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Fannie Mae Reports Second Quarter 2003 Financial Results.

Business Editors

WASHINGTON--(BUSINESS WIRE)--July 15, 2003

Fannie Mae (NYSE:FNM)--

-- Net income at $1,102 million, down 24.7 percent over the

second quarter of 2002; Diluted earnings per share at $1.09,

down 24.3 percent

-- Core business earnings at $1,860 million, up 18.2 percent over

the second quarter of 2002; Core business diluted earnings per

share at $1.86, up 20.0 percent

-- Common stock dividend increased to $.45 per share

Fannie Mae (NYSE:FNM), the nation's largest source of financing for home mortgages, today reported financial results for the second quarter of 2003. The company's reported results are based on generally accepted accounting principles (GAAP). Management also tracks and analyzes Fannie Mae's financial results based on a supplemental non-GAAP measure called "core business earnings," which management uses as its primary measure in operating Fannie Mae's business (see "Core Business Earnings" and attachments).

 Reported GAAP Results
----------------------------------------------------------------------
 For the Quarter Ended For the Six Months
 June 30, Ended June 30,
----------------------------------------------------------------------
 2003 2002 Change 2003 2002 Change
----------------------------------------------------------------------
Net Income (in millions) $1,102 $1,464 (24.7)% $3,042 $2,672 13.8%
----------------------------------------------------------------------
EPS* (in dollars) $1.09 $1.44 (24.3)% $3.02 $2.61 15.7%
----------------------------------------------------------------------


 Core Business Earnings
----------------------------------------------------------------------
 For the Quarter For the Six Months
 Ended June 30, Ended June 30,
----------------------------------------------------------------------
 2003 2002 Change 2003 2002 Change
----------------------------------------------------------------------
Core Business Earnings (in
 millions) $1,860 $1,573 18.2% $3,710 $3,091 20.0%
----------------------------------------------------------------------
Core Business EPS*
(in dollars) $1.86 $1.55 20.0% $3.70 $3.03 22.1%
----------------------------------------------------------------------

*Diluted


Highlights

Highlights of Fannie Mae's financial performance in the second quarter of 2003 compared with the second quarter of 2002 include:

-- Reported net interest income of $3,500.3 million, up 38.2

percent;

-- Core net interest income of $2,784.5 million, up 26.5 percent;

-- Guaranty fee income of $632.3 million, up 49.3 percent;

-- Fee and other income of $231.5 million compared with $41.6

million;

-- Credit-related expenses of $22.6 million compared with $24.2

million; and

-- Losses of $739.8 million from the call and repurchase of debt

compared with $224.7 million.

Fannie Mae's combined book of business grew at an annualized rate of 29.0 percent during the quarter, including a 55.9 percent annualized increase in outstanding mortgage-backed securities (MBS) and a 1.7 percent annualized decrease in the mortgage portfolio.

Franklin D. Raines, Fannie Mae's Chairman and Chief Executive Officer, said, "Fannie Mae delivered an extremely strong financial performance in the second quarter, again demonstrating the success of our balanced and disciplined strategies for growth. With interest rates at their lowest levels in 45 years, the efficiency of our business model enabled us to finance a truly extraordinary volume of mortgage product." Said Raines, "The quality and liquidity of our mortgage-backed securities have proven to be invaluable in this environment. Our outstanding mortgage-backed securities increased at a 56 percent rate during the quarter, and over the past four quarters they have grown by more than 30 percent, to over $1.2 trillion. We anticipate that these loans will generate profitable revenues for us for many years to come." Raines added that the company strengthened its capital base by $1.2 billion during the quarter, while at the same time taking advantage of market opportunities to repurchase 5.3 million shares of common stock.

Fannie Mae's Vice Chairman and Chief Financial Officer, Timothy Howard, said, "Each of our primary businesses delivered exceptional financial performance in the second quarter, including substantial increases in both core net interest income and guaranty fee income." Howard added that the company's performance benefited significantly from very low mortgage rates and high levels of refinancing, which resulted in a further temporary increase in the company's net interest margin during the second quarter, to an average of 130 basis points. As a consequence, core net interest income during the second quarter of 2003 was 26.5 percent above the second quarter of 2002.

Howard said that the record amounts of refinancing volumes during the quarter had a number of other positive effects on the company's top-line revenues. In the credit guaranty business, rapid refinancings not only fueled extremely strong MBS growth, but also led to a rise in the effective guaranty fee rate, to an average of 21.2 basis points, as rapid prepayments caused deferred guaranty fee revenues to be recognized more quickly. Record business volumes also resulted in very high levels of transaction and technology fee income during the quarter. In addition, said Howard, credit-related expenses remained at very low levels, totaling just $22.6 million in the second quarter which was $1.6 million lower than the same quarter a year ago.

Howard said that the 1.7 percent annualized decline in the company's mortgage portfolio during the second quarter reflected its disciplined approach to purchasing. Howard noted that Fannie Mae took advantage of favorable pricing in the forward market to make many of its mortgage purchase commitments during the quarter for delayed settlement. Howard said that during the second quarter retained commitments exceeded purchases by $63 billion. Accordingly, unsettled commitments rose to a record $135 billion at June 30. Said Howard, "As these commitments settle during the second half of the year, Fannie Mae's portfolio growth should accelerate noticeably." Howard added that assuming mortgage-to-debt spreads are relatively favorable for the balance of the year the company continues to anticipate recording mid-teens portfolio growth for the year as a whole.

Howard noted that the duration gap on Fannie Mae's mortgage portfolio averaged a negative one month in June. For the first six months of the year the company's duration gap averaged a negative three months, in spite of the extremely low and volatile mortgage rates that prevailed during this period.

Finally, Howard said that the company had several opportunities to call and repurchase relatively high cost debt during the second quarter, resulting in losses on the early extinguishment of debt of $740 million. These debt repurchases will benefit the company's financial performance in coming years.

Reported Results

Fannie Mae's reported net income for the second quarter of 2003 was $1,102 million, a 24.7 percent decline compared with $1,464 million in the second quarter of 2002. Diluted earnings per share (EPS) were $1.09 in the second quarter of 2003, down 24.3 percent from $1.44 in the second quarter of 2002.

Reported net income for the first six months of 2003 was $3,042 million, up 13.8 percent from the first six months of 2002. Diluted earnings per share were $3.02 during the first six months of 2003, up 15.7 percent from the comparable period the previous year.

The company recorded $1,883 million of mark-to-market losses on purchased options during the second quarter of 2003 compared with $498 million in mark-to-market losses in the second quarter of 2002. These unrealized losses were recorded in accordance with Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). The increase in unrealized losses was due to the declining interest rate environment and an increase in the balance of purchased options used to hedge interest rate risk. This was the primary factor behind the decline in reported net income during the quarter.

Strong growth in net interest income contributed positively to the company's reported results in the quarter. Net interest income for the second quarter of 2003 was $3,500.3 million, up 38.2 percent from the second quarter of 2002. This increase was driven by an 11.0 percent rise in the average net investment balance and a 30 basis point increase in the net interest yield.

The company's net interest yield averaged 163 basis points in the second quarter of 2003 compared with 133 basis points in the second quarter of 2002. Fannie Mae's net interest yield benefited from an increase in the amount of purchased options used as a substitute for callable debt, since the cost of these options is not included in net interest income or net interest yield. Since the adoption of FAS 133 in January of 2001 this amortization expense has been included as a component of purchased options expense on the income statement and excluded from interest expense. Net interest margin, discussed below, includes purchased options amortization expense and is calculated consistently with the company's previous methodology.

Core Business Earnings

Core business earnings for the second quarter of 2003 were $1,860 million, an 18.2 percent increase compared with $1,573 million in the second quarter of 2002. Core business diluted EPS for the second quarter of 2003 were $1.86, or 20.0 percent above the second quarter of 2002. Growth in core business earnings and diluted EPS was paced by a 26.5 percent increase in core net interest income, a 49.3 percent increase in guaranty fee income, and a $189.9 million increase in fee and other income.

