Federal National Mortgage Association (FNMA) 8-K Fannie Mae Files 2005 10-K with the Sec

Exhibit 99.1

Media Hotline: 1-888-326-6694
Consumer Resource Center: 1-800-732-6643

Contact:	Chuck Greener	Janis Smith
	202-752-2616	202-752-6673
Number:	3993-1
Date:	May 2, 2007

FANNIE MAE FILES 2005 10-K WITH THE SEC

Company Increases Quarterly Common Stock Dividend to $0.50 per Share

WASHINGTON, DC — Fannie Mae (FNM/NYSE) today filed its 2005 Annual Report on Form 10-K with the U.S. Securities and Exchange Commission (SEC), reporting annual net income of $6.3 billion in 2005, up from $5.0 billion in 2004, and earnings per share (EPS) of $6.01 in 2005, up from $4.94 in 2004.

Fannie Mae also announced that the company’s Board of Directors increased the regular quarterly common stock dividend to fifty cents per share ($0.50). The Board determined that the increased dividend would be effective beginning in the second quarter of 2007, and therefore declared a special common stock dividend of $0.10 per share, payable on May 25, 2007 to stockholders of record on May 18, 2007. This special dividend of $0.10, combined with the company’s previously declared dividend of $0.40, will result in a total common stock dividend of $0.50 for the second quarter of 2007.

Fannie Mae said in today’s filing that with completion of the 2005 Form 10-K, management is also assessing the impact on its original timeline for filing the 2006 Form 10-K. The company previously announced that it expects to file its 2006 Form 10-K by the end of 2007 but will review that timeline in light of today’s filing. Fannie Mae also said that the company intends to continue to provide periodic updates regarding progress toward timely financial reporting.

“Today’s filing of our 2005 10-K continues our steady march toward providing the market with timely quarterly financials,” said President and Chief Executive Officer Daniel H. Mudd. “This is an important milestone, and we’re pleased to be able to take another step by increasing our dividend.”

(more)

Fannie Mae 2005 10-K Filing
Page Two

“We’re very pleased to file these 2005 results,” said Robert T. Blakely, Executive Vice President and Chief Financial Officer, who led last year’s restatement effort after joining the company in January 2006. “Work is already underway on the 2006 financials, and we’re building momentum towards catching up and becoming current.”

2005 10-K Filing — Overview and Highlights

“Our results for 2005 show we had a good year for our business in a challenging market environment,” Mudd said. “As we began working through our restatement and remediation, we saw growth in our book of business, solid performance in our guaranty businesses, growth in core capital and growth in the fair value of our net assets.”

Highlights of Fannie Mae’s 2005 results include:

Earnings:Fannie Mae’s net income and diluted earnings per share totaled $6.3 billion and $6.01, respectively, in 2005, compared with $5.0 billion and $4.94 in 2004, and $8.1 billion and $8.08 in 2003.

Stockholders’ Equity:Total stockholders’ equity increased to $39.3 billion as of December 31, 2005, from $38.9 billion as of December 31, 2004, and $32.3 billion as of December 31, 2003.

Regulatory Capital:On March 30, 2007, the Office of Federal Housing Enterprise Oversight (OFHEO) announced that Fannie Mae was classified as adequately capitalized as of December 31, 2006. Core capital of $42.3 billion exceeded the statutory minimum capital requirement by $13.0 billion and the OFHEO-directed 30 percent additional minimum capital requirement by $4.2 billion. Total capital of $43.0 billion exceeded the statutory risk-based capital requirement by $16.2 billion.

Fair Value of Net Assets (Non-GAAP):Fannie Mae’s estimated fair value of net assets (net of tax effect), a non-GAAP measure, increased to $42.2 billion as of December 31, 2005, compared with $40.1 billion as of year-end 2004, and $28.4 billion as of year-end 2003.

(more)

Fannie Mae 2005 10-K Filing
Page Three

2005 Financial Results

2005 results include:

• Guaranty fee incomeincreased approximately five percent to $3.8 billion in 2005 from $3.6 billion in 2004, primarily due to an increase in average outstanding Fannie Mae MBS and other guaranties. The company’s average effective guaranty fee rate, which includes the effect of buy-up impairments, remained essentially unchanged at 21 basis points in 2005, 2004 and 2003.

• Net interest incomedropped 36 percent year-over-year, to $11.5 billion in 2005 from $18.1 billion in 2004, driven by a ten percent decrease in Fannie Mae’s average interest-earning assets and a 30 percent (55 basis point) decline in the company’s net interest yield to 1.31 percent.

• Net derivatives fair value lossestotaled $4.2 billion for 2005, down from $12.3 billion for 2004. A significant portion of the company’s derivatives are pay-fixed swaps, resulting in increases in fair value and decreases in swap contractual interest expense as interest rates increased.

• Fee and other incometotaled $1.5 billion in 2005, up significantly from $404 million in 2004. The increase was primarily due to exchange gains recorded in 2005 on Fannie Mae’s foreign-denominated debt that stemmed from the strengthening of the U.S. dollar relative to the Japanese yen, which were offset by corresponding net losses on foreign currency swaps that are included in net derivatives fair value losses (discussed above).

• Provision for credit lossesincreased to $441 million in 2005, from $352 million in 2004, largely due to a provision for losses of $106 million in 2005 for single-family and multifamily properties affected by Hurricane Katrina (substantially lower than our original estimated range for after tax losses associated with Hurricane Katrina of $250 to $550 million).

