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Confidential Proprietary Business Information Produced Pursuant to House Rules

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PROPRIETARY AND CONFIDENTIALCONFIDENTIAL TREATMENT REQUESTED

BY FANNIE MAE

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Confidential Treatment Requested By Fannie Mae FMSE 511752

Fannie Mae FM-COGR 00143392

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Executive Summary

• Business Update: Stable performance but competition remains fierce across the board; must reevaluate strategies in light of environment

II Restatement: Planning to staffing to broad engagement

II Housing and Minority Lending Goals: HUD goals on track but minority lending goals require a new approach; initiated several strategies to mitigate projected shortfall

II Single-Family CORE: Wholesale change of management team; retention of advisor for the project duration; engaging external Independent Verification and Validation Services

II! HR Update: Focusing on senior team, culture and diversity

II Legislative Status: House draft bill out, Senate bill pending, and Administration seeking tougher reforms; key issues continue to be portfolio growth limits and MBA bright line

II 180-day Plan: Completing key links in the chain and extensive outreach

Challenge of old model! culture caught in a new environment

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Business Update: Guaranty Business

Single-Family Single-Family Volume and Book Growth

II Volume through May ($1938) under plan II Volume outlook for the year ($5008) on par with plan II Full year book growth forecast (-0.2%) under plan II Net charged fee through May (25.14 bps) under plan II Credit risks and affordability concerns have increased

dramatically in the highly competitive mortgage market II Continuing to focus on:

8usiness retention Competitive pressures (private label and subprime) Regulatory and minority lending goals

n o ~ ~ Multifamily ~ ~ .. Volume through June ($11.28) $2.18 above plan; pipelines 3 ~ are holding steady

~ ~ ~ II Charged guaranty fee through June (24.1 bps) above plan ~ g > (22.8 bps) ~ ~ ~ II Pricing for loans on conventional properties continues to be s:; 8 extremely low due to competition; balanced out with higher r;; ~ ~ fees on specialty products ~ ~ II Profitability and credit standards are major concern ~ ~ II DUS Advisory Council met June 2-3 - they are concerned ~ r with low pricing and diminished historical advantages o II Lender Delegation Pilot planned for September 1 roll-out to

address DUS concern

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Business Update: Portfolio Business

Short-term interest rates have gradually increased over the year in line with the continuation of Fed Funds rate hikes

Debt to swap spreads have improved considerably over the course of the year due to decreased agency issuance and perceived changes in the regulatory environment

Mortgage option adjusted spreads have remained very tight despite lower levels of agency purchase activity

Continuing to actively manage the portfolio duration gap position, with the monthly gap reported at +/- 1 month or less through May

Mortgage balance growth through May is -20% annualized, driven by tight mortgage option adjusted spreads and our need to conserve statutory capital in support of the Capital Restoration Plan

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Net Mortgage Balance Duration Gap and Rebalancing (Years) ($ in billions

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Housing and Minority Lending Goals

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STATUTORY HOUSING GOALS

FY05 Plan

Low Mod (Affordable) 52.0%

Special Affordable 22.0%

Underserved 37.0%

FY05 SF PMM Sub-Goal Plan

Low Mod (Affordable) 45.0%

Special Affordable 17.0%

Underserved 32.0%

MINORITY LENDING GOALS

FY05 Target

African American 5.4%

Hispanic 11.6%

Total Minority 24.7%

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5/05 YTD Actual

55.5%

26.7%

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5/05 YTD Actual

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5/05 YTD Actual I 5.5% I

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• Ahead of targets for all housing goal categories

• Loss of share to subprime, interest only, and option ARMs products, all attracting mission borrowers relative to our "core" products

• Results through May behind goal for Hispanic (10.99% vs. goal of 11.6%) and total minority (23.78% vs. goal of 24.7%)

.. Though minority lending scores are trending down, we have initiated several strategies to mitigate the projected shortfall:

Puerto Rico transactions - CRA transactions

My Community Mortgage enhancements

• The results of these efforts should begin to show in June; our preliminary total minority score for June is 24.62%. Further improvement possible upon receipt of Countrywide's June borrower data in July

5 ~FannieMae

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Single-Family CORE Update

Original Goal of the Project

• Replace Fannie Mae's core infrastructure in 18 months

• Retire 35 legacy systems; enable mass customized products

• Make it easier for customers to do business with us

What Happened?

• "Big Bang" development/rollout strategy was front-loaded

• Project was too big, ramped quickly; parallel development efforts ensued

• Team made several heroic but unsuccessful implementation attempts

• System design did not scale to meet performance requirements

• Not all of the functionality could be tested due to performance issues

• Multiple external reviews conducted throughout project

• CEO requested additional external review of status/viability

What Do We Have?

• Database is solid; software licenses and hardware useable

• Software is in various stages of development, testing, and re-write

• Some requirements are missing, not traceable, and potentially stale

• Significant rewrite required to move from interactive model to batch

• Loss of credibility with internal and external stakeholders; team morale low

. Confidential - Highly Restricted 6 ~FannieMae

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Single-Family CORE Update

What We've Done So Far to Fix it • Implementation of consultants' recommendations:

Simplifying databases; making systems less interactive Building better test environments

• Wholesale change of management team; retention of the CSC advisor for the project duration; engaging external "Independent Verification and Validation" services

•

• •

Reorganization of CORE into a group of smaller, more manageable projects with a multi-phase release strategy; focusing first on Servicing and Investor Reporting

Creation of a standard development and release strategy and abandoning the "Big Bang" Engagement of Accenture to review and ensure integrity of all financial reporting controls

What's Next •

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Replace customer-facing components of the Acquisitions systems Servicing for cash business can be implemented in late 2006 MBS and Investor Reporting will follow in 2007 Reduce scope to reduce implementation risk Acquisitions systems are still under review and will take 60 more days to assess Moving some Securitization components to Conduit effort

Costs ~~g :=mo ~~z

• Re-planning in process to be completed by the end of September

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• Estimated costs for Servicing and Investor Reporting: $60-75M for each of the next two years (current run rate is $80M for 2005).


