1. Fannie Mae: 6 Months Into Conservatorship Jim Vogel, CFA Executive Vice President Fixed Income Research March, 2009

2. 2 GSEs Upside Down but Still Spinning Clockwise  Conservatorship is working for debt holders  Underlying financials still important  The next six months  Brave New World

3. 3 1) From Botched Creation to Lower Spreads  Treasury over sold strength of support  Clarification for market: Seeing support in action  Transition from overseas investors to domestic  Renewed spread appetite in 2009  Fannie’s term market more than recovered from fall issuance drought.

4. 4 U.S. Investors Perk Up as Yields and Equities Fall Attractive pricing brings attention 2005-2007 2009

5. 5 Rebuilding Fannie’s Liability Base Discount Note Maturities Lengthen, Too Monthly Issuance Longer than 18 Months Term bullets outstanding now exceed summer ‘08 by more than $15bb. Callables still lag.

6. 6 Spreads Improve Across the Curve As a Result LIBOR Basis of the GSE On-the-run Bullet Curve: 2-30 Years Fed kickstarted the process, but influence on new issues has been limited. Bullet spreads have done better than current coupon mortgages (adjusted for volatility).

7. 7 Fannie’s Retained Portfolio Holds Back Monthly Retained Portfolio New Cap of $900 billion awaits clarity on debt limit. All growth since summer of 2008 has been in mortgage loans, mostly repurchased from pools for modification. 5 years ago portfolio was at $925 billion.

8. 8 GSEs in the Mortgage World Vital to credit, not to funding Credit Risk Share = 49% Banks Dominate Funding GSEs Market Share as of March 31, 2009

9. 9 2) Fannie’s Course Found in its Financials  GSEs are free to US policy makers after equity holders demolished.  Accumulated value accrual/destruction establishes resource pool to support housing.  Cash flow from portfolio offsets credit losses.  Analyzing reserve for future cash losses.  Speed and length of housing credit losses

10. 10 GAAP Losses Dwarf Cash Losses Non-Cash items include Mark to market charges on derivatives due to lower rates. Additions to reserves for future losses. Elimination of deferred tax calculation. Note: 2007-08, Fannie paid $2.7 billion in federal taxes.

11. 11 Net Interest Income Soars as Curve Steepens Fannie producing cash flow to absorb credit hits Net interest yield of.89% in 2008 vs.39% in 2007. Total growth of 90% in annual net interest income. Typical increase for large banks was 25% to 40%. Built-in increases (GAAP) for 2009 based on asset write- downs in 2H 08. Quarterly Net Interest Income

12. 12 Credit Losses Still in Infancy Stage Reserve for losses now at $25 billion. Projected cash losses for 2009 are $25 billion, but Fannie will keep adding to reserves from cash flow and Treasury injections. Quarterly Provision for Loan Losses and Actual Losses

13. 13 Delinquencies are Still Accelerating Rate of Change of Quarterly Delinquencies Alt-A still driving the bulk of delinquencies and losses. Fannie’s prime delinquencies of 1.40% at year-end still compare favorably with 3.75% for national figures. Florida is hands down the worst single state. Pre-2005 vintages remain intact for now.

14. 14 Projecting Cash Accumulation Run Rate Fannie has a ‘future’ when it turns positive Critical Components Net interest income growth despite refinancing role. Slowing additions to reserves once they are ‘ample.’ Eliminate losses on securities holdings (nearer than expected). Avoid new mistakes.

15. 15 3) Looking Ahead Six Months  Funding modified loans  Creating value in portfolio away from Fed purchase profile  Staying out of headlines. Capping preferred injections.  Regaining some dignity

16. 16 4) Beyond Conservatorship is Congress  Overseas investors on sidelines until Treasury is no longer sole authority  Preferred stock purchase agreement very hard to reverse.  Status depends on relative success  Re-formation of housing finance system.

17. 17 5) Brave New World  Demise of the rating agencies  Counterparty contraction  Really private equity  Sovereign wealth policy initiatives