Fannie Mae management relies on core business earnings in operating the company's business. Management believes that core business earnings better reflects the company's risk management strategies, and provides investors with a better measure of the company's financial results than GAAP net income. Core business earnings was developed in conjunction with the company's January 1, 2001 adoption of FAS 133, to adjust for accounting differences between alternative transactions used to hedge interest rate risk that produce similar economic results but require different accounting treatment under FAS 133. The difference in the values and percentage changes between net income and core business earnings, and EPS and core business EPS, are entirely attributable to these accounting differences for interest rate hedges. The attachments to this release include a reconciliation of the company's non-GAAP financial measures to its GAAP results.

Corporate Financial Disciplines

Fannie Mae Chairman Raines said that the company had just completed a year-long assessment of its corporate financial disciplines, and had reviewed the results of this assessment with its Board of Directors. Said Raines, "Our disciplined growth strategies have served the company well over the last 15 years. With our regulatory risk-based capital standard in place, and with the likelihood of continued financial market volatility in the future, we felt it was an appropriate time to take a comprehensive look at the internal financial disciplines and risk management strategies that govern our business."

Raines said that following its review the company was making enhancements to the risk management strategies of both of its primary businesses. In the credit guaranty business, the company is explicitly monitoring the potential income variability stemming from its highest risk loans, and is using pricing, credit enhancements and other techniques to manage this variability. In the portfolio investment business, the company has moderately increased its percentage of option-based debt and is timing its rebalancing actions with the objective of maintaining the portfolio's duration gap within a range of plus or minus six months substantially all of the time. Prior to this year the company had allowed the portfolio duration gap to exceed the plus-or-minus six-month band about one-third of the time. Raines noted that the narrower range for the portfolio duration gap going forward should reduce potential core business earnings variability, but also could produce a somewhat lower net interest margin over the longer term.

Said Raines, "Financial discipline is at the core of Fannie Mae's business. Our intent in updating our risk management strategies, and making them explicit to investors and policymakers, is to make as clear as possible that as we continue to carry out our housing mission in a growing mortgage market our commitment to financial safety and soundness will be absolute."

Capital Account Management

Vice Chairman Howard said that the company also had reviewed and updated its strategy for managing its capital account. Howard noted that the company has had in the past, and should continue to have in the future, a high rate of internally generated capital. He added that the company also has capacity to add more preferred stock to its capital base. Said Howard, "Fannie Mae is committed to using active capital account management to enhance shareholder value. While our first priority always is to reinvest in our business, we believe we will have sufficient internally generated capital and preferred stock capacity to pay a competitive dividend, maintain an active share repurchase program, and build a significant cushion of capital above our statutory minimum to finance future growth."

Howard said that following this quarter's six-cent increase in the dividend, to 45 cents per quarter, Fannie Mae would continue to assess the appropriate dividend payout rate and yield on the company's shares going forward. After paying a competitive dividend, said Howard, the company will balance the pacing of its share repurchase program with its goals for building surplus capital.

On January 21, 2003 Fannie Mae's Board of Directors authorized the purchase of up to 49.4 million shares of the company's common stock, or 5 percent of shares outstanding as of December 31, 2002. Howard said that Fannie Mae expects to be able to repurchase these shares within the next three years.

Outlook

Howard reiterated that the company's long-term earnings would be fueled by the growth in the market in which it operates--residential mortgage debt outstanding. Fannie Mae expects this market to grow by between 8 and 10 percent per year during the current decade. Historically, Howard said, residential mortgage debt outstanding has grown about two percentage points faster than nominal GDP.

Said Howard, "Fannie Mae has no fixed targets for long-term core EPS growth. Over the longer term we would expect our core EPS to grow somewhat faster than our market. We will seek to accomplish this growth through increases in the market shares of our two businesses, increases in our business margins, and active management of our capital account--all within the context of the rigorous financial disciplines that will continue to govern our business."

Howard noted that over the past ten quarters the company's core earnings per share have grown at an above-trend rate averaging 22 percent per year. Howard said that the primary factor driving this growth had been a substantial and temporary increase in the net interest margin on the company's mortgage portfolio. With mortgage rates having fallen by 300 basis points during the last three years, portfolio liquidation rates have risen to unprecedented levels. In this environment, as mortgage durations shortened the company increased its volumes of short-term debt--and raised its percentage of option-based debt, including interest rate caps--to maintain a close duration match on its mortgage portfolio.

Howard said that the company expects that as interest rates stabilize or rise, and liquidating mortgages are replaced with current-coupon loans, mortgage durations will lengthen and the company will pay down much of its short-term debt. Under such circumstances, Howard said, the company expects that its net interest margin will decline significantly, and that its EPS growth will move from above its historical trend to below that trend for a few quarters.

Howard said that the company expects additional repurchases of high-cost fixed-rate debt to cause core EPS in the second half of 2003 to be somewhat below the levels recorded in the first half. For the full year, Howard said, the company expects to report core EPS growth of between 12 and 14 percent compared with 2002, consistent with previous guidance.

Howard added that the tighter tolerance within which the company has been managing the portfolio's duration gap, together with the effects of the additional declines in interest rates that took place during the spring, could result in Fannie Mae's net interest margin stabilizing around a moderately lower average than had been estimated previously. Howard said that as the interest margin levels out over the next several quarters, growth in core EPS is likely to be more variable than in previous periods. Howard noted, however, that by the end of 2004 or early 2005 the company expects core EPS to return to a more predictable growth path around or above its long-term expectation, which is somewhat faster than the growth in residential mortgage debt outstanding.

Fannie Mae is unable to provide an outlook for net income and net interest yield, the most comparable GAAP measures to core business earnings and net interest margin. These GAAP measures are heavily influenced by unrealized gains or losses in the time value of purchased options, which depend on the volume and mix of purchased options used to finance the company's portfolio as well as fluctuations in interest rates, which cannot reliably be projected.

Details of Fannie Mae's second quarter 2003 financial performance follow.

Business Volume

Fannie Mae's business volume - mortgages purchased for portfolio plus MBS issues acquired by other investors - totaled a record $410.5 billion in the second quarter of 2003, compared with $159.8 billion in the second quarter of 2002 and $335.9 billion in the first quarter of 2003. Business volume in the second quarter of 2003 consisted of $128.0 billion in portfolio purchases and $282.5 billion in MBS issues acquired by investors other than Fannie Mae's portfolio. This compares with $56.9 billion and $102.9 billion, respectively, in the second quarter of 2002. Retained commitments to purchase mortgages were $190.7 billion in the second quarter of 2003, compared with $59.9 billion in the second quarter of 2002 and $115.9 billion in the first quarter of 2003. Outstanding portfolio commitments for mandatory delivery rose to $134.6 billion at June 30, 2003 from $73.4 billion at March 31, 2003.

Fannie Mae's combined book of business - the gross balance of mortgages held in portfolio and outstanding MBS and other mortgage-related securities guaranteed by Fannie Mae and held by other investors - grew at a compound annual rate of 29.0 percent during the second quarter of 2003, ending the period at $2.050 trillion. This growth resulted from a 55.9 percent annualized growth rate in outstanding MBS and a 1.7 percent annualized decline in the gross mortgage portfolio.

Portfolio Investment Business Results

Fannie Mae's portfolio investment business manages the interest rate risk of the company's mortgage portfolio and other investments. The results of this business are largely reflected in core net interest income, which is net interest income less the amortization expense of purchased options. Core net interest income for the second quarter of 2003 was $2,785 million, up 26.5 percent from $2,202 million in the second quarter of 2002. This increase was driven by an 11.0 percent rise in the average net investment balance and a 14 basis point increase in the net interest margin.

Fannie Mae's net investment balance - consisting of the company's liquid investment portfolio together with its mortgage portfolio net of unrealized gains or losses on available for sale securities, deferred balances, and the allowance for loan losses - averaged $890 billion during the second quarter of 2003 compared with $802 billion during the second quarter of 2002. The net investment balance was $889 billion at June 30, 2003.

The company's net interest margin averaged 130 basis points in the second quarter of 2003 compared with 116 basis points in the second quarter of 2002 and 125 basis points in the first quarter of 2003. Fannie Mae's net interest margin continued to benefit from an unusually steep yield curve and low short-term interest rates, along with a benefit from the difference in timing between the settlement of mortgage commitments, mortgage liquidations, and funding.