(more)

Fannie Mae 2005 10-K Filing
Page Four

• Administrative expensestotaled $2.1 billion in 2005, up $459 million, or 28 percent over $1.7 billion in 2004. The increase primarily related to costs associated with the company’s restatement and related regulatory examinations, investigations and litigation defense, which totaled approximately $570 million in 2005.

• Investment losses, netincreased to $1.3 billion in 2005 from a loss of $362 million in 2004. The increase was due primarily to impairments on mortgage related securities of $1.2 billion in 2005, up from $285 million in 2004. This increase was due to changes in interest rates — not credit quality — with increasing rates driving the fair value of certain securities below our cost basis.

• Other expensestotaled $251 million in 2005, down from $607 million in 2004. The decrease was primarily due to the recognition in 2004 of a $400 million civil penalty that the company paid in 2006 pursuant to settlements with the SEC and OFHEO.

Going forward, Fannie Mae expects high levels of period to period volatility in financial results as changes in market conditions cause periodic fluctuations in the estimated fair value of derivative instruments used by the company. Fannie Mae uses derivatives as economic hedges to help manage interest rate risk and achieve a targeted interest rate risk profile. The estimated fair value of the company’s derivatives may fluctuate substantially from period to period because of changes in interest rates, expected interest rate volatility and derivative activity.

(more)

Fannie Mae 2005 10-K Filing
Page Five

2003-2005 Consolidated Results

The following table from the Form 10-K provides a consolidated breakdown of Fannie Mae’s results for 2005, 2004 and 2003:

Table 3: Condensed Consolidated Results of Operations

										Variance
	For the Year Ended December 31,									2005 vs. 2004						2004 vs. 2003
	2005			2004			2003			$			%			$			%
	(Dollars in millions, except per share amounts)
Net interest income	$	11,505		$	18,081		$	19,477		$	(6,576	)		(36	)%		$(1,396	)		(7	)%
Guaranty fee income		3,779			3,604			3,281			175			5			323			10
Fee and other income		1,526			404			340			1,122			278			64			19
Investment losses, net		(1,334	)		(362	)		(1,231	)		(972	)		(269	)		869			71
Derivatives fair value losses, net		(4,196	)		(12,256	)		(6,289	)		8,060			66			(5,967	)		(95	)
Debt extinguishment losses, net		(68	)		(152	)		(2,692	)		84			55			2,540			94
Loss from partnership investments		(849	)		(702	)		(637	)		(147	)		(21	)		(65	)		(10	)
Provision for credit losses		(441	)		(352	)		(365	)		(89	)		(25	)		13			4
Other non-interest expense		(2,351	)		(2,266	)		(1,598	)		(85	)		(4	)		(668	)		(42	)
Income before federal income taxes, extraordinary gains (losses), and cumulative effect of change in accounting principle		7,571			5,999			10,286			1,572			26			(4,287	)		(42	)
Provision for federal income taxes		(1,277	)		(1,024	)		(2,434	)		(253	)		(25	)		1,410			58
Extraordinary gains (losses), net of tax effect		53			(8	)		195			61			763			(203	)		(104	)
Cumulative effect of change in accounting principle, net of tax effect		—			—			34			—			—			(34	)		(100	)
Net income	$	6,347		$	4,967		$	8,081		$	1,380			28	%	$	(3,114	)		(39	)%
Diluted earnings per common share	$	6.01		$	4.94		$	8.08		$	1.07			22	%	$	(3.14	)		(39	)%

2006 Outlook

Fannie Mae said in today’s filing that the company expects net income to decline in 2006, primarily due to further reductions in net interest income and net interest yield in 2006, and the decline in the spread between the average yield on assets and on borrowing costs (which the company began experiencing at the end of 2004). Administrative expenses also significantly increased in 2006, to an estimated $3.1 billion, largely due to costs associated with the restatement process and related regulatory examinations, investigations and litigation defense, the preparation of consolidated financial statements, control remediation activities and increased personnel to support these efforts. Fannie Mae also expects, however, continued strength in guaranty fee income, moderate increases in our provision for credit losses and somewhat lower derivative fair value losses as interest rates have generally trended up since the end of 2005 and remain at overall higher levels.

(more)

Fannie Mae 2005 10-K Filing
Page Six

The company does not expect to be able to further quantify its operating results and financial condition until it completes the preparation of consolidated financial statements for the year ended December 31, 2006. However, the company meets regularly with OFHEO to discuss its current capital position.

Results of 2005 Business Segment Operations

Fannie Mae’s business is organized into three complementary business segments:

• TheSingle-Family Credit Guaranty businessworks with lender customers to securitize single-family mortgage loans into Fannie Mae MBS and to facilitate the purchase of single-family mortgage loans for our portfolio.

• TheHousing and Community Development business helps to expand the supply of affordable and market-rate rental housing in the United States by working with lender customers to securitize multifamily mortgage loans into Fannie Mae MBS, facilitate the purchase of multifamily mortgage loans for the company’s mortgage portfolio, and also by making investments in rental and for-sale housing projects, including investments in rental housing projects that qualify for federal low-income housing tax credits.

• TheCapital Markets group manages the company’s investment activity in mortgage loans and mortgage-related securities, and has responsibility for managing the company’s assets and its liabilities and the company’s liquidity and capital positions.

