Final Transcript

FANNIE MAE: Investor / Analyst Conference Call August 8, 2008 / 10:30 a.m., ET

SPEAKERS Mary Lou Christy - Senior Vice President, Investor Relations Daniel H. Mudd - President and Chief Executive Officer Stephen M. Swad - Executive Vice President and Chief Financial Officer Peter Niculescu – Executive Vice President, Capital Markets Thomas A. Lund – Executive Vice President, Single-Family Mortgage Business Eric J. Schuppenhauer – Senior Vice President and Single-Family Chief Financial Officer Mike Williams – Executive Vice President and Chief Operating Officer Enrico Dallavecchia, Executive Vice President and Chief Risk Officer Scott Blackley, Senior Vice President and Capital Markets Chief Financial Officer Mark Winer – Senior Vice President, Business Analysis & Decisions ANALYSTS David Hochstim – Buckingham Research Group Howard Shapiro – Fox-Pitt, Kelton Bob Napoli – Piper Jaffray Paul Miller – Friedman, Billings, Ramsey (FBR) Capital Markets Ken Bruce – Merrill Lynch Mark DeVries – Lehman Brothers Gary Gordon – Portales Partners Fred Cannon – Keefe, Bruyette & Woods PRESENTATION

Moderator Ladies and gentlemen, thank you for standing by and welcome to the

Fannie Mae investor analyst conference call. My name is Kristen and

I'll be your conference operator today. All lines have been placed on

mute to prevent any background noise. After the speaker's remarks

there will be a question and answer session. If you would like to ask a

question during this time, simply press star then number one on your

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telephone keypad. If you would like to withdraw your question, press

the pound key. I would now like to turn the conference over to your

host, Mary Lou Christy.

Please go ahead.

M. Christy Thank you. Good morning, and welcome to today’s Investor/Analyst Conference Call. I am Mary Lou Christy, Senior Vice President of Investor Relations. Dan Mudd, Fannie Mae’s President and Chief Executive Officer will lead off today’s call, followed by Steve Swad, Executive Vice President and Chief Financial Officer.

After Steve’s remarks, the question and answer session will start and

we will be joined by other members of senior management. In addition to the [Second Quarter] 2008 10-Q and the press release, we published an Investor Summary on our Web site, which provides an overview of our financial performance and key drivers for the period, as well as detailed information on our credit book.

Please note that this conference call will include forward-looking

statements, including statements related to our future performance, capital position, credit-related expenses and credit losses, our expectations regarding the housing, credit, and mortgage market, and our planned actions in connection with capital and credit.

Future events may turn out to be very different from what is discussed

in this call. Please see the “Risk Factors” section of our 2007 Form 10-K, and our [Second Quarter 2008] Form 10-Q for a description of issues that may lead to different results.

Now let me turn the call over to Dan Mudd. D. Mudd Thank you. Good morning, everyone and thanks for joining us today.

This morning we filed our results for the second quarter⎯a $2.3 billion loss, slightly higher than the first quarter. We also announced a

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number of additional actions on capital and credit, including a dividend reduction, a price increase, and the wind down of our Alt-A business that has driven our credit expenses.

I am going to begin this call by discussing the market, the results, our

outlook, our plans. And our CFO Steve Swad will then provide more detail on the financials. And we will try to devote the bulk of time on the call today to your Q&A.

To start, it has been three months since our last filing. I have to say it

does seem even longer. But let me briefly chronicle the main events of the quarter.

In April, we began taking delivery of jumbo-conforming mortgages. In May, we raised $7.4 billion in capital, which added to what we did in December; drove a total raise of $14.4 billion. And our regulator also in May lifted our consent order. In June, the Senate took up the housing relief bill, which included as a component GSE legislation, and set the stage for the passage of that legislation in July.

Then, in the market, the conditions which many of us had already

described as the worst in a generation, took a turn for more worse after the quarter ended. You will recall, by way of background, that even though our second quarter books closed on June 30th, subsequent events factor in, and in fact heavily weight, our outlook and our expectations going forward, and those events in July loom significantly in that calculus.

That week of July 7th was one of the worst Fannie Mae has

experienced in the debt and equity markets. The Treasury-Fed backstop plan that was announced on July 13th calmed the markets somewhat, and the passage of the housing bill on the 26th of July added more certainty. But, on the downside, July was a tough month for our credit performance. We experienced higher defaults and higher loan loss severities in markets that were experiencing the steepest home price declines.

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And that gave us higher charge-offs than we had experienced in any month in the second quarter, and higher than we had expected. We also saw a higher proportion of foreclosures coming from states and products with higher loan balances, which increases the absolute dollar losses. In terms of severity, the loss that we experience when a loan defaults, also increased from 19 [percent] in the first quarter to 23 [percent] in the second quarter. And that rose again in July to 27 [percent]. We are now seeing average initial charge-off severities of 40 percent for loans in California.

Home prices have cratered in certain markets since the peak. Cape Coral, Florida, down 50 percent; Las Vegas, down 35 percent; Northern Virginia, down 30 percent; and in California, Modesto and Stockton, down 50 percent; Riverside, down 40 percent. The list goes on. Alt-A foreclosures have doubled in Southern California. Our average serious delinquency rate in Florida increased in June to over three percent. Four times the average on our total book of business last year. Almost two percent of the loans in our Florida book are now referred to foreclosure.

So the housing market has returned to earth fast and hard. Some signs

do offer rays of positive light. Foreclosures actually fell in Michigan. Same period home sales were up in California. And as the GSE’s provide most of the liquidity to the primary market, that market is functioning and a safe center of credit risk; pricing and product is being restored.

All told however, that story all put together led us to again revise our

credit loss estimate upward for the year, from 13 to 17 basis points to 23 to 26 basis points. And that, as you will note, commensurately drives our addition to loss reserves of almost $4 billion.

In that, there are a few larger questions that I think remain open. What

about the impact of job losses and fuel costs on homeowners’ ability to pay, a more broad macroeconomic question. Many of you have asked the question, phrased in one form or another, “what inning are we in?”

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That reflects your uncertainty and reflects our uncertainty as to when home prices hit bottom, and how long they will stay there once they are there.

There is progress, but we have a long way to go. Home prices and

inventories need to reach equilibrium. Fixed income liquidity and depth have to recover. The macroeconomic downturn has to play out. And at that point I think, forward visibility will again become more science than judgment.

Now, with that environment as background, let me turn to our second

quarter results. In the midst of this market, our second quarter results were down from the first as credit provisioning once again outweighed the revenue line. Total credit-related expenses were $5.3 billion, of which $3.7 billion was a boost to loss reserves. Those loss reserves now stand at a total of $8.9 billion, [or] 31 basis points on the total [guaranty] book of business.

Under GAAP, as you know, it is our policy to provision today for the

losses on the existing book that we expect to realize over the next 18 to 24 months, and that is where we are. These reserves are of course supported, in fact, over time by the revenue line. So in some sense, therefore, our ongoing operations fund future losses. And in this quarter, the revenue story remained quite solid, up $189 million to $4 billion, or five percent over the first quarter, and 46 percent higher revenue line than [the same period] last year.

The main driver here was wider investment spreads due to lower

funding costs. The business overall continued to grow as we added nearly $200 billion to the overall book. And during the same period, we significantly increased our multifamily investor spread, charged fees, as well as market share.

On the front of capital, we closed the quarter with $47 billion in

capital, $9.4 billion above our OFHEO-directed minimum, and $14.3 billion above our statutory minimum. And let me pause there and

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assert that we continue to believe that this is an environment where it is important to remain long on capital.

I also believe that our critical role in this market and our actions in

response to the challenges we face will make an appreciable and positive difference as housing works through this crisis. And as our investors, whether debt or equity, and our stakeholders, whether customers or homeowners, policymakers, or related industries like homebuilding or real estate, all of those constituencies will benefit from our success as we work through this downturn.

Let me therefore describe our additional actions around capital and

credit, and do so with the caveat that there is something here for every single constituency to dislike.

One: we are conserving $1.9 billion in capital through 2009 by reducing our common stock dividend to five cents a share, and we're maintaining our access to future capital by paying all of our preferred series as scheduled.

Second: we increased pricing on all loans by adding 25 basis points to

our adverse market delivery charge, bringing that charge to 50 basis points, effective October 1st. And we instituted other risk-based pricing changes. That's the fourth such increase so far this year.

Third: we continue to support market liquidity, with a particular focus

on the less liquid sectors, which, by the way, reveals the positive turn of the model, because these sectors⎯the less liquid ones⎯are the ones that carry the highest spreads and deliver the best revenue per dollar of risk capital.

Fourth: we're going to reduce ongoing operating expenses another 10

percent by year end '09, following the delivery that we did on the 35 percent reductions in the '06 through '08 time frame.

Credit. We're attacking credit across the board. We have installed new

standards in our automated underwriting engine, DU® 7.0, to mitigate

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the risk of most of the lower credit quality product features that we don't like to see. We've tightened up on our MyCommunityMortgage® and Expanded Approval® products, and we will cease purchasing newly originated Alt-A loans by year end.