For the second quarter of 2003 the company realized losses from debt repurchases and debt calls of $739.8 million compared with losses of $224.7 million in the second quarter of 2002. During the quarter the company realized $713.3 million of losses on debt repurchases and $26.5 million of losses on debt calls. Debt repurchased and debt called in the second quarter totaled $7.0 billion and $66.4 billion, respectively. Fannie Mae regularly calls or repurchases debt as part of its interest rate risk management program.

Credit Guaranty Business Results

Fannie Mae's credit guaranty business manages the company's credit risk. The results of this business are primarily reflected in guaranty fee income and credit-related losses. Guaranty fee income was $632.3 million in the second quarter of 2003, a 49.3 percent increase compared with the second quarter of 2002. The increase in guaranty fee income was driven by a 28.8 percent rise in average outstanding MBS and a 15.9 percent increase in the effective guaranty fee rate on that business. The effective guaranty fee rate in the second quarter of 2003 was 21.2 basis points compared with 18.3 basis points in the second quarter of 2002 and 20.3 basis points in the first quarter of 2003. The increase in the effective guaranty fee rate between the second quarters of 2003 and 2002 was a result of higher fee rates on new business, together with the faster revenue recognition of deferred fees due to accelerated prepayments.

Credit-related losses -- charge-offs plus foreclosed property income - remained very low in the second quarter, driven by a strong housing market and continued home price gains. Credit-related losses totaled $22.9 million in the second quarter of 2003 compared with $17.3 million in the second quarter of 2002.

Fannie Mae's credit loss rate - credit-related losses as a percentage of the average combined book of business - was 0.5 basis points in the second quarter of 2003 compared with 0.4 basis points in the second quarter of 2002.

Credit-related expense, which includes the provision for losses and foreclosed property income and is the amount recorded on the company's income statement, totaled $22.6 million in the second quarter of 2003, in line with credit-related losses and $1.6 million lower than the second quarter of 2002. Fannie Mae's loss provision was $26.1 million in the second quarter of 2003 compared with $33.4 million in the second quarter of 2002. Foreclosed property income was $3.5 million in the second quarter of 2003 compared with income of $9.2 million in the second quarter of 2002, primarily due to gains on foreclosed property dispositions. The company's allowance for loan losses and guaranty liability for MBS totaled $808 million at June 30, 2003, unchanged from December 31, 2002.

Fannie Mae's conventional single-family serious delinquency rate, an indicator of potential future loss activity, was 0.55 percent at May 31, 2003 compared with 0.57 percent at December 31, 2002. The company's reporting of delinquent loans includes the performance of all seriously delinquent conventional loans, whether or not they benefit from credit enhancement.

Fee and Other Income

Fee and other income in the second quarter of 2003 totaled $231.5 million compared with $41.6 million in the second quarter of 2002. The surge in second quarter volume from a stronger refinancing market drove the combination of transaction, technology, and multifamily fees to $283.2 million, $186.5 million higher than the previous year.

Fee and other income includes technology fees, transaction fees, multifamily fees and other miscellaneous items, and is net of operating losses from certain tax-advantaged investments - primarily investments in affordable housing which qualify for the low income housing tax credit. Tax credits associated with housing tax credit investments are included in the provision for federal income taxes.

Income Taxes

Provision for federal income taxes on net income was $262.9 million in the second quarter of 2003 compared with $485.1 million in the second quarter of 2002. The effective federal income tax rate on net income was 19 percent in the second quarter of 2003 compared with 25 percent for the same period last year. The decrease in the effective rate is attributable to a decrease in taxable income while non-taxable income and tax credits were relatively unchanged from period to period.

Provision for federal income taxes on core business earnings was $671.3 million in the second quarter of 2003, compared with $543.9 million in the second quarter of 2002. The effective federal income tax rate on core business earnings was 27 percent in the second quarter of 2003, compared with 26 percent in the same period last year.

Administrative Expenses

Administrative expenses totaled $354.2 million in the second quarter of 2003, up 17.6 percent from the second quarter of 2002. The above-average growth in expenses is related primarily to Fannie Mae's reengineering of its core technology infrastructure to enhance its ability to process and manage the risk on mortgage assets and the expensing of new stock-based compensation. The growth rate of administrative expenses is expected to slow significantly in 2004.

The company's ratio of administrative expense to the average combined book of business decreased in the second quarter of 2003 to .071 percent from .073 percent in the second quarter of 2002. Fannie Mae's efficiency ratio - administrative expense divided by core taxable-equivalent revenue - was 8.9 percent in the second quarter of 2003 compared with 10.1 percent in the second quarter of 2002.

Capital

Fannie Mae's core capital, which is the basis for the company's statutory minimum capital requirement, was $30.7 billion at June 30, 2003 compared with $28.1 billion at December 31, 2002 and $26.4 billion at June 30, 2002. Core capital was an estimated $1,527 million above the statutory minimum at June 30, 2003. At December 31, 2002, core capital was $877 million above the statutory minimum.

Total capital includes core capital and the total allowance for loan losses and guaranty liabilities for MBS, less any specific loss allowances, and is the basis for the risk-based capital standard. Total capital was $31.5 billion at June 30, 2003 compared with $28.9 billion at December 31, 2002 and $27.2 billion at June 30, 2002. Fannie Mae's total capital exceeded the risk-based requirement by $13.8 billion as of March 31, 2003, the latest period for which a risk-based capital requirement has been determined. The risk-based standard uses a stress test to determine the amount of total capital the company needs to hold in order to protect against credit and interest rate risk, and requires an additional 30 percent capital for management and operations risk. The higher of Fannie Mae's risk-based or minimum capital standard is binding.

Fannie Mae repurchased 5.3 million shares of common stock during the second quarter of 2003 compared with 3.3 million shares in the second quarter of 2002. At June 30, 2003 Fannie Mae had 976.3 million shares of common stock outstanding compared with 988.8 million shares at December 31, 2002.

The company issued $1.5 billion of subordinated debentures in the second quarter of 2003, and had $10.0 billion of subordinated debt outstanding at June 30, 2003. Subordinated debt serves as an important risk-bearing supplement to Fannie Mae's equity capital, although it is not a component of core capital. After providing for capital to support its off-balance sheet MBS, Fannie Mae's total capital and outstanding subordinated debt as a percent of on-balance sheet assets was 3.9 percent at June 30, 2003. The company issued $805 million of preferred stock during the second quarter of 2003. At June 30, 2003, preferred stock made up 12.7 percent of Fannie Mae's core capital.

Voluntary Disclosures

As part of Fannie Mae's voluntary market discipline, liquidity, safety and soundness initiatives of October 2000, the company discloses on a quarterly basis its liquid assets as a percent of total assets along with the sensitivity of its future credit losses to an immediate 5 percent decline in home prices.

At June 30, 2003 Fannie Mae's ratio of liquid assets to total assets was 7.5 percent compared with 6.9 percent at December 31, 2002. Fannie Mae has committed to maintain a portfolio of high-quality, liquid, non-mortgage securities equal to at least 5 percent of total assets.

At March 31, 2003 the present value of Fannie Mae's net sensitivity of future credit losses to an immediate 5 percent decline in home prices was $635 million, taking into account the beneficial effect of third-party credit enhancements. This compares with $596 million at December 31, 2002. The March 31 figure reflects a gross credit loss sensitivity of $1,798 million before the effect of credit enhancements, and is net of projected credit risk sharing proceeds of $1,163 million.

Fannie Mae's quarterly disclosures, together with the monthly interest-rate-risk disclosures, are included in the attachments to this release.

Derivatives and FAS 133

Fannie Mae primarily uses derivative instruments as substitutes for noncallable and callable debt issued in the cash markets to help match the cash flow characteristics of its debt with those of its mortgages and reduce the interest rate risk in its portfolio. Fannie Mae accounts for its derivatives under FAS 133.

FAS 133 requires that Fannie Mae mark to market on its income statement the changes in the time value, but not the total value, of its purchased options - interest rate swaptions and interest rate caps. The mark to market of the time value of Fannie Mae's purchased options during the second quarter of 2003 resulted in a net mark-to-market loss of $1,882.7 million compared with a net mark-to-market loss of $498.2 million in the second quarter of 2002, which is reported on the purchased option expense line of the income statement. Purchased option expense in the second quarter of 2003 includes $715.8 million in amortization expense, which was included in net interest income prior to FAS 133 and currently is included in core net interest income and in core business earnings. This amortization expense represents the straight-line amortization of the up-front premium paid to purchase the options over the expected life of the options together with any acceleration of expense related to options extinguished prior to exercise.

