e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
|
|
x |
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
|
For the quarterly period ended
June 30, 2009
or
|
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
|
For the transition period
from
to
Commission File Number: 000-53330
Federal Home Loan Mortgage
Corporation
(Exact name of registrant as
specified in its charter)
Freddie Mac
|
|
|
Federally chartered corporation
|
|
52-0904874
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
8200 Jones Branch Drive, McLean, Virginia
|
|
22102-3110
|
(Address of principal executive
offices)
|
|
(Zip Code)
|
(703) 903-2000
(Registrants telephone
number, including area code)
Indicate by check mark whether the
registrant: (1) has filed all reports required
to be filed by Section 13 or
15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. x Yes o No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). o Yes o No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
|
|
Large
accelerated
filer o
|
Accelerated
filer o
|
|
|
Non-accelerated
filer (Do not check if a smaller
reporting
company) x
|
Smaller
reporting
company o
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). o Yes x No
As of July 31, 2009, there were 648,305,154 shares of
the registrants common stock outstanding.
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
1
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
90
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
97
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
170
|
|
|
|
|
|
|
170
|
|
|
|
|
|
|
170
|
|
|
|
|
|
|
170
|
|
|
|
|
|
|
171
|
|
|
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
172
|
|
|
|
|
173
|
|
|
|
|
179
|
|
|
|
* |
Throughout this Quarterly Report on
Form 10-Q,
we use certain acronyms and terms and refer to certain
accounting pronouncements which are defined in the Glossary.
|
FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
102
|
|
|
|
|
103
|
|
|
|
|
104
|
|
|
|
|
105
|
|
|
|
|
106
|
|
|
|
|
111
|
|
|
|
|
114
|
|
|
|
|
116
|
|
|
|
|
127
|
|
|
|
|
131
|
|
|
|
|
132
|
|
|
|
|
133
|
|
|
|
|
134
|
|
|
|
|
135
|
|
|
|
|
140
|
|
|
|
|
143
|
|
|
|
|
145
|
|
|
|
|
145
|
|
|
|
|
158
|
|
|
|
|
162
|
|
|
|
|
168
|
|
|
|
|
169
|
|
PART I
FINANCIAL INFORMATION
This Quarterly Report on
Form 10-Q
includes forward-looking statements, which may include
statements pertaining to the conservatorship and our current
expectations and objectives for internal control remediation
efforts, future business plans, liquidity, capital management,
economic and market conditions and trends, market share,
legislative and regulatory developments, implementation of new
accounting standards, credit losses, and results of operations
and financial condition on a GAAP, Segment Earnings and fair
value basis. You should not rely unduly on our forward-looking
statements. Actual results might differ significantly from those
described in or implied by such forward-looking statements due
to various factors and uncertainties, including those described
in (i) Managements Discussion and Analysis, or
MD&A, MD&A FORWARD-LOOKING
STATEMENTS and RISK FACTORS in this
Form 10-Q
and in the comparably captioned sections of our Annual Report on
Form 10-K
for the year ended December 31, 2008, or 2008 Annual
Report, and our
Form 10-Q
for the first quarter of 2009 and (ii) the
BUSINESS section of our 2008 Annual Report. These
forward-looking statements are made as of the date of this
Form 10-Q
and we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date of
this
Form 10-Q,
or to reflect the occurrence of unanticipated events.
Throughout PART I of this Form 10-Q, including the
Financial Statements and MD&A, we use certain acronyms and
terms and refer to certain accounting pronouncements which are
defined in the Glossary.
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE
SUMMARY
You should read this MD&A in conjunction with our
consolidated financial statements and related notes for the
three and six months ended June 30, 2009 and our 2008
Annual Report.
Overview
Freddie Mac was chartered by Congress in 1970 with a public
mission to stabilize the nations residential mortgage
market and expand opportunities for home ownership and
affordable rental housing. Our statutory mission is to provide
liquidity, stability and affordability to the U.S. housing
market. Our participation in the secondary mortgage market
includes providing our credit guarantee for residential
mortgages originated by mortgage lenders and investing in
mortgage loans and mortgage-related securities. Through our
credit guarantee activities, we securitize mortgage loans by
issuing PCs to third-party investors. We also resecuritize
mortgage-related securities that are issued by us or Ginnie Mae
as well as private, or non-agency, entities. We also guarantee
multifamily mortgage loans that support housing revenue bonds
issued by third parties and we guarantee other mortgage loans
held by third parties. Securitized mortgage-related assets that
back PCs and Structured Securities that are held by third
parties are not reflected as our assets. We earn management and
guarantee fees for providing our guarantee and performing
management activities (such as ongoing trustee services,
administration of pass-through amounts, paying agent services,
tax reporting and other required services) with respect to
issued PCs and Structured Securities.
We had net income attributable to Freddie Mac of
$0.8 billion for the second quarter of 2009 and total
equity of $8.2 billion as of June 30, 2009. Net loss
attributable to common stockholders was $374 million for
the second quarter of 2009, reflecting the payment of
$1.1 billion of dividends in cash on the senior preferred
stock. As discussed below, total equity benefited from the
cumulative effect of a change in accounting principle, which
increased total equity by $5.1 billion. Our financial
results for the second quarter of 2009 reflect the favorable
impact on the fair value of our derivatives and on our
investment activities of the steepening of the yield curve, as
short-term rates decreased and long-term rates increased, as
well as spread tightening. This favorable impact was partially
offset by large credit-related expenses and losses on loans
purchased due to loan modification. Second quarter net income
also reflects a decrease in our provision for credit losses that
we estimate to be approximately $1.4 billion related to an
enhancement to our methodology for estimating loan loss reserves.
We expect a variety of factors will place downward pressure on
our financial results in future periods, and could cause us to
incur GAAP net losses. Key factors include the potential for
continued deterioration in the housing market, which could
increase credit-related expenses and security impairments,
adverse changes in interest rates and spreads, which could
result in
mark-to-market
losses, and our efforts under the MHA Program and other
government initiatives, some of which are expected to have an
adverse impact on our financial results. We believe that the
recent modest home price improvements were largely seasonal, and
expect home price declines in future periods. Consequently, our
provisions for credit losses will likely remain high during the
remainder of 2009 and increase above the level recognized in the
second quarter. To the extent we incur GAAP net losses in future
periods, we will likely need to take additional draws under the
Purchase Agreement. In addition, due to the substantial dividend
obligation on the senior
preferred stock, we expect to continue to record net losses
attributable to common stockholders in future periods. For a
discussion of factors that could result in additional draws, see
LIQUIDITY AND CAPITAL RESOURCES Capital
Adequacy.
On July 21, 2009, we announced that our Board of Directors
named Charles E. Haldeman, Jr. as our Chief Executive
Officer. We expect that Mr. Haldemans employment will
begin on August 10, 2009. We also announced that
Mr. Haldeman was elected as a member of the Board,
effective the date his employment commences. Mr. Haldeman
will succeed John A. Koskinen, who has been serving as our
Interim Chief Executive Officer and performing the function of
principal financial officer and who will return to the position
of Non-Executive Chairman of the Board.
Business
Objectives
We continue to operate under the conservatorship that commenced
on September 6, 2008, conducting our business under the
direction of FHFA as our Conservator. During the
conservatorship, the Conservator has delegated certain authority
to the Board of Directors to oversee, and to management to
conduct, day-to-day operations so that the company can continue
to operate in the ordinary course of business.
We have changed certain business practices and other
non-financial objectives to provide support for the mortgage
market in a manner that serves public policy, but that may not
contribute to profitability. Some of these changes increase our
expenses, while others require us to forego revenue
opportunities in the near term. In addition, the objectives set
forth for us under our charter and by our Conservator, as well
as the restrictions on our business under the Purchase Agreement
with Treasury, may adversely impact our results, including our
segment results.
There is significant uncertainty as to whether or when we will
emerge from conservatorship, as it has no specified termination
date, and as to what changes may occur to our business structure
during or following our conservatorship, including whether we
will continue to exist. However, we are not aware of any current
plans of our Conservator to significantly change our business
structure in the near-term. As discussed below in
Legislative and Regulatory Matters Pending
and Proposed Legislation and Related Matters, Treasury
and HUD, in consultation with other government agencies, are
expected to develop legislative recommendations for the future
of the GSEs.
Our current focus and purpose is to meet the urgent liquidity
needs of the U.S. mortgage market, lower costs for borrowers and
support the recovery of the housing market and
U.S. economy. Through our role in the Obama
Administrations initiatives, including the
MHA Program, we are working to meet the needs of the
mortgage market, in line with our mission, by making
homeownership and rental housing more affordable, minimizing
foreclosures and helping families keep their homes.
MHA
Program and Other Efforts to Assist the Housing
Market
We are working with our Conservator to help distressed
homeowners through initiatives that support the MHA Program
(previously known as the Homeowner Affordability and Stability
Plan), which was announced by the Obama Administration in
February 2009. We have also implemented a number of other
initiatives to assist the U.S. residential mortgage market
and help families keep their homes, some of which were
undertaken at the direction of FHFA. The more significant
initiatives are discussed below.
The MHA Program includes:
|
|
|
|
|
Home Affordable Refinance, which gives eligible
homeowners with loans owned or guaranteed by Freddie Mac or
Fannie Mae an opportunity to refinance into more affordable
monthly payments. The Freddie Mac Relief Refinance
Mortgagesm
is our implementation of Home Affordable Refinance. We began
purchasing loans under our program in April 2009, and as of
June 30, 2009 we had purchased approximately 28,500 loans
totaling $5.1 billion in unpaid principal balance
originated under this initiative. The Administrations Home
Affordable Refinance effort is targeted at borrowers with
current LTV ratios above 80%; however, our implemented program
also allows borrowers with LTV ratios below 80% to participate.
In July 2009, we announced that borrowers who have mortgages
with current LTV ratios up to 125% would be allowed to
participate in this program.
|
|
|
|
Home Affordable Modification Program, or HAMP, which
commits U.S. government, Freddie Mac and Fannie Mae funds
to avoid foreclosure and keep eligible homeowners in their homes
through mortgage modifications. We are working with servicers
and borrowers to pursue modifications under HAMP, which requires
that each borrower complete a three month trial period before
the modification becomes effective. Based on information
provided by certain of our largest servicers who service a
majority of our loans, approximately 16,000 loans that we own or
guarantee started the trial period portion of the HAMP process
as of June 30, 2009. We expect a significant increase in
the number of loans in the trial period as HAMP expands and we
receive additional results from our servicers. Freddie Mac will
bear the full cost of the monthly payment reductions related to
|
|
|
|
|
|
modifications of loans we own or guarantee, and all servicer and
borrower incentive fees, and we will not receive a reimbursement
of these costs from Treasury.
|
|
|
|
|
|
Second Lien Program, also known as 2MP, which will offer
incentive payments to borrowers, servicers and investors (other
than us and Fannie Mae), for modifications and principal
reductions on second lien mortgages in certain circumstances.
This program is intended to help facilitate greater
modifications of second lien mortgages, but has not yet been
implemented.
|
|
|
|
Short Sale and
Deed-in-Lieu
Program, which will offer borrowers who are ineligible to
participate in HAMP the ability to sell their homes for amounts
that are not sufficient for a full payoff of the borrowers
mortgage debt and for lenders to accept such amounts. This
program has not yet been implemented.
|
At present, it is difficult for us to predict the full impact of
the MHA Program on us. However, to the extent our borrowers
participate in HAMP in large numbers, it is likely that the
costs we incur, including the servicer and borrower incentive
fees, will be substantial. In addition, we continue to devote
significant internal resources to the implementation of the
various initiatives under the MHA Program. It is not possible at
present to estimate the extent to which costs, incurred in the
near term, may be offset, if at all, by the prevention or
reduction of potential future costs of loan defaults and
foreclosures due to these initiatives.
Our other efforts to assist the U.S. housing market include:
Increase in our Mortgage Portfolio
Activity. Since we entered into conservatorship
in September 2008, we have been providing additional liquidity
to the mortgage market, including by acquiring and holding
increased amounts of mortgage loans and mortgage-related
securities in our mortgage-related investments portfolio,
subject to the limitation on the size of such portfolio as set
forth in the Purchase Agreement. However, our mortgage-related
investments portfolio decreased during the second quarter of
2009, due to a relative lack of favorable investment
opportunities.
Temporary Foreclosure and Eviction
Suspensions. In order to allow our mortgage
servicers time to implement our more recent modification
programs and provide additional relief to troubled borrowers, we
temporarily suspended all foreclosure transfers of occupied
homes for certain periods. On March 7, 2009, we suspended
foreclosure transfers on owner-occupied homes where the borrower
may be eligible to receive a loan modification under HAMP. In
addition, we temporarily suspended the eviction process for
occupants of foreclosed homes from November 26, 2008
through April 1, 2009.
Increased Foreclosure Alternatives. In the
second quarter of 2009, we completed approximately
29,400 foreclosure alternative agreements, excluding loans
in trial-period payment plans under HAMP, with borrowers out of
the estimated 415,000 single-family loans in our
single-family mortgage portfolio that were or became delinquent
(90 days or more past due or in foreclosure) during the
second quarter of 2009.
Government
Support for our Business
We are dependent upon the continued support of Treasury and FHFA
in order to continue operating our business. We also receive
substantial support from the Federal Reserve. Our ability to
access funds from Treasury under the Purchase Agreement is
critical to keeping us solvent and avoiding the appointment of a
receiver by FHFA under statutory mandatory receivership
provisions.
Significant recent developments with respect to the support we
receive from the government include the following:
|
|
|
|
|
On May 6, 2009, FHFA, acting on our behalf in its capacity
as Conservator, and Treasury amended the Purchase Agreement to,
among other items: (i) increase the funding available under
the Purchase Agreement from $100 billion to
$200 billion; (ii) increase the limit on our
mortgage-related investments portfolio (which is based on the
carrying value of such assets as reflected on our GAAP balance
sheet) as of December 31, 2009 from $850 billion to
$900 billion; and (iii) revise the limit on our
aggregate indebtedness and the method of calculating such limit.
The amendment also expands the category of persons covered by
the restrictions on executive compensation contained in the
Purchase Agreement.
|
|
|
|
On June 30, 2009 and March 31, 2009, we received
$6.1 billion and $30.8 billion, respectively, in
funding from Treasury under the Purchase Agreement, which
increased the aggregate liquidation preference of the senior
preferred stock to $51.7 billion as of June 30, 2009.
We received these funds pursuant to draw requests made to
address the deficits in our net worth as of March 31, 2009
and December 31, 2008, respectively. On June 30, 2009
and March 31, 2009, we paid dividends of $1.1 billion
and $370 million, respectively, in cash on the senior
preferred stock to Treasury for the three months ended
June 30, 2009 and March 31, 2009, respectively, at the
direction of the Conservator.
|
|
|
|
|
|
According to information provided by Treasury, it held
$151.1 billion of mortgage-related securities issued by us
and Fannie Mae as of June 30, 2009 under the purchase
program it announced in September 2008.
|
|
|
|
According to information provided by the Federal Reserve, as of
July 29, 2009 it had net purchases of $246.3 billion
of our mortgage-related securities under the purchase program it
announced in November 2008 and held $39.6 billion of our
direct obligations.
|
At June 30, 2009, our assets exceeded our liabilities by
$8.2 billion. Because we had a positive net worth as of
June 30, 2009, FHFA has not submitted a draw request on our
behalf to Treasury for additional funding under the Purchase
Agreement. The aggregate liquidation preference of the senior
preferred stock is $51.7 billion and the amount remaining
under the Treasurys funding agreement is
$149.3 billion as of June 30, 2009. The corresponding
annual cash dividends payable to Treasury are $5.2 billion,
which exceeds our annual historical earnings in most periods. We
expect to make additional draws under the Purchase Agreement in
future periods due to a variety of factors that could affect our
net worth.
For more information on the terms of the conservatorship, the
powers of our Conservator and certain of the initiatives,
programs and agreements described above, see
BUSINESS Conservatorship and Related
Developments in our 2008 Annual Report.
Housing
and Economic Conditions and Impact on Second Quarter 2009
Results
Our financial results for the second quarter of 2009 reflect the
continuing adverse economic conditions in the U.S., which
deteriorated dramatically during the last half of 2008 and have
continued to deteriorate in 2009. During the first half of 2009,
there have been some positive housing market developments,
including higher volumes of home sales and modest improvements
in national home prices, which we believe to be largely
seasonal. However, the U.S. recession has deepened, and there
were significant increases in unemployment rates which, coupled
with declines in household wealth, have contributed to increases
in residential mortgage delinquency rates. Much of the increase
in home sales reflects distressed home sales, including higher
short sales and sales of foreclosed properties in the market. As
a result, we continue to experience significant credit-related
expenses, and our provision for credit losses was
$5.2 billion in the second quarter of 2009, principally due
to increased estimates of incurred losses caused by the
deteriorating economic conditions, which were evidenced by our
increased rates of delinquency, the significant volume of REO
acquisitions and an increase in our single-family non-performing
assets.
Although home prices nationwide increased an estimated 3.2% in
the second quarter of 2009 (and an estimated 1.4% during the
first half of 2009) based on our own internal index, which is
based on properties underlying our single-family mortgage
portfolio, home prices have suffered significant declines in
nearly all regions and states in the last 12 months. The
percentage decline in home prices in the last 12 months has been
particularly large in the states of California, Florida, Arizona
and Nevada, where we have significant concentrations of mortgage
loans. The second quarter of the year is historically a strong
period for home sales. This seasonal strength, combined with the
fact that many financial institutions have maintained
foreclosure suspensions during the first half of 2009, may have
contributed to the increase in home prices during the period. We
expect that when these temporary foreclosure suspensions are
lifted and the seasonal peak in home sales has passed, there
will likely be further downward pressure on home prices over the
remainder of the year, which would likely result in increased
credit related expenses. Unemployment rates have worsened
significantly in the second quarter of 2009, and the national
unemployment rate increased to 9.5% at June 30, 2009 as
compared to 8.5% at March 31, 2009. Certain states have
experienced much higher unemployment rates, such as California,
Florida, Michigan and Nevada, where the unemployment rate
reached 11.6%, 10.6%, 15.2% and 12.0%, respectively, at
June 30, 2009. These states comprise approximately 25% of
loans in our single-family mortgage portfolio as of
June 30, 2009. Many financial institutions have continued
to remain cautious in their lending activities during the second
quarter of 2009. Although there was overall improvement in
credit and liquidity conditions during the second quarter,
credit spreads for both mortgage and corporate loans remained
higher than before the start of the recession.
These macroeconomic conditions and other factors, such as our
temporary suspensions of foreclosure transfers of occupied
homes, contributed to a substantial increase in the number and
aging of delinquent loans in our single-family mortgage
portfolio during the second quarter of 2009. While temporary
suspensions of foreclosure transfers and recent loan
modification efforts reduced the rate of growth in our
charge-offs and REO acquisitions during the second quarter of
2009, our provision for credit losses includes expected losses
on those foreclosures currently suspended. We also observed a
continued increase in market-reported delinquency rates for
mortgages serviced by financial institutions, not only for
subprime and
Alt-A loans
but also for prime loans, and we experienced significant
increases in delinquency rates for all product types during the
second quarter of 2009. Additionally, as the slump in the U.S.
housing market has
persisted for approximately two years, increasing numbers of
borrowers that previously had significant equity are now
underwater, or owing more on their mortgage loans
than their homes are currently worth.
Multifamily housing fundamentals have also further deteriorated
during the second quarter of 2009, reflecting the increasing
unemployment rate and tightened credit of consumers and
institutional borrowers. Home ownership is also becoming more
affordable, due to home price declines that have occurred over
the past several years. Consequently, multifamily properties
have experienced declining rent levels and vacancy rates have
recently risen to multi-year highs, which has negatively
impacted multifamily property cash flows. As a result, our
multifamily delinquency rate increased from 9 basis points
as of March 31, 2009 to 11 basis points as of
June 30, 2009. Despite challenging conditions, in June 2009
we completed a structured securitization transaction with
multifamily mortgage loans totaling approximately
$1 billion, which was one of the first large commercial
mortgage bond issuances in the CMBS market this year.
The continued weakness in housing market conditions during the
second quarter of 2009 also led to a further decline in the
performance of the non-agency mortgage-related securities in our
mortgage-related investments portfolio. Mortgage-related
securities backed by subprime, MTA Option ARM,
Alt-A and
other loans, have significantly greater concentrations in the
states that are undergoing the greatest stress, including
California, Florida, Arizona and Nevada. As a result of these
and other factors, we recorded $2.2 billion of net
impairments of
available-for-sale
securities recognized in earnings during the second quarter of
2009.
There were some other positive signs of economic recovery in the
U.S. during the second quarter of 2009, including a
significant wave of single-family loan refinancing as mortgage
interest rates dipped to near record lows in March and April.
Approximately 87% of our single-family mortgage purchases were
refinance loans during the second quarter of 2009 as compared to
66% during the second quarter of 2008.
Consolidated
Results of Operations Second Quarter 2009
We adopted
FSP FAS 115-2
and
FAS 124-2
effective April 1, 2009. FSP FAS
115-2 and
FAS 124-2
amends the recognition, measurement and presentation of
other-than-temporary impairments of debt securities, and is
intended to bring greater consistency to the timing of
impairment recognition and provide greater clarity to investors
about the credit and non-credit components of impaired debt
securities that are not expected to be sold. This guidance
changes (a) the method of determining whether an
other-than-temporary impairment exists, and (b) the amount
of an impairment charge to be recorded in earnings. See
NOTE 4: INVESTMENTS IN SECURITIES to our
consolidated financial statements for further disclosures
regarding our investments in securities and other-than-temporary
impairments.
Net income (loss) was $767 million and $(819) million
for the second quarters of 2009 and 2008, respectively. Net
income increased in the second quarter of 2009 compared to the
second quarter of 2008, principally due to higher net interest
income, derivative gains and fair value gains on trading
securities, compared to these items during the second quarter of
2008. These income and gains for the second quarter of 2009 were
partially offset by increased credit-related expenses, which
consist of the provision for credit losses and REO operations
expense, and increased losses on loans purchased, compared to
the second quarter of 2008. Although we reported net income in
the second quarter of 2009, the dividends on the senior
preferred stock resulted in net loss attributable to common
stockholders for the period.
Net interest income was $4.3 billion for the second quarter
of 2009, compared to $1.5 billion for the second quarter of
2008. As compared to the second quarter of 2008, we held higher
amounts of fixed-rate agency mortgage-related securities in our
mortgage-related investments portfolio and had lower funding
costs, due to significantly lower interest rates on our short-
and long-term borrowings during the three months ended
June 30, 2009.
Non-interest income was $3.2 billion for the three months
ended June 30, 2009, compared to non-interest income of
$56 million for the three months ended June 30, 2008.
The increase in non-interest income in the second quarter of
2009 was primarily due to a decrease in losses on investment
activity of $1.9 billion as well as increased gains on our
guarantee asset of $0.7 billion and derivatives portfolio,
excluding foreign-currency related effects, of
$1.2 billion. The decrease in losses on investment activity
during the second quarter of 2009 was principally attributed to
fair value gains on mortgage-related securities classified as
trading of $0.6 billion compared to fair value losses on
trading securities of $2.3 billion during the second
quarter of 2008. This was partially offset by higher
impairment-related losses primarily recognized on
available-for-sale
non-agency mortgage-related securities backed by subprime, MTA
Option ARM,
Alt-A and
other loans during the quarter, which increased to
$2.2 billion in the second quarter of 2009, compared to
$1.0 billion in the second quarter of 2008.
Non-interest expenses increased to $6.9 billion in the
second quarter of 2009 from $3.4 billion in the second
quarter of 2008 due to higher credit-related expenses and losses
on loans purchased. Credit-related expenses totaled
$5.2 billion and $2.8 billion for the second quarters
of 2009 and 2008, respectively, and included our provision for
credit losses of $5.2 billion and $2.5 billion,
respectively. The increase in provision for credit losses was
due to continued credit deterioration in our single-family
mortgage portfolio, primarily from further increases in
delinquency rates and higher loss severities on a per-property
basis. During the second quarter of 2009, we enhanced our model
for estimating credit losses on single-family loans. We estimate
this change reduced our estimate of loan loss reserves, and
consequently our provision for credit losses, by approximately
$1.4 billion in the second quarter of 2009. See
CONSOLIDATED RESULTS OF OPERATIONS Provision
for Credit Losses for additional information on these
changes to our loan loss reserve model. Losses on loans
purchased increased to $1.2 billion for the second quarter
of 2009, compared to $120 million for the second quarter of
2008, due to a higher volume of purchases of modified loans out
of PCs during the second quarter of 2009. Administrative
expenses totaled $383 million for the second quarter of
2009, down from $404 million for the second quarter of
2008, primarily due to a reduction in short-term compensation
expenses and other cost reduction measures.
Segment
Earnings
Our operations consist of three reportable segments, which are
based on the type of business activities each
performs Investments, Single-family Guarantee and
Multifamily. Certain activities that are not part of a segment
are included in the All Other category. We manage and evaluate
performance of the segments and All Other using a Segment
Earnings approach, subject to the conduct of our business under
the direction of the Conservator. Segment Earnings differ
significantly from, and should not be used as a substitute for,
net income (loss) as determined in accordance with GAAP.
Table 1 presents Segment Earnings by segment and the All
Other category and includes a reconciliation of Segment Earnings
to net income (loss) prepared in accordance with GAAP.
Table 1
Reconciliation of Segment Earnings to GAAP Net Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Segment Earnings, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
158
|
|
|
$
|
793
|
|
|
$
|
(1,414
|
)
|
|
$
|
906
|
|
Single-family Guarantee
|
|
|
(3,552
|
)
|
|
|
(1,388
|
)
|
|
|
(9,037
|
)
|
|
|
(1,846
|
)
|
Multifamily
|
|
|
50
|
|
|
|
118
|
|
|
|
190
|
|
|
|
216
|
|
All Other
|
|
|
(8
|
)
|
|
|
144
|
|
|
|
(8
|
)
|
|
|
140
|
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
2,800
|
|
|
|
527
|
|
|
|
4,358
|
|
|
|
(667
|
)
|
Credit guarantee-related adjustments
|
|
|
2,354
|
|
|
|
1,818
|
|
|
|
956
|
|
|
|
1,644
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
900
|
|
|
|
(3,096
|
)
|
|
|
928
|
|
|
|
(1,571
|
)
|
Fully taxable-equivalent adjustments
|
|
|
(98
|
)
|
|
|
(105
|
)
|
|
|
(198
|
)
|
|
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax adjustments
|
|
|
5,956
|
|
|
|
(856
|
)
|
|
|
6,044
|
|
|
|
(809
|
)
|
Tax-related
adjustments(1)
|
|
|
(1,836
|
)
|
|
|
368
|
|
|
|
(4,858
|
)
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
4,120
|
|
|
|
(488
|
)
|
|
|
1,186
|
|
|
|
(388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Freddie Mac
|
|
$
|
768
|
|
|
$
|
(821
|
)
|
|
$
|
(9,083
|
)
|
|
$
|
(972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes a non-cash charge, net related to the establishment of
a partial valuation allowance against our deferred tax assets,
net of approximately $(184) million and $2.9 billion
that is not included in Segment Earnings for the three and six
months ended June 30, 2009, respectively.
|
Segment Earnings is calculated for the segments by adjusting
GAAP net income (loss) for certain investment-related activities
and credit guarantee-related activities. Segment Earnings
includes certain reclassifications among income and expense
categories that have no impact on net income (loss) but provide
us with a meaningful metric to assess the performance of each
segment and our company as a whole. Segment Earnings does not
include the effect of the establishment of the valuation
allowance against our deferred tax assets, net. For more
information on Segment Earnings, including the adjustments made
to GAAP net income (loss) to calculate Segment Earnings and the
limitations of Segment Earnings as a measure of our financial
performance, see CONSOLIDATED RESULTS OF
OPERATIONS Segment Earnings and
NOTE 16: SEGMENT REPORTING to our consolidated
financial statements.
Consolidated
Balance Sheets Analysis
During the six months ended June 30, 2009, total assets
increased by $41.3 billion to $892.3 billion while
total liabilities increased by $2.5 billion to
$884.1 billion. Total equity (deficit) was
$8.2 billion at June 30, 2009 compared to
$(30.6) billion at December 31, 2008. See below for
the key drivers of these changes in our consolidated balance
sheet as of June 30, 2009.
Our cash and other investments portfolio increased by
$9.1 billion during the six months ended June 30, 2009
to $73.3 billion, primarily due to an $11.9 billion
increase in non-mortgage-related trading securities. On
June 30, 2009,
we received $6.1 billion from Treasury under the Purchase
Agreement pursuant to a draw request that FHFA submitted to
Treasury on our behalf to address the deficit in our net worth
as of March 31, 2009. The unpaid principal balance of our
mortgage-related investments portfolio increased 3%, or
$25.1 billion, during the six months ended June 30,
2009 to $829.8 billion. The increase in our
mortgage-related investments portfolio resulted from our
acquiring and holding increased amounts of mortgage loans and
mortgage-related securities to provide additional liquidity to
the mortgage market, and, to a lesser degree, favorable
investment opportunities for agency securities, primarily in the
first quarter of 2009, as a result of continued lack of
liquidity in the market. Deferred tax assets, net increased
$1.5 billion during the six months ended June 30, 2009
to $16.9 billion, primarily attributable to the increase in
the net loss in AOCI, net of taxes, as discussed below.
Short-term debt decreased by $91.0 billion during the six
months ended June 30, 2009 to $344.1 billion, and
long-term debt increased by $84.9 billion to
$492.8 billion. As a result, our outstanding short-term
debt, including the current portion of long-term debt, has
decreased as a percentage of our total debt outstanding to 41%
at June 30, 2009 from 52% at December 31, 2008. The
increase in our long-term debt reflects the improvement during
the first half of 2009 of spreads on our debt and our increased
access to the debt markets primarily as a result of the Federal
Reserves purchases in the secondary market of our
long-term debt under its purchase program. Additionally, our
reserve for guarantee losses on PCs increased by
$9.4 billion to $24.4 billion during the six months
ended June 30, 2009 as a result of probable incurred
losses, primarily attributable to the overall macroeconomic
environment with declining home values, higher mortgage
delinquency rates, and increasing unemployment.
Total equity (deficit) increased from $(30.6) billion at
December 31, 2008 to $8.2 billion at June 30,
2009, reflecting the $36.9 billion we received from
Treasury under the Purchase Agreement during the first six
months of 2009 and a net increase in retained earnings
(accumulated deficit) as a result of the adoption of
FSP FAS 115-2
and
FAS 124-2.
Upon our adoption of this accounting guidance, we recognized a
cumulative-effect adjustment of $15.0 billion to our
opening balance of retained earnings (accumulated deficit) on
April 1, 2009, and a corresponding adjustment of
$(9.9) billion, net of tax, to AOCI. The cumulative effect
adjustment reclassified the non-credit component of
other-than-temporary
impairments on our non-agency mortgage-related securities from
retained earnings (accumulated deficit) (i.e., previously
expensed) to AOCI. The difference between these adjustments of
$5.1 billion represents an increase in total equity
primarily resulting from the release of the valuation allowance
previously recorded against the deferred tax asset that is no
longer required related to the cumulative-effect adjustment.
These increases in total equity (deficit) were partially offset
by a $9.1 billion net loss and $1.5 billion of senior
preferred stock dividends for the six months ended June 30,
2009. In addition, the net loss in AOCI, net of taxes, increased
by $2.5 billion, resulting largely from the
cumulative-effect adjustment of the adoption of
FSP FAS 115-2
and
FAS 124-2,
partially offset by the unrealized gains on our agency
mortgage-related securities and the recognition of
other-than-temporary impairments in earnings related to our
non-agency mortgage-related securities.
Consolidated
Fair Value Results
During the three months ended June 30, 2009, the fair value
of net assets, before capital transactions, increased by
$5.4 billion compared to no change during the three months
ended June 30, 2008. The fair value of net assets as of
June 30, 2009 was $(70.5) billion, compared to
$(80.9) billion as of March 31, 2009. Included in our
fair value results for the three months ended June 30, 2009
are the $6.1 billion of funds received from Treasury on
June 30, 2009 under the Purchase Agreement, partially
offset by the $1.1 billion of dividends paid in cash to
Treasury on our senior preferred stock. The increase in the fair
value of our net assets, before capital transactions, during the
second quarter of 2009 was principally related to an increase in
the fair value of our mortgage-related investments portfolio,
resulting from higher core spread income and net tightening of
mortgage-to-debt OAS.
Liquidity
and Capital Resources
Liquidity
Our access to the debt markets has improved since the height of
the credit crisis in the fall of 2008. We attribute this
improvement to the continued support of Treasury and the Federal
Reserve. During the second quarter of 2009, the Federal Reserve
continued to be an active purchaser in the secondary market of
our long-term debt under its purchase program as discussed below
and, as a result, spreads on our debt remained favorable. Debt
spreads generally refer to the difference between the yields on
our debt securities and the yields on a benchmark index or
security, such as LIBOR or Treasury bonds of similar maturity.
During the second quarter of 2009, we were able to increase our
use of long-term and callable debt to fund our operations, and
reduce our use of short-term debt. See
MD&A LIQUIDITY AND CAPITAL
RESOURCES Liquidity in our 2008 Annual Report
for more information on our debt funding activities and risks
posed by current market challenges and RISK FACTORS
in our 2008 Annual Report for a discussion of the risks to our
business posed by our reliance on the issuance of debt to fund
our operations.
Treasury and the Federal Reserve have taken a number of actions
affecting our access to debt financing, including the following:
|
|
|
|
|
Treasury entered into the Lending Agreement with us on
September 18, 2008, under which we may request funds
through December 31, 2009. As of June 30, 2009, we had
not borrowed under the Lending Agreement. As such, use of the
Lending Agreement has not been tested as a component of our
liquidity contingency plan.
|
|
|
|
The Federal Reserve has implemented a program to purchase, in
the secondary market, up to $200 billion in direct
obligations of Freddie Mac, Fannie Mae, and the FHLBs.
|
Our improved access to the unsecured debt markets may not
continue upon completion or termination of the government
actions noted above. Any reduction in government support for our
debt funding program could adversely affect our ability to issue
long-term debt. The Lending Agreement is scheduled to expire on
December 31, 2009. Upon expiration of the Lending
Agreement, we will not have a liquidity backstop available to us
(other than Treasurys ability to purchase up to
$2.25 billion of our obligations under its permanent
authority) if we are unable to obtain funding from issuances of
debt or other conventional sources. Absent an extension of the
Lending Agreement, if backstop liquidity is needed after
December 31, 2009, we will need to seek alternative sources
for it. At present, we are not able to predict the likelihood
that a liquidity backstop will be needed, or to identify the
alternative sources that might then be available to us, other
than draws from Treasury under the Purchase Agreement or its
ability to purchase up to $2.25 billion of our obligations
under its permanent authority.
Our annual dividend obligation on the senior preferred stock
exceeds our annual historical earnings in most periods, and will
result in increasingly negative cash flows in future periods, if
we continue to pay the dividends in cash. In addition, the
potential for continued deterioration in the housing market and
future net losses in accordance with GAAP make it more likely
that we will have additional draws under the Purchase Agreement
in future periods, which will make it more difficult to pay
senior preferred dividends in cash in the future.
Capital
Adequacy
On October 9, 2008, FHFA announced that it was suspending
capital classification of us during conservatorship in light of
the Purchase Agreement.
The Purchase Agreement provides that, if FHFA, as Conservator,
determines as of quarter end that our liabilities have exceeded
our assets under GAAP, upon FHFAs request on our behalf,
Treasury will contribute funds to us in an amount equal to the
difference between such liabilities and assets, up to the
maximum aggregate amount that may be funded under the Purchase
Agreement. At June 30, 2009, our assets exceeded our
liabilities by $8.2 billion. Because we had a positive net
worth as of June 30, 2009, FHFA has not submitted a draw
request on our behalf to Treasury for any additional funding
under the Purchase Agreement. We received $6.1 billion on
June 30, 2009 under the Purchase Agreement in accordance
with the draw request submitted by FHFA on May 12, 2009 to
address the deficit in our net worth as of March 31, 2009.
The aggregate liquidation preference of the senior preferred
stock is $51.7 billion and the amount remaining under the
Treasurys funding agreement is $149.3 billion as of
June 30, 2009.
Treasury is entitled to annual cash dividends of
$5.2 billion based on the current amount of the aggregate
liquidation preference of the senior preferred stock. To date,
we have paid $1.7 billion in cash in senior preferred stock
dividends under the Purchase Agreement. This dividend
obligation, combined with potentially substantial commitment
fees payable to Treasury starting in 2010 (the amounts of which
must be determined by December 31, 2009) and limited
flexibility to pay down draws under the Purchase Agreement, will
have an adverse impact on our future financial position and net
worth. In addition, we expect to make additional draws under the
Purchase Agreement in future periods, due to a variety of
factors that could materially affect the level and volatility of
our net worth. For instance, if the housing market conditions
continue to deteriorate, increasing the possibility of our
incurring GAAP net losses in the future, we will likely need to
take additional draws, which would increase our senior preferred
dividend obligation. For additional information concerning the
potential impact of the Purchase Agreement, including taking
additional draws, see RISK FACTORS in our 2008
Annual Report. For additional information on our capital
management during conservatorship and factors that could affect
the level and volatility of our net worth, see LIQUIDITY
AND CAPITAL RESOURCES Capital Adequacy and
NOTE 9: REGULATORY CAPITAL to our consolidated
financial statements.
Risk
Management
Credit
Risks
Overview
Our total mortgage portfolio is subject primarily to two types
of credit risk: mortgage credit risk and institutional credit
risk. Mortgage credit risk is the risk that a borrower will fail
to make timely payments on a mortgage we own or
guarantee. We are exposed to mortgage credit risk on our total
mortgage portfolio because we either hold the mortgage assets or
have guaranteed mortgages in connection with the issuance of a
PC, Structured Security or other mortgage-related guarantee.
Institutional credit risk is the risk that a counterparty that
has entered into a business contract or arrangement with us will
fail to meet its obligations.
Mortgage and credit market conditions deteriorated significantly
during 2008 and remained challenging in the first half of 2009.
These conditions were brought about by a number of factors,
which have increased our exposure to both mortgage credit and
institutional credit risks. Factors that have negatively
affected the mortgage and credit markets included:
|
|
|
|
|
the effect of changes in other financial institutions
underwriting standards in past years, which allowed for the
origination of significant amounts of new higher-risk mortgage
products in 2006 and 2007 and the early months of 2008. These
mortgages have performed particularly poorly during the current
housing and economic downturn, and have defaulted at
historically high rates. However, even with the tightening of
underwriting standards, economic conditions will continue to
negatively impact recent originations;
|
|
|
|
increases in unemployment;
|
|
|
|
declines in home prices nationally and regionally during the
last two years;
|
|
|
|
higher incidence of institutional insolvencies;
|
|
|
|
higher levels of mortgage foreclosures and delinquencies;
|
|
|
|
significant volatility in interest rates;
|
|
|
|
significantly lower levels of liquidity in institutional credit
markets;
|
|
|
|
wider credit spreads;
|
|
|
|
rating agency downgrades of mortgage-related securities and
financial institutions; and
|
|
|
|
declines in market rents and increased vacancy rates affecting
multifamily housing operators and investors.
|
The deteriorating economic conditions discussed above and
uncertainty concerning the effect of current or any future
government actions to remedy them have increased the uncertainty
of future economic conditions, including unemployment rates and
home price changes. While our assumption for home prices, based
on our own index, continues to be for a decline during the
second half of 2009, there continues to be divergence among
economists about the future outlook and whether a sustained
recovery in home prices may occur.
Single-Family
Mortgage Portfolio
The following statistics illustrate the credit deterioration of
loans in our single-family mortgage portfolio, which consists of
single-family mortgage loans in our mortgage-related investments
portfolio and those backing our PCs, Structured Securities and
other mortgage-related guarantees.
Table 2
Credit Statistics, Single-Family Mortgage
Portfolio(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
06/30/09
|
|
03/31/2009
|
|
12/31/2008
|
|
09/30/2008
|
|
06/30/2008
|
|
Delinquency
rate(2)
|
|
|
2.78
|
%
|
|
|
2.29
|
%
|
|
|
1.72
|
%
|
|
|
1.22
|
%
|
|
|
0.93
|
%
|
Non-performing assets, on balance sheet (in millions)
|
|
$
|
14,981
|
|
|
$
|
13,445
|
|
|
$
|
11,241
|
|
|
$
|
9,840
|
|
|
$
|
9,220
|
|
Non-performing assets, off-balance sheet (in
millions)(3)
|
|
$
|
61,936
|
|
|
$
|
49,881
|
|
|
$
|
36,718
|
|
|
$
|
25,657
|
|
|
$
|
18,260
|
|
REO inventory (in units)
|
|
|
34,699
|
|
|
|
29,145
|
|
|
|
29,340
|
|
|
|
28,089
|
|
|
|
22,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
06/30/09
|
|
03/31/2009
|
|
12/31/2008
|
|
09/30/2008
|
|
06/30/2008
|
|
|
|
|
(in units, unless noted)
|
|
|
|
Loan
modifications(4)
|
|
|
15,603
|
|
|
|
24,623
|
|
|
|
17,695
|
|
|
|
8,456
|
|
|
|
4,687
|
|
REO acquisitions
|
|
|
21,997
|
|
|
|
13,988
|
|
|
|
12,296
|
|
|
|
15,880
|
|
|
|
12,410
|
|
REO disposition severity
ratio(5)
|
|
|
39.8
|
%
|
|
|
36.7
|
%
|
|
|
32.8
|
%
|
|
|
29.3
|
%
|
|
|
25.2
|
%
|
Single-family credit losses (in
millions)(6)
|
|
$
|
1,906
|
|
|
$
|
1,318
|
|
|
$
|
1,151
|
|
|
$
|
1,270
|
|
|
$
|
810
|
|
|
|
(1)
|
See OUR PORTFOLIOS and GLOSSARY for
information about our portfolios.
|
(2)
|
Single-family delinquency rate information is based on the
number of loans that are 90 days or more past due and those
in the process of foreclosure, excluding Structured
Transactions. Mortgage loans whose contractual terms have been
modified under agreement with the borrower are not included if
the borrower is less than 90 days delinquent under the
modified terms. Delinquency rates for our single-family mortgage
portfolio including Structured Transactions were 2.89% and 1.83%
at June 30, 2009 and December 31, 2008, respectively.
|
(3)
|
Consists of delinquent loans in our single-family mortgage
portfolio which underlie our issued PCs and Structured
Securities, based on unpaid principal balances that are past due
for 90 days or more.
|
(4)
|
The number of executed modifications under agreement with the
borrower during the period. Excludes forbearance agreements,
which are made in certain circumstances and under which reduced
or no payments are required during a defined period, as well as
repayment plans, which are separate agreements with the borrower
to repay past due amounts and return to compliance with the
original terms. Also excludes loans that entered the three-month
trial period for the modification process under HAMP during the
second quarter of 2009.
|
(5)
|
Calculated as the aggregate amount of our losses recorded on
disposition of REO properties during the respective quarterly
period divided by the aggregate unpaid principal balances of the
related loans with the borrowers. The amount of losses
recognized on disposition of the properties is equal to the
amount by which the unpaid principal balance of loans exceeds
the amount of net sales proceeds from disposition of the
properties. Excludes other related credit losses, such as
property maintenance and costs, as well as related recoveries
from credit enhancements, such as mortgage insurance.
|
(6)
|
Consists of REO operations expense plus charge-offs, net of
recoveries from third-party insurance and other credit
enhancements. Excludes other market-based fair value losses,
such as losses on loans purchased and
other-than-temporary
impairments of securities.
|
As the table above illustrates, we have experienced continued
deterioration in the performance of our single-family mortgage
portfolio due to several factors, including the following:
|
|
|
|
|
The expansion of the housing and economic downturn has reached a
broader group of borrowers. The unemployment rate in the
U.S. rose from 7.2% at December 31, 2008 to 9.5% as of
June 30, 2009. In the first half of 2009 we experienced a
significant increase in delinquency rate of fixed-rate
amortizing loans, which represents a more traditional mortgage
product. The delinquency rate for single-family 30-year
fixed-rate amortizing loans increased to 2.76% at June 30,
2009 as compared to 2.25% at March 31, 2009 and 1.69% at
December 31, 2008.
|
|
|
|
Certain loan groups within the single-family mortgage portfolio,
such as Alt-A and interest-only loans, as well as 2006 and 2007
vintage loans, continue to be larger contributors to our
worsening credit statistics than other, more traditional loan
groups. These loans have been more affected by macroeconomic
factors, such as declines in home prices, which have resulted in
erosion in the borrowers equity. These loans are also
concentrated in the West region. The West region comprised 27%
of the unpaid principal balances of our single-family mortgage
portfolio as of June 30, 2009, but accounted for 46% of our
REO acquisitions in the first half of 2009, based on the related
loan amount prior to our acquisition. In addition, states in the
West region (especially California, Arizona and Nevada) and
Florida tend to have higher average loan balances than the rest
of the U.S. and were most affected by the steep home price
declines during the last two years. California and Florida were
the states with the highest credit losses in the first half of
2009, comprising 45% of our single-family credit losses on a
combined basis.
|
Loss
Mitigation
As discussed above, we have taken several steps during 2008 and
continuing in 2009 designed to support homeowners and mitigate
the growth of our non-performing assets. We continue to expand
our efforts to increase our use of foreclosure alternatives, and
have expanded our staff to assist our seller/servicers in
completing loan modifications and other outreach programs with
the objective of keeping more borrowers in their homes.
Currently, we are primarily focusing on initiatives that support
the MHA Program. We also serve as the compliance agent under the
MHA Program for certain foreclosure prevention activities, and
we advise and consult with Treasury about the design, results
and future improvement of the MHA Program.
Our more recent loss mitigation activities have created
fluctuations in our credit statistics. For example, our
temporary suspensions of foreclosure transfers of occupied homes
temporarily reduced the rate of growth of our REO inventory and
of charge-offs, a component of our credit losses, in certain
periods since November 2008, but caused our
reserve for guarantee losses to rise. This also has created an
increase in the number of delinquent loans that remain in our
single-family mortgage portfolio, which results in higher
reported delinquency rates than without the suspension of
foreclosure transfers. In addition, the implementation of HAMP
in the second quarter of 2009 contributed to a temporary
decrease in the number of loan modifications since there is a
three month trial-period before these modifications become
effective. It is not possible at present to estimate the extent
to which the costs of this program, incurred in the near term,
may be offset, if at all, by the prevention or reduction of
potential future costs of loan defaults and foreclosures due to
these changes in business practices.
Investments
in Non-Agency Mortgage-Related Securities
Our investments in non-agency mortgage-related securities also
were affected by the deteriorating credit conditions in 2008 and
continuing into the first half of 2009. The table below
illustrates the increases in delinquency rates for subprime
first lien, MTA Option ARM and
Alt-A loans
that back $105.1 billion of the $186.2 billion of
non-agency mortgage-related securities in our mortgage-related
investments portfolio as of June 30, 2009. Given the
forecast for home price declines in the remainder of 2009, the
performance of the loans backing these securities could continue
to deteriorate.
Table 3
Credit Statistics, Non-Agency Mortgage-Related Securities Backed
by Subprime, MTA Option ARM and
Alt-A
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
06/30/2009
|
|
03/31/2009
|
|
12/31/2008
|
|
09/30/2008
|
|
06/30/2008
|
|
Delinquency
rates:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities backed by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime first lien
|
|
|
44
|
%
|
|
|
42
|
%
|
|
|
38
|
%
|
|
|
35
|
%
|
|
|
31
|
%
|
MTA Option ARM
|
|
|
40
|
|
|
|
36
|
|
|
|
30
|
|
|
|
24
|
|
|
|
18
|
|
Alt-A(2)
|
|
|
22
|
|
|
|
20
|
|
|
|
17
|
|
|
|
14
|
|
|
|
12
|
|
Cumulative collateral
loss:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities backed by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime first lien
|
|
|
10
|
%
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
4
|
%
|
|
|
2
|
%
|
MTA Option ARM
|
|
|
4
|
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
Alt-A(2)
|
|
|
3
|
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
Gross unrealized losses, pre-tax
(in millions)(4)(5)
|
|
$
|
41,157
|
|
|
$
|
27,475
|
|
|
$
|
30,671
|
|
|
$
|
22,411
|
|
|
$
|
25,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment of available-for-sale
securities(5)
|
|
$
|
10,380
|
|
|
$
|
6,956
|
|
|
$
|
6,794
|
|
|
$
|
8,856
|
|
|
$
|
826
|
|
Portion of other-than-temporary impairment recognized in
AOCI(5)
|
|
|
8,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment of available-for-sale securities recognized in
earnings for the three months ended
(in millions)(5)
|
|
$
|
2,157
|
|
|
$
|
6,956
|
|
|
$
|
6,794
|
|
|
$
|
8,856
|
|
|
$
|
826
|
|
|
|
(1)
|
Based on the number of loans that are 60 days or more past
due. Mortgage loans whose contractual terms have been modified
under agreement with the borrower are not included if the
borrower is less than 60 days delinquent under the modified
terms.
|
(2)
|
Excludes non-agency mortgage-related securities backed by other
loans primarily comprised of securities backed by home equity
lines of credit.
|
(3)
|
Based on the actual losses incurred on the collateral underlying
these securities. Actual losses incurred on the securities that
we hold are less than the losses on the underlying collateral as
presented in this table, as a majority of the securities we hold
include significant credit enhancements, particularly through
subordination.
|
(4)
|
Gross unrealized losses, pre-tax, represent the aggregate of the
amount by which amortized cost exceeds fair value measured at
the individual lot level.
|
(5)
|
Includes mortgage-related securities backed by subprime, MTA
Option ARM,
Alt-A and
other loans. Upon the adoption of FSP FAS
115-2 and
FAS 124-2 on
April 1, 2009, the amount of
other-than-temporary
impairment related to intent to sell or where it is more likely
than not that we will be required to sell and credit losses is
recognized in our consolidated statements of operations as net
impairment on
available-for-sale
securities recognized in earnings. The amount of
other-than-temporary
impairment related to all other factors is recognized in AOCI.
See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Change in Accounting Principles
Additional Guidance and Disclosures for Fair Value
Measurements and Change in the Impairment Model for Debt
Securities Change in the Impairment Model for Debt
Securities to our consolidated financial statements.
|
We held unpaid principal balances of $109.5 billion of
non-agency mortgage-related securities backed by subprime, MTA
Option ARM,
Alt-A and
other loans in our mortgage-related investments portfolio as of
June 30, 2009, compared to $119.5 billion as of
December 31, 2008. This decrease is due to the monthly
remittances of principal repayments we received on these
securities of $4.9 billion and $10.0 billion during
the three and six months ended June 30, 2009, respectively,
representing a partial return of our investment in these
securities. We have recorded net impairment of
available-for-sale securities recognized in earnings on
non-agency mortgage-related securities backed by subprime, MTA
Option ARM,
Alt-A and
other loans of approximately $2.2 billion and
$9.1 billion for the three and six months ended
June 30, 2009, respectively. See NOTE 1: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Change in
Accounting Principles Additional Guidance and
Disclosures for Fair Value Measurements and Change in the
Impairment Model for Debt Securities Change in
the Impairment Model for Debt Securities to our
consolidated financial statements for information on how
other-than-temporary impairments are recorded on our financial
statements commencing in the second quarter of 2009. Gross
unrealized losses, pre-tax, on securities backed by subprime,
MTA Option ARM,
Alt-A and
other loans reflected in AOCI increased during the first half of
2009 by $10.4 billion to $41.2 billion at
June 30, 2009. This increase in unrealized losses includes
$15.3 billion, pre-tax,
($9.9 billion, net of tax) of other-than-temporary
impairment losses reversed as a result of the second quarter
2009 adoption of
FSP FAS 115-2
and
FAS 124-2.
These losses more than offset the unrealized gains in our
non-agency mortgage-related securities that occurred during the
first half of 2009.
Interest
Rate and Other Market Risks
Our mortgage-related investments portfolio activities expose us
to interest rate risk and other market risks arising primarily
from the uncertainty as to when borrowers will pay the
outstanding principal balance of mortgage loans that we hold or
underlie securities in our mortgage-related investments
portfolio, known as prepayment risk, and the resulting potential
mismatch in the timing of our receipt of cash flows related to
our assets versus the timing of payment of cash flows related to
our liabilities. As interest rates fluctuate, we use derivatives
to adjust the interest rate characteristics of our debt funding
in order to more closely match those of our assets.
The recent market environment has been increasingly volatile.
Throughout 2008 and into 2009, we adjusted our interest rate
risk models to reflect rapidly changing market conditions. In
particular, prepayment models were adjusted during the first
half of 2009 to more accurately reflect prepayment expectations
under our implementation of the MHA Program as well as
refinancing expectations in the current interest rate
environment. During the second quarter of 2009, we purchased put
swaptions to replace maturing positions in order to partially
hedge our exposure to increasing negative convexity.
Operational
Risks
Operational risks are inherent in all of our business activities
and can become apparent in various ways, including accounting or
operational errors, business interruptions, fraud, failures of
the technology used to support our business activities,
difficulty in filling executive officer and key business unit
vacancies and other operational challenges from failed or
inadequate internal controls. These operational risks may expose
us to financial loss, interfere with our ability to sustain
timely financial reporting, or result in other adverse
consequences. Management of our operational risks takes place
through the enterprise risk management framework, with the
business areas retaining primary responsibility for identifying,
assessing and reporting their operational risks.
As a result of managements evaluation of our disclosure
controls and procedures, our Interim Chief Executive Officer,
who is also performing the functions of principal financial
officer on an interim basis, has concluded that our disclosure
controls and procedures were not effective as of June 30,
2009, at a reasonable level of assurance. We continue to work to
improve our financial reporting governance process and remediate
material weaknesses and other deficiencies in our internal
controls. While we are making progress on our remediation plans,
our material weaknesses have not been fully remediated at this
time. In view of our mitigating activities, including our
remediation efforts through June 30, 2009, we believe that
our interim consolidated financial statements for the quarter
ended June 30, 2009, have been prepared in conformity with
GAAP.
We face significant operational risks related to the process and
systems changes we will be required to implement as a result of
the FASBs issuance of SFAS 166 and SFAS 167
(which will be effective as of January 1, 2010), including
that it may be difficult for us to complete the changes in time
to ensure we prepare timely financial reports in a controlled
manner. These new accounting standards require us to consolidate
our PC trusts in our financial statements, which could have a
significant impact on our net worth.
Off-Balance
Sheet Arrangements
We enter into certain business arrangements that are not
recorded on our consolidated balance sheets or may be recorded
in amounts that differ from the full contract or notional amount
of the transaction. Most of these arrangements relate to our
financial guarantee and securitization activity for which we
record guarantee assets and obligations, but the related
securitized assets are owned by third parties. These off-balance
sheet arrangements may expose us to potential losses in excess
of the amounts recorded on our consolidated balance sheets.
Our maximum potential off-balance sheet exposure to credit
losses relating to our PCs, Structured Securities and other
mortgage-related guarantees is primarily represented by the
unpaid principal balance of the related loans and securities
held by third parties, which was $1,411 billion and
$1,403 billion at June 30, 2009 and December 31,
2008, respectively. Based on our historical credit losses, which
in the first half of 2009 averaged approximately 34 basis
points of the aggregate unpaid principal balance of our PCs and
Structured Securities, we do not believe that the maximum
exposure is representative of our actual exposure on these
guarantees.
Legislative
and Regulatory Matters
Legislation
On May 20, 2009, President Obama signed into law the
Helping Families Save Their Homes Act of 2009, which, among
other things, provides a safe harbor from liability for
servicers engaging in certain loss mitigation activities,
requires borrowers to be notified when their mortgage loans are
sold or transferred. The Protecting Tenants at Foreclosure Act,
enacted as part of the Helping Families Save Their Homes Act,
provides certain foreclosure protections for tenants by also
requiring immediate successors in interest of foreclosed
properties to give bona fide, non-owners at least 90 days
advance notice before they are evicted from the premises.
Freddie Mac is prohibited from evicting a bona fide tenant who
was occupying the foreclosure property at the time of the sale
before the expiration of a written lease agreement. We currently
do not expect the impact of these provisions of the Act on us to
be significant, because they are similar to our existing leasing
policy.
On May 20, 2009, President Obama also signed into law the
Fraud Enforcement and Recovery Act of 2009, which establishes a
commission designated to examine the causes of the current
financial crises, including the role of Freddie Mac and Fannie
Mae. The commission is composed of ten members appointed by the
House and Senate majority and minority leaders.
Pending
and Proposed Legislation and Related Matters
On March 5, 2009, the House of Representatives passed a
bill that, among other items, includes a provision allowing
bankruptcy judges to modify the terms of mortgages on principal
residences for borrowers in Chapter 13 bankruptcy.
Specifically, the House bill would allow bankruptcy judges to
adjust interest rates, extend repayment terms and lower the
outstanding principal amount to the current estimated fair value
of the underlying property. On May 6, 2009, the Senate
passed a similar housing-related bill that did not include
provisions allowing bankruptcy judges to modify the terms of
mortgages. It is unclear when, or if, the Senate will reconsider
other alternative bankruptcy-related legislation. If enacted,
this legislation could cause the volume of bankruptcy filings to
rise, potentially increasing charge-offs for mortgages in our
single-family mortgage portfolio and increasing our losses on
loans purchased, which are recognized on our consolidated
statements of operations.
On May 7, 2009, the House of Representatives passed a bill
that, among other things, would require originators to retain a
level of credit risk for certain mortgages that they sell,
enhance consumer disclosures, impose new servicing standards,
allow for assignee liability and require lenders to determine
that a borrower has a reasonable ability to repay home loans. If
enacted, the legislation would impact Freddie Mac and the
overall residential mortgage market. However, it is unclear
when, or if, the Senate will consider comparable legislation.
On June 17, 2009, the Obama Administration announced a plan
to overhaul the regulatory structure of the financial services
industry. While the plan does not contain specific
recommendations regarding the GSEs, many recommendations in the
plan will, if implemented, cause significant changes in the
regulation of the financial services industry. We cannot predict
the impact of these potential changes on our business and
operations. In addition, under the plan, Treasury and HUD are
expected to develop recommendations for the future of the GSEs,
in consultation with other government agencies, and will report
to Congress on such recommendations at the time of the
Presidents 2011 budget, which is currently targeted for
February 2010.
On June 26, 2009, the House of Representatives passed
comprehensive energy legislation that would, among other things,
require FHFA to provide Freddie Mac and Fannie Mae with extra
affordable housing goals credit for purchases of certain
energy-efficient and location-efficient mortgages. The
legislation would also create a new duty to serve underserved
markets for energy-efficient and location-efficient mortgages.
It is currently unclear when, or if, the Senate will consider
comparable legislation.
On July 16, 2009, the House of Representatives passed the
appropriations bill for financial services and general
government for fiscal year 2010. The House Committee on
Appropriations report accompanying the bill directs Treasury to
report to Congress on its plans to ensure that taxpayers receive
repayment of their investment in Freddie Mac and Fannie Mae, as
well as companies that received funds from the Troubled Asset
Relief Program and other companies receiving taxpayer funds.
On July 23, 2009, the House of Representatives passed the
appropriations bill for HUD for fiscal year 2010. The bill
includes a provision that would extend the temporary high-cost
conforming loan limits through September 2010.
The House of Representatives has passed several bills that would
impact executive and employee compensation paid by companies
receiving federal financial assistance, including Freddie Mac.
One bill would impose a 90% tax on the aggregate bonuses
received by certain executives and employees of such companies.
Another bill would prohibit unreasonable and
excessive compensation by certain companies that have
received federal financial assistance and would prohibit these
companies from paying non-performance based bonuses. Under this
bill, Treasury would be required to establish certain standards
regarding compensation payments. It is unclear when, or if, the
Senate will consider comparable legislation. The adoption of any
legislation that results in a significant tax on compensation or
that imposes significant compensation restrictions would likely
have an adverse impact on Freddie Macs ability to
recruit and retain executives and employees whose compensation
would be limited or reduced as a result of such legislation.
On July 31, 2009, the House of Representatives passed a
bill that would require certain publicly traded companies to
hold non-binding shareholder votes on executive compensation;
would require certain publicly traded companies to take steps to
ensure that their compensation committees are independent; would
require specified financial institutions, including Freddie Mac,
to disclose certain compensation structures to regulators; and
would permit federal regulators to prohibit specified financial
institutions, including Freddie Mac, from using certain types of
compensation structures that the regulators determine encourage
inappropriate risks.
Proposed
and Interim Final Regulations
On June 5, 2009, FHFA published proposed executive
compensation rules. The proposed rules, which would replace
FHFAs current executive compensation regulations, would
establish procedural requirements and processes related to the
compensation of executive officers at Freddie Mac, Fannie Mae,
the FHLBs and the Office of Finance of the FHLBs and would
implement certain compensation oversight authorities established
by the Reform Act.
On June 17, 2009, FHFA published a proposed rule that would
require Freddie Mac, Fannie Mae and the FHLBs to report to FHFA
any fraud or possible fraud relating to any loans or other
financial instruments that the entity has purchased or sold. The
proposed rule would implement the Reform Acts fraud
reporting provisions and would replace the existing mortgage
fraud regulation.
On June 29, 2009, FHFA published proposed rules that would
set forth standards for permissible and prohibited golden
parachute payments and indemnification payments to
entity-affiliated parties by Freddie Mac, Fannie Mae, the FHLBs
and the Office of Finance of the FHLBs. The proposed rules would
implement FHFAs statutory authority to regulate or
prohibit golden parachute and indemnification payments, and
would specify requirements that are closely related to the
limitations that already exist for insured depository
institutions under comparable banking regulations.
On July 2, 2009, FHFA published an interim final rule on
prior approval of new products, implementing the new product
provisions for Freddie Mac and Fannie Mae in the Reform Act. The
rule establishes a process for Freddie Mac and Fannie Mae to
provide prior notice to the Director of FHFA of a new activity
and, if applicable, to obtain prior approval from the Director
if the new activity is determined to be a new product. Under the
rule, if the Director determines that a new activity of Freddie
Mac is a new product, a description of the new
product must be published for public comment, after which the
Director will approve the new product if the Director determines
that the new product is: (a) authorized by our charter;
(b) in the public interest; and (c) consistent with
the safety and soundness of Freddie Mac and the mortgage finance
and financial system. We cannot currently predict the impact
that the interim final rule will have on our business, financial
position or results of operations.
Regulation
Z
In July 2008, the Federal Reserve published a final rule
amending Regulation Z (which implements the Truth in
Lending Act). According to the Federal Reserve, one of the goals
of the amendments is to protect consumers in the mortgage market
from unfair, abusive, or deceptive lending and servicing
practices while preserving responsible lending and sustainable
homeownership. Most of the provisions of the final rule are
effective on October 1, 2009. On July 23, 2009, the
Federal Reserve proposed amendments to Regulation Z
intended to improve the disclosures consumers receive in
connection with certain mortgages and home-equity lines of
credit. For more information, see RISK
MANAGEMENT Credit Risks Mortgage
Credit Risk Underwriting Standards and Quality
Control Process.
State
Actions
Several states have enacted laws that permit localities to
impose new assessments to allow homeowners to finance energy
efficient home improvements. The assessments are generally
treated like property tax assessments and may result in the
creation of a new lien that is senior to Freddie Macs
lien. The ultimate impact of these new laws is currently unclear.
Various state and local governments have been taking actions
that could delay or otherwise change their foreclosure
processes. These actions could increase our expenses, including
by potentially delaying the final resolution of delinquent
mortgage loans and the disposition of non-performing assets. For
example:
|
|
|
|
|
During the period from July 5, 2009 to July 5, 2011,
the state of Michigan is temporarily restricting servicers from
executing foreclosure acquisitions for a
90-day
period, from the date default notices are mailed to
|
|
|
|
|
|
homeowners, to allow servicers the opportunity to pursue loan
modifications and other workout options with homeowners as
alternatives to foreclosure.
|
|
|
|
|
|
During the
90-day
period commencing on June 1, 2009, the state of California
is temporarily restricting loan servicers from executing
foreclosure acquisitions unless they have an established
modification program meeting certain criteria. We have not been
significantly impacted by this restriction since we pursue
modifications and other foreclosure alternatives with eligible
borrowers before executing our foreclosure acquisitions.
|
Affordable
Housing Goals
Under the Reform Act, the annual housing goals for Freddie Mac
and Fannie Mae in place for 2008 remain in effect for 2009,
except that within 270 days from July 30, 2008, FHFA
must review the 2009 housing goals to determine the feasibility
of such goals in light of current market conditions and, after
seeking public comment for up to 30 days, FHFA may make
adjustments to the 2009 goals consistent with market conditions.
On July 28, 2009, FHFA issued a final rule that adjusts the
affordable housing goals and home purchase subgoals for 2009 to
the levels set forth in Table 4 below. Except for the
multifamily special affordable volume target, FHFA decreased all
of the goals and subgoals, as compared to those in effect for
2008.
Table
4 Housing Goals and Home Purchase Subgoals for
2009(1)
|
|
|
|
|
|
|
Housing Goals
|
|
Low- and moderate-income goal
|
|
|
43
|
%
|
Underserved areas goal
|
|
|
32
|
|
Special affordable goal
|
|
|
18
|
|
Multifamily special affordable volume target (in billions)
|
|
$
|
4.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Purchase
|
|
|
Subgoals
|
|
Low- and moderate-income subgoal
|
|
|
40
|
%
|
Underserved areas subgoal
|
|
|
30
|
|
Special affordable subgoal
|
|
|
14
|
|
|
|
(1) |
An individual mortgage may qualify for more than one of the
goals or subgoals. Each of the goal and subgoal percentages will
be determined independently and cannot be aggregated to
determine a percentage of total purchases that qualifies for
these goals or subgoals.
|
The rule permits loans we own or guarantee that are modified in
accordance with the MHA Program to be treated as mortgage
purchases and count toward the housing goals. In addition, the
rule excludes from the 2009 housing goals loans with original
principal balances that exceed the base nationwide conforming
loan limits (e.g., $417,000 for a one-unit single-family
property) in certain high-cost areas and exceed 150% of the
nationwide conforming loan limits in Alaska, Guam, Hawaii and
the Virgin Islands, which we refer to as
super-conforming mortgages.
We expect that market conditions and the tightened credit and
underwriting environment will make achieving our affordable
housing goals and subgoals for 2009 challenging.
Effective beginning calendar year 2010, the Reform Act requires
that FHFA establish, by regulation, four single-family housing
goals and one multifamily special affordable housing goal. In
addition, the Reform Act establishes a duty for Freddie Mac and
Fannie Mae to serve three underserved markets, manufactured
housing, affordable housing preservation and rural areas, by
developing loan products and flexible underwriting guidelines to
facilitate a secondary market for mortgages for very low-,
low-and moderate-income families in those markets. Effective for
2010, FHFA is required to establish a manner for annually:
(1) evaluating whether and to what extent Freddie Mac and
Fannie Mae have complied with the duty to serve underserved
markets; and (2) rating the extent of compliance.
New
York Stock Exchange Matters
On November 17, 2008, we received a notice from the NYSE
that we had failed to satisfy one of the NYSEs standards
for continued listing of our common stock. Specifically, the
NYSE advised us that we were below criteria for the
NYSEs price criteria for common stock because the average
closing price of our common stock over a consecutive 30
trading-day
period was less than $1 per share. On December 2, 2008, we
advised the NYSE of our intent to cure this deficiency, and that
we may undertake a reverse stock split in order to do so.
On February 26, 2009, the NYSE suspended the application of
its minimum price listing standard until June 30, 2009
(subsequently extended until July 31, 2009). The suspension
period expired on July 31, 2009, and we have not regained
compliance with the minimum price standard. Under applicable
NYSE rules, we now have until October 20, 2009 to bring our
share price and our average share price for the 30 consecutive
trading days preceding October 20, 2009, above $1. If we
fail to do so, NYSE rules provide that the NYSE will initiate
suspension and delisting procedures.
The delisting of our common stock would likely also result in
the delisting of our NYSE-listed preferred stock. The delisting
of our common stock or NYSE-listed preferred stock would require
any trading in these securities to occur in the over-the-counter
market and could adversely affect the market prices, trading
volume and liquidity of the markets for these securities. As a
result, it could be more difficult for our shareholders to sell
their shares, especially at prices comparable to those in effect
prior to delisting. We will work with our Conservator to
determine the specific action or actions that may be taken to
cure the deficiency, but there is no assurance that any such
actions will be taken or that any actions taken will be
successful. The average share price of our common stock for the
30 consecutive trading days ended as of the filing of this
Form 10-Q
was less than $1 per share.
SELECTED
FINANCIAL
DATA(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(dollars in millions, except
|
|
|
|
share related amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
4,255
|
|
|
$
|
1,529
|
|
|
$
|
8,114
|
|
|
$
|
2,327
|
|
Non-interest income
|
|
|
3,215
|
|
|
|
56
|
|
|
|
127
|
|
|
|
670
|
|
Non-interest expense
|
|
|
(6,887
|
)
|
|
|
(3,434
|
)
|
|
|
(18,446
|
)
|
|
|
(5,417
|
)
|
Net income (loss) attributable to Freddie Mac
|
|
|
768
|
|
|
|
(821
|
)
|
|
|
(9,083
|
)
|
|
|
(972
|
)
|
Net loss attributable to common stockholders
|
|
|
(374
|
)
|
|
|
(1,053
|
)
|
|
|
(10,603
|
)
|
|
|
(1,476
|
)
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
|
|
$
|
(1.63
|
)
|
|
$
|
(3.26
|
)
|
|
$
|
(2.28
|
)
|
Diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(1.63
|
)
|
|
$
|
(3.26
|
)
|
|
$
|
(2.28
|
)
|
Weighted average common shares outstanding (in
thousands):(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,253,716
|
|
|
|
646,868
|
|
|
|
3,254,815
|
|
|
|
646,603
|
|
Diluted
|
|
|
3,253,716
|
|
|
|
646,868
|
|
|
|
3,254,815
|
|
|
|
646,603
|
|
Dividends per common share
|
|
$
|
|
|
|
$
|
0.25
|
|
|
$
|
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
$
|
892,290
|
|
|
$
|
850,963
|
|
Short-term debt
|
|
|
|
|
|
|
|
|
|
|
344,135
|
|
|
|
435,114
|
|
Long-term senior debt
|
|
|
|
|
|
|
|
|
|
|
488,329
|
|
|
|
403,402
|
|
Long-term subordinated debt
|
|
|
|
|
|
|
|
|
|
|
4,514
|
|
|
|
4,505
|
|
All other liabilities
|
|
|
|
|
|
|
|
|
|
|
47,080
|
|
|
|
38,576
|
|
Total equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
8,232
|
|
|
|
(30,634
|
)
|
Portfolio Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related investments
portfolio(3)
|
|
|
|
|
|
|
|
|
|
|
829,837
|
|
|
|
804,762
|
|
Total PCs and Structured Securities
issued(4)
|
|
|
|
|
|
|
|
|
|
|
1,851,124
|
|
|
|
1,827,238
|
|
Total mortgage portfolio
|
|
|
|
|
|
|
|
|
|
|
2,240,483
|
|
|
|
2,207,476
|
|
Non-performing assets
|
|
|
|
|
|
|
|
|
|
|
77,519
|
|
|
|
48,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Ratios(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average
assets(6)
|
|
|
0.3
|
%
|
|
|
(0.4
|
)%
|
|
|
(2.1
|
)%
|
|
|
(0.2
|
)%
|
Non-performing assets
ratio(7)
|
|
|
3.9
|
|
|
|
1.5
|
|
|
|
3.9
|
|
|
|
1.5
|
|
Equity to assets
ratio(8)
|
|
|
0.1
|
|
|
|
1.7
|
|
|
|
(1.3
|
)
|
|
|
2.4
|
|
Preferred stock to core capital
ratio(9)
|
|
|
N/A
|
|
|
|
38.0
|
|
|
|
N/A
|
|
|
|
38.0
|
|
|
|
(1)
|
See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Change in Accounting Principles to
our consolidated financial statements for information regarding
accounting changes impacting the current period. See
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Recently Adopted Accounting Standards
in our 2008 Annual Report for information regarding accounting
changes impacting previously reported results.
|
(2)
|
For the three and six months ended June 30, 2009, includes
the weighted average number of shares that are associated with
the warrant for our common stock issued to Treasury as part of
the Purchase Agreement. This warrant is included in basic loss
per share for the second quarter of 2009, because it is
unconditionally exercisable by the holder at a cost of $.00001
per share.
|
(3)
|
The mortgage-related investments portfolio presented on our
consolidated balance sheets differs from the mortgage-related
investments portfolio in this table because the consolidated
balance sheet amounts include valuation adjustments, discounts,
premiums and other deferred balances. See CONSOLIDATED
BALANCE SHEETS ANALYSIS Table 19
Characteristics of Mortgage Loans and Mortgage-Related
Securities in our Mortgage-Related Investments Portfolio
for more information.
|
(4)
|
Includes PCs and Structured Securities that are held in our
mortgage-related investments portfolio. See OUR
PORTFOLIOS Table 54 Freddie
Macs Total Mortgage Portfolio and Segment Portfolio
Composition for the composition of our total mortgage
portfolio. Excludes Structured Securities for which we have
resecuritized our PCs and Structured Securities. These
resecuritized securities do not increase our credit-related
exposure and consist of single-class Structured Securities
backed by PCs, REMICs, and principal-only strips. The notional
balances of interest-only strips are excluded because this line
item is based on unpaid principal balance. Includes other
guarantees issued that are not in the form of a PC, such as
long-term standby commitments and credit enhancements for
multifamily housing revenue bonds.
|
(5)
|
The return on common equity ratio is not presented because total
Freddie Mac stockholders equity (deficit) is less than
zero for all periods presented. The dividend payout ratio on
common stock is not presented because we are reporting a net
loss attributable to common stockholders for all periods
presented.
|
(6)
|
Ratio computed as annualized net income (loss) attributable to
Freddie Mac divided by the simple average of the beginning and
ending balances of total assets.
|
(7)
|
Ratio computed as non-performing assets divided by the ending
unpaid principal balances of our total mortgage portfolio,
excluding non-Freddie Mac securities.
|
(8)
|
Ratio computed as the simple average of the beginning and ending
balances of Total Freddie Mac stockholders equity
(deficit) divided by the simple average of the beginning and
ending balances of total assets.
|
(9)
|
Ratio computed as preferred stock (excluding senior preferred
stock), at redemption value divided by core capital. Senior
preferred stock does not meet the statutory definition of core
capital. Ratio is not computed for periods in which core capital
is less than zero. See NOTE 9: REGULATORY
CAPITAL to our consolidated financial statements for more
information regarding core capital.
|
CONSOLIDATED
RESULTS OF OPERATIONS
The following discussion of our consolidated results of
operations should be read in conjunction with our consolidated
financial statements including the accompanying notes. Also see
CRITICAL ACCOUNTING POLICIES AND ESTIMATES for more
information concerning our more significant accounting policies
and estimates applied in determining our reported financial
position and results of operations.
Table 5
Summary Consolidated Statements of Operations GAAP
Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Net interest income
|
|
$
|
4,255
|
|
|
$
|
1,529
|
|
|
$
|
8,114
|
|
|
$
|
2,327
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income
|
|
|
710
|
|
|
|
757
|
|
|
|
1,490
|
|
|
|
1,546
|
|
Gains (losses) on guarantee asset
|
|
|
1,817
|
|
|
|
1,114
|
|
|
|
1,661
|
|
|
|
(280
|
)
|
Income on guarantee obligation
|
|
|
961
|
|
|
|
769
|
|
|
|
1,871
|
|
|
|
1,938
|
|
Derivative gains (losses)
|
|
|
2,361
|
|
|
|
115
|
|
|
|
2,542
|
|
|
|
(130
|
)
|
Gains (losses) on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment-related(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment of
available-for-sale
securities
|
|
|
(10,473
|
)
|
|
|
(1,040
|
)
|
|
|
(17,603
|
)
|
|
|
(1,111
|
)
|
Portion of other-than-temporary impairment recognized in AOCI
|
|
|
8,260
|
|
|
|
|
|
|
|
8,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment of
available-for-sale
securities recognized in earnings
|
|
|
(2,213
|
)
|
|
|
(1,040
|
)
|
|
|
(9,343
|
)
|
|
|
(1,111
|
)
|
Other gains (losses) on investments
|
|
|
797
|
|
|
|
(2,287
|
)
|
|
|
2,983
|
|
|
|
(997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) on investments
|
|
|
(1,416
|
)
|
|
|
(3,327
|
)
|
|
|
(6,360
|
)
|
|
|
(2,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on debt recorded at fair value
|
|
|
(797
|
)
|
|
|
569
|
|
|
|
(330
|
)
|
|
|
(816
|
)
|
Gains (losses) on debt retirement
|
|
|
(156
|
)
|
|
|
(29
|
)
|
|
|
(260
|
)
|
|
|
276
|
|
Recoveries on loans impaired upon purchase
|
|
|
70
|
|
|
|
121
|
|
|
|
120
|
|
|
|
347
|
|
Low-income housing tax credit partnerships
|
|
|
(167
|
)
|
|
|
(108
|
)
|
|
|
(273
|
)
|
|
|
(225
|
)
|
Trust management income (expense)
|
|
|
(238
|
)
|
|
|
(19
|
)
|
|
|
(445
|
)
|
|
|
(16
|
)
|
Other income
|
|
|
70
|
|
|
|
94
|
|
|
|
111
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
3,215
|
|
|
|
56
|
|
|
|
127
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expense
|
|
|
(383
|
)
|
|
|
(404
|
)
|
|
|
(755
|
)
|
|
|
(801
|
)
|
Provision for credit losses
|
|
|
(5,199
|
)
|
|
|
(2,537
|
)
|
|
|
(13,990
|
)
|
|
|
(3,777
|
)
|
REO operations expense
|
|
|
(9
|
)
|
|
|
(265
|
)
|
|
|
(315
|
)
|
|
|
(473
|
)
|
Other
|
|
|
(1,296
|
)
|
|
|
(228
|
)
|
|
|
(3,386
|
)
|
|
|
(366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
(6,887
|
)
|
|
|
(3,434
|
)
|
|
|
(18,446
|
)
|
|
|
(5,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefit
|
|
|
583
|
|
|
|
(1,849
|
)
|
|
|
(10,205
|
)
|
|
|
(2,420
|
)
|
Income tax benefit
|
|
|
184
|
|
|
|
1,030
|
|
|
|
1,121
|
|
|
|
1,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
767
|
|
|
$
|
(819
|
)
|
|
$
|
(9,084
|
)
|
|
$
|
(968
|
)
|
Less: Net (income) loss attributable to noncontrolling interest
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Freddie Mac
|
|
$
|
768
|
|
|
$
|
(821
|
)
|
|
$
|
(9,083
|
)
|
|
$
|
(972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
We adopted FSP
FAS 115-2
and
FAS 124-2
effective April 1, 2009. See NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Change in Accounting
Principles to our consolidated financial statements for
further information.
|
Net
Interest Income
Table 6 presents an analysis of net interest income,
including average balances and related yields earned on assets
and incurred on liabilities.