As you saw in the disclosure, Alt-A loans generated 50 percent of our

Q2 credit losses. A significant portion of the additional balance came out of MCM [MyCommunityMortgage] and EA [Expanded Approval], and we have tightened those up from an intake level.

We have also increased our reviews of defaulted loans⎯the loans that

we get back. We've increased that fivefold, and we're focusing especially on Alt-A, so we would expect to increase our recoveries for contractual violations substantially this year and next.

Some of these changes are already in progress⎯we've already initiated

them and we've continued to push even further. Examples: we've boosted loan workouts⎯and we now plan and believe we can hit a 60 percent rate, which was up from 50 percent last year.

We're opening on-site offices in two of the more challenging

states⎯Florida and California⎯with the intention of reducing defaults and managing our REO in those states. Real estate is at some level local⎯it makes sense to be local. We're adding hundreds of staff as well as contractors to our loss mitigation team, and we have effectively quintupled the amount of senior management that is⎯dedicated to this effort.

We continue to move property⎯to move REO in this strained market.

We're processing much more REO at the same through-put and at the same cycle times using a lot of innovative ways to get the property out the door. I do not think this is a time to be holding on to REO and hoping for a better day. So, we’re doing a good job of moving that inventory back out onto the market.

Now to wrap up, the market remains extraordinarily challenging.

We're taking aggressive action to preserve capital and control our

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credit losses. Underneath all of that, the fundamentals of the business are strong. We've generated nearly $8 billion of revenues at the six-month mark. Since last spring, we've provided roughly $1 trillion of liquidity to the market, which is helping to keep this sector operating.

We will do more in the context of clear regulatory guidance and

compliance in terms of capital, and we'll continue to work with government and industry to ensure that we continue to deliver on our mission.

Our actions, I think, that I just described on capital and credit,

combined with the revenues that we're generating will help us manage through this tough, tough market.

Let me stop there and turn to our CFO, Steve Swad, for details on the

filing and the other announcement we've made today. Steve.

S. Swad Thank you, Dan. My comments will cover five key points. 1) The company had solid

revenue trends in the quarter; 2) We had substantially higher credit-related expenses, mostly driven by the reserve build; 3) We made progress in lowering interest rate-driven volatility; 4) I'll provide an outlook for the second half of 2008; and 5) I'll close on where we stand with capital.

Let me start with net interest income. As you can see on slide 8 of the

investor summary, our tax-equivalent net interest income was $2.1 billion in Q2, up nearly 21 percent over Q1.

8

8

Taxable-Equivalent Net Interest Income (NII) and Net Interest Yield (NIY)

$824.6$805.2

$826.9$804.5

$833.2

62

104

86

6457 60

68

85

6166

$450

$550

$650

$750

$850

2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q245

65

85

105

Average Interest-Earning Assets

Taxable-Equivalent Net Interest Yield

Taxable-Equivalent Net Interest Yield Excl Step-Rate Debt and Incl Swaps

(Avg Balancein billions)

(NIYin basis points)

Increase in taxable-equivalent net interest yield reflects the benefits of lower short-term interest rates.

We recognize net contractual interest income (expense) on interest rate swaps, which has an economic effect on our funding costs. However, this interest is not reflected in net interest income or in the net interest yield, but instead is recorded as a component of fair value gains (losses).

SOP 03-3 accretion increased net interest income and the net interest yield by $53 million and 3 bps in 2008 Q2, $35 million and 2 bps in 2008 Q1, $38 million and 2 bps in 2007 Q4, $21 million and 1 bp in 2007 Q3, and $14 million and 1 bp in 2007 Q2, respectively.

(dollars in millions) NII NIY(bps) NII NIY(bps) NII NIY(bps) NII NIY(bps) NII NIY(bps)Contractual NII/NIY 1,209$ 61 1,207$ 59 1,353$ 68 1,507$ 72 2,013$ 98 Amortization income (expense), net (1) (16) (1) (149) (7) (217) (10) 183 10 44 2 GAAP NII/NIY 1,193 60 1,058 52 1,136 58 1,690 82 2,057 100 Taxable-equivalent adjmt (tax rate of 35%) 90 4 87 5 85 4 83 4 82 4 Taxable-equivalent NII/NIY 1,283 64 1,145 57 1,221 62 1,773 86 2,139 104 Less: step-rate debt interest reversal (19) (1) (28) (1) (96) (5) (347) (17) (85) (4) Taxable-equivalent NII/NIY excl step-rate debt 1,264$ 63 1,117$ 56 1,125$ 57 1,426$ 69 2,054$ 100

Swap interest income (expense) accruals 64$ 3 95$ 5 68$ 3 (26)$ (1) (304)$ (15) (1) Includes amortization and accretion of premiums, discounts and other cost basis adjustments, accretion of SOP 03-3 fair value losses, and the interest expense adjustment from the call of step-rate debt.

2007 Q2 2008 Q22007 Q3 2007 Q4 2008 Q1

The gold line on this slide shows that our net interest income, backing out the impact of debt redemptions and adding in expenses relating to swaps, which we view as part of our funding costs. On this basis, our net interest yield moved from 68 basis points in Q1 to 85 basis points in Q2. The key driver here was the impact of lower short-term borrowing costs.

Moving to guaranty fee income, on slide 9, you can see that G-fees

were $1.6 billion, down approximately eight percent in Q2 compared to Q1, but up 44 percent compared to Q2 2007.

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9

Guaranty Fee Income

Guaranty Fee Income ($M) $1,120 $1,232 $1,621 $1,752 $1,608

(Avg O/S MBS in trillions)

(Avg Gfeein basis points)

Decrease in average effective guaranty fee rate for 2008 Q2 reflects a reduction in amortization of deferred income due to the increase in interest rates and slower prepayment assumptions in the quarter.

Price changes went into effect on March 1, 2008 and June 1, 2008. The impact of price increases was partially offset by a significant decline in acquisitions of higher-risk, higher-priced product, such as Alt-A.

On August 4, 2008, we announced additional price increases, including a 25 basis point increase in our adverse market delivery charge and other risk-based pricing changes effective October 1, 2008.

Accretion of deferred amounts on guaranty contracts where we previously recognized losses at the inception of the contract increased guaranty fee income by $127 million in 2008 Q2, $297 million in 2008 Q1, $276 million in 2007 Q4, $144 million in 2007 Q3, and $91 million in 2007 Q2.

Net guaranty obligation at the end of 2008 Q2 of $6.2 billion will effectively accrete into guaranty fee income over time.

Lower amortization income due to interest rate increase resulted in lower guaranty fee income in 2008 Q2.

$2.44

$2.08$2.16

$2.27$2.37

28.529.5

26.3

21.5

22.8

22.822.622.321.8

21.5

$1.5

$2.0

$2.5

2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q220

25

30

35

Avg Outstanding MBS and Other GuarantiesAvg Effective Guaranty Fee Rate on MBS Book of BusinessAvg Charged Guaranty Fee Rate on MBS Book of Business(contractual guaranty fee rate with upfront cash amortized over four years )

Slide 10 shows positive trends we've seen on our average charged rate

for new business⎯an increase to 28 basis points, up from 25 basis points in Q1. In addition, we saw three percent growth in our average guaranty book.

10

10

Single-Family Pricing and Credit – Flow Business

718

727

737

744

700

710

720

730

740

750

Weighted Average FICO

2007 2008 Q1 2008 Q2 June 2008

72%71%

76%

74%

65%

68%

71%

74%

77%

80%

Weighted Average Original LTV

2007 2008 Q1 2008 Q2 June 2008

Average Charged Guaranty Fee Rate on New Flow Business

Credit Score – All Conventional Products

LTV Ratio – All Conventional Products

25.0

23.2

27.827.0

15.0

20.0

25.0

30.0

2007 2008 Q1 2008 Q2 June 2008

Data in each chart includes Fannie Mae’s “flow” business only.

Average charged fee in June 2008 reflects the reduction in higher risk, higher fee loan products.

Improved credit and pricing metrics on new acquisitions.

Note: Average charged guaranty fee rate includes contractual guaranty fee with upfront cash amortized over four years.

But while our book and average charged fees on new business both

increased, the average life of our loans extended as mortgage rates rose during the quarter. So we amortized less in deferred guaranty fee items during the second quarter. And this more than offset the positive impacts of both book growth and higher charged fees on new business.

Net net, the fundamentals of our G-fee revenue stream remain strong,

as evidenced by a steady increase in the average charged fee on our book if you assume a four-year average life for all periods.

Now let's move to fair value items, which are shown on slide 12. We

recognized a $517 million gain in Q2 compared with a $4.4 billion loss in Q1. Two key points here. First, we implemented hedge accounting in mid-April, which virtually eliminated interest rate risk-driven volatility on hedged items. Second, spreads tightened, which led to a fair value gain of $739 million, compared to a loss of $3.0 billion in Q1. Unfortunately, since June, we’ve seen spreads widen to

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levels exceeding what we saw in the first quarter. So we gave back our Q2 gains and more.

12

2008 Q2 Estimated Attribution of Fair Value Gains, NetFair Value Items

Hedge accounting and trading assets reduced volatility caused by changes in interest rates during the quarter. Spread risk remains in the trading portfolio.

