Executive Summary / Key Takeaways

• Fannie Mae's core mission to provide liquidity and stability to the U.S. housing market continues, underpinned by its government-sponsored enterprise status and risk management capabilities, despite operating under conservatorship which imposes significant limitations and structural complexities.
• The company reported solid financial results in Q1 2025 with $3.7 billion in net income, contributing to a net worth increase to $98.3 billion, although net income was down year-over-year primarily due to shifts in fair value gains and credit loss provisions.
• Key market trends in Q1 2025 included modestly increasing housing activity, a slight decrease in mortgage rates, continued national home price growth (estimated 1.4%), and persistent challenges in the multifamily sector with declining property values and elevated new supply impacting rents and vacancies.
• Fannie Mae is actively leveraging technology and strategic initiatives, such as using rent payment data, modernizing valuations, and issuing social bonds, to address affordability and access challenges, particularly for underserved borrowers and renters, while managing credit risk through robust underwriting and credit risk transfer programs.
• Despite building capital through retained earnings, Fannie Mae remains significantly undercapitalized relative to regulatory requirements, and the ongoing conservatorship and related litigation present material risks and uncertainties regarding its future structure and operations.

The Bedrock of U.S. Housing Finance: Mission, Structure, and the Weight of History

Federal National Mortgage Association, or Fannie Mae ($FNMAI), stands as a foundational pillar of the U.S. housing finance system. Chartered by Congress in 1938, its enduring mission is to provide liquidity, stability, and access to mortgage credit across the nation. Unlike traditional banks, Fannie Mae does not originate loans directly to borrowers. Instead, it operates in the secondary mortgage market, purchasing residential mortgage loans from lenders, pooling them into trusts, and issuing guaranteed mortgage-backed securities (MBS) to global investors. This guaranty, for which Fannie Mae receives a fee – its primary revenue source – is the critical mechanism that ensures the flow of capital into the housing market, allowing lenders to free up funds to make new loans.

Fannie Mae supports both the single-family market (properties with four or fewer units) and the multifamily market (five or more units). As of December 31, 2024, the company owned or guaranteed an estimated 25% of single-family and 21% of multifamily mortgage debt outstanding in the U.S., highlighting its significant footprint.

The defining characteristic of Fannie Mae's recent history, however, is its conservatorship, initiated in 2008 with the Federal Housing Finance Agency (FHFA) appointed as conservator. This status, alongside agreements with the U.S. Department of the Treasury, fundamentally reshaped the company, imposing stringent restrictions on its business activities and stockholder rights. FHFA exercises direct control, with the FHFA Director serving as the Chairman of Fannie Mae's Board since March 17, 2025. This unique structure, while providing essential government support that is critical to the company operating as a going concern and maintaining access to debt funding, also creates inherent structural limitations, including a material weakness in internal control over financial reporting related to information flow from FHFA, which is not expected to be remediated while in conservatorship. The legacy of the 2012 "net worth sweep" amendment to the Treasury agreement also persists, subject to ongoing litigation that challenges past dividend payments and seeks damages, adding a layer of legal and financial uncertainty.

The Competitive Arena: Scale, Stability, and the Pursuit of Efficiency

Fannie Mae operates within a complex competitive landscape dominated by its fellow government-sponsored enterprise, Freddie Mac (FMCC), and includes private mortgage insurers like MGIC Investment Corporation (MTG) and Radian Group (RDN), as well as MBS investment firms like Annaly Capital Management (NLY) and various fintech players.

Fannie Mae's primary competitive advantage stems from its government-sponsored status, which provides an implicit guarantee. This backing allows it to access debt funding at lower costs than private entities, translating into a significant pricing power advantage and contributing to its ability to maintain robust net margins (TTM Net Profit Margin was 17.98%). This scale and stability are difficult for private competitors to match, particularly in providing liquidity across all market cycles and supporting affordable housing initiatives. While Freddie Mac shares this GSE advantage, Fannie Mae generally holds a larger share of the single-family market.

However, the conservatorship imposes limitations that can hinder strategic agility compared to private players. Private mortgage insurers like MGIC and Radian compete directly in providing credit enhancement, sometimes offering lower upfront costs for lenders. While Fannie Mae's integrated approach to securitization, servicing, and risk management provides greater overall efficiency in portfolio management (contributing to lower loss rates), its operational cost structure can be higher. Fintech companies, such as Rocket Companies (RKT), challenge the traditional mortgage process with digital tools offering faster and potentially cheaper origination for borrowers, pressuring GSEs to enhance their own technological capabilities.