Table 6
Net Interest Income/Yield and Average Balance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
|
(dollars in millions)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(3)
|
|
$
|
127,863
|
|
|
$
|
1,721
|
|
|
|
5.38
|
%
|
|
$
|
89,813
|
|
|
$
|
1,320
|
|
|
|
5.88
|
%
|
Mortgage-related
securities(4)
|
|
|
702,693
|
|
|
|
8,235
|
|
|
|
4.69
|
|
|
|
664,727
|
|
|
|
8,380
|
|
|
|
5.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related investments portfolio
|
|
|
830,556
|
|
|
|
9,956
|
|
|
|
4.79
|
|
|
|
754,540
|
|
|
|
9,700
|
|
|
|
5.14
|
|
Non-mortgage-related
securities(4)
|
|
|
16,594
|
|
|
|
288
|
|
|
|
6.96
|
|
|
|
26,935
|
|
|
|
223
|
|
|
|
3.31
|
|
Cash and cash equivalents
|
|
|
57,401
|
|
|
|
62
|
|
|
|
0.42
|
|
|
|
27,126
|
|
|
|
178
|
|
|
|
2.60
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
29,542
|
|
|
|
13
|
|
|
|
0.17
|
|
|
|
20,660
|
|
|
|
119
|
|
|
|
2.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
934,093
|
|
|
|
10,319
|
|
|
|
4.42
|
|
|
|
829,261
|
|
|
|
10,220
|
|
|
|
4.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
293,475
|
|
|
|
(571
|
)
|
|
|
(0.77
|
)
|
|
|
240,119
|
|
|
|
(1,637
|
)
|
|
|
(2.70
|
)
|
Long-term
debt(5)
|
|
|
582,998
|
|
|
|
(5,211
|
)
|
|
|
(3.57
|
)
|
|
|
569,443
|
|
|
|
(6,711
|
)
|
|
|
(4.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
876,473
|
|
|
|
(5,782
|
)
|
|
|
(2.63
|
)
|
|
|
809,562
|
|
|
|
(8,348
|
)
|
|
|
(4.11
|
)
|
Expense related to
derivatives(6)
|
|
|
|
|
|
|
(282
|
)
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
(343
|
)
|
|
|
(0.17
|
)
|
Impact of net non-interest-bearing funding
|
|
|
57,620
|
|
|
|
|
|
|
|
0.17
|
|
|
|
19,699
|
|
|
|
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding of interest-earning assets
|
|
$
|
934,093
|
|
|
|
(6,064
|
)
|
|
|
(2.59
|
)
|
|
$
|
829,261
|
|
|
|
(8,691
|
)
|
|
|
(4.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/yield
|
|
|
|
|
|
|
4,255
|
|
|
|
1.83
|
|
|
|
|
|
|
|
1,529
|
|
|
|
0.75
|
|
Fully taxable-equivalent
adjustments(7)
|
|
|
|
|
|
|
99
|
|
|
|
0.04
|
|
|
|
|
|
|
|
105
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/yield (fully taxable-equivalent basis)
|
|
|
|
|
|
$
|
4,354
|
|
|
|
1.87
|
|
|
|
|
|
|
$
|
1,634
|
|
|
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
|
(dollars in millions)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(3)
|
|
$
|
123,209
|
|
|
$
|
3,301
|
|
|
|
5.36
|
%
|
|
$
|
87,052
|
|
|
$
|
2,563
|
|
|
|
5.89
|
%
|
Mortgage-related
securities(4)
|
|
|
700,578
|
|
|
|
16,995
|
|
|
|
4.85
|
|
|
|
646,724
|
|
|
|
16,513
|
|
|
|
5.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related investments portfolio
|
|
|
823,787
|
|
|
|
20,296
|
|
|
|
4.93
|
|
|
|
733,776
|
|
|
|
19,076
|
|
|
|
5.20
|
|
Non-mortgage-related
securities(4)
|
|
|
13,896
|
|
|
|
499
|
|
|
|
7.19
|
|
|
|
28,750
|
|
|
|
536
|
|
|
|
3.73
|
|
Cash and cash equivalents
|
|
|
53,666
|
|
|
|
138
|
|
|
|
0.51
|
|
|
|
18,008
|
|
|
|
266
|
|
|
|
2.92
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
31,574
|
|
|
|
31
|
|
|
|
0.20
|
|
|
|
17,548
|
|
|
|
238
|
|
|
|
2.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
922,923
|
|
|
|
20,964
|
|
|
|
4.54
|
|
|
|
798,082
|
|
|
|
20,116
|
|
|
|
5.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
328,020
|
|
|
|
(1,693
|
)
|
|
|
(1.03
|
)
|
|
|
222,385
|
|
|
|
(3,681
|
)
|
|
|
(3.27
|
)
|
Long-term
debt(5)
|
|
|
552,075
|
|
|
|
(10,575
|
)
|
|
|
(3.83
|
)
|
|
|
553,869
|
|
|
|
(13,436
|
)
|
|
|
(4.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
880,095
|
|
|
|
(12,268
|
)
|
|
|
(2.79
|
)
|
|
|
776,254
|
|
|
|
(17,117
|
)
|
|
|
(4.40
|
)
|
Expense related to
derivatives(6)
|
|
|
|
|
|
|
(582
|
)
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
(672
|
)
|
|
|
(0.17
|
)
|
Impact of net non-interest-bearing funding
|
|
|
42,828
|
|
|
|
|
|
|
|
0.14
|
|
|
|
21,828
|
|
|
|
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding of interest-earning assets
|
|
$
|
922,923
|
|
|
|
(12,850
|
)
|
|
|
(2.78
|
)
|
|
$
|
798,082
|
|
|
|
(17,789
|
)
|
|
|
(4.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/yield
|
|
|
|
|
|
|
8,114
|
|
|
|
1.76
|
|
|
|
|
|
|
|
2,327
|
|
|
|
0.60
|
|
Fully taxable-equivalent
adjustments(7)
|
|
|
|
|
|
|
201
|
|
|
|
0.04
|
|
|
|
|
|
|
|
212
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/yield (fully taxable-equivalent basis)
|
|
|
|
|
|
$
|
8,315
|
|
|
|
1.80
|
|
|
|
|
|
|
$
|
2,539
|
|
|
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes mortgage loans and mortgage-related securities traded,
but not yet settled.
|
(2)
|
For securities, we calculated average balances based on their
unpaid principal balance plus their associated deferred fees and
costs (e.g., premiums and discounts), but excluded the
effect of
mark-to-fair-value
changes.
|
(3)
|
Non-performing loans, where interest income is recognized when
collected, are included in average balances.
|
(4)
|
Interest income (expense) includes the portion of impairment
charges recognized in earnings expected to be recovered.
|
(5)
|
Includes current portion of long-term debt.
|
(6)
|
Represents changes in fair value of derivatives in cash flow
hedge relationships that were previously deferred in AOCI and
have been reclassified to earnings as the associated hedged
forecasted issuance of debt and mortgage purchase transactions
affect earnings. 2008 also includes the accrual of periodic cash
settlements of all derivatives in qualifying hedge accounting
relationships.
|
(7)
|
The determination of net interest income/yield (fully
taxable-equivalent basis), which reflects fully
taxable-equivalent adjustments to interest income, involves the
conversion of tax-exempt sources of interest income to the
equivalent amounts of interest income that would be necessary to
derive the same net return if the investments had been subject
to income taxes using our federal statutory tax rate of 35%.
|
Net interest income and net interest yield on a fully
taxable-equivalent basis increased during the three and six
months ended June 30, 2009 compared to the three and six
months ended June 30, 2008 primarily due to: (a) a
decrease in funding costs as a result of the replacement of
higher cost short- and long-term debt with new lower cost debt;
(b) a significant increase in the average size of our
mortgage-related investments portfolio, including an increase in
our holdings of fixed-rate assets; and
(c) $968 million of income, primarily recognized in
the three months ended March 31, 2009, related to the
accretion of other-than temporary impairments of investments in
available-for-sale securities recorded primarily during the
second half of 2008. Upon our adoption of FSP
FAS 115-2
and
FAS 124-2
on April 1, 2009, previously recognized non-credit related
other-than-temporary impairments were reclassified from retained
earnings to AOCI and these amounts are no longer accreted into
net interest income. See NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES to our consolidated
financial statements for a discussion of the impact of these
accounting changes.
During the three and six months ended June 30, 2009, both
our floating-rate long-term and our short-term debt funding
average balances increased significantly when compared to the
three and six months ended June 30, 2008. Our use of
floating-rate long-term debt funding and short-term debt funding
has been driven by varying levels of demand for our long-term
and callable debt in the worldwide financial markets commencing
in the second half of 2008. During the first half of 2009, the
Federal Reserve was an active purchaser in the secondary market
of our long-term debt under its purchase program and, as a
result, spreads on our debt and access to the debt markets
improved. Due to our limited ability to issue long-term and
callable debt during the second half of 2008 and the first few
months of 2009, we increased our use of the strategy of
combining derivatives and floating-rate long-term debt or
short-term debt to synthetically create the substantive economic
equivalent of various longer-term fixed rate debt funding
structures. See Non-Interest Income (Loss)
Derivative Overview for additional information. As
discussed in LIQUIDITY AND CAPITAL RESOURCES
Liquidity Debt Securities, our access
to the debt markets has improved.
The increase in our mortgage-related investments portfolio
resulted from our acquiring and holding increased amounts of
mortgage loans and mortgage-related securities to provide
additional liquidity to the mortgage market. Also, primarily
during the first quarter of 2009, continued liquidity concerns
in the market resulted in more favorable investment
opportunities for agency mortgage-related securities at wider
spreads. In response, our net purchase activities resulted in an
increase in the average balance of our interest-earning assets.
The increases in net interest income and net interest yield on a
fully taxable-equivalent basis during the three and six months
ended June 30, 2009 were partially offset by the impact of
declining short-term interest rates on floating rate assets held
in our mortgage-related investments portfolio. We also increased
our cash and other investments portfolio during the three and
six months ended June 30, 2009 compared to the three and
six months ended June 30, 2008, as we replaced
higher-yielding, longer-term non-mortgage-related securities
with lower-yielding, shorter-term cash and cash equivalents and
securities purchased under agreements to resell. This shift, in
combination with lower short-term rates, also partially offset
the increase in net interest income and net interest yield.
Non-Interest
Income (Loss)
Management
and Guarantee Income
Table 7 provides summary information about management and
guarantee income. Management and guarantee income consists of
contractual amounts due to us (reflecting buy-ups and buy-downs
to base management and guarantee fees) as well as amortization
of pre-2003
delivery and buy-down fees received by us that were recorded as
deferred income as a component of other liabilities. Beginning
in 2003, delivery and buy-down fees are reflected within income
on guarantee obligation as the guarantee obligation is amortized.
Table 7
Management and Guarantee Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(dollars in millions, rates in basis points)
|
|
|
Contractual management and guarantee
fees(1)
|
|
$
|
776
|
|
|
|
17.3
|
|
|
$
|
778
|
|
|
|
17.5
|
|
|
$
|
1,558
|
|
|
|
17.4
|
|
|
$
|
1,535
|
|
|
|
17.5
|
|
Amortization of deferred fees included in other liabilities
|
|
|
(66
|
)
|
|
|
(1.5
|
)
|
|
|
(21
|
)
|
|
|
(0.5
|
)
|
|
|
(68
|
)
|
|
|
(0.8
|
)
|
|
|
11
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management and guarantee income
|
|
$
|
710
|
|
|
|
15.8
|
|
|
$
|
757
|
|
|
|
17.0
|
|
|
$
|
1,490
|
|
|
|
16.6
|
|
|
$
|
1,546
|
|
|
|
17.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized balance of deferred fees included in other
liabilities, at period end
|
|
$
|
250
|
|
|
|
|
|
|
$
|
403
|
|
|
|
|
|
|
$
|
250
|
|
|
|
|
|
|
$
|
403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Consists of management and guarantee fees related to all issued
and outstanding guarantees, including those issued prior to
adoption of FIN 45 in January 2003, which did not require
the establishment of a guarantee asset.
|
Management and guarantee income decreased for the three and six
months ended June 30, 2009 compared to the three and six
months ended June 30, 2008 primarily due to the reversal of
amortization of
pre-2003
deferred fees in the
2009 periods. Amortization of deferred fees declined due to our
expectations of increasing interest rates and slowing
prepayments in the future, which resulted in our recognizing a
catch-up,
or, in this case, reversal of previous amortization. The unpaid
principal balance of our issued PCs and Structured Securities
was $1.85 trillion at June 30, 2009 compared to
$1.82 trillion at June 30, 2008, an increase of 1.5%.
Although there were higher average balances of our issued
guarantees during the three and six months ended June 30,
2009, compared to the same periods in 2008, the effect of this
increase was offset by declines in the average rate of
contractual management and guarantee fees. Our average
management and guarantee fee rates have declined slightly in the
second quarter and first half of 2009, compared to the same
periods in 2008, due primarily to portfolio turnover in these
periods, since newly issued PCs generally had lower average
contractual guarantee fee rates than the previously outstanding
PCs that were liquidated. This rate decline was primarily caused
by the impact of our market-pricing on new business purchases
and a decrease in higher-risk mortgage composition in our
purchases that was partially offset by an increase in the
preference for
buy-ups in
rates by our customers.
Gains
(Losses) on Guarantee Asset
Upon issuance of a financial guarantee, we record a guarantee
asset on our consolidated balance sheets representing the fair
value of the management and guarantee fees we expect to receive
over the life of our PCs and Structured Securities. Subsequent
changes in the fair value of the future cash flows of our
guarantee asset are reported in the current period income as
gains (losses) on guarantee asset.
Gains (losses) on guarantee asset reflect:
|
|
|
|
|
reductions related to the management and guarantee fees received
that are considered a return of our recorded investment in our
guarantee asset; and
|
|
|
|
changes in the fair value of management and guarantee fees we
expect to receive over the life of the financial guarantee.
|
Contractual management and guarantee fees shown in Table 8
represent cash received in each period for those financial
guarantees with an established guarantee asset. A portion of
these contractual management and guarantee fees is attributed to
imputed interest income on the guarantee asset.
Table 8
Attribution of Change Gains (Losses) on Guarantee
Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Contractual management and guarantee fees
|
|
$
|
(731
|
)
|
|
$
|
(720
|
)
|
|
$
|
(1,464
|
)
|
|
$
|
(1,409
|
)
|
Portion attributable to imputed interest income
|
|
|
251
|
|
|
|
243
|
|
|
|
500
|
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of investment on guarantee asset
|
|
|
(480
|
)
|
|
|
(477
|
)
|
|
|
(964
|
)
|
|
|
(951
|
)
|
Change in fair value of future management and guarantee fees
|
|
|
2,297
|
|
|
|
1,591
|
|
|
|
2,625
|
|
|
|
671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on guarantee asset
|
|
$
|
1,817
|
|
|
$
|
1,114
|
|
|
$
|
1,661
|
|
|
$
|
(280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual management and guarantee fees and imputed interest
income increased slightly in the three and six months ended
June 30, 2009 as compared to the three and six months ended
June 30, 2008, primarily due to increases in the average
balance of our PCs and Structured Securities issued.
As shown in the table above, the change in fair value of
management and guarantee fees was $2.3 billion in the
second quarter of 2009 compared to $1.6 billion in the
second quarter of 2008. The increase in the gain on our
guarantee asset in the second quarter and first half of 2009 was
principally attributed to a greater increase in interest rates
during the 2009 periods, compared to the increase in interest
rates that occurred during the same periods of 2008.
Income
on Guarantee Obligation
Upon issuance of our guarantee, we record a guarantee obligation
on our consolidated balance sheets representing the estimated
fair value of our obligation to perform under the terms of the
guarantee. Our guarantee obligation is amortized into income
using a static effective yield determined at inception of the
guarantee based on forecasted repayments of the principal
balances on loans underlying the guarantee. See CRITICAL
ACCOUNTING POLICIES AND ESTIMATES Application of the
Static Effective Yield Method to Amortize the Guarantee
Obligation in our 2008 Annual Report for additional
information on application of the static effective yield method.
The static effective yield is periodically evaluated and
amortization is adjusted when significant changes in economic
events cause a shift in the pattern of our economic release from
risk. When this type of change is required, a cumulative
catch-up adjustment, which could be significant in a given
period, will be recognized. In the first quarter of 2009, we
enhanced our methodology for evaluating significant changes in
economic events to be more in line with the current economic
environment and to monitor the rate of amortization on our
guarantee obligation so that it remains reflective of our
expected duration of losses.
Table 9 provides information about the components of income
on guarantee obligation.
Table 9
Income on Guarantee Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Amortization income related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Static effective yield
|
|
$
|
741
|
|
|
$
|
681
|
|
|
$
|
1,516
|
|
|
$
|
1,261
|
|
Cumulative catch-up
|
|
|
220
|
|
|
|
88
|
|
|
|
355
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income on guarantee obligation
|
|
$
|
961
|
|
|
$
|
769
|
|
|
$
|
1,871
|
|
|
$
|
1,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic amortization under the static effective yield method
increased in both the three and six months ended June 30,
2009, compared to the same periods in 2008 primarily due to
upward adjustments to the basic rates at the end of 2008, which
were due to significant declines in home prices late in the
year. Higher liquidation, or prepayment, rates on the related
loans, which was attributed to higher refinance activity during
the 2009 periods, also resulted in increased static effective
yield amortization in the 2009 periods, compared to the 2008
periods.
Cumulative
catch-up
amortization was higher for the second quarter of 2009 compared
to the second quarter of 2008 principally due to higher
prepayment rates. We recognized much higher cumulative catch-up
adjustments in the first half of 2008 than in the first half of
2009 due to home price declines during the first half of 2008
compared to an increase in national home prices during the first
half of 2009, which resulted in catch-up adjustments in the 2008
period. We estimate a slight increase of 1.4% during the first
half of 2009 in national home prices, based on our own index of
our single family mortgage portfolio, compared to an estimated
decrease of 2.9% during the first half of 2008.
Derivative
Overview
During 2008, we designated certain derivative positions as cash
flow hedges of changes in cash flows associated with our
forecasted issuances of debt, consistent with our risk
management goals, in an effort to reduce interest rate risk
related volatility in our consolidated statements of operations.
In conjunction with our entry into conservatorship on
September 6, 2008, we determined that we could no longer
assert that the associated forecasted issuances of debt were
probable of occurring and, as a result, we ceased designating
derivative positions as cash flow hedges associated with
forecasted issuances of debt. The previous deferred amount
related to these hedges remains in our AOCI balance and will be
recognized into earnings over the expected time period for which
the forecasted issuances of debt impact earnings. Any subsequent
changes in fair value of those derivative instruments are
included in derivative gains (losses) on our consolidated
statements of operations. As a result of our discontinuance of
this hedge accounting strategy, we transferred
$27.6 billion in notional amount and $(488) million in
fair value from open cash flow hedges to closed cash flow hedges
on September 6, 2008. During 2008, we also elected cash
flow hedge accounting relationships for certain commitments to
sell mortgage-related securities; however, we discontinued hedge
accounting for these derivative instruments in December 2008.
For a discussion of the impact of derivatives on our
consolidated financial statements and our discontinuation of
derivatives designated as cash flow hedges see
NOTE 10: DERIVATIVES to our consolidated
financial statements.
Table 10 presents the gains and losses related to
derivatives that were not accounted for in hedge accounting
relationships. Derivative gains (losses) represents the change
in fair value of derivatives not accounted for in hedge
accounting relationships because the derivatives did not qualify
for, or we did not elect to pursue, hedge accounting, resulting
in fair value changes being recorded to earnings. Derivative
gains (losses) also includes the accrual of periodic settlements
for derivatives that are not in hedge accounting relationships.
Although derivatives are an important aspect of our management
of interest-rate risk, they generally increase the volatility of
reported net income (loss), particularly when they are not
accounted for in hedge accounting relationships.
Table 10
Derivative Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Gains
(Losses)(1)
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
Derivatives not Designated as Hedging
|
|
June 30,
|
|
|
June 30,
|
|
Instruments under
SFAS 133(2)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Interest-rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive-fixed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign-currency denominated
|
|
$
|
(63
|
)
|
|
$
|
(490
|
)
|
|
$
|
124
|
|
|
$
|
(297
|
)
|
U.S. dollar denominated
|
|
|
(10,187
|
)
|
|
|
(7,204
|
)
|
|
|
(11,990
|
)
|
|
|
2,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receive-fixed swaps
|
|
|
(10,250
|
)
|
|
|
(7,694
|
)
|
|
|
(11,866
|
)
|
|
|
2,002
|
|
Pay-fixed
|
|
|
18,524
|
|
|
|
11,259
|
|
|
|
25,229
|
|
|
|
(3,874
|
)
|
Basis (floating to floating)
|
|
|
(116
|
)
|
|
|
(23
|
)
|
|
|
(115
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-rate swaps
|
|
|
8,158
|
|
|
|
3,542
|
|
|
|
13,248
|
|
|
|
(1,893
|
)
|
Option-based:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Call swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
(5,910
|
)
|
|
|
(2,542
|
)
|
|
|
(9,297
|
)
|
|
|
698
|
|
Written
|
|
|
94
|
|
|
|
27
|
|
|
|
211
|
|
|
|
21
|
|
Put swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
1,002
|
|
|
|
72
|
|
|
|
1,047
|
|
|
|
(53
|
)
|
Written
|
|
|
(370
|
)
|
|
|
(93
|
)
|
|
|
(357
|
)
|
|
|
(90
|
)
|
Other option-based
derivatives(3)
|
|
|
(240
|
)
|
|
|
(88
|
)
|
|
|
(215
|
)
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total option-based
|
|
|
(5,424
|
)
|
|
|
(2,624
|
)
|
|
|
(8,611
|
)
|
|
|
512
|
|
Futures
|
|
|
(252
|
)
|
|
|
(154
|
)
|
|
|
(224
|
)
|
|
|
493
|
|
Foreign-currency
swaps(4)
|
|
|
583
|
|
|
|
(48
|
)
|
|
|
10
|
|
|
|
1,189
|
|
Forward purchase and sale commitments
|
|
|
140
|
|
|
|
(243
|
)
|
|
|
(272
|
)
|
|
|
268
|
|
Credit derivatives
|
|
|
(6
|
)
|
|
|
10
|
|
|
|
(5
|
)
|
|
|
14
|
|
Swap guarantee derivatives
|
|
|
9
|
|
|
|
(1
|
)
|
|
|
(22
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,208
|
|
|
|
482
|
|
|
|
4,124
|
|
|
|
582
|
|
Accrual of periodic settlements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive-fixed interest rate
swaps(5)
|
|
|
1,380
|
|
|
|
648
|
|
|
|
2,468
|
|
|
|
721
|
|
Pay-fixed interest rate swaps
|
|
|
(2,269
|
)
|
|
|
(1,118
|
)
|
|
|
(4,211
|
)
|
|
|
(1,595
|
)
|
Foreign-currency swaps
|
|
|
22
|
|
|
|
101
|
|
|
|
71
|
|
|
|
158
|
|
Other
|
|
|
20
|
|
|
|
2
|
|
|
|
90
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrual of periodic settlements
|
|
|
(847
|
)
|
|
|
(367
|
)
|
|
|
(1,582
|
)
|
|
|
(712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,361
|
|
|
$
|
115
|
|
|
$
|
2,542
|
|
|
$
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Gains (losses) are reported as derivative gains (losses) on our
consolidated statements of operations.
|
(2)
|
See NOTE 10: DERIVATIVES to our consolidated
financial statements for additional information about the
purpose of entering into derivatives not designated as hedging
instruments and our overall risk management strategies.
|
(3)
|
Primarily represents purchased interest rate caps and floors,
purchased put options on agency mortgage-related securities, as
well as certain written options, including guarantees of stated
final maturity of issued Structured Securities and written call
options on agency mortgage-related securities.
|
(4)
|
Foreign-currency swaps are defined as swaps in which the net
settlement is based on one leg calculated in a foreign-currency
and the other leg calculated in U.S. dollars.
|
(5)
|
Includes imputed interest on zero-coupon swaps.
|
We use receive- and pay-fixed interest rate swaps to adjust the
interest-rate characteristics of our debt funding in order to
more closely match changes in the interest-rate characteristics
of our mortgage-related assets. We also use derivatives to
synthetically create the substantive economic equivalent of
various debt funding structures. For example, the combination of
a series of short-term debt issuances over a defined period and
a pay-fixed interest rate swap with the same maturity as the
last debt issuance is the substantive economic equivalent of a
long-term fixed-rate debt instrument of comparable maturity. Due
to limits on our ability to issue long-term and callable debt in
the second half of 2008 and the first few months of 2009, we
pursued this strategy and thus increased our use of pay-fixed
interest rate swaps. However, the use of these derivatives may
expose us to additional counterparty credit risk and increased
volatility reported in our GAAP net income (loss). For a
discussion regarding our ability to issue debt see
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Debt Securities. During the
three months ended June 30, 2009, fair value gains on our
pay-fixed interest rate swaps of $18.5 billion were
partially offset by losses on our receive-fixed interest rate
swaps of $10.3 billion as longer-term swap interest rates
increased, resulting in an overall gain recorded for
derivatives. During the three months ended June 30, 2008,
fair value gains on our pay-fixed swaps of $11.3 billion
contributed to an overall gain recorded for derivatives. The
gains were partially offset by losses on our receive-fixed swaps
of $7.7 billion as swap interest rates increased.
Additionally, we use swaptions and other option-based
derivatives to adjust the characteristics of our debt in
response to changes in the expected lives of mortgage-related
assets in our mortgage-related investments portfolio. We
recorded losses of $5.9 billion and $2.5 billion on
our purchased call swaptions during the three months ended
June 30, 2009 and 2008, respectively. The losses during the
three months ended June 30, 2009 and 2008 were primarily
attributable to increasing swap interest rates, partially offset
by increases in implied volatility.
During the six months ended June 30, 2009, we recognized
derivative gains of $2.5 billion as compared to derivative
losses of $130 million during the six months ended
June 30, 2008. During the six months ended June 30,
2009, swap interest rates increased resulting in a gain on our
pay-fixed swap positions, partially offset by losses on our
receive-fixed swaps. The increase in swap interest rates more
than offset the increase in volatility, resulting in a loss
related to our purchased call swaptions for the six months ended
June 30, 2009. During the six months ended June 30,
2008, shorter term swap interest rates declined, resulting in a
loss on our pay-fixed swap positions, partially offset by gains
on our receive-fixed swaps. The decrease in shorter term swap
interest rates during the six months ended June 30, 2008,
combined with an increase in volatility, resulted in a gain
related to our purchased call swaptions for the six months ended
June 30, 2008.
As a result of our election of the fair value option for our
foreign-currency denominated debt, foreign-currency translation
gains and losses and fair value adjustments related to our
foreign-currency denominated debt are recognized on our
consolidated statements of operations as gains (losses) on debt
recorded at fair value. We use a combination of foreign-currency
swaps and foreign-currency denominated receive-fixed interest
rate swaps to hedge the changes in fair value of our
foreign-currency denominated debt related to fluctuations in
exchange rates and interest rates, respectively.
For the three and six months ended June 30, 2009, we
recognized fair value gains (losses) of $(797) million and
$(330) million, respectively, on our foreign-currency
denominated debt. These amounts included fair value gains
(losses) related to translation of $(655) million and
$(75) million, respectively, and gains (losses) relating to
interest-rate and instrument-specific credit risk adjustments of
$(142) million and $(255) million, respectively. For
the three and six months ended June 30, 2009, derivative
gains (losses) on foreign-currency swaps of $583 million
and $10 million, respectively, partially offset fair value
translation gains (losses) of $(655) million and
$(75) million, respectively, on our foreign-currency
denominated debt. In addition, derivative gains (losses) of
$(63) million and $124 million on foreign-currency
denominated receive-fixed interest rate swaps partially offset
the interest-rate and instrument-specific credit risk
adjustments included in gains (losses) on debt recorded at fair
value for the three and six months ended June 30, 2009,
respectively.
For the three and six months ended June 30, 2008, we
recognized fair value gains (losses) of $569 million and
$(816) million, respectively, on our foreign-currency
denominated debt. These amounts included fair value gains
(losses) related to translation of $88 million and
$(1.1) billion, respectively, and gains (losses) relating
to interest-rate and instrument-specific credit risk adjustments
of $481 million and $310 million, respectively. For
the three and six months ended June 30, 2008, derivative
gains (losses) on foreign-currency swaps of $(48) million
and $1.2 billion, respectively, largely offset fair value
translation gains (losses) of $88 million and
$(1.1) billion, respectively, on our foreign-currency
denominated debt. In addition, derivative gains (losses) of
$(490) million and $(297) million on foreign-currency
denominated receive-fixed interest rate swaps largely offset the
interest-rate and instrument-specific credit risk adjustments
included in gains (losses) on debt recorded at fair value for
the three and six months ended June 30, 2008, respectively.
For a discussion of the instrument-specific credit risk and our
election to adopt the fair value option on our foreign-currency
denominated debt see NOTE 17: FAIR VALUE
DISCLOSURES Fair Value Election
Foreign-Currency Denominated Debt with the Fair Value Option
Elected in our 2008 Annual Report.
Gains
(Losses) on Investments
Gains (losses) on investments include gains and losses on
certain assets where changes in fair value are recognized
through earnings, gains and losses related to sales, impairments
and other valuation adjustments. Table 11 summarizes the
components of gains (losses) on investments.
Table 11
Gains (Losses) on Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Impairment-related(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment of
available-for-sale
securities
|
|
$
|
(10,473
|
)
|
|
$
|
(1,040
|
)
|
|
$
|
(17,603
|
)
|
|
$
|
(1,111
|
)
|
Portion of other-than-temporary impairment recognized in AOCI
|
|
|
8,260
|
|
|
|
|
|
|
|
8,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment of
available-for-sale
securities recognized in earnings
|
|
|
(2,213
|
)
|
|
|
(1,040
|
)
|
|
|
(9,343
|
)
|
|
|
(1,111
|
)
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on trading
securities(2)
|
|
|
622
|
|
|
|
(2,279
|
)
|
|
|
2,753
|
|
|
|
(1,308
|
)
|
Gains (losses) on sale of mortgage
loans(3)
|
|
|
143
|
|
|
|
(5
|
)
|
|
|
294
|
|
|
|
66
|
|
Gains (losses) on sale of
available-for-sale
securities
|
|
|
205
|
|
|
|
38
|
|
|
|
256
|
|
|
|
253
|
|
Lower-of-cost-or-fair-value
adjustments
|
|
|
(102
|
)
|
|
|
(41
|
)
|
|
|
(231
|
)
|
|
|
(8
|
)
|
Gains (losses) on mortgage loans elected at fair value
|
|
|
(71
|
)
|
|
|
|
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) on investments
|
|
$
|
(1,416
|
)
|
|
$
|
(3,327
|
)
|
|
$
|
(6,360
|
)
|
|
$
|
(2,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
We adopted FSP
FAS 115-2
and
FAS 124-2
effective April 1, 2009. See NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Change in Accounting
Principles to our consolidated financial statements for
further information.
|
(2)
|
Includes mark-to-fair value adjustments recorded in accordance
with
EITF 99-20
on securities classified as trading.
|
(3)
|
Represents gains (losses) on mortgage loans sold in connection
with securitization transactions.
|
Impairments
on
Available-For-Sale
Securities
We adopted FSP
FAS 115-2
and
FAS 124-2
on April 1, 2009, which provides guidance designed to
create greater clarity and consistency in accounting for and
presenting impairment losses on securities. Under the guidance
set forth in these pronouncements, the non-credit-related
portion of the
other-than-temporary
impairment (that portion which relates to securities not
intended to be sold or which it is not more likely than not we
will be required to sell) is recorded in AOCI and not recognized
in earnings. See NOTE 4: INVESTMENTS IN
SECURITIES to our consolidated financial statements for
additional information regarding these accounting principles and
other-than-temporary impairments recorded during the three and
six months ended June 30, 2009 and 2008. See
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Change in Accounting Principles
Additional Guidance and Disclosures for Fair Value
Measurements and Change in the Impairment Model for Debt
Securities Change in the Impairment Model for Debt
Securities to our consolidated financial statements
for information on how other-than-temporary impairments are
recorded on our financial statements commencing in the second
quarter of 2009.
See CONSOLIDATED BALANCE SHEETS ANALYSIS
Mortgage-Related Investments Portfolio
Other-Than-Temporary
Impairments on Available-for-Sale Mortgage-Related
Securities for additional information.
Gains
(Losses) on Trading Securities
We recognized net gains on trading securities of
$0.6 billion and $2.8 billion for the three and six
months ended June 30, 2009, respectively, as compared to
net losses of $(2.3) billion and $(1.3) billion for
the three and six months ended June 30, 2008, respectively.
The unpaid principal balance of our securities classified as
trading increased to $240 billion at June 30, 2009
compared to $157 billion at June 30, 2008, primarily
due to our increased purchases of agency mortgage-related
securities. The increased balance in our trading portfolio,
combined with tightening OAS levels, contributed
$0.4 billion and $1.5 billion to the gains on these
trading securities for the three and six months ended
June 30, 2009, respectively. In addition, during the three
and six months ended June 30, 2009, we sold agency
securities classified as trading with unpaid principal balances
of approximately $51 billion and $87 billion,
respectively, which generated realized gains of
$0.2 billion and $1.3 billion, respectively.
For the three and six months ended June 30, 2008, an
increase in interest rates contributed to the losses on trading
securities which were partially offset by gains on our
interest-only securities classified as trading.
Gains
(Losses) on Debt Recorded at Fair Value
We elected the fair value option for our foreign-currency
denominated debt effective January 1, 2008. Accordingly,
foreign-currency translation exposure is a component of gains
(losses) on debt recorded at fair value. We manage the exposure
associated with our foreign-currency denominated debt related to
fluctuations in exchange rates and interest rates through the
use of derivatives, and changes in the fair value of such
derivatives are recorded as derivative gains (losses) in our
consolidated statements of operations. For the three and six
months ended June 30, 2009, we recognized fair value gains
(losses) of $(797) million and $(330) million,
respectively, due primarily to the
U.S. dollar weakening relative to the Euro. For the three
months ended June 30, 2008, we recognized fair value gains
of $569 million on our foreign-currency denominated debt
primarily due to an increase in interest rates and the
U.S. dollar strengthening relative to the Euro. However,
the U.S. dollar weakened relative to the Euro during the
six months ended June 30, 2008, contributing to our
recognition of fair value losses of $816 million on our
foreign-currency denominated debt. See Derivative
Overview for additional information about how we
mitigate changes in the fair value of our foreign-currency
denominated debt by using derivatives.
Gains
(Losses) on Debt Retirement
Gains (losses) on debt retirement were $(156) million and
$(260) million during the three and six months ended
June 30, 2009, respectively, compared to $(29) million
and $276 million for the three and six months ended
June 30, 2008, respectively. The three and six months ended
June 30, 2009 include losses of $21 million related to
our June 2009 tender offer for certain of our debt securities
with maturity dates ranging between September 2009 and August
2010. In addition, during June 2009, we made a tender offer for
our euro-denominated debt securities with maturity dates ranging
between September 2010 and January 2014. There was no gain or
loss recorded on these securities as foreign-currency
denominated debt is recorded at fair value. For more information
on these tender offers, see LIQUIDITY AND CAPITAL
RESOURCES Liquidity Debt
Securities Debt Retirement Activities.
Also contributing to the increased losses was a decreased level
of call activity involving our debt with coupon levels that
increase at pre-determined intervals.
Recoveries
on Loans Impaired Upon Purchase
Recoveries on loans impaired upon purchase represent the
recapture into income of previously recognized losses on loans
purchased and provision for credit losses associated with
purchases of delinquent loans under our financial guarantee.
Recoveries occur when a non-performing loan is repaid in full or
when at the time of foreclosure the estimated fair value of the
acquired property, less costs to sell, exceeds the carrying
value of the loan. For impaired loans where the borrower has
made required payments that return the loan to less than
90 days delinquent, the recovery amounts are instead
accreted into interest income over time as periodic payments are
received.
During the three months ended June 30, 2009 and 2008, we
recognized recoveries on loans impaired upon purchase of
$70 million and $121 million, respectively. For the
six months ended June 30, 2009 and 2008, our recoveries
were $120 million and $347 million, respectively. Our
recoveries on impaired loans decreased in the first half of 2009
due to a lower rate of loan payoffs and a higher proportion of
modified loans among those loans purchased, as compared to the
same period in 2008. In addition, home prices in states having
the greatest concentration of our impaired loans have remained
weak during the first half of 2009, which limited our recoveries
on foreclosure transfers.
Trust
Management Income (Expense)
Trust management income (expense) represents the amounts we
earn as administrator, issuer and trustee, net of related
expenses, related to the management of remittances of principal
and interest on loans underlying our PCs and Structured
Securities. Trust management income (expense) was
$(238) million and $(19) million for the
three months ended June 30, 2009 and 2008,
respectively, and $(445) million and $(16) million for
the six months ended June 30, 2009 and 2008, respectively.
We experienced trust management expenses associated with
shortfalls in interest payments on PCs, known as compensating
interest, which significantly exceeded our trust management
income during the three and six months ended June 30,
2009. The increase in expense for these shortfalls was
attributable to significantly higher refinance activity and
lower interest income on trust assets, which we receive as fee
income, in the first half of 2009, as compared to the first half
of 2008. If mortgage interest rates remain low and refinance
activity remains elevated, then our trust management expenses
will continue to exceed our related income in the second half of
2009. See MD&A CONSOLIDATED RESULTS OF
OPERATIONS Segment Earnings-Results
Single-Family Guarantee in our 2008 Annual Report
for further information on compensating interest.
Other
Income (Losses)
Other income (losses) primarily consists of resecuritization
fees, net hedging gains and losses, fees associated with
servicing and technology-related programs, and various other
fees received from mortgage originators and servicers. Other
income (losses) declined to $70 million in the second
quarter of 2009, compared to $94 million in the second
quarter of 2008, and totaled $111 million and
$138 million in the six months ended June 30, 2009 and
2008, respectively. The decline in other income in both the
second quarter and first half of 2009, as compared with the same
periods of 2008, reflects a decline in income associated with
termination of long-term standby commitments. Following these
terminations, we securitized the mortgage loans as PCs or
Structured Transactions. We terminated $5.7 billion and
$18.8 billion of these long-term standby commitments during
the first half of 2009 and 2008, respectively.
Non-Interest
Expense
Table 12 summarizes the components of non-interest expense.
Table 12
Non-Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
221
|
|
|
$
|
241
|
|
|
$
|
428
|
|
|
$
|
472
|
|
Professional services
|
|
|
64
|
|
|
|
55
|
|
|
|
124
|
|
|
|
127
|
|
Occupancy expense
|
|
|
15
|
|
|
|
18
|
|
|
|
33
|
|
|
|
33
|
|
Other administrative expenses
|
|
|
83
|
|
|
|
90
|
|
|
|
170
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
|
383
|
|
|
|
404
|
|
|
|
755
|
|
|
|
801
|
|
Provision for credit losses
|
|
|
5,199
|
|
|
|
2,537
|
|
|
|
13,990
|
|
|
|
3,777
|
|
REO operations expense
|
|
|
9
|
|
|
|
265
|
|
|
|
315
|
|
|
|
473
|
|
Losses on loans purchased
|
|
|
1,199
|
|
|
|
120
|
|
|
|
3,211
|
|
|
|
171
|
|
Other expenses
|
|
|
97
|
|
|
|
108
|
|
|
|
175
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
$
|
6,887
|
|
|
$
|
3,434
|
|
|
$
|
18,446
|
|
|
$
|
5,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
Expenses
Administrative expenses decreased for the three and six months
ended June 30, 2009, compared to the three and six months
ended June 30, 2008, in part due to a decrease in the
number of full-time employees as well as other cost reduction
measures. The decrease in salaries and benefits expense for the
three and six months ended June 30, 2009 also reflected
reductions in short-term performance compensation.
Provision
for Credit Losses
Our reserves for mortgage loan and guarantee losses reflect our
best projection of defaults we believe are likely as a result of
loss events that have occurred through June 30, 2009. The
substantial weakness in the national housing market, the
uncertainty in other macroeconomic factors, such as trends in
unemployment rates and home prices, and the uncertainty of the
effect of current or any future government actions to address
the economic and housing crisis makes forecasting of default
rates imprecise. Our reserves also include the impact of our
projections of the results of strategic loss mitigation
initiatives, including our temporary suspensions of certain
foreclosure transfers, a higher volume of loan modifications,
and projections of recoveries through repurchases by
seller/servicers of defaulted loans due to failure to follow
contractual underwriting requirements at the time of the loan
origination. An inability to realize the benefits of our loss
mitigation plans, a lower realized rate of seller/servicer
repurchases or default rates that exceed our current projections
would cause our losses to be significantly higher than those
currently estimated.
The provision for credit losses was $5.2 billion in the
second quarter of 2009, compared to $2.5 billion in the
second quarter of 2008, as continued weakness in the housing
market and a rapid rise in unemployment affected our
single-family mortgage portfolio. A portion of our provision
relates to the delinquent interest on loans remaining in PC
pools while they remain past due. During the second quarter of
2009, we enhanced our methodology for estimating our loan loss
reserves to consider a greater number of loan characteristics
and revisions to (1) the effects of home price changes on
borrower behavior, and (2) the impact of our loss
mitigation actions, including our temporary suspensions of
foreclosure transfers and loan modification efforts. We estimate
the impact of this enhancement reduced our provision for credit
losses by approximately $1.4 billion during the second
quarter of 2009. For more information regarding how we derive
our estimate for the provision for credit losses, see
MD&A CRITICAL ACCOUNTING POLICIES AND
ESTIMATES in our 2008 Annual Report. See EXECUTIVE
SUMMARY Table 2 Credit Statistics,
Single-Family Mortgage Portfolio for quarterly trends in
our other credit-related statistics. Our provision for credit
losses was $14.0 billion and $3.8 billion for the six
months ended June 30, 2009 and 2008, respectively. In the
three and six months ended June 30, 2009, we recorded a
$2.5 billion and $9.6 billion increase, respectively,
in our loan loss reserve, which is a combined reserve for credit
losses on loans within our mortgage-related investments
portfolio and mortgages underlying our PCs, Structured
Securities and other mortgage-related guarantees. This resulted
in a total reserve balance of $25.2 billion at
June 30, 2009. The primary drivers of these increases are
outlined below:
|
|
|
|
|
increased estimates of incurred losses on single-family mortgage
loans that are expected to experience higher default rates. In
particular, our estimates of incurred losses are higher for
single-family loans we purchased or guaranteed during 2006, 2007
and to a lesser extent 2005 and 2008. We expect such loans to
continue experiencing higher default rates than loans originated
in earlier years. We purchased a greater percentage of
higher-risk loans in 2005 through 2008, such as
Alt-A,
interest-only and other such products, and these mortgages have
performed particularly poorly during the current housing and
economic downturn;
|
|
|
|
|
|
a significant increase in the size of the non-performing
single-family loan portfolio for which we maintain loan loss
reserves. This increase is primarily due to deteriorating market
conditions and initiatives to prevent or avoid foreclosures. Our
single-family non-performing assets increased to
$76.9 billion at June 30, 2009, compared to
$48.0 billion and $27.5 billion at December 31,
2008 and June 30, 2008, respectively;
|
|
|
|
an observed trend of increasing delinquency rates, foreclosure
starts, which is the number of loans that enter the foreclosure
process, and foreclosure timeframes. We have experienced more
significant increases in delinquency rates and foreclosure
starts concentrated in certain regions and states within the
U.S. that have been most affected by home price declines, as
well as loans with second lien, third-party financing. For
example, as of June 30, 2009, at least 14% of loans in our
single-family mortgage portfolio had second lien, third-party
financing at the time of origination and we estimate that these
loans comprise 23% of our delinquent loans, based on unpaid
principal balances; and
|
|
|
|
increases in the estimated average loss per loan, or severity of
losses, net of expected recoveries from credit enhancements,
driven in part by declines in home sales and home prices in the
last two years. The states with the largest declines in home
prices in the last 12 months and highest severity of losses
include California, Florida, Nevada and Arizona.
|
Our model estimates indicate that recent modest national home
price improvements, which we believe to be largely seasonal,
during the second quarter of 2009, helped slow the rate of
growth in our loan loss reserves in the quarter. However, we
expect home price declines in future periods, which will result
in increasing default frequency and loss severity and would
likely require us to further increase our loan loss reserves.
Consequently, we expect our provisions for credit losses will
likely remain high during the remainder of 2009 and to increase
above the level recognized in the second quarter. The likelihood
that our provision for credit losses will remain high beyond
2009 will depend on a number of factors, including the impact of
the MHA Program on our loss mitigation efforts, changes in
property values, regional economic conditions, including
unemployment rates, third-party mortgage insurance coverage and
recoveries and the realized rate of seller/servicer repurchases.
REO
Operations Expense
REO operations expense was $9 million during the three
months ended June 30, 2009, as compared to
$265 million during the three months ended June 30,
2008, and was $315 million and $473 million during the
six months ended June 30, 2009 and 2008, respectively. REO
operations expense decreased in the second quarter of 2009
primarily as a result of a reduction in our holding period
allowance. We recognize an allowance for estimated changes in
REO fair value during the period properties are held, which is
included in REO operations expense. During the second quarter of
2009, our carrying values and disposition values were more
closely aligned due to more stable national home prices,
reducing the size of our holding period allowance. Single-family
REO disposition losses, excluding our holding period allowance,
totaled $304 million and $183 million for the three
months ended June 30, 2009 and 2008, respectively, and were
$610 million and $292 million during the six months
ended June 30, 2009 and 2008, respectively. The reduction
in our holding period allowance substantially offset the impact
of our REO disposition losses during the second quarter of 2009.
We expect REO operations expense to fluctuate in the remainder
of 2009, as single-family REO acquisition volume increases and
home prices remain under downward pressure.
Losses
on Loans Purchased
Losses on delinquent and modified loans purchased from the
mortgage pools underlying PCs and Structured Securities occur
when the acquisition basis of the purchased loan exceeds the
estimated fair value of the loan on the date of purchase. As a
result of increases in delinquency rates of loans underlying our
PCs and Structured Securities and our increasing efforts to
reduce foreclosures, the number of loan modifications increased
significantly during the first half of 2009, as compared to the
first half of 2008. When a loan underlying our PCs and
Structured Securities is modified, we generally exercise our
repurchase option and hold the modified loan in our
mortgage-related investments portfolio. See Recoveries
on Loans Impaired upon Purchase and RISK
MANAGEMENT Credit Risks
Table 46 Changes in Loans Purchased Under
Financial Guarantees for additional information about the
impacts of these loans on our financial results.
During the three and six months ended June 30, 2009, the
market-based valuation of non-performing loans continued to be
adversely affected by the expectation of higher default costs
and reduced liquidity in the single-family mortgage market. Our
losses on loans purchased were $1.2 billion and
$120 million for the three months ended June 30, 2009
and 2008, respectively, and totaled $3.2 billion and
$171 million for the six months ended June 30, 2009
and 2008, respectively. The increase in losses on loans
purchased is attributed both to the increase in volume of our
optional repurchases of delinquent and modified loans underlying
our guarantees as well as a decline in market valuations for
these loans as compared to the first half of 2008. The growth in
volume of our purchases of delinquent
and modified loans from our PC pools temporarily slowed in the
second quarter of 2009 due to our implementation of the loan
modification process under HAMP. Loans that we would have
otherwise purchased instead remained in the PC pools while the
borrowers began the three-month trial period payment plan under
HAMP. However, we expect these losses to increase for the
remainder of 2009, as we continue to increase modifications and
purchases of loans currently in PCs.
Income
Tax (Expense) Benefit
For the three months ended June 30, 2009 and 2008, we
reported an income tax benefit of $184 million and
$1.0 billion, respectively. For the six months ended
June 30, 2009 and 2008 we reported an income tax benefit of
$1.1 billion and $1.5 billion, respectively. See
NOTE 12: INCOME TAXES to our consolidated
financial statements for additional information.
Segment
Earnings
Our operations consist of three reportable segments, which are
based on the type of business activities each
performs Investments, Single-family Guarantee and
Multifamily. Certain activities that are not part of a segment
are included in the All Other category; this category consists
of certain unallocated corporate items, such as costs associated
with remediating our internal controls and near-term
restructuring costs, costs related to the resolution of certain
legal matters and certain income tax items. We manage and
evaluate performance of the segments and All Other using a
Segment Earnings approach, subject to the conduct of our
business under the direction of the Conservator. The objectives
set forth for us under our charter and by our Conservator, as
well as the restrictions on our business under the Purchase
Agreement with Treasury, may negatively impact our Segment
Earnings and the performance of individual segments.
Segment Earnings is calculated for the segments by adjusting
GAAP net income (loss) for certain investment-related activities
and credit guarantee-related activities. Segment Earnings also
includes certain reclassifications among income and expense
categories that have no impact on net income (loss) but provide
us with a meaningful metric to assess the performance of each
segment and our company as a whole. We continue to assess the
methodologies used for segment reporting and refinements may be
made in future periods. Segment Earnings does not include the
effect of the establishment of the valuation allowance against
our deferred tax assets, net. See NOTE 16: SEGMENT
REPORTING to our consolidated financial statements for
further information regarding our segments and the adjustments
and reclassifications used to calculate Segment Earnings, as
well as the allocation process used to generate our segment
results.
Segment
Earnings Results
Investments
Our Investments segment is responsible for investment activity
in mortgages and mortgage-related securities, other investments,
debt financing, and managing our interest rate risk, liquidity
and capital positions. We invest principally in mortgage-related
securities and single-family mortgages.
Table 13 presents the Segment Earnings of our Investments
segment.
Table 13
Segment Earnings and Key Metrics
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(dollars in millions)
|
|
|
Segment Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
2,454
|
|
|
$
|
1,481
|
|
|
$
|
4,468
|
|
|
$
|
1,780
|
|
Non-interest income (loss)
|
|
|
(2,084
|
)
|
|
|
(125
|
)
|
|
|
(6,390
|
)
|
|
|
(110
|
)
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses
|
|
|
(119
|
)
|
|
|
(130
|
)
|
|
|
(239
|
)
|
|
|
(261
|
)
|
Other non-interest expense
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
(15
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
(127
|
)
|
|
|
(137
|
)
|
|
|
(254
|
)
|
|
|
(277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings (loss) before income tax (expense) benefit
|
|
|
243
|
|
|
|
1,219
|
|
|
|
(2,176
|
)
|
|
|
1,393
|
|
Income tax (expense) benefit
|
|
|
(85
|
)
|
|
|
(426
|
)
|
|
|
762
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings (loss), net of taxes
|
|
|
158
|
|
|
|
793
|
|
|
|
(1,414
|
)
|
|
|
906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
2,798
|
|
|
|
530
|
|
|
|
4,388
|
|
|
|
(653
|
)
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
907
|
|
|
|
(3,096
|
)
|
|
|
952
|
|
|
|
(1,571
|
)
|
Fully taxable-equivalent adjustment
|
|
|
(98
|
)
|
|
|
(105
|
)
|
|
|
(198
|
)
|
|
|
(215
|
)
|
Tax-related
adjustments(1)
|
|
|
111
|
|
|
|
1,004
|
|
|
|
750
|
|
|
|
992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
3,718
|
|
|
|
(1,667
|
)
|
|
|
5,892
|
|
|
|
(1,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income (loss)
|
|
$
|
3,876
|
|
|
$
|
(874
|
)
|
|
$
|
4,478
|
|
|
$
|
(541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key metrics Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities Mortgage-related investments
portfolio:(2)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities
|
|
$
|
46,599
|
|
|
$
|
91,054
|
|
|
$
|
130,779
|
|
|
$
|
112,598
|
|
Non-Freddie Mac mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-related securities
|
|
|
10,796
|
|
|
|
24,688
|
|
|
|
42,117
|
|
|
|
34,071
|
|
Non-agency mortgage-related securities
|
|
|
19
|
|
|
|
1,024
|
|
|
|
95
|
|
|
|
1,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchases of securities Mortgage-related
investments portfolio
|
|
$
|
57,414
|
|
|
$
|
116,766
|
|
|
$
|
172,991
|
|
|
$
|
148,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth rate of mortgage-related investments portfolio
(annualized)
|
|
|
(20.14
|
)%
|
|
|
46.9
|
%
|
|
|
5.32
|
%
|
|
|
19.5
|
%
|
Return:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest yield Segment Earnings basis
|
|
|
1.16
|
%
|
|
|
0.80
|
%
|
|
|
1.07
|
%
|
|
|
0.50
|
%
|
|
|
(1)
|
2009 includes an allocation of the non-cash charge related to
the establishment of the partial valuation allowance against our
deferred tax assets, net that is not included in Segment
Earnings.
|
(2)
|
Based on unpaid principal balance and excludes mortgage-related
securities traded, but not yet settled.
|
(3)
|
Excludes single-family mortgage loans.
|
Segment Earnings for our Investments Segment decreased
$635 million for the three months ended June 30, 2009
compared to the three months ended June 30, 2008, and
decreased $2.3 billion for the six months ended
June 30, 2009 compared to the six months ended
June 30, 2008. Net impairment of available-for-sale
securities recognized in earnings increased to $2.2 billion
and $6.6 billion during the three and six months ended
June 30, 2009, respectively, due to an increase in expected
credit-related losses on our non-agency mortgage-related
securities, compared to $142 million and $144 million
of net impairment of available-for-sale securities recognized in
earnings during the three and six months ended June 30,
2008, respectively. Among the securities impaired during the
three months ended June 30, 2009 are securities backed by
subprime, MTA Option ARM, Alt-A and other loans impaired as a
result of the adoption of FSP
FAS 115-2
and
FAS 124-2.
Security impairments that reflect expected or realized
credit-related losses are realized in earnings immediately
pursuant to GAAP and in Segment Earnings. In contrast,
non-credit-related security impairments are recorded in our GAAP
results in AOCI, but are not recorded in Segment Earnings.
Impairments on securities we intend to sell or more likely than
not will be required to sell prior to anticipated recovery are
also excluded from Segment Earnings. Segment Earnings net
interest income increased $1.0 billion and Segment Earnings
net interest yield increased 36 basis points to
116 basis points for the three months ended June 30,
2009 compared to the three months ended June 30, 2008.
Segment Earnings net interest income increased $2.7 billion
and Segment Earnings net interest yield increased 57 basis
points to 107 basis points for the six months ended
June 30, 2009 compared to the six months ended
June 30, 2008. The primary drivers underlying the increases
in Segment Earnings net interest income and Segment Earnings net
interest yield were (a) a decrease in funding costs as a
result of the replacement of higher cost short- and long-term
debt with lower cost debt and (b) a significant increase in
the average size of our mortgage-related investments portfolio
including an increase in our holdings of fixed-rate assets.
Partially offsetting these increases was an increase in
derivative interest carry expense on net pay-fixed interest rate
swaps, which is recognized within net interest income in Segment
Earnings. In addition, certain terminated derivative positions
resulted in losses that are amortized prospectively within net
interest income in Segment Earnings.
During the six months ended June 30, 2009, the
mortgage-related investments portfolio of our Investments
Segment grew at an annualized rate of 5.3%, compared to 19.5%
for the six months ended June 30, 2008. The unpaid
principal balance of the mortgage-related investments portfolio
of our Investments Segment increased from $732 billion at
December 31, 2008 to $752 billion at June 30,
2009. The portfolio grew because we acquired and held increased
amounts of mortgage loans and mortgage-related securities in our
mortgage-related investments portfolio to provide additional
liquidity to the mortgage market and, to a lesser degree, due to
more favorable investment opportunities for agency securities,
primarily in the first quarter of 2009, due to liquidity
concerns in the market. While our mortgage-related investments
portfolio increased overall during the six months ended
June 30, 2009, it decreased during the second quarter of
2009, due to forward sale commitments of our mortgage-related
securities at March 31, 2009 that settled during the second
quarter of 2009 and a relative lack of favorable investment
opportunities.
We held $72.9 billion of non-Freddie Mac agency
mortgage-related securities and $186.2 billion of
non-agency mortgage-related securities as of June 30, 2009
compared to $70.9 billion of non-Freddie Mac agency
mortgage-related securities and $197.9 billion of
non-agency mortgage-related securities as of December 31,
2008. The decline in the unpaid principal balance of non-agency
mortgage-related securities is due to the receipt of monthly
principal repayments on these securities. Agency securities
comprised approximately 68% of the unpaid principal balance of
the Investments Segment mortgage-related investments portfolio
at both June 30, 2009 and December 31, 2008. See
CONSOLIDATED BALANCE SHEETS ANALYSIS
Mortgage-Related Investments Portfolio for additional
information regarding our mortgage-related securities.
The objectives set forth for us under our charter and
conservatorship and restrictions set forth in the Purchase
Agreement may negatively impact our Investments segment results
over the long term. For example, the required reduction in our
mortgage-related investments portfolio balance to
$250 billion, through successive annual 10% declines
commencing in 2010, will cause a corresponding reduction in our
net interest income. This may negatively affect our Investments
segment results.
Single-Family
Guarantee Segment
In our Single-family Guarantee segment, we guarantee the payment
of principal and interest on single-family mortgage-related
securities, including those held in our mortgage-related
investments portfolio, in exchange for monthly management and
guarantee fees and other up-front compensation. Earnings for
this segment consist primarily of management and guarantee fee
revenues less the related credit costs (i.e., provision
for credit losses) and operating expenses. Earnings for this
segment also include the interest earned on assets held in the
Investments segment related to single-family guarantee
activities, net of allocated funding costs and amounts related
to expected net float benefits.
Table 14 presents the Segment Earnings of our Single-family
Guarantee segment.
Table 14
Segment Earnings and Key Metrics Single-Family
Guarantee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Segment Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
28
|
|
|
$
|
58
|
|
|
$
|
53
|
|
|
$
|
135
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income
|
|
|
942
|
|
|
|
840
|
|
|
|
1,864
|
|
|
|
1,735
|
|
Other non-interest income
|
|
|
88
|
|
|
|
103
|
|
|
|
171
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
1,030
|
|
|
|
943
|
|
|
|
2,035
|
|
|
|
1,942
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses
|
|
|
(206
|
)
|
|
|
(212
|
)
|
|
|
(406
|
)
|
|
|
(416
|
)
|
Provision for credit losses
|
|
|
(6,285
|
)
|
|
|
(2,630
|
)
|
|
|
(15,226
|
)
|
|
|
(3,979
|
)
|
REO operations expense
|
|
|
(1
|
)
|
|
|
(265
|
)
|
|
|
(307
|
)
|
|
|
(473
|
)
|
Other non-interest expense
|
|
|
(30
|
)
|
|
|
(29
|
)
|
|
|
(52
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
(6,522
|
)
|
|
|
(3,136
|
)
|
|
|
(15,991
|
)
|
|
|
(4,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings (loss) before income tax expense
|
|
|
(5,464
|
)
|
|
|
(2,135
|
)
|
|
|
(13,903
|
)
|
|
|
(2,839
|
)
|
Income tax (expense) benefit
|
|
|
1,912
|
|
|
|
747
|
|
|
|
4,866
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings (loss), net of taxes
|
|
|
(3,552
|
)
|
|
|
(1,388
|
)
|
|
|
(9,037
|
)
|
|
|
(1,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit guarantee-related adjustments
|
|
|
2,356
|
|
|
|
1,822
|
|
|
|
953
|
|
|
|
1,648
|
|
Tax-related
adjustments(1)
|
|
|
(1,338
|
)
|
|
|
(638
|
)
|
|
|
(4,316
|
)
|
|
|
(577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of
taxes(1)
|
|
|
1,018
|
|
|
|
1,184
|
|
|
|
(3,363
|
)
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income (loss)
|
|
$
|
(2,534
|
)
|
|
$
|
(204
|
)
|
|
$
|
(12,400
|
)
|
|
$
|
(775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key metrics Single-family Guarantee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances and Growth (in billions, except rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average securitized balance of single-family credit guarantee
portfolio(2)
|
|
$
|
1,787
|
|
|
$
|
1,764
|
|
|
$
|
1,783
|
|
|
$
|
1,746
|
|
Issuance Single-family credit
guarantees(2)
|
|
$
|
154
|
|
|
$
|
132
|
|
|
$
|
258
|
|
|
$
|
245
|
|
Fixed-rate products Percentage of
issuances(3)
|
|
|
96.7
|
%
|
|
|
90.0
|
%
|
|
|
97.9
|
%
|
|
|
91.3
|
%
|
Liquidation Rate Single-family credit guarantees
(annualized
rate)(4)
|
|
|
30.7
|
%
|
|
|
20.8
|
%
|
|
|
26.0
|
%
|
|
|
18.9
|
%
|
Credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
rate(5)
|
|
|
2.78
|
%
|
|
|
0.93
|
%
|
|
|
|
|
|
|
|
|
Delinquency transition
rate(6)
|
|
|
24.7
|
%
|
|
|
22.8
|
%
|
|
|
|
|
|
|
|
|
REO inventory (number of units)
|
|
|
34,699
|
|
|
|
22,029
|
|
|
|
34,699
|
|
|
|
22,029
|
|
Single-family credit losses, in basis points (annualized)
|
|
|
41.7
|
|
|
|
18.1
|
|
|
|
35.4
|
|
|
|
15.1
|
|
Market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgage debt outstanding (total U.S. market,
in billions)(7)
|
|
$
|
10,465
|
|
|
$
|
11,227
|
|
|
$
|
10,465
|
|
|
$
|
11,227
|
|
30-year
fixed mortgage
rate(8)
|
|
|
5.0
|
%
|
|
|
6.1
|
%
|
|
|
5.1
|
%
|
|
|
6.0
|
%
|
|
|
(1)
|
2009 includes an allocation of the non-cash charge related to
the partial valuation allowance recorded against our deferred
tax assets, net that is not included in Segment Earnings.
|
(2)
|
Based on unpaid principal balance.
|
(3)
|
Excludes Structured Transactions, but includes interest-only
mortgages with fixed interest rates.
|
(4)
|
Includes the effect of terminations of long-term standby
commitments.
|
(5)
|
Represents the percentage of loans in our single-family credit
guarantee portfolio, based on loan count, which are 90 days
or more past due at period end and excluding loans underlying
Structured Transactions. See RISK MANAGEMENT
Credit Risks Credit Performance
Delinquencies for additional information.
|
(6)
|
Represents the percentage of loans that have been reported as
90 days or more delinquent or in foreclosure in the same
quarter of the preceding year that have transitioned to REO. The
rate excludes other dispositions that can result in a loss, such
as short-sales and
deed-in-lieu
transactions.
|
(7)
|
Source: Federal Reserve Flow of Funds Accounts of the United
States of America dated July 11, 2009.
|
(8)
|
Based on Freddie Macs PMMS rate. Represents the national
average mortgage commitment rate to a qualified borrower
exclusive of the fees and points required by the lender. This
commitment rate applies only to conventional financing on
conforming mortgages with LTV ratios of 80% or less.
|
Segment Earnings (loss) for our Single-family Guarantee segment
declined to a loss of $(3.6) billion for the second quarter
of 2009, compared to a loss of $(1.4) billion for the
second quarter of 2008. This decline reflects an increase in
credit-related expenses of $3.4 billion due to higher
delinquency rates, higher volumes of non-performing loans and
foreclosure transfers, higher severity of losses on a
per-property basis and other regional economic conditions.
Segment Earnings management and guarantee income increased for
the three and six months ended June 30, 2009, compared to
the same periods in 2008, primarily due to higher credit fee
amortization which was accelerated as a result of increased
liquidation, or prepayment, rates on the related loans, which is
attributed to higher refinance activity in the 2009 periods.
Higher credit fee amortization in the 2009 periods was partially
offset by slightly lower average contractual management and
guarantee rates as compared to the three and six months ended
June 30, 2008.
Table 15 below provides summary information about Segment
Earnings management and guarantee income for this segment.
Segment Earnings management and guarantee income consists of
contractual amounts due to us related to our management and
guarantee fees as well as amortization of credit fees.
Table 15
Segment Earnings Management and Guarantee Income
Single-Family Guarantee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(dollars in millions, rates in basis points)
|
|
|
Contractual management and guarantee fees
|
|
$
|
697
|
|
|
|
15.2
|
|
|
$
|
708
|
|
|
|
15.8
|
|
|
$
|
1,404
|
|
|
|
15.3
|
|
|
$
|
1,415
|
|
|
|
16.0
|
|
Amortization of credit fees included in other liabilities
|
|
|
245
|
|
|
|
5.3
|
|
|
|
132
|
|
|
|
2.9
|
|
|
|
460
|
|
|
|
5.1
|
|
|
|
320
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings management and guarantee income
|
|
|
942
|
|
|
|
20.5
|
|
|
|
840
|
|
|
|
18.7
|
|
|
|
1,864
|
|
|
|
20.4
|
|
|
|
1,735
|
|
|
|
19.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile to consolidated GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification between net interest income and management and
guarantee
fee(1)
|
|
|
61
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
118
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
Credit guarantee-related activity
adjustments(2)
|
|
|
(315
|
)
|
|
|
|
|
|
|
(156
|
)
|
|
|
|
|
|
|
(535
|
)
|
|
|
|
|
|
|
(317
|
)
|
|
|
|
|
Multifamily management and guarantee
income(3)
|
|
|
22
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income, GAAP
|
|
$
|
710
|
|
|
|
|
|
|
$
|
757
|
|
|
|
|
|
|
$
|
1,490
|
|
|
|
|
|
|
$
|
1,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Management and guarantee fees earned on mortgage loans held in
our mortgage-related investments portfolio are reclassified from
net interest income within the Investments segment to management
and guarantee fees within the Single-family Guarantee segment.
Buy-up and buy-down fees are transferred from the Single-family
Guarantee segment to the Investments segment.
|
(2)
|
Primarily represent credit fee amortization adjustments.
|
(3)
|
Represents management and guarantee income recognized related to
our Multifamily segment that is not included in our
Single-family Guarantee segment.
|
For the six months ended June 30, 2009 and 2008, the
annualized growth rates of our single-family credit guarantee
portfolio were 2.6% and 9.5%, respectively. Our mortgage
purchase volumes are impacted by several factors, including
origination volumes, mortgage product and underwriting trends,
competition, customer-specific behavior, contract terms, and
governmental initiatives concerning our business activities.
Origination volumes are also affected by government programs,
such as the MHA Program. Single-family mortgage purchase volumes
from individual customers can fluctuate significantly. Despite
these fluctuations, our share of the overall single-family
mortgage origination market was higher in the first half of 2009
as compared to the first half of 2008, as mortgage originators
have generally tightened their credit standards, causing
conforming mortgages to be the predominant product in the market
during the first half of 2009. We have also tightened our own
guidelines for mortgages we purchase and we have seen
improvements in the credit quality of mortgages delivered to us
in 2009. We experienced an increase in refinance activity in
both the second quarter and first half of 2009 caused by
declines in mortgage interest rates during those periods as well
as our support of Home Affordable Refinance under the MHA
Program.
Our Segment Earnings provision for credit losses for the
Single-family Guarantee segment increased to $6.3 billion
for the three months ended June 30, 2009 compared to
$2.6 billion for the three months ended June 30,
2008, due to continued credit deterioration in our single-family
credit guarantee portfolio. Segment Earnings provision for
credit losses was $15.2 billion and $4.0 billion for
the six months ended June 30, 2009 and 2008, respectively.
Mortgages in our single-family credit guarantee portfolio
experienced significantly higher delinquency rates, higher
transition rates to foreclosure, as well as higher loss
severities on a per-property basis in the first half of 2009
than in the first half of 2008. During the second quarter of
2009, we enhanced our methodology for estimating our loan loss
reserves to consider a greater number of loan characteristics
and revisions to (1) the effects of home price changes on
borrower behavior, and (2) the impact of our loss
mitigation actions, including our temporary suspensions of
foreclosure transfers and loan modification efforts. Our
provision for credit losses is based on our estimate of incurred
losses inherent in both our single-family credit guarantee
portfolio and the single-family mortgage loans in our
mortgage-related investments portfolio using recent historical
performance, such as trends in delinquency rates, recent
charge-off experience, recoveries from credit enhancements and
other loss mitigation activities.
The delinquency rate on our single-family credit guarantee
portfolio, excluding Structured Transactions, increased to 2.78%
as of June 30, 2009 from 1.72% as of December 31,
2008. Increases in delinquency rates occurred in all product
types for the three and six months ended June 30, 2009.
Increases in delinquency rates have been more severe in the
states of Nevada, Florida, Arizona and California. The
delinquency rates for loans in our single-family mortgage
portfolio, excluding Structured Transactions, related to the
states of Nevada, Florida, Arizona and California were 7.87%,
7.73%, 5.12% and 4.23%, respectively, as of June 30, 2009.
We expect our delinquency rates will continue to rise in the
remainder of 2009.
Charge-offs, gross, for this segment increased to
$2.4 billion in the second quarter of 2009 compared to
$0.7 billion in the second quarter of 2008, primarily due
to an increase in the volume of REO properties we acquired
through foreclosure transfers after our temporary suspension of
foreclosure transfers ended in March. Declining home prices
during the last 12 months resulted in higher charge-offs,
on a per property basis, during the second quarter of 2009
compared to the second quarter of 2008, and we expect growth in
charge-offs to continue in the remainder of 2009. See RISK
MANAGEMENT Credit Risks
Table 50 Single-Family Credit Loss
Concentration Analysis for additional delinquency and
credit loss information.
Single-family Guarantee REO operations expense declined during
the three and six months ended June 30, 2009, compared to
the same periods in 2008. REO operations expense decreased in
the second quarter of 2009 as a result of a reduction in our
holding period allowance. During the second quarter of 2009, our
existing and newly acquired REO required fewer market-based
write-downs due to stabilizing home prices during the period. We
expect REO operations expense to fluctuate in the remainder of
2009, as single-family REO acquisition volume increases and home
prices remain under downward pressure.
During the first half of 2009, we experienced significant
increases in REO activity in all regions of the U.S.,
particularly in the states of California, Florida, Nevada and
Arizona. The West region represented approximately 34% and 26%
of our REO property acquisitions during the first half of 2009
and the first half of 2008, respectively, based on the number of
units. The highest concentration in the West region is in the
state of California. At June 30, 2009, our REO inventory in
California comprised 16% of total REO property inventory, based
on units, and approximately 25% of our total REO property
inventory, based on loan amount prior to acquisition. California
has accounted for a significant amount of our credit losses and
losses on our loans in this state comprised approximately 32%
and 31% of our total credit losses in the second quarter of 2009
and the second quarter of 2008, respectively. We temporarily
suspended all foreclosure transfers on occupied homes from
November 26, 2008 through January 31, 2009 and from
February 14, 2009 through March 6, 2009. On
March 7, 2009, we suspended foreclosure transfers on
owner-occupied homes where the borrower may be eligible to
receive a loan modification under the MHA Program; however, we
have continued with initiation and other preclosing steps in the
foreclosure process. As a result of our suspension of
foreclosure transfers, we experienced an increase in
single-family delinquency rates and a slow-down in the growth of
REO acquisitions and REO inventory during the first half of
2009, as compared to what we would have experienced without
these actions. Our suspension or delay of foreclosure transfers
and any imposed delay in foreclosures by regulatory or
governmental agencies also causes a delay in our recognition of
credit losses and our loan loss reserves to increase. See
RISK MANAGEMENT Credit Risks
Loss Mitigation Activities for further information
on these programs.
Approximately 27% of loans in our single-family credit guarantee
portfolio had estimated current LTV ratios above 90%, excluding
second liens by third parties, at June 30, 2009, compared
to 15% at June 30, 2008. In general, higher total LTV
ratios indicate that the borrower has less equity in the home
and would thus be more likely to default in the event of a
financial hardship. There was a slight increase in national home
prices during the first half of 2009; however, we expect that
home prices are likely to decline during the second half of
2009. We expect that declines in home prices combined with the
deterioration in rates of unemployment and other factors will
result in higher credit losses for our Single-family Guarantee
segment during the remainder of 2009. The implementation of any
governmental actions or programs that expand the ability of
delinquent borrowers to obtain modifications with concessions of
past due principal or interest amounts, including proposed
changes to bankruptcy laws, could lead to higher charge-offs.
Multifamily
Segment
Through our Multifamily segment, we purchase multifamily
mortgages for investment and guarantee the payment of principal
and interest on multifamily mortgage-related securities and
mortgages underlying multifamily housing revenue bonds. The
mortgage loans of the Multifamily segment consist of mortgages
that are secured by properties with five or more residential
rental units. We typically hold multifamily loans for investment
purposes. In 2008, we began holding multifamily mortgages
designated
held-for-sale
as part of our initiative to offer securitization capabilities
to the market and our customers, and we executed the first of
these securitizations in the second quarter of 2009. We may
consider executing additional securitization transactions using
multifamily loans we hold in our portfolio in the future, as
market conditions permit.
Table 16 presents the Segment Earnings of our Multifamily
segment.
Table 16
Segment Earnings and Key Metrics
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(dollars in millions)
|
|
|
Segment Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
112
|
|
|
$
|
98
|
|
|
$
|
230
|
|
|
$
|
173
|
|
Non-interest income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income
|
|
|
22
|
|
|
|
17
|
|
|
|
43
|
|
|
|
34
|
|
LIHTC partnerships
|
|
|
(167
|
)
|
|
|
(108
|
)
|
|
|
(273
|
)
|
|
|
(225
|
)
|
Other non-interest income
|
|
|
5
|
|
|
|
7
|
|
|
|
8
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income (loss)
|
|
|
(140
|
)
|
|
|
(84
|
)
|
|
|
(222
|
)
|
|
|
(176
|
)
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses
|
|
|
(52
|
)
|
|
|
(49
|
)
|
|
|
(101
|
)
|
|
|
(98
|
)
|
Provision for credit losses
|
|
|
(57
|
)
|
|
|
(7
|
)
|
|
|
(57
|
)
|
|
|
(16
|
)
|
REO operations expense
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
Other non-interest expense
|
|
|
(7
|
)
|
|
|
(5
|
)
|
|
|
(12
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
(124
|
)
|
|
|
(61
|
)
|
|
|
(178
|
)
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings (loss) before income tax benefit
|
|
|
(152
|
)
|
|
|
(47
|
)
|
|
|
(170
|
)
|
|
|
(126
|
)
|
LIHTC partnerships tax benefit
|
|
|
148
|
|
|
|
149
|
|
|
|
299
|
|
|
|
298
|
|
Income tax benefit
|
|
|
54
|
|
|
|
16
|
|
|
|
60
|
|
|
|
44
|
|
Less: Net (income) loss noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings, net of taxes
|
|
|
50
|
|
|
|
118
|
|
|
|
190
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative and foreign-currency denominated debt-related
adjustments
|
|
|
2
|
|
|
|
(3
|
)
|
|
|
(30
|
)
|
|
|
(14
|
)
|
Credit guarantee-related adjustments
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
3
|
|
|
|
(4
|
)
|
Investment sales, debt retirements and fair value related
adjustments
|
|
|
(7
|
)
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
Tax-related
adjustments(1)
|
|
|
(41
|
)
|
|
|
2
|
|
|
|
(704
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of
taxes(1)
|
|
|
(48
|
)
|
|
|
(5
|
)
|
|
|
(755
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income (loss)
|
|
$
|
2
|
|
|
$
|
113
|
|
|
$
|
(565
|
)
|
|
$
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key metrics Multifamily:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances and Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of Multifamily loan
portfolio(2)
|
|
$
|
77,650
|
|
|
$
|
62,706
|
|
|
$
|
75,946
|
|
|
$
|
60,759
|
|
Average balance of Multifamily guarantee
portfolio(2)
|
|
$
|
15,819
|
|
|
$
|
13,209
|
|
|
$
|
15,666
|
|
|
$
|
12,274
|
|
Purchases Multifamily loan
portfolio(2)
|
|
$
|
4,303
|
|
|
$
|
4,189
|
|
|
$
|
7,951
|
|
|
$
|
8,252
|
|
Issuances Multifamily guarantee
portfolio(2)
|
|
$
|
1,127
|
|
|
$
|
1,105
|
|
|
$
|
1,304
|
|
|
$
|
3,487
|
|
Liquidation Rate Multifamily loan portfolio
(annualized rate)
|
|
|
3.4
|
%
|
|
|
7.9
|
%
|
|
|
3.5
|
%
|
|
|
6.9
|
%
|
Credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
rate(3)
|
|
|
0.11
|
%
|
|
|
0.04
|
%
|
|
|
0.11
|
%
|
|
|
0.04
|
%
|
Allowance for loan losses
|
|
$
|
330
|
|
|
$
|
78
|
|
|
$
|
330
|
|
|
$
|
78
|
|
|
|
(1)
|
2009 includes an allocation of the non-cash charge related to
the partial valuation allowance recorded against our deferred
tax assets, net that is not included in Segment Earnings.
|
(2)
|
Based on unpaid principal balance.
|
(3)
|
Based on net carrying value of mortgages 90 days or more
delinquent as well as those in the process of foreclosure and
excluding Structured Transactions.
|
Segment Earnings for our Multifamily segment decreased to
$50 million for the second quarter of 2009 compared to
$118 million for the second quarter of 2008. Segment
Earnings for the Multifamily segment were $190 million and
$216 million for the six months ended June 30, 2009
and 2008, respectively. The declines in Segment Earnings for the
three and six months ended June 30, 2009 as compared to the
corresponding periods in 2008 were primarily due to higher
non-interest expenses and higher LIHTC partnership losses,
partially offset by higher net interest income. Net interest
income increased $14 million, or 14%, for the second
quarter of 2009 compared to the second quarter of 2008,
primarily driven by a 24% increase in the average balances of
our Multifamily loan portfolio and significantly lower funding
costs, partially offset by a decrease in prepayment fees, or
yield maintenance income, and increased costs of capital
reserves held for potential funding of our liquidity guarantees.
See OFF-BALANCE SHEET ARRANGEMENTS for more
information on our liquidity guarantees.
Non-interest income (loss) was $(140) million in the second
quarter of 2009 compared to $(84) million in the second
quarter of 2008. The increase in loss is attributed to higher
losses on LIHTC partnerships in the second quarter of 2009. We
invest as a limited partner in LIHTC partnerships formed for the
purpose of providing equity funding for affordable multifamily
rental properties. Our investments in LIHTC partnerships totaled
$3.9 billion and $4.1 billion as of June 30, 2009
and December 31, 2008, respectively. Although these
partnerships generate operating losses, we realize a return on
our investment through reductions in income tax expense that
result from tax credits. Our exposure is limited to the amount
of our investment; however, the potential exists that we may not
be able to utilize some
previously taken or future tax credits. In consultation with our
Conservator, we are considering potential transactions to
realize the value of these interests, if market conditions are
appropriate.
Non-interest expenses increased for the three and six months
ended June 30, 2009 compared to the same periods in 2008,
primarily due to increased provision for credit losses and REO
operations expense. Our multifamily delinquency rates continued
to increase in the second quarter and we expect further
increases during the second half of 2009 as multifamily
operators remain under pressure. Our REO property inventory has
increased to seven properties as of June 30, 2009. REO
operations expenses in the second quarter of 2009 relate to fair
value write-down of the properties in inventory due to market
conditions.
We continued to provide stability and liquidity for the
financing of rental housing nationwide by continuing our
purchases and credit guarantees of multifamily mortgage loans.
In June 2009, we completed a structured securitization
transaction with multifamily mortgage loans of approximately
$1 billion. This Structured Transaction was backed by
62 multifamily loans and was one of the first large
commercial mortgage bond issuances in the CMBS market this year.
We may consider additional transactions in the future, if market
conditions are appropriate.
CONSOLIDATED
BALANCE SHEETS ANALYSIS
The following discussion of our consolidated balance sheets
should be read in conjunction with our consolidated financial
statements, including the accompanying notes. Also see
CRITICAL ACCOUNTING POLICIES AND ESTIMATES for more
information concerning our more significant accounting policies
and estimates applied in determining our reported financial
position.
Cash and
Other Investments Portfolio
Table 17 provides detail regarding our cash and other
investments portfolio.
Table 17
Cash and Other Investments Portfolio
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(in millions)
|
|
|
Cash and cash equivalents
|
|
$
|
46,662
|
|
|
$
|
45,326
|
|
Investments:
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
6,248
|
|
|
|
8,794
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
non-mortgage-related securities
|
|
|
6,248
|
|
|
|
8,794
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
540
|
|
|
|
|
|
Treasury bills
|
|
|
11,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading non-mortgage-related securities
|
|
|
11,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related available-for-sale and trading
securities
|
|
|
18,183
|
|
|
|
8,794
|
|
Federal funds sold and securities purchased under agreements to
resell:
|
|
|
|
|
|
|
|
|
Securities purchased under agreements to resell
|
|
|
8,500
|
|
|
|
10,150
|
|
|
|
|
|
|
|
|
|
|
Total cash and other investments portfolio
|
|
$
|
73,345
|
|
|
$
|
64,270
|
|
|
|
|
|
|
|
|
|
|
Our cash and other investments portfolio is important to our
cash flow and asset and liability management and our ability to
provide liquidity and stability to the mortgage market, as
discussed in MD&A CONSOLIDATED BALANCE
SHEETS ANALYSIS Cash and Other Investments
Portfolio in our 2008 Annual Report. Cash and cash
equivalents comprised $46.7 billion of the
$73.3 billion in this portfolio as of June 30, 2009.
At June 30, 2009, the investments in this portfolio also
included $6.8 billion of non-mortgage-related asset-backed
securities and $11.4 billion of Treasury bills that we
could sell to provide us with an additional source of liquidity
to fund our business operations.
During the six months ended June 30, 2009, we increased the
balance of our cash and other investments portfolio by
$9.1 billion, primarily due to an $11.9 billion
increase in trading asset-backed securities and Treasury bills.
On June 30, 2009, we received $6.1 billion from
Treasury under the Purchase Agreement pursuant to a draw request
that FHFA submitted to Treasury on our behalf to address the
deficit in net worth as of March 31, 2009.
We recorded net impairment of available-for-sale securities
recognized in earnings related to our cash and other investments
portfolio of $11 million and $185 million during the
three and six months ended June 30, 2009, respectively, for
our non-mortgage-related investments, as we could not assert
that we did not intend to, or we will not be required to, sell
these securities before a recovery of the unrealized losses. The
non-mortgage-related securities impaired during the second
quarter of 2009 had $0.3 billion of unpaid principal
balances at June 30, 2009. The decision to impair these
securities is consistent with our consideration of securities
from the cash and other investments portfolio as a contingent
source of liquidity. We do not expect any contractual cash
shortfalls related to these securities.
All unrealized losses related to available-for-sale securities
in our cash and other investments portfolio have been recorded
in net impairment of available-for-sale securities recognized in
earnings for the quarter ended June 30, 2009. See
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Change in Accounting Principles
Additional Guidance and Disclosures for Fair Value
Measurements and Change in the Impairment Model for Debt
Securities Change in the Impairment Model for Debt
Securities to our consolidated financial statements
for information on how other-than-temporary impairments are
recorded on our financial statements commencing in the second
quarter of 2009.
During the three and six months ended June 30, 2008, we
recorded $214 million of net impairment of
available-for-sale securities recognized in earnings related to
investments in non-mortgage-related asset-backed securities
within our cash and other investments portfolio with
$8.9 billion of unpaid principal balances as we could no
longer assert the positive intent to hold these securities to
recovery.
Table 18 provides credit ratings of the
non-mortgage-related asset-backed securities in our cash and
other investments portfolio at June 30, 2009. Table 18
includes securities classified as either available-for-sale or
trading on our consolidated balance sheets.