($14)

$739$517

$0

Interest Rates-Hedge

Accounting

Spreads Other Total

$600

$400

$200

($400)

$19

(dollar in millions)$800

($200)

($227)

Interest Rates/Volatility-Other

(dollars in millions) Derivatives 789$ 1,477$ -$ 27$ 2,293$ Trading - (1,704) 739 - (965) Hedging (803) - - - (803) Other - - - (8) (8) Total (14)$ (227)$ 739$ 19$ 517$

For your reference, slide 13 breaks out the impact of a one basis point increase in spreads on the various products in our trading portfolio.

12

13

Spread Sensitivity in Mortgage Securities Trading Portfolio

Changes in spreads on trading securities have an impact on income and capital.

(dollars in millions)gains (losses) pre-tax

Spread Sensitivity

Spread Sensitivity

Product Fair Value (OAS + 1 bp) (1) Fair Value (OAS + 1 bp) (1)

Trading portfolio mortgage securitiesFixed Rate MBS 37,322$ (14)$ 39,325$ (12)$ Agency CMOs 12,264 (6) 12,270 (6) CMBS 10,461 (6) 10,936 (6) ARM MBS 6,709 (2) 7,083 (1) PLS 6,558 (2) 6,981 (2) Municipals bonds 717 (1) 779 (1)

Total 74,031$ (31)$ 77,374$ (28)$

As of June 30, 2008 As of March 31, 2008

(1) Reflects change in fair value from a 1 basis point increase in option-adjusted spreads (OAS).

Now, let’s move to credit. As you can see on slide 14, credit-related expenses increased to $5.3

billion in Q2. The key point here: current period credit losses, which I view as “cash out the door,” are up. However, the single most significant driver of credit-related expenses remained to be the addition to our allowance for losses. This addition pulls forward losses inherent in our book well before they’re recognized in cash.

13

14

Credit-Related Expenses/Credit Loss Performance Metrics

Credit loss ratio (excluding the impact of SOP 03-3 and HomeSaver Advance) increased to 17.5 bps in 2008 Q2 from 12.6 bps in 2008 Q1.

Allowance for loan losses and reserve for guaranty losses are influenced by a variety of factors such as delinquency trends, borrower behavior in rapidly declining markets, and the pace and depth of home price declines, particularly pronounced in certain regions.

We expect our 2008 credit loss ratio to be within a range of 23 to 26 bps. We expect that our credit loss ratio will increase in 2009 relative to 2008.

We expect our credit-related expenses to peak in 2008. We expect that the majority of the credit-related expenses that we will realize from our 2006 and 2007 vintages will be recognized by the end of 2008 through the combination of charge-offs, foreclosed property expense, and increases to our combined loss reserves, although we expect that the total amount of our credit-related expenses will be significant in 2009.

Allowance for loan losses and reserve for guaranty losses grew as a result of the continued decline in home prices, which resulted in higher delinquencies, defaults and average loan loss severity. Credit remains a key

focus of the company.

(dollars in millions) AmountRate

(bps) (1) AmountRate

(bps) (1) AmountRate

(bps) (1) (2) AmountRate

(bps) (1) (2) AmountRate

(bps) (1) (2)

Charge-offs, net of recoveries (3) 945$ 13.2 630$ 9.0 307$ 4.6 197$ 3.0 154$ 2.5 Foreclosed property expense (3) 308 4.3 250 3.6 233 3.5 146 2.3 96 1.5 Credit losses, excluding the impact of SOP 03-3 and HSA 1,253 17.5 880 12.6 540 8.1 343 5.3 250 4.0 SOP 03-3 and HSA fair value losses 494 6.9 728 10.5 559 8.3 670 10.5 66 1.1 Impact of SOP 03-3 and HSA on charge-offs and foreclosed property expense (129) (1.8) (169) (2.4) (110) (1.6) (62) (1.0) (26) (0.4)

Credit losses, including the impact of SOP 03-3 and HSA 1,618 22.6 1,439 20.7 989 14.8 951 14.8 290 4.7 Increase in allowance for loan losses and reserve for guaranty losses 3,731 1,804 1,984 249 228 Credit-related expenses 5,349$ 3,243$ 2,973$ 1,200$ 518$

Allowance for loan losses and reserve for guaranty losses 8,926$ 5,195$ 3,391$ 1,407$ 1,158$ Percent of allowance for loan losses and reserve for guaranty losses to the guaranty book of business 0.31% 0.18% 0.12% 0.05% 0.05% Coverage ratio (4) 2.4 2.1 2.8 1.8 1.9 Single-family serious delinquency rate 1.36% 1.15% 0.98% 0.78% 0.64%

(4) Allowance for loan losses and reserve for guaranty losses divided by annualized net charge-offs (excluding SOP 03-3 and HSA).

(1) Rates are annualized.

(3) Excludes estimated impact of SOP 03-3 and HomeSaver Advance (HSA).

(2) We previously calculated our credit loss ratio based on annualized credit losses as a percentage of our mortgage credit book of business, which includes non-Fannie Mae mortgage-related securities held in our mortgage investment portfolio that we do not guarantee. Because losses related to non-Fannie Mae mortgage-related securities are not reflected in our credit losses, we revised the calculation of our credit loss ratio to reflect credit losses as a percentage of our guaranty book of business.

2008 Q1 2007 Q32007 Q4 2007 Q22008 Q2

Let me get into the specifics. Credit losses were $1.3 billion in Q2, up

42 percent compared to the prior quarter. This increase was driven by higher defaults and more of them coming from states with the sharpest home price declines. As in the first quarter, our Q2 credit losses fall into three buckets, which are broken out on slide 16.

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16

Single-Family Credit Losses for 2008 Q2 By Vintage/Product

Alt-A50%

Core34%

Other 14%

Subprime2%

By Product Type

200521%2006

35%

Pre-20011%

20012% 2002

3%

20036%

20048%

200724%

By Vintage Year

• The 2006 and 2007 books are performing significantly worse than typical given their age, primarily as a result of loans that were originated at peak home prices.

• Losses from Alt-A products increased, making up almost 50% of total credit losses.

• California has surpassed Michigan to represent the largest credit losses in 2008 Q2 due to higher loan balances and representation of Alt-A.

Credit Losses by State

VA4%

All Other21%

NV5%

GA4%

MI 14%

OH 4%

CA 29%

MN4%

FL7%

AZ6%

IL2%

Credit losses increased due to continued home price declines and overall economic weakness.

First, geography. Forty-eight percent of our credit losses were from

four states: California, Arizona, Nevada, and Florida. These states saw the most dramatic run-up in prices, and are now seeing the most rapid declines. Additionally, 18 percent of our Q2 credit losses were from Michigan and Ohio, where borrowers are being hit by weak local economies and job losses.

The second bucket is vintage. Loans originated in 2006 and 2007

accounted for almost 60 percent of Q2’s credit losses. Early period default rates for these vintages are much higher than what we have experienced on earlier vintages, and you can see this clearly on slide 32.

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32Data as of June 30, 2008 is not necessarily indicative of the ultimate performance and are likely to change, perhaps materially, in future periods.

Consistent with industry trends, 2006 and 2007 vintages performing poorly. Defaults for the 2008 vintage through 2008 Q2 have been negligible.

Overall Cumulative Default Rates - Overall Originations from 2000 through 2008 Q2

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

Yr1-Q1

Yr1-Q2

Yr1-Q3

Yr1-Q4

Yr2-Q1

Yr2-Q2

Yr2-Q3

Yr2-Q4

Yr3-Q1

Yr3-Q2

Yr3-Q3

Yr3-Q4

Yr4-Q1

Yr4-Q2

Yr4-Q3

Yr4-Q4

Yr5-Q1

Yr5-Q2

Yr5-Q3

Yr5-Q4

Yr6-Q1

Yr6-Q2

Yr6-Q3

Yr6-Q4

Yr7-Q1

Yr7-Q2

Yr7-Q3

Yr7-Q4

Yr8-Q1

Yr8-Q2

Yr8-Q3

Yr8-Q4

Yr9-Q1

Yr9-Q2

Time Since Origination

Def

ault

Rat

e

2000

2001

2002

2003

2004

2005

2006

2007

2008

2000

2001

2002

2003

20042005

2006

2007

2008

Note: Cumulative default rates include loans that have been liquidated other than through voluntary pay-off or repurchase by lenders and include loan foreclosures, preforeclosure sales, sales to third parties and deeds in lieu of foreclosure.

The third bucket is product. Our Alt-A book represents just under 11

percent of our credit book, but accounted for almost 50 percent of Q2 losses. So, that’s what’s driving current period cash losses.

But again, the single biggest driver of credit-related expenses was the

addition to our loss reserves. In Q2, we increased our reserves by $3.7 billion, bringing our combined loss reserves to $8.9 billion. This equals 31 basis points of our guaranty [book of] business, almost 9.5 times our Q2 charge-offs, and 2.4 times our annualized Q2 charge-offs.

This significant reserve build is shown on slide 15. And you can see

clearly the pull-forward effect of GAAP provisioning.