In the multifamily sector, Fannie Mae competes with Freddie Mac and private capital. While Fannie Mae's scale provides economies of scale, Freddie Mac has been noted for aggressive risk-sharing structures that have captured market share. Multifamily acquisition volumes for Fannie Mae in Q1 2025 ($17.0 billion) increased 17% year-over-year but remained subdued compared to historical peaks, reflecting low overall market volumes and competition, similar to trends seen in 2023. FHFA also caps Fannie Mae's multifamily loan purchases, set at $73.0 billion for 2025, adding a specific constraint not faced by all competitors.

Overall, Fannie Mae's competitive positioning is one of a stable, large-scale market leader, particularly in single-family, whose government backing and integrated risk management provide a durable moat. However, it faces pressure from more agile private competitors and fintech innovators who can offer cost or speed advantages in specific market niches, necessitating continuous strategic response and technological investment.

Technology as a Catalyst for Mission and Efficiency

Technology is increasingly central to Fannie Mae's strategy, serving not just to enhance operational efficiency but also as a critical tool for advancing its mission and managing risk in a data-driven environment. While not a technology development company in the traditional sense, Fannie Mae leverages sophisticated platforms and analytics to improve its core functions and address market challenges.

A key area of technological focus is credit assessment and risk management. Fannie Mae utilizes advanced analytics within its automated underwriting system, Desktop Underwriter, to evaluate borrower creditworthiness. A notable innovation is the ability to consider on-time rent payment data in credit evaluations, or to assess the cash flow and creditworthiness of borrowers without traditional credit scores. This directly addresses the obstacle of insufficient credit for many potential homebuyers, particularly those with thin credit files. The quantifiable impact of this initiative was highlighted in 2023, where according to vendors, nearly 28,000 renters established credit scores, and participating renters who already had a score saw an average increase of 35 points.

Another area of technological advancement is modernizing the home valuation process. By using models and analytics, Fannie Mae offers less costly appraisal waivers and alternatives. In 2023, this resulted in an estimated $52 million in upfront cost savings for low- to moderate-income borrowers, directly contributing to affordability. The company is also exploring options like using attorney opinion letters instead of traditional title insurance on some transactions, another effort to reduce upfront costs.

Furthermore, Fannie Mae is using technology and data transparency in the capital markets to support its mission. The launch of enhanced single-family Mission Index disclosures helps MBS investors identify and allocate capital towards affordable housing and underserved borrowers and markets. These disclosures form the basis for Fannie Mae's single-family social bonds, designed to attract additional mission-aligned investment.

While specific R&D spending figures or detailed performance metrics for internal technology platforms compared to competitors are not extensively detailed, the strategic intent is clear: leverage data and technology to improve access, reduce costs, enhance risk management, and connect mission objectives with capital markets. The "so what" for investors is that these technological initiatives, particularly those focused on credit access and cost reduction, have the potential to expand the addressable market for Fannie Mae's guaranty business and improve the credit quality of its book over time by enabling responsible lending to previously underserved segments. However, the pace of technological adoption and innovation relative to faster-moving fintech competitors remains a challenge to monitor.

Financial Performance and Market Dynamics: Navigating Crosscurrents

Fannie Mae's financial performance reflects the interplay of its core business model, market conditions, and the unique constraints of conservatorship. In the first quarter of 2025, the company reported net income of $3.7 billion, a decrease of $659 million compared to $4.3 billion in the first quarter of 2024. This decline was primarily driven by a decrease in fair value gains and a shift from a benefit for credit losses in Q1 2024 to a provision for credit losses in Q1 2025.

Net revenues remained relatively flat year-over-year at $7.1 billion in Q1 2025. Net interest income, the primary component, saw lower contributions from the retained portfolio due to higher funding costs, largely offset by higher base guaranty fee income driven by increased fees on recent single-family acquisitions and lower expense from hedge accounting.

The shift in credit losses was notable. In Q1 2025, Fannie Mae recorded a $24 million provision for credit losses, primarily related to the single-family segment. This reflected the impact of recent economic uncertainty, although it was partially offset by a benefit from improvements in actual and forecasted home price growth. This contrasts with Q1 2024, which saw a $180 million benefit for credit losses, largely driven by favorable home price forecasts at that time. The multifamily segment's provision was neutral in Q1 2025, compared to a $155 million provision in Q1 2024 driven by declining property values and rising interest rates. The multifamily allowance for credit losses as of March 31, 2025, explicitly includes a component for economic uncertainty, particularly regarding property values, and reflects uncertainty from an ongoing investigation into suspected fraud in lending transactions.

Fair value gains, net, decreased significantly to $123 million in Q1 2025 from $480 million in Q1 2024. The Q1 2025 gains were primarily from fixed-rate trading securities but were substantially offset by losses on long-term debt, mortgage commitment derivatives, and risk management derivatives, largely due to declining interest rates during the quarter. Q1 2024 gains were driven by rising interest rates impacting derivatives and fair value debt.