Table 18
Investments in Non-Mortgage-Related Asset-Backed
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Original%
|
|
|
Current%
|
|
|
Investment
|
|
Collateral Type
|
|
Cost
|
|
|
Value
|
|
|
AAA-rated(1)
|
|
|
AAA-rated(2)
|
|
|
Grade(3)
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
|
$
|
3,415
|
|
|
$
|
3,684
|
|
|
|
100
|
%
|
|
|
76
|
%
|
|
|
97
|
%
|
Auto credit
|
|
|
1,710
|
|
|
|
1,824
|
|
|
|
100
|
|
|
|
66
|
|
|
|
100
|
|
Equipment lease
|
|
|
489
|
|
|
|
506
|
|
|
|
100
|
|
|
|
88
|
|
|
|
100
|
|
Student loans
|
|
|
404
|
|
|
|
425
|
|
|
|
100
|
|
|
|
89
|
|
|
|
100
|
|
Dealer floor
plans(4)
|
|
|
28
|
|
|
|
33
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
Stranded
assets(5)
|
|
|
187
|
|
|
|
193
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Insurance premiums
|
|
|
123
|
|
|
|
123
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related asset-backed securities
|
|
$
|
6,356
|
|
|
$
|
6,788
|
|
|
|
100
|
|
|
|
76
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects the composition of the portfolio that was
AAA-rated as
of the date of our acquisition of the security, based on unpaid
principal balance and the lowest rating available.
|
(2)
|
Reflects the
AAA-rated
composition of the securities as of July 31, 2009, based on
unpaid principal balance as of June 30, 2009 and the lowest
rating available.
|
(3)
|
Reflects the composition of these securities with credit ratings
BBB or above as of July 31, 2009, based on unpaid
principal balance as of June 30, 2009 and the lowest rating
available.
|
(4)
|
Consists of securities backed by liens secured by automobile
dealer inventories.
|
(5)
|
Consists of securities backed by liens secured by fixed assets
owned by regulated public utilities.
|
Mortgage-Related
Investments Portfolio
We are primarily a
buy-and-hold
investor in mortgage assets. We invest principally in mortgage
loans and mortgage-related securities, which consist of
securities issued by us, Fannie Mae, Ginnie Mae and other
financial institutions. We refer to these investments that are
recorded on our consolidated balance sheets as our
mortgage-related investments portfolio. Our mortgage-related
securities are classified as either
available-for-sale
or trading on our consolidated balance sheets.
Under the Purchase Agreement with Treasury and FHFA regulation,
our mortgage-related investments portfolio may not exceed
$900 billion as of December 31, 2009 and then must
decline by 10% per year thereafter until it reaches
$250 billion. The first of the annual 10% portfolio
reductions is effective on December 31, 2010 and will be
calculated relative to the actual balance of our
mortgage-related investments portfolio on December 31,
2009. Consistent with our ability under the Purchase Agreement
to increase the size of our on-balance sheet mortgage portfolio
through the end of 2009, since we entered into conservatorship
we have acquired and held increased amounts of mortgage loans
and mortgage-related securities in our mortgage-related
investments portfolio to provide additional liquidity to the
mortgage market. While our mortgage-related investments
portfolio increased overall during the six months ended
June 30, 2009, it decreased during the second quarter of
2009, due to forward sale commitments of mortgage-related
securities at March 31, 2009 that settled during the second
quarter and a relative lack of favorable investment
opportunities. Table 19 provides unpaid principal balances
of the mortgage loans and mortgage-related securities in our
mortgage-related investments portfolio. Table 19 includes
securities classified as either
available-for-sale
or trading on our consolidated balance sheets.
Table 19
Characteristics of Mortgage Loans and Mortgage-Related
Securities in our Mortgage-Related Investments
Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Fixed Rate
|
|
|
Variable Rate
|
|
|
Total
|
|
|
Fixed Rate
|
|
|
Variable Rate
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
47,659
|
|
|
$
|
1,042
|
|
|
$
|
48,701
|
|
|
$
|
34,630
|
|
|
$
|
1,295
|
|
|
$
|
35,925
|
|
Interest-only
|
|
|
409
|
|
|
|
685
|
|
|
|
1,094
|
|
|
|
440
|
|
|
|
841
|
|
|
|
1,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conventional
|
|
|
48,068
|
|
|
|
1,727
|
|
|
|
49,795
|
|
|
|
35,070
|
|
|
|
2,136
|
|
|
|
37,206
|
|
USDA Rural Development/FHA/VA
|
|
|
2,173
|
|
|
|
|
|
|
|
2,173
|
|
|
|
1,549
|
|
|
|
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
50,241
|
|
|
|
1,727
|
|
|
|
51,968
|
|
|
|
36,619
|
|
|
|
2,136
|
|
|
|
38,755
|
|
Multifamily(3)
|
|
|
68,564
|
|
|
|
9,743
|
|
|
|
78,307
|
|
|
|
65,322
|
|
|
|
7,399
|
|
|
|
72,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance of mortgage loans
|
|
|
118,805
|
|
|
|
11,470
|
|
|
|
130,275
|
|
|
|
101,941
|
|
|
|
9,535
|
|
|
|
111,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCs and Structured
Securities:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family(1)
|
|
|
350,733
|
|
|
|
87,777
|
|
|
|
438,510
|
|
|
|
328,965
|
|
|
|
93,498
|
|
|
|
422,463
|
|
Multifamily
|
|
|
279
|
|
|
|
1,689
|
|
|
|
1,968
|
|
|
|
332
|
|
|
|
1,729
|
|
|
|
2,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total PCs and Structured Securities
|
|
|
351,012
|
|
|
|
89,466
|
|
|
|
440,478
|
|
|
|
329,297
|
|
|
|
95,227
|
|
|
|
424,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Freddie Mac mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-related
securities:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family(1)
|
|
|
38,670
|
|
|
|
33,132
|
|
|
|
71,802
|
|
|
|
35,142
|
|
|
|
34,460
|
|
|
|
69,602
|
|
Multifamily
|
|
|
448
|
|
|
|
91
|
|
|
|
539
|
|
|
|
582
|
|
|
|
92
|
|
|
|
674
|
|
Ginnie Mae:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family(1)
|
|
|
370
|
|
|
|
143
|
|
|
|
513
|
|
|
|
398
|
|
|
|
152
|
|
|
|
550
|
|
Multifamily
|
|
|
35
|
|
|
|
|
|
|
|
35
|
|
|
|
26
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total agency mortgage-related securities
|
|
|
39,523
|
|
|
|
33,366
|
|
|
|
72,889
|
|
|
|
36,148
|
|
|
|
34,704
|
|
|
|
70,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:(1)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime
|
|
|
417
|
|
|
|
67,158
|
|
|
|
67,575
|
|
|
|
438
|
|
|
|
74,413
|
|
|
|
74,851
|
|
MTA Option ARM
|
|
|
|
|
|
|
18,746
|
|
|
|
18,746
|
|
|
|
|
|
|
|
19,606
|
|
|
|
19,606
|
|
Alt-A and
other
|
|
|
3,049
|
|
|
|
20,118
|
|
|
|
23,167
|
|
|
|
3,266
|
|
|
|
21,801
|
|
|
|
25,067
|
|
Commercial mortgage-backed securities
|
|
|
24,205
|
|
|
|
38,748
|
|
|
|
62,953
|
|
|
|
25,060
|
|
|
|
39,131
|
|
|
|
64,191
|
|
Obligations of states and political
subdivisions(7)
|
|
|
12,438
|
|
|
|
50
|
|
|
|
12,488
|
|
|
|
12,825
|
|
|
|
44
|
|
|
|
12,869
|
|
Manufactured
housing(8)
|
|
|
1,090
|
|
|
|
176
|
|
|
|
1,266
|
|
|
|
1,141
|
|
|
|
185
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related
securities(9)
|
|
|
41,199
|
|
|
|
144,996
|
|
|
|
186,195
|
|
|
|
42,730
|
|
|
|
155,180
|
|
|
|
197,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
431,734
|
|
|
|
267,828
|
|
|
|
699,562
|
|
|
|
408,175
|
|
|
|
285,111
|
|
|
|
693,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance of mortgage-related investments
portfolio
|
|
$
|
550,539
|
|
|
$
|
279,298
|
|
|
|
829,837
|
|
|
$
|
510,116
|
|
|
$
|
294,646
|
|
|
|
804,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums, discounts, deferred fees, impairments of unpaid
principal balances and other basis adjustments
|
|
|
|
|
|
|
|
|
|
|
(12,298
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,788
|
)
|
Net unrealized losses on mortgage-related securities, pre-tax
|
|
|
|
|
|
|
|
|
|
|
(41,585
|
)
|
|
|
|
|
|
|
|
|
|
|
(38,228
|
)
|
Allowance for loan losses on mortgage loans
held-for-investment(10)
|
|
|
|
|
|
|
|
|
|
|
(831
|
)
|
|
|
|
|
|
|
|
|
|
|
(690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying value of mortgage-related investments portfolio
|
|
|
|
|
|
|
|
|
|
$
|
775,123
|
|
|
|
|
|
|
|
|
|
|
$
|
748,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Variable-rate single-family mortgage loans and mortgage-related
securities include those with a contractual coupon rate that,
prior to contractual maturity, is either scheduled to change or
is subject to change based on changes in the composition of the
underlying collateral. Single-family mortgage loans also include
mortgages with balloon/reset provisions.
|
(2)
|
See RISK MANAGEMENT Credit Risks
Mortgage Credit Risk for information on
Alt-A and
subprime loans, which are a component of our single-family
conventional mortgage loans
|
(3)
|
Variable-rate multifamily mortgage loans include only those
loans that, as of the reporting date, have a contractual coupon
rate that is subject to change.
|
(4)
|
For our PCs and Structured Securities, we are subject to the
credit risk associated with the underlying mortgage loan
collateral.
|
(5)
|
Agency mortgage-related securities are generally not separately
rated by nationally recognized statistical rating organizations,
but are viewed as having a level of credit quality at least
equivalent to non-agency mortgage-related securities rated AAA
or equivalent.
|
(6)
|
Single-family non-agency mortgage-related securities backed by
subprime, MTA Option ARM,
Alt-A and
other mortgage loans include significant credit enhancements,
particularly through subordination. For information about how
these securities are rated, see Table 24
Ratings of
Available-For-Sale
Non-Agency Mortgage-Related Securities backed by Subprime, MTA
Option ARM,
Alt-A and
Other Loans at June 30, 2009 and December 31,
2008 and Table 25 Ratings Trend of
Available-For-Sale
Non-Agency Mortgage-Related Securities backed by Subprime, MTA
Option ARM,
Alt-A and
Other Loans.
|
(7)
|
Consists of mortgage revenue bonds. Approximately 56% and 58% of
these securities held at June 30, 2009 and
December 31, 2008, respectively, were
AAA-rated as
of those dates, based on the lowest rating available.
|
(8)
|
At June 30, 2009 and December 31, 2008, 19% and 32%,
respectively, of mortgage-related securities backed by
manufactured housing were rated BBB or above, based on the
lowest rating available. For both dates, 91% of mortgage-related
securities backed by manufactured housing had credit
enhancements, including primary monoline insurance, that covered
23% of the mortgage-related securities backed by manufactured
housing based on the unpaid principal balance. At both
June 30, 2009 and December 31, 2008, we had secondary
insurance on 60% of these securities that were not covered by
the primary monoline insurance, based on the unpaid principal
balance. Approximately 3% of the mortgage-related securities
backed by manufactured housing were
AAA-rated at
both June 30, 2009 and December 31, 2008 based on the
unpaid principal balance and the lowest rating available.
|
(9)
|
Credit ratings for most non-agency mortgage-related securities
are designated by no fewer than two nationally recognized
statistical rating organizations. Approximately 38% and 55% of
total non-agency mortgage-related securities held at
June 30, 2009 and December 31, 2008, respectively,
were
AAA-rated as
of those dates, based on the unpaid principal balance and the
lowest rating available.
|
(10)
|
See RISK MANAGEMENT Credit Risks
Mortgage Credit Risk Credit
Performance Loan Loss Reserves for
information about our allowance for loan losses on mortgage
loans
held-for-investment.
|
The total unpaid principal balance of our mortgage-related
investments portfolio increased by $25.1 billion to
$829.8 billion at June 30, 2009 compared to
December 31, 2008. The portfolio grew during the first half
of 2009 because we acquired and held increased amounts of
mortgage loans and mortgage-related securities in our
mortgage-related investments portfolio to provide additional
liquidity to the mortgage market and, to a lesser degree, due to
more favorable investment opportunities for agency securities.
Our net purchase activity increased considerably as we deployed
capital at favorable OAS levels. The $25.1 billion increase
included net purchases of PCs and Structured Securities and
agency mortgage-related securities balances totaling
$18 billion, partially offset by an $11.7 billion
decrease in non-agency mortgage-related securities balances,
primarily due to principal repayments on securities backed by
subprime, MTA Option ARM,
Alt-A and
other loans.
The balance of mortgage loans held in our mortgage-related
investments portfolio increased by $18.8 billion during the
first half of 2009, including an increase of approximately
$5.6 billion in multifamily loans. We invest in both
adjustable- and fixed-rate multifamily loans secured by
apartment buildings or communities. Fixed-rate multifamily loans
generally include prepayment fees if the borrowers prepay within
the yield maintenance period, which is normally the initial five
to ten years. The unpaid principal balance of multifamily loans
in our mortgage-related investments portfolio increased from
$72.7 billion at December 31, 2008 to
$78.3 billion at June 30, 2009, an increase of 7.7%.
We expect industry-wide loan demand to remain weak in the second
half of 2009. While we expect our multifamily loan portfolio to
increase in the second half of 2009, the rate of growth has
slowed, reflecting the markets contraction.
As mortgage interest rates declined during the first half of
2009, single-family refinance mortgage originations increased
and the volume of deliveries of single-family mortgage loans to
us for cash purchase rather than for guarantor swap transactions
also increased. Loans purchased through the cash purchase
program are typically sold to investors through a cash auction
of PCs and, in the interim, are carried as mortgage loans on our
consolidated balance sheets. However, demand for our cash
auctions of PCs has fluctuated during the first half of 2009.
Our increased cash purchase activity coupled with fewer PCs sold
at cash auctions, as well as our increased purchases of
delinquent and modified loans from the mortgage pools underlying
our PCs and Structured Securities, resulted in a 34.1% increase
in the unpaid principal balance of single-family mortgage loans
held in our mortgage-related investments portfolio during the
first half of 2009.
Higher
Risk Components of Our Mortgage-Related Investments
Portfolio
As discussed below, we have exposure to subprime,
Alt-A and
option ARM loans in our mortgage-related investments portfolio
as follows:
|
|
|
|
|
Single-family non-agency mortgage-related
securities: We hold non-agency mortgage-related
securities backed by subprime, MTA Option ARM, and
Alt-A and
other loans in our mortgage-related investments portfolio.
|
|
|
|
Single-family mortgage loans: We hold
Alt-A loans
in our mortgage-related investments portfolio. We do not hold a
significant dollar amount of option ARM or subprime loans in our
mortgage-related investments portfolio.
|
In addition, a portion of the single-family mortgage loans
underlying our PCs and Structured Securities are subprime,
Alt-A and
option ARM loans and we hold significant dollar amounts of PCs
and Structured Securities in our mortgage-related investments
portfolio. For more information on single-family loans
underlying our PCs and Structured Securities, see RISK
MANAGEMENT Credit Risks Mortgage
Credit Risk Mortgage Product Types.
During the first half of 2009, we did not buy or sell any
non-agency mortgage-related securities backed by subprime, MTA
Option ARM or
Alt-A and
other loans. As discussed below, we recognized impairment and
unrealized losses on our holdings of such securities in the
first half of 2009. See Table 20
Other-Than-Temporary Impairments on Securities Backed by
Subprime, MTA Option ARM,
Alt-A and
Other Loans for more information. We believe that the
declines in fair values for these securities are attributable to
poor underlying collateral performance and decreased liquidity
and larger risk premiums in the mortgage market.
Higher
Risk Single-Family Mortgage Loans
Participants in the mortgage market often characterize
single-family loans based upon their overall credit quality at
the time of origination, generally considering them to be prime
or subprime. There is no universally accepted definition of
subprime. The subprime segment of the mortgage market primarily
serves borrowers with poorer credit payment histories and such
loans typically have a mix of credit characteristics that
indicate a higher likelihood of default and higher loss
severities than prime loans. Such characteristics might include
a combination of high LTV ratios, low credit scores or
originations using lower underwriting standards such as limited
or no documentation of a borrowers income. Mortgage loans
with higher LTV ratios have a higher risk of default, especially
since the U.S.
mortgage market has experienced declining home prices and home
sales for an extended period. Also, the industry has viewed
borrowers with credit scores below 620 based on the FICO scale
as having a higher risk of default.
We generally do not classify the single-family mortgage loans in
our mortgage-related investments portfolio as either prime or
subprime; however, there are mortgage loans within our
mortgage-related investments portfolio with higher risk
characteristics than other mortgage loans. For example, we
estimate that there were $2.2 billion and $1.7 billion
at June 30, 2009 and December 31, 2008, respectively,
of loans with both original LTV ratios greater than 90% and FICO
credit scores less than 620 at the time of loan origination.
Although there is no universally accepted definition of
Alt-A, many
mortgage market participants classify single-family loans with
credit characteristics that range between their prime and
subprime categories as
Alt-A
because these loans have a combination of characteristics of
each category or may be underwritten with lower or alternative
income or asset documentation requirements relative to a full
documentation mortgage loan. In determining our
Alt-A
exposure in loans underlying our single-family mortgage
portfolio, we have classified mortgage loans as
Alt-A if the
lender that delivers them to us has classified the loans as
Alt-A, or if
the loans had reduced documentation requirements, which indicate
that the loan should be classified as
Alt-A. We
estimate that approximately $3.7 billion, or 7% of the
single-family mortgage loans in our mortgage-related investments
portfolio were classified as
Alt-A loans
at June 30, 2009.
See RISK MANAGEMENT Credit Risks
Mortgage Credit Risk for further information.
Non-Agency
Mortgage-Related Securities Backed by Subprime
Loans
We have classified securities as subprime if the securities were
labeled as subprime when sold to us. At June 30, 2009 and
December 31, 2008, we held $67.6 billion and
$74.8 billion, respectively, in unpaid principal balances
of non-agency mortgage-related securities backed by first lien
and second lien subprime loans in our mortgage-related
investments portfolio. In addition to the contractual interest
payments, we receive monthly remittances of principal repayments
on these securities, which totaled $3.4 billion and
$7.2 billion during the three and six months ended
June 30, 2009, respectively, representing a partial return
of our investment in these securities. We have seen a decrease
in the annualized rate of principal repayments on such
securities from 25% in the fourth quarter of 2008 to 19% in the
second quarter of 2009. These securities benefit from
significant credit enhancement, particularly through
subordination. These securities experienced significant
downgrades during the first half of 2009, as 20% and 58% were
investment grade at June 30, 2009 and December 31,
2008, respectively.
Non-Agency
Mortgage-Related Securities Backed by MTA Option ARM
Loans
MTA Option ARM loans are indexed to the Moving Treasury Average
and have optional payment terms, including options that allow
for deferral of principal payments which result in negative
amortization for an initial period of years. MTA Option ARM
loans generally have a specified date when the mortgage is
recast to require principal payments under new terms, which can
result in substantial increases in monthly payments by the
borrower.
We have classified securities as MTA Option ARM if the
securities were labeled as MTA Option ARM when sold to us or if
we believe the underlying collateral includes a significant
amount of MTA Option ARM loans. We had $18.7 billion and
$19.6 billion in unpaid principal balances of non-agency
mortgage-related securities classified as MTA Option ARM at
June 30, 2009 and December 31, 2008, respectively. In
addition to the contractual interest payments, we receive
monthly remittances of principal repayments on these securities,
which totaled $0.5 billion and $0.9 billion during the
three and six months ended June 30, 2009, respectively,
representing a partial return of our investment in these
securities. The annualized rate of principal repayments during
the second quarter of 2009 on these securities was 10%, an
increase from the fourth quarter 2008 rate of 8%. These
securities benefit from significant credit enhancements,
particularly through subordination. These securities experienced
significant downgrades during the first half of 2009, as 4% and
72% were investment grade at June 30, 2009 and
December 31, 2008, respectively.
Non-Agency
Mortgage-Related Securities Backed by
Alt-A and
Other Loans
We have classified securities as
Alt-A if the
securities were labeled as
Alt-A when
sold to us or if we believe the underlying collateral includes a
significant amount of
Alt-A loans.
We classified $23.2 billion and $25.1 billion in
unpaid principal balances of our single-family non-agency
mortgage-related securities as
Alt-A and
other loans at June 30, 2009 and December 31, 2008,
respectively. In addition to the contractual interest payments,
we receive monthly remittances of principal repayments on these
securities, which totaled $1.0 billion and
$1.9 billion during the three and six months ended
June 30, 2009, representing a partial return of our
investment in these securities. The annualized rate of principal
repayments during the second quarter of 2009 on these securities
was 17%, an increase from the fourth quarter 2008 rate of 14%.
These securities benefit from significant credit enhancements,
particularly through subordination. These securities experienced
significant downgrades during the first half of 2009, as 35% and
79% were investment grade at June 30, 2009 and
December 31, 2008, respectively.
Unrealized
Losses on Available-for-Sale Mortgage-Related
Securities
At June 30, 2009, our gross unrealized losses, pre-tax, on
available-for-sale
mortgage-related securities were $58.5 billion, compared to
$50.9 billion at December 31, 2008. This increase in
unrealized losses includes the impact of $15.3 billion,
pre-tax, ($9.9 billion, net of tax) of
other-than-temporary
impairment losses recorded as a result of the adoption of
FSP FAS 115-2
and
FAS 124-2
that more than offset the unrealized gains in non-agency
mortgage-related securities that occurred during the first half
of 2009. We believe that unrealized losses on non-agency
mortgage-related securities at June 30, 2009 were
attributable to poor underlying collateral performance,
decreased liquidity and larger risk premiums in the non-agency
mortgage market. All securities in an unrealized loss position
are evaluated to determine if the impairment is
other-than-temporary.
See NOTE 4: INVESTMENTS IN SECURITIES to our
consolidated financial statements for additional information
regarding unrealized losses on available-for-sale securities.
Other-Than-Temporary
Impairments on Available-for-Sale Mortgage-Related
Securities
We adopted FSP
FAS 115-2
and
FAS 124-2
on April 1, 2009, which provides guidance designed to
create greater clarity and consistency in accounting for and
presenting impairment losses on securities. Under the guidance
set forth in these pronouncements, a portion of the
other-than-temporary impairment (that portion which relates to
securities not intended to be sold and which is not
credit-related) is recorded in AOCI and not recognized in
earnings. See NOTE 4: INVESTMENTS IN
SECURITIES Other-Than-Temporary Impairments on
Available-For-Sale Securities to our consolidated
financial statements for additional information regarding these
accounting principles and impairments.
Table 20 provides additional information regarding
other-than-temporary impairments related to our
available-for-sale mortgage-related securities during the second
quarter of 2009.
Table
20 Net Impairment on Available-For-Sale
Mortgage-Related Securities Recognized in Earnings
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009
|
|
|
|
Unpaid
|
|
|
Net Impairment of
|
|
|
|
Principal
|
|
|
Available-For-Sale Securities
|
|
|
|
Balance
|
|
|
Recognized in Earnings
|
|
|
|
(in millions)
|
|
|
Subprime:
|
|
|
|
|
|
|
|
|
2006 & 2007 first lien
|
|
$
|
24,899
|
|
|
$
|
949
|
|
Other years first and second
liens(1)
|
|
|
8,532
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
Total subprime first and second liens
|
|
|
33,431
|
|
|
|
1,291
|
|
|
|
|
|
|
|
|
|
|
MTA Option ARM:
|
|
|
|
|
|
|
|
|
2006 & 2007
|
|
|
11,446
|
|
|
|
301
|
|
Other years
|
|
|
5,586
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
Total MTA Option ARM
|
|
|
17,032
|
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
Alt-A:
|
|
|
|
|
|
|
|
|
2006 & 2007
|
|
|
7,004
|
|
|
|
169
|
|
Other years
|
|
|
4,601
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A
|
|
|
11,605
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
Other loans
|
|
|
2,780
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
Total Subprime, MTA Option ARM, Alt-A and other loans
|
|
|
64,848
|
|
|
|
2,157
|
|
Manufactured housing
|
|
|
807
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale mortgage-related securities
|
|
$
|
65,655
|
|
|
$
|
2,202
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes 2006 and 2007 second liens.
|
We recorded net impairment of available-for-sale securities in
earnings related to non-agency mortgage-related securities of
approximately $2.2 billion during the second quarter of
2009. These impairments are due to significant sustained
deterioration in the performance of the collateral underlying
these securities. The expected loss during the second quarter of
2009 is also due to a lack of confidence in the credit
enhancements provided by primary monoline bond insurance from
four monoline insurers on individual securities in an unrealized
loss position. Since the second quarter of 2008, we have
recorded impairment of available-for-sale securities in earnings
related to non-agency mortgage-related securities backed by four
monoline insurers. We expect a principal and interest shortfall
will occur on the insured securities and that, in such a case,
there is substantial uncertainty surrounding the insurers
ability to pay all future claims. The deterioration has not
impacted our conclusion that we do not intend to sell these
securities and it is more likely than not that we will not be
required to sell such securities. See RISK
MANAGEMENT Credit Risks Institutional
Credit Risk Bond Insurers for more
information on our exposure to bond insurers. Included in these
net impairments are $0.9 billion of impairments related to
securities backed by subprime, MTA Option ARM,
Alt-A and
other loans with $21 billion of unpaid principal balance
that were impaired for the first time during the second quarter
of 2009. Among the securities impaired during the second quarter
of 2009 are securities backed by subprime, MTA Option ARM, Alt-A
and other loans with $10 billion of unpaid principal
balance impaired as a result
of the adoption of FSP
FAS 115-2
and
FAS 124-2.
These securities were identified as securities that would have
been other-than-temporarily impaired as of March 31, 2009
if the guidance had been in place prior to April 1, 2009.
Cumulative credit-related impairments recognized in earnings on
these $10 billion of securities were $0.6 billion
during the second quarter of 2009.
As a result of the adoption of
FSP FAS 115-2
and
FAS 124-2
on April 1, 2009, we recorded a cumulative adjustment of
$(9.9) billion, net of tax, related to
other-than-temporary
impairment losses to AOCI. This cumulative adjustment
reclassified the non-credit component of previously recognized
other-than-temporary
impairments from retained earnings to AOCI. In addition,
$8.3 billion of the total other-than-temporary impairments
primarily related to our non-agency securities for the second
quarter of 2009 were non-credit-related and, thus, recognized in
AOCI. The $8.3 billion, pre-tax, of impairments recognized
in AOCI during the second quarter of 2009 represents the portion
of cumulative fair value declines, that are not related to
credit, on newly identified securities as a result of adoption
of FSP
FAS 115-2
and
FAS 124-2
and current period changes in fair value, not attributed to
credit, for previously impaired securities. We currently
estimate that the future expected principal and interest
shortfall on these securities will be significantly less than
the recent fair value declines. We have incurred actual
principal cash shortfalls of $39 million on impaired
securities. See NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Change in Accounting
Principles Additional Guidance and Disclosures
for Fair Value Measurements and Change in the Impairment Model
for Debt Securities Change in the Impairment Model
for Debt Securities to our consolidated financial
statements for information on how other-than-temporary
impairments are recorded on our financial statements commencing
in the second quarter of 2009.
We recorded net impairment of available-for-sale securities
recognized in earnings related to non-agency mortgage-related
securities of approximately $9.2 billion during the six
months ended June 30, 2009. Of this amount,
$6.9 billion were recognized in the first quarter of 2009,
prior to the adoption of
FSP FAS 115-2
and
FAS 124-2,
and were related to non-agency mortgage-related securities
backed by subprime, MTA Option ARM,
Alt-A and
other loans that were probable of incurring a contractual
principal or interest loss.
During the three and six months ended June 30, 2008, we
recorded $0.8 billion of impairment of available-for-sale
securities recognized in earnings related to our investments in
non-agency mortgage-related securities backed by subprime, MTA
Option ARM,
Alt-A and
other loans primarily due to deterioration in the performance of
the collateral underlying these loans. All of this amount was
recorded in the second quarter.
The decline in mortgage credit performance has been severe for
subprime, MTA Option ARM,
Alt-A and
other loans. Many of the same economic factors impacting the
performance of our single-family mortgage portfolio also impact
the performance of the non-agency mortgage-related securities in
our mortgage-related investments portfolio. Rising unemployment,
an increasing inventory of unsold homes, tight credit
conditions, volatility in mortgage rates and LIBOR, and
weakening consumer confidence not only contributed to poor
performance during the second quarter of 2009, but also impacted
our expectations regarding future performance, both of which are
critical in assessing
other-than-temporary
impairments. Furthermore, the subprime, MTA Option ARM,
Alt-A and
other loans backing our securities have significantly greater
concentrations in the states that are undergoing the greatest
economic stress, such as California, Florida, Arizona and Nevada.
While it is reasonably possible that, under certain conditions
(especially given the current economic environment), defaults
and severity of losses on our remaining
available-for-sale
securities that are in an unrealized loss position, but for
which we have not recorded an impairment earnings charge, could
exceed our subordination and credit enhancement levels and a
principal or interest loss could occur, we do not believe that
those conditions were likely at June 30, 2009. Based on our
conclusion that we do not intend to sell our remaining
available-for-sale mortgage-related securities and it is more
likely than not that we will not be required to sell these
securities before a sufficient time to recover all unrealized
losses and our consideration of available information, we have
concluded that the reduction in fair value of these securities
was temporary at June 30, 2009.
Our assessments concerning
other-than-temporary
impairment require significant judgment and are subject to
change as the performance of the individual securities changes,
mortgage conditions evolve and our assessments of future
performance are updated. Bankruptcy reform, loan modification
programs and other government intervention can significantly
change the performance of the underlying loans and thus our
securities. Current market conditions are unprecedented, in our
experience, and actual results could differ materially from our
expectations. Furthermore, different market participants could
arrive at materially different conclusions regarding the
likelihood of various default and severity outcomes, and these
differences tend to be magnified for nontraditional products
such as MTA Option ARM loans.
Hypothetical
Performance Scenarios for Non-Agency Mortgage-Related
Securities
In this section, we present for informational purposes
hypothetical scenarios based on an analysis we designed to
simulate the distribution of cash flows from the underlying
loans to the securities that we hold, considering different
default rate and severity assumptions. In preparing each
scenario, we use numerous assumptions (in addition to the
default rate and severity assumptions), including, but not
limited to, the timing of losses, prepayment rates, the
collectability of excess interest and interest rates. Changes in
these assumptions could materially impact the results. Since we
do not use this analysis for determination of our reported
results under GAAP, this analysis is hypothetical and may not be
indicative of our actual economic losses.
Tables 21 23 provide the summary results of the
default rate and severity hypothetical scenarios for our
investments in
available-for-sale
non-agency mortgage-related securities backed by first lien
subprime, MTA Option ARM and
Alt-A loans
at June 30, 2009. In light of increasing uncertainty
concerning default rates and severity due to the overall
deterioration in the economy and the impact of the MHA Program,
proposed bankruptcy reform legislation and other government
intervention on the loans underlying our securities, we have
provided a number of default and severity scenarios to reflect a
broad range of possible outcomes. For example, in the
hypothetical scenario for our non-agency mortgage-related
securities backed by first lien subprime loans presented in
Table 21, we use cumulative default rates of 60% to 80%.
However, different market participants could arrive at
materially different conclusions regarding the likelihood of
various default and severity outcomes. These differences tend to
be magnified for nontraditional products such as MTA Option ARM
loans. While the more stressful scenarios are beyond what we
currently believe are likely, these tables give insight into the
potential economic losses under hypothetical scenarios.
In addition to the hypothetical scenarios, these tables also
display underlying collateral performance and credit enhancement
statistics, by vintage and quartile of delinquency. The current
collateral delinquency rates presented in Tables 21, 22 and
23 averaged 44%, 40% and 22%, respectively. Within each of these
quartiles, there is a distribution of both credit enhancement
levels and delinquency performance, and individual security
performance will differ from the quartile as a whole.
Furthermore, some individual securities with lower subordination
levels could have higher delinquencies.
The projected economic losses presented for each hypothetical
scenario represent the present value of possible cash shortfalls
given the related assumptions. The projected economic losses are
based solely on the present value of potential principal
shortfalls, as we do not believe that the interest shortfalls
are representative of our risk of economic loss since the
interest represents cash flow generated by our investment in the
securities, whereas the principal amount generally represents
the amount of our investment in the securities. Additionally,
some of these securities are not subject to principal
write-downs until their legal final maturity based on the
contractual terms of the security, which leads to a smaller
present value loss than on a security that could take principal
write-downs when incurred. However, these amounts do not
represent the
other-than-temporary
impairment charge that would result under the given scenario.
Any such charges would vary depending on the expected timing of
such losses at that point in time, and could be higher than the
amount of losses indicated by these scenarios. Impairment
charges would also reflect interest shortfalls.
Table 21
Investments in
Available-For-Sale
Non-Agency Mortgage-Related Securities Backed by First Lien
Subprime Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
Underlying Collateral Performance
|
|
|
Credit Enhancements Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Hypothetical
Scenarios(4)
|
|
|
|
Delinquency
|
|
Principal
|
|
|
Collateral
|
|
|
Average Credit
|
|
|
Current
|
|
|
Default
|
|
Severity
|
|
Acquisition Date
|
|
Quartile
|
|
Balance
|
|
|
Delinquency(1)
|
|
|
Enhancement(2)
|
|
|
Subordination(3)
|
|
|
Rate
|
|
60%
|
|
|
70%
|
|
|
80%
|
|
|
|
|
|
(dollars in millions)
|
|
|
2004 & Prior
|
|
1
|
|
$
|
298
|
|
|
|
13
|
%
|
|
|
49
|
%
|
|
|
33
|
%
|
|
|
60%
|
|
|
$
|
10
|
|
|
$
|
11
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
12
|
|
|
|
21
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
26
|
|
|
|
55
|
|
|
|
83
|
|
2004 & Prior
|
|
2
|
|
|
276
|
|
|
|
20
|
%
|
|
|
54
|
%
|
|
|
23
|
%
|
|
|
60%
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
11
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
14
|
|
|
|
28
|
|
|
|
41
|
|
2004 & Prior
|
|
3
|
|
|
309
|
|
|
|
24
|
%
|
|
|
54
|
%
|
|
|
29
|
%
|
|
|
60%
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
3
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
3
|
|
|
|
9
|
|
|
|
30
|
|
2004 & Prior
|
|
4
|
|
|
295
|
|
|
|
31
|
%
|
|
|
64
|
%
|
|
|
22
|
%
|
|
|
60%
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
3
|
|
|
|
9
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
10
|
|
|
|
20
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 & Prior subtotal
|
|
|
|
$
|
1,178
|
|
|
|
22
|
%
|
|
|
55
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
1
|
|
$
|
2,721
|
|
|
|
29
|
%
|
|
|
60
|
%
|
|
|
40
|
%
|
|
|
60%
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
5
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
10
|
|
|
|
75
|
|
|
|
265
|
|
2005
|
|
2
|
|
|
2,583
|
|
|
|
36
|
%
|
|
|
59
|
%
|
|
|
40
|
%
|
|
|
60%
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
11
|
|
|
|
109
|
|
2005
|
|
3
|
|
|
2,661
|
|
|
|
43
|
%
|
|
|
54
|
%
|
|
|
31
|
%
|
|
|
60%
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
8
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
13
|
|
|
|
43
|
|
|
|
172
|
|
2005
|
|
4
|
|
|
2,654
|
|
|
|
51
|
%
|
|
|
51
|
%
|
|
|
25
|
%
|
|
|
60%
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
3
|
|
|
|
19
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
27
|
|
|
|
76
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 subtotal
|
|
|
|
$
|
10,619
|
|
|
|
40
|
%
|
|
|
56
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
1
|
|
$
|
6,599
|
|
|
|
39
|
%
|
|
|
32
|
%
|
|
|
18
|
%
|
|
|
60%
|
|
|
$
|
6
|
|
|
$
|
23
|
|
|
$
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
75
|
|
|
|
292
|
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
432
|
|
|
|
963
|
|
|
|
1,627
|
|
2006
|
|
2
|
|
|
6,524
|
|
|
|
46
|
%
|
|
|
24
|
%
|
|
|
|
%
|
|
|
60%
|
|
|
$
|
29
|
|
|
$
|
101
|
|
|
$
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
167
|
|
|
|
405
|
|
|
|
793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
533
|
|
|
|
1,032
|
|
|
|
1,591
|
|
2006
|
|
3
|
|
|
6,548
|
|
|
|
51
|
%
|
|
|
25
|
%
|
|
|
14
|
%
|
|
|
60%
|
|
|
$
|
6
|
|
|
$
|
73
|
|
|
$
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
152
|
|
|
|
503
|
|
|
|
971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
664
|
|
|
|
1,234
|
|
|
|
1,834
|
|
2006
|
|
4
|
|
|
6,639
|
|
|
|
59
|
%
|
|
|
25
|
%
|
|
|
|
%
|
|
|
60%
|
|
|
$
|
13
|
|
|
$
|
78
|
|
|
$
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
172
|
|
|
|
471
|
|
|
|
941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
629
|
|
|
|
1,228
|
|
|
|
1,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 subtotal
|
|
|
|
$
|
26,310
|
|
|
|
49
|
%
|
|
|
27
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
1
|
|
$
|
6,665
|
|
|
|
31
|
%
|
|
|
32
|
%
|
|
|
21
|
%
|
|
|
60%
|
|
|
$
|
13
|
|
|
$
|
41
|
|
|
$
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
106
|
|
|
|
560
|
|
|
|
1,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
791
|
|
|
|
1,684
|
|
|
|
2,585
|
|
2007
|
|
2
|
|
|
6,418
|
|
|
|
39
|
%
|
|
|
26
|
%
|
|
|
15
|
%
|
|
|
60%
|
|
|
$
|
2
|
|
|
$
|
65
|
|
|
$
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
151
|
|
|
|
564
|
|
|
|
1,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
776
|
|
|
|
1,454
|
|
|
|
2,142
|
|
2007
|
|
3
|
|
|
6,632
|
|
|
|
46
|
%
|
|
|
25
|
%
|
|
|
9
|
%
|
|
|
60%
|
|
|
$
|
11
|
|
|
$
|
75
|
|
|
$
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
195
|
|
|
|
556
|
|
|
|
1,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
761
|
|
|
|
1,404
|
|
|
|
2,083
|
|
2007
|
|
4
|
|
|
6,445
|
|
|
|
56
|
%
|
|
|
26
|
%
|
|
|
2
|
%
|
|
|
60%
|
|
|
$
|
8
|
|
|
$
|
48
|
|
|
$
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
124
|
|
|
|
523
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
754
|
|
|
|
1,447
|
|
|
|
2,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 subtotal
|
|
|
|
$
|
26,160
|
|
|
|
43
|
%
|
|
|
27
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal uninsured non-agency mortgage-related securities backed
by first lien subprime loans
|
|
|
|
$
|
64,267
|
|
|
|
44
|
%
|
|
|
32
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by first lien
subprime loans with monoline bond insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade monoline no
other-than-temporary impairments to date
|
|
|
|
$
|
1,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade monoline other-than-temporary
impairments taken
|
|
|
|
|
1,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-agency mortgage-related securities, backed by first
lien subprime loans with monoline bond
insurance(5)
|
|
|
|
$
|
2,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities, backed by first
lien subprime loans
|
|
|
|
$
|
66,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Determined based on loans that are 60 days or more past due
that underlie the securities. Collateral delinquency percentages
are calculated based on the unpaid principal balance and
information provided primarily by Intex Solutions, Inc.
|
(2)
|
Consists of subordination, financial guarantees and other credit
enhancements. Does not include the benefit of excess interest.
|
(3)
|
Reflects the current subordination credit enhancement of the
lowest security in each quartile.
|
(4)
|
Reflects the present value of projected principal losses based
on the disclosed hypothetical cumulative default and loss
severity rates against the outstanding collateral balance.
|
(5)
|
Represents the amount of unpaid principal balance covered by
monoline insurance coverage. This amount does not represent the
maximum amount of losses we could recover, as the monoline
insurance also covers interest.
|
Table 22
Investments in Non-Agency Mortgage-Related Securities Backed by
MTA Option ARM Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
Underlying Collateral Performance
|
|
Credit Enhancement Statistics
|
|
Hypothetical
Scenarios(4)
|
|
|
|
|
|
Unpaid
|
|
|
|
|
Average
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
|
|
Principal
|
|
|
Collateral
|
|
Credit
|
|
Current
|
|
Default
|
|
Severity
|
|
Acquisition Date
|
|
Quartile
|
|
Balance
|
|
|
Delinquency(1)
|
|
Enhancement(2)
|
|
Subordination(3)
|
|
Rate
|
|
50%
|
|
|
60%
|
|
|
70%
|
|
|
|
|
|
(dollars in millions)
|
|
|
2005 & Prior
|
|
1
|
|
$
|
978
|
|
|
|
31%
|
|
|
|
27%
|
|
|
|
20%
|
|
|
|
50%
|
|
|
$
|
14
|
|
|
$
|
52
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
61
|
|
|
|
126
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
124
|
|
|
|
207
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 & Prior
|
|
2
|
|
|
863
|
|
|
|
36%
|
|
|
|
26%
|
|
|
|
17%
|
|
|
|
50%
|
|
|
$
|
16
|
|
|
$
|
49
|
|
|
$
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
57
|
|
|
|
115
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
118
|
|
|
|
198
|
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 & Prior
|
|
3
|
|
|
958
|
|
|
|
38%
|
|
|
|
25%
|
|
|
|
19%
|
|
|
|
50%
|
|
|
$
|
53
|
|
|
$
|
94
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
97
|
|
|
|
150
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
152
|
|
|
|
232
|
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 & Prior
|
|
4
|
|
|
909
|
|
|
|
43%
|
|
|
|
25%
|
|
|
|
21%
|
|
|
|
50%
|
|
|
$
|
28
|
|
|
$
|
71
|
|
|
$
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
81
|
|
|
|
139
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
142
|
|
|
|
217
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 & Prior subtotal
|
|
|
|
$
|
3,708
|
|
|
|
37%
|
|
|
|
26%
|
|
|
|
17%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
1
|
|
$
|
2,371
|
|
|
|
38%
|
|
|
|
15%
|
|
|
|
7%
|
|
|
|
50%
|
|
|
$
|
101
|
|
|
$
|
188
|
|
|
$
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
224
|
|
|
|
366
|
|
|
|
511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
381
|
|
|
|
552
|
|
|
|
727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2
|
|
|
2,343
|
|
|
|
44%
|
|
|
|
14%
|
|
|
|
7%
|
|
|
|
50%
|
|
|
$
|
39
|
|
|
$
|
130
|
|
|
$
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
196
|
|
|
|
350
|
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
378
|
|
|
|
536
|
|
|
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
3
|
|
|
1,736
|
|
|
|
45%
|
|
|
|
18%
|
|
|
|
12%
|
|
|
|
50%
|
|
|
$
|
22
|
|
|
$
|
67
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
95
|
|
|
|
183
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
204
|
|
|
|
325
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
4
|
|
|
2,263
|
|
|
|
50%
|
|
|
|
21%
|
|
|
|
9%
|
|
|
|
50%
|
|
|
$
|
45
|
|
|
$
|
133
|
|
|
$
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
163
|
|
|
|
281
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
296
|
|
|
|
450
|
|
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 subtotal
|
|
|
|
$
|
8,713
|
|
|
|
44%
|
|
|
|
17%
|
|
|
|
7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
1
|
|
$
|
1,342
|
|
|
|
25%
|
|
|
|
20%
|
|
|
|
5%
|
|
|
|
50%
|
|
|
$
|
11
|
|
|
$
|
41
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
52
|
|
|
|
129
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
131
|
|
|
|
230
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2
|
|
|
1,333
|
|
|
|
31%
|
|
|
|
21%
|
|
|
|
6%
|
|
|
|
50%
|
|
|
$
|
46
|
|
|
$
|
77
|
|
|
$
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
88
|
|
|
|
146
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
150
|
|
|
|
240
|
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
3
|
|
|
1,612
|
|
|
|
39%
|
|
|
|
12%
|
|
|
|
7%
|
|
|
|
50%
|
|
|
$
|
38
|
|
|
$
|
119
|
|
|
$
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
148
|
|
|
|
248
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
261
|
|
|
|
380
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
4
|
|
|
1,339
|
|
|
|
48%
|
|
|
|
33%
|
|
|
|
7%
|
|
|
|
50%
|
|
|
$
|
21
|
|
|
$
|
53
|
|
|
$
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
62
|
|
|
|
107
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
110
|
|
|
|
177
|
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 subtotal
|
|
|
|
$
|
5,626
|
|
|
|
36%
|
|
|
|
21%
|
|
|
|
5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal uninsured non-agency mortgage-related securities backed
by MTA Option ARM loans
|
|
|
|
$
|
18,047
|
|
|
|
40%
|
|
|
|
20%
|
|
|
|
5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by MTA Option ARM
loans with monoline bond insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade monoline no
other-than-temporary impairments to date
|
|
|
|
$
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade monoline other-than-temporary
impairments taken
|
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-agency mortgage-related securities, backed by MTA
Option ARM loans with monoline bond
insurance(5)
|
|
|
|
$
|
699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities, backed by MTA
Option ARM loans
|
|
|
|
$
|
18,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Determined based on loans that are 60 days or more past due
that underlie the securities. Collateral delinquency percentages
are calculated based on the unpaid principal balances and
information provided primarily by Intex Solutions, Inc.
|
(2)
|
Consists of subordination, financial guarantees and other credit
enhancements. Does not include the benefit of excess interest.
|
(3)
|
Reflects the current subordination credit enhancement of the
lowest security in each quartile.
|
(4)
|
Reflects the present value of projected principal losses based
on the disclosed hypothetical cumulative default and loss
severity rates against the outstanding collateral balance.
|
(5)
|
Represents the amount of unpaid principal balance covered by
monoline insurance coverage. This amount does not represent the
maximum amount of losses we could recover, as the monoline
insurance also covers interest.
|
Table 23
Investments in Non-Agency Mortgage-Related Securities backed by
Alt-A
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
Underlying
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral Performance
|
|
Enhancement Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Minimum
|
|
Hypothetical
Scenarios(4)
|
|
|
|
Delinquency
|
|
Principal
|
|
|
Collateral
|
|
Average Credit
|
|
Current
|
|
Default
|
|
Severity
|
|
Acquisition Date
|
|
Quartile
|
|
Balance
|
|
|
Delinquency(1)
|
|
Enhancement(2)
|
|
Subordination(3)
|
|
Rate
|
|
45%
|
|
|
55%
|
|
|
65%
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 & Prior
|
|
1
|
|
$
|
1,049
|
|
|
|
4%
|
|
|
|
10%
|
|
|
|
7%
|
|
|
|
20%
|
|
|
$
|
8
|
|
|
$
|
18
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
57
|
|
|
|
89
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
124
|
|
|
|
173
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
195
|
|
|
|
263
|
|
|
|
330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 & Prior
|
|
2
|
|
|
1,177
|
|
|
|
8%
|
|
|
|
14%
|
|
|
|
9%
|
|
|
|
20%
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
31
|
|
|
|
66
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
104
|
|
|
|
166
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
190
|
|
|
|
274
|
|
|
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 & Prior
|
|
3
|
|
|
1,102
|
|
|
|
13%
|
|
|
|
18%
|
|
|
|
11%
|
|
|
|
20%
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
11
|
|
|
|
28
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
58
|
|
|
|
115
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
135
|
|
|
|
213
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 & Prior
|
|
4
|
|
|
1,117
|
|
|
|
19%
|
|
|
|
24%
|
|
|
|
12%
|
|
|
|
20%
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
10
|
|
|
|
29
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
53
|
|
|
|
93
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
111
|
|
|
|
174
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 & Prior subtotal
|
|
|
|
$
|
4,445
|
|
|
|
11%
|
|
|
|
16%
|
|
|
|
7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
1
|
|
$
|
2,020
|
|
|
|
7%
|
|
|
|
8%
|
|
|
|
4%
|
|
|
|
20%
|
|
|
$
|
41
|
|
|
$
|
73
|
|
|
$
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
160
|
|
|
|
225
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
292
|
|
|
|
389
|
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
431
|
|
|
|
560
|
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2
|
|
|
1,967
|
|
|
|
15%
|
|
|
|
13%
|
|
|
|
5%
|
|
|
|
20%
|
|
|
$
|
14
|
|
|
$
|
28
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
91
|
|
|
|
151
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
211
|
|
|
|
302
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
344
|
|
|
|
475
|
|
|
|
605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
3
|
|
|
2,055
|
|
|
|
20%
|
|
|
|
15%
|
|
|
|
7%
|
|
|
|
20%
|
|
|
$
|
9
|
|
|
$
|
22
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
67
|
|
|
|
106
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
146
|
|
|
|
225
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
261
|
|
|
|
367
|
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
4
|
|
|
1,977
|
|
|
|
32%
|
|
|
|
18%
|
|
|
|
5%
|
|
|
|
20%
|
|
|
$
|
8
|
|
|
$
|
18
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
51
|
|
|
|
76
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
109
|
|
|
|
157
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
184
|
|
|
|
259
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 subtotal
|
|
|
|
$
|
8,019
|
|
|
|
18%
|
|
|
|
13%
|
|
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
1
|
|
$
|
989
|
|
|
|
9%
|
|
|
|
11%
|
|
|
|
5%
|
|
|
|
20%
|
|
|
$
|
13
|
|
|
$
|
25
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
67
|
|
|
|
98
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
132
|
|
|
|
179
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
200
|
|
|
|
263
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2
|
|
|
1,050
|
|
|
|
22%
|
|
|
|
12%
|
|
|
|
%
|
|
|
|
20%
|
|
|
$
|
25
|
|
|
$
|
36
|
|
|
$
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
73
|
|
|
|
107
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
145
|
|
|
|
195
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
220
|
|
|
|
287
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
3
|
|
|
907
|
|
|
|
37%
|
|
|
|
11%
|
|
|
|
%
|
|
|
|
20%
|
|
|
$
|
2
|
|
|
$
|
9
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
31
|
|
|
|
52
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
82
|
|
|
|
121
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
147
|
|
|
|
211
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
4
|
|
|
1,021
|
|
|
|
52%
|
|
|
|
8%
|
|
|
|
2%
|
|
|
|
20%
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
1
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
19
|
|
|
|
46
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
92
|
|
|
|
165
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 subtotal
|
|
|
|
$
|
3,967
|
|
|
|
30%
|
|
|
|
11%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
1
|
|
$
|
470
|
|
|
|
32%
|
|
|
|
6%
|
|
|
|
4%
|
|
|
|
20%
|
|
|
$
|
17
|
|
|
$
|
24
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
43
|
|
|
|
56
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
70
|
|
|
|
90
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
100
|
|
|
|
129
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2
|
|
|
888
|
|
|
|
40%
|
|
|
|
9%
|
|
|
|
3%
|
|
|
|
20%
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
11
|
|
|
|
23
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
53
|
|
|
|
86
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
119
|
|
|
|
176
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
3
|
|
|
591
|
|
|
|
44%
|
|
|
|
5%
|
|
|
|
1%
|
|
|
|
20%
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
5
|
|
|
|
9
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
33
|
|
|
|
56
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
78
|
|
|
|
115
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
4
|
|
|
579
|
|
|
|
52%
|
|
|
|
12%
|
|
|
|
%
|
|
|
|
20%
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
1
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
13
|
|
|
|
23
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
39
|
|
|
|
72
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 subtotal
|
|
|
|
$
|
2,528
|
|
|
|
42%
|
|
|
|
8%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal uninsured non-agency mortgage-related securities backed
by Alt-A
loans
|
|
|
|
$
|
18,959
|
|
|
|
22%
|
|
|
|
13%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by Alt-A loans
with monoline bond insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade monoline no
other-than-temporary impairments to date
|
|
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade monoline other-than-temporary
impairments taken
|
|
|
|
|
412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-agency mortgage-related securities, backed by
Alt-A loans
with monoline bond
insurance(5)
|
|
|
|
$
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities, backed by
Alt-A loans
|
|
|
|
$
|
19,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Determined based on loans that are 60 days or more past due
that underlie the securities. Collateral delinquency percentages
are calculated based on the unpaid principal balance and
information provided primarily by Intex Solutions, Inc.
|
(2)
|
Consists of subordination, financial guarantees and other credit
enhancements. Does not include the benefit of excess interest.
|
(3)
|
Reflects the current subordination credit enhancement of the
lowest security in each quartile.
|
(4)
|
Reflects the present value of projected principal losses based
on the disclosed hypothetical cumulative default and loss
severity rates against the outstanding collateral balance.
|
(5)
|
Represents the amount of unpaid principal balance covered by
monoline insurance coverage. This amount does not represent the
maximum amount of losses we could recover, as the monoline
insurance also covers interest.
|
Ratings
of Non-Agency Mortgage-Related Securities
Table 24 shows the ratings of
available-for-sale
non-agency mortgage-related securities backed by subprime, MTA
Option ARM,
Alt-A and
other loans held at June 30, 2009 based on their ratings as
of June 30, 2009 as well as those held at December 31,
2008 based on their ratings as of December 31, 2008.
Tables 24 and 25 use the lowest rating available for each
security.
Table 24
Ratings of
Available-For-Sale
Non-Agency Mortgage-Related Securities backed by Subprime, MTA
Option ARM,
Alt-A and
Other Loans at June 30, 2009 and December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Gross
|
|
|
Monoline
|
|
|
|
Principal
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Insurance
|
|
Credit Ratings as of June 30, 2009
|
|
Balance
|
|
|
Cost
|
|
|
Losses
|
|
|
Coverage(1)
|
|
|
|
(in millions)
|
|
|
Subprime loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
$
|
5,733
|
|
|
$
|
5,729
|
|
|
$
|
(1,049
|
)
|
|
$
|
36
|
|
Other investment grade
|
|
|
7,848
|
|
|
|
7,847
|
|
|
|
(2,257
|
)
|
|
|
691
|
|
Below investment grade
|
|
|
53,983
|
|
|
|
50,347
|
|
|
|
(20,694
|
)
|
|
|
2,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67,564
|
|
|
$
|
63,923
|
|
|
$
|
(24,000
|
)
|
|
$
|
3,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTA Option ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Other investment grade
|
|
|
667
|
|
|
|
640
|
|
|
|
(398
|
)
|
|
|
177
|
|
Below investment grade
|
|
|
18,079
|
|
|
|
14,395
|
|
|
|
(8,101
|
)
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,746
|
|
|
$
|
15,035
|
|
|
$
|
(8,499
|
)
|
|
$
|
699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A and
other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
$
|
2,509
|
|
|
$
|
2,530
|
|
|
$
|
(633
|
)
|
|
$
|
11
|
|
Other investment grade
|
|
|
5,626
|
|
|
|
5,647
|
|
|
|
(2,125
|
)
|
|
|
619
|
|
Below investment grade
|
|
|
15,032
|
|
|
|
12,819
|
|
|
|
(5,900
|
)
|
|
|
3,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,167
|
|
|
$
|
20,996
|
|
|
$
|
(8,658
|
)
|
|
$
|
3,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Ratings as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
$
|
21,267
|
|
|
$
|
21,224
|
|
|
$
|
(4,821
|
)
|
|
$
|
40
|
|
Other investment grade
|
|
|
22,502
|
|
|
|
22,418
|
|
|
|
(6,302
|
)
|
|
|
1,493
|
|
Below investment grade
|
|
|
31,070
|
|
|
|
27,757
|
|
|
|
(8,022
|
)
|
|
|
1,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74,839
|
|
|
$
|
71,399
|
|
|
$
|
(19,145
|
)
|
|
$
|
3,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTA Option ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
$
|
8,818
|
|
|
$
|
5,803
|
|
|
$
|
(2,086
|
)
|
|
$
|
57
|
|
Other investment grade
|
|
|
5,375
|
|
|
|
3,290
|
|
|
|
(1,423
|
)
|
|
|
377
|
|
Below investment grade
|
|
|
5,413
|
|
|
|
3,024
|
|
|
|
(1,230
|
)
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,606
|
|
|
$
|
12,117
|
|
|
$
|
(4,739
|
)
|
|
$
|
733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A and
other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
$
|
11,293
|
|
|
$
|
10,512
|
|
|
$
|
(3,567
|
)
|
|
$
|
185
|
|
Other investment grade
|
|
|
8,521
|
|
|
|
6,488
|
|
|
|
(2,405
|
)
|
|
|
2,950
|
|
Below investment grade
|
|
|
5,253
|
|
|
|
3,032
|
|
|
|
(815
|
)
|
|
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,067
|
|
|
$
|
20,032
|
|
|
$
|
(6,787
|
)
|
|
$
|
4,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents the amount of unpaid principal balance covered by
monoline insurance coverage. This amount does not represent the
maximum amount of losses we could recover, as the monoline
insurance also covers interest.
|
Table 25 shows the percentage of unpaid principal balance
at June 30, 2009 based on the rating of
available-for-sale
non-agency mortgage-related securities backed by subprime, MTA
Option ARM,
Alt-A and
other loans held as of June 30, 2009 and July 31, 2009
and the percentage of unpaid principal balance at
December 31, 2008 based on their December 31, 2008
ratings.
Table 25
Ratings Trend of
Available-For-Sale
Non-Agency Mortgage-Related Securities backed by Subprime, MTA
Option ARM,
Alt-A and
Other Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Ratings as of
|
|
|
|
July 31, 2009
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Percentage of Unpaid
|
|
|
Percentage of Unpaid
|
|
|
|
Principal Balance at
|
|
|
Principal Balance at
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
Subprime loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
|
8
|
%
|
|
|
8
|
%
|
|
|
28
|
%
|
Other investment grade
|
|
|
12
|
|
|
|
12
|
|
|
|
30
|
|
Below investment grade
|
|
|
80
|
|
|
|
80
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTA Option ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
|
|
%
|
|
|
|
%
|
|
|
45
|
%
|
Other investment grade
|
|
|
2
|
|
|
|
4
|
|
|
|
27
|
|
Below investment grade
|
|
|
98
|
|
|
|
96
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A and
other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
45
|
%
|
Other investment grade
|
|
|
25
|
|
|
|
24
|
|
|
|
34
|
|
Below investment grade
|
|
|
65
|
|
|
|
65
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Although non-agency mortgage-related securities backed by
subprime, MTA Option ARM,
Alt-A and
other loans experienced significant ratings downgrades during
the first half of 2009, we currently believe the economic
factors leading to these downgrades are already appropriately
considered in our other-than-temporary impairment decisions and
valuations.
Derivative
Assets and Liabilities, Net
The composition of our derivative portfolio changes from period
to period as a result of derivative purchases, terminations or
assignments prior to contractual maturity and expiration of the
derivatives at their contractual maturity. We classify net
derivative interest receivable or payable, trade/settle
receivable or payable and cash collateral held or posted on our
consolidated balance sheets to derivative assets, net and
derivative liabilities, net. We record changes in fair values of
our derivatives in current income or, where applicable, to the
extent our cash-flow hedge accounting relationships are
effective, we defer those changes in AOCI.
As interest rates fluctuate, we use derivatives to adjust the
interest-rate characteristics of our debt funding in order to
more closely match changes in the interest-rate characteristics
of our mortgage-related assets. Our mix of notional or
contractual amounts changes period to period as we respond to
changing interest rate environments. In the second half of 2008,
we responded to our declining ability to issue longer-term debt
by maintaining our pay-fixed interest rate swap position even as
rates decreased. We used a combination of a series of short-term
debt issuances and a pay-fixed interest rate swap with the same
maturity as the last debt issuance to obtain the substantive
economic equivalent of a long-term fixed-rate debt instrument.
See LIQUIDITY AND CAPITAL RESOURCES
Liquidity Debt Securities for further
information regarding our debt security issuances. See
NOTE 10: DERIVATIVES
Table 10.1 Derivative Assets and Liabilities at
Fair Value to our consolidated financial statements for
our notional or contractual amounts and related fair values of
our total derivative portfolio by product type at June 30,
2009 and December 31, 2008.
The fair value of the total derivative portfolio increased in
the six months ended June 30, 2009, primarily due to rising
long-term interest rates, which positively impacted our
pay-fixed interest rate swap portfolio. However, rising
long-term interest rates negatively impacted the fair value of
our receive-fixed interest rate swap portfolio. In addition, the
fair value of our purchased call swaptions decreased during the
six months ended June 30, 2009, primarily due to an
increase in swap interest rates.
Table 26 shows the fair value for each derivative type and
the maturity profile of our derivative positions. A positive
fair value in Table 26 for each derivative type is the
estimated amount, prior to netting by counterparty, which we
would be entitled to receive if we terminated the derivatives of
that type. A negative fair value for a derivative type is the
estimated amount, prior to netting by counterparty, which we
would owe if we terminated the derivatives of that type. See
RISK MANAGEMENT Credit Risks
Institutional Credit Risk
Table 36 Derivative Counterparty Credit
Exposure for additional information regarding derivative
counterparty credit exposure. Table 26 also provides the
weighted average fixed rate of our pay-fixed and receive-fixed
interest rate swaps.
Table 26
Derivative Fair Values and Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
Fair
Value(1)
|
|
|
|
Notional or
|
|
|
Total Fair
|
|
|
Less than
|
|
|
1 to 3
|
|
|
Greater than 3
|
|
|
In Excess
|
|
|
|
Contractual
Amount(2)
|
|
|
Value(3)
|
|
|
1 Year
|
|
|
Years
|
|
|
and up to 5 Years
|
|
|
of 5 Years
|
|
|
|
(dollars in millions)
|
|
|
Interest-rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive-fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
$
|
284,244
|
|
|
$
|
2,246
|
|
|
$
|
27
|
|
|
$
|
1,281
|
|
|
$
|
724
|
|
|
$
|
214
|
|
Weighted-average fixed
rate(4)
|
|
|
|
|
|
|
|
|
|
|
2.28
|
%
|
|
|
2.31
|
%
|
|
|
3.10
|
%
|
|
|
4.05
|
%
|
Forward-starting
swaps(5)
|
|
|
31,040
|
|
|
|
8
|
|
|
|
|
|
|
|
126
|
|
|
|
73
|
|
|
|
(191
|
)
|
Weighted-average fixed
rate(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.45
|
%
|
|
|
4.22
|
%
|
|
|
4.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receive-fixed
|
|
|
315,284
|
|
|
|
2,254
|
|
|
|
27
|
|
|
|
1,407
|
|
|
|
797
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis (floating to floating)
|
|
|
51,065
|
|
|
|
21
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
(15
|
)
|
Pay-fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
337,560
|
|
|
|
(15,402
|
)
|
|
|
(391
|
)
|
|
|
(1,491
|
)
|
|
|
(1,584
|
)
|
|
|
(11,936
|
)
|
Weighted-average fixed
rate(4)
|
|
|
|
|
|
|
|
|
|
|
3.80
|
%
|
|
|
2.90
|
%
|
|
|
3.82
|
%
|
|
|
4.40
|
%
|
Forward-starting
swaps(5)
|
|
|
64,341
|
|
|
|
(3,727
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
27
|
|
|
|
(3,746
|
)
|
Weighted-average fixed
rate(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.16
|
%
|
|
|
2,89
|
%
|
|
|
5.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pay-fixed
|
|
|
401,901
|
|
|
|
(19,129
|
)
|
|
|
(391
|
)
|
|
|
(1,499
|
)
|
|
|
(1,557
|
)
|
|
|
(15,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-rate swaps
|
|
|
768,250
|
|
|
|
(16,854
|
)
|
|
|
(364
|
)
|
|
|
(56
|
)
|
|
|
(760
|
)
|
|
|
(15,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option-based:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Call swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
187,047
|
|
|
|
10,499
|
|
|
|
2,117
|
|
|
|
3,475
|
|
|
|
1,375
|
|
|
|
3,532
|
|
Written
|
|
|
12,250
|
|
|
|
(156
|
)
|
|
|
(31
|
)
|
|
|
(84
|
)
|
|
|
(41
|
)
|
|
|
|
|
Put swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
65,375
|
|
|
|
2,288
|
|
|
|
501
|
|
|
|
782
|
|
|
|
462
|
|
|
|
543
|
|
Written
|
|
|
26,500
|
|
|
|
(619
|
)
|
|
|
(34
|
)
|
|
|
(139
|
)
|
|
|
(446
|
)
|
|
|
|
|
Other option-based
derivatives(6)
|
|
|
239,553
|
|
|
|
1,572
|
|
|
|
(51
|
)
|
|
|
(1
|
)
|
|
|
(7
|
)
|
|
|
1,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total option-based
|
|
|
530,725
|
|
|
|
13,584
|
|
|
|
2,502
|
|
|
|
4,033
|
|
|
|
1,343
|
|
|
|
5,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures
|
|
|
31,101
|
|
|
|
(41
|
)
|
|
|
(28
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
Foreign-currency swaps
|
|
|
7,186
|
|
|
|
1,749
|
|
|
|
247
|
|
|
|
1,292
|
|
|
|
210
|
|
|
|
|
|
Forward purchase and sale commitments
|
|
|
70,306
|
|
|
|
(242
|
)
|
|
|
(242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap guarantee derivatives
|
|
|
3,441
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,411,009
|
|
|
|
(1,839
|
)
|
|
$
|
2,115
|
|
|
$
|
5,256
|
|
|
$
|
793
|
|
|
$
|
(10,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives
|
|
|
19,648
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,430,657
|
|
|
|
(1,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative interest receivable (payable), net
|
|
|
|
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade/settle receivable (payable), net
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative cash collateral (held) posted, net
|
|
|
|
|
|
|
1,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,430,657
|
|
|
$
|
(566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Fair value is categorized based on the period from June 30,
2009 until the contractual maturity of the derivative.
|
(2)
|
Notional or contractual amounts are used to calculate the
periodic settlement amounts to be received or paid and generally
do not represent actual amounts to be exchanged. Notional or
contractual amounts are not recorded as assets or liabilities on
our consolidated balance sheets.
|
(3)
|
The value of derivatives on our consolidated balance sheets is
reported as derivative assets, net and derivative liabilities,
net, and includes derivative interest receivable or (payable),
net, trade/settle receivable or (payable), net and derivative
cash collateral (held) or posted, net.
|
(4)
|
Represents the notional weighted average rate for the fixed leg
of the swaps.
|
(5)
|
Represents interest-rate swap agreements that are scheduled to
begin on future dates ranging from less than one year to ten
years.
|
(6)
|
Primarily represents purchased interest rate caps and floors,
purchased put options on agency mortgage-related securities, as
well as written options, including guarantees of stated final
maturity of issued Structured Securities and written call
options on agency mortgage-related securities.
|
Table 27 summarizes the changes in derivative fair values.
Table 27
Changes in Derivative Fair Values
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,(1)
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Beginning balance net asset (liability)
|
|
$
|
(3,827
|
)
|
|
$
|
4,790
|
|
Net change in:
|
|
|
|
|
|
|
|
|
Forward purchase and sale commitments
|
|
|
(247
|
)
|
|
|
(242
|
)
|
Credit derivatives
|
|
|
(12
|
)
|
|
|
14
|
|
Swap guarantee derivatives
|
|
|
(24
|
)
|
|
|
(2
|
)
|
Other
derivatives:(2)
|
|
|
|
|
|
|
|
|
Changes in fair value
|
|
|
4,424
|
|
|
|
857
|
|
Fair value of new contracts entered into during the
period(3)
|
|
|
1,393
|
|
|
|
1,477
|
|
Contracts realized or otherwise settled during the period
|
|
|
(3,520
|
)
|
|
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance net asset (liability)
|
|
$
|
(1,813
|
)
|
|
$
|
6,685
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The value of derivatives on our consolidated balance sheets is
reported as derivative assets, net and derivative liabilities,
net, and includes derivative interest receivable (payable), net,
trade/settle receivable (payable), net and derivative cash
collateral (held) posted, net. Refer to
Table 26 Derivative Fair Values and
Maturities for reconciliation of fair value to the amounts
presented on our consolidated balance sheets as of June 30,
2009. Fair value excludes derivative interest receivable, net of
$1.1 billion, trade/settle receivable or (payable), net of
$ million and derivative cash collateral posted, net
of $1.5 billion at January 1, 2009. Fair value
excludes derivative interest receivable, net of
$1.0 billion, trade/settle payable, net of
$0.1 billion and derivative cash collateral held, net of
$8.1 billion at June 30, 2008. Fair value excludes
derivative interest receivable, net of $1.7 billion,
trade/settle receivable or (payable), net of
$ million and derivative cash collateral held, net of
$6.2 billion at January 1, 2008.
|
(2)
|
Includes fair value changes for interest-rate swaps,
option-based derivatives, futures, foreign-currency swaps and
interest-rate caps.
|
(3)
|
Consists primarily of cash premiums paid or received on options.
|
Table 28 provides information on our outstanding written
and purchased swaption and option premiums at June 30, 2009
and December 31, 2008, based on the original premium
receipts or payments.
Table 28
Outstanding Written and Purchased Swaption and Option
Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Premium
|
|
Original Weighted
|
|
|
|
|
Amount (Paid)
|
|
Average Life to
|
|
Remaining Weighted
|
|
|
Received
|
|
Expiration
|
|
Average Life
|
|
|
(dollars in millions)
|
|
Purchased:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009
|
|
$
|
(7,729
|
)
|
|
|
6.9 years
|
|
|
|
5.6 years
|
|
At December 31, 2008
|
|
$
|
(6,775
|
)
|
|
|
7.6 years
|
|
|
|
6.2 years
|
|
Written:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009
|
|
$
|
769
|
|
|
|
2.8 years
|
|
|
|
2.3 years
|
|
At December 31, 2008
|
|
$
|
186
|
|
|
|
2.9 years
|
|
|
|
2.2 years
|
|
|
|
(1) |
Purchased options exclude callable swaps.
|
(2) Excludes written options on guarantees of stated final
maturity of Structured Securities.
Guarantee
Asset
See CONSOLIDATED RESULTS OF OPERATIONS
Non-Interest Income Gains (Losses) on Guarantee
Asset for a description of, and an attribution of
other changes in, the guarantee asset. Table 29 summarizes
the changes in the guarantee asset balance.
Table 29
Changes in Guarantee Asset
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
4,847
|
|
|
$
|
9,591
|
|
Additions, net
|
|
|
1,080
|
|
|
|
1,795
|
|
Other(1)
|
|
|
(12
|
)
|
|
|
(87
|
)
|
Components of gains (losses) on guarantee asset:
|
|
|
|
|
|
|
|
|
Return of investment on guarantee asset
|
|
|
(964
|
)
|
|
|
(951
|
)
|
Changes in fair value of future management and guarantee fees
|
|
|
2,625
|
|
|
|
671
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on guarantee asset
|
|
|
1,661
|
|
|
|
(280
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
7,576
|
|
|
$
|
11,019
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents a reduction in our guarantee asset associated with
the extinguishment of our previously issued long-term standby
commitments upon conversion into either PCs or Structured
Transactions within the same month.
|
The decrease in additions to our guarantee asset in the first
half of 2009 was due to lower fair values on mortgage assets,
and, to a lesser extent, lower fee rates as compared to the
first half of 2008. The return of investment on our guarantee
asset represents the cash received during the period. The higher
average balance of outstanding guarantees led to an increase in
the return of investment in the first half of 2009 compared to
the first half of 2008. The change in
the fair value of future fees was $2.6 billion and
$671 million in the first half of 2009 and 2008,
respectively, and was due to a greater increase in interest
rates during the first half of 2009, primarily in the second
quarter, as compared to the first half of 2008. Increasing
interest rates extend the life of our guarantee asset since the
underlying mortgages are less susceptible to prepayment in a
rising rate environment.
Real
Estate Owned, Net
We acquire residential properties through foreclosure on
mortgage loans that we own or for which we have issued our
financial guarantees. The balance of our REO, net increased to
$3.4 billion at June 30, 2009 from $3.3 billion
at December 31, 2008. Despite our temporary suspensions of
foreclosure transfers, we experienced a higher volume of
foreclosure activity during the first half of 2009 than in the
first half of 2008; in addition, our disposition of properties
accelerated in the first half of 2009. The most significant
amount of REO acquisitions was of properties in the states of
California, Arizona, Florida, Michigan and Nevada. The second
quarter of 2009 was more robust for dispositions than the first
quarter as spring is a seasonally strong period for home sales.
We temporarily suspended foreclosure transfers on occupied homes
from November 26, 2008 through January 31, 2009 and
from February 14, 2009 through March 6, 2009. On
March 7, 2009, we suspended foreclosure transfers of
owner-occupied homes where the borrower may be eligible to
receive a loan modification under the MHA Program; however, we
expect our REO inventory to continue to grow during 2009.
Deferred
Tax Assets, Net
Deferred tax assets and liabilities are recognized based upon
the expected future tax consequences of existing temporary
differences between the financial reporting and the tax
reporting basis of assets and liabilities using statutory tax
rates. Valuation allowances are recorded to reduce deferred tax
assets, net when it is more likely than not that a tax benefit
will not be realized. The realization of our deferred tax
assets, net is dependent upon the generation of sufficient
taxable income or upon our conclusion that we have the intent
and ability to hold our available-for-sale securities to the
recovery of any temporary unrealized losses. On a quarterly
basis, we determine whether a valuation allowance is necessary.
In so doing, we consider all evidence currently available, both
positive and negative, in determining whether, based on the
weight of that evidence, the deferred tax assets, net will be
realized and whether a valuation allowance is necessary.
Subsequent to the date of our entry into conservatorship, we
determined that it was more likely than not that a portion of
our deferred tax assets, net would not be realized due to our
inability to generate sufficient taxable income. After
evaluating all available evidence, including the events and
developments related to our conservatorship, other recent events
in the market, and related difficulty in forecasting future
profit levels, we reached a similar conclusion in the second
quarter of 2009. We reduced our valuation allowance by
$2.2 billion during the first half of 2009. This was as a
result of recording an additional valuation allowance of
$3.1 billion in the first quarter offset by a
$5.3 billion reduction in the second quarter, which
primarily represents the release of the valuation allowance
previously recorded against the deferred tax asset that is no
longer required upon adoption of
FSP FAS 115-2
and
FAS 124-2.
See NOTE 4: INVESTMENTS IN SECURITIES to our
consolidated financial statements for additional information on
our adoption of this FSP. Our total valuation allowance as of
June 30, 2009 was $20.1 billion. As of June 30,
2009, we had a deferred tax asset, net of $16.9 billion
representing the tax effect of unrealized losses on our
available-for-sale
securities, which management believes is more likely than not of
being realized because of our conclusion that we have the intent
and ability to hold our available-for-sale securities until any
temporary unrealized losses are recovered. For additional
information, see NOTE 12: INCOME TAXES
Deferred Tax Assets, Net to our consolidated financial
statements. Our view of our ability to realize the deferred tax
assets, net may change in future periods, particularly if the
mortgage and housing markets continue to decline.
LIHTC
Partnerships
We invest as a limited partner in LIHTC partnerships formed for
the purpose of providing equity funding for affordable
multifamily rental properties. The LIHTC partnerships invest as
limited partners in lower-tier partnerships, which own and
operate multifamily rental properties. These properties are
rented to qualified low-income tenants, allowing the properties
to be eligible for federal tax credits. Our investments in LIHTC
partnerships totaled $3.9 billion and $4.1 billion as
of June 30, 2009 and December 31, 2008, respectively.
Although these partnerships generate operating losses, we
realize a return on our investment through reductions in income
tax expense that result from tax credits. Our exposure is
limited to the amount of our investment; however, the potential
exists that we may not be able to utilize some previously taken
or future tax credits. In consultation with our Conservator, we
are considering potential transactions to realize the value of
these interests, if market conditions are appropriate.
Total
Debt
See LIQUIDITY AND CAPITAL RESOURCES for a discussion
of our debt management activities.
Guarantee
Obligation
Table 30 summarizes the changes in the guarantee obligation
balance.
Table 30
Changes in Guarantee Obligation
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
12,098
|
|
|
$
|
13,712
|
|
Deferred guarantee income of newly-issued guarantees
|
|
|
1,761
|
|
|
|
2,387
|
|
Other(1)
|
|
|
(32
|
)
|
|
|
(139
|
)
|
Amortization income:
|
|
|
|
|
|
|
|
|
Static effective yield
|
|
|
(1,516
|
)
|
|
|
(1,261
|
)
|
Cumulative catch-up
|
|
|
(355
|
)
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
Income on guarantee obligation
|
|
|
(1,871
|
)
|
|
|
(1,938
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
11,956
|
|
|
$
|
14,022
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents; (a) portions of the guarantee obligation that
correspond to incurred credit losses reclassified to reserve for
guarantee losses on PCs, and (b) reductions associated with
the extinguishment of our previously issued long-term standby
commitments upon conversion into either PCs or Structured
Transactions.
|
The primary drivers affecting our guarantee obligation balances
are our credit guarantee business volume and the rates of
amortization for these balances, including recognition of
cumulative catch-up adjustments. We issued $259.7 billion
and $248.0 billion of our financial guarantees during the
six months ended June 30, 2009 and 2008, respectively.
Additions, or the guarantee obligation associated with
newly-issued guarantees, declined in the first half of 2009 from
$2.4 billion in the first half of 2008, to
$1.8 billion, principally due to lower guarantee asset
values for newly-issued guarantees, which was partially offset
by a slight increase in credit fees on new guarantees as
compared to the first half of 2008. See CONSOLIDATED
RESULTS OF OPERATIONS Non-Interest Income
(Loss) Income on Guarantee Obligation
for a description of the components of the guarantee obligation
and a discussion of amortization income related to our guarantee
obligation.
Total
Equity (Deficit)
Total equity (deficit) increased from $(30.6) billion at
December 31, 2008 to $8.2 billion at June 30,
2009, reflecting the $36.9 billion received from Treasury
under the Purchase Agreement and a net increase in retained
earnings (accumulated deficit) as a result of the adoption of
FSP
FAS 115-2
and
FAS 124-2.
Upon our adoption of this accounting change, we recognized a
cumulative-effect adjustment of $15.0 billion to our
opening balance of retained earnings (accumulated deficit) on
April 1, 2009, and a corresponding adjustment of
$(9.9) billion, net of taxes, to AOCI. The cumulative
effect adjustment reclassified the non-credit component of
other-than-temporary
impairments on our non-agency mortgage-related securities from
retained earnings (accumulated deficit) (i.e., previously
expensed) to AOCI. The difference between these adjustments of
$5.1 billion represents an increase in total equity
primarily resulting from the release of the valuation allowance
previously recorded against the deferred tax asset that is no
longer required related to the cumulative-effect adjustment.
These increases in total equity (deficit) were partially offset
by a net loss of $9.1 billion, as well as $1.5 billion
of senior preferred dividends declared during the six months
ended June 30, 2009. See NOTE 4: INVESTMENTS IN
SECURITIES to our consolidated financial statements for
further discussion regarding our investments in securities and
other-than-temporary impairments.
The balance of AOCI at June 30, 2009 was a net loss of
approximately $34.8 billion, net of taxes, compared to a
net loss of $32.4 billion, net of taxes, at
December 31, 2008. The increase in net loss in AOCI, net of
taxes, was primarily attributable to the cumulative-effect
adjustment of $(9.9) billion from the adoption of FSP
FAS 115-2
and
FAS 124-2,
partially offset by the unrealized gains on our agency
mortgage-related securities of $2.2 billion and the
recognition of other-than-temporary impairments in earnings
related to our non-agency mortgage-related securities. See
Mortgage-Related Investment Portfolio
Higher Risk Components of Our Mortgage-Related Investment
Portfolio for more information regarding our
non-agency mortgage-related securities.
CONSOLIDATED
FAIR VALUE BALANCE SHEETS ANALYSIS
Our consolidated fair value balance sheets include the estimated
fair values of financial instruments recorded on our
consolidated balance sheets prepared in conformity with GAAP, as
well as off-balance sheet financial instruments that represent
our assets or liabilities that are not recorded on our GAAP
consolidated balance sheets. See NOTE 14: FAIR VALUE
DISCLOSURES Table 14.4 Consolidated
Fair Value Balance Sheets to our consolidated financial
statements for our fair value balance sheets.
These off-balance sheet items predominantly consist of:
(a) the unrecognized guarantee asset and guarantee
obligation associated with our PCs issued through our guarantor
swap program prior to the implementation of FIN 45 in 2003;
(b) certain commitments to purchase mortgage loans; and
(c) certain credit enhancements on manufactured housing
asset-backed securities. The fair value balance sheets also
include certain assets and liabilities that are not financial
instruments (such as property and equipment and REO, which are
included in other assets) at their carrying value in conformity
with GAAP. During the six months ended June 30, 2009, our
fair value results as presented in our consolidated fair value
balance sheets were affected by several enhancements in our
approach for estimating the fair value of certain financial
instruments. See NOTE 14: FAIR VALUE
DISCLOSURES to our consolidated financial statements for
information regarding the impact of changes in our approach for
estimating the fair value of certain financial instruments. See
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES and NOTE 17: FAIR VALUE
DISCLOSURES in our 2008 Annual Report for more information
on fair values, including how we estimate the fair value of
financial instruments.