(more)

Fannie Mae 2005 10-K Filing
Page Seven

The following table shows the company’s results for 2005, 2004 and 2003 by each business segment, as provided in the 2005 Form 10-K:

Table 12: Business Segment Results Summary

							Increase (Decrease)
	For the Year Ended December 31,						2005 vs. 2004						2004 vs. 2003
	2005		2004		2003		$			%			$			%
	(Dollars in millions)
Revenues:(1)
Single-Family Credit Guaranty	$	5,805	$	5,153	$	4,994	$	652			13	%	$	159			3	%
Housing and Community Development		743		538		398		205			38			140			35
Capital Markets		43,601		46,135		47,293		(2,534	)		(5	)		(1,158	)		(2	)
Total	$	50,149	$	51,826	$	52,685	$	(1,677	)		(3	)%	$	(859	)		(2	)%
Net income:
Single-Family Credit Guaranty	$	2,889	$	2,514	$	2,481	$	375			15	%	$	33			1	%
Housing and Community Development		462		337		286		125			37			51			18
Capital Markets		2,996		2,116		5,314		880			42			(3,198	)		(60	)
Total	$	6,347	$	4,967	$	8,081	$	1,380			28	%	$	(3,114	)		(39	)%
	As of December 31,
		2005		2004
Total assets:
Single-Family Credit Guaranty	$	12,871	$	11,543			$	1,328			12	%
Housing and Community Development		11,829		10,166				1,663			16
Capital Markets Group		809,468		999,225				(189,757	)		(19	)
Total	$	834,168	$	1,020,934			$	(186,766	)		(18	)%

⁽¹⁾     Includes interest income, guaranty fee income, and fee and other income.

The following provides further explanation of the business segment results:

• The Single-Family Credit Guaranty business generated net income of $2.9 billion in 2005 and $2.5 billion in 2004. Net income for the single-family business segment increased by $375 million, or 15 percent in 2005 from 2004, primarily due to higher interest income and guaranty fee income, offset by an increase in our provision for credit losses and administrative expenses. Interest income earned on cash flows from the date of the remittance by servicers to us until the date of distribution by us to MBS certificate holders increased by $282 million as a result of higher short-term interest rates throughout 2005.

(more)

Fannie Mae 2005 10-K Filing
Page Eight

Guaranty fee income for 2005 increased slightly from 2004 as the average single-family credit book of business increased three percent. The average effective guaranty fee rate remained essentially unchanged from year to year.

The provision for credit losses increased by 46 percent to $454 million in 2005 due to the provision for losses from the Gulf Coast hurricanes and the adoption of a new accounting standard.

• The Housing and Community Development business generated net income of $462 million in 2005 and $337 million in 2004. Net income for the HCD business segment increased by $125 million, or 37 percent in 2005 from 2004 as a result of increased tax benefits from tax-advantaged investments and higher fee and other income. Low Income Housing Tax Credit (LIHTC) investments totaled $7.7 billion in 2005, compared to $6.8 billion in 2004, and represented the largest proportion of HCD equity investment activity in 2005. Losses from partnership investments increased by $147 million as HCD increased its investment activity; however, these losses were more than offset by increased LIHTC tax benefits that resulted in a reduction in Fannie Mae’s tax rate by approximately thirteen percent from the statutory tax rate in 2005.

• The Capital Markets group generated net income of $3.0 billion in 2005 and $2.1 billion in 2004. Net income for the Capital Markets group increased by $880 million, or 42 percent in 2005 from 2004, as a reduction in net interest income and an increase in investment losses were more than offset by lower derivatives fair value losses. Net interest income decreased $6.9 billion, or 39 percent in 2005 from 2004 largely due to a ten percent decline in the company’s average portfolio balance.

(more)

Fannie Mae 2005 10-K Filing
Page Nine

Fair Value Balance Sheet (Non-GAAP)

GAAP requires disclosure of the fair value of our financial assets and liabilities. Fair value is the amount at which an asset or liability could be sold or exchanged between willing parties, other than in a forced or liquidation sale. In addition to the fair value of the company’s financial assets, management looks at the estimated non-GAAP supplemental fair value of the company’s other assets and liabilities. A reconciliation of the company’s fair value of net assets (non-GAAP) to stockholders’ equity (GAAP) is presented in Annex 1 to this press release.

“As we’ve said before, we believe fair value measures are a useful tool in assessing our business economics and risks,” said Blakely, “We use fair value measures to make investment decisions and to measure, monitor and manage our interest rate risk and market risk, and our non-GAAP fair value balance sheets are an important component in assessing the sensitivity of our net asset fair value. As a result, we intend to provide a non-GAAP fair value balance sheet on a quarterly basis once we become current in our financial reporting.”

(more)

Fannie Mae 2005 10-K Filing
Page Ten

The following table from the 2005 10-K shows Fannie Mae’s non-GAAP fair value balance sheet as of the years-ended 2005 and 2004:

Table 17: Non-GAAP Supplemental Consolidated Fair Value Balance Sheets

	As of December 31, 2005								As of December 31, 2004
			Fair								Fair
	Carrying		Value			Estimated			Carrying		Value			Estimated
	Value		Adjustment			Fair Value			Value		Adjustment			Fair Value
	(Dollars in millions)
Assets:
Cash and cash equivalents	$	3,575	$	—		$	3,575		$	3,701	$	—		$	3,701
Federal funds sold and securities purchased under agreements to resell		8,900		—			8,900			3,930		—			3,930
Trading securities		15,110		—			15,110			35,287		—			35,287
Available-for-sale securities		390,964		—			390,964			532,095		—			532,095
Mortgage loans held for sale		5,064		36			5,100			11,721		131			11,852
Mortgage loans held for investment, net of allowance for loan losses		362,479		(350	)		362,129			389,651		7,952			397,603
Derivative assets at fair value		5,803		—			5,803			6,589		—			6,589
Guaranty assets and buy-ups		7,629		3,077			10,706			6,616		2,647			9,263
Total financial assets		799,524		2,763			802,287			989,590		10,730			1,000,320
Other assets		34,644		(861	)		33,783			31,344		(23	)		31,321
Total assets	$	834,168	$	1,902		$	836,070		$	1,020,934	$	10,707		$	1,031,641
Liabilities:
Federal funds purchased and securities sold under agreements to repurchase	$	705	$	—		$	705		$	2,400	$	(1	)	$	2,399
Short-term debt		173,186		(209	)		172,977			320,280		(567	)		319,713
Long-term debt		590,824		5,978			596,802			632,831		15,445			648,276
Derivative liabilities at fair value		1,429		—			1,429			1,145		—			1,145
Guaranty obligations		10,016		(4,848	)		5,168			8,784		(3,512	)		5,272
Total financial liabilities		776,160		921			777,081			965,440		11,365			976,805
Other liabilities		18,585		(1,916	)		16,669			16,516		(1,850	)		14,666
Total liabilities		794,745		(995	)		793,750			981,956		9,515			991,471
Minority interests in consolidated subsidiaries		121		—			121			76		—			76
Net assets, net of tax effect (non-GAAP)	$	39,302	$	2,897		$	42,199		$	38,902	$	1,192		$	40,094
Fair value adjustments							(2,897	)							(1,192	)
Total stockholders’ equity (GAAP)						$	39,302							$	38,902

A reconciliation of the fair value of the company’s other assets, other liabilities, total assets and total liabilities as of those periods to the most comparable GAAP measures is contained in the notes to the non-GAAP fair value balance sheet included in Annex 1.

(more)

Fannie Mae 2005 10-K Filing
Page Eleven

As of December 31, 2005, the (non-GAAP) estimated fair value of Fannie Mae’s net assets (net of tax effect) was $42.2 billion after payments of $1.4 billion of cash dividends to holders of common and preferred stock, an increase of $2.1 billion, or five percent, over the 2004 net asset fair value of $40.1 billion. Fannie Mae’s own activities — as well as market conditions — caused changes in the estimated fair value of net assets. The key drivers of the change include:

• an increase in the fair value of our net guaranty assets of approximately $1.5 billion; and

• earnings of the corporation.

Conclusion

“2005 was a good year for our business and an important year for Fannie Mae as we began the process of repairing our financials, remediating systems and controls, building a new management team and renewing our corporate culture,” said CEO Mudd. “We also faced a shifting market in 2005, where we felt many of the mortgages being originated weren’t appropriately priced for risk. We believe the tough business decisions we made at that time have helped put us in a stronger position today,” he added.

Conference Call

Fannie Mae will host a conference call for the investment community at 1:30 p.m. Eastern Time, today, May 2nd. Mary Lou Christy, Senior Vice President, Investor Relations, will host the call. Daniel H. Mudd, President and Chief Executive Officer, and Robert Blakely, Chief Financial Officer, will address investors and analysts and will be available for a question and answer session along with other members of senior management.

The dial-in number for the call is 1-888-423-3273, for international callers, 612-332-0923. The confirmation code is 872289. Please dial in 5 to 10 minutes prior to the start of the call. The conference call will also be web cast athttp://www.fanniemae.comand will be available for 30 days after the call.

#  #  #

Certain statements in this press release, including those relating to our future performance, trends and expectations for our industry, our future plans, business activities and expenses, and financial measures that may be relevant in assessing our performance, may be considered forward-looking statements within the meaning of the federal securities laws. Although Fannie Mae believes that the expectations set forth in these statements are based upon reasonable assumptions, Fannie Mae’s future operations and its actual performance may differ materially from those indicated in any forward-looking statements. Additional information that could cause actual results to differ materially from these statements are detailed in Fannie Mae’s annual report on SECForm 10-K for the year ended December 31, 2005, including the “Risk Factors” section, and in its reports on SECForm 8-K.

Any security holder may receive a copy of Fannie Mae’s Annual Report onForm 10-K for the year ended December 31, 2005, free of charge, by sending a request to: Fannie Mae, Investor Relations, 3900 Wisconsin Avenue N.W., Washington, DC 20016. The 10-K, and all other Fannie Mae forms filed with the SEC, can also be obtained on the company’s web site at www.fanniemae.com/ir/sec/.

Annex 1

FANNIE MAE
Consolidated Balance Sheets
(Dollars in millions, except share amounts)