Operational metrics reflect the challenging market. Single-family acquisition volume (HFI UPB) was $63.6 billion in Q1 2025, slightly up from $62.3 billion in Q1 2024, but still low compared to historical levels, constrained by affordability and limited supply. The single-family serious delinquency rate remained flat at 0.56% as of March 31, 2025, near historically low levels, but management noted that recent trade/fiscal policies and expected slower economic growth could impact future performance. Multifamily new business volume increased to $17.0 billion in Q1 2025 from $14.0 billion in Q1 2024. The multifamily serious delinquency rate increased to 0.63% as of March 31, 2025, from 0.57% at year-end 2024, with new delinquencies primarily in fixed-rate conventional loans, adding to the elevated criticized loan population largely driven by ARM loans.

Liquidity remains strong, with $77.8 billion in cash, cash equivalents, and restricted cash as of March 31, 2025. The company was in compliance with all liquidity requirements and its aggregate indebtedness of $140.1 billion was well below the $270 billion debt limit. The retained mortgage portfolio decreased slightly to $80.3 billion, remaining well below the $225 billion cap.

Capital remains a critical focus. While GAAP net worth increased to $98.3 billion, Fannie Mae had a $33.0 billion deficit in available capital under the enterprise regulatory capital framework as of March 31, 2025, primarily because the $120.8 billion senior preferred stock held by Treasury does not count as regulatory capital. The shortfall to the total risk-based capital requirement (including buffers) was $220.0 billion. This shortfall decreased by $7.0 billion in Q1 2025 due to retained earnings and decreased risk-weighted assets. The aggregate liquidation preference of the senior preferred stock continues to grow with net worth increases, reaching $216.2 billion as of March 31, 2025, and projected to increase further to $219.8 billion by June 30, 2025. Treasury's remaining funding commitment stood at $113.9 billion.

Outlook and Risks: A Cautious Path Forward

Fannie Mae's outlook for 2025, as articulated by management, anticipates continued, albeit slower, economic growth than in 2024, with a modest increase in the unemployment rate. The forecast for national home price growth in 2025 is 4.1%, with expected regional variations. Single-family mortgage market originations are projected to increase by approximately 17% in 2025 to $1.98 trillion, driven by a notable increase in refinance originations to $529 billion.

In the multifamily market, elevated new construction completions (estimated 450,000-500,000 units in 2025) are expected to potentially push vacancy rates higher (up to 6.25% in 2025). Despite this, rent growth is expected to be in the 2.0% to 2.5% range if job growth remains steady, though a substantial slowdown in job growth could dampen renter demand and keep rent growth subdued. Multifamily property values, which declined 18% from their Q2 2022 peak through Q1 2025, are expected to see further near-term declines before a long-term improvement.

Key risks to this outlook include the uncertain impact of trade, fiscal, regulatory, and immigration policies on interest rates, home prices, and economic growth. Market risk, particularly interest rate risk and spread risk, can cause significant volatility in fair value gains/losses and earnings, although derivatives are used to manage benchmark interest rate exposure. Credit risk remains paramount, influenced by economic conditions, home prices, property values, and borrower behavior. While single-family delinquencies are low, potential increases due to economic slowdown or specific events (like natural disasters) are monitored. Multifamily credit risk is elevated, particularly for ARM loans and properties facing valuation pressure, and the increase in the serious delinquency rate warrants close attention. Counterparty risk, especially with mortgage servicers and insurers, is also a concentration risk. The material weakness in internal controls related to conservatorship information flow and the uncertainty surrounding the ongoing litigation challenging the Treasury agreement are significant structural risks that could materially impact the company.

Conclusion

Fannie Mae's Q1 2025 results demonstrate continued profitability and capital accumulation, reinforcing its financial stability amidst a complex and evolving housing market. The company effectively fulfills its core mission of providing liquidity and promoting access to credit, strategically leveraging technology and targeted initiatives to address affordability and underserved markets. Its robust risk management framework, particularly in credit risk transfer and loan workouts, remains essential in mitigating potential losses from market volatility and credit deterioration.

However, the investment narrative for Fannie Mae remains inextricably linked to its conservatorship status. While government support provides a critical foundation, the associated restrictions, capital deficit relative to regulatory requirements, and ongoing litigation introduce significant uncertainties regarding the company's long-term structure and the potential for future returns to common stockholders. The ability to navigate challenging market conditions, manage elevated multifamily credit risks, and adapt to competitive pressures from private and fintech players will be crucial, but the overarching influence of regulatory and governmental factors continues to be the dominant theme shaping Fannie Mae's trajectory.