In conjunction with the preparation of our consolidated fair
value balance sheets, we use a number of financial models. See
RISK FACTORS, MD&A
OPERATIONAL RISKS and QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK Interest-Rate Risk and
Other Market Risks in our 2008 Annual Report for
information concerning the risks associated with the use of
financial models.
Table 31 summarizes the change in the fair value of net
assets.
Table 31
Summary of Change in the Fair Value of Net Assets
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in billions)
|
|
|
Beginning balance
|
|
$
|
(95.6
|
)
|
|
$
|
12.6
|
|
Changes in fair value of net assets, before capital transactions
|
|
|
(10.3
|
)
|
|
|
(17.4
|
)
|
Capital transactions:
|
|
|
|
|
|
|
|
|
Dividends, share repurchases and issuances,
net(1)
|
|
|
35.4
|
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(70.5
|
)
|
|
$
|
(5.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Six months ended June 30, 2009 and 2008 includes funds
received from Treasury of $36.9 billion and $,
respectively, under the Purchase Agreement, which increased the
liquidation preference of our senior preferred stock.
|
Discussion
of Fair Value Results
Our consolidated fair value measurements are a component of our
risk management procedures, as we use daily estimates of the
changes in fair value to calculate our PMVS and duration gap
measures. During the six months ended June 30, 2009, the
fair value of net assets, before capital transactions, decreased
by $10.3 billion, compared to a $17.4 billion decrease
during the six months ended June 30, 2008. During the six
months ended June 30, 2009, we increased our fair value
from the receipt of $36.9 billion from Treasury under the
Purchase Agreement, offset by the payment in cash of senior
preferred stock dividends, net of reissuance of treasury stock,
which reduced total fair value by $1.5 billion. The fair
value of net assets as of June 30, 2009 was
$(70.5) billion, compared to $(95.6) billion as of
December 31, 2008. Included in the reduction of the fair
value of net assets, before capital transactions, is
$2.7 billion related to our partial valuation allowance
against our deferred tax assets, net for the six months ended
June 30, 2009.
Changes in the fair value of our assets and liabilities are
primarily attributable to two distinct activities, investment
activities and credit guarantee activities. Certain of our
assets and liabilities may be used across both activities. Our
attribution of changes in the fair value of net assets relies on
models, assumptions, and other measurement techniques that
evolve over time. The following attribution of changes in fair
value reflects our current estimate of the items presented (on a
pre-tax basis) and excludes the effect of returns on capital and
administrative expenses.
During the six months ended June 30, 2009, our investment
activities increased fair value by approximately
$24.9 billion. This estimate includes higher core spread
income and an increase in fair value of approximately
$7.0 billion attributable to net mortgage-to-debt OAS
tightening.
Our investment activities decreased fair value by approximately
$16.5 billion during the six months ended June 30,
2008. This estimate includes declines in fair value of
approximately $26.9 billion attributable to net mortgage-
to-debt OAS widening. Of this amount, approximately
$20.3 billion was related to the impact of the net
mortgage-to-debt OAS widening on our portfolio of non-agency
mortgage-related securities.
The impact of mortgage-to-debt OAS widening and the resulting
fair value losses increases the likelihood that, in future
periods, we will be able to recognize income from our investment
activities at a higher spread level than has been the case
historically. The reverse is true when the OAS on a given asset
tightens current period fair values for that
asset typically increase due to the tightening in OAS, while
future income recognized on the asset is more likely to be
earned at a reduced spread. However, as market conditions
change, our estimate of expected fair value gains and losses
from OAS may also change, and the actual core spread income
recognized in future periods could be significantly different
from current estimates.
During the six months ended June 30, 2009, our credit
guarantee activities, including our single-family whole loan
credit exposure, decreased fair value by an estimated
$36.7 billion. This estimate includes an increase in the
single-family guarantee obligation of approximately
$35.9 billion, primarily due to a declining credit
environment.
Our credit guarantee activities decreased fair value by an
estimated $9.2 billion during the six months ended
June 30, 2008. This estimate includes an increase in the
single-family guarantee obligation of approximately
$9.9 billion, primarily attributable to the markets
pricing of mortgage credit, partially offset by a reduction of
$7.1 billion in the fair value of our guarantee obligation
recorded on January 1, 2008 as a result of our adoption of
SFAS 157.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
Our business activities require that we maintain adequate
liquidity to fund our operations, which may include the need to
make payments upon the maturity, redemption or repurchase of our
debt securities; make payments of principal and interest on our
debt securities and on our PCs and Structured Securities; make
net payments on derivative instruments; pay dividends on our
senior preferred stock; purchase mortgage-related securities and
other investments; and purchase mortgage loans. For more
information on our liquidity needs and liquidity management, see
MD&A LIQUIDITY AND CAPITAL
RESOURCES Liquidity in our 2008 Annual Report.
We fund our cash requirements primarily by issuing short-term
and long-term debt. Other sources of cash include:
|
|
|
|
|
receipts of principal and interest payments on securities or
mortgage loans we hold;
|
|
|
|
other cash flows from operating activities, including guarantee
activities;
|
|
|
|
borrowings against mortgage-related securities and other
investment securities we hold; and
|
|
|
|
sales of securities we hold.
|
As described below and in MD&A LIQUIDITY
AND CAPITAL RESOURCES Liquidity in our 2008
Annual Report, Treasury, the Federal Reserve and FHFA have taken
a number of actions that affect our cash requirements and
ability to fund those requirements. The support of Treasury and
the Federal Reserve to date has enabled us to access debt
funding on terms sufficient for our needs.
Our annual dividend obligation on the senior preferred stock
exceeds our annual historical earnings in most periods, and, if
paid in cash, will result in increasingly negative cash flows in
future periods. In addition, the potential for continued
deterioration in the housing market and future net losses in
accordance with GAAP make it likely that we will continue to
have additional draws under the Purchase Agreement in future
periods, which will make it more difficult to pay senior
preferred dividends in cash. For more information on our cash
requirements and challenges in funding our cash requirements,
see RISK FACTORS in our 2008 Annual Report,
including RISK FACTORS Conservatorship and
Related Developments Factors including credit
losses from our mortgage guarantee activities have had an
increasingly negative impact on our cash flows from operations
during 2007 and 2008. As we anticipate these trends to continue
for the foreseeable future, it is likely that the company will
increasingly rely upon access to the public debt markets as a
source of funding for ongoing operations. Access to such public
debt markets may not be available.
As discussed below, current market conditions limit the
availability of the assets in our mortgage-related investments
portfolio as a significant source of funding. In addition, the
Lending Agreement is scheduled to expire on December 31,
2009. Upon expiration of the Lending Agreement, we will not have
a liquidity backstop available to us (other than Treasurys
ability to purchase up to $2.25 billion of our obligations
under its permanent authority) if we are unable to obtain
funding from issuances of debt or other conventional sources.
Absent an extension of the Lending Agreement, if backstop
liquidity is needed after December 31, 2009, we will need
to seek alternative sources for it. At present, we are not able
to predict the likelihood that a liquidity backstop will be
needed, or to identify the alternative sources that might then
be available to us, other than draws from Treasury under the
Purchase Agreement or its ability
to purchase up to $2.25 billion of our obligations under
its permanent authority. No amounts have been borrowed under the
Lending Agreement as of June 30, 2009. As such, use of the
Lending Agreement has not been tested as a component of our
liquidity contingency plan.
Actions
of Treasury, the Federal Reserve and FHFA
Since our entry into conservatorship, Treasury, the Federal
Reserve and FHFA have taken a number of actions that affect our
cash requirements and ability to fund those requirements. Our
annual dividend obligation on the senior preferred stock held by
Treasury is $5.2 billion, based on the aggregate
liquidation preference of $51.7 billion as of June 30,
2009. Recent actions and developments include the following:
|
|
|
|
|
According to information provided by the Federal Reserve, as of
July 29, 2009 it had net purchases of $246.3 billion
of our mortgage-related securities under the purchase program it
announced in November 2008 and held $39.6 billion of our
direct obligations.
|
|
|
|
According to information provided by Treasury, it held
$151.1 billion of mortgage-related securities issued by us
and Fannie Mae as of June 30, 2009 under the purchase
program it announced in September 2008.
|
In addition, on May 6, 2009, we, through FHFA, in its
capacity as Conservator, and Treasury amended the Purchase
Agreement. The principal changes to the Purchase Agreement
affected by the amendment are as follows:
|
|
|
|
|
Treasurys funding commitment under the Purchase Agreement
has been increased from $100 billion to $200 billion;
|
|
|
|
The limit on the size of our mortgage-related investments
portfolio as of December 31, 2009 has been increased from
$850 billion to $900 billion;
|
|
|
|
The limit on our aggregate indebtedness and the method of
calculating such limit have been revised. As amended, without
the prior written consent of Treasury, we may not incur
indebtedness that would result in our aggregate indebtedness
exceeding (i) through and including December 30, 2010,
120% of the amount of mortgage assets we are permitted to own
under the Purchase Agreement on December 31, 2009 and
(ii) beginning on December 31, 2010, and through and
including December 30, 2011, and each year thereafter, 120%
of the amount of mortgage assets we are permitted to own under
the Purchase Agreement on December 31 of the immediately
preceding calendar year. We previously had been prohibited from
incurring indebtedness that would result in our aggregate
indebtedness exceeding 110% of our aggregate indebtedness as of
June 30, 2008, calculated based primarily on the carrying
value of our indebtedness as reflected on our GAAP balance sheet;
|
|
|
|
The category of persons covered by the executive compensation
restrictions has been expanded. We may not enter into any new
compensation arrangements or increase amounts or benefits
payable under existing compensation arrangements of any named
executive officer (as defined by SEC rules) or other executive
officer (as defined by SEC rules) without the consent of the
Director of FHFA, in consultation with the Secretary of the
Treasury. This requirement had previously only applied to our
named executive officers; and
|
|
|
|
The definition of indebtedness in the Purchase
Agreement has been revised to provide that
indebtedness is determined without giving effect to
any change that may be made in respect of SFAS 140 or any
similar accounting standard.
|
Debt
Securities
Our access to the debt markets has improved since the height of
the credit crisis in the fall of 2008. We attribute this
improvement to the continued support of Treasury and the Federal
Reserve. During the second quarter of 2009, the Federal Reserve
continued to be an active purchaser in the secondary market of
our long-term debt under its purchase program as discussed above
and, as a result, spreads on our debt remained favorable. During
the second quarter of 2009, we were able to increase our use of
long-term and callable debt to fund our operations, and reduce
our use of short-term debt. As discussed below, we are
attempting to reduce our reliance on short-term funding and to
replace, over time, much of our short-term funding with
longer-term debt at favorable spreads. We cannot predict the
extent to which we will be successful in executing this strategy
in future periods.
As discussed above, the Purchase Agreement provides that,
without the prior consent of Treasury, we may not incur
indebtedness beyond a specified limit. We also cannot become
liable for any subordinated indebtedness without the prior
written consent of Treasury. For the purposes of the Purchase
Agreement, we have determined that the balance of our
indebtedness at June 30, 2009 did not exceed the applicable
limit.
Debt
Issuance Activities
Table 32 summarizes the par value of the debt securities we
issued, based on settlement dates, during the three and six
months ended June 30, 2009 and 2008.
Table
32 Debt Security Issuances by Product, at
Par Value(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reference
Bills®
securities and discount notes
|
|
$
|
116,525
|
|
|
$
|
201,419
|
|
|
$
|
320,341
|
|
|
$
|
384,915
|
|
Medium-term notes callable
|
|
|
|
|
|
|
6,530
|
|
|
|
7,780
|
|
|
|
10,130
|
|
Medium-term notes non-callable
|
|
|
|
|
|
|
4,500
|
|
|
|
11,350
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
|
116,525
|
|
|
|
212,449
|
|
|
|
339,471
|
|
|
|
399,545
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
callable(2)
|
|
|
52,968
|
|
|
|
64,388
|
|
|
|
111,906
|
|
|
|
124,108
|
|
Medium-term notes non-callable
|
|
|
37,797
|
|
|
|
17,044
|
|
|
|
93,811
|
|
|
|
38,042
|
|
U.S. dollar Reference
Notes®
securities
non-callable(3)
|
|
|
14,500
|
|
|
|
18,000
|
|
|
|
39,000
|
|
|
|
32,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
105,265
|
|
|
|
99,432
|
|
|
|
244,717
|
|
|
|
194,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities issued
|
|
$
|
221,790
|
|
|
$
|
311,881
|
|
|
$
|
584,188
|
|
|
$
|
593,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes federal funds purchased and securities sold under
agreements to repurchase and lines of credit.
|
(2)
|
Includes $ million and $7.2 billion of
medium-term notes callable issued for the three
months ended June 30, 2009 and 2008, respectively, which
were accounted for as debt exchanges. For the six months ended
June 30, 2009 and 2008, there were $25 million and
$7.2 billion accounted for as debt exchanges, respectively.
|
Debt
Retirement Activities
We repurchase or call our outstanding debt securities from time
to time to help support the liquidity and predictability of the
market for our debt securities and to manage our mix of
liabilities funding our assets. When our debt securities become
seasoned or one-time call options on our debt securities expire,
they may become less liquid, which could cause their price to
decline. By repurchasing debt securities, we help preserve the
liquidity of our debt securities and improve their price
performance, which helps to reduce our funding costs over the
long-term. Our repurchase activities also help us manage the
funding mismatch, or duration gap, created by changes in
interest rates.
In order to take advantage of spread compression on agency debt
and improved access to the long-term debt markets that occurred
during the first half of 2009, in June 2009 we made a tender
offer to purchase up to $30 billion of certain of our debt
securities with maturity dates ranging between September 2009
and August 2010. We accepted $18 billion of the tendered
debt securities. These purchases are consistent with our effort
to reduce reliance on short term funding and, over time, replace
much of the shorter-term funding with longer-term debt at
favorable spreads. As a result, our outstanding short-term debt,
including the current portion of long-term debt, has decreased
as a percentage of our total debt outstanding to 41% at
June 30, 2009 from 52% at December 31, 2008.
In addition, during June 2009 we made a tender offer to purchase
more than $11 billion of Reference
Notes®
securities with remaining maturities ranging between September
2010 and January 2014. We accepted $6 billion of the
tendered securities, which allows us to terminate the related
foreign currency swaps, and thus reduce our swap counterparty
exposure. During July 2009 we made a tender offer to purchase
$4.4 billion of our outstanding Freddie
SUBS®
securities. We accepted $3.9 billion of the tendered
securities. These buybacks are consistent with our effort to
reduce our funding costs.
Table 33 provides the par value, based on settlement dates, of
debt securities we repurchased, called and exchanged during the
three and six months ended June 30, 2009 and 2008.
Table
33 Debt Security Repurchases, Calls and
Exchanges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Repurchases of outstanding Reference
Notes®
securities
|
|
$
|
5,814
|
|
|
$
|
|
|
|
$
|
5,814
|
|
|
$
|
|
|
Repurchases of outstanding medium-term notes
|
|
|
17,806
|
|
|
|
348
|
|
|
|
17,826
|
|
|
|
427
|
|
Calls of callable medium-term notes
|
|
|
59,193
|
|
|
|
48,123
|
|
|
|
136,498
|
|
|
|
97,492
|
|
Exchanges of medium-term notes
|
|
|
|
|
|
|
4,138
|
|
|
|
15
|
|
|
|
4,138
|
|
Subordinated
Debt
During the first half of 2009, we did not call or issue any
Freddie
SUBS®
securities; however, as noted above we made a tender offer in
July 2009 for these securities. At both June 30, 2009 and
December 31, 2008, the balance of our subordinated debt
outstanding was $4.5 billion. Following completion of the
tender offer, this balance was reduced
to $0.6 billion. Our subordinated debt in the form of
Freddie
SUBS®
securities is a component of our risk management and disclosure
commitments with FHFA, although that component has been
suspended by FHFA. FHFA has directed Freddie Mac during
conservatorship and thereafter until directed otherwise to make,
without deferral, all periodic principal and interest payments
on all outstanding subordinated debt, regardless of Freddie
Macs existing capital levels. See RISK MANAGEMENT
AND DISCLOSURE COMMITMENTS for a discussion of other
changes affecting our subordinated debt as a result of our entry
into conservatorship and the Conservators suspension of
certain requirements relating to our subordinated debt. Under
the Purchase Agreement, we may not issue subordinated debt
without Treasurys consent.
Credit
Ratings
Our ability to access the capital markets and other sources of
funding, as well as our cost of funds, are highly dependent upon
our credit ratings. Table 34 indicates our credit ratings
as of July 31, 2009.
Table
34 Freddie Mac Credit Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nationally Recognized Statistical
|
|
|
Rating Organization
|
|
|
Standard & Poors
|
|
Moodys
|
|
Fitch
|
|
Senior long-term
debt(1)
|
|
|
AAA
|
|
|
|
Aaa
|
|
|
|
AAA
|
|
Short-term
debt(2)
|
|
|
A-1+
|
|
|
|
P-1
|
|
|
|
F1+
|
|
Subordinated
debt(3)
|
|
|
A
|
|
|
|
Aa2
|
|
|
|
AA−
|
|
Preferred
stock(4)
|
|
|
C
|
|
|
|
Ca
|
|
|
|
C/RR6
|
|
|
|
(1)
|
Consists of medium-term notes, U.S. dollar Reference
Notes®
securities and Reference
Notes®
securities.
|
(2)
|
Consists of Reference
Bills®
securities and discount notes.
|
(3) Consists of Freddie
SUBS®
securities only.
|
|
(4) |
Does not include senior preferred stock issued to Treasury.
|
A security rating is not a recommendation to buy, sell or hold
securities. It may be subject to revision or withdrawal at any
time by the assigning rating organization. Each rating should be
evaluated independently of any other rating.
Equity
Securities
The Purchase Agreement provides that, without the prior consent
of Treasury, we cannot issue capital stock of any kind other
than the senior preferred stock, the warrant issued to Treasury
or any shares of common stock issued pursuant to the warrant or
binding agreements in effect on the date of the Purchase
Agreement. Therefore, absent Treasurys consent we no
longer have access to equity funding except through draws under
the Purchase Agreement.
Cash
and Other Investments Portfolio
We maintain a cash and other investments portfolio that is
important to our cash flow and asset and liability management
and our ability to provide liquidity and stability to the
mortgage market. At June 30, 2009, the investments in this
portfolio consisted of liquid non-mortgage-related asset-backed
securities and Treasury bills that we could sell to provide us
with an additional source of liquidity to fund our business
operations. For additional information on our cash and other
investments portfolio, see CONSOLIDATED BALANCE SHEETS
ANALYSIS Cash and Other Investments Portfolio.
The non-mortgage-related asset-backed investments in this
portfolio may expose us to institutional credit risk and the
risk that the investments could decline in value due to
market-driven events such as credit downgrades or changes in
interest rates and other market conditions. See RISK
MANAGEMENT Credit Risks Institutional
Credit Risk for more information.
Mortgage-Related
Investments Portfolio
Historically, our mortgage-related investments portfolio assets
have been a significant capital resource and a potential source
of funding. A large majority of this portfolio is unencumbered.
During the second quarter of 2009, the market for non-agency
securities backed by subprime, MTA Option ARM,
Alt-A and
other loans continued to experience limited liquidity and wide
spreads, as there continued to be little investor demand for
these assets. We expect these trends to continue in the near
future. These market conditions, and the declining credit
quality of the assets, limit their availability as a significant
source of funds, as their value has declined, and it may be more
difficult to sell them. However, we do continue to receive
monthly remittances from the underlying collateral. In addition,
we do not intend to sell these securities and it is more likely
than not that we will not be required to sell these securities
before a sufficient time to recover all unrealized losses and,
other than certain mortgage-related securities backed by
subprime, MTA Option ARM,
Alt-A and
other loans where we have already realized other-than-temporary
impairments, we do not currently expect the cash flows from
these securities to negatively impact our liquidity. See
CONSOLIDATED BALANCE SHEETS ANALYSIS
Mortgage-Related Investments Portfolio for more
information.
Cash
Flows
Our cash and cash equivalents increased approximately
$1.3 billion to $46.7 billion during the six months
ended June 30, 2009. Cash flows used for operating
activities during the six months ended June 30, 2009 were
$1.5 billion, which primarily reflected a reduction in cash
as a result of a net increase in our held-for-sale mortgage
loans. Cash flows used for investing activities during the six
months ended June 30, 2009 were $27.0 billion,
primarily resulting from a net increase in trading securities
and held-for-investment mortgages partially offset by net
proceeds from maturities of available-for-sale securities. Cash
flows provided by financing activities for the six months ended
June 30, 2009 were $29.8 billion, largely attributable
to proceeds of $36.9 billion received from Treasury under
the Purchase Agreement. As discussed in Capital
Adequacy, in future periods, we will require significant
amounts of cash to pay the dividends on our senior preferred
stock, if we pay them in cash.
Our cash and cash equivalents increased $35.0 billion to
$43.6 billion during the six months ended June 30,
2008. Cash flows used for operating activities during the six
months ended June 30, 2008 were $4.0 billion, which
primarily reflected a reduction in cash as a result of increases
in net purchases of held-for-sale mortgage loans. Cash flows
used for investing activities for the six months ended
June 30, 2008 were $57.4 billion, primarily due to net
purchases of trading securities partially offset by net cash
proceeds from available-for-sale securities in our investment
portfolio. Cash flows provided by financing activities for the
six months ended June 30, 2008 were $96.3 billion,
largely attributable to proceeds from the issuance of debt
securities, net of repayments.
Capital
Adequacy
Our entry into conservatorship resulted in significant changes
to the assessment of our capital adequacy and our management of
capital. On October 9, 2008, FHFA suspended capital
classification of us during conservatorship in light of the
Purchase Agreement. The Purchase Agreement provides that, if
FHFA, as Conservator, determines as of quarter end that our
liabilities have exceeded our assets under GAAP, upon
FHFAs request on our behalf, Treasury will contribute
funds to us in an amount equal to the difference between such
liabilities and assets; a higher amount may be drawn if Treasury
and Freddie Mac mutually agree that the draw should be increased
beyond the level by which liabilities exceed assets under GAAP.
The maximum aggregate amount that may be funded under the
Purchase Agreement is $200 billion.
FHFA continues to closely monitor our capital levels, but the
existing statutory and FHFA-directed regulatory capital
requirements are not binding during conservatorship. We continue
to provide our regular submissions to FHFA on both minimum and
risk-based capital. Additionally, FHFA announced October 9,
2008 that it will engage in rule-making to revise our minimum
capital and risk-based capital requirements. See
NOTE 9: REGULATORY CAPITAL to our consolidated
financial statements for our minimum capital requirement, core
capital and GAAP net worth results as of June 30, 2009.
We are focusing our risk and capital management, consistent with
the objectives of conservatorship, on, among other things,
maintaining a positive balance of GAAP equity in order to reduce
the likelihood that we will need to make additional draws on the
Purchase Agreement with Treasury, while returning to long-term
profitability.
Under the Reform Act, FHFA must place us into receivership if
FHFA determines in writing that our assets are and have been
less than our obligations for a period of 60 days. At
June 30, 2009, our assets exceeded our liabilities by
$8.2 billion; therefore, FHFA did not submit a draw request
on our behalf to Treasury under the Purchase Agreement. Should
our assets be lower than our obligations, we must obtain funding
from Treasury pursuant to its commitment under the Purchase
Agreement in order to avoid being placed into receivership by
FHFA. We received $6.1 billion on June 30, 2009 under
the Purchase Agreement in accordance with the draw request
submitted by FHFA on May 12, 2009 to address the deficit in
our net worth as of March 31, 2009. The aggregate
liquidation preference of the senior preferred stock is
$51.7 billion and the amount remaining under the
Treasurys funding agreement is $149.3 billion. We
expect to make additional draws under the Purchase Agreement in
future periods. As discussed below, the size of such draws will
be determined by a variety of factors, including whether market
conditions continue to deteriorate. See
BUSINESS Regulation and
Supervision Federal Housing Finance
Agency Receivership in our 2008 Annual
Report for additional information on mandatory receivership.
The senior preferred stock accrues quarterly cumulative
dividends at a rate of 10% per year or 12% per year in any
quarter in which dividends are not paid in cash until all
accrued dividends have been paid in cash. We paid a quarterly
dividend of $1.1 billion in cash on the senior preferred
stock on June 30, 2009 at the direction of our Conservator,
which increases our senior preferred stock dividends paid in
cash to date to $1.7 billion. Treasury is entitled to
annual cash dividends of $5.2 billion, as calculated based
on the aggregate liquidation preference of $51.7 billion as
of June 30, 2009.
Our annual dividend obligation, based on that liquidation
preference, exceeds our annual historical earnings in most
periods. If it continues to be paid in cash, this substantial
dividend obligation, combined with potentially substantial
commitment fees payable to Treasury starting in 2010 (the
amounts of which must be determined by December 31, 2009),
will have an adverse impact on our future financial position and
net worth, and will result in increasingly negative cash flows
in future periods. In addition, the potential for continued
deterioration in the housing market and future net losses in
accordance with GAAP will make it likely that we will continue
to have additional draws under the Purchase Agreement in future
periods, which in turn will make it more difficult to pay senior
preferred dividends in cash. The aggregate liquidation
preference of the senior preferred stock and our related
dividend obligations increase when we make additional draws
under the Purchase Agreement, or to the extent we do not pay, in
cash, any required dividends or commitment fees. Under the
Purchase Agreement, our ability to repay the liquidation
preference of the senior preferred stock is limited and we will
not be able to do so for the foreseeable future, if at all.
A variety of factors could materially affect the level and
volatility of our total equity (deficit) in future periods,
requiring us to make additional draws under the Purchase
Agreement. Key factors include the potential for continued
deterioration in the housing market, which could increase credit
expenses and cause additional other-than-temporary impairments
of our non-agency mortgage-related securities; the introduction
of new public policy-related initiatives that may adversely
impact our financial results; adverse changes in interest rates,
the yield curve, implied volatility or mortgage OAS, which could
increase realized and unrealized mark-to-fair value losses
recorded in earnings or AOCI; increased dividend obligations on
the senior preferred stock; our inability to access the public
debt markets on terms sufficient for our needs, absent continued
support from Treasury and the Federal Reserve; establishment of
additional valuation allowances for our remaining deferred tax
assets, net; changes in accounting practices or standards,
including the implementation of SFAS 166 and SFAS 167;
the effect of the MHA Program and other government initiatives;
or changes in business practices resulting from legislative and
regulatory developments, such as the enactment of legislation
providing bankruptcy judges with the authority to revise the
terms of a mortgage, including the principal amount. As a result
of the factors described above, it may be difficult for us to
maintain a positive level of total equity.
To date, our need for funding under the Purchase Agreement has
not been caused by cash flow shortfalls, but rather primarily
reflects large credit-related expenses and non-cash fair value
adjustments as well as a partial valuation allowance against our
deferred tax assets, net that reduced our total equity. However,
as discussed above, we expect that we may experience cash flow
shortfalls in the future, particularly in light of the size of
our substantial and growing cash dividend obligation on the
senior preferred stock in future periods.
For more information on the Purchase Agreement, its effect on
our business and capital management activities, and the
potential impact of taking additional draws, see EXECUTIVE
SUMMARY Capital Management and RISK
FACTORS in our 2008 Annual Report.
RISK
MANAGEMENT
Our investment and credit guarantee activities expose us to
three broad categories of risk: (a) interest rate risk and
other market risks; (b) credit risks; and
(c) operational risks. Risk management is a critical aspect
of our business. See RISK FACTORS in our 2008 Annual
Report and in our
Form 10-Q
for the first quarter of 2009 for further information regarding
these and other risks. We manage risk through a framework that
recognizes primary risk ownership and management by our business
areas. Within this framework, our executive management
responsible for independent risk oversight monitors performance
against our risk management strategies and established risk
limits and reporting thresholds, identifies and assesses
potential issues and provides oversight regarding changes in
business processes and activities. See
MD&A CREDIT RISKS and
MD&A OPERATIONAL RISKS in our 2008
Annual Report for further discussion of credit and operational
risks and see CONTROLS AND PROCEDURES in our 2008
Annual Report for further discussion of disclosure controls and
procedures and internal control over financial reporting.
Credit
Risks
Our total mortgage portfolio is subject primarily to two types
of credit risk: institutional credit risk and mortgage credit
risk. We are exposed to mortgage credit risk on our total
mortgage portfolio because we either hold the mortgage assets or
have guaranteed mortgages in connection with the issuance of a
PC, Structured Security or other mortgage-related guarantees.
Mortgage and credit market conditions deteriorated significantly
in the second half of 2008 and adverse conditions have persisted
in the first half of 2009. For more information on factors
negatively affecting the mortgage and credit markets, see
EXECUTIVE SUMMARY in this
Form 10-Q
and MD&A CREDIT RISKS in our 2008
Annual Report.
Institutional
Credit Risk
Our primary institutional credit risk exposure arises from
agreements with:
|
|
|
|
|
institutional counterparties of investments held in our cash and
other investments portfolio and such investments we manage for
our PC trusts;
|
|
|
|
derivative counterparties;
|
|
|
|
mortgage seller/servicers;
|
|
|
|
mortgage insurers;
|
|
|
|
issuers, guarantors or third-party providers of other credit
enhancements (including bond insurers);
|
|
|
|
mortgage investors and originators; and
|
|
|
|
document custodians.
|
A significant failure to perform by a major entity in one of
these categories could have a material adverse effect on our
mortgage-related investments portfolio, cash and other
investments portfolio or credit guarantee activities. The
challenging market conditions have adversely affected, and are
expected to continue to adversely affect, the liquidity and
financial condition of a number of our counterparties. Many of
our counterparties have experienced ratings downgrades or
liquidity constraints and other counterparties may also
experience these concerns. The weakened financial condition and
liquidity position of some of our counterparties may adversely
affect their ability to perform their obligations to us, or the
quality of the services that they provide to us. In particular,
the current weakened financial condition of our mortgage and
bond insurers creates an increased risk that these entities will
fail to fulfill their obligations to reimburse us for claims
under insurance policies. Our exposure to individual
counterparties may become more concentrated, due to the needs of
our business and consolidation in the industry. In addition, any
efforts we take to reduce exposure to financially weakened
counterparties could result in increased exposure among a
smaller number of institutions.
For more information on our institutional credit risk, including
developments concerning our counterparties and how we seek to
manage institutional credit risk, see
MD&A CREDIT RISKS
Institutional Credit Risk in our 2008 Annual Report and
NOTE 15: CONCENTRATION OF CREDIT AND OTHER
RISKS to our consolidated financial statements.
Cash
and Other Investments Counterparties
We are exposed to institutional credit risk from the potential
insolvency or non-performance of counterparties of
investment-related agreements and cash equivalent transactions
in our cash and other investments portfolio. Instruments in this
portfolio are investment grade at the time of purchase and
primarily short-term in nature, thereby substantially mitigating
institutional credit risk in this portfolio.
We also manage significant cash flow for the securitization
trusts that are created with our issuance of PCs and Structured
Securities. See BUSINESS Our Business and
Statutory Mission Our Business Segments
Single-Family Guarantee Segment
Securitization Activities in our 2008 Annual Report
for further information on these off-balance sheet transactions.
Table 35 summarizes our counterparty credit exposure for
cash equivalents, federal funds sold and securities purchased
under agreements to resell that are presented on our
consolidated balance sheets as well as off-balance sheet
transactions that we have entered on behalf of securitization
trusts.
Table 35
Counterparty Credit Exposure Cash Equivalents and
Federal Funds Sold and Securities Purchased Under Agreements to
Resell(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Maturity
|
|
Rating(2)
|
|
Counterparties(3)
|
|
|
Amount(4)
|
|
|
(in days)
|
|
|
|
(dollars in millions)
|
|
|
On-balance sheet exposure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
A-1+
|
|
|
26
|
|
|
$
|
22,533
|
|
|
|
6
|
|
A-1
|
|
|
31
|
|
|
|
12,949
|
|
|
|
44
|
|
Federal funds sold and securities purchased under agreements
to resell
|
|
|
|
|
|
|
|
|
|
|
|
|
A-1
|
|
|
4
|
|
|
|
8,500
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
61
|
|
|
|
43,982
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet
exposure:(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
A-1+
|
|
|
7
|
|
|
|
16,800
|
|
|
|
1
|
|
Federal funds sold and securities purchased under agreements
to resell
|
|
|
|
|
|
|
|
|
|
|
|
|
A-1+
|
|
|
1
|
|
|
|
1,000
|
|
|
|
1
|
|
A-1
|
|
|
3
|
|
|
|
9,000
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
11
|
|
|
|
26,800
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
72
|
|
|
$
|
70,782
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Maturity
|
|
Rating(2)
|
|
Counterparties(3)
|
|
|
Amount(4)
|
|
|
(in days)
|
|
|
|
(dollars in millions)
|
|
|
On-balance sheet exposure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
A-1+
|
|
|
43
|
|
|
$
|
28,396
|
|
|
|
2
|
|
A-1
|
|
|
15
|
|
|
|
4,328
|
|
|
|
7
|
|
Federal funds sold and securities purchased under agreements
to resell
|
|
|
|
|
|
|
|
|
|
|
|
|
A-1+
|
|
|
2
|
|
|
|
2,250
|
|
|
|
2
|
|
A-1
|
|
|
2
|
|
|
|
7,900
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
62
|
|
|
|
42,874
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet
exposure:(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
A-1+
|
|
|
7
|
|
|
|
3,700
|
|
|
|
1
|
|
Federal funds sold and securities purchased under agreements
to resell
|
|
|
|
|
|
|
|
|
|
|
|
|
A-1+
|
|
|
1
|
|
|
|
1,500
|
|
|
|
2
|
|
A-1
|
|
|
1
|
|
|
|
1,500
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
9
|
|
|
|
6,700
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
71
|
|
|
$
|
49,574
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes restricted cash balances as well as cash deposited with
the Federal Reserve and other federally-chartered institutions.
|
(2)
|
Represents the lower of S&P and Moodys short-term
credit ratings as of each period end; however, in this table,
the rating of the legal entity is stated in terms of the
S&P equivalent.
|
(3)
|
Based on legal entities. Affiliated legal entities are reported
separately.
|
(4)
|
Represents the par value or outstanding principal balance.
|
(5)
|
Consists of highly-liquid securities that have an original
maturity of three months or less. Excludes $11.2 billion
and $10.3 billion of cash deposited with the Federal
Reserve as of June 30, 2009 and December 31, 2008,
respectively, and a $2.3 billion demand deposit with a
custodial bank having an S&P rating of
A-1+ as of
December 31, 2008.
|
(6)
|
Represents the non-mortgage assets managed by us, excluding cash
held at the Federal Reserve Bank, on behalf of securitization
trusts created for administration of remittances for our PCs and
Structured Securities.
|
(7)
|
Consists of highly-liquid securities that have an original
maturity of three months or less. Excludes $8.7 billion and
$4.9 billion of cash deposited with the Federal Reserve as
of June 30, 2009 and December 31, 2008, respectively.
|
Derivative
Counterparties
All of our OTC derivative counterparties are major financial
institutions and are experienced participants in the OTC
derivatives market, despite the large number of counterparties
that have credit ratings below AA. Our OTC derivative
counterparties that have credit ratings below AA are
subject to a collateral posting threshold of $1 million or
less. See NOTE 18: CONCENTRATION OF CREDIT AND OTHER
RISKS in our 2008 Annual Report for additional information.
The relative concentration of our derivative exposure among our
primary derivative counterparties has increased in recent
periods due to industry consolidation and the failure of certain
counterparties, and could further increase. Table 36
summarizes our exposure to our derivative counterparties, which
represents the net positive fair value of
derivative contracts, related accrued interest and collateral
held by us from our counterparties, after netting by
counterparty as applicable (i.e., net amounts due to us
under derivative contracts).
Table
36 Derivative Counterparty Credit Exposure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Notional or
|
|
|
Total
|
|
|
Exposure,
|
|
|
Contractual
|
|
|
|
|
Number of
|
|
Contractual
|
|
|
Exposure at
|
|
|
Net of
|
|
|
Maturity
|
|
Collateral Posting
|
Rating(1)
|
|
Counterparties(2)
|
|
Amount
|
|
|
Fair
Value(3)
|
|
|
Collateral(4)
|
|
|
(in years)
|
|
Threshold
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
AAA
|
|
|
1
|
|
|
$
|
1,150
|
|
|
$
|
|
|
|
$
|
|
|
|
|
6.9
|
|
|
Mutually agreed upon
|
AA
|
|
|
3
|
|
|
|
56,278
|
|
|
|
|
|
|
|
|
|
|
|
6.6
|
|
|
$10 million or less
|
AA
|
|
|
4
|
|
|
|
299,431
|
|
|
|
2,422
|
|
|
|
97
|
|
|
|
6.7
|
|
|
$10 million or less
|
A+
|
|
|
7
|
|
|
|
493,680
|
|
|
|
8
|
|
|
|
|
|
|
|
5.7
|
|
|
$1 million or less
|
A
|
|
|
4
|
|
|
|
259,107
|
|
|
|
443
|
|
|
|
34
|
|
|
|
4.6
|
|
|
$1 million or less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal(5)
|
|
|
19
|
|
|
|
1,109,646
|
|
|
|
2,873
|
|
|
|
131
|
|
|
|
5.7
|
|
|
|
Other
derivatives(6)
|
|
|
|
|
|
|
247,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward purchase and sale commitments
|
|
|
|
|
|
|
70,306
|
|
|
|
142
|
|
|
|
142
|
|
|
|
|
|
|
|
Swap guarantee derivatives
|
|
|
|
|
|
|
3,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
|
|
$
|
1,430,657
|
|
|
$
|
3,015
|
|
|
$
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Notional or
|
|
|
Total
|
|
|
Exposure,
|
|
|
Contractual
|
|
|
|
|
Number of
|
|
Contractual
|
|
|
Exposure at
|
|
|
Net of
|
|
|
Maturity
|
|
Collateral Posting
|
Rating(1)
|
|
Counterparties(2)
|
|
Amount
|
|
|
Fair
Value(3)
|
|
|
Collateral(4)
|
|
|
(in years)
|
|
Threshold
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
AAA
|
|
|
1
|
|
|
$
|
1,150
|
|
|
$
|
|
|
|
$
|
|
|
|
|
7.4
|
|
|
Mutually agreed upon
|
AA+
|
|
|
1
|
|
|
|
27,333
|
|
|
|
|
|
|
|
|
|
|
|
5.2
|
|
|
$10 million or less
|
AA
|
|
|
2
|
|
|
|
16,987
|
|
|
|
500
|
|
|
|
|
|
|
|
3.1
|
|
|
$10 million or less
|
AA
|
|
|
5
|
|
|
|
342,635
|
|
|
|
1,457
|
|
|
|
4
|
|
|
|
7.0
|
|
|
$10 million or less
|
A+
|
|
|
8
|
|
|
|
355,534
|
|
|
|
912
|
|
|
|
162
|
|
|
|
5.7
|
|
|
$1 million or less
|
A
|
|
|
4
|
|
|
|
296,039
|
|
|
|
1,179
|
|
|
|
15
|
|
|
|
4.5
|
|
|
$1 million or less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal(5)
|
|
|
21
|
|
|
|
1,039,678
|
|
|
|
4,048
|
|
|
|
181
|
|
|
|
5.7
|
|
|
|
Other
derivatives(6)
|
|
|
|
|
|
|
175,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward purchase and sale commitments
|
|
|
|
|
|
|
108,273
|
|
|
|
537
|
|
|
|
537
|
|
|
|
|
|
|
|
Swap guarantee derivatives
|
|
|
|
|
|
|
3,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
|
|
$
|
1,327,020
|
|
|
$
|
4,585
|
|
|
$
|
718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
We use the lower of S&P and Moodys ratings to manage
collateral requirements. In this table, the rating of the legal
entity is stated in terms of the S&P equivalent.
|
(2)
|
Based on legal entities. Affiliated legal entities are reported
separately.
|
(3)
|
For each counterparty, this amount includes derivatives with a
net positive fair value (recorded as derivative assets, net),
including the related accrued interest receivable/payable (net)
and trade/settle fees.
|
(4)
|
Calculated as Total Exposure at Fair Value less collateral held
as determined at the counterparty level. Includes amounts
related to our posting of cash collateral in excess of our
derivative liability as determined at the counterparty level.
|
(5)
|
Consists of OTC derivative agreements for interest-rate swaps,
option-based derivatives (excluding certain written options),
foreign-currency swaps and purchased interest-rate caps.
|
(6)
|
Consists primarily of exchange-traded contracts, certain written
options and certain credit derivatives. Written options do not
present counterparty credit exposure, because we receive a
one-time up-front premium in exchange for giving the holder the
right to execute a contract under specified terms, which
generally puts us in a liability position.
|
Over time, our exposure to individual counterparties for OTC
interest-rate swaps, option-based derivatives and
foreign-currency swaps varies depending on changes in fair
values, which are affected by changes in period-end interest
rates, the implied volatility of interest rates,
foreign-currency exchange rates and the amount of derivatives
held. Our uncollateralized exposure to counterparties for these
derivatives, after applying netting agreements and collateral,
decreased to $131 million at June 30, 2009 from
$181 million at December 31, 2008.
The uncollateralized exposure to
non-AAA-rated
counterparties was primarily due to exposure amounts below the
applicable counterparty collateral posting threshold, as well as
market movements during the time period between when a
derivative was marked to fair value and the date we received the
related collateral. Collateral is typically transferred within
one business day based on the values of the related derivatives.
As indicated in Table 36, approximately 95% of our
counterparty credit exposure for OTC interest-rate swaps,
option-based derivatives and foreign-currency swaps was
collateralized at June 30, 2009. If all of our
counterparties for these derivatives had defaulted
simultaneously on June 30, 2009, our maximum loss for
accounting purposes would have been approximately
$131 million.
In the event of counterparty default, our economic loss may be
higher than the uncollateralized exposure of our derivatives if
we are not able to replace the defaulted derivatives in a timely
and cost-effective fashion. We monitor the risk that our
uncollateralized exposure to each of our OTC counterparties for
interest rate swaps, option-based derivatives and
foreign-currency swaps will increase under certain adverse
market conditions by performing daily market stress tests. These
tests evaluate the potential additional uncollateralized
exposure we would have to each of these derivative
counterparties assuming changes in the level and implied
volatility of interest rates and changes in foreign-currency
exchange rates over a brief time period.
As indicated in Table 36, the total exposure on our OTC
forward purchase and sale commitments of $142 million and
$537 million at June 30, 2009 and December 31,
2008, respectively, which are treated as derivatives, was
uncollateralized. Because the typical maturity of our forward
purchase and sale commitments is less than 60 days and they
are generally settled through a clearinghouse, we do not require
master netting and collateral agreements for the counterparties
of these commitments. However, we monitor the credit
fundamentals of the counterparties to our forward purchase and
sale commitments on an ongoing basis to ensure that they
continue to meet our internal risk-management standards. At
June 30, 2009, we had purchase and sale commitments related
to our mortgage-related investments portfolio the majority of
which settled in July 2009.
Mortgage
Seller/Servicers
We acquire a significant portion of our mortgage loans from
several large lenders. These lenders, or seller/servicers, are
among the largest mortgage loan originators in the U.S. We are
exposed to the risk that we could lose purchase volume to the
extent our mortgage commitment arrangements with any of our top
seller/servicers are terminated or reduced in size without
replacement from other lenders. Our top 10 single-family
seller/servicers provided approximately 71% of our single-family
purchase volume during the six months ended June 30, 2009.
Wells Fargo Bank, N.A. and Bank of America, N.A.
accounted for 26% and 10%, respectively, of our single-family
mortgage purchase volume and were the only single-family
seller/servicers that comprised 10% or more of our purchase
volume during the six months ended June 30, 2009. During
the six months ended June 30, 2009, our top four
multifamily lenders, CBRE Melody & Company, Deutsche
Bank Berkshire Mortgage, Capmark Finance Inc. and Wells
Fargo Multifamily Capital, each accounted for more than 10% of
our multifamily mortgage purchase volume, and represented an
aggregate of approximately 57% of our multifamily purchase
volume.
We are exposed to institutional credit risk arising from the
potential insolvency or non-performance by our mortgage
seller/servicers, including non-performance of their repurchase
obligations arising from breaches of the representations and
warranties made to us for loans they underwrote and sold to us.
As a result of their repurchase obligations, our
seller/servicers repurchase mortgages sold to us, or indemnify
us against losses on those mortgages, whether we subsequently
securitized the loans or held them in our mortgage-related
investments portfolio. During the six months ended June 30,
2009 and 2008, the aggregate unpaid principal balance of
single-family mortgages repurchased by our seller/servicers
(without regard to year of original purchase) was approximately
$1,740 million and $737 million, respectively. Our
seller/servicers have an active role in our loss mitigation
efforts, including under the MHA Program, and therefore we also
have exposure to them to the extent a decline in their
performance results in a failure to realize the anticipated
benefits of our loss mitigation plans. Our exposure to
seller/servicers could lead to default rates that exceed our
current estimates and could cause our losses to be significantly
higher than those estimated within our loan loss reserves. For
information on our loss mitigation plans, see Mortgage
Credit Risk Portfolio Management
Activities Loss Mitigation Activities.
Due to the strain on the mortgage finance industry, a number of
our significant single-family seller/servicers have been
adversely affected and have undergone dramatic changes in their
ownership or financial condition. Many institutions, some of
which were our customers, have failed, been acquired, or
received substantial government assistance. The resulting
consolidation within the mortgage finance industry further
concentrates our institutional credit risk among a smaller
number of institutions.
In July 2008, IndyMac Bancorp, Inc., or IndyMac, announced
that the FDIC was appointed conservator of the bank. In March
2009, we entered into an agreement with the FDIC with respect to
the transfer of loan servicing from IndyMac to a third party,
under which we received an amount to partially recover our
future losses from IndyMacs repurchase obligations. We
retain our remaining claims against IndyMac for loan repurchases
that are in excess of the amount received under the agreement.
Lehman Brothers Holdings Inc., or Lehman, and its
affiliates also service single-family loans for us. We have
potential exposure to Lehman for servicing-related obligations
due to us, including repurchase obligations, which we estimated
to be approximately $850 million. Lehman has suspended its
repurchases from us since declaring bankruptcy in September 2008.
In September 2008, Washington Mutual Bank was acquired by
JPMorgan Chase Bank, N.A. We have agreed to JPMorgan Chase
becoming the servicer of mortgages previously serviced by
Washington Mutual in return for its agreement to assume
Washington Mutuals recourse obligations to repurchase any
of such mortgages that were sold to us with recourse. With
respect to mortgages that Washington Mutual sold to us without
recourse, JPMorgan Chase made a one-time payment to us in the
first quarter of 2009 with respect to obligations of Washington
Mutual to repurchase any of such mortgages that are inconsistent
with certain representations and warranties made at the time of
sale. The amounts associated with the JPMorgan Chase agreement
and IndyMac servicing transfer have been recorded within other
liabilities in our consolidated balance sheets and will be
reclassified to our loan loss reserve to partially offset losses
as incurred on related loans covered by these agreements. During
the first half of 2009, we reclassified approximately
$375 million to our loan loss reserve representing the
recovery of losses recognized by us on these related loans
incurred through June 30, 2009.
On August 4, 2009, we notified Taylor, Bean &
Whitaker Mortgage Corp., or TBW, that we had terminated its
eligibility, for cause, as a seller and servicer for us
effective immediately. TBW accounted for approximately 5.2% and
2.7% of our single-family mortgage purchase volume activity for
full-year 2008 and the six months ended June 30, 2009,
respectively. We are in the process of determining our total
exposure to TBW in the event it cannot perform its contractual
obligations to us. The amount of our losses in such event could
be significant.
We are also exposed to the risk that multifamily
seller/servicers may come under financial pressure due to the
current stressful economic environment and weakened real estate
markets, which could cause degradation in the quality of
servicing they provide. In addition, some of our multifamily
seller/servicers or their related entities provide guarantees on
loans we have made to one or more of their affiliates. In some
cases, the ability of those counterparties to fulfill their
guarantee obligations has been weakened.
Our estimate of probable incurred losses for exposure to
seller/servicers for their repurchase obligations to us is a
component of our allowance for loan losses as of June 30,
2009 and December 31, 2008. The estimates of potential
exposure to our seller/servicers are higher than our estimates
for probable loss as we consider the range of possible outcomes
as well as the passage of time, which can change the indicators
of incurred, or probable losses. We also consider the estimated
value of related mortgage servicing rights in determining our
estimates of probable loss, which reduce our potential
exposures. We believe we have adequately provided for these
exposures, based upon our estimate of incurred loss, in our loan
loss reserves at June 30, 2009 and December 31, 2008;
however, our actual losses may exceed our estimates.
During the second quarter of 2009, we entered into a standby
purchase commitment for up to $1 billion of single-family
mortgages with a financial institution that provides short-term
loans to mortgage originators. This commitment is contingent
upon the default of a specific mortgage originator, which is one
of our single-family seller/servicers. We expect to enter into
additional such non-derivative commitments in the future to
continue to provide support to the residential mortgage market.
Mortgage
Insurers
We have institutional credit risk relating to the potential
insolvency or non-performance of mortgage insurers that insure
mortgages we purchase or guarantee. As a guarantor, we remain
responsible for the payment of principal and interest if a
mortgage insurer fails to meet its obligations to reimburse us
for claims. If any of our mortgage insurers that provides credit
enhancement fails to fulfill its obligation, we could experience
increased credit-related costs and a possible reduction in the
fair values associated with our PCs or Structured Securities.
Table 37 presents our outstanding coverage with mortgage
insurers, excluding bond insurance, as of June 30, 2009. In
the event that a mortgage insurer fails to perform, the
outstanding coverage represents our maximum exposure to credit
losses resulting from such failure.
Table 37
Mortgage Insurance by Counterparty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
S&P Credit
|
|
S&P Credit
|
|
Primary
|
|
|
Pool
|
|
|
Coverage
|
|
Counterparty Name
|
|
Rating(1)
|
|
Rating
Outlook(1)
|
|
Insurance(2)
|
|
|
Insurance(2)
|
|
|
Outstanding(3)
|
|
|
|
|
|
|
|
(dollars in billions)
|
|
|
Mortgage Guaranty Insurance Corp.
|
|
|
BB
|
|
|
|
Credit watch negative
|
|
|
$
|
58.7
|
|
|
$
|
44.5
|
|
|
$
|
15.6
|
|
Radian Guaranty Inc.
|
|
|
BB
|
|
|
|
Stable
|
|
|
|
41.7
|
|
|
|
21.4
|
|
|
|
12.1
|
|
Genworth Mortgage Insurance Corporation
|
|
|
BBB+
|
|
|
|
Stable
|
|
|
|
39.8
|
|
|
|
1.2
|
|
|
|
10.1
|
|
PMI Mortgage Insurance Co.
|
|
|
BB
|
|
|
|
Stable
|
|
|
|
31.9
|
|
|
|
3.9
|
|
|
|
8.2
|
|
United Guaranty Residential Insurance Co.
|
|
|
BBB+
|
|
|
|
Negative
|
|
|
|
30.8
|
|
|
|
0.5
|
|
|
|
7.6
|
|
Republic Mortgage Insurance
|
|
|
A
|
|
|
|
Stable
|
|
|
|
26.3
|
|
|
|
3.6
|
|
|
|
6.6
|
|
Triad Guaranty
Insurance Corp.(4)
|
|
|
N/A
|
|
|
|
|
|
|
|
13.5
|
|
|
|
4.6
|
|
|
|
3.4
|
|
CMG Mortgage Insurance Co.
|
|
|
BBB+
|
|
|
|
Negative outlook
|
|
|
|
2.8
|
|
|
|
0.1
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
245.5
|
|
|
$
|
79.8
|
|
|
$
|
64.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Latest rating available as of July 31, 2009. Financial
conditions have been changing rapidly, which has caused greater
divergence in the ratings of individual insurers by nationally
recognized statistical rating organizations.
|
(2)
|
Represents the amount of unpaid principal balance at the end of
the period for our single-family mortgage portfolio covered by
the respective insurance type.
|
(3)
|
Represents the remaining aggregate contractual limit for
reimbursement of losses of principal under policies of both
primary and pool insurance. These amounts are based on our gross
coverage without regard to netting of coverage that may exist on
some of the related mortgages for double-coverage under both
types of insurance.
|
(4)
|
Beginning on June 1, 2009, Triad began paying valid claims
60% in cash and 40% in deferred payment obligations.
|
We received proceeds of $420.6 million and
$261.4 million during the six months ended June 30,
2009 and 2008, respectively, from our primary and pool mortgage
insurance policies for recovery of losses on our single-family
loans. We had outstanding receivables from mortgage insurers,
net of associated reserves, of $855 million and
$678 million as of June 30, 2009 and December 31,
2008, respectively, related to amounts claimed on foreclosed
properties. Our receivable balance for insurance recovery claims
rose significantly in the last half of 2008 and the first half
of 2009, as the volume of loss events, such as foreclosures,
increased.
Based upon currently available information, we expect that all
of our mortgage insurance counterparties will continue to pay
all claims as due in the normal course for the near term except
for claims obligations of Triad that are partially deferred
after June 1, 2009, under order of Triads state
regulator. However, we believe that several of our mortgage
insurance counterparties are at risk of falling out of
compliance with regulatory capital requirements, which may
result in regulatory actions that could threaten our ability to
receive future claims payments, and negatively impact our access
to mortgage insurance for high LTV loans. Further, we believe
one or more of these mortgage insurers, over the remainder of
2009, could be found to be lacking sufficient capital and could
face suspension under Freddie Macs eligibility
requirements for mortgage insurers. Mortgage Guaranty Insurance
Corp., or MGIC, has announced a plan to underwrite new business
through a wholly-owned subsidiary, and that it is engaged in
discussions to have the subsidiary approved as an eligible
mortgage insurer by Freddie Mac and Fannie Mae. According to
MGIC, this plan was driven by MGICs concern that in the
future MGIC might not meet regulatory capital requirements to
continue to write new business. Any final proposal is subject to
the receipt of necessary approvals and authority, including
obtaining Freddie Macs and Fannie Maes approval of
the subsidiary as an eligible mortgage insurer. We are currently
in discussions with MGIC concerning its plans. We consider the
recovery from mortgage insurance policies as part of the
estimate of our loan loss reserves. If our assessment of one or
more of our mortgage insurers ability to fulfill its
obligations to us worsens, it could result in a significant
increase in our loan loss reserve estimate.
Bond
Insurers
We have institutional credit risk relating to the potential
insolvency or non-performance of bond insurers that insure bonds
we hold as investment securities on our consolidated balance
sheets. Bond insurance, including primary and secondary
policies, is a credit enhancement covering the non-agency
securities held in our mortgage-related investments portfolio or
non-mortgage-related investments held in our cash and other
investments portfolio. Primary policies are acquired by the
issuing trust while secondary policies are acquired directly by
us. Bond insurance exposes us to the risks related to the bond
insurers ability to satisfy claims. At June 30, 2009,
we had insurance coverage, including secondary policies, on
securities totaling $13.9 billion, consisting of
$13.3 billion and $0.6 billion of coverage for
mortgage-related securities and non-mortgage-related securities,
respectively. Table 38 presents our coverage amounts of
monoline bond insurance, including secondary coverage, for all
securities held on our balance sheets. In the event a monoline
bond insurer fails to perform, the coverage outstanding
represents our maximum exposure to loss related to such a
failure.
Table 38
Monoline Bond Insurance by Counterparty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
S&P Credit
|
|
S&P Credit
|
|
Coverage
|
|
|
Percent
|
|
Counterparty Name
|
|
Rating(1)
|
|
Rating
Outlook(1)
|
|
Outstanding(2)
|
|
|
of Total
|
|
|
|
(dollars in billions)
|
|
|
Ambac Assurance Corporation
|
|
|
CC
|
|
|
|
|
|
|
$
|
5.4
|
|
|
|
39
|
%
|
Financial Guaranty Insurance Company (FGIC)
|
|
|
N/A(3)
|
|
|
|
|
|
|
|
2.6
|
|
|
|
19
|
|
MBIA Insurance Corp.
|
|
|
BBB
|
|
|
|
Negative
|
|
|
|
2.0
|
|
|
|
14
|
|
Financial Security Assurance Inc. (FSA)
|
|
|
AAA
|
|
|
|
Negative
|
|
|
|
1.6
|
|
|
|
11
|
|
Syncora Guarantee Inc. (SGI)
|
|
|
R(4)
|
|
|
|
|
|
|
|
1.1
|
|
|
|
8
|
|
National Public Finance Guarantee Corp. (NPFGC)
|
|
|
A
|
|
|
|
|
|
|
|
1.2
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
13.9
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Latest rating available as of July 31, 2009. Financial
conditions have been changing rapidly, which has caused greater
divergence in the ratings of individual insurers by nationally
recognized statistical rating organizations.
|
(2)
|
Represents the remaining contractual limit for reimbursement of
losses, including lost interest and other expenses, on
non-agency mortgage-related securities held in our
mortgage-related investments portfolio and non-mortgage-related
investments in our cash and other investments portfolio.
|
(3)
|
In March 2009, FGIC issued its 2008 financial statements, which
expressed substantial doubt concerning the ability to operate as
a going concern. Consequently, in April 2009, S&P withdrew
its ratings of FGIC and discontinued ratings coverage.
|
(4)
|
In April 2009, SGI announced that under an order from the New
York State Insurance Department, it has suspended payment of all
claims in order to complete a comprehensive restructuring of its
business. Consequently, S&P assigned an R
rating, reflecting that the company is under regulatory
supervision.
|
In accordance with our risk management policies we will continue
to actively monitor the financial strength of our bond insurers
in this challenging market environment. We believe that, except
for FSA, the remaining bond insurers to which we currently have
significant exposure lack sufficient ability to fully meet all
of their expected lifetime claims-paying obligations to us as
they emerge. During the second quarter of 2009, as part of a
comprehensive restructuring, SGI pursued a settlement with
certain policyholders. In July 2009, we agreed to terminate our
rights under certain policies with SGI, which provided credit
coverage for certain bonds owned by us, in exchange for a
one-time cash payment of $113 million. We continue to own
certain securities insured under other policies issued by SGI.
In the event one or more of these bond insurers were to become
insolvent, it is likely that we would not collect all of our
claims from the affected insurer, and it would impact our
ability to recover certain unrealized losses on our
mortgage-related investments portfolio. We recognized
other-than-temporary impairment losses during 2008 and the first
half of 2009 related to investments in mortgage-related
securities covered by bond insurance due to the probability of
losses on the securities and our concerns about the claims
paying abilities of certain bond insurers in the event of a
loss. See NOTE 4: INVESTMENTS IN
SECURITIES Other-Than-Temporary Impairments on
Available-For-Sale Securities to our consolidated
financial statements for additional information regarding
impairment losses on securities covered by monoline insurers.
Table 39 shows our non-agency mortgage-related securities
covered by monoline bond insurance at June 30, 2009 and
December 31, 2008.
Table 39
Non-Agency Mortgage-Related Securities Covered by Monoline Bond
Insurance at June 30, 2009 and December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Guaranty
|
|
|
Syncora
|
|
|
AMBAC Assurance
|
|
|
Financial Security
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Company
|
|
|
Guarantee Inc.
|
|
|
Corporation
|
|
|
Assurance Inc.
|
|
|
MBIA Insurance Corp.
|
|
|
Other(1)(2)
|
|
|
Total
|
|
|
|
Unpaid
|
|
|
Gross
|
|
|
Unpaid
|
|
|
Gross
|
|
|
Unpaid
|
|
|
Gross
|
|
|
Unpaid
|
|
|
Gross
|
|
|
Unpaid
|
|
|
Gross
|
|
|
Unpaid
|
|
|
Gross
|
|
|
Unpaid
|
|
|
Gross
|
|
|
|
Principal
|
|
|
Unrealized
|
|
|
Principal
|
|
|
Unrealized
|
|
|
Principal
|
|
|
Unrealized
|
|
|
Principal
|
|
|
Unrealized
|
|
|
Principal
|
|
|
Unrealized
|
|
|
Principal
|
|
|
Unrealized
|
|
|
Principal
|
|
|
Unrealized
|
|
|
|
Balance(3)
|
|
|
Losses(4)
|
|
|
Balance(3)
|
|
|
Losses(4)
|
|
|
Balance(3)
|
|
|
Losses(4)
|
|
|
Balance(3)
|
|
|
Losses(4)
|
|
|
Balance(3)
|
|
|
Losses(4)
|
|
|
Balance(3)
|
|
|
Losses(4)
|
|
|
Balance(3)
|
|
|
Losses(4)
|
|
|
|
(in millions)
|
|
|
At June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien subprime
|
|
$
|
1,176
|
|
|
$
|
(524
|
)
|
|
$
|
205
|
|
|
$
|
(89
|
)
|
|
$
|
786
|
|
|
$
|
(293
|
)
|
|
$
|
477
|
|
|
$
|
(193
|
)
|
|
$
|
22
|
|
|
$
|
(4
|
)
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
2,672
|
|
|
$
|
(1,103
|
)
|
Second lien subprime
|
|
|
317
|
|
|
|
(95
|
)
|
|
|
66
|
|
|
|
(11
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
392
|
|
|
|
(107
|
)
|
MTA Option ARM
|
|
|
|
|
|
|
|
|
|
|
350
|
|
|
|
(75
|
)
|
|
|
172
|
|
|
|
(50
|
)
|
|
|
177
|
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
699
|
|
|
|
(262
|
)
|
Alt-A and
other(5)
|
|
|
1,000
|
|
|
|
(525
|
)
|
|
|
418
|
|
|
|
(246
|
)
|
|
|
1,444
|
|
|
|
(701
|
)
|
|
|
470
|
|
|
|
(283
|
)
|
|
|
574
|
|
|
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
|
3,906
|
|
|
|
(2,071
|
)
|
Manufactured Housing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
179
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
289
|
|
|
|
(87
|
)
|
CMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,217
|
|
|
|
(596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,197
|
|
|
|
(356
|
)
|
|
|
3,414
|
|
|
|
(952
|
)
|
Obligations of states and political subdivisions
|
|
|
39
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
463
|
|
|
|
(43
|
)
|
|
|
395
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
307
|
|
|
|
(26
|
)
|
|
|
1,204
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,532
|
|
|
$
|
(1,148
|
)
|
|
$
|
1,039
|
|
|
$
|
(421
|
)
|
|
$
|
5,199
|
|
|
$
|
(1,721
|
)
|
|
$
|
1,519
|
|
|
$
|
(640
|
)
|
|
$
|
777
|
|
|
$
|
(370
|
)
|
|
$
|
1,510
|
|
|
$
|
(382
|
)
|
|
$
|
12,576
|
|
|
$
|
(4,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien subprime
|
|
$
|
1,290
|
|
|
$
|
(340
|
)
|
|
$
|
220
|
|
|
$
|
(2
|
)
|
|
$
|
837
|
|
|
$
|
(280
|
)
|
|
$
|
510
|
|
|
$
|
(66
|
)
|
|
$
|
26
|
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,883
|
|
|
$
|
(690
|
)
|
Second lien subprime
|
|
|
362
|
|
|
|
(113
|
)
|
|
|
72
|
|
|
|
|
|
|
|
52
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501
|
|
|
|
(148
|
)
|
MTA Option ARM
|
|
|
|
|
|
|
|
|
|
|
367
|
|
|
|
(48
|
)
|
|
|
179
|
|
|
|
(123
|
)
|
|
|
187
|
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
733
|
|
|
|
(298
|
)
|
Alt-A and
other(5)
|
|
|
1,096
|
|
|
|
(123
|
)
|
|
|
450
|
|
|
|
(30
|
)
|
|
|
1,573
|
|
|
|
(980
|
)
|
|
|
522
|
|
|
|
(272
|
)
|
|
|
632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,273
|
|
|
|
(1,405
|
)
|
Manufactured Housing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
302
|
|
|
|
(63
|
)
|
CMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,219
|
|
|
|
(399
|
)
|
|
|
|
|
|
|
|
|
|
|
1,167
|
|
|
|
(368
|
)
|
|
|
30
|
|
|
|
(7
|
)
|
|
|
3,416
|
|
|
|
(774
|
)
|
Obligations of states and political subdivisions
|
|
|
38
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
467
|
|
|
|
(94
|
)
|
|
|
397
|
|
|
|
(74
|
)
|
|
|
354
|
|
|
|
(44
|
)
|
|
|
17
|
|
|
|
(2
|
)
|
|
|
1,273
|
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,786
|
|
|
$
|
(583
|
)
|
|
$
|
1,109
|
|
|
$
|
(80
|
)
|
|
$
|
5,441
|
|
|
$
|
(1,974
|
)
|
|
$
|
1,616
|
|
|
$
|
(539
|
)
|
|
$
|
2,382
|
|
|
$
|
(414
|
)
|
|
$
|
47
|
|
|
$
|
(9
|
)
|
|
$
|
13,381
|
|
|
$
|
(3,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
At June 30, 2009, includes certain exposures to bonds
insured by NPFGC, formerly known as MBIA Insurance Corp. of
Illinois, which is a subsidiary of MBIA Inc., the parent
company of MBIA Insurance Corp. Amounts at
December 31, 2008 are included under MBIA
Insurance Corp.
|
(2)
|
Includes monoline insurance provided by Radian Group Inc.
and CIFG Holdings Ltd.
|
(3)
|
Represents the amount of unpaid principal balance covered by
monoline insurance coverage. This amount does not represent the
maximum amount of losses we could recover, as the monoline
insurance also covers unpaid interest.
|
(4)
|
Represents the amount of gross unrealized losses at the
respective reporting date on the securities with monoline
insurance.
|
(5)
|
The majority of the
Alt-A and
other loans covered by monoline bond insurance are securities
backed by home equity lines of credit.
|
Mortgage
Credit Risk
Mortgage credit risk is primarily influenced by the credit
profile of the borrower on the mortgage, the features of the
mortgage itself, the type of property securing the mortgage and
the general economy. All mortgages that we purchase for our
mortgage-related investments portfolio or that we guarantee have
an inherent risk of default. To manage our mortgage credit risk,
we focus on three key areas: underwriting standards and quality
control process; portfolio diversification; and portfolio
management activities, including loss mitigation and the use of
credit enhancements. Our underwriting process evaluates mortgage
loans using several critical risk characteristics, such as
credit score, LTV ratio and occupancy type. For more information
on our mortgage credit risk, including how we seek to manage
mortgage credit risk, see MD&A CREDIT
RISKS Mortgage Credit Risk in our 2008 Annual
Report.
All types of mortgage loans, whether classified as prime or
non-prime, have been affected by the pressures on household
wealth caused by declines in home values, declines in the stock
market, rising rates of unemployment and other impacts of the
economic recession that began in early 2008. Macroeconomic
conditions have generally continued to worsen in the first half
of 2009. The table below shows the credit performance of our
single-family mortgage portfolio for the last several quarters
as compared to certain industry averages.
Table 40
Single-Family Mortgage Credit Performance Comparison
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
06/30/2009
|
|
03/31/2009
|
|
12/31/2008
|
|
09/30/2008
|
|
06/30/2008
|
|
Delinquency rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Macs single-family mortgage
portfolio(1)
|
|
|
2.78
|
%
|
|
|
2.29
|
%
|
|
|
1.72
|
%
|
|
|
1.22
|
%
|
|
|
0.93
|
%
|
Industry prime
loans(2)
|
|
|
N/A
|
|
|
|
4.70
|
|
|
|
3.74
|
|
|
|
2.87
|
|
|
|
2.35
|
|
Industry subprime
loans(2)
|
|
|
N/A
|
|
|
|
24.88
|
|
|
|
23.11
|
|
|
|
19.56
|
|
|
|
17.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
06/30/2009
|
|
03/31/2009
|
|
12/31/2008
|
|
09/30/2008
|
|
06/30/2008
|
|
Foreclosures starts ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Macs single-family mortgage
portfolio(3)
|
|
|
0.62
|
%
|
|
|
0.61
|
%
|
|
|
0.41
|
%
|
|
|
0.36
|
%
|
|
|
0.31
|
%
|
Industry prime
loans(2)
|
|
|
N/A
|
|
|
|
0.94
|
|
|
|
0.68
|
|
|
|
0.61
|
|
|
|
0.61
|
|
Industry subprime
loans(2)
|
|
|
N/A
|
|
|
|
4.65
|
|
|
|
3.96
|
|
|
|
4.23
|
|
|
|
4.26
|
|
|
|
(1)
|
Based on the number of loans 90 days or more past due, as
well as those in the process of foreclosure. Our temporary
suspensions of foreclosure transfers on occupied homes resulted
in more loans remaining delinquent than without these
suspensions. See Credit Performance
Delinquencies for further information on the
delinquency rates of our single-family mortgage portfolio and
our temporary suspensions of foreclosure transfers.
|
(2)
|
Source: Mortgage Bankers Associations National Delinquency
Survey representing first lien single-family loans in the survey
categorized as prime or subprime, respectively. Excludes FHA and
VA loans. Data is not yet available for the second quarter of
2009.
|
(3)
|
Represents the ratio of the number of loans that entered the
foreclosure process during the respective quarter divided by the
number of loans in the portfolio at the end of the quarter.
Excludes Structured Transactions and mortgages covered under
long-term standby commitment agreements.
|
Underwriting
Standards and Quality Control Process
We use a process of delegated underwriting for the single-family
mortgages we purchase or securitize. In this process, our
contracts with originators describe mortgage underwriting
standards and, except to the extent we modify these standards,
the originators represent and warrant to us that the mortgages
sold to us meet these requirements. We subsequently review a
sample of these loans and, if we determine that any loan is not
in compliance with our contractual standards, we may require the
seller/servicer to repurchase that mortgage or make us whole in
the event of a default. In response to the changes in the
residential mortgage market during the last several years, we
made several changes to our underwriting requirements in 2008,
and many of these took effect in early 2009, or as our
customers contracts permitted. While some of these changes
will not apply to mortgages purchased under the refinance
initiative of the MHA Program, we expect that they will improve
the credit profile of many of the mortgages that are delivered
to us going forward.
Our charter requires that single-family mortgages with LTV
ratios above 80% at the time of purchase be covered by one of
the following: (a) mortgage insurance for mortgage amounts
above the 80% threshold; (b) a sellers agreement to
repurchase or replace any mortgage upon default; or
(c) retention by the seller of at least a 10% participation
interest in the mortgages. In addition, we employ other types of
credit enhancements, including pool insurance, indemnification
agreements, collateral pledged by lenders and subordinated
security structures. On February 18, 2009, in conjunction
with the announcement of the MHA Program, FHFA determined that
consistent with our charter, until June 10, 2010, we may
purchase mortgages that refinance borrowers whose mortgages we
currently own or guarantee, without obtaining additional credit
enhancement in excess of that already in place for that loan. In
April 2009, we began purchasing mortgages originated pursuant to
the refinance initiative under the MHA Program. During 2009 we
expect to purchase and guarantee a significant amount of these
loans, which we announced as the Freddie Mac Relief Refinance
Mortgagesm.
These mortgages allow for the refinance of existing loans
guaranteed by us under terms such that we may not have mortgage
insurance for some or all of the unpaid principal balance of the
mortgage in excess of 80% of the value of the property for
certain of these loans. We initially allowed refinancing with
this product for loans up to a maximum LTV ratio of 105%. On
July 1, 2009, we announced an increase in the allowable
maximum LTV ratio to 125% for this product. Although we
discontinued purchases of new mortgage loans with lower
documentation standards for assets or income beginning
March 1, 2009 (or as our customers contracts permit),
we will continue to purchase certain amounts of these mortgages
in those cases that the loan qualifies as a refinance mortgage
under Freddie Mac Relief Refinance
Mortgagesm
and the pre-existing mortgage was originated under less than
full documentation standards.
We also vary our guarantee and delivery fee pricing relative to
different mortgage products and mortgage or borrower
underwriting characteristics. We implemented an increase in
delivery fees that was effective at April 1, 2009, or as
our customers contracts permitted. This increase applies
for certain mortgages deemed to be higher-risk based primarily
on whether there are initial interest-only provisions and on
loan characteristics, such as loan purpose, LTV ratio
and/or
borrower credit scores, and excludes refinance-loans under the
MHA Program.
In July 2008, the Federal Reserve published a final rule
amending Regulation Z (which implements the Truth in
Lending Act). According to the Federal Reserve, one of the goals
of the amendments is to protect consumers in the mortgage market
from unfair, abusive, or deceptive lending and servicing
practices while preserving responsible lending and sustainable
homeownership. The final rule applies four protections to a
newly-defined category of higher-priced mortgage loans, or
HPMLs, secured by a consumers principal dwelling,
including a prohibition on lending based on the collateral
without regard to consumers ability to repay their
obligations from income, or from other sources besides the
collateral. Most of the provisions of the final rule are
effective on October 1, 2009. As a result of changes to our
underwriting requirements in the first half of 2009, our loan
purchases in 2009 have not included significant amounts of lower
documentation loans and HPMLs. In July 2009, we issued
guidelines to our seller/servicers regarding our purchase
criteria for HPMLs, effective October 1, 2009. HPMLs sold
to Freddie Mac are not eligible to be Freddie Mac Relief
Refinance
Mortgagessm
because that product does not require verification of income and
assets. Although Regulation Z permits prepayment penalties
for HPMLs under certain conditions, Freddie Mac will not
purchase HPMLs subject to any prepayment penalty. Likewise,
although Regulation Z permits the origination of HPMLs
which adjust or reset during the first seven years after
origination subject to specified underwriting criteria, Freddie
Mac will not purchase HPMLs which are subject to any interest or
payment adjustment or reset during the first seven years.
On July 23, 2009, the Federal Reserve proposed amendments
to Regulation Z intended to improve the disclosures
consumers receive in connection with certain mortgages and
home-equity lines of credit. The amendments would also provide
new consumer protections for all home-secured credit. In
addition to the proposed disclosure requirements, the proposed
amendments would prohibit payments to a mortgage broker or a
loan officer that are based on the loans interest rate or
other terms; and prohibit a mortgage broker or loan officer from
steering consumers to transactions that are not in
their interest in order to increase the mortgage brokers
or loan officers compensation. We cannot predict the
impact that the proposed amendments, if adopted, would have on
our business.
Table 41 provides characteristics of our single-family
mortgage loans purchased during the three months ended
June 30, 2009 and 2008, and of our single-family mortgage
portfolio at June 30, 2009 and December 31, 2008.
Table 41
Characteristics of Single-Family Mortgage
Portfolio(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases During the
|
|
|
Purchases During the
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Portfolio at
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Original LTV Ratio
Range(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60% and below
|
|
|
36
|
%
|
|
|
26
|
%
|
|
|
35
|
%
|
|
|
24
|
%
|
|
|
23
|
%
|
|
|
22
|
%
|
Above 60% to 70%
|
|
|
18
|
|
|
|
17
|
|
|
|
18
|
|
|
|
17
|
|
|
|
16
|
|
|
|
16
|
|
Above 70% to 80%
|
|
|
38
|
|
|
|
38
|
|
|
|
39
|
|
|
|
39
|
|
|
|
45
|
|
|
|
46
|
|
Above 80% to 90%
|
|
|
5
|
|
|
|
11
|
|
|
|
6
|
|
|
|
11
|
|
|
|
8
|
|
|
|
8
|
|
Above 90%
|
|
|
3
|
|
|
|
8
|
|
|
|
2
|
|
|
|
9
|
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average original LTV ratio
|
|
|
65
|
%
|
|
|
70
|
%
|
|
|
66
|
%
|
|
|
71
|
%
|
|
|
71
|
%
|
|
|
72
|
%
|
Estimated
Current LTV Ratio
Range(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60% and below
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
%
|
|
|
32
|
%
|
Above 60% to 70%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
13
|
|
Above 70% to 80%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
16
|
|
Above 80% to 90%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
16
|
|
Above 90% to 100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
Above 100% to 110%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
5
|
|
Above 110%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average estimated current LTV ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
%
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
740 and above
|
|
|
74
|
%
|
|
|
54
|
%
|
|
|
73
|
%
|
|
|
52
|
%
|
|
|
48
|
%
|
|
|
46
|
%
|
700 to 739
|
|
|
17
|
|
|
|
22
|
|
|
|
17
|
|
|
|
22
|
|
|
|
22
|
|
|
|
23
|
|
660 to 699
|
|
|
6
|
|
|
|
15
|
|
|
|
7
|
|
|
|
16
|
|
|
|
17
|
|
|
|
17
|
|
620 to 659
|
|
|
2
|
|
|
|
6
|
|
|
|
2
|
|
|
|
7
|
|
|
|
8
|
|
|
|
9
|
|
Less than 620
|
|
|
1
|
|
|
|
3
|
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
Not available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average credit score
|
|
|
759
|
|
|
|
735
|
|
|
|
758
|
|
|
|
732
|
|
|
|
727
|
|
|
|
725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
13
|
%
|
|
|
34
|
%
|
|
|
14
|
%
|
|
|
35
|
%
|
|
|
36
|
%
|
|
|
40
|
%
|
Cash-out refinance
|
|
|
28
|
|
|
|
36
|
|
|
|
28
|
|
|
|
34
|
|
|
|
31
|
|
|
|
30
|
|
Other refinance
|
|
|
59
|
|
|
|
30
|
|
|
|
58
|
|
|
|
31
|
|
|
|
33
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 unit
|
|
|
99
|
%
|
|
|
97
|
%
|
|
|
99
|
%
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
97
|
%
|
2-4 units
|
|
|
1
|
|
|
|
3
|
|
|
|
1
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary residence
|
|
|
94
|
%
|
|
|
90
|
%
|
|
|
94
|
%
|
|
|
90
|
%
|
|
|
91
|
%
|
|
|
91
|
%
|
Second/vacation home
|
|
|
4
|
|
|
|
5
|
|
|
|
4
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
Investment
|
|
|
2
|
|
|
|
5
|
|
|
|
2
|
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Purchases and ending balances are based on the unpaid principal
balance of the single-family mortgage portfolio excluding
Structured Securities backed by Ginnie Mae certificates and
certain Structured Transactions. Structured Transactions with
ending balances of $2 billion at both June 30, 2009
and December 31, 2008 are excluded since these securities
are backed by non-Freddie Mac issued securities for which the
loan characteristics data was not available.
|
(2)
|
Original LTV ratios are calculated as the amount of the mortgage
we guarantee including the credit-enhanced portion, divided by
the lesser of the appraised value of the property at time of
mortgage origination or the mortgage borrowers purchase
price. Second liens not owned or guaranteed by us are excluded
from the LTV ratio calculation. Including secondary financing,
the total original LTV ratios above 90% were 13% and 14% at
June 30, 2009 and December 31, 2008, respectively.
|
(3)
|
Current market values are estimated by adjusting the value of
the property at origination based on changes in the market value
of homes since origination. Estimated current LTV ratio range is
not applicable to purchase activity, includes the
credit-enhanced portion of the loan and excludes any secondary
financing by third parties.
|
(4)
|
Credit score data is as of mortgage loan origination and is
based on FICO scores.
|
As shown in the table above, the percentage of borrowers in our
single-family mortgage portfolio with estimated current LTV
ratios greater than 100% was 17% and 13% at June 30, 2009
and December 31, 2008, respectively. As estimated current
LTV ratios increase, the borrowers equity in the home
decreases, which negatively affects the
borrowers ability to refinance or to sell the property for
an amount at or above the balance of the outstanding mortgage
loan and purchase a less expensive home or move to a rental
property. If a borrower has an estimated current LTV ratio
greater than 100%, the borrower is underwater and is
more likely to default than other borrowers, regardless of the
borrowers financial condition. A borrower would also be
considered underwater if the borrowers total current LTV
ratio (which includes any secondary financing) is greater than
100%. As of June 30, 2009 and December 31, 2008, for
the single-family mortgage loans with greater than 80% estimated
current LTV ratios, the borrowers had a weighted average credit
score at origination of 715 and 714, respectively.
Mortgage
Product Types
Product mix affects the credit risk profile of single-family
loans within our total mortgage portfolio. In general,
15-year
amortizing fixed-rate mortgages exhibit the lowest default rate
among the types of mortgage loans we securitize and purchase,
due to the accelerated rate of principal amortization on these
mortgages and the credit profiles of borrowers who seek and
qualify for them. The primary mortgage products comprising the
single-family mortgage loans in our single-family mortgage
portfolio are conventional first lien, fixed-rate mortgage
loans. As discussed below, there are significant amounts of
Alt-A,
interest-only and other higher-risk mortgage products in our
single-family mortgage portfolio. See CONSOLIDATED BALANCE
SHEETS ANALYSIS Mortgage-Related Investments
Portfolio Higher Risk Components of Our
Mortgage-Related Investments Portfolio for information
on how we classify loans and non-agency mortgage-related
securities as
Alt-A or
subprime.
While we have classified certain loans as subprime or
Alt-A for
purposes of the discussion below and elsewhere in this
Form 10-Q,
there is no universally accepted definition of subprime or
Alt-A, and
our classifications of such loans may differ from those used by
other companies. In addition, we do not rely primarily on these
loan classifications to evaluate the credit risk exposure
relating to such loans in our single-family mortgage portfolio.