16

15

Allowance for Loan Losses and Reserve for Guaranty Losses

Substantial increase in combined loss reserves in 2008 Q1 and Q2.

(1) Excludes the impact of SOP 03-3 and HSA.

(Dol

lars

in m

illio

ns)

$121 $154 $197 $307$630

$945

$249 $434$930

$1,158

$8,926

$5,085

$3,073$2,794

$1,087

$5,195

$3,391

$1,407

0.31%

0.18%

0.12%

0.05%0.04%

0.05%

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q20.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

Charge-offs, net of recoveries (1) Provision for credit losses

Combined reserves for credit losses Reserve as a % of the guaranty book of business

As you may recall from prior discussions we’ve had, the reserve is

built by looking at default curves for the book and capturing defaults out 18 to 24 months. Then we apply a severity assumption based on our current quarter’s experience. As you climb up the loss curve and you see severities worsen, this requires more reserve building. And that’s exactly what we’re seeing today.

Now, let’s move on to impairments. The same market dynamics that

drove our credit-related expenses also led to higher impairments. And these are summarized on slide 19.

17

19

Investment Losses, Net

2008 Q2 other-than-temporary impairment of $507 million reflects a reduction in expected cash flows for primarily Alt-A and subprime private-label securities, driven by higher expected defaults and loss severities on the underlying mortgages.

2008 Q2 lower-of-cost-or-market adjustments resulted in losses of $240 million attributable to an increase in interest rates in the quarter.

2007 Q4 other-than-temporary impairment of $736 million was driven by impairment of securities in our liquid investment portfolio. Beginning in 2008 Q1, these securities were re-designated as trading and are marked-to-market through earnings as fair value gains (losses).

Higher impairment losses and higher lower-of-cost-or-market adjustments drove the increase in investment losses in 2008 Q2.

(dollars in millions) Q2 Q1 Q4 (1) Q3 (1) Q2 (1)

Other-than-temporary impairment on AFS securities (507)$ (55)$ (736)$ (75)$ -$ Lower-of-cost-or-market adjustments on held-for-sale loans (240) (71) 12 3 (115) Gains (losses) on Fannie Mae portfolio securitizations, net (67) 42 (376) (65) (11) Gains (losses) on sale of AFS securities, net (20) 33 325 52 55 Other investment losses, net (49) (60) (140) (69) (22)

Investment losses, net (883)$ (111)$ (915)$ (154)$ (93)$

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

2008 2007

In Q2, we recorded a $507 million charge, primarily relating to impairments on Alt-A and subprime securities. As a reminder, since the beginning of 2007, we’ve recorded $3.4 billion of write-downs on these securities⎯$2.7 billion in the trading loss line item and $706 million in impairments.

Slides 40 through 42 are also provided for your reference, so you can

see how these bonds are modeled to perform under a range of default and severity scenarios.

18

40

Investments in Alt-A Mortgage-Related Securities (Option ARM)

Trading Securities AFS Securities Average Price Fair Value

Monoline Financial

Guaranteed Amount 20d/40s NPV 20d/50s NPV

30d/40s NPV

50d/50s NPV

Investments in Alt-A securities:Option ARM Alt-A securities:

2004 and prior $ - $ 704 $ 82.09 $ 578 22 % 9 % 16 % $ - $ - $ - $ - $ 31 2005-1 - 577 78.91 455 27 16 19 - - - - 14 2005-2 - 1,223 80.77 988 58 51 33 337 - - - 9

2006-1 (1) - 135 66.57 90 21 19 11 - - - - 30 2006-1 (2) - 419 75.43 316 41 38 40 - - - - 3 2006-1 (3) - 389 75.14 292 45 42 45 - - - - - 2006-1 (4) - 434 75.61 328 88 88 49 335 - - - -

2006-1 subtotal - 1,377 74.54 1,026 55 53 11 335 - - - 33 2006-2 (1) - - - - - - - - - - - - 2006-2 (2) - 215 76.70 165 37 35 37 - - - - - 2006-2 (3) - 100 76.43 77 42 40 42 - - - - - 2006-2 (4) - 224 82.22 184 69 68 47 92 - - - -

2006-2 subtotal - 539 78.95 426 51 50 37 92 - - - - 2007-1 (1) 209 - 76.06 159 25 24 24 - - - - 10 2007-1 (2) 371 - 75.54 280 46 45 45 - - - - - 2007-1 (3) 264 - 72.75 192 48 47 48 - - - - - 2007-1 (4) 529 - 71.02 376 100 100 100 530 - - - -

2007-1 subtotal 1,373 - 73.34 1,007 64 64 24 530 - - - 10 2007-2 (1) 296 - 77.40 229 33 32 25 - - - - 10 2007-2 (2) 216 - 77.60 167 47 47 47 - - - - - 2007-2 (3) 311 - 78.04 243 48 47 48 - - - - - 2007-2 (4) 422 - 76.74 324 100 100 100 422 - - - -

2007-2 subtotal 1,245 - 77.37 963 62 62 25 422 - - - 10 2008-1 (1) - - - - - - - - - - - - 2008-1 (2) - - - - - - - - - - - - 2008-1 (3) - - - - - - - - - - - - 2008-1 (4) - - - - - - - - - - - -

2008-1 subtotal - - - - - - - - - Total $ 2,618 $ 4,420 $ 77.34 $ 5,443 53 % 49 % 11 % $ 1,716 $ - $ - $ - $ 107

Trading securities with hypothetical NPV losses:Fair Value $ - $ - $ - $ 307 Unpaid Principal Balance - - - 399 Difference $ - $ - $ - $ (92)

AFS securities with hypothetical NPV losses:Fair Value $ - $ - $ 46 $ 1,735 Unpaid Principal Balance - - 66 2,213 Difference $ - $ - $ (20) $ (478)

- - -

Average Current Original

Minimum Current

(Dollars in millions)

Unpaid Principal Credit Enhancement Statistics Hypothetical Scenarios

All data as of June 30, 2008

41

Investments in Alt-A Mortgage-Related Securities (Other)

Trading Securities AFS Securities Average Price Fair Value

Monoline Financial

Guaranteed Amount

20d/40s NPV

20d/50s NPV

30d/40s NPV

30d/50s NPV

Investments in Alt-A securities:Other Alt-A securities:

2004 and prior $ - $ 9,195 $ 87.97 $ 8,089 12 % 6 % 4 % $ 29 $ 22 $ 75 $ 170 $ 429 2005-1 - 1,744 88.11 1,536 14 9 6 - 1 6 20 49 2005-2 - 4,172 84.29 3,517 14 11 4 - 17 41 76 146

2006-1 (1) 34 1,110 91.85 1,051 5 4 5 - 28 49 71 103 2006-1 (2) - 1,103 86.97 959 10 8 9 - 5 16 30 51 2006-1 (3) 51 1,324 85.93 1,182 15 12 12 - - - 2 18 2006-1 (4) - 1,351 76.54 1,034 22 17 19 - - - - 3

2006-1 subtotal 85 4,888 84.97 4,226 13 11 5 - 33 65 103 175 2006-2 (1) - - - - - - - - - - - - 2006-2 (2) - 518 77.89 404 11 10 6 - - - 3 11 2006-2 (3) - 284 74.16 210 17 16 17 - - - - - 2006-2 (4) - 343 77.67 266 18 16 18 - - - - -

2006-2 subtotal - 1,145 76.90 880 15 13 6 - - - 3 11 2007-1 (1) 76 - 77.12 59 7 5 7 - - - - 2 2007-1 (2) 189 - 76.55 145 8 7 7 - 1 3 4 6 2007-1 (3) 109 - 79.08 86 12 11 8 - - - - - 2007-1 (4) 236 - 77.84 183 17 16 16 - - - - -

2007-1 subtotal 610 - 77.57 473 12 11 7 - 1 3 4 8 2007-2 (1) - - - - - - - - - - - - 2007-2 (2) - - - - - - - - - - - - 2007-2 (3) - - - - - - - - - - - - 2007-2 (4) 457 - 83.26 381 100 100 100 457 - - - -

2007-2 subtotal 457 - 83.26 381 100 100 100 457 - - - - 2008-1 (1) - - - - - - - - - - - - 2008-1 (2) - - - - - - - - - - - - 2008-1 (3) - - - - - - - - - - - - 2008-1 (4) - 173 93.02 161 20 20 20 - - - - -

2008-1 subtotal - 173 93.02 161 20 20 20 - - - - - Total $ 1,152 $ 21,317 $ 85.73 $ 19,263 15 % 11 % 4 % $ 486 $ 74 $ 190 $ 376 $ 818

Trading securities with hypothetical NPV losses:Fair Value $ 98 $ 98 $ 157 $ 349 Unpaid Principal Balance 113 113 189 435 Difference $ (15) $ (15) $ (32) $ (86)

AFS securities with hypothetical NPV losses:Fair Value $ 5,254 $ 8,150 $ 11,496 $ 13,869 Unpaid Principal Balance 5,832 9,135 13,016 15,762 Difference $ (578) $ (985) $ (1,520) $ (1,893)