	As of December 31,
	2005			2004
ASSETS
Cash and cash equivalents (includes cash equivalents that may be repledged of $686 and $242 as of December 31, 2005 and 2004, respectively)	$	2,820		$	2,655
Restricted cash		755			1,046
Federal funds sold and securities purchased under agreements to resell		8,900			3,930
Investments in securities:
Trading, at fair value (includes Fannie Mae MBS of $14,607 and $34,350 as of December 31, 2005 and 2004, respectively)		15,110			35,287
Available-for-sale, at fair value (includes Fannie Mae MBS of $217,842 and $315,195 as of December 31, 2005 and 2004, respectively)		390,964			532,095
Total investments in securities		406,074			567,382
Mortgage loans:
Loans held for sale, at lower of cost or market		5,064			11,721
Loans held for investment, at amortized cost		362,781			390,000
Allowance for loan losses		(302	)		(349	)
Total loans held for investment, net of allowance		362,479			389,651
Total mortgage loans		367,543			401,372
Advances to lenders		4,086			4,850
Accrued interest receivable		3,506			4,237
Acquired property, net		1,771			1,704
Derivative assets at fair value		5,803			6,589
Guaranty assets		6,848			5,924
Deferred tax assets		7,684			6,074
Partnership investments		9,305			8,061
Other assets		9,073			7,110
Total assets	$	834,168		$	1,020,934
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Accrued interest payable	$	6,616		$	6,212
Federal funds purchased and securities sold under agreements to repurchase		705			2,400
Short-term debt		173,186			320,280
Long-term debt		590,824			632,831
Derivative liabilities at fair value		1,429			1,145
Reserve for guaranty losses (includes $71 and $113 as of December 31, 2005 and 2004, respectively, related to Fannie Mae MBS included in Investments in securities)		422			396
Guaranty obligations (includes $506 and $814 as of December 31, 2005 and 2004, respectively, related to Fannie Mae MBS included in Investments in securities)		10,016			8,784
Partnership liabilities		3,432			2,662
Other liabilities		8,115			7,246
Total liabilities		794,745			981,956
Minority interests in consolidated subsidiaries		121			76
Commitments and contingencies (see Note 19)		—			—
Stockholders’ Equity:
Preferred stock, 200,000,000 shares authorized—132,175,000 shares issued and outstanding as of December 31, 2005 and 2004		9,108			9,108
Common stock, no par value, no maximum authorization—1,129,090,420 shares issued as of December 31, 2005 and 2004; 970,532,789 shares and 969,075,573 shares outstanding as of December 31, 2005 and 2004, respectively		593			593
Additional paid-in capital		1,913			1,982
Retained earnings		35,555			30,705
Accumulated other comprehensive income (loss)		(131	)		4,387
Treasury stock, at cost, 158,557,631 shares and 160,014,847 shares as of December 31, 2005 and 2004, respectively		(7,736	)		(7,873	)
Total stockholders’ equity		39,302			38,902
Total liabilities and stockholders’ equity	$	834,168		$	1,020,934

See Notes to Consolidated Financial Statements.

FANNIE MAE

Consolidated Statements of Income
(Dollars and shares in millions, except per share amounts)

	For the Year Ended December 31,
	2005			2004			2003
Interest income:
Investments in securities	$	24,156		$	26,428		$	27,694
Mortgage loans		20,688			21,390			21,370
Total interest income		44,844			47,818			49,064
Interest expense:
Short-term debt		6,562			4,399			4,012
Long-term debt		26,777			25,338			25,575
Total interest expense		33,339			29,737			29,587
Net interest income		11,505			18,081			19,477
Guaranty fee income (includes imputed interest of $803, $833 and $314 for 2005, 2004 and 2003, respectively)		3,779			3,604			3,281
Investment losses, net		(1,334	)		(362	)		(1,231	)
Derivatives fair value losses, net		(4,196	)		(12,256	)		(6,289	)
Debt extinguishment losses, net		(68	)		(152	)		(2,692	)
Loss from partnership investments		(849	)		(702	)		(637	)
Fee and other income		1,526			404			340
Non-interest loss		(1,142	)		(9,464	)		(7,228	)
Administrative expenses:
Salaries and employee benefits		959			892			849
Professional services		792			435			238
Occupancy expenses		221			185			166
Other administrative expenses		143			144			201
Total administrative expenses		2,115			1,656			1,454
Minority interest in earnings of consolidated subsidiaries		(2	)		(8	)		—
Provision for credit losses		441			352			365
Foreclosed property expense (income)		(13	)		11			(12	)
Other expenses		251			607			156
Total expenses		2,792			2,618			1,963
Income before federal income taxes, extraordinary gains (losses), and cumulative effect of change in accounting principle		7,571			5,999			10,286
Provision for federal income taxes		1,277			1,024			2,434
Income before extraordinary gains (losses) and cumulative effect of change in accounting principle		6,294			4,975			7,852
Extraordinary gains (losses), net of tax effect		53			(8	)		195
Cumulative effect of change in accounting principle, net of tax effect		—			—			34
Net income	$	6,347		$	4,967		$	8,081
Preferred stock dividends		(486	)		(165	)		(150	)
Net income available to common stockholders	$	5,861		$	4,802		$	7,931
Basic earnings (loss) per share:
Earnings before extraordinary gains (losses) and cumulative effect of change in accounting principle	$	5.99		$	4.96		$	7.88
Extraordinary gains (losses), net of tax effect		0.05			(0.01	)		0.20
Cumulative effect of change in accounting principle, net of tax effect		—			—			0.04
Basic earnings per share	$	6.04		$	4.95		$	8.12
Diluted earnings per share:
Earnings before extraordinary gains (losses) and cumulative effect of change in accounting principle	$	5.96		$	4.94		$	7.85
Extraordinary gains (losses), net of tax effect		0.05			—			0.20
Cumulative effect of change in accounting principle, net of tax effect		—			—			0.03
Diluted earnings per share	$	6.01		$	4.94		$	8.08
Cash dividends per common share	$	1.04		$	2.08		$	1.68
Weighted-average common shares outstanding:
Basic		970			970			977
Diluted		998			973			981

See Notes to Consolidated Financial Statements.