Through our delegated underwriting process, mortgage loans and
the borrowers ability to repay the loans are evaluated
using several critical risk characteristics, including but not
limited to the borrowers credit score and credit history,
the borrowers monthly income relative to debt payments,
LTV ratio, type of mortgage product and occupancy type. For more
information, see MD&A CREDIT
RISKS Mortgage Credit Risk in our 2008 Annual
Report.
Interest-Only
and Option ARM Loans
Originations of interest-only loans in the market declined
substantially in 2009. We purchased $377 million and
$18 billion of these loans during the six months ended
June 30, 2009 and 2008, respectively. Interest-only loans
in our single-family mortgage portfolio were approximately
$144.8 billion and $160.6 billion as of June 30,
2009 and December 31, 2008, respectively. The unpaid
principal balance of option ARM mortgage loans, which include
some MTA Option ARM loans, underlying our Structured Securities
and Structured Transactions was $11.6 billion and
$12.2 billion as of June 30, 2009 and
December 31, 2008, respectively. We did not purchase any
option ARM mortgage loans during the six months ended
June 30, 2009. At June 30, 2009, interest-only and
option ARM loans collectively represented approximately 9% of
the unpaid principal balance of our single-family mortgage
portfolio. These types of loans have experienced significantly
higher delinquency rates than other mortgage products since most
of them have initial periods during which the payment options
are in place before the loans reach the initial end date and the
terms are recast. The delinquency rate on option ARM loans in
our single-family mortgage portfolio was 14.0% and 8.7% at
June 30, 2009 and December 31, 2008, respectively.
We also invest in non-agency mortgage-related securities backed
by MTA Option ARM loans. As of June 30, 2009 and
December 31, 2008, the unpaid principal balance of
non-agency mortgage related securities classified as having MTA
Option ARM loans as collateral was $18.7 billion and
$19.6 billion, respectively. See CONSOLIDATED BALANCE
SHEETS ANALYSIS Mortgage-Related Investments
Portfolio for credit statistics and other information
about these securities as well as other non-agency
mortgage-related security investments backed by subprime and
Alt-A loan
types discussed below.
Higher
Risk Combinations
Combining certain loan products and loan characteristics often
can indicate a higher degree of credit risk. For example,
single-family mortgages with both high LTV ratios and borrowers
who have lower credit scores typically experience higher rates
of delinquency and default and higher credit losses. However,
our participation in these categories generally contributes to
our performance under our affordable housing goals. As of
June 30, 2009, approximately 1% of mortgage loans in our
single-family mortgage portfolio were made to borrowers with
credit scores below 620 and had first lien, original LTV ratios
greater than 90% at the time of mortgage origination. In
addition, as of June 30, 2009, approximately 4% of the
Alt-A
single-family loans in our single-family mortgage portfolio were
made to borrowers with credit scores below 620 at mortgage
origination. Other mortgage product types, such as interest-only
or option ARM loans, that also are combined with certain
characteristics, such as lower credit
scores or higher LTV ratios, will also have a higher risk of
default than those same products without these characteristics.
In addition, in recent years, as home prices increased, many
borrowers used second liens at the time of purchase to reduce
the LTV ratio on first lien mortgages. We estimate that
approximately 13% and 14% of first lien loans in our
single-family mortgage portfolio had total original LTV ratios,
including secondary liens by third parties, above 90% at
June 30, 2009 and December 31, 2008, respectively.
Subprime
Loans
While we have not historically characterized the single-family
loans underlying our PCs and Structured Securities as either
prime or subprime, we do monitor the amount of loans we have
guaranteed with characteristics that indicate a higher degree of
credit risk (see Higher Risk Combinations
above for further information). In addition, we estimate
that approximately $4.9 billion and $5.1 billion in
unpaid principal balances of security collateral underlying our
Structured Transactions at June 30, 2009 and
December 31, 2008, respectively, were classified as
subprime, based on our determination that they are also
higher-risk loan types.
We generally categorize non-agency mortgage-related securities
as subprime if they were labeled as subprime when we purchased
them. At June 30, 2009 and December 31, 2008, we held
$67.6 billion and $74.9 billion, respectively, in
unpaid principal balances of non-agency mortgage-related
securities backed by subprime loans. These securities include
significant credit enhancement, particularly through
subordination, and 20% and 58% of these securities were
investment grade at June 30, 2009 and December 31,
2008, respectively.
Alt-A
Loans
We estimate that approximately $161.5 billion, or 9%, and
$182.5 billion, or 10%, in unpaid principal balances of the
loans underlying our single-family PCs and Structured Securities
at June 30, 2009 and December 31, 2008, respectively,
were classified as
Alt-A
mortgage loans. In addition, we estimate that approximately
$3.7 billion, or 7%, and $2.4 billion, or 6%, in
unpaid principal balances of the single-family mortgage loans in
our mortgage-related investments portfolio were classified as
Alt-A at
June 30, 2009 and December 31, 2008, respectively. For
all of these
Alt-A loans
combined, the average credit score was 722, and the estimated
current average LTV ratio, based on our first-lien exposure, was
91% at June 30, 2009. The delinquency rate for these
Alt-A loans
was 9.44% and 5.61% at June 30, 2009 and December 31,
2008, respectively. We implemented several changes in our
underwriting and eligibility criteria in 2008 and 2009 to reduce
our acquisition of certain higher-risk loan products, including
Alt-A loans.
As a result, our purchases of single-family
Alt-A
mortgage loans for our total mortgage portfolio declined to
$32 million for the second quarter of 2009, from
$9.0 billion for the second quarter of 2008. Although we
discontinued new purchases of mortgage loans with lower
documentation standards for assets or income, beginning
March 1, 2009 (or as our customers contracts permit),
we will continue to purchase certain amounts of the mortgages in
cases that the loan qualifies as a refinance mortgage under Home
Affordable Refinance and the pre-existing mortgage was
originated under less than full documentation standards.
We also invest in non-agency mortgage-related securities backed
by single-family
Alt-A loans
in our mortgage-related investments portfolio. At June 30,
2009 and December 31, 2008, we held investments of
$23.2 billion and $25.1 billion, respectively, of
non-agency mortgage-related securities backed by
Alt-A and
other mortgage loans.
Structured
Transactions
We issue certain Structured Securities to third parties in
exchange for non-Freddie Mac mortgage-related securities. The
non-Freddie Mac mortgage-related securities use collateral
transferred to trusts that were specifically created for the
purpose of issuing the securities. We refer to this type of
Structured Security as a Structured Transaction. Structured
Transactions can generally be segregated into two different
types. In the first type, we purchase only the senior tranches
from a non-Freddie Mac senior-subordinated securitization, place
these senior tranches into a securitization trust, provide a
guarantee of the principal and interest of the senior tranches,
and issue the Structured Transaction. The senior tranches we
purchase as collateral for the Structured Transactions benefit
from credit protections from the related subordinated tranches,
which we do not purchase. Additionally, there are other credit
enhancements and structural features retained by the seller,
such as excess interest or overcollateralization, which provide
credit protection to our interests, and reduce the likelihood
that we will have to perform under our guarantee. For the second
type of Structured Transaction, we purchase non-Freddie Mac
single-class, or pass-through, securities, place them in a
securitization trust, guarantee the principal and interest, and
issue the Structured Transaction. Structured Transactions backed
by pass-through securities do not benefit from structural or
other credit enhancement protections.
Portfolio
Management Activities
Credit
Enhancements
As discussed above, our charter generally requires that
single-family mortgages with LTV ratios above 80% at the time of
purchase be covered by specified credit enhancements or
participation interests. At June 30, 2009 and
December 31, 2008, our credit-enhanced mortgages and
mortgage-related securities represented approximately 17% and
18% of the $1,954 billion and $1,914 billion,
respectively, unpaid principal balance of our total mortgage
portfolio, excluding non-Freddie Mac mortgage-related
securities, our single-family Structured Transactions and that
portion of issued Structured Securities that is backed by Ginnie
Mae Certificates. We exclude non-Freddie Mac mortgage-related
securities because they expose us primarily to institutional
credit risk. We exclude that portion of Structured Securities
backed by Ginnie Mae Certificates because the incremental credit
risk to which we are exposed is considered insignificant due to
the guarantee provided on these securities by the U.S.
government. Although many of our Structured Transactions are
credit enhanced, we present the credit enhancement coverage
information separately in the table below due to the use of
subordination in many of the securities structures. See
CONSOLIDATED BALANCE SHEETS ANALYSIS
Mortgage-Related Investments Portfolio for additional
information on credit enhancement coverage of our investments in
non-Freddie Mac mortgage-related securities. In the first half
of 2009, there has been a significant decline in our credit
enhancement coverage for new purchases compared to the first
half of 2008 that is primarily a result of the high refinance
activity during the period. Refinance loans typically have lower
LTV ratios, which fall below the threshold that require mortgage
insurance coverage.
Primary mortgage insurance is the most prevalent type of credit
enhancement protecting our single-family mortgage portfolio,
including single-family loans underlying our PCs and Structured
Securities, and is typically provided on a loan-level basis. As
of June 30, 2009 and December 31, 2008, in connection
with the single-family mortgage portfolio, excluding the loans
that are underlying Structured Transactions, the maximum amount
of losses we could recover under primary mortgage insurance,
excluding reimbursement of expenses, was $57.0 billion and
$59.4 billion, respectively.
Other prevalent types of credit enhancement that we use are
lender recourse and indemnification agreements (under which we
may require a lender to reimburse us for credit losses realized
on mortgages), as well as pool insurance. Pool insurance
provides insurance on a pool of loans up to a stated aggregate
loss limit. In addition to a pool-level loss coverage limit,
some pool insurance contracts may have limits on coverage at the
loan level. At June 30, 2009 and December 31, 2008, in
connection with the single-family mortgage portfolio, excluding
the loans that are underlying Structured Transactions, the
maximum amount of losses we could recover under lender recourse
and indemnification agreements was $9.7 billion and
$11.0 billion, respectively, and under pool insurance was
$3.6 billion and $3.8 billion, respectively. See
Institutional Credit Risk Mortgage
Insurers and Mortgage
Seller/Servicers for further discussion about our
mortgage loan insurers and seller/servicers.
Other forms of credit enhancements on single-family mortgage
loans include government guarantees, collateral (including cash
or high-quality marketable securities) pledged by a lender,
excess interest and subordinated security structures. At both
June 30, 2009 and December 31, 2008, in connection
with the single-family mortgage portfolio, excluding the loans
that are underlying Structured Transactions, the maximum amount
of losses we could recover under other forms of credit
enhancements was $0.5 billion.
Table 42 provides information on credit enhancements and
credit performance for our Structured Transactions.
Table 42
Credit Enhancement and Credit Performance of Single-Family
Structured
Transactions(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal Balance
|
|
|
Average Credit
|
|
|
|
Credit
Losses(4)
|
|
|
|
at June 30,
|
|
|
Enhancement
|
|
Delinquency
|
|
Six Months Ended June 30,
|
|
Structured Transaction Type
|
|
2009
|
|
|
2008
|
|
|
Coverage(2)
|
|
Rate(3)
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
|
|
|
|
(in millions)
|
|
|
Pass-through(5)
|
|
$
|
21,324
|
|
|
$
|
19,821
|
|
|
|
%
|
|
|
|
3.40%
|
|
|
$
|
133
|
|
|
$
|
19
|
|
Overcollateralization(6)
|
|
|
4,873
|
|
|
|
5,592
|
|
|
|
18.46%
|
|
|
|
21.07%
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Structured Transactions
|
|
$
|
26,197
|
|
|
$
|
25,413
|
|
|
|
3.43%
|
|
|
|
7.79%
|
|
|
$
|
134
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Credit enhancement percentages for each category are calculated
based on information available from third-party financial data
providers and exclude certain loan-level credit enhancements,
such as private mortgage insurance, that may also afford
additional protection to us.
|
(2)
|
Average credit enhancement represents a weighted-average
coverage percentage, is based on unpaid principal balances and
includes overcollateralization and subordination at
June 30, 2009.
|
(3)
|
Based on the number of loans that are past due 90 days or
more, or in the process of foreclosure, at June 30, 2009.
|
(4)
|
Represents the total of our guaranteed payments that has
exceeded the remittances of the underlying collateral and
includes amounts charged-off during the period. Charge-offs are
the amount of contractual principal balance that has been
discharged in order to satisfy the mortgage and extinguish our
guarantee.
|
(5)
|
Includes $10.2 billion and $10.3 billion of option ARM
mortgages that back these securities as of June 30, 2009
and June 30, 2008, respectively, and the delinquency rate
on these loans was 14.1% and 4.9%, respectively.
|
(6)
|
Includes $1.75 billion and $1.97 billion at
June 30, 2009 and 2008, respectively, that are securitized
FHA/VA loans, for which those agencies provide recourse for 100%
of qualifying losses associated with the loan.
|
The delinquency rates and credit losses associated with
single-family Structured Transactions categorized as
pass-through structures continued to increase during the first
half of 2009. We further increased our provision for credit
losses associated with these guarantees during the six months
ended June 30, 2009. Our credit losses on Structured
Transactions during the six months ended June 30, 2009 are
principally related to option ARM loans underlying several of
these transactions. The majority of the option ARM loans
underlying our pass-through Structured Transactions were
purchased from Washington Mutual Bank and are subject to our
agreement with JPMorgan Chase, which acquired Washington Mutual
Bank in September 2008. We are continuing to work with the
servicers of the loans underlying our Structured Transactions on
their loss mitigation efforts. See Institutional Credit
Risk Mortgage Seller/Servicers for further
information.
We may also use credit enhancements to mitigate risk of loss on
certain multifamily mortgages and revenue bonds. At
June 30, 2009 and December 31, 2008, in connection
with multifamily loans as well as PCs and Structured Securities
backed by multifamily mortgage loans, excluding the loans that
are underlying Structured Transactions, we had maximum coverage
of $3.0 billion and $3.3 billion, respectively.
Loss
Mitigation Activities
Loss mitigation activities are a key component of our strategy
for managing and resolving troubled assets and lowering credit
losses. Our single-family loss mitigation strategy emphasizes
early intervention in delinquent mortgages and providing
alternatives to foreclosure. Foreclosure alternatives are
intended to reduce the number of delinquent mortgages that
proceed to foreclosure and, ultimately, mitigate our total
credit losses by reducing or eliminating a portion of the costs
related to foreclosed properties and avoiding the credit loss in
REO. For more detailed explanation of the types of foreclosure
alternatives, see CREDIT RISKS Mortgage Credit
Risk Loss Mitigation Activities in our
2008 Annual Report. Table 43 presents our completed
single-family foreclosure alternative volumes for the three and
six months ended June 30, 2009 and 2008, respectively.
Table 43
Single-Family Foreclosure
Alternatives(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(number of loans)
|
|
|
Loan modifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with no change in
terms(2)
|
|
|
1,204
|
|
|
|
2,479
|
|
|
|
3,020
|
|
|
|
5,207
|
|
with change in terms and no reductions of principal
|
|
|
14,399
|
|
|
|
2,208
|
|
|
|
37,206
|
|
|
|
3,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan modifications
|
|
|
15,603
|
|
|
|
4,687
|
|
|
|
40,226
|
|
|
|
8,933
|
|
Repayment plans
|
|
|
7,409
|
|
|
|
10,691
|
|
|
|
17,868
|
|
|
|
23,078
|
|
Forbearance agreements
|
|
|
1,564
|
|
|
|
785
|
|
|
|
3,417
|
|
|
|
1,602
|
|
Pre-foreclosure sales
|
|
|
4,821
|
|
|
|
1,252
|
|
|
|
7,914
|
|
|
|
2,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosure alternatives
|
|
|
29,397
|
|
|
|
17,415
|
|
|
|
69,425
|
|
|
|
35,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on the single-family mortgage portfolio, excluding
Structured Transactions and that portion of Structured
Securities that is backed by Ginnie Mae Certificates.
|
(2)
|
Under this modification type, past due amounts are added to the
principal balance of the original contractual loan amount.
|
We had significant increases in loan modifications as well as
pre-foreclosure sales during the three and six month periods
ended June 30, 2009 compared to the three and six month
periods ended June 30, 2008. However, our loan modification
volume declined in the second quarter of 2009 compared to the
first quarter of 2009 due to the more complex process for
modifying loans under HAMP compared to non-HAMP modifications,
which is due, in part, to the required three month trial-period
for loans modified under HAMP. Based on information provided by
certain of our largest servicers who service a majority of our
loans, approximately 16,000 loans that we own or guarantee
started the trial period portion of the HAMP process as of
June 30, 2009. We expect a significant increase in the
number of loans in the trial period as HAMP expands and we
receive additional results from our servicers. We expect higher
modification activity volumes during the second half of 2009,
when HAMP loans will begin to complete the pre-modification
trial period.
Our servicers have a key role in the success of our loss
mitigation activities. The significant increases in delinquent
loan volume and the deteriorating conditions of the mortgage
market during 2008 and the first half of 2009 placed a strain on
the loss mitigation resources of many of our mortgage servicers.
A decline in the performance of any servicers in loss mitigation
efforts could result in missed opportunities for modifications
and an increase in our credit losses.
On November 11, 2008, our Conservator announced a
broad-based Streamlined Modification Program,
involving Freddie Mac, Fannie Mae, FHA, FHFA and 27 servicers,
which was intended to offer fast-track loan modifications to
certain troubled borrowers. The number of loan modifications
under this program was limited. Beginning in March 2009, our
efforts shifted to HAMP and refinance programs under the MHA
Program, which have replaced the Streamlined Modification
Program.
In order to allow our mortgage servicers time to implement our
more recent modification programs and provide additional relief
to troubled borrowers, we temporarily suspended all foreclosure
transfers of occupied homes from November 26, 2008 through
January 31, 2009 and from February 14, 2009 through
March 6, 2009. On March 7, 2009, we suspended
foreclosure transfers on owner-occupied homes where the borrower
may be eligible to receive a loan modification under the MHA
Program. We continued to pursue loss mitigation options with
delinquent borrowers during these temporary suspension periods;
however, we also continued to proceed with the initiation and
other,
pre-closing
steps in the foreclosure process. In addition, we temporarily
suspended the eviction process for occupants of foreclosed homes
from November 26, 2008 through April 1, 2009, and in
March 2009 we announced an initiative to provide for
month-to-month
rentals to qualified former borrowers and tenants that occupy
our newly-foreclosed single-family properties while we continue
our efforts to resell the home.
MHA
Program
On February 18, 2009, the Obama Administration announced
the MHA Program, which includes the components described below.
At present, it is difficult for us to predict the full extent of
our activities under these initiatives and assess their impact
on us. However, to the extent that borrowers participate in HAMP
in large numbers, it is likely that the costs we incur
associated with modifications of loans, and the costs associated
with servicer and borrower incentive fees may be substantial. In
addition, we are devoting significant internal resources to the
implementation of the various initiatives under the MHA Program.
We expect to be compensated by Treasury for some or all of our
services as compliance agent; however, we do not expect to be
compensated for the consulting services we are providing to
Treasury, as described below.
Home Affordable Modification Program. HAMP
commits U.S. government, Freddie Mac and Fannie Mae funds
to avoid foreclosures and keep eligible homeowners in their
homes through mortgage modifications. Under this program, we
will offer to financially struggling homeowners loan
modifications that reduce their monthly principal and interest
payments on their mortgages. Unlike the Streamlined Modification
Program that applied only to mortgages that were past due by
three or more payments, HAMP also applies to current borrowers
at risk of imminent default. Other features of HAMP include the
following:
|
|
|
|
|
HAMP uses specified requirements for borrower eligibility. The
program seeks to provide a uniform, consistent regime that all
participating servicers must use in modifying loans held or
guaranteed by all types of investors: Freddie Mac, Fannie Mae,
banks and trusts backing non-agency mortgage-related securities.
|
|
|
|
Under the program, the goal is to reduce the borrowers
monthly mortgage payments to 31% of gross monthly income, which
may be achieved through a combination of methods, including
interest rate reductions, term extensions and principal
deferral. Although HAMP contemplates that some servicers will
also make use of principal reduction to achieve reduced payments
for borrowers, we do not currently anticipate that principal
reduction will be used in modifying our loans.
|
|
|
|
HAMP requires that each borrower complete a three-month trial
period during which the borrower will make monthly payments
based on the estimated amount of the modification payments.
After the third trial-period payment is received by our
servicers, the modification will become effective.
|
|
|
|
Servicers will be paid a $1,000 incentive fee when they
originally modify a loan and an additional $500 incentive fee
for a loan that was current when it entered the three-month
trial period (i.e., where default was imminent but had
not yet occurred). In addition, servicers will receive up to
$1,000 for any modification that reduces a borrowers
monthly payment by 6% or more, in each of the first three years
after the modification, as long as the modified loan remains
current.
|
|
|
|
Borrowers whose loans are modified through this program will
accrue monthly incentive payments that will be applied annually
to reduce up to $1,000 of their principal, per year, for five
years, as long as they are making timely payments under the
modified loan terms.
|
|
|
|
Freddie Mac will bear the full cost of the monthly payment
reductions for loans we own or guarantee, and all servicer and
borrower incentive fees, and we will not receive a reimbursement
of these costs from Treasury.
|
|
|
|
HAMP applies to loans originated on or before January 1,
2009 and new borrowers will be accepted until December 31,
2012.
|
The success of modifications under HAMP is dependent on many
factors, including the ability to obtain updated information
from borrowers, resources of our servicers to execute the
process, the employment status and financial condition of the
borrower and the intent of the borrower to continue to occupy
the home. Borrowers who have insufficient income or have vacated
the property will not be able to cure their delinquency through
these programs. Although Treasury has provided that mortgage
investors, under the MHA Program, are entitled to certain
subsidies for reducing the borrowers monthly payments from
38% to 31% of the borrowers income, we will not receive
such subsidies on modified mortgages owned or guaranteed by us.
We are working with servicers and borrowers to pursue
modifications under HAMP and we expect that an increasing number
of loans eligible for modification under HAMP will enter a trial
period during the remainder of 2009. We expect to purchase a
significant number of loans modified under this program from PC
pools, which will likely result in the continued recognition of
losses on loans purchased on our consolidated statements of
operations during the remainder of 2009.
HAMP provides uniform guidelines for the modification not only
of troubled mortgages owned or guaranteed by us or by Fannie
Mae, but also for troubled mortgages held by others, or non-GSE
mortgages. We expect that non-GSE mortgages modified under HAMP
will include mortgages backing non-agency mortgage-related
securities in our mortgage-related investments portfolio, and
that such modifications will reduce the monthly payments due
from affected borrowers. In contrast to the modifications of
mortgages held or guaranteed by us or Fannie Mae, Treasury will
pay compensation to the holder of each modified non-GSE
mortgage, equal to half the reduction in the borrowers
monthly payment (less than half in a case where the
borrowers pre-modification monthly payment exceeded 38% of
his or her income). We expect that a share of this compensation
will be distributable to us as holder of securities backed by
such mortgages, in accordance with the governing documents for
the securities. The remainder of the monthly payment reductions
will be absorbed by subordinated investors or other credit
enhancement, if any, that is part of the structure for the
securities, or, should that credit enhancement be exhausted,
could reduce amounts distributable to us. Under Treasury
guidelines, each modification must be preceded by a servicer
analysis concluding that the net present value of the income
that the mortgage holder will receive after the modification
will equal or exceed the net
present value of the income that the holder would have received
had there been no modification, i.e., had the mortgage
been foreclosed.
Home Affordable Refinance. The Home Affordable
Refinance initiative gives eligible homeowners with loans owned
or guaranteed by us or Fannie Mae an opportunity to refinance
into more affordable monthly payments. Under Home Affordable
Refinance, we will help borrowers who have mortgages with high
current LTV ratios to refinance their mortgages without
obtaining new mortgage insurance in excess of what was already
in place. On July 1, 2009, we announced that the current
LTV ratio limit would be increased from 105% to 125%.
The Freddie Mac Relief Refinance
Mortgagesm,
which we announced in March 2009, is our implementation of Home
Affordable Refinance. We have worked with FHFA to provide us the
flexibility to implement this element of the MHA Program. The
Home Affordable Refinance effort is targeted at borrowers with
current LTV ratios above 80%; however, our implemented program
also allows borrowers with LTV ratios below 80% to participate.
Through our program, we offer this refinancing option only for
qualifying mortgage loans we hold in our portfolio or that we
guarantee. We will continue to bear the credit risk for
refinanced loans under this program, to the extent that such
risk is not covered by existing mortgage insurance or other
existing credit enhancements. We began purchasing loans under
this program in April 2009 and as of June 30, 2009 we had
purchased approximately 28,500 loans totalling $5.1 billion
of unpaid principal balances originated under the program.
On June 5, 2009, we announced our Relief Refinance
Mortgage Open Access offering and other changes to
the Relief Refinance Mortgage. The Open Access offering allows
borrowers to refinance a Freddie Mac-owned or guaranteed
mortgage with any lender that is a Freddie Mac-approved
seller/servicer. Previously, borrowers had to work with the
lender who currently services their mortgage.
Compliance Agent. We are the compliance agent
for certain foreclosure prevention activities under the MHA
Program. Among other duties, as the program compliance agent, we
will conduct examinations and review servicer compliance with
the published rules for the program. Some of these examinations
are on-site,
and others involve off-site documentation reviews. We will
report the results of our examination findings to Treasury.
Based on the examinations, we may also provide Treasury with
advice, guidance and lessons learned to improve operation of the
program.
Consulting Services. We are advising and
consulting with Treasury about the design, results and future
improvement of the MHA Program.
Second Lien Program. On April 28, 2009,
the Obama Administration announced new efforts under the MHA
Program to achieve greater affordability for homeowners by
lowering payments on second mortgages through modifications.
Under the program, also known as 2MP, participating servicers
will modify the borrowers monthly payments under a second
mortgage when a modification to the first lien mortgage is made
under the MHA Program. Servicers may alternatively extinguish
the second lien (if the investor that owns the second lien
mortgage agrees) in exchange for a lump-sum payment under a
pre-set formula determined by Treasury when appropriate. The 2MP
offers incentive payments to borrowers, servicers and investors
and requires principal forbearance on the second lien in the
same proportion as any principal forebearance granted on the
first lien. We do not expect to incur significant direct costs
under the program, because we only own or guarantee an
insignificant amount of second lien mortgages. This program has
not been implemented and we cannot yet determine any other
likely impacts on us.
Short Sale and
Deed-in-Lieu
Program. On May 14, 2009, the Obama
Administration announced the Foreclosure Alternatives Program,
which is designed to permit borrowers who are ineligible to
participate in HAMP to sell their homes in short
sales. In a short sale, the owner sells the home and the
lender accepts proceeds that are less than the outstanding
mortgage indebtedness. The program also provides a process for
borrowers to convey title to their homes through a
deed-in-lieu
of foreclosure. In both cases, the program will offer incentives
to the servicer and the borrower. This program has not been
implemented, and we cannot yet determine its impact on us.
Other
Developments
Various state and local governments have been taking actions
that could delay or otherwise change their foreclosure
processes. These actions could increase our expenses, including
by potentially delaying the final resolution of delinquent
mortgage loans and the disposition of non-performing assets. In
addition, Congress has considered, but not yet enacted,
legislation that would allow bankruptcy judges to modify the
terms of mortgages on principal residences for borrowers in
Chapter 13 bankruptcy. If enacted, this legislation could
cause bankruptcy filings to rise, potentially increasing
charge-offs associated with mortgages in our single-family
mortgage portfolio and increasing our losses on loans purchased,
which are recognized on our consolidated statements of
operations. For more information, see EXECUTIVE
SUMMARY Legislative and Regulatory Matters in
this
Form 10-Q
and RISK FACTORS Legal and Regulatory
Risks in our 2008 Annual Report.
Credit
Performance
Delinquencies
We report single-family delinquency rate information based on
the number of loans that are 90 days or more past due and
those in the process of foreclosure. For multifamily loans, we
report delinquency rates based on net carrying values of
mortgage loans 90 days or more past due and those in the
process of foreclosure. Mortgage loans whose contractual terms
have been modified under agreement with the borrower are not
counted as delinquent for purposes of reporting delinquency
rates if the borrower is less than 90 days delinquent under
the modified terms. We include all the single-family loans that
we own and those that are collateral for our PCs and Structured
Securities for which we actively manage the credit risk.
Consequently, we exclude that portion of our Structured
Securities that are backed by Ginnie Mae Certificates and our
Structured Transactions. We exclude Structured Securities backed
by Ginnie Mae Certificates because these securities do not
expose us to meaningful amounts of credit risk due to the
guarantee provided on these securities by the
U.S. government. We exclude Structured Transactions from
the delinquency rates of our single-family mortgage portfolio
because these are backed by non-Freddie Mac securities and,
consequently, we do not service the underlying loans and do not
perform primary loss mitigation. Many of our Structured
Transactions are credit enhanced through subordination and are
not representative of the loans for which we have primary, or
first loss, exposure. Structured Transactions represented
approximately 1% of our total mortgage portfolio at both
June 30, 2009 and December 31, 2008. See
NOTE 5: MORTGAGE LOANS AND LOAN LOSS RESERVES
Table 5.6 Delinquency Performance
to our consolidated financial statements for the delinquency
performance of our single-family and multifamily mortgage
portfolios, including Structured Transactions. Table 44
presents regional single-family delinquency rates for non-credit
enhanced loans, excluding those underlying our Structured
Transactions.
Table 44
Single-Family Delinquency Rates By
Region(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Unpaid Principal
|
|
|
Delinquency
|
|
|
Unpaid Principal
|
|
|
Delinquency
|
|
|
|
Balance(2)
|
|
|
Rate
|
|
|
Balance(2)
|
|
|
Rate
|
|
|
Northeast(1)
|
|
|
24
|
%
|
|
|
1.63
|
%
|
|
|
24
|
%
|
|
|
0.96
|
%
|
Southeast(1)
|
|
|
18
|
|
|
|
3.01
|
|
|
|
18
|
|
|
|
1.87
|
|
North
Central(1)
|
|
|
19
|
|
|
|
1.55
|
|
|
|
19
|
|
|
|
0.98
|
|
Southwest(1)
|
|
|
12
|
|
|
|
0.96
|
|
|
|
13
|
|
|
|
0.68
|
|
West(1)
|
|
|
27
|
|
|
|
3.20
|
|
|
|
26
|
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-credit-enhanced all regions
|
|
|
|
|
|
|
2.13
|
|
|
|
|
|
|
|
1.26
|
|
Total credit-enhanced all regions
|
|
|
|
|
|
|
5.82
|
|
|
|
|
|
|
|
3.79
|
|
Total single-family mortgage portfolio
|
|
|
|
|
|
|
2.78
|
|
|
|
|
|
|
|
1.72
|
|
|
|
(1)
|
Presentation of non-credit-enhanced delinquency rates with the
following regional designation: West (AK, AZ, CA, GU, HI, ID,
MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH, NJ,
NY, PA, RI, VT, VA, WV); North Central (IL, IN, IA, MI, MN, ND,
OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI);
and Southwest (AR, CO, KS, LA, MO, NE, NM, OK, TX, WY).
|
(2)
|
Based on mortgage loans in our mortgage-related investments
portfolio and underlying our guaranteed PCs and Structured
Securities issued, excluding that portion of Structured
Securities that is backed by Ginnie Mae Certificates.
|
During 2008 and continuing in the first half of 2009, home
prices remained weak due to significant inventories of unsold
homes in every region of the U.S. In some geographical
areas, particularly in certain states within the West, Southeast
and North Central regions, home price declines have been
combined with significantly higher rates of unemployment and
weakness in home sales, which have resulted in significant
increases in delinquency rates. These increases in delinquency
rates have been more severe in the states of California,
Florida, Nevada and Arizona. For example, as of June 30,
2009, single-family loans in the state of California comprised
14% of our single-family mortgage portfolio; however, delinquent
loans in California comprised more than 23% of the delinquent
loans in our single-family mortgage portfolio, based on unpaid
principal balances. The delinquency rate for loans in our
single-family mortgage portfolio, excluding Structured
Transactions, related to the states of Nevada, Florida, Arizona
and California were 7.87%, 7.73%, 5.12% and 4.23%, respectively,
as of June 30, 2009.
Increases in delinquency rates occurred for all single-family
mortgage product types during the first half of 2009, but were
most significant for interest-only,
Alt-A and
option ARM mortgage loans. Delinquency rates for interest-only
and option ARM products, which together represented
approximately 9% of our total single-family mortgage portfolio
at June 30, 2009, increased to 13.31% and 14.06% at
June 30, 2009, respectively, compared with 7.59% and 8.70%
at December 31, 2008, respectively. Reflecting the
expansion of the housing and economic downturn to a broader
group of borrowers, the delinquency rate for single-family
fixed-rate amortizing loans, a more traditional loan product,
increased to 2.76% at June 30, 2009 as compared to 1.69% at
December 31, 2008. We have also continued to experience
higher rates of delinquency on loans originated after 2005,
since those borrowers are more susceptible to
the recent declines in home prices than homeowners that have
built equity over time. The table below presents delinquency and
default rate information for our single-family mortgage
portfolio based on year of origination.
Table 45
Single-Family Mortgage Portfolio by Year of
Origination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
Single-Family
|
|
|
|
|
|
Cumulative
|
|
|
Single-Family
|
|
|
|
|
|
Cumulative
|
|
Year of Origination
|
|
UPB
Balance(1)
|
|
|
Delinquency
Rate(1)
|
|
|
Default
Rate(2)
|
|
|
UPB Balance
|
|
|
Delinquency Rate
|
|
|
Default
Rate(2)
|
|
|
Pre-2000
|
|
|
2
|
%
|
|
|
1.91
|
%
|
|
|
n/a
|
|
|
|
2
|
%
|
|
|
1.53
|
%
|
|
|
n/a
|
|
2000
|
|
|
<1
|
|
|
|
4.71
|
|
|
|
1.07
|
%
|
|
|
<1
|
|
|
|
3.95
|
|
|
|
1.05
|
%
|
2001
|
|
|
1
|
|
|
|
2.13
|
|
|
|
0.77
|
|
|
|
2
|
|
|
|
1.56
|
|
|
|
0.74
|
|
2002
|
|
|
4
|
|
|
|
1.39
|
|
|
|
0.64
|
|
|
|
5
|
|
|
|
0.95
|
|
|
|
0.60
|
|
2003
|
|
|
14
|
|
|
|
0.93
|
|
|
|
0.40
|
|
|
|
16
|
|
|
|
0.58
|
|
|
|
0.35
|
|
2004
|
|
|
9
|
|
|
|
1.82
|
|
|
|
0.66
|
|
|
|
11
|
|
|
|
1.10
|
|
|
|
0.53
|
|
2005
|
|
|
13
|
|
|
|
3.31
|
|
|
|
1.15
|
|
|
|
15
|
|
|
|
1.93
|
|
|
|
0.79
|
|
2006
|
|
|
13
|
|
|
|
6.31
|
|
|
|
1.80
|
|
|
|
15
|
|
|
|
3.48
|
|
|
|
1.15
|
|
2007
|
|
|
17
|
|
|
|
6.82
|
|
|
|
1.25
|
|
|
|
19
|
|
|
|
3.46
|
|
|
|
0.64
|
|
2008
|
|
|
14
|
|
|
|
1.66
|
|
|
|
0.14
|
|
|
|
15
|
|
|
|
0.56
|
|
|
|
0.02
|
|
2009
|
|
|
13
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
2.78
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes Structured Transactions and those Structured Securities
backed by Ginnie Mae Certificates.
|
(2)
|
Represents the cumulative transition rate of loans to a default
event, and is calculated for each year of origination as the
number of loans that have proceeded to foreclosure acquisition
or other disposition events, excluding liquidations through
voluntary pay-off, divided by the number of loans in our
single-family mortgage portfolio. Excludes certain Structured
Transactions for which data is unavailable.
|
Our temporary actions to suspend foreclosure transfers of
occupied homes as well as the longer foreclosure process
timeframes of certain states (including Florida) have, in part,
caused our delinquency rates to increase more rapidly in the
first half of 2009, as loans that would have been foreclosed
have instead remained in delinquent status. Until economic
conditions moderate and the fundamentals of the housing market
improve, we expect our delinquency rates to continue to rise. In
general, our suspension or delays of foreclosure transfers and
any imposed delays in the foreclosure process by regulatory or
governmental agencies will cause our delinquency rates to rise
more rapidly.
Due to deterioration in the economic and market fundamentals,
our multifamily portfolio delinquency rate, which includes
multifamily loans on our consolidated balance sheets as well as
multifamily loans underlying our issued PCs and Structured
Securities, excluding Structured Transactions, has also
increased during the first half of 2009, rising to 0.11% at
June 30, 2009 from 0.01% at December 31, 2008.
Increasing job losses have contributed to declining effective
rents and increased vacancies in multifamily properties. There
has been an increase in the delinquency rate for multifamily
loans in our mortgage-related investments portfolio, principally
from loans on properties in the states of Georgia and Texas. As
of June 30, 2009, our multifamily portfolio is divided into
the following regions, with composition percentages based on
unpaid principal balance of the related loans: Northeast (29%),
Western (26%), Southwest (19%), Southeast (17%) and North
Central (9%).
Loans
Purchased Under Financial Guarantees
As securities administrator, we are required to purchase a
mortgage loan from a mortgage pool under certain circumstances
at the direction of a court of competent jurisdiction or a
federal government agency. Additionally, we are required to
repurchase all convertible ARMs when the borrower exercises the
option to convert the interest rate from an adjustable rate to a
fixed rate; and in the case of balloon/reset loans, shortly
before the mortgage reaches its scheduled balloon reset date.
During the six months ended June 30, 2009 and 2008, we
purchased $714 million and $1.3 billion, respectively,
of convertible ARMs and balloon/reset loans out of PC pools.
As guarantor, we also have the right to purchase mortgages that
back our PCs and Structured Securities (other than Structured
Transactions) from the underlying loan pools when they are
significantly past due or when we determine that loss of the
property is likely or default by the borrower is imminent due to
borrower incapacity, death or other extraordinary circumstances
that make future payments unlikely or impossible. This right to
repurchase mortgages or assets is known as our repurchase
option, and we exercise this option when we modify a mortgage.
We record loans that we purchase in connection with our
performance under our financial guarantees at fair value and
record losses on loans purchased on our consolidated statements
of operations in order to reduce our net investment in acquired
loans to their fair value. The table below presents activities
related to optional purchases of loans under financial
guarantees for the three months ended June 30, 2009 and
2008.
Table 46
Changes in Loans Purchased Under Financial
Guarantees(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009
|
|
|
Three Months Ended June 30, 2008
|
|
|
|
Unpaid
|
|
|
Purchase
|
|
|
Loan Loss
|
|
|
Net
|
|
|
Unpaid
|
|
|
Purchase
|
|
|
Loan Loss
|
|
|
Net
|
|
|
|
Principal Balance
|
|
|
Discount
|
|
|
Reserves
|
|
|
Investment
|
|
|
Principal Balance
|
|
|
Discount
|
|
|
Reserves
|
|
|
Investment
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
13,910
|
|
|
$
|
(5,712
|
)
|
|
$
|
(147
|
)
|
|
$
|
8,051
|
|
|
$
|
6,143
|
|
|
$
|
(1,444
|
)
|
|
$
|
(5
|
)
|
|
$
|
4,694
|
|
Purchases of loans
|
|
|
2,071
|
|
|
|
(1,492
|
)
|
|
|
|
|
|
|
579
|
|
|
|
723
|
|
|
|
(173
|
)
|
|
|
|
|
|
|
550
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Principal
repayments(2)
|
|
|
(70
|
)
|
|
|
87
|
|
|
|
2
|
|
|
|
19
|
|
|
|
(226
|
)
|
|
|
64
|
|
|
|
|
|
|
|
(162
|
)
|
Troubled debt restructurings
|
|
|
(299
|
)
|
|
|
162
|
|
|
|
1
|
|
|
|
(136
|
)
|
|
|
(17
|
)
|
|
|
5
|
|
|
|
|
|
|
|
(12
|
)
|
Property acquisitions, transferred to REO
|
|
|
(231
|
)
|
|
|
84
|
|
|
|
7
|
|
|
|
(140
|
)
|
|
|
(524
|
)
|
|
|
162
|
|
|
|
1
|
|
|
|
(361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance(3)
|
|
$
|
15,381
|
|
|
$
|
(6,871
|
)
|
|
$
|
(92
|
)
|
|
$
|
8,418
|
|
|
$
|
6,099
|
|
|
$
|
(1,386
|
)
|
|
$
|
(6
|
)
|
|
$
|
4,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009
|
|
|
Six Months Ended June 30, 2008
|
|
|
|
Unpaid
|
|
|
Purchase
|
|
|
Loan Loss
|
|
|
Net
|
|
|
Unpaid
|
|
|
Purchase
|
|
|
Loan Loss
|
|
|
Net
|
|
|
|
Principal Balance
|
|
|
Discount
|
|
|
Reserves
|
|
|
Investment
|
|
|
Principal Balance
|
|
|
Discount
|
|
|
Reserves
|
|
|
Investment
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
9,522
|
|
|
$
|
(3,097
|
)
|
|
$
|
(80
|
)
|
|
$
|
6,345
|
|
|
$
|
7,001
|
|
|
$
|
(1,767
|
)
|
|
$
|
(2
|
)
|
|
$
|
5,232
|
|
Purchases of loans
|
|
|
6,932
|
|
|
|
(4,304
|
)
|
|
|
|
|
|
|
2,628
|
|
|
|
1,146
|
|
|
|
(245
|
)
|
|
|
|
|
|
|
901
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Principal
repayments(2)
|
|
|
(97
|
)
|
|
|
146
|
|
|
|
4
|
|
|
|
53
|
|
|
|
(510
|
)
|
|
|
139
|
|
|
|
|
|
|
|
(371
|
)
|
Troubled debt restructurings
|
|
|
(580
|
)
|
|
|
244
|
|
|
|
4
|
|
|
|
(332
|
)
|
|
|
(28
|
)
|
|
|
7
|
|
|
|
|
|
|
|
(21
|
)
|
Property acquisitions, transferred to REO
|
|
|
(396
|
)
|
|
|
140
|
|
|
|
11
|
|
|
|
(245
|
)
|
|
|
(1,510
|
)
|
|
|
480
|
|
|
|
1
|
|
|
|
(1,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance(3)
|
|
$
|
15,381
|
|
|
$
|
(6,871
|
)
|
|
$
|
(92
|
)
|
|
$
|
8,418
|
|
|
$
|
6,099
|
|
|
$
|
(1,386
|
)
|
|
$
|
(6
|
)
|
|
$
|
4,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Consist of seriously delinquent or modified loans purchased at
our option in performance of our financial guarantees and in
accordance
with SOP 03-3.
|
(2)
|
Includes the capitalization of past due interest on loans
subject to repayment or other agreements executed during the
period, which resulted in an increase in our net investment in
these loans during the three and six months ended June 30,
2009.
|
(3)
|
Includes loans that have subsequently returned to current status
under the original loan terms.
|
Our net investment in delinquent and modified loans purchased
under financial guarantees increased approximately 33% during
the six months ended June 30, 2009. During that period, we
purchased approximately $6.9 billion in unpaid principal
balances of these loans with a fair value at acquisition of
$2.6 billion. The $4.3 billion purchase discount
consists of $1.1 billion previously recognized as loan loss
reserve or guarantee obligation and $3.2 billion of losses
on loans purchased. We expect the volume of our loan
modifications and our optional loan purchases from PC pools to
increase in the second half of 2009. As a result, we expect to
continue to incur significant losses on the purchase of
delinquent or modified loans in the second half of 2009.
However, the volume and severity of these losses is dependent on
many factors, including changes in fair values of delinquent or
modified loans, which are impacted by investor demand as well as
regional changes in home prices.
As of June 30, 2009, the cure rate for loans that we
purchased out of PC pools during the first and second quarters
of 2009 was approximately 68% and 85%, respectively. The cure
rate is the percentage of loans purchased with or without
modification under our financial guarantees that have returned
to less than 90 days past due or have been paid off,
divided by the total of loans purchased under our financial
guarantees. The cure rate for the first quarter of 2009 is lower
than the second quarter of 2009 because a significant number of
the modifications in the first quarter were completed as part of
a pilot program, offered in mid-2008, to complete modifications
of significantly delinquent loans on a broad scale. Many of the
delinquent borrowers in that pilot program, including those
whose modifications were completed in the first quarter of 2009,
agreed to the modifications, but did not meet their new payment
obligations and defaulted on their modified loans. Mortgages
that remain in the pools and reperform or proceed to foreclosure
are not included in these cure rate statistics.
Non-Performing
Assets
We classify single-family loans in our total mortgage portfolio
as non-performing assets if they are past due for 90 days
or more (seriously delinquent) or if their contractual terms
have been modified as a troubled debt restructuring due to the
financial difficulties of the borrower. Similarly, we classify
multifamily loans as non-performing assets if they are
90 days or more past due (seriously delinquent), if
collectibility of principal and interest is not reasonably
assured based on an individual loan level assessment, or if
their contractual terms have been modified as a troubled debt
restructuring due to financial difficulties of the borrower.
Table 47 provides detail of non-performing loans and REO
assets on our consolidated balance sheets and non-performing
loans underlying our financial guarantees.
Table 47
Non-Performing
Assets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Non-performing mortgage loans on balance
sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reperforming or less than 90 days delinquent
|
|
$
|
2,365
|
|
|
$
|
2,280
|
|
|
$
|
2,433
|
|
90 days or more delinquent
|
|
|
1,242
|
|
|
|
838
|
|
|
|
682
|
|
Multifamily troubled debt
restructurings(2)
|
|
|
226
|
|
|
|
238
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
|
3,833
|
|
|
|
3,356
|
|
|
|
3,379
|
|
Other single-family non-performing
loans(3)
|
|
|
7,993
|
|
|
|
4,915
|
|
|
|
3,525
|
|
Other multifamily non-performing loans
|
|
|
187
|
|
|
|
78
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing mortgage loans on balance sheet
|
|
|
12,013
|
|
|
|
8,349
|
|
|
|
6,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing mortgage loans underlying
financial
guarantees:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
loans(5)
|
|
|
61,936
|
|
|
|
36,718
|
|
|
|
18,260
|
|
Multifamily loans
|
|
|
154
|
|
|
|
63
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-performing mortgage loans underlying
financial guarantees
|
|
|
62,090
|
|
|
|
36,781
|
|
|
|
18,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned, net
|
|
|
3,416
|
|
|
|
3,255
|
|
|
|
2,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
77,519
|
|
|
$
|
48,385
|
|
|
$
|
27,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets as a percentage of the total
mortgage portfolio, excluding non-Freddie Mac securities
|
|
|
3.9
|
%
|
|
|
2.5
|
%
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Non-performing assets consist of loans that have undergone a
troubled debt restructuring, loans that are more than
90 days past due, and REO assets, net. Troubled debt
restructurings include loans where the contractual terms have
been modified to provide concessions to borrowers that are
experiencing financial difficulties. Mortgage loan amounts are
based on unpaid principal balances and REO, net is based on
carrying values.
|
(2)
|
Includes multifamily loans 90 days or more delinquent where
principal and interest are being paid to us under the terms of a
credit enhancement agreement.
|
(3)
|
Represents loans held by us in our mortgage-related investments
portfolio, including loans purchased from the mortgage pools
underlying our financial guarantees due to the borrowers
delinquency. Once we purchase a loan under our financial
guarantee, it is placed on non-accrual status as long as it
remains greater than 90 days past due.
|
(4)
|
Includes loans more than 90 days past due that underlie all
our issued PCs and Structured Securities and long-term standby
agreements, regardless of whether a security is held in our
mortgage-related investments portfolio or held by third parties.
|
(5)
|
Includes mortgages that underlie our Structured Transactions.
Beginning December 2007, we changed our operational practice for
purchasing loans from PC pools, which effectively delayed our
purchase of nonperforming loans into our mortgage-related
investments portfolio. This change, combined with increasing
delinquency rates, caused an increase in non-performing loans
underlying our financial guarantees during 2008 and the first
half of 2009.
|
The amount of our non-performing assets, both on our balance
sheets and underlying our issued PCs and Structured Securities,
increased to approximately $77.5 billion at June 30,
2009, from $48.4 billion at December 31, 2008, due to
continued deterioration in single-family housing market
fundamentals which led to significant increases in the
delinquency rate and delinquency transition rates during the
first half of 2009. The delinquency transition rate is the
percentage of delinquent loans that proceed to foreclosure or
are modified as troubled debt restructurings. We expect to
continue to experience high delinquency transition rates and a
continued increase in our non-performing assets in the second
half of 2009.
Table 48 provides detail by region for REO activity. Our
REO activity consists almost entirely of single-family
residential properties. Consequently, our regional REO
acquisition trends generally follow a pattern that is similar
to, but lags, that of regional delinquency trends of our
single-family mortgage portfolios.
Table
48 REO Activity by
Region(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(number of units)
|
|
|
REO Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning property inventory
|
|
|
29,151
|
|
|
|
18,419
|
|
|
|
29,346
|
|
|
|
14,394
|
|
Properties acquired by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
|
1,827
|
|
|
|
1,310
|
|
|
|
2,950
|
|
|
|
2,577
|
|
Southeast
|
|
|
4,441
|
|
|
|
2,614
|
|
|
|
7,996
|
|
|
|
4,597
|
|
North Central
|
|
|
6,143
|
|
|
|
3,445
|
|
|
|
8,897
|
|
|
|
6,582
|
|
Southwest
|
|
|
2,094
|
|
|
|
1,465
|
|
|
|
3,753
|
|
|
|
2,835
|
|
West
|
|
|
7,493
|
|
|
|
3,576
|
|
|
|
12,391
|
|
|
|
5,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total properties acquired
|
|
|
21,998
|
|
|
|
12,410
|
|
|
|
35,987
|
|
|
|
22,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties disposed by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
|
(1,283
|
)
|
|
|
(1,000
|
)
|
|
|
(2,523
|
)
|
|
|
(1,622
|
)
|
Southeast
|
|
|
(3,634
|
)
|
|
|
(1,949
|
)
|
|
|
(6,672
|
)
|
|
|
(3,359
|
)
|
North Central
|
|
|
(3,769
|
)
|
|
|
(2,795
|
)
|
|
|
(7,247
|
)
|
|
|
(4,940
|
)
|
Southwest
|
|
|
(1,640
|
)
|
|
|
(1,359
|
)
|
|
|
(3,185
|
)
|
|
|
(2,414
|
)
|
West
|
|
|
(6,117
|
)
|
|
|
(1,697
|
)
|
|
|
(11,000
|
)
|
|
|
(2,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total properties disposed
|
|
|
(16,443
|
)
|
|
|
(8,800
|
)
|
|
|
(30,627
|
)
|
|
|
(14,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending property inventory
|
|
|
34,706
|
|
|
|
(22,029
|
)
|
|
|
34,706
|
|
|
|
22,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
See Table 44 Single-Family
Delinquency Rates, By Region for a description
of these regions.
|
The impact of the declines in single-family home prices and
increasing rates of unemployment lessened the alternatives to
foreclosure for homeowners exposed to temporary deterioration in
their financial condition. As discussed in Loss
Mitigation Activities, we announced several loan
modification initiatives designed to potentially assist troubled
borrowers avoid foreclosure as well as temporary suspensions in
foreclosure transfers of occupied homes that have significantly
affected the rate of growth of our REO acquisitions during the
first half of 2009. On March 7, 2009, we suspended
foreclosure transfers on owner-occupied homes where the borrower
may be eligible to receive a loan modification under the MHA
Program; however, we have continued with initiation and other
preclosing steps in the foreclosure process. Our suspension or
delay of foreclosure transfers and any delay in foreclosures
that might be imposed by regulatory or governmental agencies
will cause a temporary decline in REO acquisitions and continue
to affect the rate of growth of our REO inventory. Many of the
foreclosure starts, for which we temporarily suspended
foreclosure transfers at the end of 2008 and in the first
quarter of 2009, did not qualify for modifications under HAMP or
any of our other programs and caused the volume of our REO
property acquisitions to increase during the second quarter of
2009. Our REO property inventory increased 19% and 18% during
the three and six months ended June 30, 2009, respectively. We
expect our REO inventory to continue to grow in the remainder of
2009.
Our single-family REO acquisitions during the first half of 2009
were most significant in the states of California, Arizona,
Michigan, Florida and Nevada. The West region represented
approximately 34% of the new REO acquisitions during the six
months ended June 30, 2009, based on the number of units,
and the highest concentration in that region is in the state of
California. At June 30, 2009, our REO inventory in
California comprised 16% of total REO property inventory, based
on units, and approximately 25% of our total REO property
inventory, based on loan amount prior to acquisition.
Credit
Loss Performance
Many loans that are delinquent or in foreclosure result in
credit losses. Table 49 provides detail on our credit loss
performance associated with mortgage loans underlying our
guaranteed PCs and Structured Securities as well as mortgage
loans in our mortgage-related investments portfolio.
Table 49
Credit Loss Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(dollars in millions)
|
|
|
REO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REO balances, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
3,381
|
|
|
$
|
2,580
|
|
|
$
|
3,381
|
|
|
$
|
2,580
|
|
Multifamily
|
|
|
35
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,416
|
|
|
$
|
2,580
|
|
|
$
|
3,416
|
|
|
$
|
2,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REO operations expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
(1
|
)
|
|
$
|
(265
|
)
|
|
$
|
(307
|
)
|
|
$
|
(473
|
)
|
Multifamily
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(9
|
)
|
|
$
|
(265
|
)
|
|
$
|
(315
|
)
|
|
$
|
(473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHARGE-OFFS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs,
gross(1)
(including $2,348 million, $628 million,
$3,674 million and $926 million relating to loan loss
reserve, respectively)
|
|
$
|
(2,413
|
)
|
|
$
|
(722
|
)
|
|
$
|
(3,779
|
)
|
|
$
|
(1,177
|
)
|
Recoveries(2)
|
|
|
508
|
|
|
|
177
|
|
|
|
862
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family, net
|
|
$
|
(1,905
|
)
|
|
$
|
(545
|
)
|
|
$
|
(2,917
|
)
|
|
$
|
(865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs,
gross(1)
(including $2 million, $ million,
$4 million and $ million relating to loan loss
reserve, respectively)
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily, net
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs,
gross(1)
(including $2,350 million, $628 million,
$3,678 million and $926 million relating to loan loss
reserves, respectively)
|
|
$
|
(2,415
|
)
|
|
$
|
(722
|
)
|
|
$
|
(3,783
|
)
|
|
$
|
(1,177
|
)
|
Recoveries(2)
|
|
|
508
|
|
|
|
177
|
|
|
|
862
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs, net
|
|
$
|
(1,907
|
)
|
|
$
|
(545
|
)
|
|
$
|
(2,921
|
)
|
|
$
|
(865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CREDIT
LOSSES(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
(1,906
|
)
|
|
$
|
(810
|
)
|
|
$
|
(3,224
|
)
|
|
$
|
(1,338
|
)
|
Multifamily
|
|
|
(10
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,916
|
)
|
|
$
|
(810
|
)
|
|
$
|
(3,236
|
)
|
|
$
|
(1,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total in basis
points(4)
(annualized)
|
|
|
39.8
|
|
|
|
17.3
|
|
|
|
33.8
|
|
|
|
14.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represent the amount of the unpaid principal balance of a loan
that has been discharged in order to remove the loan from our
mortgage-related investments portfolio at the time of
resolution, regardless of when the impact of the credit loss was
recorded on our consolidated statements of operations through
the provision for credit losses or losses on loans purchased.
The amount of charge-offs for credit loss performance is
generally calculated as the contractual balance of a loan at the
date it is discharged less the estimated value in final
disposition.
|
(2)
|
Recoveries of charge-offs primarily result from foreclosure
alternatives and REO acquisitions on loans where a share of
default risk has been assumed by mortgage insurers, servicers or
other third parties through credit enhancements.
|
(3)
|
Equal to REO operations expense plus charge-offs, net. Excludes
interest forgone on nonperforming loans, which reduces our net
interest income but is not reflected in our total credit losses.
In addition, excludes other market-based credit losses incurred
on our mortgage-related investments portfolio and recognized in
our consolidated statements of operations, including losses on
loans purchased and losses on certain credit guarantees.
|
(4)
|
Calculated as annualized credit losses divided by the average
total mortgage portfolio, excluding non-Freddie Mac
mortgage-related securities and that portion of Structured
Securities that is backed by Ginnie Mae Certificates.
|
Our credit loss performance is a historic metric that measures
losses at the conclusion of the loan and related collateral
resolution process. There is a significant lag in time from the
implementation of loss mitigation activities to the final
resolution of delinquent mortgage loans as well as the
disposition of non-performing assets. We expect our charge-offs
will continue to increase in the remainder of 2009. Our credit
loss performance does not include our provision for credit
losses and losses on loans purchased. We expect our credit
losses to continue to increase during 2009, as our REO
acquisition volume will likely remain high and market
conditions, such as home prices and the rate of home sales,
continue to remain weak. As discussed in Loss
Mitigation Activities, we announced several
suspensions in foreclosure transfers of owner-occupied homes
that affected our charge-off and REO operations expenses during
the first half of 2009. Further suspension or delay of
foreclosure transfers and any imposed delay in the foreclosure
process by regulatory or governmental agencies will cause a
delay in our recognition of credit losses. The implementation of
any governmental actions or programs that expand the ability of
delinquent borrowers to refinance with concessions of past due
principal or interest amounts, including legislative changes to
bankruptcy laws, could lead to higher charge-offs and increased
credit losses.
Single-family charge-offs, gross, for the six months ended
June 30, 2009 increased to $3.8 billion compared to
$1.2 million for the six months ended June 30, 2008,
primarily due to an increase in the volume of REO properties
acquired at foreclosure and continued weakness of residential
real estate markets in regional areas. The severity of
charge-offs during the first half of 2009 increased compared to
the first half of 2008, due to declines in regional housing
markets resulting in higher per-property losses. Our
per-property loss severity during the first half of 2009 has
been greatest in those areas that experienced the fastest
increases in property values during 2000 through 2006, such as
California, Florida, Nevada and Arizona. In addition, although
Alt-A loans
comprised approximately 9% of our single-family mortgage
portfolio as of June 30, 2009, these loans have contributed
disproportionately to our credit losses during the six months
ended June 30, 2009, comprising approximately 45% of these
losses. Table 50 presents the credit loss concentration of
loans in our single-family portfolio for the six months ended
June 30, 2009 and 2008.
Table 50 Single-Family
Credit Loss Concentration Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal
Balance(1)
|
|
|
Credit
Losses(2)
|
|
|
|
As of June 30,
|
|
|
Six Months Ended
|
|
|
|
2009
|
|
|
2008
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
(in billions)
|
|
|
(in millions)
|
|
|
Year of origination:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
240
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2008
|
|
|
257
|
|
|
|
174
|
|
|
|
113
|
|
|
|
|
|
2007
|
|
|
307
|
|
|
|
363
|
|
|
|
1,121
|
|
|
|
205
|
|
2006
|
|
|
236
|
|
|
|
290
|
|
|
|
1,178
|
|
|
|
594
|
|
All other
|
|
|
847
|
|
|
|
1,009
|
|
|
|
812
|
|
|
|
539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,887
|
|
|
$
|
1,836
|
|
|
$
|
3,224
|
|
|
$
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
267
|
|
|
$
|
248
|
|
|
$
|
993
|
|
|
$
|
363
|
|
Florida
|
|
|
122
|
|
|
|
124
|
|
|
|
459
|
|
|
|
118
|
|
Arizona
|
|
|
51
|
|
|
|
52
|
|
|
|
374
|
|
|
|
99
|
|
Nevada
|
|
|
23
|
|
|
|
23
|
|
|
|
190
|
|
|
|
45
|
|
Michigan
|
|
|
60
|
|
|
|
62
|
|
|
|
250
|
|
|
|
180
|
|
All other
|
|
|
1,364
|
|
|
|
1,327
|
|
|
|
958
|
|
|
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,887
|
|
|
$
|
1,836
|
|
|
$
|
3,224
|
|
|
$
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Documentation-type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
|
|
$
|
165
|
|
|
$
|
193
|
|
|
$
|
1,444
|
|
|
$
|
657
|
|
Non Alt-A
|
|
|
1,722
|
|
|
|
1,643
|
|
|
|
1,780
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,887
|
|
|
$
|
1,836
|
|
|
$
|
3,224
|
|
|
$
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on the unpaid principal balance of our single-family
mortgage loans in our mortgage-related investments portfolio as
well as those underlying our PCs and Structured Securities,
excluding those backed by Ginnie Mae Certificates and certain
Structured Transactions for which loan level data is not
available.
|
(2)
|
Credit losses consist of the aggregate amount of charge-offs,
net of recoveries, and the amount of REO operations expense in
each of the respective periods and exclude other market-based
losses recognized on our consolidated statements of operations.
|
Loan Loss
Reserves
We maintain two mortgage-related loan loss reserves
allowance for losses on mortgage loans held-for-investment and
reserve for guarantee losses at levels we deem
adequate to absorb probable incurred losses on mortgage loans
held-for-investment in our mortgage-related investments
portfolio and mortgages underlying our PCs, Structured
Securities and other financial guarantees, respectively.
Determining the loan loss and credit-related loss reserves
associated with our mortgage loans and financial guarantees is
complex and requires significant management judgment about
matters that involve a high degree of subjectivity. This
management estimate was inherently more difficult to perform in
the first half of 2009 due to the absence of historical
precedents relative to the current economic environment as well
as the potential impacts of our temporary suspension of
foreclosure transfers of occupied homes and those loans that may
be eligible for modification under the MHA Program. As described
elsewhere in this
Form 10-Q,
we modified our approach for estimating our loan loss reserves
during the second quarter of 2009. See
MD&A CRITICAL ACCOUNTING POLICIES AND
ESTIMATES Allowance for Loan Losses and Reserve for
Guarantee Losses and NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES in our 2008 Annual Report
for further information. Table 51 summarizes our loan loss
reserves activity for guaranteed loans and those mortgage loans
held in our mortgage-related investments portfolio, in total.
Table
51 Loan Loss Reserves Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Total loan loss
reserves:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
22,678
|
|
|
$
|
3,872
|
|
|
$
|
15,618
|
|
|
$
|
2,822
|
|
Provision (benefit) for credit
losses(2)
|
|
|
5,199
|
|
|
|
2,537
|
|
|
|
13,990
|
|
|
|
3,777
|
|
Charge-offs,
gross(3)
|
|
|
(2,350
|
)
|
|
|
(628
|
)
|
|
|
(3,678
|
)
|
|
|
(926
|
)
|
Recoveries(4)
|
|
|
508
|
|
|
|
177
|
|
|
|
862
|
|
|
|
312
|
|
Transfers,
net(5)
|
|
|
(838
|
)
|
|
|
(145
|
)
|
|
|
(1,595
|
)
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
25,197
|
|
|
$
|
5,813
|
|
|
$
|
25,197
|
|
|
$
|
5,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan loss reserve, as a percentage of the total mortgage
portfolio, excluding non-Freddie Mac securities
|
|
|
|
|
|
|
|
|
|
|
1.27
|
%
|
|
|
0.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Include reserves for loans held-for-investment in our
mortgage-related investments portfolio and reserves for
guarantee losses on PCs.
|
(2)
|
During the second quarter of 2009, we enhanced our methodology
for estimating our loan loss reserves related to single-family
loans to consider a greater number of loan characteristics and
revisions to (1) the effects of home price changes on
borrower behavior, and (2) the impact of our loss
mitigation actions. We estimate the impact of this enhancement
reduced our loan loss reserves and consequently, the provision
for credit losses, by approximately $1.4 billion during the
second quarter of 2009.
|
(3)
|
Charge-offs represent the amount of the unpaid principal balance
of a loan that has been discharged to remove the loan from our
mortgage-related investments portfolio at the time of
resolution. Charge-offs presented above exclude $65 million
and $94 million for the three month periods ended
June 30, 2009 and 2008, respectively, and $105 million
and $251 million for the six month periods ended
June 30, 2009 and 2008, respectively, related to certain
loans purchased under financial guarantees and reflected within
losses on loans purchased on our consolidated statements of
operations.
|
(4)
|
Recoveries of charge-offs primarily resulting from foreclosure
alternatives and REO acquisitions on loans where a share of
default risk has been assumed by mortgage insurers, servicers or
other third parties through credit enhancements.
|
(5)
|
Consist primarily of: (a) the transfer of an amount of the
recognized reserves for guaranteed losses related to PC pools
associated with loans purchased from mortgage pools underlying
our PCs, Structured Securities and long-term standby agreements
to establish the initial recorded investment in these loans at
the date of our purchase; (b) approximately
$375 million during the first half of 2009 related to
agreements with seller/servicers where the transfer represents
recoveries received under these agreements to compensate us for
previously incurred and recognized losses; and (c) amounts
attributable to uncollectible interest on mortgage loans in our
mortgage-related investments portfolio.
|
The amount of our total loan loss reserves that related to
single-family and multifamily mortgage loans was
$24.9 billion and $0.3 billion, respectively, as of
June 30, 2009. Our total loan loss reserves increased in
both the first half of 2009 and first half of 2008 as we
recorded additional reserves to reflect increased estimates of
incurred losses based on an observed increase in delinquency
rates for single-family loans as well as the impact of our
suspension of foreclosure transfers, which results in longer
delinquency periods and increases our estimates of the severity
of losses on a per-property basis related to our single-family
mortgage portfolio. See CONSOLIDATED RESULTS OF
OPERATIONS Non-Interest Expense
Provision for Credit Losses, for additional
information.
Credit
Risk Sensitivity
We provide a credit risk sensitivity analysis as part of our
risk management and disclosure commitments with FHFA. Our credit
risk sensitivity analysis assesses the estimated increase in the
net present value, or NPV, of expected single-family mortgage
portfolio credit losses over a ten year period as the result of
an immediate 5% decline in home prices nationwide, followed by a
stabilization period and return to the base case. Since we do
not use this analysis for determination of our reported results
under GAAP, this sensitivity analysis is hypothetical and may
not be indicative of our actual results. For more information,
see MD&A CREDIT RISKS Credit
Risk Sensitivity in our 2008 Annual Report. Our quarterly
credit risk sensitivity estimates are as follows:
Table
52 Single-Family Credit Loss Sensitivity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Receipt of
|
|
After Receipt of
|
|
|
Credit
Enhancements(1)
|
|
Credit
Enhancements(2)
|
|
|
|
|
|
NPV
|
|
|
|
|
NPV
|
|
|
NPV(3)
|
|
|
Ratio(4)
|
|
NPV(3)
|
|
|
Ratio(4)
|
|
|
(dollars in millions)
|
|
At:
|
|
|
|
|
|
|
|
|
|
|
|
|
June, 30, 2009
|
|
$
|
12,076
|
|
|
65.3 bps
|
|
$
|
10,827
|
|
|
58.6 bps
|
March, 31, 2009
|
|
$
|
11,900
|
|
|
64.9 bps
|
|
$
|
10,423
|
|
|
56.8 bps
|
December 31,
2008(5)
|
|
$
|
9,981
|
|
|
54.4 bps
|
|
$
|
8,591
|
|
|
46.8 bps
|
September 30, 2008
|
|
$
|
5,948
|
|
|
32.3 bps
|
|
$
|
5,230
|
|
|
28.4 bps
|
June 30, 2008
|
|
$
|
5,151
|
|
|
28.3 bps
|
|
$
|
4,241
|
|
|
23.3 bps
|
|
|
(1)
|
Assumes that none of the credit enhancements currently covering
our mortgage loans has any mitigating impact on our credit
losses.
|
(2)
|
Assumes we collect amounts due from credit enhancement providers
after giving effect to certain assumptions about counterparty
default rates.
|
(3)
|
Based on the single-family mortgage portfolio, excluding
Structured Securities backed by Ginnie Mae Certificates.
|
(4)
|
Calculated as the ratio of NPV of increase in credit losses to
the single-family mortgage portfolio, defined in
note (3) above.
|
(5)
|
The significant increase in our credit risk sensitivity
estimates beginning in the fourth quarter of 2008 was primarily
attributable to changes in our assumptions employed to calculate
the credit risk sensitivity disclosure. Given deterioration in
housing fundamentals, at the end of 2008, we modified our
assumptions for forecasted home prices subsequent to the
immediate 5% decline. We also modified our assumptions to
reflect the increasing proportion of borrowers whose homes are
currently worth less than the related outstanding indebtedness.
|
Interest
Rate and Other Market Risks
For a discussion of our interest rate and other market risks,
see QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Operational
Risks
Operational risks are inherent in all of our business activities
and can become apparent in various ways, including accounting or
operational errors, business interruptions, fraud, failures of
the technology used to support our business activities,
difficulty in filling executive officer and key business unit
vacancies and other operational challenges from failed or
inadequate internal controls. These operational risks may expose
us to financial loss, interfere with our ability to sustain
timely financial reporting, or result in other adverse
consequences. Management of our operational risks takes place
through the enterprise risk management framework with the
business areas retaining primary responsibility for identifying,
assessing and reporting their operational risks.
We recently announced the appointment of a permanent Chief
Executive Officer, who is expected to join the company on
August 10, 2009. We continue to operate without a permanent
Chief Operating Officer or Chief Financial Officer. We face
heightened operational risk in our day-to-day operations while
these positions remain unfilled. The task of filling these
positions is complicated by uncertainty regarding legislative or
regulatory restrictions on executive compensation that may apply
to these positions.
Our business processes are highly dependent on our use of
technology and business and financial models. Although we have
strengthened our model oversight and governance processes to
validate model assumptions, code, theory and the system
applications that utilize our models, the complexity and recent
changes in our models and the impact of the ongoing turmoil in
the housing and credit markets create additional risk regarding
the reliability of our model estimates.
We continue to make significant investments to build new
financial accounting systems and move to more effective and
efficient business processing systems. Until those systems are
fully implemented, we continue to remain reliant on end-user
computing systems. We are also challenged to effectively and
timely deliver integrated production systems. Reliance on
certain of these end-user computing systems increases the risk
of errors in some of our core operational processes and
increases our dependency on monitoring controls. We believe we
are mitigating this risk by improving our documentation and
process controls over these end-user computing systems and
implementing change management controls over certain key
end-user systems using tools which are subject to our
information technology general controls.
In order to manage the risk of inaccurate or unreliable
valuations of our financial instruments, we engage in an ongoing
internal review of our valuations. We perform analysis of
internal valuations on a monthly basis to confirm the
reasonableness of the valuations. This analysis is performed by
a group independent of the business area responsible for
valuing the positions. Our verification and validation
procedures depend on the nature of the security and valuation
methodology being reviewed and may include: comparisons with
external pricing sources, comparisons with observed trades,
independent verification of key valuation model inputs and
independent security modeling. Results of the monthly
verification process, as well as any changes in our valuation
methodologies, are reported to a management committee that is
responsible for reviewing the approaches used in our valuations
to ensure that they are well controlled and effective, and
result in reasonable fair values. For more information on the
controls in our valuation process, see CRITICAL ACCOUNTING
POLICIES AND ESTIMATES Fair Value Measurements.
As a result of managements evaluation of our disclosure
controls and procedures, our Interim Chief Executive Officer,
who also has been performing the functions of principal
financial officer on an interim basis, has concluded that our
disclosure controls and procedures were not effective as of
June 30, 2009, at a reasonable level of assurance. We
continue to work to improve our financial reporting governance
process and remediate material weaknesses and other deficiencies
in our internal controls. While we are making progress on our
remediation plans, our material weaknesses have not been fully
remediated at this time. In view of our mitigating activities,
including our remediation efforts through June 30, 2009, we
believe that our interim consolidated financial statements for
the quarter ended June 30, 2009, have been prepared in
conformity with GAAP. For additional information on our
disclosure controls and procedures and related material
weaknesses in internal control over financial reporting, see
CONTROLS AND PROCEDURES.
Two new accounting standards, SFAS 166 and SFAS 167,
will be effective as of January 1, 2010. These new
accounting standards require us to consolidate our PC trusts in
our financial statements, which could have a significant impact
on our net worth. Implementation of these new accounting
standards will require us to make significant operational and
systems changes. Further, we continue to evaluate various
implementation issues related to these two new standards which
may introduce further operational complexity. As a result, it
may be difficult for us to make all
such changes in a controlled manner by the effective date.
Failure to make such changes by the effective date could
adversely affect our ability to prepare timely financial
reports. We are devoting significant resources and management
attention to complete these changes by the effective date, which
could adversely affect our ability to complete other systems,
controls and business related initiatives. For example, we may
be required to delay the implementation of, or divert resources
from, other initiatives. As a result of the short time period to
implement the new accounting standards, we may need to increase
our reliance on manual processes and other temporary systems
solutions, creating a higher risk of operational failure. We
also may be unable to effectively design and implement the
necessary operational and systems changes due to the short
implementation period as well as the magnitude and complexity of
the changes. These potential developments could increase the
risks of future material errors in our reported financial
results, which could have a material adverse effect on our
business. For more information, see NOTE 1: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES to our consolidated
financial statements.
OFF-BALANCE
SHEET ARRANGEMENTS
We enter into certain business arrangements that are not
recorded on our consolidated balance sheets or may be recorded
in amounts that differ from the full contract or notional amount
of the transaction. Most of these arrangements relate to our
financial guarantee and securitization activity for which we
record guarantee assets and obligations, but the related
securitized assets are owned by third parties. These off-balance
sheet arrangements may expose us to potential losses in excess
of the amounts recorded on our consolidated balance sheets. See
OFF-BALANCE SHEET ARRANGEMENTS and
NOTE 2: FINANCIAL GUARANTEES AND MORTGAGE
SECURITIZATIONS in our 2008 Annual Report for more
discussion of our off-balance sheet arrangements. See
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Change in Accounting Principles to
our consolidated financial statements for information on
recently issued accounting standards, that will result in our
recording most of these securitizations on our balance sheets
upon adoption of the standards in 2010.
Our maximum potential off-balance sheet exposure to credit
losses relating to our PCs, Structured Securities and other
mortgage-related financial guarantees is primarily represented
by the unpaid principal balance of the related loans and
securities held by third parties, which was $1,411 billion
and $1,403 billion at June 30, 2009 and
December 31, 2008, respectively. Based on our historical
credit losses, which in the first half of 2009 averaged
approximately 34 basis points of the aggregate unpaid
principal balance of PCs and Structured Securities, we do not
believe that the maximum exposure is representative of our
actual exposure on these guarantees. The maximum exposure does
not take into consideration the recovery we would receive
through exercising our rights to the collateral backing the
underlying loans nor the available credit enhancements, which
include recourse and primary insurance with third parties. In
addition, we provide for incurred losses each period on these
guarantees within our provision for credit losses. The
accounting policies and fair value estimation methodologies we
apply to our credit guarantee activities significantly affect
the volatility of our reported earnings. See CONSOLIDATED
RESULTS OF OPERATIONS Non-Interest Income
(Loss) for more information on the effects on our
consolidated statements of operations related to our credit
guarantee activities.
As part of our credit guarantee business, we routinely enter
into forward purchase and sale commitments for mortgage loans
and mortgage-related securities. Some of these commitments are
accounted for as derivatives and their fair values are reported
as either derivative assets, net or derivative liabilities, net
on our consolidated balance sheets. We also have purchase
commitments primarily related to mortgage purchase flow business
which we principally fulfill by executing PC guarantees in swap
transactions and, to a lesser extent, commitments to purchase
multifamily mortgage loans and revenue bonds that are not
accounted for as derivatives and are not recorded on our
consolidated balance sheets. Our non-derivative commitments
totaled $402 billion and $216.5 billion at
June 30, 2009 and December 31, 2008, respectively. See
RISK MANAGEMENT Credit Risks
Institutional Credit Risk Mortgage
Seller/Servicers for further information. These
mortgage purchase contracts contain no penalty or liquidated
damages clauses based on our inability to take delivery of
mortgage loans.
As part of the guarantee arrangements pertaining to certain
multifamily housing revenue bonds and securities backed by
multifamily housing revenue bonds, we provided commitments to
advance funds, commonly referred to as liquidity
guarantees, totaling $12.4 billion and
$12.3 billion at June 30, 2009 and December 31,
2008, respectively. These guarantees require us to advance funds
to third parties that enable them to repurchase tendered bonds
or securities that are unable to be remarketed. Any repurchased
securities are pledged to us to secure funding until the
securities are remarketed. We hold cash and cash equivalents in
our cash and other investments portfolio in excess of these
commitments to advance funds. At both June 30, 2009 and
December 31, 2008, there were no liquidity guarantee
advances outstanding.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP
requires us to make a number of judgments, estimates and
assumptions that affect the reported amounts of our assets,
liabilities, income and expenses. Certain of our accounting
policies, as well as estimates we make, are
critical, as they are both important to the
presentation of our financial condition and results of
operations and require management to make difficult, complex or
subjective judgments and estimates, often regarding matters that
are inherently uncertain. Actual results could differ from our
estimates and the use of different judgments and assumptions
related to these policies and estimates could have a material
impact on our consolidated financial statements.
Our critical accounting policies and estimates relate to:
(a) valuation of a significant portion of assets and
liabilities; (b) allowances for loan losses and reserve for
guarantee losses; (c) application of the static effective
yield method to amortize the guarantee obligation;
(d) application of the effective interest method;
(e) impairment recognition on investments in securities;
and (f) realizability of deferred tax assets, net. For
additional information about our critical accounting policies
and estimates and other significant accounting policies,
including recently issued accounting pronouncements, see
MD&A CRITICAL ACCOUNTING POLICIES AND
ESTIMATES and NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES in our 2008 Annual Report.
Fair
Value Measurements
SFAS 157, which we adopted on January 1, 2008, defines
fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. Fair value is
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. For additional information
regarding fair value hierarchy and measurements, see
MD&A CRITICAL ACCOUNTING POLICIES AND
ESTIMATES in our 2008 Annual Report.
The three levels of the fair value hierarchy under SFAS 157
are described below:
Level 1: Quoted prices (unadjusted) in active markets that
are accessible at the measurement date for identical assets or
liabilities;
Level 2: Quoted prices for similar assets and liabilities
in active markets; quoted prices for identical or similar assets
and liabilities in markets that are not active; inputs other
than quoted market prices that are observable for the asset or
liability; and inputs that are derived principally from or
corroborated by observable market data for substantially the
full term of the assets or liabilities; and
Level 3: Unobservable inputs for the asset or liability
that are supported by little or no market activity and that are
significant to the fair values.
We categorize assets and liabilities in the scope of
SFAS 157 within the fair value hierarchy based on the
valuation process used to derive their fair values and our
judgment regarding the observability of the related inputs.
Those judgments are based on our knowledge and observations of
the markets relevant to the individual assets and liabilities
and may vary based on current market conditions. In applying our
judgments, we look to ranges of third party prices, transaction
volumes and discussions with dealers and pricing service vendors
to understand and assess the extent of market benchmarks
available and the judgments or modeling required in their
processes. Based on these factors, we determine whether the
inputs are observable in active markets or whether the markets
are inactive.
While the non-agency mortgage-related securities market remained
weak in the first half of 2009 with low transaction volumes,
wide credit spreads and limited transparency, we value our
non-agency mortgage-related securities based primarily on prices
received from third party pricing services and prices received
from dealers. The techniques used by these pricing services and
dealers to develop the prices generally are either (a) a
comparison to transactions of instruments with similar
collateral and risk profiles; or (b) industry standard
modeling such as the discounted cash flow model. For a large
majority of the securities we value using dealers and pricing
services, we obtain at least three independent prices, which are
non-binding to us or our counterparties. When multiple prices
are received, we use the median of the prices. The models and
related assumptions used by the dealers and pricing services are
owned and managed by them. However, we have an understanding of
their processes used to develop the prices provided to us based
on our ongoing due diligence. We generally have formal
discussions with our dealers and pricing service vendors on a
quarterly basis to maintain a current understanding of the
processes and inputs they use to develop prices. We make no
adjustments to the individual prices we receive from third party
pricing services or dealers for non-agency mortgage-related
securities backed by subprime loans,
Alt-A loans
and MTA Option ARM loans beyond calculating median prices and
discarding certain prices that are not valid based on our
validation processes.
Table 53 below summarizes our assets and liabilities
measured at fair value on a recurring basis by level in the
valuation hierarchy at June 30, 2009.
