating to a borrower's first-lien mortgage loan, generally up to the lesser of $15,000 or 15% of the unpaid principal balance of the delinquent first-lien loan. The advance is used to bring the first-lien mortgage loan current. This workout option was retired in 2010. "Implied volatility" refers to the market's expectation of the magnitude of future changes in interest rates. "Interest rate swap" refers to a transaction between two parties in which each agrees to exchange payments tied to different interest rates or indices for a specified period of time, generally based on a notional principal amount. An interest rate swap is a type of derivative. "LIHTC partnerships" refer to low-income housing tax credit limited partnerships or limited liability companies. "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. "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 is based on the unpaid principal balance of such assets and does not reflect market valuation adjustments, allowance for loan losses, impairments, unamortized premiums and discounts and the impact of our consolidation of variable interest entities. We disclose the amount of our mortgage assets for purposes of the senior preferred stock purchase agreement on a monthly basis under the caption "Gross Mortgage Portfolio" in our Monthly Summaries, which are available on our Web site 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 by Fannie Mae or by others. "Mortgage credit book of business" refers to the sum of the unpaid principal balance of: (1) mortgage loans of Fannie Mae; (2) mortgage loans underlying Fannie Mae MBS; (3) non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio; and (4) other credit enhancements that we provide on mortgage assets. "Multifamily mortgage loan" refers to a mortgage loan secured by a property containing five or more residential dwelling units. "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. "Option-adjusted spread" refers to the incremental expected return between a security, loan or derivative contract and a benchmark yield curve (typically, U.S. Treasury securities, LIBOR and swaps or agency debt securities). The option-adjusted spread provides explicit consideration of the variability in the security's cash flows across multiple interest rate scenarios resulting from any options embedded in the security, such as prepayment options. For example, the option-adjusted spread of a mortgage that can be prepaid by the homeowner without penalty is typically lower than a nominal yield spread to the same benchmark because the option-adjusted spread reflects the exercise of the prepayment option by the homeowner, which lowers the expected return of the mortgage investor. In other words, option-adjusted spread for mortgage loans is a risk-adjusted spread after consideration of the prepayment risk in mortgage loans. The market convention for mortgages is typically to quote their option-adjusted spread to swaps. The option-adjusted spread of our debt and derivative instruments are also frequently quoted to swaps. The option-adjusted spread of our net mortgage assets is therefore the combination of these two spreads to swaps and is the option-adjusted spread between our assets and our funding and hedging instruments. "Outstanding Fannie Mae MBS" refers to the total unpaid principal balance of Fannie Mae MBS that is held by third-party investors and held in our retained mortgage portfolio. "Pay-fixed swap" refers to an interest rate swap trade under which we pay a predetermined fixed rate of interest based upon a set notional amount and receive a variable interest payment based upon a stated index, with the index resetting at regular intervals over a specified period of time. These contracts generally increase in value as interest rates rise and decrease in value as interest rates fall. "Private-label securities" or "PLS" refers to mortgage-related securities issued by entities other than agency issuers Fannie Mae, Freddie Mac or Ginnie Mae. "Receive-fixed swap" refers to an interest rate swap trade under which we make a variable interest payment based upon a stated index, with the index resetting at regular intervals, and receive a predetermined fixed rate of interest based upon a set 155 -------------------------------------------------------------------------------- notional amount and over a specified period of time. These contracts generally increase in value as interest rates fall and decrease in value as interest rates rise. "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. "Retained mortgage portfolio" refers to the mortgage-related assets we own (which excludes the portion of assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties). "Severity rate" or "loss severity rate" refers to a measure of the amounts that will not be recovered in the event a loan defaults. Severity rates generally reflect charge-offs as a percentage of unpaid principal balance. Additional items may be taken into account in calculating severity rates. For example, the numerator may reflect items such as foreclosed property expenses, taxes and insurance, and expected recoveries from pool insurance, while the denominator may reflect items such as purchased interest, basis, and selling costs. "Single-class Fannie Mae MBS" refers to Fannie Mae MBS where the investors receive principal and interest payments in proportion to their percentage ownership of the MBS issue. "Single-family mortgage loan" refers to a mortgage loan secured by a property containing four or fewer residential dwelling units. "Small balance loans" refers to multifamily loans with an original unpaid balance of up to $3 million nationwide or up to $5 million in high cost markets. "Structured Fannie Mae MBS" refers to Fannie Mae MBS that are resecuritizations of other Fannie Mae MBS. "Subprime mortgage loan" generally refers to a mortgage loan made to a borrower with a weaker credit profile than that of a prime borrower. As a result of the weaker credit profile, subprime borrowers have a higher likelihood of default than prime borrowers. Subprime mortgage loans were typically originated by lenders specializing in this type of business or by subprime divisions of large lenders, using processes unique to subprime loans. We classify certain loans as subprime so that we can discuss our exposure to subprime loans in this Form 10-K and elsewhere. However, there is no universally accepted definition of subprime loans. In reporting our subprime exposure, we have classified mortgage loans as subprime if and only if the loans were originated by a lender specializing in subprime business or by a subprime division of a large lender; however, we exclude loans originated by these lenders from the subprime classification if we acquired the loans in accordance with our standard underwriting criteria, which typically require compliance by the seller with our Selling Guide (including standard representations and warranties) and/or evaluation of the loans through our Desktop Underwriter system. We have loans with some features that are similar to subprime mortgage loans that we have not classified as subprime because they do not meet our classification criteria. We do not rely solely on our classifications of loans as subprime 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 "Risk Management-Credit Risk Management-Mortgage Credit Risk Management-Single-Family Mortgage Credit Risk Management," "Note 3, Mortgage Loans" and "Note 6, Financial Guarantees." We have classified private-label mortgage-related securities held in our retained mortgage portfolio as subprime if the securities were labeled as such when issued. For more information on the subprime loans and securities in our mortgage credit book of business, see "Note 16, Concentrations of Credit Risk." "Swaption" refers to an option that gives the option buyer the right, but not the obligation, to enter into an interest rate swap on a future date with the option seller on terms specified on the date the parties agreed to the swaption. "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 pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011, which we remit to Treasury on a quarterly basis. "Total Loss Reserve" consists of allowance for loan losses, allowance for accrued interest receivable, allowance for preforeclosure property taxes and insurance receivables and reserve for guaranty losses. Our total loss reserve reflects 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. 156



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