FANNIE MAE

Consolidated Statements of Cash Flows
(Dollars in millions)

	For the Year Ended December 31,
	2005			2004			2003
Cash flows provided by operating activities:
Net income	$	6,347		$	4,967		$	8,081
Reconciliation of net income to net cash provided by operating activities:
Amortization of mortgage loans and security cost basis adjustments		(56	)		1,249			1,852
Amortization of debt cost basis adjustments		7,179			4,908			4,517
Provision for credit losses		441			352			365
Valuation losses		1,394			433			1,433
Debt extinguishment losses, net		68			152			2,692
Debt foreign currency transaction (gains) losses, net		(625	)		304			707
Loss from partnership investments		849			702			637
Current and deferred federal income taxes		79			(1,435	)		(1,083	)
Extraordinary (gains) losses, net of tax effect		(53	)		8			(195	)
Cumulative effect of change in accounting principle, net of tax effect		—			—			(34	)
Derivatives fair value adjustments		826			(1,395	)		(5,811	)
Purchases of loans held for sale		(26,562	)		(30,198	)		(72,519	)
Proceeds from repayments of loans held for sale		1,307			2,493			9,703
Proceeds from sales of loans held for sale		51			66			8
Net decrease in trading securities, excluding non-cash transfers		86,637			58,396			106,679
Net change in:
Guaranty assets		(1,464	)		(2,033	)		(5,018	)
Guaranty obligations		507			2,926			7,745
Other, net		1,216			(339	)		(1,536	)
Net cash provided by operating activities		78,141			41,556			58,223
Cash flows provided by (used in) investing activities:
Purchases of available-for-sale securities		(117,826	)		(234,081	)		(503,313	)
Proceeds from maturities of available-for-sale securities		169,734			196,606			339,878
Proceeds from sales of available-for-sale securities		117,713			18,503			129,487
Purchases of loans held for investment		(57,840	)		(55,996	)		(92,668	)
Proceeds from repayments of loans held for investment		99,943			100,727			164,822
Advances to lenders		(69,505	)		(53,865	)		(180,338	)
Net proceeds from disposition of acquired property		3,725			4,284			3,355
Contributions to partnership investments		(1,829	)		(1,934	)		(1,675	)
Proceeds from partnership investments		329			208			60
Net change in federal funds sold and securities purchased under agreements to resell		(5,040	)		8,756			(12,355	)
Net cash provided by (used in) investing activities		139,404			(16,792	)		(152,747	)
Cash flows (used in) provided by financing activities:
Proceeds from issuance of short-term debt		2,578,152			1,925,159			1,944,544
Payments to redeem short-term debt		(2,750,912	)		(1,965,693	)		(1,904,640	)
Proceeds from issuance of long-term debt		156,336			253,880			349,356
Payments to redeem long-term debt		(197,914	)		(240,031	)		(285,872	)
Repurchase of common and redemption of preferred stock		—			(523	)		(1,390	)
Proceeds from issuance of common and preferred stock		29			5,162			1,488
Payment of cash dividends on common and preferred stock		(1,376	)		(2,185	)		(1,796	)
Net change in federal funds purchased and securities sold under agreements to repurchase		(1,695	)		(1,273	)		(5,497	)
Net cash (used in) provided by financing activities		(217,380	)		(25,504	)		96,193
Net increase (decrease) in cash and cash equivalents		165			(740	)		1,669
Cash and cash equivalents at beginning of period		2,655			3,395			1,726
Cash and cash equivalents at end of period	$	2,820		$	2,655		$	3,395
Cash paid during the period for:
Interest	$	32,491		$	29,777		$	30,322
Income taxes		1,197			2,470			3,516
Non-cash activities:
Net transfers between investments in securities and mortgage loans	$	35,337		$	17,750		$	71,560
Transfers from advances to lenders to investments in securities		69,605			53,705			195,964
Net mortgage loans acquired by assuming debt		18,790			13,372			9,274
Transfers of loans held for sale to loans held for investment		3,208			15,543			51,855
Transfers from mortgage loans to acquired property, net		3,699			4,307			3,580
Issuance of common stock from treasury stock for stock option and benefit plans		137			306			149

See Notes to Consolidated Financial Statements.

FANNIE MAE
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars and shares in millions, except per share amounts)

																Accumulated
										Additional						Other						Total
	Shares Outstanding					Preferred		Common		Paid-In			Retained			Comprehensive			Treasury			Stockholders’
	Preferred		Common			Stock		Stock		Capital			Earnings			Income(1)			Stock			Equity
Balance as of January 1, 2003		53		989		$	2,678	$	593	$	1,937		$	21,638		$	11,468		$	(6,415	)	$	31,899
Comprehensive income:
Net income		—		—			—		—		—			8,081			—			—			8,081
Other comprehensive income, net of tax effect:
Unrealized losses on available-for-sale securities (net of tax of $3,381)		—		—			—		—		—			—			(6,278	)		—			(6,278	)
Reclassification adjustment for losses included in net income		—		—			—		—		—			—			57			—			57
Unrealized gains on guaranty assets and guaranty fee buy-ups (net of tax of $47)		—		—			—		—		—			—			88			—			88
Net cash flow hedging losses		—		—			—		—		—			—			(18	)		—			(18	)
Minimum pension liability (net of tax of $1)		—		—			—		—		—			—			(2	)		—			(2	)
Total comprehensive income																							1,928
Common stock dividends ($1.68 per share)		—		—			—		—		—			(1,646	)		—			—			(1,646	)
Preferred stock:
Preferred dividends		—		—			—		—		—			(150	)		—			—			(150	)
Preferred stock issued		29		—			1,430		—		(13	)		—			—			—			1,417
Treasury stock:
Treasury stock acquired		—		(22	)		—		—		—			—			—			(1,390	)		(1,390	)
Treasury stock issued for stock options and benefit plans		—		3			—		—		61			—			—			149			210
Balance as of December 31, 2003		82		970			4,108		593		1,985			27,923			5,315			(7,656	)		32,268
Comprehensive income:
Net income		—		—			—		—		—			4,967			—			—			4,967
Other comprehensive income, net of tax effect:
Unrealized losses on available-for-sale securities (net of tax of $483)		—		—			—		—		—			—			(897	)		—			(897	)
Reclassification adjustment for gains included in net income		—		—			—		—		—			—			(17	)		—			(17	)
Unrealized losses on guaranty assets and guaranty fee buy-ups (net of tax of $4)		—		—			—		—		—			—			(8	)		—			(8	)
Net cash flow hedging losses		—		—			—		—		—			—			(3	)		—			(3	)
Minimum pension liability (net of tax of $2)		—		—			—		—		—			—			(3	)		—			(3	)
Total comprehensive income																							4,039
Common stock dividends ($2.08 per share)		—		—			—		—		—			(2,020	)		—			—			(2,020	)
Preferred stock:
Preferred dividends		—		—			—		—		—			(165	)		—			—			(165	)
Preferred stock issued		50		—			5,000		—		(75	)		—			—			—			4,925
Treasury stock:
Treasury stock acquired		—		(7	)		—		—		—			—			—			(523	)		(523	)
Treasury stock issued for stock options and benefit plans		—		6			—		—		72			—			—			306			378
Balance as of December 31, 2004		132		969			9,108		593		1,982			30,705			4,387			(7,873	)		38,902