Table 53
Summary of Assets and Liabilities at Fair Value on a Recurring
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009
|
|
|
|
Total GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
253,589
|
|
|
|
|
%
|
|
|
91
|
%
|
|
|
9
|
%
|
Subprime
|
|
|
39,935
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Commercial mortgage-backed securities
|
|
|
49,208
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
MTA Option ARM
|
|
|
6,536
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Alt-A and other
|
|
|
12,347
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Fannie Mae
|
|
|
40,027
|
|
|
|
|
|
|
|
99
|
|
|
|
1
|
|
Obligations of states and political subdivisions
|
|
|
11,617
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Manufactured housing
|
|
|
809
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Ginnie Mae
|
|
|
375
|
|
|
|
|
|
|
|
93
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
414,443
|
|
|
|
|
|
|
|
66
|
|
|
|
34
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
6,248
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities, at fair value
|
|
|
420,691
|
|
|
|
|
|
|
|
66
|
|
|
|
34
|
|
Trading, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
202,362
|
|
|
|
|
|
|
|
99
|
|
|
|
1
|
|
Fannie Mae
|
|
|
36,146
|
|
|
|
|
|
|
|
97
|
|
|
|
3
|
|
Ginnie Mae
|
|
|
193
|
|
|
|
|
|
|
|
87
|
|
|
|
13
|
|
Other
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
238,731
|
|
|
|
|
|
|
|
99
|
|
|
|
1
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
540
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
Treasury Bills
|
|
|
11,395
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities
|
|
|
11,935
|
|
|
|
95
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities, at fair value
|
|
|
250,666
|
|
|
|
5
|
|
|
|
94
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
|
671,357
|
|
|
|
2
|
|
|
|
76
|
|
|
|
22
|
|
Mortgage Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for-sale, at fair value
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Derivative assets,
net(1)
|
|
|
319
|
|
|
|
|
|
|
|
99
|
|
|
|
1
|
|
Guarantee asset, at fair value
|
|
|
7,576
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets carried at fair value on a recurring
basis(1)
|
|
$
|
679,475
|
|
|
|
2
|
|
|
|
76
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities denominated in foreign currencies
|
|
$
|
7,497
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
Derivative liabilities,
net(1)
|
|
|
885
|
|
|
|
|
|
|
|
97
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities carried at fair value on a recurring
basis(1)
|
|
$
|
8,382
|
|
|
|
|
|
|
|
98
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Percentages by level are based on gross fair value of derivative
assets and derivative liabilities before counterparty netting,
cash collateral netting, net trade/settle receivable or payable
and net derivative interest receivable or payable.
|
Changes
in Level 3 Recurring Fair Value Measurements
At June 30, 2009, we measured and recorded on a recurring
basis $154.2 billion, or approximately 22% of total assets,
at fair value using significant unobservable inputs
(Level 3), before the impact of counterparty and cash
collateral netting across the levels of the fair value
hierarchy. Our Level 3 assets primarily consist of certain
agency and non-agency residential mortgage-related securities,
CMBS, our guarantee asset and multifamily mortgage loans
held-for-sale. We also measured and recorded on a recurring
basis $0.8 billion of derivative liabilities, net, which
were 2% of total liabilities, at fair value using significant
unobservable inputs, before the impact of counterparty and cash
collateral netting across the levels of the fair value hierarchy.
In the second quarter of 2009, our Level 3 assets increased
by $4.3 billion, mainly attributable to changes in the fair
value of non-agency CMBS as prices increased, and increases in
the fair value of management and guarantee fees we expect to
receive over the life of the financial guarantee. Our net
transfer of Level 2 assets to Level 3 during the
second quarter of 2009 was $133 million.
During the six months ended June 30, 2009, our Level 3
assets increased primarily due to the continued weakness in the
market for non-agency CMBS, as evidenced by low transaction
volumes and wide spreads, as investor demand for these assets
remained limited. As a result, we continued to observe
significant variability in the quotes received
from dealers and third-party pricing services. Consequently, we
transferred $46.7 billion of Level 2 assets to
Level 3 during the six months ended June 30, 2009.
These transfers were primarily within non-agency CMBS in the
first quarter of 2009 where inputs that are significant to their
valuation became limited or unavailable, as previously
discussed. We recorded a gain of $737 million, primarily in
AOCI, on these transferred assets during the first half of 2009,
which were included in our Level 3 reconciliation. We
believe that the cumulative unrealized losses on non-agency CMBS
at June 30, 2009 were principally a result of decreased
liquidity and larger risk premiums in the non-agency mortgage
market. We concluded that the unrealized losses on such
securities were temporary, as we do not intend to sell these
securities, it is more likely than not that we will not be
required to sell such securities before recovery of the
unrealized losses and we expect to receive cash flows sufficient
to recover the entire amortized cost basis of the securities.
See NOTE 4: INVESTMENTS IN SECURITIES
Evaluation of Other-Than-Temporary Impairments to our
consolidated financial statements for further information about
our evaluation of unrealized losses on our available-for-sale
portfolio for other-than-temporary impairments. See
NOTE 14: FAIR VALUE DISCLOSURES
Table 14.2 Fair Value Measurements of Assets
and Liabilities Using Significant Unobservable Inputs to
our consolidated financial statements for the Level 3
reconciliation. For discussion of types and characteristics of
mortgage loans underlying our mortgage-related securities, see
RISK MANAGEMENT Credit Risks and
CONSOLIDATED BALANCE SHEETS ANALYSIS
Table 19 Characteristics of Mortgage Loans and
Mortgage-Related Securities in our Mortgage-Related Investments
Portfolio.
Consideration
of Credit Risk in Our Valuation of Assets and
Liabilities
We consider credit risk in the valuation of our assets and
liabilities with the credit risk of the counterparty considered
in asset valuations and our own institutional credit risk
considered in liability valuations. For foreign-currency
denominated debt with the fair value option elected, we
considered our own credit risk as a component of the fair value
determination. For foreign-currency denominated debt with the
fair value option elected, the total fair value changes were net
gains (losses) of $(797) million and $(330) million
for the three and six months ended June 30, 2009,
respectively. Of these amounts, $(277) million and
$(196) million were attributable to changes in the
instrument-specific credit risk for the three and six months
ended June 30, 2009, respectively. The changes in fair
value attributable to changes in instrument-specific credit risk
were determined by comparing the total change in fair value of
the debt to the total change in fair value of the interest rate
and foreign currency derivatives used to hedge the debt. Any
difference in the fair value change of the debt compared to the
fair value change in the derivatives is attributed to
instrument-specific credit risk.
For multifamily held-for-sale loans with the fair value option
elected, we considered the credit risk of the borrower. We
recorded $(71) million and $(89) million of fair value
changes in gains (losses) on investment activity in our
consolidated statements of operations during the three and six
months ended June 30, 2009. These amounts reflect $(26) and
$(43) million attributable to changes in the
instrument-specific credit risk for the three and six months
ended June 30, 2009, respectively. The gains and losses
attributable to changes in instrument-specific credit risk
related to our multifamily held-for-sale loans were determined
primarily from the changes in OAS level.
We also consider credit risk in the valuation of our derivative
positions. For derivatives that are in an asset position, we
hold collateral against those positions in accordance with
agreed upon thresholds. The fair value of derivative assets
considers the impact of institutional credit risk in the event
that the counterparty does not honor its payment obligation. The
amount of collateral held depends on the credit rating of the
counterparty and is based on our credit risk policies. See
RISK MANAGEMENT Credit Risks
Institutional Credit Risk Derivative
Counterparties for a discussion of our counterparty
credit risk. Similarly, for derivatives that are in a liability
position we post collateral to counterparties in accordance with
agreed upon thresholds.
OUR
PORTFOLIOS
Total
Mortgage Portfolio
During the six months ended June 30, 2009 and 2008, our
total mortgage portfolio grew at an annualized rate of 3% and
9%, respectively. Our new business purchases consist of mortgage
loans and non-Freddie Mac mortgage-related securities that are
purchased for our mortgage-related investments portfolio or
serve as collateral for our issued PCs and Structured
Securities. During the six months ended June 30, 2009, our
purchases of fixed-rate product as a percentage of our total
purchases increased while our purchases of ARMs and
interest-only products decreased. Purchase volume associated
with single-family refinance-loans was approximately
$134.5 billion for the second quarter of 2009, or 87% of
the single-family volume during the period. March 2009 was our
largest refinance month since 2003, a year in which interest
rates for residential mortgages also moved sharply downward. We
began the purchase of refinance mortgages originated under The
Freddie Mac Relief Refinance
Mortgagesm
program in April 2009 and purchased approximately
$5.1 billion in unpaid principal balance of these loans in
the second quarter of 2009.
Table 54 presents the composition of our total mortgage
portfolio and the various segment portfolios.
Table
54 Freddie Macs Total Mortgage Portfolio and
Segment Portfolio
Composition(1)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Total mortgage portfolio:
|
|
|
|
|
|
|
|
|
Mortgage-related investments portfolio:
|
|
|
|
|
|
|
|
|
Single-family mortgage loans
|
|
$
|
51,968
|
|
|
$
|
38,755
|
|
Multifamily mortgage loans
|
|
|
78,307
|
|
|
|
72,721
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
130,275
|
|
|
|
111,476
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities in the mortgage-related
investments portfolio
|
|
|
440,478
|
|
|
|
424,524
|
|
|
|
|
|
|
|
|
|
|
Non-Freddie Mac mortgage-related securities, agency
|
|
|
72,889
|
|
|
|
70,852
|
|
Non-Freddie Mac mortgage-related securities, non-agency
|
|
|
186,195
|
|
|
|
197,910
|
|
|
|
|
|
|
|
|
|
|
Total non-Freddie Mac mortgage-related securities
|
|
|
259,084
|
|
|
|
268,762
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related investments
portfolio(2)
|
|
|
829,837
|
|
|
|
804,762
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities held by third
parties:
|
|
|
|
|
|
|
|
|
Single-family PCs and Structured Securities
|
|
|
1,389,103
|
|
|
|
1,381,531
|
|
Single-family Structured Transactions
|
|
|
7,057
|
|
|
|
7,586
|
|
Multifamily PCs and Structured Securities
|
|
|
12,739
|
|
|
|
12,768
|
|
Multifamily Structured Transactions
|
|
|
1,747
|
|
|
|
829
|
|
|
|
|
|
|
|
|
|
|
Total guaranteed PCs and Structured Securities held by third
parties
|
|
|
1,410,646
|
|
|
|
1,402,714
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
$
|
2,240,483
|
|
|
$
|
2,207,476
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities:
|
|
|
|
|
|
|
|
|
In our mortgage-related investments portfolio
|
|
$
|
440,478
|
|
|
$
|
424,524
|
|
Held by third parties
|
|
|
1,410,646
|
|
|
|
1,402,714
|
|
|
|
|
|
|
|
|
|
|
Total Guaranteed PCs and Structured Securities
|
|
$
|
1,851,124
|
|
|
$
|
1,827,238
|
|
|
|
|
|
|
|
|
|
|
Segment portfolios:
|
|
|
|
|
|
|
|
|
Investments Mortgage-related investments
portfolio:
|
|
|
|
|
|
|
|
|
Single-family mortgage loans
|
|
$
|
51,968
|
|
|
$
|
38,755
|
|
Guaranteed PCs and Structured Securities in the mortgage-related
investments portfolio
|
|
|
440,478
|
|
|
|
424,524
|
|
Non-Freddie Mac mortgage-related securities in the
mortgage-related investments portfolio
|
|
|
259,084
|
|
|
|
268,762
|
|
|
|
|
|
|
|
|
|
|
Total Investments Mortgage-related investments
portfolio(3)
|
|
|
751,530
|
|
|
|
732,041
|
|
|
|
|
|
|
|
|
|
|
Single-family Guarantee Credit guarantee
portfolio:
|
|
|
|
|
|
|
|
|
Single-family PCs and Structured Securities in the
mortgage-related investments portfolio
|
|
|
418,342
|
|
|
|
405,375
|
|
Single-family PCs and Structured Securities held by third parties
|
|
|
1,389,103
|
|
|
|
1,381,531
|
|
Single-family Structured Transactions in the mortgage-related
investments portfolio
|
|
|
20,168
|
|
|
|
17,088
|
|
Single-family Structured Transactions held by third parties
|
|
|
7,057
|
|
|
|
7,586
|
|
|
|
|
|
|
|
|
|
|
Total Single-family Guarantee Credit guarantee
portfolio
|
|
$
|
1,834,670
|
|
|
$
|
1,811,580
|
|
|
|
|
|
|
|
|
|
|
Multifamily Guarantee and loan portfolios:
|
|
|
|
|
|
|
|
|
Multifamily PCs and Structured Securities
|
|
|
14,707
|
|
|
|
14,829
|
|
Multifamily Structured Transactions
|
|
|
1,747
|
|
|
|
829
|
|
|
|
|
|
|
|
|
|
|
Total Multifamily Guarantee portfolio
|
|
|
16,454
|
|
|
|
15,658
|
|
Multifamily loan portfolio
|
|
|
78,307
|
|
|
|
72,721
|
|
|
|
|
|
|
|
|
|
|
Total Multifamily Guarantee and loan portfolio
|
|
|
94,761
|
|
|
|
88,379
|
|
|
|
|
|
|
|
|
|
|
Less: Guaranteed PCs and Structured Securities in the
mortgage-related investments
portfolio(4)
|
|
|
(440,478
|
)
|
|
|
(424,524
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
$
|
2,240,483
|
|
|
$
|
2,207,476
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on unpaid principal balance and excludes mortgage loans
and mortgage-related securities traded, but not yet settled. For
PCs and Structured Securities, the balance reflects reported
security balances and not the unpaid principal of the underlying
mortgage loans. Mortgage loans held in our mortgage-related
investments portfolio reflect the unpaid principal balance of
the loan.
|
(2)
|
See CONSOLIDATED BALANCE SHEETS ANALYSIS
Table 19 Characteristics of Mortgage Loans and
Mortgage-Related Securities in our Mortgage-Related Investments
Portfolio for a reconciliation of our mortgage-related
investments portfolio amounts shown in this table to the amounts
shown under such caption in conformity with GAAP on our
consolidated balance sheets.
|
(3)
|
Includes certain assets related to Single-family Guarantee
activities and Multifamily activities.
|
(4)
|
The amount of PCs and Structured Securities in our
mortgage-related investments portfolio is included in both our
segments mortgage-related and guarantee portfolios and
thus deducted in order to reconcile to our total mortgage
portfolio. These securities are managed by the Investments
segment, which receives related interest income; however, the
Single-family and Multifamily segments manage and receive
associated management and guarantee fees.
|
Guaranteed
PCs and Structured Securities
Guaranteed PCs and Structured Securities represent the unpaid
principal balances of the mortgage-related assets we issue or
otherwise guarantee. We create Structured Securities primarily
by resecuritizing our PCs or previously issued Structured
Securities as collateral. We do not charge a management and
guarantee fee for Structured Securities backed by our PCs or
previously issued Structured Securities, because the underlying
collateral is already guaranteed, so there is no incremental
credit risk to us as a result of resecuritization. We also issue
Structured Securities to third parties in exchange for
non-Freddie Mac mortgage-related securities, which we refer to
as Structured Transactions. See
BUSINESS Our Business Segments
Single-family Guarantee Segment in our 2008 Annual
Report and RISK MANAGEMENT Credit
Risks Mortgage Credit Risk herein for
detailed discussion and other information on our PCs and
Structured Securities, including Structured Transactions.
During the six months ended June 30, 2009, we did not enter
into any long-term standby commitments for mortgage assets held
by third parties. Under these commitments, we purchase loans
from lenders when the loans subject to these commitments meet
certain delinquency criteria. We terminated $5.7 billion
and $18.8 billion of our previously issued long-term
standby commitments in the six months ended June 30, 2009
and 2008, respectively. The majority of the loans previously
covered by these commitments were subsequently securitized as
PCs or Structured Securities.
Table 55 presents the distribution of underlying mortgage
assets for our issued PCs, Structured Securities and other
mortgage-related guarantees.
Table
55 Issued Guaranteed PCs and Structured
Securities(1)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
Conventional:
|
|
|
|
|
|
|
|
|
30-year
fixed-rate(2)
|
|
$
|
1,277,405
|
|
|
$
|
1,216,765
|
|
20-year
fixed-rate
|
|
|
61,071
|
|
|
|
67,215
|
|
15-year
fixed-rate
|
|
|
241,417
|
|
|
|
246,089
|
|
ARMs/adjustable-rate
|
|
|
69,190
|
|
|
|
80,771
|
|
Option
ARMs(3)
|
|
|
1,477
|
|
|
|
1,551
|
|
Interest-only(4)
|
|
|
145,703
|
|
|
|
159,645
|
|
Balloon/resets
|
|
|
7,643
|
|
|
|
10,967
|
|
Conforming
jumbo(5)
|
|
|
2,177
|
|
|
|
2,475
|
|
FHA/VA
|
|
|
1,240
|
|
|
|
1,310
|
|
USDA Rural Development and other federally guaranteed loans
|
|
|
122
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
Total
single-family(6)
|
|
|
1,807,445
|
|
|
|
1,786,906
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Conventional and other
|
|
|
14,707
|
|
|
|
14,829
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
14,707
|
|
|
|
14,829
|
|
Structured Securities backed by non-Freddie Mac mortgage-related
securities:
|
|
|
|
|
|
|
|
|
Ginnie Mae
Certificates(7)
|
|
|
1,028
|
|
|
|
1,089
|
|
Structured
Transactions(8)
|
|
|
27,944
|
|
|
|
24,414
|
|
|
|
|
|
|
|
|
|
|
Total Structured Securities backed by non-Freddie Mac
mortgage-related securities
|
|
|
28,972
|
|
|
|
25,503
|
|
|
|
|
|
|
|
|
|
|
Total guaranteed PCs and Structured Securities
|
|
$
|
1,851,124
|
|
|
$
|
1,827,238
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on unpaid principal balance of the securities and excludes
mortgage-related securities traded, but not yet settled. Also
includes long-term standby commitments for mortgage assets held
by third parties that require that we purchase loans from
lenders when these loans meet certain delinquency criteria.
|
(2)
|
Portfolio balances include $1.7 billion and
$1.9 billion of
40-year
fixed-rate mortgages at June 30, 2009 and December 31,
2008, respectively.
|
(3)
|
Excludes option ARM mortgage loans that back our Structured
Transactions. See endnote (8) for additional information.
|
(4)
|
Represents loans where the borrower pays interest only for a
period of time before the borrower begins making principal
payments. Includes both fixed- and variable-rate interest-only
loans.
|
(5)
|
Consists of loans purchased under the Economic Stimulus Act of
2008, which temporarily increased the conforming loan limits in
certain high-cost areas for single-family mortgages
originated from July 1, 2007 through December 31,
2008. Under the Reform Act, the differing limits in high-cost
areas became permanent in 2009, and we refer to loans we
purchase in 2009, with unpaid principal balances in excess of
the $417,000 nationwide base limit, as super-conforming
mortgages.
|
(6)
|
There were $10.8 billion of super-conforming mortgages
underlying our guaranteed PCs and Structured Securities as of
June 30, 2009. The super-conforming mortgages underlying
our guaranteed PCs and Structured Securities have been allocated
to the appropriate single-family conventional classification.
|
(7)
|
Ginnie Mae Certificates that underlie the Structured Securities
are backed by FHA/VA loans.
|
(8)
|
Represents Structured Securities backed by non-agency securities
that include prime, FHA/VA and subprime mortgage loan issuances.
Includes $10.2 billion and $10.8 billion of securities
backed by option ARM mortgage loans at June 30, 2009 and
December 31, 2008, respectively.
|
Table 56 summarizes purchases into our total mortgage portfolio.
Table
56 Total Mortgage Portfolio
Activity(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Purchase
|
|
|
% of
|
|
|
Purchase
|
|
|
% of
|
|
|
Purchase
|
|
|
% of
|
|
|
Purchase
|
|
|
% of
|
|
|
|
Amount
|
|
|
Purchases
|
|
|
Amount
|
|
|
Purchases
|
|
|
Amount
|
|
|
Purchases
|
|
|
Amount
|
|
|
Purchases
|
|
|
|
(dollars in millions)
|
|
|
New business purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgage purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-year
amortizing
fixed-rate(2)
|
|
$
|
129,917
|
|
|
|
81
|
%
|
|
$
|
95,896
|
|
|
|
71
|
%
|
|
$
|
230,368
|
|
|
|
83
|
%
|
|
$
|
192,555
|
|
|
|
74
|
%
|
15-year
amortizing fixed-rate
|
|
|
19,677
|
|
|
|
12
|
|
|
|
12,279
|
|
|
|
9
|
|
|
|
31,059
|
|
|
|
11
|
|
|
|
21,368
|
|
|
|
8
|
|
ARMs/adjustable-rate(3)
|
|
|
117
|
|
|
|
<1
|
|
|
|
5,853
|
|
|
|
4
|
|
|
|
300
|
|
|
|
<1
|
|
|
|
7,576
|
|
|
|
3
|
|
Interest-only(4)
|
|
|
157
|
|
|
|
<1
|
|
|
|
8,084
|
|
|
|
6
|
|
|
|
377
|
|
|
|
<1
|
|
|
|
18,060
|
|
|
|
7
|
|
Balloon/resets(5)
|
|
|
1
|
|
|
|
<1
|
|
|
|
9
|
|
|
|
<1
|
|
|
|
1
|
|
|
|
<1
|
|
|
|
124
|
|
|
|
<1
|
|
Conforming
jumbo(6)
|
|
|
|
|
|
|
<1
|
|
|
|
471
|
|
|
|
|
|
|
|
91
|
|
|
|
<1
|
|
|
|
471
|
|
|
|
<1
|
|
FHA/VA(7)
|
|
|
477
|
|
|
|
<1
|
|
|
|
214
|
|
|
|
<1
|
|
|
|
695
|
|
|
|
<1
|
|
|
|
242
|
|
|
|
<1
|
|
USDA Rural Development and other federally guaranteed loans
|
|
|
142
|
|
|
|
<1
|
|
|
|
59
|
|
|
|
<1
|
|
|
|
211
|
|
|
|
<1
|
|
|
|
91
|
|
|
|
<1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
single-family(8)
|
|
|
150,488
|
|
|
|
93
|
|
|
|
122,865
|
|
|
|
90
|
|
|
|
263,102
|
|
|
|
94
|
|
|
|
240,487
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional and other
|
|
|
4,447
|
|
|
|
3
|
|
|
|
5,294
|
|
|
|
4
|
|
|
|
8,271
|
|
|
|
3
|
|
|
|
11,739
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
4,447
|
|
|
|
3
|
|
|
|
5,294
|
|
|
|
4
|
|
|
|
8,271
|
|
|
|
3
|
|
|
|
11,739
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage purchases
|
|
|
154,935
|
|
|
|
96
|
|
|
|
128,159
|
|
|
|
94
|
|
|
|
271,373
|
|
|
|
97
|
|
|
|
252,226
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Freddie Mac mortgage-related securities purchased for
Structured Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ginnie Mae Certificates
|
|
|
23
|
|
|
|
<1
|
|
|
|
2
|
|
|
|
<1
|
|
|
|
34
|
|
|
|
<1
|
|
|
|
2
|
|
|
|
<1
|
|
Structured Transactions
|
|
|
4,705
|
|
|
|
3
|
|
|
|
8,139
|
|
|
|
6
|
|
|
|
4,705
|
|
|
|
2
|
|
|
|
8,245
|
|
|
|
3
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Transactions
|
|
|
985
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
985
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Freddie Mac mortgage-related securities
purchased for Structured Securities
|
|
|
5,713
|
|
|
|
4
|
|
|
|
8,141
|
|
|
|
6
|
|
|
|
5,724
|
|
|
|
3
|
|
|
|
8,247
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total single-family and multifamily mortgage purchases and
total non-Freddie Mac mortgage-related securities purchased for
Structured Securities
|
|
|
160,648
|
|
|
|
100
|
%
|
|
|
136,300
|
|
|
|
100
|
%
|
|
|
277,097
|
|
|
|
100
|
%
|
|
|
260,473
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Freddie Mac mortgage-related securities purchased into
the mortgage-related investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
9,418
|
|
|
|
|
|
|
|
17,082
|
|
|
|
|
|
|
|
39,527
|
|
|
|
|
|
|
|
18,262
|
|
|
|
|
|
Variable-rate
|
|
|
1,378
|
|
|
|
|
|
|
|
7,606
|
|
|
|
|
|
|
|
2,563
|
|
|
|
|
|
|
|
15,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fannie Mae
|
|
|
10,796
|
|
|
|
|
|
|
|
24,688
|
|
|
|
|
|
|
|
42,090
|
|
|
|
|
|
|
|
34,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ginnie Mae fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total agency mortgage-related securities
|
|
|
10,796
|
|
|
|
|
|
|
|
24,688
|
|
|
|
|
|
|
|
42,117
|
|
|
|
|
|
|
|
34,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
|
|
|
|
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
547
|
|
|
|
|
|
Variable-rate
|
|
|
|
|
|
|
|
|
|
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage revenue bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
19
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
Variable-rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage revenue bonds
|
|
|
19
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities
|
|
|
19
|
|
|
|
|
|
|
|
1,024
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
1,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-Freddie Mac mortgage-related securities
purchased into the mortgage-related investments portfolio
|
|
|
10,815
|
|
|
|
|
|
|
|
25,712
|
|
|
|
|
|
|
|
42,212
|
|
|
|
|
|
|
|
35,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new business purchases
|
|
$
|
171,463
|
|
|
|
|
|
|
$
|
162,012
|
|
|
|
|
|
|
$
|
319,309
|
|
|
|
|
|
|
$
|
296,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage purchases with credit
enhancements(9)
|
|
|
6
|
%
|
|
|
|
|
|
|
19
|
%
|
|
|
|
|
|
|
7
|
%
|
|
|
|
|
|
|
22
|
%
|
|
|
|
|
Mortgage liquidations
|
|
$
|
150,862
|
|
|
|
|
|
|
$
|
107,535
|
|
|
|
|
|
|
$
|
253,593
|
|
|
|
|
|
|
$
|
193,966
|
|
|
|
|
|
Mortgage liquidations rate
(annualized)(10)
|
|
|
27
|
%
|
|
|
|
|
|
|
20
|
%
|
|
|
|
|
|
|
23
|
%
|
|
|
|
|
|
|
18
|
%
|
|
|
|
|
Freddie Mac securities repurchased into the mortgage-related
investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$
|
46,331
|
|
|
|
|
|
|
$
|
75,431
|
|
|
|
|
|
|
$
|
130,262
|
|
|
|
|
|
|
$
|
91,098
|
|
|
|
|
|
Variable-rate
|
|
|
268
|
|
|
|
|
|
|
|
15,623
|
|
|
|
|
|
|
|
517
|
|
|
|
|
|
|
|
21,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Freddie Mac securities repurchased into the
mortgage-related investments portfolio
|
|
$
|
46,599
|
|
|
|
|
|
|
$
|
91,054
|
|
|
|
|
|
|
$
|
130,779
|
|
|
|
|
|
|
$
|
112,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on unpaid principal balances. Excludes mortgage loans and
mortgage-related securities traded but not yet settled. Also
excludes net additions to our mortgage-related investments
portfolio for delinquent mortgage loans and balloon/reset
mortgages purchased out of PC pools.
|
(2)
|
Includes
40-year and
20-year
fixed-rate mortgages.
|
(3)
|
Includes amortizing ARMs with 1-, 3-, 5-, 7- and
10-year
initial fixed-rate periods. We did not purchase any option ARM
loans during the first half of 2009.
|
(4)
|
Represents loans where the borrower pays interest only for a
period of time before the borrower begins making principal
payments. Includes both fixed- and variable-rate interest-only
loans.
|
(5)
|
Represents mortgages whose terms require lump sum principal
payments on contractually determined future dates unless the
borrower qualifies for and elects an extension of the maturity
date at an adjusted interest-rate.
|
(6)
|
Consists of loans purchased under the Economic Stimulus Act of
2008, which temporarily increased the confirming loan limits in
certain high-cost areas for single-family mortgages
originated from July 1, 2007 through December 31,
2008. Under the Reform Act, the differing limits in high-cost
areas became permanent in 2009, and we refer to loans we
purchase in 2009, with unpaid principal balances in excess of
the $417,000 nationwide base limit, as super-conforming
mortgages.
|
(7)
|
Excludes FHA/VA loans that back Structured Transactions.
|
(8)
|
Includes $10.9 billion in purchases of super-conforming
mortgages during the first half of 2009. The super-confirming
mortgages purchased in the first half of 2009 have been
allocated to the appropriate single-family conventional
classification.
|
(9)
|
Excludes mortgage-related securities backed by Ginnie Mae
Certificates.
|
(10)
|
Based on the total mortgage portfolio.
|
Cash and
Other Investments Portfolio
Our cash and other investments portfolio consists of cash and
cash equivalents, federal funds sold and securities purchased
under agreements to resell and non-mortgage-related investment
securities. Our cash and other investments portfolio totaled
$73.3 billion and $64.3 billion on our consolidated
balance sheets at June 30, 2009 and December 31, 2008,
respectively. See CONSOLIDATED BALANCE SHEETS
ANALYSIS Cash and Other Investments Portfolio
for further information on this portfolio.
FORWARD-LOOKING
STATEMENTS
We regularly communicate information concerning our business
activities to investors, the news media, securities analysts and
others as part of our normal operations. Some of these
communications, including this
Form 10-Q,
contain forward-looking statements pertaining to the
conservatorship and our current expectations and objectives for
our efforts under the MHA Program and other programs to assist
the U.S. residential mortgage market, internal control
remediation efforts, future business plans, liquidity, capital
management, economic and market conditions and trends, market
share, legislative and regulatory developments, implementation
of new accounting standards, credit losses, and results of
operations and financial condition on a GAAP, Segment Earnings
and fair value basis. Forward-looking statements are often
accompanied by, and identified with, terms such as
objective, expect, trend,
forecast, believe, intend,
could, future and similar phrases. These
statements are not historical facts, but rather represent our
expectations based on current information, plans, judgments,
assumptions, estimates and projections. Forward-looking
statements involve known and unknown risks and uncertainties,
some of which are beyond our control. You should not unduly rely
on our forward-looking statements. Actual results may differ
materially from the expectations expressed in the
forward-looking statements we make as a result of various
factors, including those factors described in the RISK
FACTORS sections of our
Form 10-Q
for the quarter ended March 31, 2009 and our 2008 Annual
Report, and:
|
|
|
|
|
the actions FHFA, Treasury and our management may take;
|
|
|
|
the impact of the restrictions and other terms of the
conservatorship, the Purchase Agreement, the senior preferred
stock and the warrant on our business, including the adequacy of
Treasurys commitment under the Purchase Agreement and our
ability to pay the dividends in cash on the senior preferred
stock;
|
|
|
|
the impact on our liquidity if the Lending Agreement expires as
scheduled on December 31, 2009;
|
|
|
|
changes in our charter or applicable legislative or regulatory
requirements, including any restructuring or reorganization in
the form of our company, including whether we will remain a
stockholder-owned company and whether we will be placed into
receivership, regulations under the Reform Act, changes to
affordable housing goals regulation, reinstatement of regulatory
capital requirements or the exercise or assertion of additional
regulatory or administrative authority;
|
|
|
|
changes in the regulation of the mortgage industry, including
legislative, regulatory or judicial action at the federal or
state level, including changes to bankruptcy laws or the
foreclosure process in individual states;
|
|
|
|
the extent to which borrowers participate in the MHA Program and
other initiatives designed to help in the housing recovery and
the impact of such programs on our credit losses and expenses;
|
|
|
|
changes in general regional, national or international economic,
business or market conditions and competitive pressures,
including the success of the U.S. governments efforts
to stabilize the financial markets and changes in employment
rates and interest rates;
|
|
|
|
changes in the U.S. residential mortgage market, including
the rate of growth in total outstanding U.S. residential
mortgage debt, the size of the U.S. residential mortgage
market and changes in home prices;
|
|
|
|
our ability to effectively implement our business strategies,
including our efforts to improve the supply and liquidity of,
and demand for, our products;
|
|
|
|
our ability to recruit and retain executive officers and other
key employees;
|
|
|
|
our ability to effectively identify and manage credit, interest
rate and other risks in our business, including changes in the
credit environment and the levels and volatilities of interest
rates, as well as the shape and slope of the yield curves;
|
|
|
|
|
|
our ability to effectively identify, evaluate, manage, mitigate
or remediate control deficiencies and risks, including material
weaknesses and significant deficiencies, in our internal control
over financial reporting and disclosure controls and procedures;
|
|
|
|
incomplete or inaccurate information provided by customers and
counterparties, or consolidation among, or adverse changes in
the financial condition of, our customers and counterparties;
|
|
|
|
the risk that we may not be able to maintain the continued
listing of our common and exchange-listed issues of preferred
stock on the NYSE;
|
|
|
|
changes in our judgments, assumptions, forecasts or estimates
regarding rates of growth in our business and spreads we expect
to earn;
|
|
|
|
changes in accounting or tax standards or in our accounting
policies or estimates, and our ability to effectively implement
any such changes in standards, policies or estimates, such as
the operational and systems changes that will be necessary to
implement SFAS 166 and SFAS 167;
|
|
|
|
the availability of debt financing in sufficient quantity and at
attractive rates to support growth in our mortgage-related
investments portfolio, to refinance maturing debt and to
mitigate interest rate risk, including the continuing support of
Treasury and the Federal Reserve;
|
|
|
|
the availability of options, interest rate and currency swaps
and other derivative financial instruments of the types and
quantities and with acceptable counterparties needed for
investment funding and risk management purposes;
|
|
|
|
changes in pricing, valuation or other methodologies, models,
assumptions, judgments, estimates or other measurement
techniques or their respective reliability;
|
|
|
|
changes in mortgage-to-debt OAS;
|
|
|
|
volatility of reported results due to changes in the fair value
of certain instruments or assets;
|
|
|
|
preferences of originators in selling into the secondary
mortgage market;
|
|
|
|
changes to our underwriting requirements or investment standards
for mortgage-related products;
|
|
|
|
investor preferences for mortgage loans and mortgage-related and
debt securities compared to other investments;
|
|
|
|
the ability of our financial, accounting, data processing and
other operating systems or infrastructure and those of our
vendors to process the complexity and volume of our transactions;
|
|
|
|
borrower preferences for fixed-rate mortgages or adjustable-rate
mortgages;
|
|
|
|
the occurrence of a major natural or other disaster in
geographic areas in which portions of our total mortgage
portfolio are concentrated;
|
|
|
|
other factors and assumptions described in this
Form 10-Q,
our
Form 10-Q
for the quarter ended March 31, 2009 or our 2008 Annual
Report, including in the MD&A sections;
|
|
|
|
our assumptions and estimates regarding the foregoing and our
ability to anticipate the foregoing factors and their
impacts; and
|
|
|
|
market reactions to the foregoing.
|
We undertake no obligation to update forward-looking statements
we make to reflect events or circumstances after the date of
this
Form 10-Q
or to reflect the occurrence of unanticipated events.
RISK
MANAGEMENT AND DISCLOSURE COMMITMENTS
In October 2000, we announced our voluntary adoption of a series
of commitments designed to enhance market discipline, liquidity
and capital. In September 2005, we entered into a written
agreement with FHFA that updated these commitments and set forth
a process for implementing them. A copy of the letters between
us and FHFA dated September 1, 2005 constituting the
written agreement has been filed as an exhibit to our
Registration Statement on Form 10, filed with the SEC on
July 18, 2008, and is available on the Investor Relations
page of our website at
www.freddiemac.com/investors/secfilings/index.html.
Our Periodic Issuance of Subordinated Debt disclosure commitment
was suspended by FHFA in a letter dated November 8, 2008.
In a letter dated March 18, 2009, FHFA notified us that
FHFA was suspending the remaining disclosure commitments under
the September 1, 2005 agreement until further notice.
However, FHFA will continue to monitor our adherence to the
applicable covenants in Liquidity Management and Contingency
Planning and the Interest-Rate Risk disclosure commitment
through normal supervision activities. For the six months ended
June 30, 2009, our duration gap averaged one month,
PMVS-L
averaged $439 million and
PMVS-YC
averaged $88 million. Our 2009 monthly average
duration gap, PMVS results and related disclosures are provided
in our Monthly Volume Summary which is available on our website,
www.freddiemac.com/investors/volsum and in current reports on
Form 8-K
we file with the SEC. For disclosures concerning credit risk
sensitivity, see RISK MANAGEMENT Credit
Risks Credit Risk Sensitivity. We are
providing our website addresses solely for your information.
Information appearing on our website is not incorporated into
this
Form 10-Q.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest
Rate Risk and Other Market Risks
Our mortgage-related investments portfolio activities expose us
to interest rate risk and other market risks arising primarily
from the uncertainty as to when borrowers will pay the
outstanding principal balance of mortgage loans and
mortgage-related securities held in our mortgage-related
investments portfolio, known as prepayment risk, and the
resulting potential mismatch in the timing of our receipt of
cash flows related to our assets versus the timing of payment of
cash flows related to our liabilities. Our credit guarantee
activities also expose us to interest rate risk because changes
in interest rates can cause fluctuations in the fair value of
our guarantee asset. See QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK Interest Rate Risk and
Other Market Risks in our 2008 Annual Report for more
information on our exposure to interest-rate risks, including
our use of derivatives as part of our efforts to manage such
risks.
PMVS
and Duration Gap
Our primary interest rate risk measures are PMVS and duration
gap. PMVS is measured in two ways, one measuring the estimated
sensitivity of our portfolio market value to parallel moves in
interest rates
(PMVS-L) and
the other to nonparallel movements
(PMVS-YC).
Our PMVS and duration gap estimates are determined using models
that involve our best judgment of interest rate and prepayment
assumptions. Accordingly, while we believe that PMVS and
duration gap are useful risk management tools, they should be
understood as estimates rather than as precise measurements.
While PMVS and duration gap estimate the exposure to changes in
interest rates, they do not capture the potential impact of
certain other market risks, such as changes in volatility,
basis, prepayment model, mortgage-to-debt OAS and
foreign-currency risk. The impact of these other market risks
can be significant.
The 50 basis point shift and 25 basis point change in
the LIBOR yield curve used for our PMVS measures reflect
reasonably possible near-term changes that we believe provide a
meaningful measure of our interest rate risk sensitivity. Our
PMVS measures assume an instantaneous shift in rates. Therefore,
these PMVS measures do not consider the effects on fair value of
any rebalancing actions that we would typically take to reduce
our risk exposure.
Limitations
of Market Risk Measures
There are inherent limitations in any methodology used to
estimate exposure to changes in market interest rates. Our
sensitivity analyses for PMVS and duration gap contemplate only
certain movements in interest rates and are performed at a
particular point in time based on the estimated fair value of
our existing portfolio. These sensitivity analyses do not
incorporate other factors that may have a significant effect,
most notably expected future business activities and strategic
actions that management may take to manage interest rate risk.
In addition, when market conditions change rapidly and
dramatically, as they have since 2007, the assumptions that we
use in our models for our sensitivity analyses may not keep pace
with changing conditions. As such, these analyses are not
intended to provide precise forecasts of the effect a change in
market interest rates would have on the estimated fair value of
our net assets.
PMVS
Results
Table 57 provides estimated
point-in-time
PMVS-L and
PMVS-YC
results. Table 57 also provides
PMVS-L
estimates assuming an immediate 100 basis point shift in
the LIBOR yield curve. We do not hedge the entire prepayment
risk exposure embedded in our mortgage assets. As a result, as
interest rate volatility increases, the duration of the mortgage
assets will change more rapidly. Accordingly, as shown in
Table 57, the
PMVS-L
results based on a 100 basis point shift in the LIBOR curve
are disproportionately higher at June 30, 2009, than the
PMVS-L
results based on a 50 basis point shift in the LIBOR curve.
Because of a significant drop in mortgage rates during the first
half of 2009 and the introduction of the Freddie Mac Relief
Refinance
Mortgagesm
product in April 2009, the prepayment option risk, or negative
convexity, of our mortgage assets increased significantly.
Accordingly, as shown in Table 57, the
PMVS-L
results are significantly higher at June 30, 2009 compared
to December 31, 2008 in both a 50 and 100 basis points
shift in the LIBOR curve. We adjusted our prepayment models in
the second quarter of 2009 to more accurately reflect
expectations under our implementation of the MHA Program as well
as refinancing expectations in the expected interest rate
environment. During the second quarter of 2009, we purchased put
swaptions to replace maturing positions in order to partially
hedge our exposure to increasing negative convexity.
Table 57
PMVS Assuming Shifts of the LIBOR Yield Curve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Pre-Tax Loss in
|
|
|
|
Portfolio Market Value
|
|
|
|
PMVS-YC
|
|
|
PMVS-L
|
|
|
|
25 bps
|
|
|
50 bps
|
|
|
100 bps
|
|
|
|
(in millions)
|
|
|
At:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
$
|
63
|
|
|
$
|
486
|
|
|
$
|
1,650
|
|
December 31, 2008
|
|
|
136
|
|
|
|
141
|
|
|
|
108
|
|
Derivatives have enabled us to keep our interest rate risk
exposure at consistently low levels in a wide range of interest
rate environments. Table 58 shows that the low
PMVS-L risk
levels for the periods presented would generally have been
higher if we had not used derivatives to manage our interest
rate risk exposure.
Table 58
Derivative Impact on
PMVS-L
(50 bps)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
After
|
|
Effect of
|
|
|
Derivatives
|
|
Derivatives
|
|
Derivatives
|
|
|
(in millions)
|
|
At:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
$
|
3,361
|
|
|
$
|
486
|
|
|
$
|
(2,875
|
)
|
December 31, 2008
|
|
|
2,708
|
|
|
|
141
|
|
|
|
(2,567
|
)
|
The disclosure in our Monthly Volume Summary reports, which are
available on our website at www.freddiemac.com and in current
reports on
Form 8-K
we file with the SEC, reflects the average of the daily
PMVS-L,
PMVS-YC and
duration gap estimates for a given reporting period (a month,
quarter or year).
Duration
Gap Results
Our estimated average duration gap for both the months of June
2009 and December 2008 was zero and one month, respectively.
Duration gap measures the difference in price sensitivity to
interest rate changes between our assets and liabilities, and is
expressed in months relative to the market value of assets. For
example, assets with a six-month duration and liabilities with a
five-month duration would result in a positive duration gap of
one month. A duration gap of zero implies that the duration of
our assets approximates the duration of our liabilities.
Multiplying duration gap (expressed as a percentage of a year)
by the fair value of our assets will provide an indication of
the change in the fair value of our equity resulting from a 1%
change in interest rates.
ITEM 4T.
CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that the information
we are required to disclose in our financial reports is
recorded, processed, summarized and reported within the time
periods specified by the SEC rules and forms and that such
information is accumulated and communicated to senior
management, as appropriate, to allow timely decisions regarding
required disclosure. In designing our disclosure controls and
procedures, we recognize that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives, and we must apply judgment in implementing possible
controls and procedures. Management, including the
companys Interim Chief Executive Officer, who also has
been performing the functions of principal financial officer on
an interim basis, conducted an evaluation of the effectiveness
of our disclosure controls and procedures as of June 30,
2009. As a result of managements evaluation, our Interim
Chief Executive Officer concluded that our disclosure controls
and procedures were not effective as of June 30, 2009, at a
reasonable level of assurance, for the following reasons:
|
|
|
|
|
our disclosure controls and procedures did not adequately ensure
the accumulation and communication to management of information
known to FHFA that is needed to meet our disclosure obligations
under the federal securities laws; and
|
|
|
|
we have not yet remediated the material weakness in our controls
over our counterparty credit risk analysis that impacts our
significant judgments and estimates for single-family loan loss
reserves.
|
We have not been able to update our disclosure controls and
procedures to provide reasonable assurance that information
known by FHFA on an ongoing basis is communicated from FHFA to
Freddie Macs management in a manner that allows for timely
decisions regarding our required disclosure. Based on
discussions with FHFA and the structural nature of this
continuing weakness, it is likely that we will not remediate
this weakness in our disclosure controls and procedures while we
are under conservatorship.
Changes
in Internal Control Over Financial Reporting During the Quarter
Ended June 30, 2009
We have evaluated the changes in our internal control over
financial reporting that occurred during the quarter ended
June 30, 2009 and concluded that the following matters have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting:
|
|
|
|
|
We have remediated the material weakness related to our
securities impairment model, as discussed below.
|
|
|
|
In April 2009, our Interim Chief Executive Officer began
performing the functions of principal financial officer, on an
interim basis.
|
|
|
|
We implemented a new single-family loan loss reserve model
process that provides more transparency into the drivers of
change to the reserves. For additional information, see
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Use of Estimates to our consolidated
financial statements.
|
Material
Weaknesses
As of March 31, 2009, we had three material weaknesses in
internal control over financial reporting. The descriptions of
our material weaknesses and our progress as of June 30,
2009 toward their remediation are summarized below. We report
progress toward remediation in the following stages:
|
|
|
|
|
In process We are in the process of designing and
implementing controls to correct identified internal control
deficiencies and conducting ongoing evaluations to ensure all
deficiencies have been identified.
|
|
|
|
Remediation activities implemented We have designed
and implemented the controls that we believe are necessary to
remediate the identified internal control deficiencies.
|
|
|
|
Remediated After a sufficient period of operation of
the controls implemented to remediate the control deficiencies,
management has evaluated the controls and found them to be
operating effectively.
|
|
|
|
|
|
|
|
Remediation
|
|
|
Progress as of
|
Material Weaknesses Original Observations
|
|
June 30, 2009
|
|
Policy Updates
|
|
|
|
|
Our disclosure controls and procedures have not provided
adequate mechanisms for information known to FHFA that may have
financial statement disclosure ramifications to be communicated
to management.
|
|
|
In
process(1)
|
|
Counterparty Credit Risk Analysis
|
|
|
|
|
Our counterparty credit risk analysis impacts significant
estimates and judgments in our financial reporting affecting
single-family loan loss reserves and other-than-temporary
impairments of available-for-sale securities. The controls over
these processes have not been adequately designed or documented
to mitigate the significantly increased risks associated with
the processes. While compensating controls mitigated these
risks, the risk of a material error in the consolidated
financial statements has not been sufficiently reduced.
|
|
|
In process
|
|
Securities Impairment Model
|
|
|
|
|
We remediated this material weakness during the second quarter
of 2009.
|
|
|
Remediated
|
|
|
|
(1) |
Based on discussions with FHFA and the structural nature of this
weakness, we believe it is likely that we will not remediate
this material weakness while we are under conservatorship. See
Description of Progress Toward Remediating Material
Weaknesses Policy Updates for additional
information.
|
Description
of Progress Toward Remediating Material Weaknesses
Policy
Updates
We have been under conservatorship of FHFA since
September 6, 2008. Under the Reform Act, FHFA is an
independent agency that currently functions as both our
Conservator and our regulator with respect to our safety,
soundness and mission. Because we are in conservatorship, some
of the information that we may need to meet our disclosure
obligations may be solely within the knowledge of FHFA. As our
Conservator, FHFA has the power to take actions without our
knowledge that could be material to investors and could
significantly affect our financial performance. Although we and
FHFA have attempted to design and implement disclosure policies
and procedures that would account for the conservatorship and
accomplish the same objectives as disclosure controls and
procedures for a typical reporting company, there are inherent
structural limitations on our ability to design, implement, test
or operate effective disclosure controls and procedures under
the current circumstances. As our Conservator and regulator
under the Reform Act, FHFA is limited in its ability to design
and implement a complete set of disclosure controls and
procedures relating to us, particularly with respect to current
reporting pursuant to
Form 8-K.
Similarly, as a regulated entity, we are limited in our ability
to design, implement, operate and test the controls and
procedures for which FHFA is responsible. For example, FHFA may
formulate certain intentions with respect to conduct of our
business that, if known to management, would require
consideration for disclosure or reflection in our financial
statements, but that FHFA, for regulatory reasons, may be
constrained from communicating to management.
Due to these circumstances, we have not been able to update our
disclosure controls and procedures in a manner that adequately
ensures the accumulation and communication to management of
information known to FHFA that is needed to meet our disclosure
obligations under the federal securities laws, including
disclosures affecting our consolidated financial statements. As
a result, we did not maintain effective controls and procedures
designed to ensure complete and accurate disclosure as required
by GAAP as of June 30, 2009.
Given the structural nature of this weakness, we believe it is
likely that we will not remediate this material weakness while
we are under conservatorship.
However, both we and FHFA have continued to engage in activities
and employ procedures and practices intended to permit
accumulation and communication to management of information
needed to meet our disclosure obligations under the federal
securities laws. These include the following:
|
|
|
|
|
FHFA has established the Office of Conservatorship Operations,
which is intended to facilitate operation of the company with
the oversight of the Conservator.
|
|
|
|
We have provided drafts of our SEC filings to FHFA personnel for
their review and comment prior to filing. We also have provided
drafts of external press releases, statements and speeches to
FHFA personnel for their review and comment prior to release.
|
|
|
|
FHFA personnel, including senior officials, have reviewed our
SEC filings prior to filing, including this Form
10-Q, and
engaged in discussions regarding issues associated with the
information contained in those filings. Prior to filing this
Form 10-Q,
FHFA provided us with a written acknowledgement that it had
reviewed the
Form 10-Q,
was not aware of any material misstatements or omissions in the
Form 10-Q,
and had no objection to our filing the
Form 10-Q.
|
|
|
|
The Director of FHFA has been in frequent communication with our
Interim Chief Executive Officer, typically meeting (in person or
by phone) on a weekly basis.
|
|
|
|
FHFA representatives have held frequent meetings, typically
weekly, with various groups within the company to enhance the
flow of information and to provide oversight on a variety of
matters, including accounting, capital markets management,
external communications and legal matters.
|
|
|
|
Senior officials within FHFAs accounting group have met
frequently, typically weekly, with our senior financial
executives regarding our accounting policies, practices and
procedures.
|
Counterparty
Credit Risk Analysis
During the second quarter of 2009, we revised our security
impairments process such that the risk of material misstatement
of our security impairment estimates related to credit risk of
our bond insurance counterparties has been mitigated. In
addition, due to the adoption of
FSP FAS 115-2
and
FAS 124-2,
the potential magnitude and, therefore, the risk of material
misstatement have been reduced. We continue to execute our
detailed remediation plan related to the effect of credit risk
of mortgage insurance and seller/servicer counterparties on our
loan loss reserve estimates. We continue to exercise a greater
degree of review and oversight of the assumptions, judgments and
model processes employed in the mortgage insurance and
seller/servicer counterparty credit risk analysis. We believe
these review and oversight activities were sufficient to
mitigate the risk of material misstatement of our June 30, 2009
consolidated financial statements.
Securities
Impairment Model
During the second quarter financial reporting cycle, we
determined that we have fully remediated the material weakness
based on our evaluation that the controls we had previously put
in place to remediate this material weakness have been effective
over a reasonable period of operation.
In view of our mitigating activities related to our material
weaknesses, including our remediation efforts through
June 30, 2009, we believe that our interim consolidated
financial statements for the quarter ended June 30, 2009,
have been prepared in conformity with GAAP.
FREDDIE
MAC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(dollars in millions, except share-related amounts)
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities
|
|
$
|
8,523
|
|
|
$
|
8,603
|
|
|
$
|
17,494
|
|
|
$
|
17,049
|
|
Mortgage loans
|
|
|
1,721
|
|
|
|
1,320
|
|
|
|
3,301
|
|
|
|
2,563
|
|
Other
|
|
|
75
|
|
|
|
297
|
|
|
|
169
|
|
|
|
504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
10,319
|
|
|
|
10,220
|
|
|
|
20,964
|
|
|
|
20,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
(571
|
)
|
|
|
(1,637
|
)
|
|
|
(1,693
|
)
|
|
|
(3,681
|
)
|
Long-term debt
|
|
|
(5,211
|
)
|
|
|
(6,711
|
)
|
|
|
(10,575
|
)
|
|
|
(13,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(5,782
|
)
|
|
|
(8,348
|
)
|
|
|
(12,268
|
)
|
|
|
(17,117
|
)
|
Expense related to derivatives
|
|
|
(282
|
)
|
|
|
(343
|
)
|
|
|
(582
|
)
|
|
|
(672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
4,255
|
|
|
|
1,529
|
|
|
|
8,114
|
|
|
|
2,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income (includes interest on guarantee
asset of $251, $243, $500 and $458, respectively)
|
|
|
710
|
|
|
|
757
|
|
|
|
1,490
|
|
|
|
1,546
|
|
Gains (losses) on guarantee asset
|
|
|
1,817
|
|
|
|
1,114
|
|
|
|
1,661
|
|
|
|
(280
|
)
|
Income on guarantee obligation
|
|
|
961
|
|
|
|
769
|
|
|
|
1,871
|
|
|
|
1,938
|
|
Derivative gains (losses)
|
|
|
2,361
|
|
|
|
115
|
|
|
|
2,542
|
|
|
|
(130
|
)
|
Gains (losses) on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment-related:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment of
available-for-sale
securities
|
|
|
(10,473
|
)
|
|
|
(1,040
|
)
|
|
|
(17,603
|
)
|
|
|
(1,111
|
)
|
Portion of other-than-temporary impairment recognized in AOCI
|
|
|
8,260
|
|
|
|
|
|
|
|
8,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment of available-for-sale securities recognized in
earnings
|
|
|
(2,213
|
)
|
|
|
(1,040
|
)
|
|
|
(9,343
|
)
|
|
|
(1,111
|
)
|
Other gains (losses) on investments
|
|
|
797
|
|
|
|
(2,287
|
)
|
|
|
2,983
|
|
|
|
(997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) on investments
|
|
|
(1,416
|
)
|
|
|
(3,327
|
)
|
|
|
(6,360
|
)
|
|
|
(2,108
|
)
|
Gains (losses) on debt recorded at fair value
|
|
|
(797
|
)
|
|
|
569
|
|
|
|
(330
|
)
|
|
|
(816
|
)
|
Gains (losses) on debt retirement
|
|
|
(156
|
)
|
|
|
(29
|
)
|
|
|
(260
|
)
|
|
|
276
|
|
Recoveries on loans impaired upon purchase
|
|
|
70
|
|
|
|
121
|
|
|
|
120
|
|
|
|
347
|
|
Low-income housing tax credit partnerships
|
|
|
(167
|
)
|
|
|
(108
|
)
|
|
|
(273
|
)
|
|
|
(225
|
)
|
Trust management income (expense)
|
|
|
(238
|
)
|
|
|
(19
|
)
|
|
|
(445
|
)
|
|
|
(16
|
)
|
Other income
|
|
|
70
|
|
|
|
94
|
|
|
|
111
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
3,215
|
|
|
|
56
|
|
|
|
127
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
(221
|
)
|
|
|
(241
|
)
|
|
|
(428
|
)
|
|
|
(472
|
)
|
Professional services
|
|
|
(64
|
)
|
|
|
(55
|
)
|
|
|
(124
|
)
|
|
|
(127
|
)
|
Occupancy expense
|
|
|
(15
|
)
|
|
|
(18
|
)
|
|
|
(33
|
)
|
|
|
(33
|
)
|
Other administrative expenses
|
|
|
(83
|
)
|
|
|
(90
|
)
|
|
|
(170
|
)
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
|
(383
|
)
|
|
|
(404
|
)
|
|
|
(755
|
)
|
|
|
(801
|
)
|
Provision for credit losses
|
|
|
(5,199
|
)
|
|
|
(2,537
|
)
|
|
|
(13,990
|
)
|
|
|
(3,777
|
)
|
Real estate owned operations expense
|
|
|
(9
|
)
|
|
|
(265
|
)
|
|
|
(315
|
)
|
|
|
(473
|
)
|
Losses on loans purchased
|
|
|
(1,199
|
)
|
|
|
(120
|
)
|
|
|
(3,211
|
)
|
|
|
(171
|
)
|
Other expenses
|
|
|
(97
|
)
|
|
|
(108
|
)
|
|
|
(175
|
)
|
|
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
(6,887
|
)
|
|
|
(3,434
|
)
|
|
|
(18,446
|
)
|
|
|
(5,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefit
|
|
|
583
|
|
|
|
(1,849
|
)
|
|
|
(10,205
|
)
|
|
|
(2,420
|
)
|
Income tax benefit
|
|
|
184
|
|
|
|
1,030
|
|
|
|
1,121
|
|
|
|
1,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
767
|
|
|
|
(819
|
)
|
|
|
(9,084
|
)
|
|
|
(968
|
)
|
Less: Net (income) loss attributable to noncontrolling
interest
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Freddie Mac
|
|
$
|
768
|
|
|
$
|
(821
|
)
|
|
$
|
(9,083
|
)
|
|
$
|
(972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(1,142
|
)
|
|
|
(231
|
)
|
|
|
(1,520
|
)
|
|
|
(503
|
)
|
Amount allocated to participating security option holders
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(374
|
)
|
|
$
|
(1,053
|
)
|
|
$
|
(10,603
|
)
|
|
$
|
(1,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
|
|
$
|
(1.63
|
)
|
|
$
|
(3.26
|
)
|
|
$
|
(2.28
|
)
|
Diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(1.63
|
)
|
|
$
|
(3.26
|
)
|
|
$
|
(2.28
|
)
|
Weighted average common shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,253,716
|
|
|
|
646,868
|
|
|
|
3,254,815
|
|
|
|
646,603
|
|
Diluted
|
|
|
3,253,716
|
|
|
|
646,868
|
|
|
|
3,254,815
|
|
|
|
646,603
|
|
Dividends per common share
|
|
$
|
|
|
|
$
|
0.25
|
|
|
$
|
|
|
|
$
|
0.50
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
FREDDIE
MAC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions, except
|
|
|
|
share-related amounts)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
46,662
|
|
|
$
|
45,326
|
|
Restricted cash
|
|
|
1,609
|
|
|
|
953
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
8,500
|
|
|
|
10,150
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value (includes $8,112 and $21,302, respectively,
pledged as collateral that may be repledged)
|
|
|
420,691
|
|
|
|
458,898
|
|
Trading, at fair value
|
|
|
250,666
|
|
|
|
190,361
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
|
671,357
|
|
|
|
649,259
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
Held-for-sale,
at lower-of-cost-or-fair-value (except $223 and $401 at fair
value, respectively)
|
|
|
22,596
|
|
|
|
16,247
|
|
Held-for-investment,
at amortized cost (net of allowances for loan losses of $831 and
$690, respectively)
|
|
|
99,354
|
|
|
|
91,344
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans, net
|
|
|
121,950
|
|
|
|
107,591
|
|
Accounts and other receivables, net
|
|
|
6,871
|
|
|
|
6,337
|
|
Derivative assets, net
|
|
|
319
|
|
|
|
955
|
|
Guarantee asset, at fair value
|
|
|
7,576
|
|
|
|
4,847
|
|
Real estate owned, net
|
|
|
3,416
|
|
|
|
3,255
|
|
Deferred tax assets, net
|
|
|
16,894
|
|
|
|
15,351
|
|
Low-income housing tax credit partnerships equity investments
|
|
|
3,879
|
|
|
|
4,145
|
|
Other assets
|
|
|
3,257
|
|
|
|
2,794
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
892,290
|
|
|
$
|
850,963
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity
(deficit)
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
$
|
5,500
|
|
|
$
|
6,504
|
|
Debt, net:
|
|
|
|
|
|
|
|
|
Short-term debt (includes $1,645 and $1,638 at fair value,
respectively)
|
|
|
344,135
|
|
|
|
435,114
|
|
Long-term debt (includes $5,852 and $11,740 at fair value,
respectively)
|
|
|
492,843
|
|
|
|
407,907
|
|
|
|
|
|
|
|
|
|
|
Total debt, net
|
|
|
836,978
|
|
|
|
843,021
|
|
Guarantee obligation
|
|
|
11,956
|
|
|
|
12,098
|
|
Derivative liabilities, net
|
|
|
885
|
|
|
|
2,277
|
|
Reserve for guarantee losses on Participation Certificates
|
|
|
24,366
|
|
|
|
14,928
|
|
Other liabilities
|
|
|
4,373
|
|
|
|
2,769
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
884,058
|
|
|
|
881,597
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 1, 2, 10 and 11)
|
|
|
|
|
|
|
|
|
Equity (deficit)
|
|
|
|
|
|
|
|
|
Freddie Mac stockholders equity (deficit)
|
|
|
|
|
|
|
|
|
Senior preferred stock, at redemption value
|
|
|
51,700
|
|
|
|
14,800
|
|
Preferred stock, at redemption value
|
|
|
14,109
|
|
|
|
14,109
|
|
Common stock, $0.00 par value, 4,000,000,000 shares authorized,
725,863,886 shares issued and 648,305,154 shares and
647,260,293 shares outstanding, respectively
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
30
|
|
|
|
19
|
|
Retained earnings (accumulated deficit)
|
|
|
(18,863
|
)
|
|
|
(23,191
|
)
|
AOCI, net of taxes, related to:
|
|
|
|
|
|
|
|
|
Available-for-sale securities (includes $17,774, net of taxes,
of other-than-temporary impairments at June 30, 2009)
|
|
|
(31,375
|
)
|
|
|
(28,510
|
)
|
Cash flow hedge relationships
|
|
|
(3,275
|
)
|
|
|
(3,678
|
)
|
Defined benefit plans
|
|
|
(165
|
)
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
Total AOCI, net of taxes
|
|
|
(34,815
|
)
|
|
|
(32,357
|
)
|
Treasury stock, at cost, 77,558,732 shares and
78,603,593 shares, respectively
|
|
|
(4,024
|
)
|
|
|
(4,111
|
)
|
|
|
|
|
|
|
|
|
|
Total Freddie Mac stockholders equity (deficit)
|
|
|
8,137
|
|
|
|
(30,731
|
)
|
Noncontrolling interest
|
|
|
95
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
Total equity (deficit)
|
|
|
8,232
|
|
|
|
(30,634
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity (deficit)
|
|
$
|
892,290
|
|
|
$
|
850,963
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
FREDDIE
MAC
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
(in millions)
|
|
|
Senior preferred stock, at redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
1
|
|
|
$
|
14,800
|
|
|
|
|
|
|
$
|
|
|
Increase in liquidation preference
|
|
|
|
|
|
|
36,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior preferred stock, end of period
|
|
|
1
|
|
|
|
51,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, at redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
464
|
|
|
|
14,109
|
|
|
|
464
|
|
|
|
14,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, end of period
|
|
|
464
|
|
|
|
14,109
|
|
|
|
464
|
|
|
|
14,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, at par value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
726
|
|
|
|
|
|
|
|
726
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, end of period
|
|
|
726
|
|
|
|
|
|
|
|
726
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
871
|
|
Stock-based compensation
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
53
|
|
Income tax benefit from stock-based compensation
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
(12
|
)
|
Common stock issuances
|
|
|
|
|
|
|
(86
|
)
|
|
|
|
|
|
|
(52
|
)
|
REIT preferred stock repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Transfer from retained earnings (accumulated deficit)
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital, end of period
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (accumulated deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
|
(23,191
|
)
|
|
|
|
|
|
|
26,909
|
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year, as adjusted
|
|
|
|
|
|
|
(23,191
|
)
|
|
|
|
|
|
|
27,932
|
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
14,996
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Freddie Mac
|
|
|
|
|
|
|
(9,083
|
)
|
|
|
|
|
|
|
(972
|
)
|
Senior preferred stock dividends declared
|
|
|
|
|
|
|
(1,519
|
)
|
|
|
|
|
|
|
|
|
Preferred stock dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(503
|
)
|
Common stock dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(323
|
)
|
Dividend equivalent payments on expired stock options
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(6
|
)
|
Transfer to additional paid-in capital
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (accumulated deficit), end of period
|
|
|
|
|
|
|
(18,863
|
)
|
|
|
|
|
|
|
26,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOCI, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
|
(32,357
|
)
|
|
|
|
|
|
|
(11,143
|
)
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year, as adjusted
|
|
|
|
|
|
|
(32,357
|
)
|
|
|
|
|
|
|
(11,993
|
)
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
(9,931
|
)
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses) related to
available-for-sale securities, net of reclassification
adjustments
|
|
|
|
|
|
|
7,066
|
|
|
|
|
|
|
|
(12,825
|
)
|
Changes in unrealized gains (losses) related to cash flow hedge
relationships, net of reclassification adjustments
|
|
|
|
|
|
|
403
|
|
|
|
|
|
|
|
637
|
|
Changes in defined benefit plans
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOCI, net of taxes, end of period
|
|
|
|
|
|
|
(34,815
|
)
|
|
|
|
|
|
|
(24,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
79
|
|
|
|
(4,111
|
)
|
|
|
80
|
|
|
|
(4,174
|
)
|
Common stock issuances
|
|
|
(1
|
)
|
|
|
87
|
|
|
|
(1
|
)
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, end of period
|
|
|
78
|
|
|
|
(4,024
|
)
|
|
|
79
|
|
|
|
(4,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
|
97
|
|
|
|
|
|
|
|
181
|
|
Net income (loss) attributable to noncontrolling interest
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
4
|
|
REIT preferred stock repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45
|
)
|
Dividends and other
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest, end of period
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity (deficit)
|
|
|
|
|
|
$
|
8,232
|
|
|
|
|
|
|
$
|
13,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
$
|
(9,084
|
)
|
|
|
|
|
|
$
|
(968
|
)
|
Changes in other comprehensive income (loss), net of taxes, net
of reclassification adjustments
|
|
|
|
|
|
|
7,473
|
|
|
|
|
|
|
|
(12,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
(1,611
|
)
|
|
|
|
|
|
|
(13,155
|
)
|
Less: Comprehensive (income) loss attributable to noncontrolling
interest
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) attributable to Freddie
Mac
|
|
|
|
|
|
$
|
(1,610
|
)
|
|
|
|
|
|
$
|
(13,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
FREDDIE
MAC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,084
|
)
|
|
$
|
(968
|
)
|
Adjustments to reconcile net loss to net cash used for operating
activities:
|
|
|
|
|
|
|
|
|
Derivative gains
|
|
|
(4,127
|
)
|
|
|
(587
|
)
|
Asset related amortization premiums, discounts and
basis adjustments
|
|
|
(13
|
)
|
|
|
8
|
|
Debt related amortization premiums and discounts on
certain debt securities and basis adjustments
|
|
|
2,528
|
|
|
|
4,760
|
|
Net discounts paid on retirements of debt
|
|
|
(3,187
|
)
|
|
|
(5,187
|
)
|
Losses (gains) on debt retirement
|
|
|
260
|
|
|
|
(276
|
)
|
Provision for credit losses
|
|
|
13,990
|
|
|
|
3,777
|
|
Low-income housing tax credit partnerships
|
|
|
273
|
|
|
|
225
|
|
Losses on loans purchased
|
|
|
3,211
|
|
|
|
171
|
|
Losses on investment activity
|
|
|
6,360
|
|
|
|
2,108
|
|
Losses on debt recorded at fair value
|
|
|
330
|
|
|
|
816
|
|
Deferred income tax benefit
|
|
|
(486
|
)
|
|
|
(1,628
|
)
|
Purchases of
held-for-sale
mortgages
|
|
|
(60,741
|
)
|
|
|
(21,885
|
)
|
Sales of
held-for-sale
mortgages
|
|
|
50,674
|
|
|
|
17,734
|
|
Repayments of
held-for-sale
mortgages
|
|
|
2,547
|
|
|
|
294
|
|
Change in:
|
|
|
|
|
|
|
|
|
Due to Participation Certificates and Structured Securities Trust
|
|
|
531
|
|
|
|
(694
|
)
|
Accounts and other receivables, net
|
|
|
(1,363
|
)
|
|
|
(1,306
|
)
|
Accrued interest payable
|
|
|
(919
|
)
|
|
|
(200
|
)
|
Income taxes payable
|
|
|
(620
|
)
|
|
|
(878
|
)
|
Guarantee asset, at fair value
|
|
|
(2,729
|
)
|
|
|
(1,427
|
)
|
Guarantee obligation
|
|
|
(254
|
)
|
|
|
368
|
|
Other, net
|
|
|
1,365
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(1,454
|
)
|
|
|
(3,959
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of trading securities
|
|
|
(177,261
|
)
|
|
|
(78,273
|
)
|
Proceeds from sales of trading securities
|
|
|
89,175
|
|
|
|
9,289
|
|
Proceeds from maturities of trading securities
|
|
|
29,659
|
|
|
|
9,974
|
|
Purchases of
available-for-sale
securities
|
|
|
(11,177
|
)
|
|
|
(155,571
|
)
|
Proceeds from sales of
available-for-sale
securities
|
|
|
7,085
|
|
|
|
19,781
|
|
Proceeds from maturities of
available-for-sale
securities
|
|
|
46,305
|
|
|
|
153,259
|
|
Purchases of
held-for-investment
mortgages
|
|
|
(15,332
|
)
|
|
|
(9,961
|
)
|
Repayments of
held-for-investment
mortgages
|
|
|
3,067
|
|
|
|
2,886
|
|
Increase in restricted cash
|
|
|
(656
|
)
|
|
|
(520
|
)
|
Net payments of mortgage insurance and acquisitions and
dispositions of real estate owned
|
|
|
(1,712
|
)
|
|
|
(461
|
)
|
Net decrease (increase) in federal funds sold and securities
purchased under agreements to resell
|
|
|
1,650
|
|
|
|
(8,702
|
)
|
Derivative premiums and terminations and swap collateral, net
|
|
|
2,201
|
|
|
|
939
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(26,996
|
)
|
|
|
(57,360
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of short-term debt
|
|
|
523,576
|
|
|
|
589,891
|
|
Repayments of short-term debt
|
|
|
(590,226
|
)
|
|
|
(544,617
|
)
|
Proceeds from issuance of long-term debt
|
|
|
240,570
|
|
|
|
192,731
|
|
Repayments of long-term debt
|
|
|
(179,347
|
)
|
|
|
(140,395
|
)
|
Proceeds from increase in liquidation preference of senior
preferred stock
|
|
|
36,900
|
|
|
|
|
|
Payment of cash dividends on senior preferred stock, preferred
stock and common stock
|
|
|
(1,522
|
)
|
|
|
(832
|
)
|
Excess tax benefits associated with stock-based awards
|
|
|
1
|
|
|
|
1
|
|
Payments of low-income housing tax credit partnerships notes
payable
|
|
|
(166
|
)
|
|
|
(433
|
)
|
Other, net
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
29,786
|
|
|
|
96,298
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
1,336
|
|
|
|
34,979
|
|
Cash and cash equivalents at beginning of period
|
|
|
45,326
|
|
|
|
8,574
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
46,662
|
|
|
$
|
43,553
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid (received) for:
|
|
|
|
|
|
|
|
|
Debt interest
|
|
$
|
14,488
|
|
|
$
|
18,465
|
|
Swap collateral interest
|
|
|
3
|
|
|
|
97
|
|
Derivative interest carry, net
|
|
|
350
|
|
|
|
65
|
|
Income taxes
|
|
|
(15
|
)
|
|
|
1,054
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Transfers from
available-for-sale
securities to trading securities
|
|
|
|
|
|
|
87,281
|
|
Held-for-sale
mortgages securitized and retained as available-for-sale
securities
|
|
|
1,024
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Freddie Mac was chartered by Congress in 1970 with a public
mission to stabilize the nations residential mortgage
market and expand opportunities for home ownership and
affordable rental housing. Our statutory mission is to provide
liquidity, stability and affordability to the U.S. housing
market. Our participation in the secondary mortgage market
includes providing our credit guarantee for residential
mortgages originated by mortgage lenders and investing in
mortgage loans and mortgage-related securities. We refer to our
investments in mortgage loans and mortgage-related securities as
our mortgage-related investments portfolio. Through our credit
guarantee activities, we securitize mortgage loans by issuing
PCs to third-party investors. We also resecuritize
mortgage-related securities that are issued by us or Ginnie Mae
as well as private, or non-agency, entities. We also guarantee
multifamily mortgage loans that support housing revenue bonds
issued by third parties and we guarantee other mortgage loans
held by third parties. Securitized mortgage-related assets that
back PCs and Structured Securities that are held by third
parties are not reflected as our assets. Our Structured
Securities represent beneficial interests in pools of PCs and
certain other types of mortgage-related assets. We earn
management and guarantee fees for providing our guarantee and
performing management activities (such as ongoing trustee
services, administration of pass-through amounts, paying agent
services, tax reporting and other required services) with
respect to issued PCs and Structured Securities. Our management
activities are essential to and inseparable from our guarantee
activities. We do not provide or charge for the activities
separately. The management and guarantee fee is paid to us over
the life of the related PCs and Structured Securities and
reflected in earnings, as management and guarantee income, as it
is accrued. Throughout our consolidated financial statements and
related notes, we use certain acronyms and terms and refer to
certain accounting pronouncements which are defined in the
Glossary.
Conservatorship
and Related Developments
We continue to operate under the conservatorship that commenced
on September 6, 2008, conducting our business under the
direction of FHFA as our Conservator. During the
conservatorship, the Conservator has delegated certain authority
to the Board of Directors to oversee, and to management to
conduct, day-to-day operations so that the company can continue
to operate in the ordinary course of business.
We have changed certain business practices and other
non-financial objectives to provide support for the mortgage
market in a manner that serves public policy but that may not
contribute to profitability. Some of these changes increase our
expenses while others require us to forego revenue opportunities
in the near term. In addition, the objectives set forth for us
under our charter and by our Conservator, as well as the
restrictions on our business under the Purchase Agreement with
Treasury, may adversely impact our results, including our
segment results.
Our current focus and purpose is to meet the urgent liquidity
needs of the U.S. mortgage market, lower costs for borrowers and
support the recovery of the housing market and
U.S. economy. Through our role in the Obama
Administrations initiatives, including the Making Home
Affordable Program, we are working to meet the needs of the
mortgage market, in line with our mission: making homeownership
and rental housing more affordable, minimizing foreclosures and
helping families keep their homes.
MHA
Program and Other Efforts to Assist the Housing
Market
We are working with our Conservator to help distressed
homeowners through initiatives that support the MHA Program
(previously known as the Homeowner Affordability and Stability
Plan), which was announced by the Obama Administration in
February 2009. We have also implemented a number of other
initiatives to assist the U.S. residential mortgage market
and help families keep their homes, some of which were
undertaken at the direction of FHFA. The more significant
initiatives are discussed below.
The MHA Program includes:
|
|
|
|
|
Home Affordable Refinance, which gives eligible
homeowners with loans owned or guaranteed by Freddie Mac or
Fannie Mae an opportunity to refinance into more affordable
monthly payments. The Freddie Mac Relief Refinance
Mortgagesm
is our implementation of Home Affordable Refinance. We began
purchasing loans under our program in April 2009, and as of
June 30, 2009 we had purchased approximately 28,500 loans
totaling $5.1 billion in unpaid principal balance
originated under the program. The Administrations Home
Affordable Refinance effort is targeted at borrowers with
current LTV ratios above 80%; however, our implemented program
also allows borrowers with LTV ratios below 80% to participate.
In July 2009, we announced that borrowers who have mortgages
with current LTV ratios up to 125% would be allowed to
participate in this program.
|
|
|
|
|
|
Home Affordable Modification Program, or HAMP, which
commits U.S. government, Freddie Mac and Fannie Mae funds
to avoid foreclosure and keep eligible homeowners in their homes
through mortgage modifications. We are working with servicers
and borrowers to pursue modifications under HAMP, which requires
that each borrower complete a three month trial period before
the modification becomes effective. Based on information
provided by certain of our largest servicers who service a
majority of our loans, approximately 16,000 loans that we own or
guarantee started the trial period portion of the HAMP process
as of June 30, 2009. Freddie Mac will bear the full cost of
the monthly payment reductions related to modifications of loans
we own or guarantee, and all servicer and borrower incentive
fees, and we will not receive a reimbursement of these costs
from Treasury.
|
|
|
|
Second Lien Program, which will offer incentive payments
to borrowers, servicers and investors (other than us and Fannie
Mae), for modifications and principal reductions on second lien
mortgages in certain circumstances. This program is intended to
help facilitate greater modifications of second lien mortgages,
but has not yet been implemented.
|
|
|
|
Short Sale and
Deed-in-Lieu
Program, which will offer borrowers who are ineligible to
participate in HAMP the ability to sell their homes for amounts
that are not sufficient for a full payoff of the borrowers
mortgage debt and for lenders to accept such amounts. This
program has not yet been implemented.
|
At present, it is difficult for us to predict the full impact of
the MHA Program on us. However, to the extent our borrowers
participate in HAMP in large numbers, it is likely that the
costs we incur will be substantial. In addition, we continue to
devote significant internal resources to the implementation of
the various initiatives under the MHA Program. It is not
possible at present to estimate the extent to which costs
incurred in the near term may be offset, if at all, by the
prevention or reduction of potential future costs of loan
defaults and foreclosures due to these initiatives.
Our other efforts to assist the U.S. housing market include:
Increase in our Mortgage Portfolio
Activity. Since we entered into conservatorship
in September 2008, we have been providing additional liquidity
to the mortgage market, including by acquiring and holding
increased amounts of mortgage loans and mortgage-related
securities in our mortgage-related investments portfolio,
subject to the limitation on the size of such portfolio set
forth in the Purchase Agreement. However, our mortgage-related
investments portfolio decreased during the second quarter of
2009, due to a relative lack of favorable investment
opportunities.
Temporary Foreclosure and Eviction
Suspensions. In order to allow our mortgage
servicers time to implement our more recent modification
programs and provide additional relief to troubled borrowers, we
temporarily suspended all foreclosure transfers of occupied
homes for certain periods. On March 7, 2009, we suspended
foreclosure transfers on owner-occupied homes where the borrower
may be eligible to receive a loan modification under HAMP. In
addition, we temporarily suspended the eviction process for
occupants of foreclosed homes from November 26, 2008
through April 1, 2009.
Increased Foreclosure Alternatives. In the
second quarter of 2009, we completed approximately 29,400
foreclosure alternative agreements, excluding the loans in
trial-period payment plans under HAMP, with borrowers out of the
estimated 415,000 single-family loans in our single-family
mortgage portfolio that were or became delinquent (90 days
or more past due or in foreclosure) during the second quarter of
2009.
Government
Support for our Business
We are dependent upon the continued support of Treasury and FHFA
in order to continue operating our business. We also receive
substantial support from the Federal Reserve. Our ability to
access funds from Treasury under the Purchase Agreement is
critical to keeping us solvent and avoiding the appointment of a
receiver by FHFA under statutory mandatory receivership
provisions.
Significant recent developments with respect to the support we
receive from the government include the following:
|
|
|
|
|
On May 6, 2009, FHFA, acting on our behalf in its capacity
as Conservator, and Treasury amended the Purchase Agreement to,
among other items: (i) increase the funding available under
the Purchase Agreement from $100 billion to
$200 billion; (ii) increase the limit on our
mortgage-related investments portfolio (which is based on the
carrying value of such assets as reflected on our GAAP balance
sheet) as of December 31, 2009 from $850 billion to
$900 billion; and (iii) revise the limit on our
aggregate indebtedness and the method of calculating such limit.
The amendment also expands the category of persons covered by
the restrictions on executive compensation contained in the
Purchase Agreement.
|
|
|
|
On June 30, 2009 and March 31, 2009, we received
$6.1 billion and $30.8 billion, respectively, in
funding from Treasury under the Purchase Agreement, which
increased the aggregate liquidation preference of the senior
preferred stock to $51.7 billion as of June 30, 2009.
We received these funds pursuant to draw requests made to
address the deficits in our net worth as of March 31, 2009
and December 31, 2008, respectively. On June 30,
|
|
|
|
|
|
2009 and March 31, 2009, we paid dividends of
$1.1 billion and $370 million, respectively, in cash
on the senior preferred stock to Treasury for the three months
ended June 30, 2009 and March 31, 2009, respectively,
at the direction of the Conservator.
|
|
|
|
|
|
According to information provided by Treasury, it held
$151.1 billion of mortgage-related securities issued by us
and Fannie Mae as of June 30, 2009 under the purchase
program it announced in September 2008.
|
|
|
|
According to information provided by the Federal Reserve, as of
July 29, 2009 it had net purchases of $246.3 billion
of our mortgage-related securities under the purchase program it
announced in November 2008 and held $39.6 billion of our
direct obligations.
|
At June 30, 2009, our assets exceeded our liabilities by
$8.2 billion. Because we had a positive net worth as of
June 30, 2009, FHFA has not submitted a draw request on our
behalf to Treasury for additional funding under the Purchase
Agreement. The aggregate liquidation preference of the senior
preferred stock is $51.7 billion and the amount remaining
under the Treasurys funding agreement is
$149.3 billion at June 30, 2009. The corresponding
annual cash dividends payable to Treasury are $5.2 billion,
which exceeds our annual historical earnings in most periods. We
expect to make additional draws under the Purchase Agreement in
future periods due to a variety of factors that could affect our
net worth.
Our annual dividend obligation on the senior preferred stock
exceeds our annual historical earnings in most periods, and will
result in increasingly negative cash flows in future periods, if
we pay the dividends in cash. In addition, the potential for
continued deterioration in the housing market and future net
losses in accordance with GAAP will make it more likely that we
will continue to have additional draws under the Purchase
Agreement in future periods, which will make it more difficult
to pay senior preferred dividends in cash in the future.
Additional draws would also diminish the amount of
Treasurys remaining commitment available to us under the
Purchase Agreement. As a result of additional draws and other
factors: (a) our cash flow from operations and earnings
will likely be negative for the foreseeable future;
(b) there is significant uncertainty as to our long-term
financial sustainability; and (c) there are likely to be
significant changes to our capital structure and business model
beyond the near-term that we expect to be decided by Congress
and the Executive Branch.
Our
Business Objectives
Our business objectives and strategies have in some cases been
altered since we entered into conservatorship, and may continue
to change. Based on our Charter, public statements from Treasury
and FHFA officials and guidance from our Conservator, we have a
variety of different, and potentially competing, objectives,
including:
|
|
|
|
|
providing liquidity, stability and affordability in the mortgage
market;
|
|
|
|
immediately providing additional assistance to the struggling
housing and mortgage markets;
|
|
|
|
reducing the need to draw funds from Treasury pursuant to the
Purchase Agreement;
|
|
|
|
returning to long-term profitability; and
|
|
|
|
protecting the interests of the taxpayers.
|
Given the important role our Conservator and the Obama
Administration have placed on Freddie Mac in addressing housing
and mortgage market conditions, we will be required to take
actions that could have a negative impact on our business,
operating results or financial condition. There are also other
actions being contemplated by Congress, such as legislation that
would provide bankruptcy judges the ability to lower the
principal amount or interest rate, or both, on mortgage loans in
bankruptcy proceedings, that are likely to increase credit
losses.