Unpaid Principal Credit Enhancement Statistics Hypothetical Scenarios

Average Current Original

Minimum Current

(Dollars in millions)

All data as of June 30, 2008

19

42

Investments in Subprime Mortgage-Related Securities

Trading Securities AFS Securities Average Price Fair Value

Monoline Financial

Guaranteed Amount

50d/50s NPV

50d/60s NPV

60d/50s NPV

60d/60s NPV

Investments in subprime securities:2004 and prior $ - $ 3,109 86.75 $ 2,697 74 % 54 % 13 % $ 1,398 $ 2 $ 4 $ 6 $ 23 2005-1 - 70 87.55 62 75 31 69 - - - - - 2005-2 - 582 91.90 535 62 39 37 69 - - - -

2006-1 (1) - 1,428 81.35 1,162 26 19 24 - - - - 3 2006-1 (2) - 1,770 82.67 1,463 29 20 28 - - - - - 2006-1 (3) - 1,794 85.33 1,531 36 22 33 - - - - - 2006-1 (4) - 1,692 82.81 1,401 49 32 40 52 - - - -

2006-1 subtotal - 6,684 83.14 5,557 35 23 24 52 - - - 3 2006-2 (1) - 2,810 79.69 2,240 22 18 19 - - - 2 105 2006-2 (2) - 3,060 80.27 2,456 25 19 24 - - - - 42 2006-2 (3) - 3,273 79.20 2,592 29 23 27 - - - - - 2006-2 (4) - 3,167 81.25 2,573 35 28 31 - - - - -

2006-2 subtotal - 12,310 80.10 9,861 28 22 19 - - - 2 147 2007-1 (1) 613 - 48.17 295 17 16 9 - 66 162 208 282 2007-1 (2) 741 - 81.23 602 27 24 25 - - - - 2 2007-1 (3) 629 - 81.06 510 28 24 28 - - - - - 2007-1 (4) 840 - 78.71 661 50 45 30 228 - - - -

2007-1 subtotal 2,823 - 73.27 2,068 32 29 9 228 66 162 208 284 2007-2 (1) 485 - 64.67 314 25 23 14 - 8 37 56 122 2007-2 (2) 399 394 84.72 671 30 28 28 - - - - 5 2007-2 (3) - 516 86.76 448 35 33 34 - - - - 2 2007-2 (4) 904 - 85.95 777 62 60 42 317 - - - -

2007-2 subtotal 1,788 910 81.92 2,210 41 39 14 317 8 37 56 129 2008-1 (1) - - - - - - - - - - - - 2008-1 (2) - - - - - - - - - - - - 2008-1 (3) - - - - - - - - - - - - 2008-1 (4) - - - - - - - - - - - -

2008-1 subtotal - - - - - - - - - Total subprime securities $ 4,611 $ 23,665 81.30 $ 22,990 37 % 28 % 9 % $ 2,064 $ 76 $ 203 $ 272 $ 586

Trading securities with hypothetical NPV losses:Fair Value $ 33 $ 66 $ 207 $ 929 Unpaid Principal Balance 223 371 558 1,493 Difference $ (190) $ (305) $ (351) $ (564)

AFS securities with hypothetical NPV losses:Fair Value $ 36 $ 298 $ 834 $ 4,679 Unpaid Principal Balance 39 335 1,002 5,823 Difference $ (3) $ (37) $ (168) $ (1,144)

Unpaid Principal Credit Enhancement Statistics Hypothetical Scenarios

- - -

Average Current Original

Minimum Current

(Dollars in millions)

All data as of June 30, 2008

Now, let me address our outlook. First, we expect to generate

revenues in the second half of 2008 largely in line with the revenues generated in the first half of the year.

Second, we provided guidance of 23 to 26 basis points for our full-

year credit loss ratio. And this compares to an annualized 15 basis points for the first half of the year, so you can see that we expect credit losses will continue to accelerate throughout 2008. This will contribute to higher credit-related expenses. But importantly, we expect 2008 to be our peak year for credit-related expenses, because of a one-two punch⎯elevated credit losses and substantial reserve build.

We expect this will change in 2009, as the need for additional reserves

should slow or stop. This will take away the most significant driver of credit-related expenses that we are experiencing in 2008. The result is that we expect credit-related expenses to remain elevated in 2009, but to come in lower than 2008.

20

The last item on outlook is administrative expenses. We expect administrative expenses to trend around $2 billion for the year, with the efficiency measures that Dan described having an impact in 2009.

Now, let’s move on to capital. At June 30th, our core capital was $47

billion⎯$9.4 billion over the 15 percent surplus requirement, and $14.3 billion over our statutory minimum.

You can see on slide 22, the most significant capital item in the quarter was $7.2 billion of capital raised in May. This raise, and the lowering of our surplus requirement from 20 to 15 percent, added $8.8 billion to our capital surplus. These adds were partially offset by our net loss for the quarter, dividend payments, and capital investments in our business.

22

2008 Q2 Capital Surplus - Sources and Uses of Excess Capital

As of June 30, 2008, Fannie Mae had $47.0 billion of core capital and a $9.4 billion capital surplus over the OFHEO-directed minimum capital requirement.

2008 Q2 capital surplus is a Fannie Mae estimate that has not been certified by OFHEO.

As of March 31, 2008, our risk-based capital (RBC) was $24.6 billion in excess of the estimated statutory requirement of $23.1 billion (most recent published capital classification). Under new rules issued by OFHEO in June 2008, to be effective beginning with our 2008 Q3 capital classification, our RBC as of March 31, 2008 would have been $17.3 billion in excess of an estimated statutory requirement of $30.4 billion.

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

1 2 3 4 5 6 7 8 9 10

Q1 2008 Net Income Common

Stock Dividends

Mortgage Portfolio Liquid and

Other Assets

2008 Q1Capital

Over 20%Requirement

2008 Q2Capital

Over 15%Requirement

(Estimate)

($ in

bill

ions

)

$5.1

$2.3

($0.7)$9.4

Preferred Stock

Dividends

$1.6

Change in Surplus

Requirement to 15%

Capital Issuance

(Net of fees)

$7.2

Net MBS Outstanding

$0.3

$0.3$0.6

$0.3

($0.3)

($0.3) ($0.3) ($0.6)

Return of CapitalNet Investment

($0.7)

($2.3)

2008 Q2 Net Loss

We currently expect that we will remain above the surplus capital requirement for the remainder of 2008. But due to the volatile market

21

conditions that Dan described, we now have less visibility into our capital position in 2009.

The actions we announced today are intended to help us conserve and

enhance our capital position as we work through the challenges of this market, while continuing to play a key role in supporting its recovery.

With that, I’ll turn back to Dan.

D. Mudd Thanks. I think we’re going to go to questions now.

Moderator Thank you. At this time, I would like to remind everyone, in order to ask a

question, please press star one on your telephone keypad. If you would like to withdraw your question, press the pound key.

And your first question comes from the line of David Hochstim with

the Buckingham Research Group.

D. Hochstim Hi. I wonder if you could, I guess, if Peter’s there, if he could talk about the changes in market conditions in July, and how that’s affecting funding costs and spreads, and how much you might grow, given your need to preserve capital.

And then, my follow-up now would be, I wonder if you could talk

about the underwriting of Alt-A loans over the last three years that led to the credit problems that you’re experiencing today.

Are the problems related to fraud, and you’re going to have massive

recoveries that, I guess, wouldn’t be factored into your reserve build? Or were the underwriting models really defective?

22

D. Mudd Thanks, David. I’ll have Peter start on capital market conditions, and then have Tom Lund talk about Alt-A book composition, actions, and so forth. Peter.

P. Niculescu Good morning, David. Thanks for that question. To be quite candid, the debt markets in July were turbulent, and the

times were challenging, as I think people recognize. And we’ve seen a lot of different ebbs and flows in the agency debt market over the last several weeks.

Mortgages have reacted by seeing some fairly sharp widening in yield

spreads through the course of July and into August, to levels that I’ve experienced are among the widest historically we’ve seen, really, for 20 years or more. So, really, an extraordinary change in the makeup of supply and demand in the marketplace.

This means that it makes⎯it makes our actions here highly dependent

on market conditions, highly opportunistic. And we certainly have access to adequate short-term and long-term funding. But there are challenges here that are not typical for us.

I do think that current acquisitions are likely to be extraordinarily

profitable going forward for Fannie Mae. But we have to recognize that funding access in the agency debt market is key. And we will look at this on a day-by-day basis, as we fund, so we can acquire.

Given even mild improvements in agency debt, we could see modest

growth in balances. I’m not making any particular projections here. I will say that balance growth will have to be prudent, and we’re going to be balancing a lot of different variables, including funding requirements, including our capital, as well, of course, as the economics of the transaction, and finally, the liquidity mission that we have to the markets.

23

I think we have a significant central role here. We’ll continue to play that central role in providing liquidity for mortgages. And we’re conscious that’s a very important element of what we do.

D. Hochstim Should we expect that the portfolio will⎯could grow slightly, given these conditions? Or you just replace runoff? Or you won’t even replace runoff?