FAS 133 also requires that the company record any change in the fair values of certain derivatives, primarily interest rate swaps it uses as substitutes for noncallable debt, on the balance sheet in accumulated other comprehensive income (AOCI), which is a separate component of stockholders' equity. For these types of transactions FAS 133 does not require or permit noncallable debt to be marked to market. At June 30, 2003, the AOCI component of stockholders' equity included a reduction of $17.0 billion, or 2.1 percent of the net mortgage balance, from the marking to market of these derivatives. Accumulated other comprehensive income is not a component of core capital.

Fannie Mae's primary credit exposure on derivatives is that a counterparty might default on payments due, which could result in Fannie Mae having to replace the derivative with a different counterparty at a higher cost. Fannie Mae's exposure on derivative contracts (taking into account master settlement agreements that allow for netting of payments and excluding collateral received) was $5.384 billion at June 30, 2003. All of this exposure was to counterparties rated A-/A3 or higher. Fannie Mae held $5.087 billion of collateral through custodians to offset the risk of the exposure for these instruments. Fannie Mae's exposure, net of collateral, was $297 million at June 30, 2003 versus $197 million at December 31, 2002.

Conference Call

Fannie Mae will host a conference call with CFO Howard to discuss the company's second quarter earnings release and respond to investor questions on Tuesday, July 15, 2003 at 4:00 p.m. ET. The dial-in number for the call is 1-888-276-0010 or, for international callers, 1-612-288-0329. The confirmation code is 689388. Please dial in 5 to 10 minutes prior to the start of the call. Fannie Mae will also provide an audio Web cast of the conference call, which interested parties can access from Fannie Mae's Web site. A replay of the conference call will be available on Fannie Mae's Web site starting July 15, 2003 at 7:30 p.m. ET. This press release, including the attachments that provide a reconciliation of the company's non-GAAP financial measures to its GAAP results, is available on our Web site at www.fanniemae.com/ir.

Forward-Looking Statements

This release includes forward-looking statements based on management's estimates of trends and economic factors in the markets in which Fannie Mae is active as well as the company's business plans. Such estimates and plans may change without notice and future results may vary from expected results if there are significant changes in economic, regulatory, or legislative conditions affecting Fannie Mae or its competitors. For a discussion of these factors, investors should review our Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission (SEC) and available on our Web site at www.fanniemae.com/ir and SEC's Web site at www.sec.gov under "Federal National Mortgage Association" or CIK number 0000310522. We undertake no duty to update these forward-looking statements.

Fannie Mae is a New York Stock Exchange company and the largest non-bank financial services company in the world. It operates pursuant to a federal charter and is the nation's largest source of financing for home mortgages. Fannie Mae is working to shrink the nation's "homeownership gaps" through a $2 trillion "American Dream Commitment" to increase homeownership rates and serve 18 million targeted American families by the end of the decade. Since 1968, Fannie Mae has provided over $4.8 trillion of mortgage financing for more than 52 million families. More information about Fannie Mae can be found on the Internet at http://www.fanniemae.com.

This press release does not constitute an offer to sell or the solicitation of an offer to buy securities of Fannie Mae. Nothing in this press release constitutes advice on the merits of buying or selling a particular investment. Any investment decision as to any purchase of securities referred to herein must be made solely on the basis of information contained in Fannie Mae's Offering Circular dated January 23, 2003, and that no reliance may be placed on the completeness or accuracy of the information contained in this press release.

You should not deal in securities unless you understand their nature and the extent of your exposure to risk. You should be satisfied that they are suitable for you in the light of your circumstances and financial position. If you are in any doubt you should consult an appropriately qualified financial advisor.

Benchmark Notes and Benchmark Securities are registered marks of Fannie Mae. Unauthorized use of these marks is prohibited.

Style Usage: Fannie Mae's Board of Directors has authorized the company to operate as "Fannie Mae," and the company's stock is now listed on the NYSE as "FNM." In order to facilitate clarity and avoid confusion, news organizations are asked to refer to the company exclusively as "Fannie Mae."

Selected Financial Information

(Dollars and shares in millions,
 except per share amounts)

 Quarter Ended
 ----------------------------------------
Income
 Statement: 6/30/2003 3/31/2003 12/31/2002
 ----------------------------------------

 Net interest
 income $ 3,500.3 $ 3,368.4 $ 3,012.3
 Guaranty
 fee income 632.3 546.6 522.3
 Fee and other
 income (expense),
 net 231.5 113.3 95.4
 Credit-related
 expenses (22.6) (20.3) (32.6)
 Administrative
 expenses (354.2) (343.8) (313.2)
 Purchased options
 income (expense) (1,882.7) (624.6) (1,881.1)
 Debt extinguishments,
 net (739.8) (392.2) (176.1)
 Income before
 taxes 1,364.8 2,647.4 1,227.0
 Federal income
 taxes (262.9) (706.9) (274.8)
 Net income $ 1,101.9 $ 1,940.5 $ 952.2
 ============ ============ =============
 Preferred stock
 dividends (34.2) (30.3) (19.9)

 Earnings per
 diluted common
 share $ 1.09 $ 1.93 $ .94
 Cash dividends
 per share .39 .39 .33
 Weighted average
 diluted common
 shares outstanding 982.3 990.2 992.4
 Effective tax rate
 on reported income 19% 27% 22%
 Return on common
 equity 31.3% 53.6% 26.6%

Core Business Earnings
 Data:(1)
 Core business
 earnings (2) $ 1,860.4 $ 1,849.7 $ 1,671.9
 Core business
 earnings per
 diluted common
 share (2) 1.86 1.84 1.66

 Core net interest
 income (3) 2,784.5 2,604.1 2,238.4
 Core taxable-
 equivalent
 revenue (4) 3,979.8 3,603.2 3,098.0
 Core taxable-
 equivalent
 revenue growth 33.9% 26.9% 7.9%
 Effective tax rate
 on core business
 earnings 27% 26% 28%
 Return on average
 realized common
 equity (5) 27.7% 28.0% 26.4%


 Quarter Ended Six Months Ended June 30,
 ------------------------- ------------------------
Income
 Statement: 9/30/2002 6/30/2002 2003 2002
 ------------------------- ------------------------
 Net interest
 income $ 2,591.3 $ 2,532.1 $ 6,868.7 $ 4,962.5
 Guaranty
 fee income 462.5 423.5 1,178.9 831.1
 Fee and other
 income (expense),
 net 91.6 41.6 344.8 45.2
 Credit-related
 expenses (13.2) (24.2) (42.9) (45.9)
 Administrative
 expenses (314.6) (301.3) (698.0) (591.4)
 Purchased options
 income (expense) (1,378.3) (498.2) (2,507.3) (1,285.4)
 Debt extinguishments,
 net (138.0) (224.7) (1,132.0) (396.4)
 Income before
 taxes 1,301.3 1,948.8 4,012.2 3,519.7
 Federal income
 taxes (307.0) (485.1) (969.8) (847.4)
 Net income $ 994.3 $ 1,463.7 $ 3,042.4 $ 2,672.3
 ============ ============ =========== ==========
 Preferred stock
 dividends (21.6) (24.1) (64.5) (56.9)

 Earnings per
 diluted common
 share $ .98 $ 1.44 $ 3.02 $ 2.61
 Cash dividends
 per share .33 .33 0.78 0.66
 Weighted average
 diluted common
 shares outstanding 994.1 1,000.4 986.5 1,001.0
 Effective tax rate
 on reported income 24% 25% 24% 24%
 Return on common
 equity 28.9% 33.9% 43.1% 32.2%

Core Business Earnings
 Data:(1)
 Core business
 earnings (2) $ 1,630.7 $ 1,572.7 $ 3,710.1 $ 3,091.4
 Core business
 earnings per
 diluted common
 share (2) 1.62 1.55 3.70 3.03

 Core net interest
 income (3) 2,192.1 2,201.7 5,388.6 4,321.9
 Core taxable-
 equivalent
 revenue (4) 2,986.7 2,971.2 7,583.0 5,811.1
 Core taxable-
 equivalent
 revenue growth 15.3% 21.4% 30.5% 23.0%
 Effective tax rate
 on core business
 earnings 28% 26% 26% 26%
 Return on average
 realized common
 equity (5) 26.2% 25.8% 27.9% 25.8%

----------------------------------------------------------------------
 (1) Core business earnings data are non-GAAP (generally accepted
 accounting principles) measures management uses to track and
 analyze financial performance. For information regarding why
 management believes non-GAAP financial measures provide useful
 information to investors and how management uses these
 measures, see "Management's Discussion and Analysis of
 Financial Condition and Results of Operations - Core Business
 Earnings and Business Segment Results" in our Annual Report on
 Form 10-K for the year ended December 31, 2002.

