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Provision for Federal Income Taxes
In the second quarter of 2011, we reached an effective settlement of issues with the Internal Revenue Service relating to tax years 2007 and 2008, which reduced our total corporate tax liability. However, the reduction in our tax liability also reduced the low-income housing tax credits we were able to use, resulting in a provision for federal income taxes for the Multifamily segment in the second quarter and first half of 2011.
Capital Markets Group Results
Table 18 summarizes the financial results of our Capital Markets group for the periods indicated. Following the table we discuss the Capital Markets group’s financial results and describe the Capital Markets group’s mortgage portfolio. For a discussion on the debt issued by the Capital Markets group to fund its investment activities, see “Liquidity and Capital Management.” For a discussion on the derivative instruments that Capital Markets uses to manage interest rate risk, see “Consolidated Balance Sheet Analysis—Derivative Instruments” in this report and “Risk Management—Market Risk Management, Including Interest Rate Risk Management—Derivative Instruments” and “Notes to Consolidated Financial Statements—Note 10, Derivative Instruments and Hedging Activities” in our 2010 Form 10-K. The primary sources of revenue for our Capital Markets group are net interest income and fee and other income. Expenses and other items that impact income or loss primarily include fair value gains and losses, investment gains and losses, allocated guaranty fee expense, other-than-temporary impairment and administrative expenses.
Table 18:  Capital Markets Group Results
    For the Three Months
    For the Six Months
    Ended June 30,     Ended June 30,  
    2011     2010     Variance     2011     2010     Variance  
    (Dollars in millions)  
Statement of operations data:
Net interest income(1)
  $ 3,867     $ 3,549     $ 318     $ 7,577     $ 6,606     $ 971  
Investment gains, net(2)
    918       779       139       1,788       1,571       217  
Net other-than-temporary impairments
    (55 )     (137 )     82       (99 )     (373 )     274  
Fair value gains (losses), net(3)
    (1,507 )     631       (2,138 )     (1,289 )     (555 )     (734 )
Fee and other income
    109       136       (27 )     184       240       (56 )
Other expenses(4)
    (560 )     (538 )     (22 )     (1,113 )     (961 )     (152 )
Income before federal income taxes
    2,772       4,420       (1,648 )     7,048       6,528       520  
Benefit (provision) for federal income taxes
    40       (8 )     48       45       21       24  
Net income attributable to Fannie Mae
  $ 2,812     $ 4,412     $ (1,600 )   $ 7,093     $ 6,549     $ 544  
(1) Includes contractual interest, excluding recoveries, on nonaccrual loans received from the Single-Family segment of $1.5 billion for the second quarter of both 2011 and 2010. Includes contractual interest, excluding recoveries, on nonaccrual loans received from the Single-Family segment of $3.5 billion for the first half of 2011 compared with $2.3 billion for the first half of 2010. Capital Markets net interest income is reported based on the mortgage-related assets held in the segment’s portfolio and excludes interest income on mortgage-related assets held by consolidated MBS trusts that are owned by third parties and the interest expense on the corresponding debt of such trusts.
(2) We include the securities that we own regardless of whether the trust has been consolidated in reporting of gains and losses on securitizations and sales of available-for-sale securities.
(3) Fair value gains or losses on trading securities include the trading securities that we own, regardless of whether the trust has been consolidated.
(4) Includes allocated guaranty fee expense, debt extinguishment gains or losses, net, administrative expenses, and other income or expenses. Gains or losses related to the extinguishment of debt issued by consolidated trusts are excluded from the Capital Markets group’s results because purchases of securities are recognized as such.
Net Interest Income
The Capital Markets group reports interest income and amortization of cost basis adjustments only on securities and loans that are held in our portfolio. For mortgage loans held in our mortgage portfolio, when interest income is