P. Niculescu You know, I think that⎯our actions are going to be opportunistic. Our actions are going to be opportunistic. I think that modest growth is possible. I think that we’re going to make those decisions on a day-to-day basis.

D. Mudd Tom.

T. Lund OK, David. On the question of Alt-A. Clearly, Alt-A is experiencing problems in the portfolio. To give you some context, a large part of the Alt-A book is in the states that have experienced the largest home price declines throughout the country.

When you combine that with⎯and I would refer you to page 37 in the

investor pack⎯when you combine that with a significant portion of this business was below 80, therefore, not having primary mortgage insurance, that increases some of the severities on that product, as well.

We purchased a significant amount of back-end MI [mortgage

insurance] and, after the deductibles are met, we’ll begin to see some of that kick in, to offset some of that performance.

I would also point you to the charts on page 37 that show the

performance of our book relative to other private-label securities in the market. In terms of underwriting standards, you know, we did it better than the market but it’s been dramatically impacted by the areas that we’ve done it in.

24

T. Lund Finally what I would say is, as these loans go bad, we’re reviewing a

significant amount of these for any misrepresentation that might have occurred on this product. And we anticipate that there will be some repurchases as a result of that.

D. Hochstim Right, but if you look at your slide on page 30, you see there’s a huge

difference in the risk profile of the Alt-A book with, you know, less than 80 percent I think as principal residences. So I guess were those permitted under DU? Or did it turn out that lenders were very clever and figured out ways to deliver loans to you that really didn’t meet your risk tolerances?

T. Lund Well just to be clear. A significant portion of Alt-A doesn’t go

through DU. And then secondly one of the components that would define it as Alt-A is investor properties. For example, that have different characteristics and that’s why we put in the Alt-A bucket. So that’s a part of the reason why you see a differential in terms of, you know, first homes, versus second homes, versus investors.

D. Hochstim Right and certain kinds of investment properties you’re comfortable

with and certain you aren’t. I guess I’m still wondering if you expect to see substantial recoveries or losses are still going to be, you know, 40 percent from Alt-A that’s really your fault?

T. Lund Well I think, as we mentioned a little bit earlier in this call. When

these loans go into default, we are looking at every loan to look for things like misrepresentation. Those loans for example that would have represented themselves as a primary residence that turned out to be an investor would be a misrepresentation. Things like that, we see more prevalence in this kind of book.

D. Hochstim OK finally just one last quick thing. Is there a reason that the delivery

fee that can’t go up by more than 25 basis points?

25

T. Lund What I would tell you is, when we, let me start with a couple of things. One, to date, David, we have put, we have put more price increases into the market this year alone.

As we do that, you know, we look at a lot of things. We made a bunch

of underwriting changes, in the process, and we also look at the competitive environment in which we operate against.

To date, we continue to serve about 45 to 50 percent of the market.

And we have begun to see some of that market that we previously served move over to the FHA.

So we evaluate all of those components, we evaluate the risk spectrum

and we evaluate the margins. Having said that, where we are today given all the underwriting changes that we have made, and through DU 7.0 and other tail cuts along with these price increases. We believe that we have very strong margins to compensate for what is a volatile market.

D. Mudd OK, David, thanks, we’ll have to get some other folks out of the

queues but thank you. D. Hochstim Thanks. Moderator Your next question is from the line of Howard Shapiro with Fox-Pitt. H. Shapiro Just a couple of questions on capital. You’ve said you have less

visibility into your capital status in 2009. And you’ve run some scenarios where you are capital adequate and where you’re capital deficient.

I’m just wondering if you can help us more narrowly define the

scenarios in which you would be capital deficient. And how capital deficient if you would put it in terms of maybe unemployment or further declines in home values or frequency or severity. Just so we can get a sense of how potentially capital deficient you might be.

26

And then on a related note, if you were to need to raise capital in one of those situations, are you contemplating using the treasury authority to buy equity or would you be accessing the capital markets and would you be able to raise preferred or would it all have to be in the form of common?

D. Mudd Yes, OK, Howard, let me touch upon the various parts of your

question. Ultimately, whether the answer is helpful or not, I’ll leave it to you to determine.

First we’re affirming that our capital is in good position for ’08. As I

indicated in my remarks, we’re well above regulatory capital. The forward projection, you know, as you know there are projections from us and from Case-Schiller and from Freddie and from Goldman and from a whole lot of other folks, that don’t have a whole lot of correlation, so there are many, many, many different scenarios out there. And they involve projecting variables which have become significantly less clear as we’ve worked our way through the summer. What are losses going to be, where is credit going to go, where are home prices going to bottom, how long is that going to last, what’s the overall impact of the macro economy, what are funding, liquidity in the capital markets?

All of these scenarios that everybody has are highly, highly sensitive to the variables and the assumptions that you make. And none, in my view are conclusory enough to have full visibility into where they wind up in ’09. As ’09 approaches that will be clearer and we’ll do that.

What we’ve chosen to do is instead of giving a set of variables and

assuming that the results are in that grid of variables. As you know both from the [10-]Q and from the investor pack we have provided an enormous amount of data on the credit book and in particular on the at-risk segments which has been augmented every time we’ve done it. That will enable somebody to take a look and apply their own favorite scenario to that situation.

27

So I would emphasize that we remain with good visibility and a

comfortable position through ’08. As ’09 approaches, we’ll continue to tack that down.

On the second question, none of the plans that we’ve advanced

contemplate access to any Treasury line. We’ve not asked them they have not offered, and the remarks I made before in terms of a helpful backstop in terms of market confidence, stand. But no update whatsoever to that. So thank you. Can we go to the next question?

Moderator Yes, your next question is from the line of Bob Napoli with Piper

Jaffray. B. Napoli Thank you and good morning. Question on the change in the charge-

off outlook. A pretty significant increase in charge-off guidance and you really got to ramp up the credit losses to get to that average for the full year. And in doing so what were the biggest drivers in that big of a ramp up?

And I don’t know, Dan, to the extent that you can put some type, you

know, of your best Fannie Mae’s, kind of middle of the range, where you think credit losses are going to peak and when?

D. Mudd Yes, let me have Steve start because, Bob, your question has got two

aspects to it, one is sort of a mechanical aspect and one is an outlook aspect. So let me have him take you through the first part and then I’ll follow up. Steve.

S. Swad Thanks, Bob. A couple of points, Bob the HPI [home price index]

estimates that we provided are national estimates, and they haven’t changed from Q1 to Q2, although we have moved to the higher end. And that movement to the higher end caused us an increase in our charge-off, our credit loss estimates. But probably more important than that is in those national numbers, our estimates of regions and, between Q1 and Q2, are estimates of the housing prices. And some of those regions went up and some of the regions, they went down.

28

The regions that went down more than we originally expected were

California, Nevada, Arizona, and Florida. And that’s what drove the increase in our credit loss estimates Q1 to Q2.

As I said in my comments, we have about a 15 basis point annualized

credit loss ratio for the first half. We are guiding 23 to 26. And so we’re expecting credit loss ratios in the 30s in the second half. And we also said that we expect the credit losses to increase ’09 versus ’08.

B. Napoli Yes. No, OK. Now I just⎯we know⎯on that⎯and maybe Dan on

the outlook⎯and what percentage of that is coming from Alt-A? D. Mudd Where we are right now is we see the home price decline on average

through the cycle being⎯we gave you a range of 15 to 19 percent⎯we’re at the high end of that range. We took in about four percent of that in 2007. We took in about nine percent of that we anticipate in 2008. That puts us at 13 with some direction to go.

That said⎯as we said earlier in the call⎯something on the order of 50

percent of the credit losses that we’re seeing in the book come out of the Alt-A book and that continues to be the first area that’s experiencing the losses. We have not given a disclosure on where we expect the losses to be on a piece-by-piece of the book, but I think it’s sensible to look at where we’ve seen them coming so far and what we see as the highest risk portions of the book; which, we’ve also given that disclosure on as the main places I would look at, Bob.

B. Napoli And the peak, Dan, I mean⎯could it be 60 to 70 basis points next

year? And do you expect to peak in credit losses in ’09? That’s my last questions. Thanks.

S. Swad This is Steve. We’re not providing ’09 specific guidance. As we close

out ’08 we’ll provide some sort of update. B. Napoli Thank you.

29

E. Schuppenhauer This is Eric Schuppenhauer, the CFO of Single-Family. I would only build upon that we have stated in our release today that 2008 will be our peak year for credit expense. Why is that? Well for credit expense in total. What we see is the 2006 to 2007 vintages as being our most problematic vintages. The book we’re putting on now in 2008 has much better credit performances as outlined for you on page 10 of the investor pack. And we would expect that, given that we provide in our allowance for loan losses for about 18 to 24 months worth of emerging credit losses or charge-offs, that this would be our peak year for provisioning for 2006 and 2007 vintages.

And so that’s kind of what we see in the outlook and that front-loading that Steve referred to in his remark of credit expenses puts us at a peak year this year for credit expenses. However, we do anticipate 2009 credit expenses will be significant.

B. Napoli Thank you. Moderator The next question is from the line of Paul Miller with FBR Capital

Markets. P. Miller Yes, thank you very much. Guys, I want to commend you guys for the

disclosure. This was great disclosure today and I really do appreciate it⎯and we all do.