 (2) Excludes unrealized gains and losses on purchased options
 recorded under FAS 133 and includes purchased options premiums
 amortized on a straight-line basis over the original estimated
 life of the option. Presented net of tax.

 (3) Includes non-GAAP adjustment for straight-line amortization of
 purchased options premiums that would have been recorded prior
 to the adoption of FAS 133 in 2001.

 (4) Includes revenues net of operating losses on low-income
 housing tax credit limited partnerships and amortization
 expense of purchased options premiums, plus taxable-equivalent
 adjustments for tax- exempt income and investment credits
 using the applicable federal income tax rate.

 (5) Core business earnings less preferred stock dividends divided
 by average realized common stockholders' equity (common
 stockholders' equity excluding accumulated other comprehensive
 income).


(Dollars in millions)
 Quarter Ended
 ------------------------------------------
Other Data: 6/30/2003 3/31/2003 12/31/2002
 ------------ ----------- ----------
 Mortgage portfolio:
 Retained commitments $ 190,726 $ 115,883 $ 149,322
 Mortgage purchases 127,960 132,005 148,551
 Mortgage liquidations 125,947 105,608 107,824
 Mortgage sales 5,425 1,271 1,386
 Mortgage portfolio,
 gross (1) 812,467 815,964 790,800
 Mortgage portfolio
 growth, gross
 (compounded) -1.7% 13.3% 22.7%

 Mortgage-Backed
 Securities:
 MBS issues acquired
 by others (2) $ 282,502 $ 203,934 $ 155,955
 Outstanding MBS
 liquidations 157,789 127,029 125,219
 Outstanding MBS (3) (4) 1,237,461 1,107,520 1,029,456
 Outstanding MBS growth
 rate (compounded) 55.9% 34.0% 16.7%
 Average effective MBS
 guaranty fee rate (bp) 21.2 20.3 20.4

 Book-of-Business:
 Business volume $ 410,462 $ 335,938 $ 304,506
 Book of business (4) 2,049,928 1,923,484 1,820,256
 Book of business
 growth rate (compounded) 29.0% 24.7% 19.3%

 Expense Ratios:
 Ratio of administrative
 expense to average
 net mortgage
 portfolio and average
 outstanding MBS (annualized) 0.071% 0.073% 0.070%
 Efficiency ratio (5) 8.9% 9.5% 10.1%

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

 Credit-related:
 Single-family
 properties acquired 6,569 5,918 5,415
 Single-family
 conventional serious
 delinquency rate (6)
 Non-credit enhanced 0.29%(7) 0.30% 0.31%
 Credit enhanced 1.38%(7) 1.34% 1.29%
 Total 0.55%(7) 0.57% 0.57%
 Multifamily serious
 delinquency rate (8) 0.15%(7) 0.09% 0.05%
 Charge-offs:
 Single-family $ 22.6 $ 21.6 $ 27.0
 Multifamily 3.8 1.5 15.6
 ------------ ----------- ----------
 Total 26.4 23.1 42.6
 Foreclosed property
 (income) expense:
 Single-family (3.6) (2.7) (8.4)
 Multifamily 0.1 0.0 0.1
 ------------ ----------- ----------
 Total (3.5) (2.7) (8.3)

 Credit-related losses 22.9 20.4 34.3
 Allowance for loan losses
 and guaranty liability
 for MBS 808.0 808.2 808.4
 Provision for losses 26.1 23.0 40.9
 Credit-related expenses 22.6 20.3 32.6
 Credit-related losses
 as a percentage of
 average net mortgage
 portfolio and average
 outstanding MBS
 (annualized) 0.005% 0.004% 0.008%


(Dollars in millions)
 Quarter Ended Six Months Ended June 30,
 ---------------------- -------------------------
Other Data: 9/30/2002 6/30/2002 2003 2002
 ---------- ---------- ------------ -----------
 Mortgage portfolio:
 Retained commitments $ 128,026 $ 59,928 $ 306,609 $ 110,711
 Mortgage purchases 74,227 56,917 259,965 147,863
 Mortgage liquidations 62,148 46,475 231,555 107,447
 Mortgage sales 1,436 3,629 6,696 6,760
 Mortgage portfolio,
 gross (1) 751,423 740,744 812,467 740,744
 Mortgage portfolio
 growth, gross
 (compounded) 5.9% 3.8% 5.6% 9.8%

 Mortgage-Backed
 Securities:
 MBS issues acquired
 by others (2) $ 112,592 $ 102,909 $ 486,435 $ 209,713
 Outstanding MBS
 liquidations 69,087 57,285 284,818 129,871
 Outstanding
 MBS (3) (4) 990,393 945,497 1,237,461 945,497
 Outstanding MBS
 growth rate
 (compounded) 20.4% 23.8% 44.5% 21.2%
 Average effective
 MBS guaranty fee
 rate (bp) 19.0 18.3 20.8 18.4

 Book-of-Business:
 Business volume $ 186,819 $ 159,826 $ 746,400 $ 357,576
 Book of business (4) 1,741,816 1,686,241 2,049,928 1,686,241
 Book of business
 growth rate
 (compounded) 13.8% 14.5% 26.8% 16.2%

 Expense Ratios:
 Ratio of
 administrative
 expense to average
 net mortgage
 portfolio and
 average outstanding
 MBS (annualized) 0.073% 0.073% 0.072% 0.073%
 Efficiency ratio (5) 10.5% 10.1% 9.2% 10.2%

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

 Credit-related:
 Single-family
 properties acquired 5,060 4,688 12,487 9,025
 Single-family
 conventional serious
 delinquency rate (6)
 Non-credit enhanced 0.29% 0.27% N/A N/A
 Credit enhanced 1.12% 1.02% N/A N/A
 Total 0.53% 0.49% N/A N/A
 Multifamily serious
 delinquency rate (8) 0.08% 0.12% N/A N/A
 Charge-offs:
 Single-family $ 25.2 $ 25.7 $ 44.2 $ 52.8
 Multifamily 1.0 0.8 5.3 1.8
 ---------- ---------- ------------ -----------
 Total 26.2 26.5 49.5 54.6
 Foreclosed property
 (income) expense:
 Single-family (12.1) (9.4) (6.3) (15.8)
 Multifamily (0.2) 0.2 0.1 0.0
 ---------- ---------- ------------ -----------
 Total (12.3) (9.2) (6.2) (15.8)

 Credit-related losses 13.9 17.3 43.3 38.8
 Allowance for loan
 losses and guaranty
 liability for MBS 808.1 811.9 808.0 811.9
 Provision for losses 25.5 33.4 49.1 61.7
 Credit-related
 expenses 13.2 24.2 42.9 45.9
 Credit-related losses
 as a percentage of
 average net mortgage
 portfolio and average
 outstanding MBS
 (annualized) 0.003% 0.004% 0.004% 0.005%

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

 (1) Represents unpaid principal balance on mortgages. Excludes the
 effect of unrealized gains or losses on available for sale
 securities, deferred balances, and the allowance for loan
 losses.

 (2) MBS and other mortgage-related securities guaranteed by Fannie
 Mae.

 (3) MBS and other mortgage-related securities guaranteed by Fannie
 Mae and held by investors other than Fannie Mae's portfolio.

 (4) Based on unpaid principal balances.

 (5) Administrative expense divided by core taxable-equivalent
 revenue.

 (6) Includes conventional loans three or more months delinquent or
 in foreclosure process as a percent of the number of loans.

 (7) As of May 31, 2003, most recent data available.