These efforts are intended to help struggling homeowners and the
mortgage market, in line with our mission, and may help to
mitigate credit losses, but some of them are expected to have an
adverse impact on our future financial results. As a result, we
will, in some cases, sacrifice the objectives of reducing the
need to draw funds from Treasury and returning to long-term
profitability as we provide this assistance. Because we expect
many of these objectives and initiatives will result in
significant costs, and the extent to which we will be
compensated or receive additional support for implementation of
these objectives and initiatives is unclear, there is
significant uncertainty as to the ultimate impact they will have
on our future capital or liquidity needs. However, we believe
that the increased level of support provided by Treasury and
FHFA, as described above, is sufficient in the near-term to
ensure we have adequate capital and liquidity to continue to
conduct our normal business activities. Management is in the
process of identifying and considering various actions that
could be taken to reduce the significant uncertainties
surrounding the business, as well as the level of future draws
under the Purchase Agreement; however, our ability to pursue
such actions may be limited based on market conditions and other
factors. Any actions we take related to the uncertainties
surrounding our business and future draws will likely require
approval by FHFA and Treasury before they are implemented. In
addition, FHFA,
Treasury or Congress may direct us to focus our efforts on
supporting the mortgage markets in ways that make it more
difficult for us to implement any such actions.
There is significant uncertainty as to whether or when we will
emerge from conservatorship, as it has no specified termination
date, and as to what changes may occur to our business structure
during or following our conservatorship, including whether we
will continue to exist. However, we are not aware of any current
plans of our Conservator to significantly change our business
structure in the near-term.
For more information on the terms of the conservatorship, the
powers of our Conservator and certain of the initiatives,
programs and agreements described above, see NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in our 2008
Annual Report.
Basis of
Presentation
The accompanying unaudited consolidated financial statements
include our accounts and those of our subsidiaries, and should
be read in conjunction with the audited consolidated financial
statements and related notes included in our 2008 Annual Report.
We are operating under the basis that we will realize assets and
satisfy liabilities in the normal course of business as a going
concern and in accordance with the delegation of authority from
FHFA to our Board of Directors and management. These unaudited
consolidated financial statements have been prepared in
conformity with GAAP for interim financial information. Certain
financial information that is normally included in annual
financial statements prepared in conformity with GAAP but is not
required for interim reporting purposes has been condensed or
omitted. Certain amounts in prior periods consolidated
financial statements have been reclassified to conform to the
current presentation. In the opinion of management, all
adjustments, which include only normal recurring adjustments,
have been recorded for a fair statement of our unaudited
consolidated financial statements in conformity with GAAP.
For the second quarter of 2009, we evaluated subsequent events
through August 7, 2009, the date that our financial
statements were issued.
Use of
Estimates
The preparation of financial statements requires us to make
estimates and assumptions that affect (a) the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and (b) the reported amounts of revenues and expenses and
gains and losses during the reporting period. Management has
made significant estimates in preparation of the financial
statements, including, but not limited to, valuation of
financial instruments and other assets and liabilities,
amortization of assets and liabilities, allowance for loan
losses and reserves for guarantee losses, assessing impairments
and subsequent accretion of impairments on investments, and
assessing the realizability of deferred tax assets, net. Actual
results could be different from these estimates.
During the second quarter of 2009, we enhanced our methodology
for estimating the reserve for losses on mortgage loans
held-for-investment and the reserve for guarantee losses on PCs.
Specifically, we enhanced our methodology to consider a greater
number of loan characteristics and revisions to (1) the
effect of home price changes on borrower behavior; and
(2) the impact of our loss mitigation actions, including
our temporary suspensions of foreclosure transfers and loan
modification efforts. We estimate that this change in
methodology decreased our provision for credit losses and
increased net income by approximately $1.4 billion or $0.44
per diluted common share for the three and six months ended
June 30, 2009. See NOTE 5: MORTGAGE LOANS AND
LOAN LOSS RESERVES for additional information on our loan
loss reserves.
Change in
Accounting Principles
Additional
Guidance and Disclosures for Fair Value Measurements and Change
in the Impairment Model for Debt Securities
On April 1, 2009, we adopted FSP
FAS 157-4
and FSP
FAS 115-2
and
FAS 124-2,
which provide application guidance regarding fair value
measurements and impairments of securities. FSP
FAS 157-4
provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of
activities have significantly decreased. FSP
FAS 115-2
and
FAS 124-2
provides additional guidance in accounting for and presenting
impairment losses on securities.
Determining
Whether a Market Is Not Active and a Transaction Is Not
Distressed
FSP
FAS 157-4
relates to determining fair values when there is no active
market or where the price inputs being used represent distressed
sales. It provides additional guidance on the factors that
should be considered in estimating fair value when there has
been a significant decrease in market activities for a financial
asset or liability. This guidance does not change the objective
of fair value measurement, which is to reflect the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction (as opposed to a distressed
or forced transaction) at the date of the financial statements
under current market conditions. Specifically, it reaffirms the
need to use judgment to
ascertain if a formerly active market has become inactive and in
determining fair values when markets have become inactive.
FSP FAS 157-4
was effective and prospectively applied by us in the second
quarter of 2009. The adoption of this FSP had no impact on our
consolidated financial statements other than expanding our
disclosures on fair value measurement in NOTE 14:
FAIR VALUE DISCLOSURES.
Change
in the Impairment Model for Debt Securities
FSP
FAS 115-2
and
FAS 124-2
amends the recognition, measurement and presentation of
other-than-temporary impairment for debt securities, and is
intended to bring greater consistency to the timing of
impairment recognition and provide greater clarity to investors
about the credit and non-credit components of impaired debt
securities that are not expected to be sold. This FSP changes
(a) the method for determining whether an
other-than-temporary impairment exists, and (b) the amount
of an impairment charge to be recorded in earnings. To determine
whether an other-than-temporary impairment exists, we assess
whether we intend to sell or more likely than not will be
required to sell the security prior to the anticipated recovery.
In addition, we must determine if we expect to recover the
entire amortized cost basis for securities that we do not intend
to sell and for which it is more likely than not that we will
not be required to sell before the anticipated recovery. This is
a change from the previous requirement for us to assess whether
it was probable that we would be able to collect all contractual
cash flows. The entire amount of other-than-temporary impairment
related to securities for which we intend to sell or for which
it is more likely than not that we will be required to sell,
discussed above, is recognized in our consolidated statements of
operations as net impairment on available-for-sale securities
recognized in earnings. For securities that we do not intend to
sell or for which it is more likely than not that we will not be
required to sell, but for which we do not expect to recover the
securities amortized cost basis, the amount of
other-than-temporary
impairment is separated between amounts recorded in earnings and
AOCI.
Other-than-temporary
impairment amounts related to credit loss are recognized in
earnings and the amounts attributable to all other factors are
recorded to AOCI.
FSP
FAS 115-2
and
FAS 124-2
was effective and applied prospectively by us in the second
quarter of 2009. As a result of the adoption, we recognized a
cumulative-effect adjustment, net of tax, of $15.0 billion
to our opening balance of retained earnings (accumulated
deficit) on April 1, 2009, with a corresponding adjustment
of $(9.9) billion, net of tax, to AOCI. The cumulative
adjustment reclassifies the non-credit component of previously
recognized other-than-temporary impairments from retained
earnings to AOCI. The difference between these adjustments of
$5.1 billion primarily represents the release of the
valuation allowance previously recorded against the deferred tax
asset that is no longer required upon adoption of this FSP. See
NOTE 4: INVESTMENTS IN SECURITIES for further
disclosures regarding our investments in securities and
other-than-temporary impairments.
Subsequent
Events
We prospectively adopted SFAS 165 on April 1, 2009.
This Statement establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to
be issued. In particular, this statement sets forth (a) the
period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial
statements, (b) the circumstances under which an entity
should recognize events or transactions occurring after the
balance sheet date in its financial statements, and (c) the
disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. It also
requires entities to disclose the date through which subsequent
events have been evaluated and whether that date is the date
that financial statements were issued or the date they were
available to be issued. The adoption of SFAS 165 did not
have a material impact on our consolidated financial statements.
Determining
Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities
On January 1, 2009, we retrospectively adopted
FSP EITF 03-6-1.
The guidance in this FSP applies to the calculation of earnings
per share for share-based payment awards with rights to
dividends or dividend equivalents. It clarifies that unvested
share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the
computation of earnings per share pursuant to the two-class
method. Our adoption of this FSP did not have a material impact
on our consolidated financial statements.
Noncontrolling
Interests
We adopted SFAS 160 on January 1, 2009. After
adoption, noncontrolling interests (referred to as a minority
interest prior to adoption) are classified within equity
(deficit), a change from their previous classification between
liabilities and stockholders equity (deficit). Income
(loss) attributable to noncontrolling interests is included in
net income (loss), although such income (loss) continues to be
deducted to measure earnings per share. SFAS 160 also
requires retrospective application of expanded presentation and
disclosure requirements. The adoption of SFAS 160 did not
have a material impact on our consolidated financial statements.
Disclosure
about Derivative Instruments and Hedging
Activities
We adopted SFAS 161 on January 1, 2009. This statement
amends and expands the disclosure provisions in SFAS 133.
It requires enhanced disclosures about (a) how and why we
use derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS 133
and its related interpretations, and (c) how derivative
instruments and related hedged items affect our financial
position, financial performance and cash flows. The adoption of
SFAS 161 enhanced our disclosures of derivatives
instruments and hedging activities in NOTE 10:
DERIVATIVES but had no impact on our consolidated
financial statements.
Recently
Issued Accounting Standards, Not Yet Adopted
Accounting
for Transfers of Financial Assets and Consolidation of Variable
Interest Entities
In June 2009, the FASB issued SFAS 166 and SFAS 167
pertaining to securitizations and variable interest entities.
SFAS 166 amends SFAS 140 regarding the accounting for
transfers of financial assets. It eliminates the concept of a
QSPE, changes the requirements for derecognizing financial
assets and requires additional disclosures. SFAS 166 also
requires initial recognition and measurement at fair value for
all assets obtained (including a transferors beneficial
interests) and liabilities incurred in a transfer of financial
assets accounted for as a sale.
In connection with the changes to SFAS 140 discussed above,
SFAS 167 amended the scope of
FIN 46(R)
to include entities previously considered QSPEs. In addition,
SFAS 167 eliminated the quantitative approach for
determining the primary beneficiary of a VIE in favor of a
qualitative approach that focuses on the power to direct the
activities of the VIE that most significantly affect the
entitys economic performance and the obligation to absorb
losses or right to receive benefits that could be significant to
the VIE. SFAS 167 requires ongoing assessments of whether
an enterprise is the primary beneficiary of a VIE. Additional
disclosures about an enterprises involvement in the VIE
are also required.
SFAS 166 and SFAS 167 are effective and will be
applied prospectively by us on January 1, 2010. We expect
that the adoption of these two standards will have a significant
impact on our consolidated financial statements. Upon the
adoption of SFAS 166 and SFAS 167, we will be required
to consolidate our PC trusts in our financial statements, which
could have a significant impact on our net worth. Such
consolidation could also significantly increase our required
level of capital under existing capital rules, which have been
suspended by our Conservator. Implementation of these changes
will require significant operational and systems changes. It may
be difficult for us to make all such changes in a controlled
manner by the effective date.
NOTE 2:
FINANCIAL GUARANTEES AND SECURITIZED
INTERESTS IN MORTGAGE-RELATED ASSETS
Financial
Guarantees
As discussed in NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES in our 2008 Annual Report, we
securitize substantially all the single-family mortgage loans we
purchase and issue securities which we guarantee. We also enter
into other financial agreements, including credit enhancements
on mortgage-related assets and derivative transactions, which
also give rise to financial guarantees. Table 2.1 below
presents our maximum potential amount of future payments, our
recognized liability and the maximum remaining term of these
guarantees.
Table 2.1
Financial Guarantees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
December 31, 2008
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
Maximum
|
|
|
Maximum
|
|
Recognized
|
|
Remaining
|
|
Maximum
|
|
Recognized
|
|
Remaining
|
|
|
Exposure(1)
|
|
Liability
|
|
Term
|
|
Exposure(1)
|
|
Liability
|
|
Term
|
|
|
(dollars in millions, terms in years)
|
|
Guaranteed PCs and Structured Securities
|
|
$
|
1,837,988
|
|
|
$
|
11,408
|
|
|
|
43
|
|
|
$
|
1,807,553
|
|
|
$
|
11,480
|
|
|
|
44
|
|
Other mortgage-related guarantees
|
|
|
13,136
|
|
|
|
548
|
|
|
|
39
|
|
|
|
19,685
|
|
|
|
618
|
|
|
|
39
|
|
Liquidity guarantees
|
|
|
12,380
|
|
|
|
|
|
|
|
43
|
|
|
|
12,260
|
|
|
|
|
|
|
|
44
|
|
Derivative instruments
|
|
|
67,601
|
|
|
|
938
|
|
|
|
34
|
|
|
|
39,488
|
|
|
|
111
|
|
|
|
34
|
|
Servicing-related premium guarantees
|
|
|
173
|
|
|
|
|
|
|
|
5
|
|
|
|
63
|
|
|
|
|
|
|
|
5
|
|
|
|
(1) |
Maximum exposure represents the contractual amounts that could
be lost under the guarantees if counterparties or borrowers
defaulted, without consideration of possible recoveries under
credit enhancement arrangements, such as recourse provisions,
third-party insurance contracts or from collateral held or
pledged. The maximum exposure disclosed above is not
representative of the actual loss we are likely to incur, based
on our historical loss experience and after consideration of
proceeds from related collateral liquidation or available credit
enhancements. In addition, the maximum exposure for our
liquidity guarantees is not mutually exclusive of our default
guarantees on the same securities; therefore, the amounts are
also included within the maximum exposure of guaranteed PCs and
Structured Securities.
|
Guaranteed
PCs and Structured Securities
We guarantee the payment of principal and interest on issued PCs
and Structured Securities that are backed by pools of mortgage
loans. We issued approximately $154 billion and
$132 billion of PCs and Structured Securities backed by
single-family mortgage loans during the three months ended
June 30, 2009 and 2008, respectively, and $258 billion
and $245 billion during the six months ended June 30,
2009 and 2008, respectively. We also issued approximately
$1.0 billion and $0.2 billion of PCs and Structured
Securities backed by multifamily mortgage loans during the three
months ended June 30, 2009 and 2008, respectively, and
$1.1 billion and $0.2 billion during the six months
ended June 30, 2009 and 2008, respectively. At
June 30, 2009 and December 31, 2008, we had
$1,838.0 billion and $1,807.6 billion of issued PCs
and Structured Securities, of which $440.5 billion and
$424.5 billion, respectively, were held as investments in
mortgage-related securities on our consolidated balance sheets.
The vast majority of these PCs and Structured Securities were
issued in securitizations accounted for in accordance with
FIN 45 at the time of issuance. The assets that underlie
issued PCs and Structured Securities as of June 30, 2009
consisted of approximately $1,802.5 billion in unpaid
principal balance of mortgage loans or mortgage-related
securities and $35.5 billion of cash and short-term
investments, which we invest on behalf of the PC trusts until
the time of payment to PC investors. There were
$1,771.0 billion and $1,800.6 billion at June 30,
2009 and December 31, 2008, respectively, of securities we
issued in resecuritization of our PCs and other previously
issued Structured Securities. These restructured securities do
not increase our credit-related exposure and consist of
single-class and multi-class Structured Securities backed
by PCs, REMICs, interest-only strips, and principal-only strips.
See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Change in Accounting Principles for
information on SFAS 166 and SFAS 167 which will result
in our consolidation of most of our securitizations on our
balance sheets upon adoption of the standards in January 2010.
Our guarantee obligation represents the recognized liability
associated with our guarantee of PCs and Structured Securities
net of cumulative amortization. In addition to our guarantee
obligation, we recognized a reserve for guarantee losses on PCs
that totaled $24.4 billion and $14.9 billion at
June 30, 2009 and December 31, 2008, respectively. At
inception of an executed guarantee, we recognize a guarantee
obligation at fair value. Subsequently, we amortize our
guarantee obligation under the static effective yield method.
For more information on the static effective yield method, see
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES in our 2008 Annual Report. In the first quarter
of 2009, we enhanced our methodology for evaluating significant
changes in economic events to be more in line with the current
economic environment and to monitor the rate of amortization on
our guarantee obligation so that it remains reflective of our
expected duration of losses.
Other
Mortgage-Related Guarantees
We provide long-term stand-by commitments to certain of our
customers, which obligate us to purchase delinquent loans that
are covered by those agreements. These non-securitized financial
guarantees totaled $3.9 billion and $10.6 billion at
June 30, 2009 and December 31, 2008, respectively.
During the six months ended June 30, 2009 and 2008, several
of these agreements were terminated, in whole or in part, at the
request of the counterparties to permit a significant portion of
the performing loans previously covered by the long-term standby
commitments to be securitized as PCs or Structured Transactions,
which totaled $5.7 billion and $18.8 billion,
respectively, in issuances of these securities in these periods.
We also had outstanding financial guarantees on multifamily
housing revenue bonds that were issued by third parties of
$9.2 billion at both June 30, 2009 and
December 31, 2008.
Liquidity
Guarantees
As part of the guarantee arrangements pertaining to multifamily
housing revenue bonds, we provided commitments to advance funds,
commonly referred to as liquidity guarantees. The
advances to counterparties provide funding for their purchase of
the bonds until they can be resold. In the event they cannot be
resold within a certain period, then these guarantees require
our repurchase of any tendered tax-exempt and related taxable
pass-through certificates and housing revenue bonds that are
unable to be remarketed. We hold cash and cash equivalents on
our consolidated balance sheets in excess of the amount of these
commitments. No liquidity guarantee advances were outstanding at
June 30, 2009 and December 31, 2008.
Derivative
Instruments
Derivative instruments primarily include written options,
written swaptions, interest-rate swap guarantees and guarantees
of stated final maturity Structured Securities. Derivative
instruments also include short-term default and other guarantee
commitments that we account for as derivatives.
Servicing-Related
Premium Guarantees
We provide guarantees to reimburse servicers for premiums paid
to acquire servicing in situations where the original seller is
unable to perform under its separate servicing agreement. The
liability associated with these agreements was not material at
June 30, 2009 and December 31, 2008.
Other
Indemnifications
In connection with certain business transactions, we may provide
indemnification to counterparties for claims arising out of
breaches of certain obligations (e.g., those arising from
representations and warranties) in contracts entered into in the
normal course of business. Our assessment is that the risk of
any material loss from such a claim for indemnification is
remote and there are no probable and estimable losses associated
with these contracts. Therefore, we have not recorded any
liabilities related to these indemnifications on our
consolidated balance sheets at June 30, 2009 and
December 31, 2008.
Retained
Interests in Securitization Transactions
In connection with transfers of financial assets that qualify as
sales, we may retain certain newly-issued PCs and Structured
Securities not transferred to third parties upon the completion
of a securitization transaction. These securities may be backed
by mortgage loans purchased from our customers, PCs and
Structured Securities, or previously resecuritized securities.
These Freddie Mac PCs and Structured Securities are included in
investments in securities in our consolidated balance sheets.
Our exposure to credit losses on the loans underlying our
retained securitization interests and our guarantee asset is
recorded within our reserve for guarantee losses on PCs and as a
component of our guarantee obligation, respectively. For
additional information regarding our delinquencies and credit
losses on mortgage loans both on our consolidated balance sheet
and underlying our PCs and Structured Securities, see
NOTE 5: MORTGAGE LOANS AND LOAN LOSS RESERVES.
Table 2.2 below presents the carrying values of our
retained interests in securitization transactions as of
June 30, 2009 and December 31, 2008, respectively.
Table 2.2
Carrying Value of Retained Interests
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
(in millions)
|
|
Retained interests, mortgage-related
securities(1)
|
|
$
|
94,164
|
|
|
$
|
98,307
|
|
Retained interests, guarantee
asset(2)
|
|
$
|
7,576
|
|
|
$
|
4,847
|
|
|
|
(1)
|
We estimate the fair value of retained interests in
mortgage-related securities based on independent price quotes
obtained from third-party pricing services or dealer provided
prices.
|
(2)
|
We estimate the fair value of the guarantee asset using
third-party market data as practicable. For fixed-rate loan
products, the valuation approach involves obtaining dealer
quotes on proxy securities with collateral similar to aggregated
characteristics of our portfolio. This effectively equates the
guarantee asset with current, or spot, market values
for excess servicing interest-only securities. For the remaining
interests, which relate to adjustable-rate mortgage products,
the fair value is determined using an expected cash flow
approach.
|
The fair values at the time of securitization and subsequent
fair value measurements at the end of a period were primarily
estimated using third-party information. Consequently, we
derived the assumptions presented in Table 2.3 by
determining those implied by our valuation estimates, with the
IRRs adjusted where necessary to align our internal models with
estimated fair values determined using third-party information.
However, prepayment rates are presented based on our internal
models and have not been similarly adjusted. Table 2.3
presents our estimates of the key assumptions used to derive the
fair value measurement that relates solely to our guarantee
asset on financial guarantees of single-family loans. These
represent the average assumptions used both at the end of the
period as well as the valuation assumptions at guarantee
issuance during each quarterly period presented on a combined
basis.
Table 2.3
Key Assumptions Used in Measuring the Fair Value of Guarantee
Asset(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
Mean Valuation Assumptions
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
IRRs(2)
|
|
|
16.3
|
%
|
|
|
9.5
|
%
|
|
|
17.8
|
%
|
|
|
9.5
|
%
|
Prepayment
rates(3)
|
|
|
26.5
|
%
|
|
|
13.0
|
%
|
|
|
28.5
|
%
|
|
|
15.4
|
%
|
Weighted average lives (years)
|
|
|
3.3
|
|
|
|
6.0
|
|
|
|
3.0
|
|
|
|
5.4
|
|
|
|
(1)
|
Estimates based solely on valuations of our guarantee asset
associated with single-family loans, which represent
approximately 96% of the total guarantee asset.
|
(2)
|
IRR assumptions represent an unpaid principal balance weighted
average of the discount rates inherent in the fair value of the
recognized guarantee asset. We estimated the IRRs using a model
which employs multiple interest rate scenarios versus a single
assumption.
|
(3)
|
Although prepayment rates are simulated monthly, the assumptions
above represent annualized prepayment rates based on unpaid
principal balances.
|
Gains and
Losses on Transfers of PCs and Structured Securities that are
Accounted for as Sales
The gain or loss on a securitization that qualifies as a sale is
determined, in part, based on the carrying amounts of the
financial assets sold. The carrying amounts of the assets sold
are allocated between those sold to third parties and those held
as retained interests based on their relative fair value at the
date of sale. We recognized net pre-tax gains (losses) on
transfers of mortgage loans, PCs and Structured Securities that
were accounted for as sales of approximately $324 million
and $1 million for the three months ended June 30,
2009 and 2008, respectively, and $518 million and
$92 million for the six months ended June 30, 2009 and
2008, respectively.
Credit
Protection and Other Forms of Credit Enhancement
In connection with our PCs, Structured Securities and other
mortgage-related guarantees, we have credit protection in the
form of primary mortgage insurance, pool insurance, recourse to
lenders, and other forms of credit enhancements. At
June 30, 2009 and December 31, 2008, we recorded
$673 million and $764 million, respectively, within
other assets on our consolidated balance sheets related to these
credit enhancements on securitized mortgages. Table 2.4
presents the maximum amounts of potential loss recovery by type
of credit protection.
Table 2.4
Credit Protection and Other Forms of
Recourse(1)
|
|
|
|
|
|
|
|
|
|
|
Maximum Coverage at
|
|
|
June 30, 2009
|
|
December 31,2008
|
|
|
(in millions)
|
|
PCs and Structured Securities:
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
Primary mortgage insurance
|
|
$
|
56,970
|
|
|
$
|
59,388
|
|
Lender recourse and indemnifications
|
|
|
9,699
|
|
|
|
11,047
|
|
Pool insurance
|
|
|
3,649
|
|
|
|
3,768
|
|
Structured Securities backed by Ginnie Mae
Certificates(2)
|
|
|
1,028
|
|
|
|
1,089
|
|
Other credit enhancements
|
|
|
455
|
|
|
|
475
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Credit enhancements
|
|
|
2,987
|
|
|
|
3,261
|
|
|
|
(1)
|
Exclude credit enhancements related to Structured Transactions,
which had unpaid principal balances that totaled
$27.9 billion and $24.4 billion at June 30, 2009
and December 31, 2008, respectively.
|
(2)
|
Ginnie Mae Certificates are backed by the full faith and credit
of the U.S. government.
|
We also have credit protection for certain of our PCs,
Structured Securities and Structured Transactions that are
backed by loans or certificates of federal agencies (such as
FHA, VA, Ginnie Mae and USDA). The total unpaid principal
balance of these securities backed by loans guaranteed by
federal agencies totaled $4.1 billion and $4.4 billion
as of June 30, 2009 and December 31, 2008,
respectively. Additionally, certain of our Structured
Transactions include subordination protection or other forms of
credit enhancement. At June 30, 2009 and December 31,
2008, the unpaid principal balance of Structured Transactions
with subordination coverage was $4.9 billion and
$5.3 billion, respectively, and the average subordination
coverage on these securities was 18% and 19%, respectively.
Trust
Management Income (Expense)
We receive trust management income, which represents the fees we
earn as master servicer, issuer, trustee and securities
administrator for our issued PCs and Structured Securities.
These fees are derived from interest earned on principal and
interest cash flows held in the trust between the time funds are
remitted to the trust by servicers and the date the funds are
distributed to our PC and Structured Securities holders. The
trust management income is offset by interest expense we incur
when a borrower prepays a mortgage, but the full amount of
interest for the month is due to the PC investor. We must also
indemnify the trust for any investment losses that are incurred
in our role as the securities administrator for the trust.
NOTE 3:
VARIABLE INTEREST ENTITIES
We are a party to numerous entities that are considered to be
VIEs. Our investments in VIEs include LIHTC partnerships and
certain Structured Transactions. In addition, we buy the
highly-rated senior securities in non-mortgage-related,
asset-backed investment trusts that are VIEs. Highly-rated
senior securities issued by these securitization trusts are not
designed to absorb a significant portion of the variability
created by the assets/collateral in the trusts. Our investments
in these securities do not represent a significant variable
interest in the securitization trusts as the securities issued
by these trusts are not designed to absorb a significant portion
of the variability in the trust. Accordingly, we do not
consolidate these securities. See NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Consolidation and
Equity Method of Accounting in our 2008 Annual Report for
further information regarding the consolidation practices of our
VIEs.
LIHTC
Partnerships
We invest as a limited partner in LIHTC partnerships formed for
the purpose of providing equity funding for affordable
multifamily rental properties. The LIHTC partnerships invest as
limited partners in lower-tier partnerships, which own and
operate multifamily rental properties. These properties are
rented to qualified low-income tenants, allowing the properties
to be eligible for federal tax credits. Most of these LIHTC
partnerships are VIEs. A general partner operates the
partnership, identifying investments and obtaining debt
financing as needed to finance partnership activities. There
were no third-party credit enhancements of our LIHTC investments
at June 30, 2009 and December 31, 2008. Although these
partnerships generate operating losses, we realize a return on
our investment through reductions in income tax expense that
result from tax credits. The partnership agreements are
typically structured to meet a required
15-year
period of occupancy by qualified low-income tenants. The
investments in LIHTC partnerships, in which we were either the
primary beneficiary or had a significant variable interest, were
made between 1989 and 2007. At June 30, 2009 and
December 31, 2008, we did not guarantee any obligations of
these LIHTC partnerships and our exposure was limited to the
amount of our investment. The potential exists that we may not
be able to utilize some previously taken or future tax credits.
See NOTE 12: INCOME TAXES for additional
information regarding our partial valuation allowance against
our deferred tax assets, net. At June 30, 2009 and
December 31, 2008, we were the primary beneficiary of
investments in six partnerships and we consolidated these
investments. The investors in the obligations of the
consolidated LIHTC partnerships have recourse only to the assets
of those VIEs and do not have recourse to us. In addition, the
assets of each partnership can be used only to settle
obligations of that partnership.
Consolidated
VIEs
Table 3.1 represents the carrying amounts and
classification of the consolidated assets and liabilities of
VIEs on our consolidated balance sheets.
Table
3.1 Assets and Liabilities of Consolidated
VIEs
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets Line Item
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(in millions)
|
|
|
Cash and cash equivalents
|
|
$
|
14
|
|
|
$
|
12
|
|
Accounts and other receivables, net
|
|
|
136
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
Total assets of consolidated VIEs
|
|
$
|
150
|
|
|
$
|
149
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
35
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
Total liabilities of consolidated VIEs
|
|
$
|
35
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
VIEs Not
Consolidated
LIHTC
Partnerships
At June 30, 2009 and December 31, 2008, we had
unconsolidated investments in 188 and 189 LIHTC
partnerships, respectively, in which we had a significant
variable interest. The size of these partnerships at
June 30, 2009 and December 31, 2008, as measured in
total assets, was $10.0 billion and $10.5 billion,
respectively. These partnerships are accounted for using the
equity method, as described in NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES in our 2008 Annual Report.
Our equity investments in these partnerships were
$3.1 billion and $3.3 billion as of June 30, 2009
and December 31, 2008, respectively, and are included in
low-income housing tax credit partnerships equity investments on
our consolidated balance sheets. As a limited partner, our
maximum exposure to loss equals the undiscounted book value of
our equity investment. At June 30, 2009 and
December 31, 2008, our maximum exposure to loss on
unconsolidated LIHTC partnerships, in which we had a significant
variable interest, was $3.1 billion and $3.3 billion,
respectively. Our investments in unconsolidated LIHTC
partnerships are funded through non-recourse non-interest
bearing notes payable recorded within other liabilities on our
consolidated balance sheets. We had $242 million and
$347 million of these notes payable outstanding at
June 30, 2009 and December 31, 2008.
Table
3.2 Significant Variable Interests in LIHTC
Partnerships
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
December 31, 2008
|
|
|
(in millions)
|
|
Maximum exposure to loss
|
|
$
|
3,115
|
|
|
$
|
3,336
|
|
Non-recourse non-interest bearing notes payable, net
|
|
|
242
|
|
|
|
347
|
|
NOTE 4:
INVESTMENTS IN SECURITIES
Table 4.1 summarizes amortized cost, estimated fair values
and corresponding gross unrealized gains and gross unrealized
losses for available-for-sale securities by major security type.
Table 4.1
Available-For-Sale Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses(1)
|
|
|
Fair Value
|
|
|
|
(in millions)
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
247,347
|
|
|
$
|
8,583
|
|
|
$
|
(2,341
|
)
|
|
$
|
253,589
|
|
Subprime
|
|
|
63,923
|
|
|
|
12
|
|
|
|
(24,000
|
)
|
|
|
39,935
|
|
Commercial mortgage-backed securities
|
|
|
62,976
|
|
|
|
|
|
|
|
(13,768
|
)
|
|
|
49,208
|
|
MTA Option ARM
|
|
|
15,035
|
|
|
|
|
|
|
|
(8,499
|
)
|
|
|
6,536
|
|
Alt-A and
other
|
|
|
20,996
|
|
|
|
9
|
|
|
|
(8,658
|
)
|
|
|
12,347
|
|
Fannie Mae
|
|
|
38,867
|
|
|
|
1,183
|
|
|
|
(23
|
)
|
|
|
40,027
|
|
Obligations of states and political subdivisions
|
|
|
12,500
|
|
|
|
22
|
|
|
|
(905
|
)
|
|
|
11,617
|
|
Manufactured housing
|
|
|
1,151
|
|
|
|
|
|
|
|
(342
|
)
|
|
|
809
|
|
Ginnie Mae
|
|
|
350
|
|
|
|
25
|
|
|
|
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
463,145
|
|
|
|
9,834
|
|
|
|
(58,536
|
)
|
|
|
414,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and other investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
5,815
|
|
|
|
433
|
|
|
|
|
|
|
|
6,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities
|
|
|
5,815
|
|
|
|
433
|
|
|
|
|
|
|
|
6,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
468,960
|
|
|
$
|
10,267
|
|
|
$
|
(58,536
|
)
|
|
$
|
420,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
271,796
|
|
|
$
|
6,333
|
|
|
$
|
(2,921
|
)
|
|
$
|
275,208
|
|
Subprime
|
|
|
71,399
|
|
|
|
13
|
|
|
|
(19,145
|
)
|
|
|
52,267
|
|
Commercial mortgage-backed securities
|
|
|
64,214
|
|
|
|
2
|
|
|
|
(14,716
|
)
|
|
|
49,500
|
|
MTA Option ARM
|
|
|
12,117
|
|
|
|
|
|
|
|
(4,739
|
)
|
|
|
7,378
|
|
Alt-A and
other
|
|
|
20,032
|
|
|
|
11
|
|
|
|
(6,787
|
)
|
|
|
13,256
|
|
Fannie Mae
|
|
|
40,255
|
|
|
|
674
|
|
|
|
(88
|
)
|
|
|
40,841
|
|
Obligations of states and political subdivisions
|
|
|
12,874
|
|
|
|
3
|
|
|
|
(2,349
|
)
|
|
|
10,528
|
|
Manufactured housing
|
|
|
917
|
|
|
|
9
|
|
|
|
(183
|
)
|
|
|
743
|
|
Ginnie Mae
|
|
|
367
|
|
|
|
16
|
|
|
|
|
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
493,971
|
|
|
|
7,061
|
|
|
|
(50,928
|
)
|
|
|
450,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and other investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
8,788
|
|
|
|
6
|
|
|
|
|
|
|
|
8,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities
|
|
|
8,788
|
|
|
|
6
|
|
|
|
|
|
|
|
8,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
502,759
|
|
|
$
|
7,067
|
|
|
$
|
(50,928
|
)
|
|
$
|
458,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Gross unrealized losses at June 30, 2009 include non-credit
related other-than-temporary impairments on available-for-sale
securities recognized in AOCI and temporary unrealized losses.
|
Available-For-Sale
Securities in a Gross Unrealized Loss Position
Table 4.2 shows the fair value of available-for-sale
securities in a gross unrealized loss position and whether they
have been in that position less than 12 months or
12 months or greater including the non-credit-related
portion of other-than-temporary impairments which have been
recognized in AOCI.
Table 4.2
Available-For-Sale Securities in a Gross Unrealized Loss
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
Greater than 12 months
|
|
|
Total
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
Other-Than-
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Temporary
|
|
|
Temporary
|
|
|
|
|
|
Fair
|
|
|
Temporary
|
|
|
Temporary
|
|
|
|
|
|
Fair
|
|
|
Temporary
|
|
|
Temporary
|
|
|
|
|
|
|
Value
|
|
|
Impairment(1)
|
|
|
Impairment(2)
|
|
|
Total
|
|
|
Value
|
|
|
Impairment(1)
|
|
|
Impairment(2)
|
|
|
Total
|
|
|
Value
|
|
|
Impairment(1)
|
|
|
Impairment(2)
|
|
|
Total
|
|
|
|
(in millions)
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
4,379
|
|
|
$
|
|
|
|
$
|
(52
|
)
|
|
$
|
(52
|
)
|
|
$
|
13,025
|
|
|
$
|
|
|
|
$
|
(2,289
|
)
|
|
$
|
(2,289
|
)
|
|
$
|
17,404
|
|
|
$
|
|
|
|
$
|
(2,341
|
)
|
|
$
|
(2,341
|
)
|
Subprime
|
|
|
8,644
|
|
|
|
(6,282
|
)
|
|
|
(1
|
)
|
|
|
(6,283
|
)
|
|
|
31,134
|
|
|
|
(7,237
|
)
|
|
|
(10,480
|
)
|
|
|
(17,717
|
)
|
|
|
39,778
|
|
|
|
(13,519
|
)
|
|
|
(10,481
|
)
|
|
|
(24,000
|
)
|
Commercial mortgage-backed securities
|
|
|
992
|
|
|
|
|
|
|
|
(317
|
)
|
|
|
(317
|
)
|
|
|
48,121
|
|
|
|
|
|
|
|
(13,451
|
)
|
|
|
(13,451
|
)
|
|
|
49,113
|
|
|
|
|
|
|
|
(13,768
|
)
|
|
|
(13,768
|
)
|
MTA Option ARM
|
|
|
5,691
|
|
|
|
(7,229
|
)
|
|
|
|
|
|
|
(7,229
|
)
|
|
|
846
|
|
|
|
(438
|
)
|
|
|
(832
|
)
|
|
|
(1,270
|
)
|
|
|
6,537
|
|
|
|
(7,667
|
)
|
|
|
(832
|
)
|
|
|
(8,499
|
)
|
Alt-A and other
|
|
|
6,012
|
|
|
|
(5,219
|
)
|
|
|
(5
|
)
|
|
|
(5,224
|
)
|
|
|
6,209
|
|
|
|
(697
|
)
|
|
|
(2,737
|
)
|
|
|
(3,434
|
)
|
|
|
12,221
|
|
|
|
(5,916
|
)
|
|
|
(2,742
|
)
|
|
|
(8,658
|
)
|
Fannie Mae
|
|
|
2,417
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
|
|
555
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
2,972
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
(23
|
)
|
Obligations of states and political subdivisions
|
|
|
865
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
(22
|
)
|
|
|
8,837
|
|
|
|
|
|
|
|
(883
|
)
|
|
|
(883
|
)
|
|
|
9,702
|
|
|
|
|
|
|
|
(905
|
)
|
|
|
(905
|
)
|
Manufactured Housing
|
|
|
657
|
|
|
|
(243
|
)
|
|
|
(49
|
)
|
|
|
(292
|
)
|
|
|
151
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
(50
|
)
|
|
|
808
|
|
|
|
(243
|
)
|
|
|
(99
|
)
|
|
|
(342
|
)
|
Ginnie Mae
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
29,674
|
|
|
|
(18,973
|
)
|
|
|
(459
|
)
|
|
|
(19,432
|
)
|
|
|
108,878
|
|
|
|
(8,372
|
)
|
|
|
(30,732
|
)
|
|
|
(39,104
|
)
|
|
|
138,552
|
|
|
|
(27,345
|
)
|
|
|
(31,191
|
)
|
|
|
(58,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities in a gross unrealized loss
position
|
|
$
|
29,674
|
|
|
$
|
(18,973
|
)
|
|
$
|
(459
|
)
|
|
$
|
(19,432
|
)
|
|
$
|
108,878
|
|
|
$
|
(8,372
|
)
|
|
$
|
(30,732
|
)
|
|
$
|
(39,104
|
)
|
|
$
|
138,552
|
|
|
$
|
(27,345
|
)
|
|
$
|
(31,191
|
)
|
|
$
|
(58,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(in millions)
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
14,423
|
|
|
$
|
(425
|
)
|
|
$
|
15,466
|
|
|
$
|
(2,496
|
)
|
|
$
|
29,889
|
|
|
$
|
(2,921
|
)
|
Subprime
|
|
|
3,040
|
|
|
|
(862
|
)
|
|
|
46,585
|
|
|
|
(18,283
|
)
|
|
|
49,625
|
|
|
|
(19,145
|
)
|
Commercial mortgage-backed securities
|
|
|
24,783
|
|
|
|
(8,226
|
)
|
|
|
24,479
|
|
|
|
(6,490
|
)
|
|
|
49,262
|
|
|
|
(14,716
|
)
|
MTA Option ARM
|
|
|
4,186
|
|
|
|
(2,919
|
)
|
|
|
1,299
|
|
|
|
(1,820
|
)
|
|
|
5,485
|
|
|
|
(4,739
|
)
|
Alt-A and
other
|
|
|
3,444
|
|
|
|
(1,526
|
)
|
|
|
7,159
|
|
|
|
(5,261
|
)
|
|
|
10,603
|
|
|
|
(6,787
|
)
|
Fannie Mae
|
|
|
5,977
|
|
|
|
(75
|
)
|
|
|
971
|
|
|
|
(13
|
)
|
|
|
6,948
|
|
|
|
(88
|
)
|
Obligations of states and political subdivisions
|
|
|
5,302
|
|
|
|
(743
|
)
|
|
|
5,077
|
|
|
|
(1,606
|
)
|
|
|
10,379
|
|
|
|
(2,349
|
)
|
Manufactured housing
|
|
|
498
|
|
|
|
(110
|
)
|
|
|
73
|
|
|
|
(73
|
)
|
|
|
571
|
|
|
|
(183
|
)
|
Ginnie Mae
|
|
|
18
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
61,671
|
|
|
|
(14,886
|
)
|
|
|
101,110
|
|
|
|
(36,042
|
)
|
|
|
162,781
|
|
|
|
(50,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities in a gross unrealized loss
position
|
|
$
|
61,671
|
|
|
$
|
(14,886
|
)
|
|
$
|
101,110
|
|
|
$
|
(36,042
|
)
|
|
$
|
162,781
|
|
|
$
|
(50,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the pre-tax amount of non-credit-related
other-than-temporary impairments on available-for-sale
securities not expected to be sold which are recognized in AOCI.
|
(2)
|
Represents the pre-tax amount of temporary impairments on
available-for-sale securities recognized in AOCI.
|
At June 30, 2009, total gross unrealized losses on
available-for-sale securities were $58.5 billion, as noted
in Table 4.2. The gross unrealized losses relate to
approximately 8,000 individual lots representing approximately
4,000 separate securities, including securities with
non-credit-related other-than-temporary impairments recognized
in AOCI. We routinely purchase multiple lots of individual
securities at different times and at different costs. We
determine gross unrealized gains and gross unrealized losses by
specifically identifying investment positions at the lot level;
therefore, some of the lots we hold for a single security may be
in an unrealized gain position while other lots for that
security are in an unrealized loss position, depending upon the
amortized cost of the specific lot.
Evaluation
of Other-Than-Temporary Impairments
We adopted FSP
FAS 115-2
and
FAS 124-2
on April 1, 2009, which provides additional guidance in
accounting for and presenting impairment losses on securities.
FSP
FAS 115-2
and
FAS 124-2
is effective and was applied prospectively by us in the second
quarter of 2009. See NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Change in Accounting
Principles Additional Guidance and Disclosures
for Fair Value Measurements
and Change in the Impairment Model for Debt
Securities Change in the Impairment Model for Debt
Securities for further additional information
regarding the impact of this FSP on our consolidated financial
statements.
We conduct quarterly reviews to identify and evaluate each
available-for-sale security that has an unrealized loss, in
accordance with
FSP FAS 115-2
and
FSP FAS 124-2.
An unrealized loss exists when the current fair value of an
individual security is less than its amortized cost basis.
The evaluation of unrealized losses on our available-for-sale
portfolio for other-than-temporary impairment contemplates
numerous factors. We perform an evaluation on a
security-by-security
basis considering all available information. The relative
importance of this information varies based on the facts and
circumstances surrounding each security, as well as the economic
environment at the time of assessment. Important factors include:
|
|
|
|
|
loan level default modeling that considers individual loan
characteristics, including current LTV ratio, FICO score and
delinquency status, requires assumptions about future home
prices and interest rates, and employs proprietary behavioral
default and prepayment models;
|
|
|
|
an analysis of the performance of the underlying collateral
relative to its credit enhancements using techniques that
require assumptions about future loss severity, default,
prepayment and other borrower behavior. Implicit in this
analysis is information relevant to expected cash flows (such as
collateral performance and characteristics). We qualitatively
consider available information when assessing whether an
impairment is other-than-temporary;
|
|
|
|
the length of time and extent to which the fair value of the
security has been less than the book value and the expected
recovery period;
|
|
|
|
the impact of changes in credit ratings (i.e., rating
agency downgrades); and
|
|
|
|
our conclusion that we do not intend to sell our
available-for-sale securities and it is more likely than not
that we will not be required to sell these securities before
sufficient time elapses to recover all unrealized losses;
|
We consider available information in determining the recovery
period and anticipated holding periods for our
available-for-sale securities. An important underlying factor we
consider in determining the period to recover unrealized losses
on our available-for-sale securities is the estimated life of
the security. Since our available-for-sale securities are
prepayable, the average life is typically shorter than the
contractual maturity. Based on the results of this evaluation,
if it is determined that the impairment is other-than-temporary,
the carrying value of the security is written down to fair
value. The amount of the total other-than-temporary impairment
related to a credit-related loss is recorded within our
consolidated statements of operations as net impairment of
available-for-sale securities recognized in earnings. The
credit-related loss represents the amount by which the present
value of cash flows expected to be collected from the security
is less than the amortized cost basis of the security. With
regard to securities that we have no intent to sell and that we
believe it is more likely than not that we will not be required
to sell, the amount of the total other-than-temporary impairment
related to non-credit-related factors is recognized, net of tax,
in AOCI. Unrealized losses on available-for-sale securities that
are determined to be temporary in nature are recorded, net of
tax, in AOCI.
For available-for-sale securities that are not deemed to be
credit impaired, we perform additional analysis to assess
whether we intend to sell or would more-likely-than-not not be
required to sell the security before the expected recovery of
the amortized cost basis. In most cases, we have asserted that
we have no intent to sell and that we believe it is
more-likely-than-not that we will not be required to sell the
security before recovery of its amortized cost basis. Where such
an assertion has not been made, the securitys decline in
fair value is deemed to be other than temporary and the entire
charge is recorded in earnings.
The paragraphs below describe our process for identifying
other-than-temporary impairment in security types with the most
significant unrealized losses as of June 30, 2009.
Freddie
Mac and Fannie Mae Securities
These securities generally fit into one of two categories:
Unseasoned Securities These securities are
utilized for resecuritization transactions. We frequently
resecuritize agency securities, typically unseasoned
pass-through securities. In these resecuritization transactions,
we typically retain an interest representing a majority of the
cash flows, but consider the resecuritization to be a sale of
all of the securities for purposes of assessing if an impairment
is other-than-temporary. As these securities have generally been
recently acquired, they generally have coupon rates and prices
close to par. Consequently, any decline in the fair value of
these agency securities is relatively small and could be
recovered easily. We expect that the recovery period would be in
the near term. Notwithstanding this, we recognize
other-than-temporary impairments on any of these securities that
are likely to be sold. This population is identified based on
our expectations of resecuritization volume and our eligible
collateral. If any of the securities identified as likely to be
sold are in a loss position, other-than-temporary
impairment is recorded as we could not assert that we would not
sell such securities prior to recovery. Any additional losses
realized upon sale result from further declines in fair value
subsequent to the balance sheet date. For securities that we do
not intend to sell and it is more likely than not that we will
not be required to sell such securities before a recovery of the
unrealized losses, we expect to recover any unrealized losses by
holding them to recovery.
Seasoned Securities These securities are not
usually utilized for resecuritization transactions. We hold the
seasoned agency securities that are in an unrealized loss
position at least to recovery and typically to maturity. As the
principal and interest on these securities are guaranteed and we
do not intend to sell these securities and it is more likely
than not that we will not be required to sell such securities
before a recovery of the unrealized losses, any unrealized loss
will be recovered. The unrealized losses on agency securities
are primarily a result of movements in interest rates.
Non-Agency
Mortgage-Related Securities
Securities
Backed by Subprime, MTA Option ARM,
Alt-A and
Other Loans
We believe the unrealized losses on our non-agency
mortgage-related securities are a result of poor underlying
collateral performance and decreased liquidity and larger risk
premiums. With the exception of the other-than-temporarily
impaired securities discussed below, we have not identified any
securities that were likely of incurring a contractual principal
or interest loss at June 30, 2009. As such, and based on
our conclusion that we do not intend to sell these securities
and it is more likely than not that we will not be required to
sell such securities before a recovery of the unrealized losses,
we have concluded that the impairment of these securities is
temporary.
We consider securities to be other-than-temporarily impaired
when future losses are deemed likely based on the loan level
default modeling and analysis of underlying collateral
performance together with credit ratings and market prices as
described below.
Our review of the securities backed by subprime loans, MTA
Option ARM,
Alt-A and
other loans includes loan level default modeling and analyses of
the individual securities based on underlying collateral
performance, including the collectibility of amounts that would
be recovered from primary monoline insurers. In the case of
monoline insurers, we also consider factors such as the
availability of capital, generation of new business, pending
regulatory action, ratings, security prices and credit default
swap levels traded on the insurers. We consider loan level
information including estimated current LTV ratios, FICO credit
scores, and other loan level characteristics. We also consider
the differences between the loan level characteristics of the
performing and non-performing loan populations.
In evaluating our non-agency mortgage-related securities backed
by subprime, MTA Option ARM,
Alt-A and
other loans for other-than-temporary impairment, we noted and
specifically considered that the percentage of securities that
were
AAA-rated
and the percentage that were investment grade had decreased
since acquisition and had decreased between the latest balance
sheet date and the release of these financial statements.
Although the ratings have declined, the ratings themselves have
not been determinative that a loss is likely. While we consider
credit ratings in our analysis, we believe that our detailed
security-by-security
analyses provide a more consistent view of the ultimate
collectibility of contractual amounts due to us. As such, we
have impaired securities with current ratings ranging from CCC
to AAA and have determined that other securities within the same
ratings were not other-than-temporarily impaired. However, we
carefully consider individual ratings, especially those below
investment grade, including changes since June 30, 2009.
Our analysis is conducted on a quarterly basis and is subject to
change as new information regarding delinquencies, severities,
loss timing, prepayments and other factors becomes available.
While it is reasonably possible that, under certain conditions
(especially given the current economic environment), defaults
and loss severities on our remaining available-for-sale
securities for which we have not recorded an impairment charge
could exceed our subordination and credit enhancement levels and
a principal or interest loss could occur, we do not believe that
those conditions were likely as of June 30, 2009.
In addition, we considered any significant changes in fair value
since June 30, 2009 to assess if they were indicative of
potential future cash shortfalls. In this assessment, we put
greater emphasis on categorical pricing information than on
individual prices. We use multiple pricing services and dealers
to price the majority of our non-agency mortgage-related
securities. We observed significant dispersion in prices
obtained from different sources. However, we carefully consider
individual and sustained price declines, placing greater weight
when dispersion is lower and less weight when dispersion is
higher. Where dispersion is higher, other factors previously
mentioned, received greater weight.
Commercial
Mortgage-Backed Securities
We perform an analysis of the underlying collateral on a
security-by-security
basis to determine whether we will receive all of the
contractual payments due to us. We believe the declines in fair
value are attributable to the deterioration of liquidity and
larger risk premiums in the commercial mortgage-backed
securities market consistent with the broader credit markets and
not to the performance of the underlying collateral supporting
the securities. A significant majority of these securities were
AAA-rated at
June 30, 2009. Though delinquencies for commercial
mortgage-backed securities have increased, the credit
enhancement of these bonds is sufficient to cover the expected
losses on them. Since we generally hold these securities to
maturity, we do not intend to sell these securities and it is
more likely than not that we will not be required to sell such
securities before recovery of the unrealized losses.
Obligations
of States and Political Subdivisions
These investments consist of mortgage revenue bonds. The
unrealized losses on obligations of states and political
subdivisions are primarily a result of movements in interest
rates and liquidity and risk premiums. We have concluded that
the impairment of these securities is temporary based on our
conclusion that we do not intend to sell these securities and it
is more likely than not that we will not be required to sell
such securities before a recovery of the unrealized losses, as
well as the extent and duration of the decline in fair value
relative to the amortized cost and a lack of any other facts or
circumstances to suggest that the decline was
other-than-temporary. The issuer guarantees related to these
securities have led us to conclude that any credit risk is
minimal.
Other-Than-Temporary
Impairments on Available-For-Sale Securities
Table 4.3 summarizes our net impairments of
available-for-sale securities recognized in earnings by security
type and the duration of the unrealized loss prior to impairment
of less than 12 months or 12 months or greater.
Table 4.3
Net Impairment of Available-For-Sale Securities Recognized in
Earnings by Gross Unrealized Loss
Position(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
Net Impairment of Available-For-Sale Securities Recognized in
Earnings
|
|
|
|
Less than
|
|
|
12 Months
|
|
|
|
|
|
Less than
|
|
|
12 Months
|
|
|
|
|
|
|
12 Months
|
|
|
or Greater
|
|
|
Total
|
|
|
12 Months
|
|
|
or Greater
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime
|
|
$
|
(484
|
)
|
|
$
|
(807
|
)
|
|
$
|
(1,291
|
)
|
|
$
|
(168
|
)
|
|
$
|
(354
|
)
|
|
$
|
(522
|
)
|
MTA Option ARM
|
|
|
(446
|
)
|
|
|
(24
|
)
|
|
|
(470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A and other
|
|
|
(342
|
)
|
|
|
(54
|
)
|
|
|
(396
|
)
|
|
|
(173
|
)
|
|
|
(131
|
)
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subprime, MTA Option ARM, Alt-A and other
|
|
|
(1,272
|
)
|
|
|
(885
|
)
|
|
|
(2,157
|
)
|
|
|
(341
|
)
|
|
|
(485
|
)
|
|
|
(826
|
)
|
Manufactured housing
|
|
|
(45
|
)
|
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments on mortgage-related
securities
|
|
|
(1,317
|
)
|
|
|
(885
|
)
|
|
|
(2,202
|
)
|
|
|
(341
|
)
|
|
|
(485
|
)
|
|
|
(826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
(11
|
)
|
|
|
|
|
|
|
(11
|
)
|
|
|
(108
|
)
|
|
|
(106
|
)
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments on non-mortgage-related
securities
|
|
|
(11
|
)
|
|
|
|
|
|
|
(11
|
)
|
|
|
(108
|
)
|
|
|
(106
|
)
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments on available-for-sale
securities
|
|
$
|
(1,328
|
)
|
|
$
|
(885
|
)
|
|
$
|
(2,213
|
)
|
|
$
|
(449
|
)
|
|
$
|
(591
|
)
|
|
$
|
(1,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
Net Impairment of Available-For-Sale Securities Recognized in
Earnings
|
|
|
|
Less than
|
|
|
12 Months
|
|
|
|
|
|
Less than
|
|
|
12 Months
|
|
|
|
|
|
|
12 Months
|
|
|
or Greater
|
|
|
Total
|
|
|
12 Months
|
|
|
or Greater
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime
|
|
$
|
(731
|
)
|
|
$
|
(4,657
|
)
|
|
$
|
(5,388
|
)
|
|
$
|
(168
|
)
|
|
$
|
(354
|
)
|
|
$
|
(522
|
)
|
MTA Option ARM
|
|
|
(564
|
)
|
|
|
(923
|
)
|
|
|
(1,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A and other
|
|
|
(551
|
)
|
|
|
(1,687
|
)
|
|
|
(2,238
|
)
|
|
|
(173
|
)
|
|
|
(131
|
)
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subprime, MTA Option ARM, Alt-A and other
|
|
|
(1,846
|
)
|
|
|
(7,267
|
)
|
|
|
(9,113
|
)
|
|
|
(341
|
)
|
|
|
(485
|
)
|
|
|
(826
|
)
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
(10
|
)
|
|
|
(68
|
)
|
Manufactured housing
|
|
|
(45
|
)
|
|
|
|
|
|
|
(45
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments on mortgage-related
securities
|
|
|
(1,891
|
)
|
|
|
(7,267
|
)
|
|
|
(9,158
|
)
|
|
|
(402
|
)
|
|
|
(495
|
)
|
|
|
(897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
(185
|
)
|
|
|
|
|
|
|
(185
|
)
|
|
|
(108
|
)
|
|
|
(106
|
)
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments on non-mortgage-related
securities
|
|
|
(185
|
)
|
|
|
|
|
|
|
(185
|
)
|
|
|
(108
|
)
|
|
|
(106
|
)
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments on available-for-sale
securities
|
|
$
|
(2,076
|
)
|
|
$
|
(7,267
|
)
|
|
$
|
(9,343
|
)
|
|
$
|
(510
|
)
|
|
$
|
(601
|
)
|
|
$
|
(1,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
As a result of the adoption of
FSP FAS 115-2 and
FAS 124-2
on April 1, 2009, net impairment of available-for-sale
securities recognized in earnings for the three months ended
June 30, 2009 includes credit-related other-than-temporary
impairments and other-than temporary impairments on securities
which we intend to sell or it is more likely than not that we
will be required to sell. In contrast, net impairment of
available-for-sale securities recognized in earnings for the
three months ended March 31, 2009 (which is included in the
six months ended June 30, 2009) and the three and six
months ended June 30, 2008 include both credit-related and
non-credit-related other-than-temporary impairments as well as
other-than-temporary impairments on securities for which we
could not assert the positive intent and ability to hold until
recovery of the unrealized losses.
|
During the second quarter of 2009, we recorded net impairment of
available-for-sale securities recognized in earnings related to
investments in mortgage-related securities of approximately
$2.2 billion primarily related to non-agency securities
backed by subprime, MTA Option ARM,
Alt-A and
other loans, due to the combination of a more pessimistic view
of future performance due to the economic environment and poor
performance of the collateral underlying these securities. We
estimate that the future expected principal and interest
shortfall on these securities will be significantly less than
the likely impairment required to be recorded under GAAP, as we
expect these shortfalls to be less than the recent fair value
declines. As such, $8.3 billion of the total
other-than-temporary impairments primarily related to
investments in non-agency mortgage-related securities backed by
subprime, MTA Option ARM,
Alt-A and
other loans were non-credit-related and, thus, recognized in
AOCI. The $8.3 billion, pre-tax, of impairments recognized
in AOCI during the second quarter of 2009 represents the portion
of cumulative fair value declines, that are not related to
credit, on newly identified securities as a result of adoption
of
FSP FAS 115-2
and
FAS 124-2
and current period
changes in fair value, not attributed to credit, for previously
impaired securities. Contributing to the impairments recognized
during the second quarter of 2009 were certain credit
enhancements related to primary monoline bond insurance provided
by four monoline insurers on individual securities in an
unrealized loss position, for which we have determined that it
is likely a principal and interest shortfall will occur, and
that in such a case there is substantial uncertainty surrounding
the insurers ability to pay all future claims. Since the
second quarter of 2008, we have recorded net impairment of
available-for-sale securities recognized in earnings related to
non-agency mortgage-related securities backed by four monoline
insurers. We rely on monoline bond insurance, including
secondary coverage, to provide credit protection on some of our
securities held in our mortgage-related investments portfolio as
well as our non-mortgage-related investments portfolio. See
NOTE 15: CONCENTRATION OF CREDIT AND OTHER
RISKS Bond Insurers for additional
information. The recent deterioration has not impacted our
conclusion that we do not intend to sell these securities and it
is more likely than not that we will not be required to sell
such securities. Among the securities impaired during the second
quarter of 2009 are securities backed by subprime, MTA Option
ARM, Alt-A
and other loans with $10 billion of unpaid principal
balance impaired as a result of the adoption of
FSP FAS 115-2
and
FAS 124-2
due to the change in criteria for determining impairments. These
securities were identified as securities that would have been
other-than-temporarily impaired as of March 31, 2009 if the
guidance had been in place prior to April 1, 2009.
Cumulative credit-related impairments recognized in earnings on
these $10 billion of securities were $0.6 billion
during the second quarter of 2009. Net impairment of
available-for-sale securities recognized in earnings during the
second quarter of 2009 also included $45 million related to
mortgage-related securities backed by manufactured housing where
the present value of cash flows expected to be collected was
less than the amortized cost basis of these securities. In
addition, we recorded $11 million of impairment of
available-for-sale securities recognized in earnings related to
non-mortgage-related asset-backed securities in our cash and
other investments portfolio where we could not assert that we
did not intend to sell these securities before a recovery of the
unrealized losses. The decision to impair these asset-backed
securities is consistent with our consideration of these
securities as a contingent source of liquidity. See
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Investments in Securities in our 2008
Annual Report for information regarding our policy on accretion
of impairments.
During the six months ended June 30, 2009, we recorded net
impairment of available-for-sale securities recognized in
earnings of $9.3 billion. Of this amount, $6.9 billion
related to impairments recognized in the first quarter of 2009,
prior to the adoption of
FSP FAS 115-2
and
FAS 124-2,
on non-agency mortgage-related securities backed by subprime,
MTA Option ARM,
Alt-A and
other loans that were likely of incurring a contractual
principal or interest loss. We have incurred actual principal
cash shortfalls of $39 million on impaired securities. Net
impairment of available-for-sale securities recognized in
earnings during the six months ended June 30, 2009 also
included $185 million related to other-than-temporary
impairments of non-mortgage-related asset-backed securities in
our cash and other investments portfolio where we could not
assert that we did not intend to sell these securities before a
recovery of the unrealized losses. All impairments recorded
prior to the adoption of
FSP FAS 115-2
and
FAS 124-2
were recognized in earnings.
During the three and six months ended June 30, 2008, we
recorded $1.0 billion and $1.1 billion, respectively,
of impairment of
available-for-sale
securities recognized in earnings. Of the impairments recognized
during the second quarter of 2008, $826 million related to
non-agency mortgage-related securities backed by subprime, MTA
Option ARM,
Alt-A and
other loans primarily due to deterioration in the performance of
the collateral underlying these loans. During the same periods,
we also recorded net impairment of available-for-sale securities
recognized in earnings of $214 million related to our
non-mortgage-related asset-backed securities where we did not
have the intent to hold to a forecasted recovery of the
unrealized losses.
Table 4.4 presents a roll-forward of the credit-related
other-than-temporary
impairment component of the amortized cost related to
available-for-sale
securities (1) that we have written down for
other-than-temporary
impairment and (2) for which the credit component of the
loss is recognized in earnings. The credit-related
other-than-temporary
impairment component of the amortized cost represents the
difference between the present value of expected future cash
flows, including bond insurance, and the amortized cost basis of
the security prior to considering credit losses. The beginning
balance represents the
other-than-temporary
impairment credit loss component related to
available-for-sale
securities for which
other-than-temporary
impairment occurred prior to April 1, 2009. Net impairment
of available-for-sale securities recognized in earnings is
presented as additions in two components based upon whether the
current period is (1) the first time the debt security was
credit-impaired or (2) not the first time the debt security
was credit impaired. The credit loss component is reduced if we
sell, intend to sell or believe we will be required to sell
previously credit-impaired
available-for-sale
securities. Additionally, the credit loss component is
reduced if we receive cash flows in excess of what we expected
to receive over the remaining life of the credit-impaired debt
security or the security matures or is fully written down.
Table
4.4 Other-Than-Temporary Impairments Related to
Credit Losses on Available-For-Sale Securities
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
2009(1)
|
|
|
|
(in millions)
|
|
|
Credit-related
other-than-temporary
impairments on
available-for-sale
securities recognized in earnings:
|
|
|
|
|
Beginning balance credit losses on
available-for-sale
securities held at the beginning of the period
|
|
$
|
7,526
|
|
Additions:
|
|
|
|
|
Amounts related to credit losses for which an
other-than-temporary
impairment was not previously recognized
|
|
|
890
|
|
Amounts related to credit losses for which an
other-than-temporary
impairment was previously recognized
|
|
|
1,312
|
|
Reductions:
|
|
|
|
|
Amounts related to securities which matured, paid down or were
sold
|
|
|
(25
|
)
|
|
|
|
|
|
Ending balance credit losses on
available-for-sale
securities held at period
end(2)
|
|
$
|
9,703
|
|
|
|
|
|
|
|
|
(1)
|
Excludes
other-than-temporary
impairments on securities that we intend to sell or it is more
likely than not that we will be required to sell before recovery
of the unrealized losses.
|
(2)
|
Excludes increases in cash flows expected to be collected that
will be recognized over the remaining life of the security of
$84 million.
|
Realized
Gains and Losses on Available-For-Sale Securities
Table 4.5 below illustrates the gross realized gains and
gross realized losses received from the sale of
available-for-sale securities.
Table 4.5
Gross Realized Gains and Gross Realized Losses on Sales of
Available-For-Sale Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Gross Realized Gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
190
|
|
|
$
|
1
|
|
|
$
|
237
|
|
|
$
|
192
|
|
Fannie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
41
|
|
|
|
1
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities gross realized gains
|
|
|
190
|
|
|
|
42
|
|
|
|
238
|
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and other investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
63
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities gross realized gains
|
|
|
63
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
253
|
|
|
|
42
|
|
|
|
306
|
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Realized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
(48
|
)
|
|
|
(4
|
)
|
|
|
(50
|
)
|
|
|
(11
|
)
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities gross realized losses
|
|
|
(48
|
)
|
|
|
(4
|
)
|
|
|
(50
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized losses
|
|
|
(48
|
)
|
|
|
(4
|
)
|
|
|
(50
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
$
|
205
|
|
|
$
|
38
|
|
|
$
|
256
|
|
|
$
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
of Available-For-Sale Securities
Table 4.6 summarizes, by major security type, the remaining
contractual maturities of available-for-sale securities.
Table
4.6 Maturities of Available-For-Sale
Securities(1)
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(in millions)
|
|
|
Mortgage-related investments portfolio:
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
Due 1 year or less
|
|
$
|
56
|
|
|
$
|
57
|
|
Due after 1 through 5 years
|
|
|
3,629
|
|
|
|
3,783
|
|
Due after 5 through 10 years
|
|
|
45,911
|
|
|
|
47,313
|
|
Due after 10 years
|
|
|
413,549
|
|
|
|
363,290
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
463,145
|
|
|
$
|
414,443
|
|
|
|
|
|
|
|
|
|
|
Cash and other investments portfolio:
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
Due 1 year or less
|
|
$
|
48
|
|
|
$
|
48
|
|
Due after 1 through 5 years
|
|
|
4,823
|
|
|
|
5,166
|
|
Due after 5 through 10 years
|
|
|
724
|
|
|
|
799
|
|
Due after 10 years
|
|
|
220
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,815
|
|
|
$
|
6,248
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities for mortgage-related
investments portfolio and cash and other investments
portfolio:
|
|
|
|
|
|
|
|
|
Due 1 year or less
|
|
$
|
104
|
|
|
$
|
105
|
|
Due after 1 through 5 years
|
|
|
8,452
|
|
|
|
8,949
|
|
Due after 5 through 10 years
|
|
|
46,635
|
|
|
|
48,112
|
|
Due after 10 years
|
|
|
413,769
|
|
|
|
363,525
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
468,960
|
|
|
$
|
420,691
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Maturity information provided is based on contractual
maturities, which may not represent expected life, as
obligations underlying these securities may be prepaid at any
time without penalty.
|
AOCI, Net
of Taxes, Related to Available-For-Sale Securities
Table 4.7 presents the changes in AOCI, net of taxes,
related to available-for-sale securities. The net unrealized
holding losses, net of tax, represents the net fair value
adjustments recorded on available-for-sale securities throughout
the quarter, after the effects of our federal statutory tax rate
of 35%. The net reclassification adjustment for net realized
losses (gains), net of tax, represents the amount of those fair
value adjustments, after the effects of our federal statutory
tax rate of 35%, that have been recognized in earnings due to a
sale of an available-for-sale security or the recognition of an
impairment loss.
Table 4.7
AOCI, Net of Taxes, Related to Available-For-Sale
Securities
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
(28,510
|
)
|
|
$
|
(7,040
|
)
|
Adjustment to initially apply FSP
FAS 115-2
and
FAS 124-2(1)
|
|
|
(9,931
|
)
|
|
|
|
|
Adjustment to initially apply
SFAS 159(2)
|
|
|
|
|
|
|
(854
|
)
|
Net unrealized holding (losses), net of
tax(3)
|
|
|
1,160
|
|
|
|
(13,383
|
)
|
Net reclassification adjustment for net realized losses, net of
tax(4)(5)
|
|
|
5,906
|
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(31,375
|
)
|
|
$
|
(20,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net of tax benefit of $5.3 billion for the six months ended
June 30, 2009.
|
(2)
|
Net of tax benefit of $460 million for the six months ended
June 30, 2008.
|
(3)
|
Net of tax (expense) benefit of $(624) million and
$7.2 billion for the six months ended June 30, 2009
and 2008, respectively.
|
(4)
|
Net of tax benefit of $3.2 billion and $301 million
for the six months ended June 30, 2009 and 2008,
respectively.
|
(5)
|
Includes the reversal of previously recorded unrealized losses
that have been recognized on our consolidated statements of
operations as impairment losses on available-for-sale securities
of $6.1 billion and $722 million, net of taxes, for
the six months ended June 30, 2009 and 2008, respectively.
|
Trading
Securities
Table 4.8 summarizes the estimated fair values by major
security type for trading securities.
Table 4.8
Trading Securities
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(in millions)
|
|
|
Mortgage-related securities issued by:
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
202,362
|
|
|
$
|
158,822
|
|
Fannie Mae
|
|
|
36,146
|
|
|
|
31,309
|
|
Ginnie Mae
|
|
|
193
|
|
|
|
198
|
|
Other
|
|
|
30
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Total trading securities that are mortgage-related securities
|
|
|
238,731
|
|
|
|
190,361
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
540
|
|
|
|
|
|
Treasury Bills
|
|
|
11,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities that are non-mortgage-related securities
|
|
|
11,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
$
|
250,666
|
|
|
$
|
190,361
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2009 and 2008, we
recorded net unrealized gains (losses) on trading securities
held at June 30, 2009 and 2008 of $7.1 billion and
$(2.1) billion, respectively. For the six months ended
June 30, 2009 and 2008, we recorded net unrealized gains
(losses) on trading securities held at June 30, 2009 and
2008 of $7.1 billion and $(1.2) billion, respectively.
Total trading securities in our mortgage-related investments
portfolio included $3.5 billion and $3.9 billion of
SFAS 155 related assets as of June 30, 2009 and
December 31, 2008, respectively. Gains (losses) on trading
securities on our consolidated statements of operations included
(losses) of $(28) million and $(15) million, related
to these SFAS 155 trading securities for the three and six
months ended June 30, 2009, respectively. Gains (losses) on
trading securities include losses of $(386) million and
$(32) million related to these SFAS 155 trading
securities for the three and six months ended June 30,
2008, respectively.
Impact of
the Purchase Agreement and FHFA Regulation on the
Mortgage-Related Investments Portfolio
Under the Purchase Agreement and FHFA regulation, our
mortgage-related investments portfolio as of December 31,
2009 may not exceed $900 billion, and must decline by
10% per year thereafter until it reaches $250 billion.
Collateral
Pledged
Collateral
Pledged to Freddie Mac
Our counterparties are required to pledge collateral for reverse
repurchase transactions and most derivative instruments, subject
to collateral posting thresholds generally related to a
counterpartys credit rating. We had cash pledged to us
related to derivative instruments of $2.8 billion and
$4.3 billion at June 30, 2009 and December 31,
2008, respectively. Although it is our practice not to repledge
assets held as collateral, a portion of the collateral may be
repledged based on master agreements related to our derivative
instruments. At June 30, 2009 and December 31, 2008,
we did not have collateral in the form of securities pledged to
and held by us under these master agreements. Also at
June 30, 2009 and December 31, 2008, we did not have
securities pledged to us for reverse repurchase transactions
that we had the right to repledge.
Collateral
Pledged by Freddie Mac
We are required to pledge collateral for margin requirements
with third-party custodians in connection with secured
financings, interest-rate swap agreements, futures and daily
trade activities with some counterparties. The level of
collateral pledged related to our derivative instruments is
determined after giving consideration to our credit rating. As
of June 30, 2009 and December 31, 2008, we had one and
two uncommitted intraday lines of credit with third parties,
respectively, which were secured, in connection with the Federal
Reserves payments system risk policy, which restricts or
eliminates daylight overdrafts by the GSEs in connection with
our use of the Fedwire system. There were no borrowings against
these lines of credit at June 30, 2009 and
December 31, 2008. In certain limited circumstances, the
lines of credit agreements give the secured parties the right to
repledge the securities underlying our financing to other third
parties, including the Federal Reserve Bank. See
NOTE 7: DEBT SECURITIES AND SUBORDINATED
BORROWINGS Lending Agreement for a discussion
of our Lending Agreement with Treasury. We pledge collateral to
meet these requirements upon demand by the respective
counterparty.
Table 4.9 summarizes all securities pledged as collateral
by us, including assets that the secured party may repledge and
those that may not be repledged as well as the related
liability, if any, recorded on our balance sheet that caused the
need to post collateral.
Table
4.9 Collateral in the Form of Securities
Pledged
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(in millions)
|
|
|
Securities pledged with the ability of the secured party to
repledge:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
8,112
|
|
|
$
|
21,302
|
|
Securities pledged without the ability of the secured party to
repledge:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
2,118
|
|
|
|
1,050
|
|
|
|
|
|
|
|
|
|
|
Total securities pledged
|
|
$
|
10,230
|
|
|
$
|
22,352
|
|
|
|
|
|
|
|
|
|
|
Securities
Pledged with the Ability of the Secured Party to
Repledge
At June 30, 2009, we had securities pledged with the
ability of the secured party to repledge of $8.1 billion,
of which $7.5 billion was collateral posted in connection
with our uncommitted intraday line of credit with a third party
as discussed above. The remaining $0.6 billion of
collateral was posted in connection with our futures
transactions.
At June 30, 2009, we also had $10.9 billion of
securities that were originally pledged with the ability of the
secured party to repledge in connection with a second
uncommitted intraday line of credit, which expired in May 2009.
These securities continued to be held by the counterparty on our
behalf following the expiration of this line of credit while we
considered a possible extension of the line. The securities were
returned to us subsequent to June 30, 2009.
At December 31, 2008, we had securities pledged with the
ability of the secured party to repledge of $21.3 billion,
of which $20.7 billion was collateral posted in connection
with our uncommitted intraday lines of credit with third parties
as discussed above. The remaining $0.6 billion of
collateral was posted in connection with our futures
transactions.
Securities
Pledged without the Ability of the Secured Party to
Repledge
At June 30, 2009 and December 31, 2008, we had
securities pledged without the ability of the secured party to
repledge of $2.1 billion and $1.1 billion,
respectively, at a clearing house in connection with our futures
transactions.
Collateral
in the Form of Cash Pledged
At June 30, 2009, we had pledged $5.5 billion of
collateral in the form of cash of which $4.2 billion
related to our interest rate swap agreements as we had
$4.4 billion of derivatives in a net loss position. The
remaining $1.3 billion was posted at clearing houses in
connection with our securities transactions.
At December 31, 2008, we had pledged $6.4 billion of
collateral in the form of cash of which $5.8 billion
related to our interest rate swap agreements as we had
$6.1 billion of derivatives in a net loss position. The
remaining $0.6 billion was posted at clearing houses in
connection with our securities transactions.
NOTE 5:
MORTGAGE LOANS AND LOAN LOSS RESERVES
We own both single-family mortgage loans, which are secured by
one-to-four family residential properties, and multifamily
mortgage loans, which are secured by properties with five or
more residential rental units.
Table 5.1 summarizes the types of loans on our balance
sheets as of June 30, 2009 and December 31, 2008.
These balances do not include mortgage loans underlying our
issued PCs and Structured Securities, since these are not
consolidated on our balance sheets. See NOTE 2:
FINANCIAL GUARANTEES AND SECURITIZED INTERESTS IN
MORTGAGE-RELATED ASSETS for information on our securitized
mortgage loans.
Table 5.1
Mortgage Loans
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(in millions)
|
|
|
Single-family:(1)
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$
|
48,067
|
|
|
$
|
35,070
|
|
Adjustable-rate
|
|
|
1,727
|
|
|
|
2,136
|
|
|
|
|
|
|
|
|
|
|
Total conventional
|
|
|
49,794
|
|
|
|
37,206
|
|
FHA/VA Fixed-rate
|
|
|
1,066
|
|
|
|
548
|
|
U.S. Department of Agriculture Rural Development and other
federally guaranteed loans
|
|
|
1,108
|
|
|
|
1,001
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
51,968
|
|
|
|
38,755
|
|
|
|
|
|
|
|
|
|
|
Multifamily(1):
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
68,561
|
|
|
|
65,319
|
|
Adjustable-rate
|
|
|
9,743
|
|
|
|
7,399
|
|
|
|
|
|
|
|
|
|
|
Total conventional
|
|
|
78,304
|
|
|
|
72,718
|
|
U.S. Department of Agriculture Rural Development
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
78,307
|
|
|
|
72,721
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance of mortgage loans
|
|
|
130,275
|
|
|
|
111,476
|
|
|
|
|
|
|
|
|
|
|
Deferred fees, unamortized premiums, discounts and other cost
basis adjustments
|
|
|
(7,253
|
)
|
|
|
(3,178
|
)
|
Lower of cost or market adjustments on loans held-for-sale
|
|
|
(241
|
)
|
|
|
(17
|
)
|
Allowance for loan losses on mortgage loans held-for-investment
|
|
|
(831
|
)
|
|
|
(690
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage loans, net of allowance for loan losses
|
|
$
|
121,950
|
|
|
$
|
107,591
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Based on unpaid principal balances and excluding mortgage loans
traded, but not yet settled.
|
There were no transfers of held-for-sale mortgage loans to
held-for-investment during the six months ended June 30,
2009 and 2008.
Loan Loss
Reserves
We maintain an allowance for loan losses on mortgage loans that
we classify as held-for-investment on our balance sheet and a
reserve for guarantee losses for mortgage loans that underlie
our issued PCs and Structured Securities, collectively referred
to as loan loss reserves. Loan loss reserves are generally
established to provide for credit losses when it is probable
that a loss has been incurred. For loans subject to
SOP 03-3,
loan loss reserves are only established when it becomes probable
that we will be unable to collect all cash flows which we
expected to collect when we acquired the loan. The amount of our
total loan loss reserves that related to single-family and
multifamily mortgage loans was $24.9 billion and
$0.3 billion, respectively, as of June 30, 2009.
Table 5.2 summarizes loan loss reserve activity.
Table 5.2
Detail of Loan Loss Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Reserve for
|
|
|
|
|
|
|
|
|
Reserve for
|
|
|
|
|
|
|
Allowance for
|
|
|
Guarantee
|
|
|
Total Loan
|
|
|
Allowance for
|
|
|
Guarantee
|
|
|
Total Loan
|
|
|
|
Loan Losses
|
|
|
Losses on PCs
|
|
|
Loss Reserves
|
|
|
Loan Losses
|
|
|
Losses on PCs
|
|
|
Loss Reserves
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
840
|
|
|
$
|
21,838
|
|
|
$
|
22,678
|
|
|
$
|
356
|
|
|
$
|
3,516
|
|
|
$
|
3,872
|
|
Provision for credit
losses(1)
|
|
|
82
|
|
|
|
5,117
|
|
|
|
5,199
|
|
|
|
159
|
|
|
|
2,378
|
|
|
|
2,537
|
|
Charge-offs(2)
|
|
|
(134
|
)
|
|
|
(2,216
|
)
|
|
|
(2,350
|
)
|
|
|
(116
|
)
|
|
|
(512
|
)
|
|
|
(628
|
)
|
Recoveries(2)
|
|
|
43
|
|
|
|
465
|
|
|
|
508
|
|
|
|
69
|
|
|
|
108
|
|
|
|
177
|
|
Transfers,
net(3)
|
|
|
|
|
|
|
(838
|
)
|
|
|
(838
|
)
|
|
|
|
|
|
|
(145
|
)
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
831
|
|
|
$
|
24,366
|
|
|
$
|
25,197
|
|
|
$
|
468
|
|
|
$
|
5,345
|
|
|
$
|
5,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Reserve for
|
|
|
|
|
|
|
|
|
Reserve for
|
|
|
|
|
|
|
Allowance for
|
|
|
Guarantee
|
|
|
Total Loan
|
|
|
Allowance for
|
|
|
Guarantee
|
|
|
Total Loan
|
|
|
|
Loan Losses
|
|
|
Losses on PCs
|
|
|
Loss Reserves
|
|
|
Loan Losses
|
|
|
Losses on PCs
|
|
|
Loss Reserves
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
690
|
|
|
$
|
14,928
|
|
|
$
|
15,618
|
|
|
$
|
256
|
|
|
$
|
2,566
|
|
|
$
|
2,822
|
|
Provision for credit losses
|
|
|
291
|
|
|
|
13,699
|
|
|
|
13,990
|
|
|
|
295
|
|
|
|
3,482
|
|
|
|
3,777
|
|
Charge-offs(2)
|
|
|
(252
|
)
|
|
|
(3,426
|
)
|
|
|
(3,678
|
)
|
|
|
(239
|
)
|
|
|
(687
|
)
|
|
|
(926
|
)
|
Recoveries(2)
|
|
|
102
|
|
|
|
760
|
|
|
|
862
|
|
|
|
156
|
|
|
|
156
|
|
|
|
312
|
|
Transfers,
net(3)
|
|
|
|
|
|
|
(1,595
|
)
|
|
|
(1,595
|
)
|
|
|
|
|
|
|
(172
|
)
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
831
|
|
|
$
|
24,366
|
|
|
$
|
25,197
|
|
|
$
|
468
|
|
|
$
|
5,345
|
|
|
$
|
5,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During the three months ended June 30, 2009, we enhanced
our methodology for estimating our loan loss reserves related to
single-family loans to consider a greater number of loan
characteristics and revisions to (1) the effect of home
price changes on borrower behavior, and (2) the impact of
our loss mitigation actions, including our temporary suspensions
of foreclosure transfers and loan modification efforts. We
estimate the impact of this enhancement reduced our loan loss
reserves and consequently, the provision for credit losses by
approximately $1.4 billion during the three and six months
ended June 30, 2009.
|
(2)
|
Charge-offs represent the amount of the unpaid principal balance
of a loan that has been discharged to remove the loan from our
mortgage-related investments portfolio at the time of
resolution. Charge-offs exclude $65 million and
$94 million for the three months ended June 30, 2009
and 2008, respectively, and $105 million and
$251 million for the six months ended June 30, 2009
and 2008, respectively, related to certain loans purchased under
financial guarantees and reflected within losses on loans
purchased on our consolidated statements of operations.