The question I have⎯it’s really to Peter⎯is you know we already

know that Freddie Mac has pretty much said that they’re not going to grow their portfolio and they’re having some capital issues.

And you know you’re making a comment today that we’re going to

make very prudent purchases in the portfolio but it’s really going to depend on what’s available and how you can issue debt.

You know the issue is you guys are the two biggest net buyers of

mortgages right now. I mean without you guys a lot of liquidity in the

30

market would be dried up and we’d be in worse shape than we are today.

But now that you guys are starting to step back, what do you think is

going happen to the market? Is interest rates going to go up to the six and a half or seven percent level? And does that further give a negative feedback loop to the whole mortgage market? Because those guys are on the margin are unable to re-fi out?

Can you just address that? Because that’s one of the big things that I

know a lot of people are very concerned about. P. Niculescu Well thank you for the question. I appreciate the concern and I think

we absolutely share it. I think that this company has and should have a central role in providing mortgage finance to homeowners in the United States. That’s what we do.

I think you’ve already seen what you’re talking about happen to a

degree in the marketplace. In July, you saw a very significant widening in mortgage yield spreads. An increase in mortgage rates relative to other interest rates in the marketplace.

So you’ve seen it happen. I think actually coming into this meeting

this morning we saw a lot of tightening in mortgage spreads but you’ve already seen the big effect already happen. The markets are efficient and they move relatively rapidly.

So going forward you’re dealing with an efficient market. You’re

dealing with a lot of flows. There are a number of other investors that had, I think, removed themselves from mortgages over the last two months and there may be some others that are coming in.

I will note that the share of adjustable-rate mortgages being originated

still remains at a historical low level. So the fixed rate GSE market remains very, very important. And I think it’s going to remain very important in the time to come.

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There are pockets of illiquidity out there. There are specific areas within the mortgage markets that are less well served compared with the generic TBA market. Those are places where we are trying to concentrate.

We’ve certainly been very, very helpful I believe in the jumbo-

conforming market, which probably wouldn’t be doing well without our sponsorship. In the multifamily areas and similar other areas continue to see less good sponsorship.

We’re certainly going to focus our efforts on the areas that are both

most delinquent and therefore have some of the highest returns for shareholders and really need us the most.

But going forward, this is a big market. I acknowledge that we are

pretty much probably not going to play as vibrant a role collectively as we might have in years gone past. And a lot of that is going to depend on what happens to the agency debt market and flows in the agency debt market.

You know we’re going to be balancing⎯as I said⎯we’re going to be

balancing funding, agency debt, capital, economics for shareholders and, of course, our liquidity mission to the market.

P. Miller And then, Peter, just as a quick follow-up though, you know it’s only

been about one month since you guys have been out of the market. Do you see⎯I’m not trying to⎯do you see mortgage rates stabilizing in the I guess the right now six and a half percent with the point basically?

And if it goes to seven percent could it cause more credit issues? Or

do you think that the rate right now is probably going to stick around six and a half percent, given the liquidity in the supply and demand in the market?

P. Niculescu Yes, Paul, it’s really tough to predict market rates in an efficient and

very liquid, very large market. Very, very tough thing to do. I’m not

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an economist, so I’m not going to make any sort of predictions like that, I’m going to stay away from that.

Your larger point that high rates do not help credit is manifestly true.

The more free financing opportunities people have the easier for them, but that’s a much broader macroeconomic question involving the long-term Treasury rates, inflation, and other things of that type, so I’ll probably just have to leave that one there.

P. Miller Right, thank you very much for trying to answer it, Peter, I appreciate

it; thank you guys. Moderator Your next question is from the line of Ken Bruce with Merrill Lynch. K. Bruce Morning. You know Dick Syron had indicated recently that he

believes that the role of private capital in the GSEs needs to be addressed more specifically in terms of some type of either guaranteed return or, you know, kind of where shareholders stand with these two enterprises going forward. Do you agree with that position, and if you do, how do you see that being addressed going forward?

D. Mudd Well, I mean I think⎯thanks for the question, Ken. You know I think

that the way the whole model works is that we have an attractive long-term investment proposition that causes investment capital to come into the U.S. housing market and earn a competitive return. I think that everybody I talk to⎯you know Jim Lockhart is a business man. He understands that. Hank Paulson ran an investment bank, he understands that, and its very important that there be an attractive shareholder proposition so that investment comes into the company; so that the company’s capital is built; so that we continue to attract that global capital that we can invest and defray the cost of U.S. housing and keep all these markets liquid.

So I think that’s understood and if you read carefully around the

commentary of the importance of having these companies play a role in the market; the importance of these companies continuing in their present form, I think all of those comments are supportive of the

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notion of what has really worked well over the fullness of time here, which is, private capital being employed for a public purpose. Right now we’re going through the 99th year of a 100-year storm and you know we’re having the discussions that we’re having. We’re going to get through it. We’re going to manage our way through it. That’s what we’re talking about here today. And we’re going to be able to manage through it while we still continue to make that mission and business model work.

So you know there is some hysteria out there on the fringes I think, but

I think the responsible commentators and the folks who know the business and the folks who are in the market understand how important it is that we get this right and keep it going. And that’s the direction this is moving in.

K. Bruce I mean you’re not suggesting that Mr. Syron’s comments are part of

the hysterical side of that I assume, so… D. Mudd I think Dick should speak for himself, and what I said is what I said,

and you know Freddie’s a good, good company and a tough competitor for us every day. And you know I don’t have any insight other than from the competitive battlefront there, but I think in all the conversations that I’ve had with him or with Jim Lockhart or with anybody else, the question is, what do you to make sure that this market functions and that the way that we have built the market continues to help get the economy, as a broad matter, in the capital markets, as a smaller matter, and the housing market back to the right place.

K. Bruce OK. And as it relates to some of the put backs that were mentioned

earlier that should relieve some of the credit costs some point in the future, have they been factored into your outlook? Has that, is there an expectation for that currently in your outlook and specifically included in that would be the MI [mortgage insurance] deductibles that Tom had mentioned earlier. And if that is the case what is your view as to

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when those would begin to occur, just from a timing perspective. Thank you.

D. Mudd Yes, let me start. Yes, they’ve been conservatively factored in. Two:

Mike Williams, who’s here, is one of our EVPs and Mike, who has run a number of the big process management complicated processes around the company has picked up kind of global responsibility for making sure that the back-end of all of our credit efforts are resourced, staffed, focused on, measured, and integrated. And he can take you through how we’ve built those numbers up. Mike.

M. Williams Thanks, Dan and thanks, Ken, for the question. Once again, the

purpose here is what we want to do is make sure we’re reviewing every loan where Fannie Mae has incurred a loss or could incur a loss due to fraud or improper lending practices.

This actually serves two purposes for us. One, it ensures our lending

practices and guidelines are being adhered to in the marketplace and allows us to recover losses we should not have incurred. Clearly, some of those have been factored into our plan but as we mentioned today, we are ramping up our efforts in this area. We are increasing the number of cases that we are planned to review by year-end; expanding our anti-fraud efforts and also, looking at QC of certain products that Tom mentioned, particularly, Alt-A for the purposes of making sure that we are recovering all losses that we should recover. And with that let me turn it over to Tom to talk about MI [mortgage insurance].

T. Lund On the MI [mortgage insurance] front, the expectation would be that

we would begin to receive some of those proceeds from those back-end enhancements policies that I talked about beginning in ’09.

K. Bruce Thank you very much. Moderator Your next question is from the line of Mark DeVries with Lehman

Brothers.

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M. DeVries A two-part question that’s actually related to the previous one, could you discuss the extent to which and you know, if at all, you have factored in counterparty risk with the financial guarantors and the MIs [mortgage insurance] in your reserving and impairments that you’ve taken?

D. Mudd Yes, let me start and then I’ll ask Enrico Dallavecchia, our Chief Risk

Officer, to talk about how we think about counterparties. We’ve⎯as a broad matter, we’ve moved with the installation of the Chief Risk Officer function, we have created the systems and the ability to look at our counterparty exposure to all of our counterparties on a divisible basis or on an aggregate basis.

We look at that. We measure that. We understand where the risk is

and as you’ve seen some of the larger counterparty changes along the way, with respect to some of the originators or some of the servicers that have changed form or as, for example, in the case of IndyMac, we’ve been able to manage through those by using that system; getting ahead of the curve, and having a very high degree of recovery. So with that let me turn it over to Enrico. Enrico, thanks.

E. Dallavecchia I’ll start with just some general comments and then one of my

colleagues in the CFOs world will recap on the specifics. We analyze all the counterparties and we do not necessarily rely, in our analysis, on external ratings in any industry. In particular, we have obtained a very detailed copy of their exposure, not only to Fannie Mae but to the industry as a whole, and we have run that through a number of stress scenarios. And we also have been focusing very heavily on the financial guarantors and I’ll leave it to one of my colleagues to explain how we factor the rating with regard to the financial guarantors in particular, which I thought was your question.