 (8) Includes loans two or more months delinquent as a percent of
 loan dollars.


(Dollars in millions)
 Quarter Ended
 ------------------------------------
 6/30/2003 3/31/2003 12/31/2002
 ----------- ----------- ------------
Net Interest Yield and Net
 Interest Margin:

 Average balances:
 Net mortgage investment $ 808,215 $ 804,804 $ 756,560
 Liquid investments 81,966 67,135 75,696
 ----------- ----------- ------------
 Total net investment $ 890,181 $ 871,939 $ 832,256
 =========== =========== ============

 Net interest yield, taxable-
 equivalent basis (1) 1.63% 1.60% 1.51%
 Net interest margin, taxable-
 equivalent basis (2) 1.30% 1.25% 1.14%

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

Fee and Other Income (Expense):

 Transaction fees $ 159.7 $ 136.7 $ 91.8
 Technology fees 91.8 70.1 62.1
 Multifamily fees 31.7 34.0 26.2
 Tax-advantaged investments (52.4) (71.3) (27.5)
 Credit enhancement expense (45.1) (41.4) (38.2)
 Other 45.8 (14.8) (19.0)
 ----------- ----------- ------------
 Total $ 231.5 $ 113.3 $ 95.4
 =========== =========== ============

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

 June 30, March 31, December 31,
 2003 2003 2002
 ----------- ----------- ------------
Selected Balance Sheet Data:
 Mortgage portfolio, net $ 820,276 $ 823,329 $ 797,693
 Liquid assets 69,089 61,142 61,553
 Total assets 923,795 913,264 887,515

 Debentures, notes, and bonds,
 net 884,081 873,920 850,982

Stockholders' Equity:
 Preferred stock $ 3,882 $ 3,078 $ 2,678
 Realized common equity 26,792 26,438 25,402

 Accumulated other comprehensive
 income (OCI)
 Unrealized gains on
 securities, net 3,642 4,237 4,459
 Cash flow hedging results,
 net (16,952) (15,849) (16,251)
 ----------- ----------- ------------
 Total accumulated OCI (13,310) (11,612) (11,792)
 ----------- ----------- ------------
 Total stockholders' equity $ 17,364 $ 17,904 $ 16,288
 =========== =========== ============

 Core capital (3) $ 30,675 $ 29,517 $ 28,079
 Total capital (4) 31,469 30,309 28,871

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

(Dollars in millions)
 Quarter Ended Six Months Ended June 30,
 ----------------------- ------------------------
 9/30/2002 6/30/2002 2003 2002
 ----------- ----------- ----------- ------------
Net Interest Yield
 and Net Interest
 Margin:

 Average balances:
 Net mortgage
 investment $ 738,812 $ 732,796 $ 806,510 $ 724,200
 Liquid
 investments 64,584 69,187 74,550 67,176
 ----------- ----------- ----------- ------------
 Total net
 investment $ 803,396 $ 801,983 $ 881,060 $ 791,376
 =========== =========== =========== ============

 Net interest yield,
 taxable-equivalent
 basis (1) 1.35% 1.33% 1.61% 1.32%
 Net interest
 margin, taxable-
 equivalent basis (2) 1.16% 1.16% 1.28% 1.16%

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

Fee and Other Income
 (Expense):

 Transaction fees $ 43.2 $ 36.0 $ 296.4 $ 69.8
 Technology fees 60.6 40.6 161.9 74.3
 Multifamily fees 20.4 20.1 65.7 39.3
 Tax-advantaged
 investments (57.0) (75.1) (123.7) (140.0)
 Credit enhancement
 expense (20.5) (23.4) (86.5) (64.3)
 Other 44.9 43.4 31.0 66.1
 ----------- ----------- ----------- ------------
 Total $ 91.6 $ 41.6 $ 344.8 $ 45.2
 =========== =========== =========== ============

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

 September 30, June 30,
 2002 2002
 ----------- -----------
Selected Balance
 Sheet Data:
 Mortgage portfolio,
 net $ 758,100 $ 740,756
 Liquid assets 53,358 64,863
 Total assets 837,880 826,843

 Debentures, notes,
 and bonds, net 800,255 788,909

Stockholders' Equity:
 Preferred stock $ 1,678 $ 1,928
 Realized common
 equity 24,807 24,454

 Accumulated other
 comprehensive
 income (OCI)
 Unrealized gains
 on securities,
 net 4,974 861
 Cash flow hedging
 results, net (16,495) (9,513)
 ----------- -----------
 Total accumulated
 OCI (11,521) (8,652)
 ----------- -----------
 Total stockholders'
 equity $ 14,964 $ 17,730
 =========== ===========

 Core capital (3) $ 26,484 $ 26,382
 Total capital (4) 27,282 27,179

----------------------------------------------------------------------
 (1) Annualized net interest income on a tax-equivalent basis
 divided by the weighted average net investment balance.

 (2) Annualized core net interest income on a tax-equivalent basis
 divided by the weighted average net investment balance.

 (3) The sum of (a) the stated value of common stock, (b) the
 stated value of outstanding noncumulative perpetual preferred
 stock, (c) paid-in capital, and (d) retained earnings, less
 treasury stock. Represents a regulatory measure of capital.

 (4) The sum of (a) core capital and (b) the total allowance for
 loan losses and guaranty liability for MBS, less (c) any
 specific loss allowances. Represents a regulatory measure of
 capital.


 Reconciliation of Core Business Earnings to Reported Results

Dollars and shares in millions,
 except per share amounts

 Quarter Ended
 June 30, 2003
 -------------------------------
 Core
 Business Reconciling Reported
 Earnings Items Results
 -------------------------------
Net interest income $3,500.3 $ - $3,500.3
Purchased options
 amortization expense (1) (715.8) 715.8 -
 -------------------------------
Core net interest income 2,784.5 715.8 3,500.3
Guaranty fee income (expense) 632.3 - 632.3
Fee and other income (expense), net 231.5 - 231.5
Credit-related expenses (22.6) - (22.6)
Administrative expenses (354.2) - (354.2)
Purchased options
 expense under FAS 133 (2) - (1,882.7) (1,882.7)
Debt extinguishments, net (739.8) - (739.8)
 -------------------------------
Income before federal income taxes 2,531.7 (1,166.9) 1,364.8
Provision for federal income taxes (3) (671.3) 408.4 (262.9)
 -------------------------------
 Net income $1,860.4 $(758.5) $1,101.9
 ===============================
Preferred stock dividends $(34.2) $ - $(34.2)
Weighted average diluted
 common shares outstanding 982.3 - 982.3
Diluted earnings per common share $1.86 $(0.77) $ 1.09

 Quarter Ended
 June 30, 2002
 -------------------------------
 Core
 Business Reconciling Reported
 Earnings Items Results
 -------------------------------
Net interest income $2,532.1 $ - $2,532.1
Purchased options
 amortization expense (1) (330.4) 330.4 -
 -------------------------------
Core net interest income 2,201.7 330.4 2,532.1
Guaranty fee income (expense) 423.5 - 423.5
Fee and other income (expense), net 41.6 - 41.6
Credit-related expenses (24.2) - (24.2)
Administrative expenses (301.3) - (301.3)
Purchased options
 expense under FAS 133 (2) - (498.2) (498.2)
Debt extinguishments, net (224.7) - (224.7)
 -------------------------------
Income before federal income taxes 2,116.6 (167.8) 1,948.8
Provision for
 federal income taxes (3) (543.9) 58.8 (485.1)
 -------------------------------
 Net income $1,572.7 $(109.0) $1,463.7
 ===============================
Preferred stock dividends $(24.1) $ - (24.1)
Weighted average diluted
 common shares outstanding 1,000.4 - 1,000.4
Diluted earnings per common share $1.55 $(0.11) $1.44
 -------------------------------