FANNIE MAE
Consolidated Statements of Changes in Stockholders’ Equity (cont’d.)
(Dollars and shares in millions, except per share amounts)

															Accumulated
									Additional						Other						Total
	Shares Outstanding				Preferred		Common		Paid-In			Retained			Comprehensive			Treasury			Stockholders’
	Preferred		Common		Stock		Stock		Capital			Earnings			Income(1)			Stock			Equity
Comprehensive income:
Net income		—		—		—		—		—			6,347			—			—			6,347
Other comprehensive income, net of tax effect:
Unrealized losses on available-for-sale securities (net of tax of $2,238)		—		—		—		—		—			—			(4,156	)		—			(4,156	)
Reclassification adjustment for gains included in net income		—		—		—		—		—			—			(432	)		—			(432	)
Unrealized gains on guaranty assets and guaranty fee buy-ups (net of tax of $39)		—		—		—		—		—			—			72			—			72
Net cash flow hedging losses (net of tax of $2)		—		—		—		—		—			—			(4	)		—			(4	)
Minimum pension liability (net of tax of $1)		—		—		—		—		—			—			2			—			2
Total comprehensive income		—		—		—		—		—			—			—			—			1,829
Common stock dividends ($1.04 per share)		—		—		—		—		—			(1,011	)		—			—			(1,011	)
Preferred stock dividends		—		—		—		—		—			(486	)		—			—			(486	)
Treasury stock issued for stock options and benefit plans		—		2		—		—		(69	)		—			—			137			68
Balance as of December 31, 2005		132		971	$	9,108	$	593	$	1,913		$	35,555		$	(131	)	$	(7,736	)	$	39,302

⁽¹⁾ Accumulated Other Comprehensive Income ending balance as of December 31, 2005 is comprised of $300 million in net unrealized losses on available-for-sale securities, net of tax, and $169 million in net unrealized gains on all other components, net of tax, and $4.3 billion and $5.2 billion of net unrealized gains on available-for-sale securities, net of tax, and $99 million and $113 million net unrealized gains on all other components, net of tax, as of December 31, 2004 and 2003, respectively.

Table 17: Non-GAAP Supplemental Consolidated Fair Value Balance Sheets

	As of December 31, 2005								As of December 31, 2004
			Fair								Fair
	Carrying		Value			Estimated			Carrying		Value			Estimated
	Value		Adjustment(1)			Fair Value			Value		Adjustment(1)			Fair Value
	(Dollars in millions)
Assets:
Cash and cash equivalents	$	3,575	$	—		$	3,575	(2)	$	3,701	$	—		$	3,701	(2)
Federal funds sold and securities purchased under agreements to resell		8,900		—			8,900	(2)		3,930		—			3,930	(2)
Trading securities		15,110		—			15,110	(2)		35,287		—			35,287	(2)
Available-for-sale securities		390,964		—			390,964	(2)		532,095		—			532,095	(2)
Mortgage loans held for sale		5,064		36			5,100	(2)		11,721		131			11,852	(2)
Mortgage loans held for investment, net of allowance for loan losses		362,479		(350	)		362,129	(2)		389,651		7,952			397,603	(2)
Derivative assets at fair value		5,803		—			5,803	(2)		6,589		—			6,589	(2)
Guaranty assets and buy-ups		7,629		3,077			10,706	(2)(3)		6,616		2,647			9,263	(2)(3)
Total financial assets		799,524		2,763			802,287			989,590		10,730			1,000,320
Other assets		34,644		(861	)		33,783	(4)(5)		31,344		(23	)		31,321	(4)(5)
Total assets	$	834,168	$	1,902		$	836,070	(6)	$	1,020,934	$	10,707		$	1,031,641	(6)
Liabilities:
Federal funds purchased and securities sold under agreements to repurchase	$	705	$	—		$	705	(2)	$	2,400	$	(1	)	$	2,399	(2)
Short-term debt		173,186		(209	)		172,977	(2)		320,280		(567	)		319,713	(2)
Long-term debt		590,824		5,978			596,802	(2)		632,831		15,445			648,276	(2)
Derivative liabilities at fair value		1,429		—			1,429	(2)		1,145		—			1,145	(2)
Guaranty obligations		10,016		(4,848	)		5,168	(2)		8,784		(3,512	)		5,272	(2)
Total financial liabilities		776,160		921			777,081			965,440		11,365			976,805
Other liabilities		18,585		(1,916	)		16,669	(5)(7)		16,516		(1,850	)		14,666	(5)(7)
Total liabilities		794,745		(995	)		793,750	(8)		981,956		9,515			991,471	(8)
Minority interests in consolidated subsidiaries		121		—			121			76		—			76
Net assets, net of tax effect (non-GAAP)	$	39,302	$	2,897		$	42,199	(9)	$	38,902	$	1,192		$	40,094	(9)
Fair value adjustments							(2,897	)							(1,192	)
Total stockholders’ equity (GAAP)						$	39,302							$	38,902