S. Blackley Hi, this is Scott Blackley, I’m the CFO for our Capital Markets

business. With respect to the financial guarantors, in our subprime securities and Alt-A securities we’ve got about [$4.5] billion of those

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securities that have some additional credit enhancement from the financial guarantors.

The way we do our impairment analysis and execute our accounting

policies, we first look at whether or not those securities have a break loss without any of the benefit of those guarantors. And, if we do find securities where there is a break loss expected, so we may be taking credit losses, in the future. In that situation, we look at whether or not the financial guarantor is one of the stronger guarantors, and at this point, we are only relying on the strongest of the guarantors in determining our impairments.

In the current period, we had about $35 million of our total

impairments that were associated with a security where we did not place reliance on the financial guarantor.

E. Schuppenhauer And as it relates to the mortgage insurance counterparties, let me

just add to that, its Eric Schuppenhauer again. The allowance for loan losses contemplates the amount of primary mortgage insurance we would expect on the charge-offs that are contemplated in the allowance for loan losses. It does not contemplate any amounts due on pool insurance policies.

Furthermore, as we’ve stated in the 10-Q that we filed today, we continue to see the mortgage insurance counterparties have claim paying ability and we’ve seen no problem in that claim paying ability with respect to current claims and how claims are being processed currently. And we don’t anticipate and have not taken a haircut in the allowance for loan losses for MI [mortgage insurance] counterparties.

D. Mudd OK, thanks. Let’s go to the next one. Moderator Your next question is from the line of Gary Gordon with Portales

Partners.

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G. Gordon Hi, thanks. Two questions, hopefully, one a quick one. It looks like your 17 to 19 percent home price decline equates to about a 30 percent decline in the reported Case-Schiller number, is that right?

D. Mudd Gary, it’s not a bad algorithm. In fact, it’s similar to the one that I use.

I think if you⎯the way that you map from Case-Schiller to ours is usually about a 10-ish point difference. That’s not a very scientific answer. Mark Winer who does the modeling in this area can give you a few more thoughts in terms of Case-Schiller. Mark.

M. Winer I think we disclosed in the investor package on page 25, the

comparisons that you can do. As Dan said, it’s about a 10 percent difference when you add in the way that Case-Schiller aggregates and when you factor in the foreclosed properties that they disclose in their indexes.

G. Gordon OK, thanks. The other is, I guess, sort of a counterparty risk in your

loss mitigation efforts. Obviously, the people you’re going back to collect in most cases are your clients; your customers delivering loans. How does that limit your ability to collect and obviously, there’ve been a number of bankruptcies of lenders. How does that limit your ability to collect?

D. Mudd Yes, I think⎯let me start and then let Tom Lund pick up on the

customer side of it. I mean I kind of go back to the old adage that your customers are the people that are paying you, so we enforce our rights and our reps and warrants, in the process and we take very seriously and we review very hard any cases where you know there have been exceptions or differences there. You’re right that these are customers and as for those customers that are paying us that there’s a disagreement on we have QC efforts that go through and work this out on a full-time basis.

So that said, in the situations that have been more publicized recently,

I think it would go back, Gary, to my prior comment, which is we monitor these in advance. We see where there are signs of stress. The big concern there for us is that we’re able to get in front and ensure

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that there’s uninterrupted servicing because by-and-large you know the underlying quality of the loans is what it is, but it’s the servicing that you don’t want to have interrupted. And we have been able to very efficiently, very quickly, and somewhat painlessly move those servicing books into hands where the servicing will continue uninterrupted. With that Tom can give you a little flavor of the discussions.

T. Lund Sure. Let me just reiterate what Dan said. I mean this is a practice

that we have had in place forever. This is the way we operate with our customers. Our customers understand this and as a team we’ve done a very good job, in a very tough environment managing counterparties. And I think part of the reason is we’ve got people on the ground; we’re inside these people’s shops. We have a great understanding of what they do.

In terms of the rep and warrant, our customers make rep and warrants

to us and when the products that they sell meet the contracts. They’re very clear about what they’re due. They know how we do this. We have ongoing discussions. This is not a surprise to them. I wouldn’t even put this in an adversary way. This is an understanding about how this business gets done. It partly creates the efficiency in the secondary market and it’s well accepted. So I would say these continued discussions are ongoing and we’re successful in that as we go forward.

G. Gordon I’m sorry, a little confused. You’re sounding here like its business as

usual, yet you’re suggesting up front that there was⎯there’s more of an effort.

T. Lund Well, what I would⎯ the way I would answer that is the standard

industry practice in terms of how this goes on, the issue is in the environment that we’re in; the number of defaults that we’re seeing, and particularly around the Alt-A product, there’s been a significant ramp-up that has occurred.

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D. Mudd So the process is there; the amount of effort around the process and the amount of focus has been tremendously high. That’s the way I kind of summarize it, Gary.

OK, we’ll do one more. Moderator OK. Your final question for today will be from Fred Cannon with

KBW. F. Cannon Oh thanks. Just a question on a somewhat different area, is the tax rate

that declined fairly significantly, in the quarter, I was wondering, kind of two part question, one if you could provide a little bit more clarity on the⎯what occurred in that because it does appear you might be losing some of the tax shield on the losses you’re taking. And secondly, I believe your deferred tax asset rose to about $20 billion at the end of the quarter and is there any risk to that asset in either a GAAP or a regulatory framework on a go-forward basis?

S. Swad Hey, Fred, this is Steve Swad. I’ll hit the effective tax rate first. We,

like most companies, have a policy to estimate our annual effective tax rate and then apply it to the quarters. And our effective tax rate changed from 57 percent, in Q1, to 43 percent for the first half. And Q2 is essentially the true-up mechanism to get that effective tax rate from 57 to 43. And the reason that happened, is our view on credit losses increased, causing us to modify downward our effective tax rate. So that’s that.

And with respect to deferred tax assets, just a few points on that

starting with most financial institutions have deferred tax assets. And they arise when the expenses for book are greater than⎯take longer than the expense for tax. And the simplest example, and there are many, but the simplest is the reserve building. That is an expense for book that doesn’t hit your tax return until you have a charge-off.

And what we do is we make an assessment on the recoverability based

on the taxable income the company generates. And just remember that our taxable income is higher than our book income because there’s no

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reserve building expense. There’s no 03-3 charge. There’s no spreading of G-fees that we get in cash and so, based on that, we think it’s sufficient to recover the asset.

We put a bunch of disclosure around our tax assets and our effective

rate in our filing and so you may want to look at that as well. F. Cannon OK in the 10-Q. S. Swad Yes. F. Cannon All right. Just finally on that in terms of regulatory capital, the banks

face a more onerous hurdle on regulatory capital than you guys have historically. I mean I believe the bank regulatory rule only allows like a two-year look back and a one-year look forward to value the asset. Is that of concern as we move into a new regulatory regime?

S. Swad Fred, I agree with your observations on the bank regulation that it’s

different than our current regulation. You know I can’t speculate or imply or⎯Peter, I don’t know if you have something to add to that.

P. Niculescu: Yes, hi Fred, this is Peter Niculescu. I think that the point you are

making is the one that our new regulator FHFA [Federal Housing Finance Agency] will be promulgating regulations over the next period of time. And they have considerable latitude, as they should have as a world-class regulator of really the entire mortgage finance system. And I expect that what they will do is move to a model that aligns capital and risk.

Beyond that, of course, this is up to them to make the decisions that

they see as correct and prudent. F. Cannon Great. All right, thanks very much. D. Mudd OK. Yes. With that, thank you everybody for joining us on the call. I

just want to summarize the key points we made today.

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First, the fundamentals of the business remain strong. The book is growing. The share is solid. The revenues are solid and our role in the market is solid and, in fact, reaffirmed.

Secondly, the housing crisis that we all observe as we drive home

every single day continues to strain our results and our capital. And we’re still in the tunnel working our way toward the other end of the light, so that’ll be the tough challenges that this company is focused on in months to come.

Third, recognizing that and recognizing what it takes to work through

that tunnel, we’re taking⎯we’re ratcheting up the steps that we’re taking. Some are painful but all of them are prudent to manage our capital, hold down our credit losses and keep people in their homes.

Broadly, though, we are reminding ourselves every single day how

important it is to keep this company healthy so we can help get this market back to healthy and we know it’s critically important to get that right. It’s important to us. It’s important to me. Its important to Fannie Mae employees and its important to you, I think, whether the shareholders that own this enterprise or partners in the housing industry; people that hold jobs; and the economy; and the government; and on up from there for everybody that is working through the housing crisis.

For our part, I assure you that we will do everything that we can to

keep working through it. We’ll keep providing the liquidity and the stability that we talked about and we’ll keep you and everybody else that has a stake in housing informed as we do so. So, we appreciate the time, we appreciate the attention, and we will look forward to hearing from everybody the next time. Thank you, again.

Moderator A replay of the call will be available for 30 days starting at 2:00 p.m.,

Eastern time, on August 8th through midnight Eastern Time on September 5th. The replay number of the U.S. and Canada is 800-642-1687 or for international callers 706-645-9291. The confirmation

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code is 55011092. This concludes today’s conference call. You may now disconnect.