 Six Months Ended
 June 30, 2003
 -------------------------------
 Core
 Business Reconciling Reported
 Earnings Items Results
 -------------------------------
Net interest income $6,868.7 $ - $6,868.7
Purchased options
 amortization expense (1) (1,480.1) 1,480.1 -
 -------------------------------
Core net interest income 5,388.6 1,480.1 6,868.7
Guaranty fee income (expense) 1,178.9 - 1,178.9
Fee and other income (expense), net 344.8 - 344.8
Credit-related expenses (42.9) - (42.9)
Administrative expenses (698.0) - (698.0)
Purchased options
 expense under FAS 133 (2) - (2,507.3) (2,507.3)
Debt extinguishments, net (1,132.0) - (1,132.0)
 -------------------------------
Income before federal income taxes 5,039.4 (1,027.2) 4,012.2
Provision for
 federal income taxes (3) (1,329.3) 359.5 (969.8)
 -------------------------------
 Net income $3,710.1 $(667.7) $3,042.4
 ===============================
Preferred stock dividends $(64.5) $ - $(64.5)
Weighted average diluted
 common shares outstanding 986.5 - 986.5
Diluted earnings per common share $3.70 $(0.68) $3.02
 -------------------------------

 Six Months Ended
 June 30, 2002
 -------------------------------
 Core
 Business Reconciling Reported
 Earnings Items Results
 -------------------------------
Net interest income $4,962.5 $ - $4,962.5
Purchased options
 amortization expense (1) (640.6) 640.6 -
 -------------------------------
Core net interest income 4,321.9 640.6 4,962.5
Guaranty fee income (expense) 831.1 - 831.1
Fee and other income (expense), net 45.2 - 45.2
Credit-related expenses (45.9) - (45.9)
Administrative expenses (591.4) - (591.4)
Purchased options
 expense under FAS 133 (2) - (1,285.4) (1,285.4)
Debt extinguishments, net (396.4) - (396.4)
 -------------------------------
Income before federal income taxes 4,164.5 (644.8) 3,519.7
Provision for
 federal income taxes (3) (1,073.1) 225.7 (847.4)
 -------------------------------
 Net income $3,091.4 $(419.1) $2,672.3
 ===============================
Preferred stock dividends $(56.9) $ - $(56.9)
Weighted average diluted
 common shares outstanding 1,001.0 - 1,001.0
Diluted earnings per common share $3.03 $(0.42) $2.61
 -------------------------------

 Reported Results
 ------------------- -------------------
 Quarter Ended Six Months Ended
 6/30/03 6/30/02 6/30/03 6/30/02
 ------------------- -------------------
Net interest income $3,500.3 $2,532.1 $6,868.7 $4,962.5
Taxable-equivalent
 adjustment on tax-exempt
 investments (4) 119.4 126.0 242.2 249.1
 -------- -------- -------- --------
Taxable-equivalent net
 interest income $3,619.7 $2,658.1 $7,110.9 $5,211.6
 ======== ======== ======== ========
Purchased options
 amortization expense
Taxable-equivalent core
 net interest income

Average net
 investment balance $890,181 $801,983 $881,060 $791,376

Average investment yield 5.66% 6.40% 5.80% 6.44%
Average borrowing cost 4.24% 5.25% 4.37% 5.30%
Purchased options
 amortization expense
Average core borrowing cost (5)
Net interest yield,
 taxable-equivalent basis (6) 1.63% 1.33% 1.61% 1.32%
Net interest margin,
 taxable- equivalent basis (7)

Net interest income $3,500.3 $2,532.1 $6,868.7 $4,962.5
Guaranty fee income 632.3 423.5 1,178.9 831.1
Fee and other
 income (expense), net 231.5 41.6 344.8 45.2
 -------- -------- -------- --------
 Total revenues 4,364.1 2,997.2 8,392.4 5,838.8
 -------- -------- -------- --------
Investment tax credits (8) 212.1 178.4 428.5 363.8
Tax-exempt investments (4) 119.4 126.0 242.2 249.1
 -------- -------- -------- --------
 Total taxable-
 equivalent adjustments 331.5 304.4 670.7 612.9
 -------- -------- -------- --------
Taxable-equivalent revenues $4,695.6 $3,301.6 $9,063.1 $6,451.7
 ======== ======== ======== ========

 Core Business Earnings
 ----------------- -------------------
 Quarter Ended Six Months Ended
 6/30/03 6/30/02 6/30/03 6/30/02
 -------- -------- -------- --------
Net interest income $3,500.3 $2,532.1 $6,868.7 $4,962.5
Taxable-equivalent
 adjustment on tax-
 exempt investments (4) 119.4 126.0 242.2 249.1
 -------- -------- -------- --------
Taxable-equivalent
 net interest income 3,619.7 2,658.1 7,110.9 5,211.6
Purchased options
 amortization expense (715.8) (330.4)(1,480.1) (640.6)
 -------- -------- -------- --------
Taxable-equivalent core
 net interest income $2,903.9 $2,327.7 $5,630.8 $4,571.0
 ======== ======== ======== ========

Average net
 investment balance $890,181 $801,983 $881,060 $791,376

Average investment yield 5.66% 6.40% 5.80% 6.44%
Average borrowing cost 4.24% 5.25% 4.37% 5.30%
Purchased options
 amortization expense 0.32% 0.17% 0.35% 0.17%
Average core
 borrowing cost (5) 4.56% 5.42% 4.72% 5.47%
Net interest
 yield, taxable-
 equivalent basis (6)
Net interest margin,
 taxable-equivalent basis (7) 1.30% 1.16% 1.28% 1.16%

Net interest income $3,500.3 $2,532.1 $6,868.7 $4,962.5
Guaranty fee income 632.3 423.5 1,178.9 831.1
Fee and other
 income (expense), net 231.5 41.6 344.8 45.2
 -------- -------- -------- --------
 Total revenues 4,364.1 2,997.2 8,392.4 5,838.8
 -------- -------- -------- --------
Investment tax credits (8) 212.1 178.4 428.5 363.8
Tax-exempt investments (4) 119.4 126.0 242.2 249.1
 -------- -------- -------- --------
 Total taxable-
 equivalent adjustments 331.5 304.4 670.7 612.9
 -------- -------- -------- --------
Taxable-equivalent revenues 4,695.6 3,301.6 9,063.1 6,451.7
Purchased options
 amortization expense (715.8) (330.4)(1,480.1) (640.6)
 -------- -------- -------- --------
Core taxable-
 equivalent revenues $3,979.8 $2,971.2 $7,583.0 $5,811.1
 ======== ======== ======== ========

----------------------------------------------------------------------
 (1) This amount represents the straight-line amortization of
 purchased options expense allocated to interest expense over
 the original expected life of the options. Included in core
 business earnings instead of the unrealized gains and losses
 on purchased options to make it consistent with the accounting
 for the embedded options in our callable debt and the vast
 majority of our mortgages.

 (2) This amount represents unrealized gains and losses on
 purchased options recorded in accordance with FAS 133.

 (3) The reconciling item represents the net federal income tax
 effect of core business earnings adjustments based on the
 applicable federal income tax rate of 35 percent.

 (4) Reflects non-GAAP adjustments to permit comparison of yields
 on tax-exempt and taxable assets based on a 35 percent
 marginal tax rate.

 (5) Includes the effect of purchased options amortization expense
 allocated to interest expense over the original expected life
 of the options.

 (6) Annualized taxable-equivalent net interest income divided by
 the weighted average net investment balance.

 (7) Annualized taxable-equivalent core net interest income divided
 by the weighted average net investment balance.

 (8) Represents non-GAAP adjustments for tax credits related to
 losses on certain affordable housing tax-advantaged equity
 investments and other investment tax credits using a 35%
 marginal tax rate.