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 reported in our GAAP consolidated balance sheets and our best judgment of the estimated fair value of the listed asset or liability.
(2)	The estimated fair value of each of these financial instruments has been computed in accordance with the GAAP fair value guidelines prescribed by SFAS No. 107,Disclosures about Fair Value of Financial Instruments(“SFAS 107”), as described in “Notes to Consolidated Financial Statements—Note 18, Fair Value of Financial Instruments.” In Note 18, we also discuss the methodologies and assumptions we use in estimating the fair value of our financial instruments.
(3)	Represents the estimated fair value produced by combining the estimated fair value of our guaranty assets as of December 31, 2005 and 2004, respectively, with the estimated fair value of buy-ups. In our GAAP consolidated balance sheets, we report our guaranty assets as a separate line item and include all buy-ups associated with our guaranty assets in “Other assets.” As a result, the GAAP carrying value of our guaranty assets reflects only those arrangements entered into subsequent to our adoption of FIN 45 on January 1, 2003. On a GAAP basis, our guaranty assets totaled $6.8 billion and $5.9 billion as of December 31, 2005 and 2004, respectively, and the associated buy-ups totaled $781 million and $692 million as of December 31, 2005 and 2004, respectively.
(4)	In addition to the $9.1 billion and $7.1 billion of assets included in “Other assets” in the GAAP consolidated balance sheets as of December 31, 2005 and 2004, respectively, the assets included in the estimated fair value of our non-GAAP “other assets” consist primarily of the assets presented on five line items in our GAAP consolidated balance sheets, consisting of advances to lenders, accrued interest receivable, partnership investments, acquired property, net, and deferred tax assets, which together totaled $26.4 billion and $24.9 billion as of December 31, 2005 and 2004, respectively, in both the GAAP consolidated balance sheets and the non-GAAP supplemental consolidated balance sheets. In addition, we deduct the carrying value of the buy-ups associated with our guaranty obligation from our GAAP other assets because we combine the guaranty asset with the associated buy-ups when we determine the fair value of the asset.
(5)	“Other assets” and “other liabilities” are reflected in each of the non-GAAP fair value balance sheets at their GAAP carrying values. With the exception of partnership investments and partnership liabilities, the GAAP carrying values of these other assets and other liabilities generally approximate fair value. The fair values of partnership investments and partnership liabilities are generally different from their GAAP carrying values, potentially materially. We have included partnership investments and partnership liabilities at their carrying value in each of the non-GAAP fair value balance sheets. We assume that other deferred assets and liabilities, consisting of prepaid expenses and deferred charges such as deferred debt issuance costs, have no fair value. We adjust the GAAP-basis deferred income taxes for purposes of each of our non-GAAP supplemental consolidated fair value balance sheets to include estimated income taxes on the difference between our non-GAAP supplemental consolidated fair value balance sheets net assets, including deferred taxes from the GAAP consolidated balance sheets, and our GAAP consolidated balance sheets stockholders’ equity. Because our adjusted deferred income taxes are a net asset in each year, the amounts are included in our non-GAAP fair value balance sheets as a component of other assets.
(6)	Non-GAAP total assets represent the sum of the estimated fair value of (i) all financial instruments carried at fair value in our GAAP balance sheets, including all financial instruments that are not carried at fair value in our GAAP balance sheets but that are reported at fair value in accordance with SFAS 107 in “Notes to Consolidated Financial Statements—Note 18, Fair Value of Financial Instruments,” (ii) non-GAAP other assets, which include all items listed in footnote 4 that are presented as separate line items in our GAAP consolidated balance sheets rather than being included in our GAAP other assets and (iii) the estimated fair value of credit enhancements, which are not included in “Other assets” in the consolidated balance sheets.
(7)	In addition to the $8.1 billion and $7.2 billion of liabilities included in “Other liabilities” in the GAAP consolidated balance sheets as of December 31, 2005 and 2004, respectively, the liabilities included in the estimated fair value of our non-GAAP “other liabilities” consist primarily of the liabilities presented on three line items on our GAAP consolidated balance sheets, consisting of accrued interest payable, reserve for guaranty losses and partnership liabilities, which together totaled $10.5 billion and $9.3 billion as of December 31, 2005 and 2004. As indicated above in footnote 5, these items are reported in our non-GAAP fair value balance sheets at their GAAP carrying values.
(8)	Non-GAAP total liabilities represent the sum of the estimated fair value of (i) all financial instruments that are carried at fair value in our GAAP balance sheets, including those financial instruments that are not carried at fair value in our GAAP balance sheets but that are reported at fair value in accordance with SFAS 107 in “Notes to Consolidated Financial Statements—Note 18, Fair Value of Financial Instruments,” and (ii) non-GAAP other liabilities, which include all items listed in footnote 7 that are presented as separate line items in our GAAP consolidated balance sheets rather than being included in our GAAP other liabilities.
(9)	Represents the estimated fair value of total assets less the estimated fair value of total liabilities, which reconciles to total stockholders’ equity (GAAP).