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HR Update - Turnover

Attrition and Onboarding as a Percent of Total Headcount (2000 - Present)

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l!tl ~ ~ Headcount as of 12131 4,144 4,486 4,735 5,057 5,309

>0 ;s: ~ 8 • 44% of our people have been with the company less than 5 years ?;j ~ ~ • Voluntary attrition is generally low

Gl t'T1 - High water mark was during 2000 dot-com boom ~ ~ • Managed attrition rates are very low ~ ~ - High water mark was in 2002: 2.6% o - 2005 YTD is 1%


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HR Update - Key Management Changes

• Officer changes from 11/04 - 6/05

Departed New

EVP and above 4 0

SVP 8 7

VP 10 15

• Changes to Senior Management Group since Decemb~e_r ________ -,

24% departure } Total of 58% in six 34% change in role months compared 13% new to company to 57% at Freddie 42% no change Mac in 18 months

• Six new hires in Senior Management Group - Scott Blackley, SVP, Accounting Policy (June) - Mary Doyle, SVP, Financial Controls & Systems (June)

Jean Hinrichs, SVP, Internal Audit (July) - David Hisey, SVP, Controller (January)

Greg Kozich, SVP, Accounting (May) Paul Noring, SVP, Finance (May)


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HR Update - Diversity

Percentage of Employees Who Are Women

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.. The representation of women in our Management Group (officers and directors) is declining.

.. Ethnic minorities are down in Officer ranks but slightly up in dir:ector category and overall.

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HR Update - Diversity (continued)

Percentage of Employees Who Are Black/African American

Percentage of Employees Who Are Asian

115%

110%

, 5%

10%

Note: Blue dotted lines represents "Look Like America" Goals

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5%

0%

• Increase in the minority number is in large part due to the increase in Asians (mostly Level 4-5s in ESO and Credit) particularly in 2004

• Hispanics are significantly underrepresented throughout the company (4.25% overall)

• Hispanics are the largest and fastest growing minority group in the US (over 14%)


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HR Update - Culture

.. January 2005: intensive outreach/listening tour begun by Senior Management with external constituents, including customers, partners and legislators

.. Since January: increased frequency and quality of all-employee communications including town halls (3 YTD) and HomeSite messages with change in tone of communications to reflect more direct and open engagement

• May 2005: adopted SEAM (Service, Engagement, Accountability, Management) as attributes expected of all employees when working internally and externally

• June/July: all officers have begun conducting local town halls with specific focus on culture/SEAM (167 completed to date)

.. June: all employees invited to leave voice mails on cultural issues that were shared at Sr. Management Group offsite

.. Three-hour discussion at SMG offsite dedicated to cultural/people issues. "All-in" people strategy being developed with Mercer incorporating strategies for performance management, compensation, training & development, etc., that will have significant operational and cultural impact

.. Instituted culture as part of OSR report-outs (peginning with July OSR)

• Developing new Accountability Survey as part of annual performance review process; measures managers' performance on people management skills and cultural leadership

Culture emerges as the principal obstruction to everything we need to do


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Legislative Status

Focus of meetings shifted to Senate: Chairman Richard Shelby (R-Al), Senator Mike Crapo (R-ID), Senator Rick Santorum (R-PA), Senator Tom Carper (D-DE), Senator Jack Reed (D-RI), Senator Mike Enzi (R-WY), Senator Jim Bunning (R-KY); plus House leadership Majority leader Tom Delay (R-TX), & Chairman Richard Baker (R-lA)

HOUSE: B House Financial Services Committee approved draft bill with a 65-5 vote; key provisions acceptable

• Reps Oxley, Frank, and Baker agreed on a "compromise" for the affordable housing fund

SENATE: • Senator Shelby draft proposal raises bar in two areas: '33 Act Registration for FNM & FRE securities and

portfolio growth constraints; draft does not include "bright line" language; possible bill mark-up July 26

• Senator Reed underscored support for 5% affordable housing fund

ADMINISTRATION: • White House continues to urge for tougher reforms on portfolio size and program approval • Chairman Greenspan restated position for a regulator with authority on par with banking regulators

INDUSTRY: • Bulk of the industry remains opposed to portfolio limits and prescriptive statutory "guidance" to the

regulator

• MBA and some large lenders continue to push for the "bright line" • ACB and MBA oppose '33 Act registration for the FHlBs, Fannie Mae, and Freddie Mac

[- Odds of 2005 bill declining


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Foundation Update

III The Foundation is in the process of refining its strategic objectives and will decide on the 2006 spending plan at its December 2005 meeting

III At the reduced spending level, the Foundation's currently accessible assets are expected to be depleted by October 2006

III The Foundation continues to plan for its 18th annual Help the Homeless campaign, culminating in the 5K Walkathon on the National Mall on Saturday, November 19

~(j ~ ~ III National housing focus sustained and Washington, DC giving not cut -!:l. ... ... !:l.=

~ [ III Leadership / succession plan in cycle ""l~ :0., C ; ~ 0 ;. -z~ a::~ :::.10 :0= t:i"1:l ... - m~

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PROPRIETARY AND CONFIDENTIAL-CONFIDENTIAL TREATMENT REQUESTED

BY FANNIE MAE

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Confidential Treatment Requested By Fannie Mae FMSE 511766

Fannie Mae FM-COGR 00143406

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