 Voluntary Initiatives Disclosure
 June 2003
----------------------------------------------------------------------
 INTEREST RATE RISK
----------------------------------------------------------------------
 Rate Level Shock (50bp) Rate Slope Shock (25bp)
 ---------------------- ----------------------
 Effective 1 year 4 Year 1 Year 4 Year
 Duration Portfolio Portfolio Portfolio Portfolio
 Gap Net Net Net Net
 (in months) interest Interest Interest Interest
 Income at Income at Income at Income at
 Risk Risk Risk Risk


 2000
 ---------------------------------------------------------------------
 1st Qtr 5 0.1% 4.3% 1.0% 3.0%
 ---------------------------------------------------------------------
 2nd Qtr 4 0.6% 4.8% 1.0% 3.0%
 ---------------------------------------------------------------------
 3rd Qtr 2 0.8% 4.3% 1.0% 3.1%
 ---------------------------------------------------------------------
 4th Qtr -3 0.5% 2.0% 3.0% 4.3%
 ---------------------------------------------------------------------

 2001
 ---------------------------------------------------------------------
 1st Qtr 1 3.8% 3.2% 3.1% 4.7%
 ---------------------------------------------------------------------
 2nd Qtr 5 1.7% 4.4% 0.9% 2.0%
 ---------------------------------------------------------------------
 3rd Qtr -1 2.4% 3.6% 2.8% 4.0%
 ---------------------------------------------------------------------
 4th Qtr 5 5.1% 4.5% 2.4% 4.3%
 ---------------------------------------------------------------------

 2002
 ---------------------------------------------------------------------
 1st Qtr 5 3.8% 6.1% 1.0% 3.1%
 ---------------------------------------------------------------------
 2nd Qtr -4 1.2% 2.4% 3.0% 5.7%
 ---------------------------------------------------------------------
 3rd Qtr -10 4.4% 3.9% 5.3% 6.4%
 ---------------------------------------------------------------------
 4th Qtr -5 0.6% 1.6% 4.7% 6.6%
----------------------------------------------------------------------

 2003
 ---------------------------------------------------------------------
 January -3 2.9% 3.8% 3.5% 5.7%
 ---------------------------------------------------------------------
 February -5 3.6% 1.3% 4.9% 6.8%
 ---------------------------------------------------------------------
 March -2 1.7% 2.8% 4.4% 6.7%
 ---------------------------------------------------------------------
 April -2 2.1% 2.5% 4.6% 6.5%
 ---------------------------------------------------------------------
 May -5 0.7% 2.2% 5.3% 7.1%
 ---------------------------------------------------------------------
 June -1 2.1% 6.6% 3.9% 5.9%
 ---------------------------------------------------------------------


-- Effective duration gap - measures the extent the effective
 duration of the portfolio's assets and liabilities are matched. A
 positive duration gap indicates that the effective duration
 of our assets exceeds the effective duration of our liabilities by
 that amount, while a negative duration gap indicates the opposite.

 Effective January 2003, the duration gap is a weighted average for
 the month. Prior to 2003, the duration gap was calculated on the
 last day of the month.


-- Net interest income at risk - compares Fannie Mae's projected
 change in portfolio net interest income under the financially more
 adverse of a 50 basis point increase and decrease in interest
 rates. Fannie Mae also compares the expected change in portfolio
 net interest income for the more adverse of a 25 basis point
 decrease and increase in the slope of the yield curve. Both
 measurements are done for one-year and four-year periods.

 A positive number indicates the percent by which net interest
 income could be reduced by the increased rate shock. A negative
 number would indicate the percent by which net interest income
 could be increased by the shock.

---------------------------------------------------------------------
 LIQUIDITY
----------------------------------------------------------------------
 Ratio of liquid to total assets Ratio
 --------------------------------- ---------

 December 31, 2000 8.2%
 March 31, 2001 6.4%
 June 30, 2001 8.0%
 September 30, 2001 7.8%
 December 31, 2001 9.5%
 March 31, 2002 7.1%
 June 30, 2002 7.8%
 September 30, 2002 6.4%
 December 31, 2002 6.9%
 March 31, 2003 6.7%
 June 30, 2003 7.5%


 -- Fannie Mae will maintain at least three months of liquidity to
 ensure the company can meet all of its obligations in any
 period of time in which it does not have access to the debt
 markets. Fannie Mae also will comply with the Basel Committee
 on Banking Supervision's fourteen principles for sound
 liquidity management.

 -- To fulfill its liquidity commitment, Fannie Mae will maintain
 more than five percent of its on-balance sheet assets in
 high-quality, liquid, non-mortgage securities.


 ---------------------------------------------------------------------
 CREDIT RISK
 ---------------------------------------------------------------------
 Before After
 Lifetime credit loss credit credit
 sensitivity as of: enhancements enhancements
 ------------------- ------------ ------------
 (Dollars in millions)
 December 31, 2000 $1,065 $295
 March 31, 2001 $1,061 $307
 June 30, 2001 $1,045 $332
 September 30, 2001 $1,349 $467
 December 31, 2001 $1,332 $487
 March 31, 2002 $1,285 $425
 June 30, 2002 $1,361 $465
 September 30, 2002 $1,738 $501
 December 31, 2002 $1,838 $596
 March 31, 2003 1/ $1,798 $635


 -- Lifetime credit loss sensitivity measures the sensitivity of
 Fannie Mae's expected future credit losses to an immediate
 five percent decline in home values for all single-family
 mortgages held in Fannie Mae's retained portfolio and
 underlying guaranteed MBS.

 -- Credit loss sensitivity is reported in present value terms and
 measures expected losses in two ways: before receipt of
 private mortgage insurance claims and any other credit
 enhancements and after receipt of expected mortgage insurance
 and other credit enhancements.

----------------------------------------------------------------------
 RISK-BASED CAPITAL
----------------------------------------------------------------------
 Risk-based Total
 Risk-based capital Capital Capital Capital
 stress test Requirement Held Surplus
 --------------------- ----------- ---------- ---------
 (Dollars in billions)
 September 30, 2002 $ 21.440 $ 27.278 $ 5.838
 December 31, 2002 17.434 28.871 11.437
 March 31, 2003 1/ 16.555 30.309 13.754

 -- The risk-based capital standard became effective on September
 13, 2002. The standard uses a stress test to determine the
 amount of total capital the company needs to hold in order to
 protect against credit and interest rate risk, and requires an
 additional 30 percent capital for management and operations
 risk. The higher of Fannie Mae's risk-based or minimum capital
 standard is binding.

 1 / Most recent data available.


 Glossary of Business Terms



Purchased options amortization expense- the cost of purchased options used to hedge interest rate risk amortized over the original expected life of the options, together with any acceleration of expense related to options extinguished prior to exercise. Included in core business earnings instead of the unrealized gains and losses on purchased options to make it consistent with the accounting for the embedded options in our callable debt and the vast majority of our mortgages.

Business Volume - Mortgages purchased for portfolio plus MBS issues acquired by other investors.

Combined Book of Business - The gross mortgage portfolio plus outstanding MBS. Also referred to as the book of business. (Formerly referred to as total book of business).

Core Capital - Total stockholders' equity excluding other comprehensive income (OCI). Represents a regulatory measure of capital.

Total Capital - Core capital plus the total allowance for loan losses and guaranty liability for MBS, less any specific loss allowances. Represents a regulatory measure of capital.

Core Net Interest Income - Net interest income and purchased options amortization expense (Comparable to net interest income pre-FAS 133).

Core Taxable-Equivalent Revenue - The sum of core net interest income, guaranty fee income, and fee and other income, together with a taxable-equivalency adjustment for tax-exempt income and investment credits (principally mortgage revenue bonds and low income housing tax credit investments).

Efficiency Ratio - Administrative expense divided by core taxable-equivalent revenue.

Gross Mortgage Portfolio - Unpaid principal balance of mortgages held in portfolio, excluding the effect of unrealized gains or losses on available for sale securities, deferred balances and the allowance for loan losses.

MBS Issues Acquired by Other Investors - Lender-originated MBS issues less MBS purchased by Fannie Mae's mortgage portfolio. Also referred to as MBS issues. (Formerly referred to as net MBS issues). Does not include Fannie Mae-originated MBS, which generally are immaterial and disclosed in a footnote.

Net Interest Margin - Annualized taxable-equivalent core net interest income (including purchased options amortization expense) divided by the weighted average net investment balance.

Net Interest Yield - Annualized taxable-equivalent net interest income divided by the weighted average net investment balance.

Net Investment Balance - The sum of Fannie Mae's net mortgage portfolio and other liquid investments (including float).

Net Mortgage Portfolio - Unpaid principal balance of mortgages held in portfolio including the effect of unrealized gains or losses on available for sale securities, unamortized purchase premium or discount and deferred price adjustments, and allowance for loan losses.

Outstanding MBS - Mortgage-backed securities (MBS) and other mortgage related-securities held by investors other than Fannie Mae's mortgage portfolio. (Formerly referred to as net MBS outstanding).

Realized Common Equity - Total stockholders' equity excluding preferred stock and OCI. Realized common equity is used in calculating return on equity.
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Date:Jul 15, 2003
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