Recoveries of charge-offs primarily result from foreclosure
alternatives and REO acquisitions on loans where a share of
default risk has been assumed by mortgage insurers, servicers or
other third parties through credit enhancements.
|
(3)
|
Consist primarily of: (a) approximately $52 million
and $375 million during the three and six months ended
June 30, 2009, respectively, related to agreements with
seller/servicers where the transfer represents recoveries
received under these agreements to compensate us for previously
incurred and recognized losses, (b) the transfer of an
amount of the recognized reserves for guaranteed losses related
to PC pools associated with delinquent or modified loans
purchased from mortgage pools underlying our PCs, Structured
Securities and long-term standby agreements to establish the
initial recorded investment in these loans at the date of our
purchase, and (c) amounts attributable to uncollectible
interest on mortgage loans in our mortgage-related investments
portfolio.
|
Impaired
Loans
Single-family impaired loans include performing and
non-performing troubled debt restructurings, as well as
delinquent or modified loans that were purchased from mortgage
pools underlying our PCs and Structured Securities and long-term
standby agreements. Multifamily impaired loans include certain
loans whose contractual terms have previously been modified due
to credit concerns (including troubled debt restructurings),
certain loans with observable collateral deficiencies, and loans
impaired based on managements judgments concerning other
known facts and circumstances associated with those loans.
Recorded investment on impaired loans includes the unpaid
principal balance plus amortized basis adjustments, which are
modifications to the loans carrying values.
Total loan loss reserves, as presented in
Table 5.2 Detail of Loan Loss
Reserves, consists of a specific valuation allowance
related to impaired mortgage loans, which is presented in Table
5.3, and an additional reserve for other probable incurred
losses, which totaled $25.0 billion and $15.5 billion
at June 30, 2009 and December 31, 2008, respectively.
Our recorded investment in impaired mortgage loans and the
related valuation allowance are summarized in Table 5.3.
Table 5.3
Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Recorded
|
|
|
Specific
|
|
|
Net
|
|
|
Recorded
|
|
|
Specific
|
|
|
Net
|
|
|
|
Investment
|
|
|
Reserve
|
|
|
Investment
|
|
|
Investment
|
|
|
Reserve
|
|
|
Investment
|
|
|
|
(in millions)
|
|
|
Impaired loans having:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related valuation allowance
|
|
$
|
1,838
|
|
|
$
|
(210
|
)
|
|
$
|
1,628
|
|
|
$
|
1,126
|
|
|
$
|
(125
|
)
|
|
$
|
1,001
|
|
No related valuation
allowance(1)
|
|
|
10,195
|
|
|
|
|
|
|
|
10,195
|
|
|
|
8,528
|
|
|
|
|
|
|
|
8,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,033
|
|
|
$
|
(210
|
)
|
|
$
|
11,823
|
|
|
$
|
9,654
|
|
|
$
|
(125
|
)
|
|
$
|
9,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Impaired loans with no related valuation allowance primarily
represent performing single-family troubled debt restructuring
loans and those mortgage loans purchased out of PC pools and
accounted for in accordance with SOP 03-3 that have not
experienced further deterioration.
|
The average investment in impaired loans was $11.3 billion
and $8.2 billion for the six month periods ended
June 30, 2009 and 2008, respectively. The increase in
impaired loans in the first half of 2009 is attributed to an
increase in troubled debt restructurings.
Interest income foregone on impaired loans was approximately
$104 million and $46 million for the six months ended
June 30, 2009 and 2008, respectively.
Loans
Acquired under Financial Guarantees
We have the option under our PC agreements to purchase mortgage
loans from the loan pools that underlie our guarantees under
certain circumstances to resolve an existing or impending
delinquency or default. Our practice is to purchase and
effectively liquidate the loans from pools when: (a) the
loans are modified; (b) foreclosure transfers occur;
(c) the loans have been delinquent for 24 months; or
(d) the loans have been 120 days delinquent and the
cost of guarantee payments to PC holders, including advances of
interest at the PC coupon, exceeds the expected cost of holding
the non-performing mortgage in our mortgage-related investments
portfolio. Loans purchased from PC pools that underlie our
guarantees are recorded at the lesser of our acquisition cost or
the loans fair value at the date of purchase. Our estimate
of the fair value of loans purchased from PC pools is determined
by obtaining indicative market prices from experienced dealers
and using the median of these market prices to estimate the fair
value. We recognize losses on loans purchased in our
consolidated statements of operations if our net investment in
the acquired loan is higher than its fair value.
We account for loans acquired in accordance with
SOP 03-3
if, at acquisition, the loans have credit deterioration and we
do not consider it probable that we will collect all contractual
cash flows from the borrowers without significant delay. The
excess of contractual principal and interest over the
undiscounted amount of cash flows we expect to collect
represents a non-accretable difference that is neither accreted
to interest income nor displayed on the consolidated balance
sheets. The amount that may be accreted into interest income on
such loans is limited to the excess of our estimate of
undiscounted expected principal, interest and other cash flows
from the loan over our initial investment in the loan. We
consider estimated prepayments when calculating the accretable
balance and the non-accretable difference. Table 5.4
provides details on loans acquired under financial guarantees
and accounted for in accordance with
SOP 03-3.
Table 5.4
Loans Acquired Under Financial Guarantees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Contractual principal and interest payments at acquisition
|
|
$
|
2,465
|
|
|
$
|
874
|
|
|
$
|
8,336
|
|
|
$
|
1,384
|
|
Non-accretable difference
|
|
|
(414
|
)
|
|
|
(49
|
)
|
|
|
(1,010
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows expected to be collected at acquisition
|
|
|
2,051
|
|
|
|
825
|
|
|
|
7,326
|
|
|
|
1,313
|
|
Accretable balance
|
|
|
(1,472
|
)
|
|
|
(275
|
)
|
|
|
(4,698
|
)
|
|
|
(412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial investment in acquired loans at acquisition
|
|
$
|
579
|
|
|
$
|
550
|
|
|
$
|
2,628
|
|
|
$
|
901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Contractual balance of outstanding loans
|
|
$
|
15,381
|
|
|
$
|
9,522
|
|
|
|
|
|
|
|
|
|
|
Carrying amount of outstanding loans
|
|
$
|
8,418
|
|
|
$
|
6,345
|
|
|
|
|
|
|
|
|
|
|
Our net investment in delinquent and modified loans purchased
under financial guarantees increased approximately 33% during
the six months ended June 30, 2009. During that period, we
purchased approximately $6.9 billion in unpaid principal
balances of these loans with a fair value at acquisition of
$2.6 billion. The $4.3 billion purchase discount
consists of $1.1 billion previously recognized as loan loss
reserve or guarantee obligation and
$3.2 billion of losses on loans purchased. The
non-accretable difference associated with new acquisitions
during the three and six months ended June 30, 2009
increased compared to the three and six months ended
June 30, 2008 due to significantly higher volumes of our
purchases in the 2009 period combined with the lower
expectations for recoveries on the these loans.
While these loans are seriously delinquent, no amounts are
accreted to interest income. Subsequent changes in estimated
future cash flows to be collected related to interest-rate
changes are recognized prospectively in interest income over the
remaining contractual life of the loan. We increase our
allowance for loan losses if there is a decline in estimates of
future cash collections due to further credit deterioration.
Subsequent to acquisition, we recognized a provision for credit
losses related to these loans of $31 million and
$5 million for the six month periods ended June 30,
2009 and 2008, respectively.
Table 5.5 provides changes in the accretable balance of
loans acquired under financial guarantees and accounted for in
accordance with
SOP 03-3.
Table 5.5
Changes in Accretable Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
6,680
|
|
|
$
|
2,249
|
|
|
$
|
3,964
|
|
|
$
|
2,407
|
|
Additions from new acquisitions
|
|
|
1,472
|
|
|
|
275
|
|
|
|
4,698
|
|
|
|
412
|
|
Accretion during the period
|
|
|
(153
|
)
|
|
|
(91
|
)
|
|
|
(277
|
)
|
|
|
(168
|
)
|
Reductions(1)
|
|
|
(67
|
)
|
|
|
(120
|
)
|
|
|
(115
|
)
|
|
|
(345
|
)
|
Change in estimated cash
flows(2)
|
|
|
(203
|
)
|
|
|
(25
|
)
|
|
|
(274
|
)
|
|
|
106
|
|
Reclassifications (to) from nonaccretable
difference(3)
|
|
|
(896
|
)
|
|
|
(77
|
)
|
|
|
(1,163
|
)
|
|
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
6,833
|
|
|
$
|
2,211
|
|
|
$
|
6,833
|
|
|
$
|
2,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the recapture of losses previously recognized due to
borrower repayment or foreclosure on the loan.
|
(2)
|
Represents the change in expected cash flows due to troubled
debt restructurings or change in the prepayment assumptions of
the related loans.
|
(3)
|
Represents the change in expected cash flows due to changes in
credit quality or credit assumptions. The amount for the three
months ended June 30, 2009 primarily results from a change
to our model for the estimation of cash flows for loans
previously modified.
|
Delinquency
Rates
Table 5.6 summarizes the delinquency performance for mortgage
loans held on our consolidated balance sheets as well as those
underlying our PCs, Structured Securities and other
mortgage-related financial guarantees and excludes that portion
of Structured Securities backed by Ginnie Mae Certificates.
Table 5.6
Delinquency Performance
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
December 31, 2008
|
|
Delinquencies:
|
|
|
|
|
|
|
|
|
Single-family:(1)
|
|
|
|
|
|
|
|
|
Non-credit-enhanced
portfolio(2)
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
2.13
|
%
|
|
|
1.26
|
%
|
Total number of delinquent loans
|
|
|
215,078
|
|
|
|
127,569
|
|
Credit-enhanced
portfolio(2)
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
5.82
|
%
|
|
|
3.79
|
%
|
Total number of delinquent loans
|
|
|
125,257
|
|
|
|
85,719
|
|
Total portfolio, excluding Structured Transactions
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
2.78
|
%
|
|
|
1.72
|
%
|
Total number of delinquent loans
|
|
|
340,335
|
|
|
|
213,288
|
|
Structured
Transactions:(3)
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
7.79
|
%
|
|
|
7.23
|
%
|
Total number of delinquent loans
|
|
|
21,472
|
|
|
|
18,138
|
|
Total single-family portfolio:
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
2.89
|
%
|
|
|
1.83
|
%
|
Total number of delinquent loans
|
|
|
361,807
|
|
|
|
231,426
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Delinquency
rate(4)
|
|
|
0.15
|
%
|
|
|
0.03
|
%
|
Net carrying value of delinquent loans (in millions)
|
|
$
|
139
|
|
|
$
|
30
|
|
|
|
(1)
|
Based on the number of mortgages 90 days or more delinquent
or in foreclosure. Delinquencies on mortgage loans underlying
certain Structured Securities, long-term standby commitments and
Structured Transactions may be reported on a different schedule
due to variances in industry practice.
|
(2)
|
Excluding Structured Transactions.
|
(3)
|
Structured Transactions generally have underlying mortgage loans
with higher risk characteristics but may provide inherent credit
protections from losses due to underlying subordination, excess
interest, overcollateralization and other features.
|
(4)
|
Multifamily delinquency performance is based on net carrying
value of mortgages 90 days or more delinquent rather than
on a unit basis, and includes multifamily Structured
Transactions.
|
We have worked with our Conservator to, among other things, help
distressed homeowners and we have implemented a number of steps
that include extending foreclosure timelines and additional
efforts to modify and
restructure loans. Currently, we are primarily focusing on
initiatives that support the MHA Program. See NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MHA
Program and Other Efforts to Assist the Housing Market
for further information.
NOTE 6:
REAL ESTATE OWNED
For periods presented below, the weighted average holding period
for our disposed properties was less than one year.
Table 6.1 provides a summary of the change in the carrying
value of our REO balances.
Table 6.1
REO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
REO,
|
|
|
Valuation
|
|
|
REO,
|
|
|
REO,
|
|
|
Valuation
|
|
|
REO,
|
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,925
|
|
|
$
|
(977
|
)
|
|
$
|
2,948
|
|
|
$
|
2,698
|
|
|
$
|
(484
|
)
|
|
$
|
2,214
|
|
Additions
|
|
|
2,348
|
|
|
|
(148
|
)
|
|
|
2,200
|
|
|
|
1,755
|
|
|
|
(106
|
)
|
|
|
1,649
|
|
Dispositions and valuation allowance assessment
|
|
|
(2,140
|
)
|
|
|
408
|
|
|
|
(1,732
|
)
|
|
|
(1,240
|
)
|
|
|
(43
|
)
|
|
|
(1,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,133
|
|
|
$
|
(717
|
)
|
|
$
|
3,416
|
|
|
$
|
3,213
|
|
|
$
|
(633
|
)
|
|
$
|
2,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
REO,
|
|
|
Valuation
|
|
|
REO,
|
|
|
REO,
|
|
|
Valuation
|
|
|
REO,
|
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
4,216
|
|
|
$
|
(961
|
)
|
|
$
|
3,255
|
|
|
$
|
2,067
|
|
|
$
|
(331
|
)
|
|
$
|
1,736
|
|
Additions
|
|
|
4,012
|
|
|
|
(253
|
)
|
|
|
3,759
|
|
|
|
3,140
|
|
|
|
(190
|
)
|
|
|
2,950
|
|
Dispositions and valuation allowance assessment
|
|
|
(4,095
|
)
|
|
|
497
|
|
|
|
(3,598
|
)
|
|
|
(1,994
|
)
|
|
|
(112
|
)
|
|
|
(2,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,133
|
|
|
$
|
(717
|
)
|
|
$
|
3,416
|
|
|
$
|
3,213
|
|
|
$
|
(633
|
)
|
|
$
|
2,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We temporarily suspended all foreclosure transfers of occupied
homes from November 26, 2008 through January 31, 2009
and from February 14, 2009 through March 6, 2009. We
continued to pursue loss mitigation options with delinquent
borrowers during these temporary suspension periods; however, we
also continued to proceed with initiation and other, pre-closing
steps in the foreclosure process. Beginning March 7, 2009,
we suspended foreclosure transfers of owner-occupied homes where
the borrower may be eligible to receive a loan modification
under the MHA Program.
The number of single-family property additions to our REO
inventory increased by 77% for the three months ended
June 30, 2009, compared to the three months ended
June 30, 2008. Increases in our single-family REO
acquisitions have been most significant in the West, North
Central and Southeast regions. The West region represents
approximately 34% of new acquisitions during the three months
ended June 30, 2009, based on the number of units, and the
highest concentration in the West region is in the state of
California. At June 30, 2009, our REO inventory in
California represented approximately 25% of our total REO
inventory based on REO value at the time of acquisition and 16%
based on the number of units.
Our REO operations expenses include foreclosure expenses, REO
operating expenses, net losses incurred on disposition of REO
properties, offset by certain recoveries, and adjustments to the
holding period allowance associated with REO properties to
record them at the lower of their carrying amount or fair value
less the costs to sell. Our REO operations expenses decreased in
the second quarter of 2009 primarily as a result of a reduction
in our holding period allowance. An allowance for estimated
declines in the REO fair value during the period properties are
held reduces the carrying value of REO property and the
associated write-down is included in REO operations expense.
During the second quarter of 2009, our REO property carrying
values and disposition values were more closely aligned due to
more stable national home prices in the period. Single-family
REO disposition losses, excluding our holding period allowance,
totaled $304 million and $183 million for the three
months ended June 30, 2009 and 2008, respectively, and were
$610 million and $292 million during the six months
ended June 30, 2009 and 2008, respectively. The reduction
in our holding period allowance substantially offset the impact
of our REO disposition losses during the second quarter of 2009.
During the six months ended June 2008, the majority of our
acquisitions of REO properties resulted from transfers from our
mortgage-related investment portfolio. We had $1.5 billion
in such non-cash transfers in that period. In contrast, the
amount of non-cash acquisitions of REO properties during the
six-months ended June 30, 2009 was $0.6 billion
because the majority of our REO acquisitions during the first
half of 2009 resulted from cash payment for loan extinguishments
of mortgages within PC pools at the time of foreclosure and
conversion to REO. These cash
expenditures are included in net payments of mortgage insurance
and acquisitions and dispositions of real estate owned in our
consolidated statement of cash flows.
NOTE 7:
DEBT SECURITIES AND SUBORDINATED BORROWINGS
Debt securities are classified as either short-term (due within
one year) or long-term (due after one year) based on their
remaining contractual maturity.
The Purchase Agreement provides that, without the prior consent
of Treasury, we may not incur indebtedness that would result in
our aggregate indebtedness exceeding (i) through and
including December 30, 2010, 120% of the amount of mortgage
assets we are permitted to own under the Purchase Agreement on
December 31, 2009 and (ii) beginning on
December 31, 2010, and through and including
December 30, 2011, and each year thereafter, 120% of the
amount of mortgage assets we are permitted to own under the
Purchase Agreement on December 31 of the immediately
preceding calendar year. We also cannot become liable for any
subordinated indebtedness, without the prior written consent of
Treasury. For the purposes of the Purchase Agreement, we have
determined that the balance of our indebtedness at June 30,
2009 and December 31, 2008 did not exceed the applicable
limit.
Table 7.1 summarizes the balances and effective interest
rates for debt securities, as well as subordinated borrowings.
Table 7.1
Total Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Par Value
|
|
|
Balance,
Net(1)
|
|
|
Effective
Rate(2)
|
|
|
Par Value
|
|
|
Balance,
Net(1)
|
|
|
Effective
Rate(2)
|
|
|
|
(dollars in millions)
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reference
Bills®
securities and discount notes
|
|
$
|
246,135
|
|
|
$
|
245,765
|
|
|
|
0.57
|
%
|
|
$
|
311,227
|
|
|
$
|
310,026
|
|
|
|
1.67
|
%
|
Medium-term notes
|
|
|
16,657
|
|
|
|
16,657
|
|
|
|
0.83
|
|
|
|
19,675
|
|
|
|
19,676
|
|
|
|
2.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
262,792
|
|
|
|
262,422
|
|
|
|
0.59
|
|
|
|
330,902
|
|
|
|
329,702
|
|
|
|
1.73
|
|
Current portion of long-term debt
|
|
|
81,737
|
|
|
|
81,713
|
|
|
|
3.22
|
|
|
|
105,420
|
|
|
|
105,412
|
|
|
|
3.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
344,529
|
|
|
|
344,135
|
|
|
|
1.21
|
|
|
|
436,322
|
|
|
|
435,114
|
|
|
|
2.15
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
debt(3)
|
|
|
507,958
|
|
|
|
488,329
|
|
|
|
3.53
|
|
|
|
429,170
|
|
|
|
403,402
|
|
|
|
4.70
|
|
Subordinated
debt(4)
|
|
|
4,784
|
|
|
|
4,514
|
|
|
|
5.59
|
|
|
|
4,784
|
|
|
|
4,505
|
|
|
|
5.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
512,742
|
|
|
|
492,843
|
|
|
|
3.55
|
|
|
|
433,954
|
|
|
|
407,907
|
|
|
|
4.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
857,271
|
|
|
$
|
836,978
|
|
|
|
|
|
|
$
|
870,276
|
|
|
$
|
843,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents par value, net of associated discounts, premiums and
hedging-related basis adjustments, including $1.6 billion
of the current portion of long-term debt at both June 30,
2009 and December 31, 2008, and $5.9 billion and
$11.7 billion of long-term debt that represents the fair
value of foreign-currency denominated debt in accordance with
SFAS 159 at June 30, 2009 and December 31, 2008,
respectively.
|
(2)
|
Represents the weighted average effective rate that remains
constant over the life of the instrument, which includes the
amortization of discounts or premiums, issuance costs and
hedging-related basis adjustments.
|
(3)
|
Balance, net for senior debt includes callable debt of
$160.1 billion and $174.3 billion at June 30,
2009 and December 31, 2008, respectively.
|
(4)
|
Balance, net for subordinated debt includes callable debt of
$ billion at both June 30, 2009 and
December 31, 2008.
|
For the three and six months ended June 30, 2009, we
recognized fair value gains (losses) of $(797) million and
$(330) million on our foreign-currency denominated debt,
respectively, of which $(655) million and
$(75) million were gains (losses) related to our net
foreign-currency translation, respectively.
During July 2009 we made a tender offer to purchase
$4.4 billion of our outstanding Freddie
SUBS®
securities. We accepted $3.9 billion of the tendered
securities. This buyback is consistent with our efforts to
reduce our funding costs.
Lines of
Credit
We have an intraday line of credit with a third-party to provide
additional liquidity to fund our intraday activities through the
Fedwire system in connection with the Federal Reserves
payments system risk policy, which restricts or eliminates
daylight overdrafts by GSEs, including us, in connection with
our use of the Fedwire system. At June 30, 2009 and
December 31, 2008, we had one and two secured, uncommitted
lines of credit totaling $7 billion and $17 billion,
respectively. No amounts were drawn on these lines of credit at
June 30, 2009 and December 31, 2008. We expect to
continue to use these facilities from time to time to satisfy
our intraday financing needs; however, since the line is
uncommitted, we may not be able to draw on it if and when needed.
Lending
Agreement
On September 18, 2008, we entered into the Lending
Agreement with Treasury under which we may request loans until
December 31, 2009. Loans under the Lending Agreement
require approval from Treasury at the time of request. Treasury
is not obligated under the Lending Agreement to make, increase,
renew or extend any loan to us. The Lending Agreement does not
specify a maximum amount that may be borrowed thereunder, but
any loans made to us
by Treasury pursuant to the Lending Agreement must be
collateralized by Freddie Mac or Fannie Mae mortgage-related
securities. As of June 30, 2009, we held approximately
$522 billion of fair value in Freddie Mac and Fannie Mae
mortgage-related securities available to be pledged as
collateral. In addition, as of that date, we held another
approximately $52 billion in single-family loans in our
mortgage-related investments portfolio that could be securitized
into Freddie Mac mortgage-related securities and then pledged as
collateral under the Lending Agreement. Treasury may assign a
reduced value to mortgage-related securities we provide as
collateral under the Lending Agreement, which would reduce the
amount we are able to borrow. Further, unless amended or waived
by Treasury, the amount we may borrow under the Lending
Agreement is limited by the restriction under the Purchase
Agreement on incurring debt in excess of a specified limit.
The Lending Agreement does not specify the maturities or
interest rate of loans that may be made by Treasury under the
credit facility. In a Fact Sheet regarding the credit facility
published by Treasury on September 7, 2008, Treasury
indicated that loans made pursuant to the credit facility will
be for short-term durations and would in general be expected to
be for less than one month but no shorter than one week. The
Fact Sheet further indicated that the interest rate on loans
made pursuant to the credit facility ordinarily will be based on
the daily LIBOR for a similar term of the loan plus
50 basis points. Given that the interest rate we are likely
to be charged under the Lending Agreement will be significantly
higher than the rates we have historically achieved through the
sale of unsecured debt, use of the facility in significant
amounts could have a material adverse impact on our financial
results. No amounts were borrowed under this facility as of
June 30, 2009.
Subordinated
Debt Interest and Principal Payments
In a September 23, 2008 statement concerning the
conservatorship, the Director of FHFA stated that we would
continue to make interest and principal payments on our
subordinated debt, even if we fail to maintain required capital
levels. As a result, the terms of any of our subordinated debt
that provide for us to defer payments of interest under certain
circumstances, including our failure to maintain specified
capital levels, are no longer applicable.
NOTE 8:
FREDDIE MAC STOCKHOLDERS EQUITY (DEFICIT)
Stock
Repurchase and Issuance Programs
We did not repurchase or issue any of our common shares or
non-cumulative preferred stock during the six months ended
June 30, 2009, other than through our stock-based
compensation plans. During the six months ended June 30,
2009, restrictions lapsed on 1,654,168 restricted stock
units, all of which were granted prior to conservatorship. For a
discussion regarding our stock-based compensation plans, see
NOTE 11: STOCK-BASED COMPENSATION in our 2008
Annual Report. We received $6.1 billion and
$30.8 billion in June 2009 and March 2009, respectively,
pursuant to draw requests that FHFA submitted to Treasury on our
behalf to address the deficits in our net worth as of
March 31, 2009 and December 31, 2008, respectively. As
a result of funding of these draw requests, the aggregate
liquidation preference on the senior preferred stock owned by
Treasury increased from $14.8 billion as of
December 31, 2008 to $51.7 billion. The amount
remaining under the funding commitment from Treasury is
$149.3 billion, which does not include the initial
liquidation preference of $1 billion reflecting the cost of
the initial funding commitment (as no cash was received).
Dividends
Declared During 2009
On March 31, 2009 and June 30, 2009, we paid dividends
of $370 million and $1.1 billion, respectively, in
cash on the senior preferred stock at the direction of our
Conservator. Consistent with the Purchase Agreement covenants,
we did not declare dividends on our common stock or any other
series of preferred stock outstanding during the six months
ended June 30, 2009.
Exchange
Listing of Common Stock and Preferred Stock
On November 17, 2008, we received a notice from the NYSE
that we had failed to satisfy one of the NYSEs standards
for continued listing of our common stock. Specifically, the
NYSE advised us that we were below criteria for the
NYSEs price criteria for common stock because the average
closing price of our common stock over a consecutive 30
trading-day
period was less than $1 per share. On December 2, 2008, we
advised the NYSE of our intent to cure this deficiency by
May 18, 2009, and that we may undertake a reverse stock
split in order to do so. On February 26, 2009, the NYSE
suspended the application of its minimum price listing standard
until June 30, 2009 (subsequently extended until
July 31, 2009). The suspension period expired on
July 31, 2009, and we have not regained compliance with the
minimum price standard. Under applicable NYSE rules, we now have
until October 20, 2009 to bring our share price and our
average share price for the 30 consecutive trading days
preceding October 20, 2009, above $1. If we fail to do so,
NYSE rules provide that the NYSE will initiate suspension and
delisting procedures.
The delisting of our common stock would likely also result in
the delisting of our NYSE-listed preferred stock. The delisting
of our common stock or NYSE-listed preferred stock would require
any trading in these securities to occur in the over-the-counter
market and could adversely affect the market prices, trading
volume and liquidity of the markets for these securities. As a
result, it could be more difficult for our shareholders to sell
their shares, especially at prices comparable to those in effect
prior to delisting. We will work with our Conservator to
determine the specific action or actions that may be taken to
cure the deficiency, but there is no assurance that any such
actions will be taken or that any actions taken will be
successful. The average share price of our common stock for the
30 consecutive trading days ended as of the filing of this
Form 10-Q
was less than $1 per share.
NOTE 9:
REGULATORY CAPITAL
On October 9, 2008, FHFA announced that it was suspending
capital classification of us during conservatorship in light of
the Purchase Agreement. FHFA continues to closely monitor our
capital levels, but the existing statutory and FHFA-directed
regulatory capital requirements are not binding during
conservatorship. We continue to provide our regular submissions
to FHFA on both minimum and risk-based capital. Additionally,
FHFA announced it will engage in rule-making to revise our
minimum capital and risk-based capital requirements.
Table 9.1 summarizes our minimum capital requirements and
deficits and net worth.
Table 9.1
Net Worth and Minimum Capital
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
December 31, 2008
|
|
|
(in millions)
|
|
GAAP net
worth(1)
|
|
$
|
8,232
|
|
|
$
|
(30,634
|
)
|
Core
capital(2)(3)
|
|
$
|
(8,748
|
)
|
|
$
|
(13,174
|
)
|
Less: Minimum capital
requirement(2)
|
|
|
29,234
|
|
|
|
28,200
|
|
|
|
|
|
|
|
|
|
|
Minimum capital surplus
(deficit)(2)
|
|
$
|
(37,982
|
)
|
|
$
|
(41,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net worth (deficit) represents the difference between our assets
and liabilities under GAAP. With our adoption of SFAS 160
on January 1, 2009, our net worth is now equal to our total
equity (deficit). Prior to adoption of SFAS 160, our total
stockholders equity (deficit) was substantially the same
as our net worth except that it excluded non-controlling
interests (previously referred to as minority interests). As a
result of SFAS 160, non-controlling interests are now
classified as part of total equity (deficit).
|
(2)
|
Core capital and minimum capital figures for June 30, 2009
are estimates. FHFA is the authoritative source for our
regulatory capital.
|
(3)
|
Core capital as of June 30, 2009 and December 31, 2008
excludes certain components of GAAP total equity (deficit)
(i.e., AOCI, liquidation preference of the senior
preferred stock and non-controlling interests) as these items do
not meet the statutory definition of core capital.
|
Following our entry into conservatorship, we have focused our
risk and capital management, consistent with the objectives of
conservatorship, on, among other things, maintaining a positive
balance of GAAP equity in order to reduce the likelihood that we
will need to make additional draws on the Purchase Agreement
with Treasury, while returning to long-term profitability. The
Purchase Agreement provides that, if FHFA determines as of
quarter end that our liabilities have exceeded our assets under
GAAP, upon FHFAs request on our behalf, Treasury will
contribute funds to us in an amount equal to the difference
between such liabilities and assets.
Under the Reform Act, FHFA must place us into receivership if
FHFA determines in writing that our assets are and have been
less than our obligations for a period of 60 days. FHFA has
notified us that the measurement period for any mandatory
receivership determination with respect to our assets and
obligations would commence no earlier than the SEC public filing
deadline for our quarterly or annual financial statements and
would continue for 60 calendar days after that date. FHFA has
advised us that, if, during that
60-day
period, we receive funds from Treasury in an amount at least
equal to the deficiency amount under the Purchase Agreement, the
Director of FHFA will not make a mandatory receivership
determination.
At June 30, 2009, our assets exceeded our liabilities by
$8.2 billion. Because we had a positive net worth as of
June 30, 2009 FHFA has not submitted a draw request on our
behalf to Treasury for any additional funding under the Purchase
Agreement. Should our assets be lower than our obligations, we
must obtain funding from Treasury pursuant to its commitment
under the Purchase Agreement in order to avoid being placed into
receivership by FHFA. We received $6.1 billion on
June 30, 2009 in accordance with the draw request submitted
by FHFA on May 12, 2009 to address the deficit in our net
worth as of March 31, 2009, and have received
$50.7 billion from Treasury under the Purchase Agreement to
date. We expect to make additional draws under the Purchase
Agreement in future periods due to a variety of factors that
could materially affect the level and volatility of our net
worth. The aggregate liquidation preference of the senior
preferred stock is $51.7 billion and the amount remaining
under the Treasurys funding agreement is
$149.3 billion. We paid our quarterly dividend of
$370 million and $1.1 billion, respectively, on the
senior preferred stock in cash on March 31, 2009 and
June 30, 2009 at the direction of the Conservator.
NOTE 10:
DERIVATIVES
Use of
Derivatives
We use derivatives primarily to:
|
|
|
|
|
hedge forecasted issuances of debt and synthetically create
callable and non-callable funding;
|
|
|
|
regularly adjust or rebalance our funding mix in order to more
closely match changes in the interest-rate characteristics of
our mortgage assets; and
|
|
|
|
hedge foreign-currency exposure.
|
Hedge
Forecasted Debt Issuances and Create Synthetic
Funding
We typically commit to purchase mortgage investments on an
opportunistic basis for a future settlement, typically ranging
from two weeks to three months after the date of the commitment.
To facilitate larger and more predictable debt issuances that
contribute to lower funding costs, we use interest-rate
derivatives to economically hedge the interest-rate risk
exposure from the time we commit to purchase a mortgage to the
time the related debt is issued. We also use derivatives to
synthetically create the substantive economic equivalent of
various debt funding structures. For example, the combination of
a series of short-term debt issuances over a defined period and
a pay-fixed interest rate swap with the same maturity as the
last debt issuance is the substantive economic equivalent of a
long-term fixed-rate debt instrument of comparable maturity.
Similarly, the combination of non-callable debt and a call
swaption, or option to enter into a receive-fixed interest rate
swap, with the same maturity as the non-callable debt, is the
substantive economic equivalent of callable debt. These
derivatives strategies increase our funding flexibility and
allow us to better match asset and liability cash flows, often
reducing overall funding costs.
Adjust
Funding Mix
We generally use interest-rate swaps to mitigate contractual
funding mismatches between our assets and liabilities. We also
use swaptions and other option-based derivatives to adjust the
contractual terms of our debt funding in response to changes in
the expected lives of mortgage-related assets in our
mortgage-related investments portfolio. As market conditions
dictate, we take rebalancing actions to keep our interest-rate
risk exposure within management-set limits. In a declining
interest-rate environment, we typically enter into receive-fixed
interest rate swaps or purchase Treasury-based derivatives to
shorten the duration of our funding to offset the declining
duration of our mortgage assets. In a rising interest-rate
environment, we typically enter into pay-fixed interest rate
swaps or sell Treasury-based derivatives in order to lengthen
the duration of our funding to offset the increasing duration of
our mortgage assets.
Foreign-Currency
Exposure
We use foreign-currency swaps to eliminate virtually all of our
foreign-currency exposure related to our foreign-currency
denominated debt. We enter into swap transactions that
effectively convert foreign-currency denominated obligations
into U.S. dollar-denominated obligations.
Types of
Derivatives
We principally use the following types of derivatives:
|
|
|
|
|
LIBOR- and Euribor-based interest-rate swaps;
|
|
|
|
LIBOR- and Treasury-based options (including swaptions);
|
|
|
|
LIBOR- and Treasury-based exchange-traded futures; and
|
|
|
|
Foreign-currency swaps.
|
In addition to swaps, futures and purchased options, our
derivative positions include the following:
Written
Options and Swaptions
Written call and put swaptions are sold to counterparties
allowing them the option to enter into receive- and pay-fixed
interest rate swaps, respectively. Written call and put options
on mortgage-related securities give the counterparty the right
to execute a contract under specified terms, which generally
occurs when we are in a liability position. We use these written
options and swaptions to manage convexity risk over a wide range
of interest rates. Written options lower our overall hedging
costs, allow us to hedge the same economic risk we assume when
selling guaranteed final maturity REMICs with a more liquid
instrument and allow us to rebalance the options in our callable
debt and REMIC portfolios. We may, from time to time, write
other derivative contracts such as caps, floors, interest-rate
futures and options on
buy-up and
buy-down commitments.
Forward
Purchase and Sale Commitments
We routinely enter into forward purchase and sale commitments
for mortgage loans and mortgage-related securities. Most of
these commitments are derivatives subject to the requirements of
SFAS 133.
Swap
Guarantee Derivatives
We issue swap guarantee derivatives that guarantee the payments
on (a) multifamily mortgage loans that are originated and
held by state and municipal housing finance agencies to support
tax-exempt multifamily housing revenue bonds and
(b) Freddie Mac pass-through certificates which are backed
by tax-exempt multifamily housing revenue bonds and related
taxable bonds
and/or
loans. In connection with some of these guarantees, we may also
guarantee the sponsors or the borrowers performance
as a counterparty on any related interest-rate swaps used to
mitigate interest-rate risk.
Credit
Derivatives
We have entered into credit derivatives, including risk-sharing
agreements. Under these risk-sharing agreements, default losses
on specific mortgage loans delivered by sellers are compared to
default losses on reference pools of mortgage loans with similar
characteristics. Based upon the results of that comparison, we
remit or receive payments based upon the default performance of
the referenced pools of mortgage loans. In addition, we have
entered into agreements whereby we assume credit risk for
mortgage loans held by third parties in exchange for a monthly
fee. We are obligated to purchase any of the mortgage loans that
become 120 days delinquent.
In addition, we have purchased mortgage loans containing debt
cancellation contracts, which provide for mortgage debt or
payment cancellation for borrowers who experience unanticipated
losses of income dependent on a covered event. The rights and
obligations under these agreements have been assigned to the
servicers. However, in the event the servicer does not perform
as required by contract, under our guarantee, we would be
obligated to make the required contractual payments.
Table 10.1 presents the location and fair value of derivatives
reported in our consolidated balance sheets.
Table 10.1
Derivative Assets and Liabilities at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009
|
|
|
At December 31, 2008
|
|
|
|
|
|
|
Derivatives at Fair Value
|
|
|
|
|
|
Derivatives at Fair Value
|
|
|
|
Notional or
|
|
|
|
|
|
|
|
|
Notional or
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Assets(1)
|
|
|
Liabilities(1)
|
|
|
Amount
|
|
|
Assets(1)
|
|
|
Liabilities(1)
|
|
|
|
(in millions)
|
|
|
Total derivative portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under
SFAS 133(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive-fixed
|
|
$
|
315,284
|
|
|
$
|
6,143
|
|
|
$
|
(3,889
|
)
|
|
$
|
279,609
|
|
|
$
|
22,285
|
|
|
$
|
(19
|
)
|
Pay-fixed
|
|
|
401,901
|
|
|
|
2,309
|
|
|
|
(21,438
|
)
|
|
|
404,359
|
|
|
|
104
|
|
|
|
(51,894
|
)
|
Basis (floating to floating)
|
|
|
51,065
|
|
|
|
38
|
|
|
|
(17
|
)
|
|
|
82,190
|
|
|
|
209
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-rate swaps
|
|
|
768,250
|
|
|
|
8,490
|
|
|
|
(25,344
|
)
|
|
|
766,158
|
|
|
|
22,598
|
|
|
|
(52,014
|
)
|
Option-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Call swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
187,047
|
|
|
|
10,499
|
|
|
|
|
|
|
|
177,922
|
|
|
|
21,089
|
|
|
|
|
|
Written
|
|
|
12,250
|
|
|
|
|
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Put swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
65,375
|
|
|
|
2,288
|
|
|
|
|
|
|
|
41,550
|
|
|
|
539
|
|
|
|
|
|
Written
|
|
|
26,500
|
|
|
|
|
|
|
|
(619
|
)
|
|
|
6,000
|
|
|
|
|
|
|
|
(46
|
)
|
Other option-based
derivatives(3)
|
|
|
239,553
|
|
|
|
1,689
|
|
|
|
(117
|
)
|
|
|
68,583
|
|
|
|
1,913
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total option-based
|
|
|
530,725
|
|
|
|
14,476
|
|
|
|
(892
|
)
|
|
|
294,055
|
|
|
|
23,541
|
|
|
|
(95
|
)
|
Futures
|
|
|
31,101
|
|
|
|
12
|
|
|
|
(53
|
)
|
|
|
128,698
|
|
|
|
234
|
|
|
|
(1,105
|
)
|
Foreign-currency swaps
|
|
|
7,186
|
|
|
|
1,749
|
|
|
|
|
|
|
|
12,924
|
|
|
|
2,982
|
|
|
|
|
|
Forward purchase and sale commitments
|
|
|
70,306
|
|
|
|
142
|
|
|
|
(384
|
)
|
|
|
108,273
|
|
|
|
537
|
|
|
|
(532
|
)
|
Credit derivatives
|
|
|
19,648
|
|
|
|
38
|
|
|
|
(12
|
)
|
|
|
13,631
|
|
|
|
45
|
|
|
|
(7
|
)
|
Swap guarantee derivatives
|
|
|
3,441
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
3,281
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments under
SFAS 133
|
|
|
1,430,657
|
|
|
|
24,907
|
|
|
|
(26,720
|
)
|
|
|
1,327,020
|
|
|
|
49,937
|
|
|
|
(53,764
|
)
|
Netting
adjustments(4)
|
|
|
|
|
|
|
(24,588
|
)
|
|
|
25,835
|
|
|
|
|
|
|
|
(48,982
|
)
|
|
|
51,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative portfolio, net
|
|
$
|
1,430,657
|
|
|
$
|
319
|
|
|
$
|
(885
|
)
|
|
$
|
1,327,020
|
|
|
$
|
955
|
|
|
$
|
(2,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The value of derivatives on our consolidated balance sheets is
reported as derivative assets, net and derivative liabilities,
net.
|
(2)
|
See Use of Derivatives for additional information
about the purpose of entering into derivatives not designated as
hedging instruments and our overall risk management strategies.
|
(3)
|
Primarily represents purchased interest rate caps and floors,
purchased put options on agency mortgage-related securities, as
well as written options, including guarantees of stated final
maturity of issued Structured Securities and written call
options on agency mortgage-related securities.
|
(4)
|
Represents counterparty netting, cash collateral netting, net
trade/settle receivable or payable and net derivative interest
receivable or payable. The net cash collateral posted and net
trade/settle payable were $1.5 billion and
$24 million, respectively, at June 30, 2009. The net
cash collateral posted and net trade/settle payable were
$1.5 billion and $ million, respectively, at
December 31, 2008. The net interest receivable (payable) of
derivative assets and derivative liabilities was approximately
$(186) million and $1.1 billion at June 30, 2009
and December 31, 2008, respectively, which was mainly
related to interest rate swaps that we have entered into.
|
Table 10.2 presents the gains and losses of derivatives reported
in our consolidated statements of operations.
Table
10.2 Gains and Losses on
Derivatives(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
|
|
|
|
Amount of Gain or (Loss)
|
|
|
Amount of Gain or (Loss)
|
|
|
Recognized in Other Income
|
|
|
|
Recognized in
|
|
|
Reclassified from
|
|
|
(Ineffective Portion and
|
|
|
|
AOCI on Derivative
|
|
|
AOCI into Earnings
|
|
|
Amount Excluded from
|
|
Derivatives in SFAS 133
|
|
(Effective Portion)
|
|
|
(Effective Portion)
|
|
|
Effectiveness
Testing)(2)
|
|
Cash Flow Hedging
Relationships(3)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Pay-fixed interest rate swaps
|
|
$
|
|
|
|
$
|
363
|
|
|
$
|
|
|
|
$
|
(36
|
)
|
|
$
|
|
|
|
$
|
7
|
|
Forward sale commitments
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed cash flow
hedges(4)
|
|
|
|
|
|
|
|
|
|
|
(294
|
)
|
|
|
(327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
366
|
|
|
$
|
(294
|
)
|
|
$
|
(363
|
)
|
|
$
|
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
|
|
|
|
Amount of Gain or (Loss)
|
|
|
Amount of Gain or (Loss)
|
|
|
Recognized in Other Income
|
|
|
|
Recognized in
|
|
|
Reclassified from
|
|
|
(Ineffective Portion and
|
|
|
|
AOCI on Derivative
|
|
|
AOCI into Earnings
|
|
|
Amount Excluded from
|
|
Derivatives in SFAS 133
|
|
(Effective Portion)
|
|
|
(Effective Portion)
|
|
|
Effectiveness
Testing)(2)
|
|
Cash Flow Hedging
Relationships(3)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Pay-fixed interest rate swaps
|
|
$
|
|
|
|
$
|
305
|
|
|
$
|
|
|
|
$
|
(36
|
)
|
|
$
|
|
|
|
$
|
4
|
|
Forward sale commitments
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed cash flow
hedges(4)
|
|
|
|
|
|
|
|
|
|
|
(609
|
)
|
|
|
(630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
316
|
|
|
$
|
(609
|
)
|
|
$
|
(666
|
)
|
|
$
|
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Gains
(Losses)(5)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Derivatives not designated as hedging
|
|
Three Months Ended June 30,
|
|
|
June 30,
|
|
instruments under
SFAS 133(6)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Interest-rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive-fixed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign-currency denominated
|
|
$
|
(63
|
)
|
|
$
|
(490
|
)
|
|
$
|
124
|
|
|
$
|
(297
|
)
|
U.S. dollar denominated
|
|
|
(10,187
|
)
|
|
|
(7,204
|
)
|
|
|
(11,990
|
)
|
|
|
2,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receive-fixed swaps
|
|
|
(10,250
|
)
|
|
|
(7,694
|
)
|
|
|
(11,866
|
)
|
|
|
2,002
|
|
Pay-fixed
|
|
|
18,524
|
|
|
|
11,259
|
|
|
|
25,229
|
|
|
|
(3,874
|
)
|
Basis (floating to floating)
|
|
|
(116
|
)
|
|
|
(23
|
)
|
|
|
(115
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-rate swaps
|
|
|
8,158
|
|
|
|
3,542
|
|
|
|
13,248
|
|
|
|
(1,893
|
)
|
Option-based:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Call swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
(5,910
|
)
|
|
|
(2,542
|
)
|
|
|
(9,297
|
)
|
|
|
698
|
|
Written
|
|
|
94
|
|
|
|
27
|
|
|
|
211
|
|
|
|
21
|
|
Put swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
1,002
|
|
|
|
72
|
|
|
|
1,047
|
|
|
|
(53
|
)
|
Written
|
|
|
(370
|
)
|
|
|
(93
|
)
|
|
|
(357
|
)
|
|
|
(90
|
)
|
Other option-based
derivatives(7)
|
|
|
(240
|
)
|
|
|
(88
|
)
|
|
|
(215
|
)
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total option-based
|
|
|
(5,424
|
)
|
|
|
(2,624
|
)
|
|
|
(8,611
|
)
|
|
|
512
|
|
Futures
|
|
|
(252
|
)
|
|
|
(154
|
)
|
|
|
(224
|
)
|
|
|
493
|
|
Foreign-currency
swaps(8)
|
|
|
583
|
|
|
|
(48
|
)
|
|
|
10
|
|
|
|
1,189
|
|
Forward purchase and sale commitments
|
|
|
140
|
|
|
|
(243
|
)
|
|
|
(272
|
)
|
|
|
268
|
|
Credit derivatives
|
|
|
(6
|
)
|
|
|
10
|
|
|
|
(5
|
)
|
|
|
14
|
|
Swap guarantee derivatives
|
|
|
9
|
|
|
|
(1
|
)
|
|
|
(22
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,208
|
|
|
|
482
|
|
|
|
4,124
|
|
|
|
582
|
|
Accrual of periodic settlements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive-fixed interest rate
swaps(9)
|
|
|
1,380
|
|
|
|
648
|
|
|
|
2,468
|
|
|
|
721
|
|
Pay-fixed interest rate swaps
|
|
|
(2,269
|
)
|
|
|
(1,118
|
)
|
|
|
(4,211
|
)
|
|
|
(1,595
|
)
|
Foreign-currency swaps
|
|
|
22
|
|
|
|
101
|
|
|
|
71
|
|
|
|
158
|
|
Other
|
|
|
20
|
|
|
|
2
|
|
|
|
90
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrual of periodic settlements
|
|
|
(847
|
)
|
|
|
(367
|
)
|
|
|
(1,582
|
)
|
|
|
(712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,361
|
|
|
$
|
115
|
|
|
$
|
2,542
|
|
|
$
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For all derivatives in qualifying hedge accounting
relationships, the accrual of periodic cash settlements is
recorded in net interest income on our consolidated statements
of operations. For derivatives not in qualifying hedge
accounting relationships, the accrual of periodic cash
settlements is recorded in derivative gains (losses) on our
consolidated statements of operations.
|
(2)
|
Gain or (loss) arises when the fair value change of a derivative
does not exactly offset the fair value change of the hedged item
attributable to the hedged risk, and is a component of other
income in our consolidated statements of operations. No amounts
have been excluded from the assessment of effectiveness.
|
(3)
|
Derivatives that meet specific criteria may be accounted for as
cash flow hedges. Changes in the fair value of the effective
portion of open qualifying cash flow hedges are recorded in
AOCI, net of taxes. Net deferred gains and losses on closed cash
flow hedges (i.e., where the derivative is either
terminated or redesignated) are also included in AOCI, net of
taxes, until the related forecasted transaction affects earnings
or is determined to be probable of not occurring.
|
(4)
|
Amounts reported in AOCI related to changes in the fair value of
commitments to purchase securities that are designated as cash
flow hedges are recognized as basis adjustments to the related
assets which are amortized in earnings as interest income.
Amounts linked to interest payments on long-term debt are
recorded in long-term debt interest expense and amounts not
linked to interest payments on long-term debt are recorded in
expense related to derivatives.
|
(5)
|
Gains (losses) are reported as derivative gains (losses) on our
consolidated statements of operations.
|
(6)
|
See Use of Derivatives for additional information
about the purpose of entering into derivatives not designated as
hedging instruments and our overall risk management strategies.
|
(7)
|
Primarily represents purchased interest rate caps and floors,
purchased put options on agency mortgage-related securities, as
well as certain written options, including guarantees of stated
final maturity of issued Structured Securities and written call
options on agency mortgage-related securities.
|
(8)
|
Foreign-currency swaps are defined as swaps in which the net
settlement is based on one leg calculated in a foreign-currency
and the other leg calculated in U.S. dollars.
|
(9)
|
Includes imputed interest on zero-coupon swaps.
|
During 2008, we designated certain derivative positions as cash
flow hedges of changes in cash flows associated with our
forecasted issuances of debt, consistent with our risk
management goals, in an effort to reduce interest rate risk
related volatility in our consolidated statements of operations.
In conjunction with our entry into conservatorship on
September 6, 2008, we determined that we could no longer
assert that the associated forecasted issuances of debt were
probable of occurring and, as a result, we ceased designating
derivative positions as cash flow hedges associated with
forecasted issuances of debt. The previous deferred amount
related to these hedges remains in our AOCI balance and will be
recognized into earnings over the expected time period for which
the forecasted issuances of debt impact earnings. Any subsequent
changes in fair value of those derivative instruments are
included in derivative gains (losses) on our consolidated
statements of operations. As a result of our discontinuance of
this hedge accounting strategy, we transferred
$27.6 billion in notional amount and $(488) million in
fair value from open cash flow hedges to closed cash flow hedges
on September 6, 2008. During 2008, we also elected cash
flow hedge accounting relationships for certain commitments to
sell mortgage-related securities; however, we discontinued hedge
accounting for these derivative instruments in December 2008.
The carrying value of our derivatives on our consolidated
balance sheets is equal to their fair value, including net
derivative interest receivable or payable, net trade/settle
receivable or payable and is net of cash collateral held or
posted, where allowable by a master netting agreement.
Derivatives in a net asset position are reported as derivative
assets, net. Similarly, derivatives in a net liability position
are reported as derivative liabilities, net. Cash collateral we
obtained from counterparties to derivative contracts that has
been offset against derivative assets, net at June 30, 2009
and December 31, 2008 was $2.8 billion and
$4.3 billion, respectively. Cash collateral we posted to
counterparties to derivative contracts that has been offset
against derivative liabilities, net at June 30, 2009 and
December 31, 2008 was $4.2 billion and
$5.8 billion, respectively. We are subject to collateral
posting thresholds based on the credit rating of our long-term
senior unsecured debt securities from S&P or Moodys.
In the event our credit ratings fell below certain specified
rating triggers or were withdrawn by S&P or Moodys,
the counterparties to the derivative instruments were entitled
to full overnight collateralization on derivative instruments in
net liability positions. The aggregate fair value of all
derivative instruments with credit-risk-related contingent
features that were in a liability position on June 30,
2009, was $4.6 billion for which we posted collateral of
$4.2 billion in the normal course of business. If the
credit-risk-related contingent features underlying these
agreements were triggered on June 30, 2009, we would have
been required to post an additional $0.4 billion of
collateral to our counterparties.
At June 30, 2009 and December 31, 2008, there were no
amounts of cash collateral that were not offset against
derivative assets, net or derivative liabilities, net, as
applicable. See NOTE 15: CONCENTRATION OF CREDIT AND
OTHER RISKS for further information related to our
derivative counterparties.
As shown in Table 10.3 the total AOCI, net of taxes,
related to derivatives designated as cash flow hedges was a loss
of $3.3 billion and $3.4 billion at June 30, 2009
and 2008, respectively, composed of deferred net losses on
closed cash flow hedges. Closed cash flow hedges involve
derivatives that have been terminated or are no longer
designated as cash flow hedges. Fluctuations in prevailing
market interest rates have no impact on the deferred portion of
AOCI relating to losses on closed cash flow hedges.
Over the next 12 months, we estimate that approximately
$719 million, net of taxes, of the $3.3 billion of
cash flow hedging losses in AOCI, net of taxes, at June 30,
2009 will be reclassified into earnings. The maximum remaining
length of time over which we have hedged the exposure related to
the variability in future cash flows on forecasted transactions,
primarily forecasted debt issuances, is 24 years. However,
over 70% and 90% of AOCI, net of taxes, relating to closed cash
flow hedges at June 30, 2009, will be reclassified to
earnings over the next five and ten years, respectively.
Table 10.3 presents the changes in AOCI, net of taxes,
related to derivatives designated as cash flow hedges. Net
change in fair value related to cash flow hedging activities,
net of tax, represents the net change in the fair value of the
derivatives that were designated as cash flow hedges, after the
effects of our federal statutory tax rate of 35% for cash flow
hedges closed prior to 2008 and a tax rate of 0% for cash flow
hedges closed during 2008, to the extent the hedges were
effective. No tax effect has been calculated on the cash flow
hedges closed during 2008 because of the establishment of the
valuation allowance in the third quarter of 2008. Net
reclassifications of losses to earnings, net of tax, represents
the AOCI amount that was recognized in earnings as the
originally hedged forecasted transactions affected earnings,
unless it was deemed probable that the forecasted transaction
would not occur. If it is probable that the forecasted
transaction will not occur, then the deferred gain or loss
associated with the hedge related to the forecasted transaction
would be reclassified into earnings immediately. For further
information on our deferred tax assets, net valuation allowance
see NOTE 12: INCOME TAXES.
Table 10.3
AOCI, Net of Taxes, Related to Cash Flow Hedge
Relationships
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Beginning
balance(1)
|
|
$
|
(3,678
|
)
|
|
$
|
(4,059
|
)
|
Adjustment to initially apply
SFAS 159(2)
|
|
|
|
|
|
|
4
|
|
Net change in fair value related to cash flow hedging
activities, net of
tax(3)
|
|
|
|
|
|
|
204
|
|
Net reclassifications of losses to earnings and other, net of
tax(4)
|
|
|
403
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
Ending
balance(1)
|
|
$
|
(3,275
|
)
|
|
$
|
(3,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the effective portion of the fair value of open
derivative contracts (i.e., net unrealized gains and
losses) and net deferred gains and losses on closed
(i.e., terminated or redesignated) cash flow hedges.
|
(2)
|
Net of tax benefit of $ for the six months ended
June 30, 2008.
|
(3)
|
Net of tax benefit of $112 million for the six months ended
June 30, 2008.
|
(4)
|
Net of tax benefit of $206 million and $233 million
for the six months ended June 30, 2009 and 2008,
respectively.
|
NOTE 11:
LEGAL CONTINGENCIES
We are involved as a party to a variety of legal and regulatory
proceedings arising from time to time in the ordinary course of
business including, among other things, contractual disputes,
personal injury claims, employment-related litigation and other
legal proceedings incidental to our business. We are frequently
involved, directly or indirectly, in litigation involving
mortgage foreclosures. From time to time, we are also involved
in proceedings arising from our termination of a
seller/servicers eligibility to sell mortgages to,
and/or
service mortgages for, us. In these cases, the former
seller/servicer sometimes seeks damages against us for wrongful
termination under a variety of legal theories. In addition, we
are sometimes sued in connection with the origination or
servicing of mortgages. These suits typically involve claims
alleging wrongful actions of seller/servicers. Our contracts
with our seller/servicers generally provide for indemnification
against liability arising from their wrongful actions.
Litigation and claims resolution are subject to many
uncertainties and are not susceptible to accurate prediction. In
accordance with SFAS 5 we reserve for litigation claims and
assessments asserted or threatened against us when a loss is
probable and the amount of the loss can be reasonably estimated.
Putative Securities Class Action
Lawsuits. Ohio Public Employees Retirement
System vs. Freddie Mac, Syron, et al, or OPERS.
This putative securities class action lawsuit was filed
against Freddie Mac and certain former officers on
January 18, 2008 in the U.S. District Court for the
Northern District of Ohio alleging that the defendants violated
federal securities laws by making false and misleading
statements concerning our business, risk management and the
procedures we put into place to protect the company from
problems in the mortgage industry. On April 10, 2008,
the court appointed OPERS as lead plaintiff and approved its
choice of counsel. On September 2, 2008, defendants filed a
motion to dismiss plaintiffs amended complaint, which
purportedly asserted claims on behalf of a class of purchasers
of Freddie Mac stock between August 1, 2006 and
November 20, 2007. On November 7, 2008, the plaintiff
filed a second amended complaint, which removed certain
allegations against Richard Syron, Anthony Piszel, and Eugene
McQuade, thereby leaving insider-trading allegations against
only Patricia Cook. The second amended complaint also extends
the damages period, but not the class period. The complaint
seeks unspecified damages and interest, and reasonable costs and
expenses, including attorney and expert fees. On
November 19, 2008, the Court granted FHFAs motion to
intervene in its capacity as Conservator. On April 6, 2009,
defendants filed a motion to dismiss the second amended
complaint. At present, it is not possible for us to predict the
probable outcome of the OPERS lawsuit or any potential impact on
our business, financial condition, or results of operations.
Kuriakose vs. Freddie Mac, Syron, Piszel and
Cook. Another putative class action lawsuit was
filed against Freddie Mac and certain former officers on
August 15, 2008 in the U.S. District Court for the
Southern District of New York for alleged violations of federal
securities laws purportedly on behalf of a class of purchasers
of Freddie Mac stock from November 21, 2007 through
August 5, 2008. The plaintiff claims that defendants made
false and misleading statements about Freddie Macs
business that artificially inflated the price of Freddie
Macs common stock, and seeks unspecified damages, costs,
and attorneys fees. On January 20, 2009, FHFA filed a
motion to intervene and stay the proceedings. On
February 6, 2009, the court granted FHFAs motion to
intervene and stayed the case for 45 days. On May 19,
2009, plaintiffs filed an amended consolidated complaint.
Freddie Macs response to the amended consolidated
complaint is due by August 27, 2009. At present, it is not
possible for us to predict the probable outcome of the lawsuit
or any potential impact on our business, financial condition, or
results of operations.
Shareholder Demand Letters. In late 2007 and
early 2008, the Board of Directors received three letters from
purported shareholders of Freddie Mac, which together contain
allegations of corporate mismanagement and breaches of fiduciary
duty in connection with the companys risk management,
alleged false and misleading financial disclosures, and the
alleged sale of stock based on material non-public information
by certain current and former officers and directors of Freddie
Mac. One letter demands that the board commence an independent
investigation into the alleged conduct, institute legal
proceedings to recover damages from the responsible individuals,
and implement corporate governance initiatives to ensure that
the alleged problems do not recur. The second letter demands
that Freddie Mac commence legal proceedings to recover damages
from responsible board members, senior officers, Freddie
Macs outside auditors, and other parties who allegedly
aided or abetted the improper conduct. The third letter demands
relief similar to that of the second letter, as well as recovery
for unjust enrichment. Prior to the Conservatorship, the Board
of Directors formed a Special Litigation Committee, or SLC, to
investigate the purported shareholders allegations, and
engaged counsel for that purpose. Pursuant to the
conservatorship, FHFA, as the Conservator, has succeeded to the
powers of the Board of Directors, including the power to conduct
investigations such as the one conducted by the SLC of the prior
Board of Directors. The counsel engaged by the former SLC is
continuing the investigation pursuant to instructions from FHFA.
Shareholder Derivative Lawsuits. A shareholder
derivative complaint, purportedly on behalf of Freddie Mac, was
filed on March 10, 2008, in the U.S. District Court
for the Southern District of New York against certain former
officers and current and former directors of Freddie Mac and a
number of third parties. An amended complaint was filed on
August 21, 2008. The complaint, which was filed by Robert
Bassman, an individual who had submitted a shareholder demand
letter to the Board of Directors in late 2007, alleges breach of
fiduciary duty, negligence, violations of the Sarbanes-Oxley Act
of 2002 and unjust enrichment in connection with various alleged
business and risk management failures. It also alleges
insider selling and false assurances by the company
regarding our financial exposure in the subprime financing
market, our risk management and our internal controls. The
plaintiff seeks unspecified damages, declaratory relief, an
accounting, injunctive relief, disgorgement, punitive damages,
attorneys fees, interest and costs. On November 20,
2008, the court transferred the case to the Eastern District of
Virginia.
On July 24, 2008, The Adams Family Trust and Kevin Tashjian
filed a purported derivative lawsuit in the U.S. District
Court for the Eastern District of Virginia against certain
current and former officers and directors of Freddie Mac, with
Freddie Mac named as a nominal defendant in the action. The
Adams Family Trust and Kevin Tashjian had previously sent a
derivative demand letter to the Board of Directors on
March 26, 2008 requesting that it commence legal
proceedings against senior management and certain directors to
recover damages for their alleged wrongdoing. Similar to the
Bassman case described above, this complaint alleges that the
defendants breached their fiduciary duties by failing to
implement
and/or
maintain sufficient risk management and other controls; failing
to adequately reserve for uncollectible loans and other risks of
loss; and making false and misleading statements regarding the
companys exposure to the subprime market, the strength of
the companys risk management and internal controls, and
the companys underwriting standards in response to alleged
abuses in the subprime industry. The plaintiffs also allege that
certain of the defendants breached their fiduciary duties and
unjustly enriched themselves through their sale of stock based
on material non-public information.
On August 15, 2008, a purported shareholder derivative
lawsuit was filed by the Louisiana Municipal Police Employees
Retirement System, or LMPERS, in the U.S. District Court
for the Eastern District of Virginia against certain current and
former officers and directors of Freddie Mac. The plaintiff
alleges that the defendants breached their fiduciary duties and
violated federal securities laws in connection with the
companys recent losses, including by unjustly enriching
themselves with salaries, bonuses, benefits and other
compensation, and through their sale of stock based on material
non-public information. The plaintiff seeks unspecified damages,
constructive trusts on proceeds associated with insider trading
and improper payments made to defendants, restitution and
disgorgement, an order requiring reform and improvement of
corporate governance, costs and attorneys fees.
On October 15, 2008, the U.S. District Court for the
Eastern District of Virginia consolidated the LMPERS and Adams
Family Trust cases. On October 24, 2008, a motion was filed
to have LMPERS appointed lead plaintiff. On November 3,
2008, the Court granted FHFAs motion to intervene in its
capacity as Conservator. In that capacity, FHFA also filed a
motion to stay all proceedings and to substitute for plaintiffs
in the action. On December 12, 2008, the Court consolidated
the Bassman litigation with the LMPERS and Adams Family Trust
cases. On December 19, 2008, the Court stayed the
consolidated cases pending further order from the Court. On
July 27, 2009, the Court granted FHFAs motion to
substitute for plaintiffs and lifted the stay. At present, it is
not possible for us to predict the probable outcome of these
lawsuits or any potential impact on our business, financial
condition or results of operations.
A shareholder derivative complaint, purportedly on behalf of
Freddie Mac, was filed on June 6, 2008 in the
U.S. District Court for the Southern District of New York
against certain former officers and current and former directors
of Freddie Mac by the Esther Sadowsky Testamentary Trust, which
had submitted a shareholder demand letter to the Board of
Directors in late 2007. The complaint alleges that defendants
caused the company to violate its charter by engaging in
unsafe, unsound and improper speculation in high risk
mortgages to boost near term profits, report growth in the
companys mortgage-related investments portfolio and
guarantee business, and take market share away from its primary
competitor, Fannie Mae. Plaintiff asserts claims for
alleged breach of fiduciary duty and declaratory and injunctive
relief. Among other things, plaintiff also seeks an accounting,
an order requiring that defendants remit all salary and
compensation received during the periods they allegedly breached
their duties, and an award of pre-judgment and post-judgment
interest, attorneys fees, expert fees and consulting fees,
and other costs and expenses. On November 13, 2008, in its
capacity as Conservator, FHFA filed a motion to intervene and
substitute for plaintiffs. FHFA also filed a motion to stay all
proceedings for a period of 90 days. On January 28,
2009, the magistrate judge assigned to the case issued a report
recommending that FHFAs motion to substitute as plaintiff
be granted. By order dated May 6, 2009, the Court adopted
and affirmed the magistrate judges report substituting
FHFA as plaintiff in place of the Trust and stayed the case for
an additional 45 days. Plaintiff has filed a notice of
appeal with respect to the Courts May 6 ruling. On
June 25, 2009, the Court entered an order allowing the
defendants until December 1, 2009 to
respond to the complaint. At present, it is not possible for us
to predict the probable outcome of the lawsuit or any potential
impact on our business, financial condition or results of
operations.
Antitrust Lawsuits. Beginning in January 2005,
a number of class actions were filed by mortgage borrowers
against Freddie Mac and Fannie Mae. These actions were
consolidated for all purposes in the U.S. District Court
for the District of Columbia and on August 5, 2005, a
Consolidated Class Action Complaint was filed alleging that
both companies conspired to establish and maintain artificially
high management and guarantee fees. The complaint covers the
period January 1, 2001 to the present and asserts a variety
of claims under federal and state antitrust laws, as well as
claims under consumer-protection and similar state laws. The
plaintiffs seek injunctive relief, unspecified damages
(including treble damages with respect to the antitrust claims
and punitive damages with respect to some of the state claims)
and other forms of relief. The defendants filed a joint motion
to dismiss the action in October 2005. On October 29, 2008,
the Court entered an Order granting in part and denying in part
the motion to dismiss. On November 13, 2008, the Court
issued an order granting FHFAs motion to intervene in its
capacity as Conservator for Freddie Mac and Fannie Mae, granting
FHFAs motion to stay the proceedings for 135 days,
and ordering the parties to file a joint status report on
April 1, 2009. On March 6, 2009, the Court stayed the
proceedings for an additional 90 days and ordered the
parties to file a joint status report and scheduling order by
June 30, 2009. On June 26, 2009, the Court dismissed
the case without prejudice pursuant to a stipulation among the
parties.
Government Investigations and Inquiries. On
September 26, 2008, Freddie Mac received a federal grand
jury subpoena from the U.S. Attorneys Office for the
Southern District of New York. The subpoena sought documents
relating to accounting, disclosure and corporate governance
matters for the period beginning January 1, 2007.
Subsequently, we were informed that the subpoena was withdrawn,
and that an investigation is being conducted by the
U.S. Attorneys Office for the Eastern District of
Virginia. On September 26, 2008, Freddie Mac received
notice from the Staff of the Enforcement Division of the
U.S. Securities and Exchange Commission that it is also
conducting an inquiry to determine whether there has been any
violation of federal securities laws, and directing the company
to preserve documents. On October 21, 2008, the SEC issued
to the company a request for documents. The SEC staff is also
conducting interviews of company employees. Beginning
January 23, 2009, the SEC issued subpoenas to Freddie Mac
and certain of its employees pursuant to a formal order of
investigation. Freddie Mac is cooperating fully in these matters.
Indemnification Requests. By letter dated
October 17, 2008, Freddie Mac received formal notification
of a putative class action securities lawsuit, Mark v.
Goldman, Sachs & Co., J.P. Morgan
Chase & Co., and Citigroup Global
Markets Inc., filed on September 23, 2008, in the
U.S. District Court for the Southern District of New York,
regarding the companys November 29, 2007 public
offering of 8.375% Fixed to Floating Rate Non-Cumulative
Perpetual Preferred Stock. On April 30, 2009, the Court
consolidated the Mark case with the Kreysar case discussed
below, and the plaintiffs filed a consolidated class action
complaint on July 2, 2009. Freddie Mac is not named as a
defendant in the consolidated lawsuit, but the underwriters
previously gave notice to Freddie Mac of their intention to seek
full indemnity and contribution under the Underwriting Agreement
in the Mark case, including reimbursement of fees and
disbursements of their legal counsel. At present, it is not
possible for us to predict the probable outcome of the lawsuit
or any potential impact on our business, financial condition or
results of operations.
By letter dated June 5, 2009, Freddie Mac received formal
notification of a putative class action lawsuit, Liberty
Mutual Insurance Company, Peerless Insurance Company, Employers
Insurance Company of Wausau, Safeco Corporation, and Liberty
Assurance Company of Boston v. Goldman, Sachs &
Co., filed on April 6, 2009 in the Superior Court for
the Commonwealth of Massachusetts, County of Suffolk and removed
to the U.S. District Court for the District of Massachusetts on
April 24, 2009. The complaint alleges that Goldman,
Sachs & Co. omitted and made untrue statements of
material facts, committed unfair or deceptive trade practices,
common law fraud, and negligent misrepresentation, and violated
the laws of the Commonwealth of Massachusetts and the State of
Washington while acting as the underwriter of
240,000,000 shares of Freddie Mac preferred stock
(Series Z) issued December 4, 2007. On
April 24, 2009, Goldman Sachs joined with defendants in the
Jacoby case discussed below and in the Mark and Kreysar cases in
filing a motion to transfer the Liberty Mutual and Jacoby cases
to the judge hearing the Mark and Kreysar cases. Freddie Mac is
not named as a defendant in this lawsuit, but the underwriters
gave notice to Freddie Mac of their intention to seek full
indemnity and contribution under the Underwriting Agreement,
including reimbursement of fees and disbursements of their legal
counsel. At present, it is not possible for us to predict the
probable outcome of the lawsuit or any potential impact on our
business, financial condition or results of operations.
Related Third Party Litigation. On
December 15, 2008, a plaintiff filed a putative class
action lawsuit in the U.S. District Court for the Southern
District of New York against certain former Freddie Mac officers
and others styled Jacoby v. Syron, Cook, Piszel, Banc of
America Securities LLC, JP Morgan
Chase & Co., and FTN Financial Markets.
The complaint, as amended on December 17, 2008, contends
that the defendants made material false and misleading
statements in connection with Freddie Macs
September 29, 2007 offering of non-cumulative,
non-convertible, perpetual fixed-rate preferred stock, and that
such statements grossly overstated Freddie Macs
capitalization and failed to disclose Freddie
Macs exposure to mortgage-related losses, poor
underwriting standards and risk management procedures. The
complaint further alleges that Syron, Cook and Piszel made
additional false statements following the offering. Freddie Mac
is not named as a defendant in this lawsuit.
On January 29, 2009, a plaintiff filed a putative class
action lawsuit in the U.S. District Court for the Southern
District of New York styled Kreysar v. Syron,
et al. As noted above, on April 30, 2009, the
Court consolidated the Mark case with the Kreysar case, and the
plaintiffs filed a consolidated class action complaint on
July 2, 2009. The consolidated complaint alleges that
former Freddie Mac officers Syron, Piszel, and Cook, certain
underwriters and Freddie Macs auditor,
PricewaterhouseCoopers LLP, violated federal securities
laws by making material false and misleading statements in
connection with an offering by Freddie Mac of $6 billion of
8.375% Fixed to Floating Rate Non-Cumulative Perpetual Preferred
Stock Series Z that commenced on November 29, 2007.
The complaint further alleges that certain defendants and others
made additional false statements following the offering. The
complaint names as defendants Syron, Piszel, Cook, Goldman,
Sachs & Co., JPMorgan Chase & Co.,
Banc of America Securities LLC, Citigroup Global
Markets Inc., Credit Suisse Securities (USA) LLC,
Deutsche Bank Securities Inc., Morgan
Stanley & Co. Incorporated, UBS
Securities LLC and PricewaterhouseCoopers LLP. Freddie
Mac is not named as a defendant in this lawsuit.
Lehman Bankruptcy. On September 15, 2008,
Lehman Brothers Holdings Inc., or Lehman, filed a
chapter 11 bankruptcy petition in the Bankruptcy Court for
the Southern District of New York. Thereafter, many of
Lehmans U.S. subsidiaries and affiliates also filed
bankruptcy petitions (collectively, the Lehman
Entities). Freddie Mac has numerous relationships with the
Lehman Entities which give rise to various claims that Freddie
Mac is pursuing against them.
NOTE 12:
INCOME TAXES
For the three months ended June 30, 2009 and 2008, we
reported an income tax benefit of $184 million and
$1.0 billion, respectively, representing effective tax
rates of (31.5)% and 55.7%, respectively. For the six months
ended June 30, 2009 and 2008, we reported an income tax
benefit of $1.1 billion and $1.5 billion,
respectively, representing effective tax rates of 11.0% and
60.0%, respectively. Our effective tax rate for the three months
and six months ended June 30, 2009 was different from the
statutory rate of 35% primarily due to the establishment of a
valuation allowance in the third quarter of 2008, for which only
those tax benefits that can be carried back pursuant to the tax
law have been recorded. As of June 30, 2008, no valuation
allowance existed and therefore, the entire tax benefit on the
pretax losses, including the additional tax benefit from the
LIHTC credits and tax-exempt interest had been recognized.
Deferred
Tax Assets, Net
Table 12.1
Deferred Tax Assets, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Adjust for
|
|
|
|
|
|
|
|
|
Adjust for
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
|
Adjusted
|
|
|
|
|
|
Valuation
|
|
|
Adjusted
|
|
|
|
Amount
|
|
|
Allowance
|
|
|
Amount
|
|
|
Amount
|
|
|
Allowance
|
|
|
Amount
|
|
|
|
(in millions)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred fees
|
|
$
|
1,981
|
|
|
$
|
(1,981
|
)
|
|
$
|
|
|
|
$
|
3,027
|
|
|
$
|
(3,027
|
)
|
|
$
|
|
|
Basis differences related to derivative instruments
|
|
|
4,137
|
|
|
|
(4,137
|
)
|
|
|
|
|
|
|
5,969
|
|
|
|
(5,969
|
)
|
|
|
|
|
Credit related items and reserve for loan losses
|
|
|
12,411
|
|
|
|
(12,411
|
)
|
|
|
|
|
|
|
7,478
|
|
|
|
(7,478
|
)
|
|
|
|
|
Basis differences related to assets held for investment
|
|
|
498
|
|
|
|
(498
|
)
|
|
|
|
|
|
|
5,504
|
|
|
|
(5,504
|
)
|
|
|
|
|
Unrealized (gains) losses related to available-for-sale
securities
|
|
|
16,894
|
|
|
|
|
|
|
|
16,894
|
|
|
|
15,351
|
|
|
|
|
|
|
|
15,351
|
|
LIHTC and AMT credit carryforward
|
|
|
1,287
|
|
|
|
(1,287
|
)
|
|
|
|
|
|
|
526
|
|
|
|
(526
|
)
|
|
|
|
|
Other items, net
|
|
|
152
|
|
|
|
(152
|
)
|
|
|
|
|
|
|
186
|
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
37,360
|
|
|
|
(20,466
|
)
|
|
|
16,894
|
|
|
|
38,041
|
|
|
|
(22,690
|
)
|
|
|
15,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis differences related to debt
|
|
|
(317
|
)
|
|
|
317
|
|
|
|
|
|
|
|
(314
|
)
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax (liability)
|
|
|
(317
|
)
|
|
|
317
|
|
|
|
|
|
|
|
(314
|
)
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
37,043
|
|
|
$
|
(20,149
|
)
|
|
$
|
16,894
|
|
|
$
|
37,727
|
|
|
$
|
(22,376
|
)
|
|
$
|
15,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We use the asset and liability method of accounting for income
taxes pursuant to SFAS 109. Under this method, deferred tax
assets and liabilities are recognized based upon the expected
future tax consequences of existing temporary differences
between the financial reporting and the tax reporting basis of
assets and liabilities using enacted statutory tax rates.
Valuation allowances are recorded to reduce deferred tax assets,
net when it is more likely than not that a tax benefit will not
be realized. The realization of our deferred tax assets, net is
dependent upon the generation of sufficient taxable income or
upon our conclusion that we have the intent and ability to hold
our available-for-sale
securities to the recovery of any temporary unrealized losses.
On a quarterly basis, we determine whether a valuation allowance
is necessary and whether the allowance should be adjusted. In so
doing, we consider all evidence currently available, both
positive and negative, in determining whether, based on the
weight of that evidence, the deferred tax assets, net will be
realized and whether a valuation allowance is necessary.
Recent events, including those described in NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Conservatorship and Related Developments, in our 2008
Annual Report fundamentally affect our control, management and
operations and are likely to affect our future financial
condition and results of operations. These events have resulted
in a variety of uncertainties regarding our future operations,
our business objectives and strategies and our future
profitability, the impact of which cannot be reliably forecasted
at this time. In evaluating our need for a valuation allowance,
we considered all of the events and evidence discussed above, in
addition to: (1) our three-year cumulative loss position;
(2) our carryback and carryforward availability;
(3) our difficulty in predicting unsettled circumstances;
and (4) our conclusion that we have the intent and ability
to hold our available-for-sale securities to the recovery of any
temporary unrealized losses.
Subsequent to the date of our entry into conservatorship, we
determined that it was more likely than not that a portion of
our deferred tax assets, net would not be realized due to our
inability to generate sufficient taxable income. After
evaluating all available evidence, including the events and
developments related to our conservatorship, other recent events
in the market, and related difficulty in forecasting future
profit levels, we reached a similar conclusion in the second
quarter of 2009. We reduced our valuation allowance by
$2.2 billion during the first half of 2009. This was as a
result of recording an additional valuation allowance of
$3.1 billion in the first quarter offset by a
$5.3 billion reduction in the second quarter, which
primarily represents the release of the valuation allowance
previously recorded against the deferred tax asset that is no
longer required upon adoption of
FSP FAS 115-2
and
FAS 124-2.
See NOTE 4: INVESTMENTS IN SECURITIES for
additional information on our adoption of this FSP. Our total
valuation allowance as of June 30, 2009 was
$20.1 billion. As of June 30, 2009, we had a deferred
tax asset, net of $16.9 billion representing the tax effect
of unrealized losses on our
available-for-sale
securities, which management believes is more likely than not of
being realized because of our conclusion that we have the intent
and ability to hold our available-for-sale securities until any
temporary unrealized losses are recovered.
We are projecting a taxable loss for full year 2009. This loss
is expected to be carried back to 2007. As a result of this
carryback, low-income housing tax credits previously recognized
in 2008 and 2007 in the amount of $164 million and
$258 million, respectively, are estimated to be carried
forward to future periods. In addition, we do not expect to be
able to use the LIHTC tax credits of $299 million generated
in 2009. A full valuation allowance was established against
these deferred tax assets based on our June 30, 2009
deferred tax asset valuation allowance assessment.
Unrecognized
Tax Benefits
At June 30, 2009, we had total unrecognized tax benefits,
exclusive of interest, of $629 million. Included in the
$629 million are $6 million of unrecognized tax
benefits that, if recognized, would favorably affect our
effective tax rate. The remaining $623 million of
unrecognized tax benefits at June 30, 2009 related to tax
positions for which ultimate deductibility is highly certain,
but for which there is uncertainty as to the timing of such
deductibility.
We continue to recognize interest and penalties, if any, in
income tax expense. Total accrued interest receivable, changed
from $245 million at December 31, 2008 to
$246 million at June 30, 2009. Amounts included in
total accrued interest relate to: (a) unrecognized tax
benefits; (b) pending claims with the IRS for open tax
years; (c) the tax benefit related to the settlement in
U.S. Tax Court discussed below; and (d) the impact of
payments made to the IRS in prior years in anticipation of
potential tax deficiencies. At June 30, 2009, our accrued
contingent interest receivable balance of $246 million was
net of approximately $232 million of accrued interest
payable that was allocable to unrecognized tax benefits. We have
no amount accrued for penalties. Accrued interest receivable is
presented pre-tax in this
Form 10-Q
to conform to the current presentation.
The period for assessment under the statute of limitations for
federal income tax purposes is open on corporate income tax
returns filed for years 1985 to 2007. Tax years 1985 to 1997 are
before the U.S. Tax Court. In June 2008, we reached
agreement with the IRS on a settlement regarding the tax
treatment of the customer relationship intangible asset
recognized upon our transition from non-taxable to taxable
status in 1985. As a result of this agreement, we re-measured
the tax benefit from this uncertain tax position and recognized
$171 million of tax and interest in the second quarter of
2008. This settlement, which was approved by the Joint Committee
on Taxation of Congress, resolves the last matter to be decided
by the U.S. Tax Court in the current litigation. Those
matters not resolved by settlement agreement in the case,
including the favorable financing intangible asset decided
favorably by the U.S. Tax Court in 2006, are subject to appeal.
The IRS has completed its examinations of years 1998 to 2005 and
has begun examining years 2006 and 2007. The principal matter in
controversy as the result of the 1998 to 2005 examinations
involves questions of timing and potential penalties regarding
our tax accounting method for certain hedging transactions. It
is reasonably possible that the hedge accounting method issue
will be resolved within the next 12 months. Management
believes adequate reserves have been provided for settlement on
reasonable terms. We do not anticipate that significant changes
in the gross balance of unrecognized tax benefits will occur
within the next 12 months that could have a material impact
on income tax expense or benefit in the period the issue is
resolved.
NOTE 13:
EMPLOYEE BENEFITS
We maintain a tax-qualified, funded defined benefit pension
plan, or Pension Plan, covering substantially all of our
employees. We also maintain a nonqualified, unfunded defined
benefit pension plan for our officers as part of our
Supplemental Executive Retirement Plan. We maintain a defined
benefit postretirement health care plan, or Retiree Health Plan,
that generally provides postretirement health care benefits on a
contributory basis to retired employees age 55 or older who
rendered at least 10 years of service (five years of
service if the employee was eligible to retire prior to
March 1, 2007) and who, upon separation or
termination, immediately elected to commence benefits under the
Pension Plan in the form of an annuity. Our Retiree Health Plan
is currently unfunded and the benefits are paid from our general
assets. This plan and our defined benefit pension plans are
collectively referred to as the defined benefit plans.
Table 13.1 presents the components of the net periodic benefit
cost with respect to pension and postretirement health care
benefits for the three and six months ended June 30, 2009
and 2008. Net periodic benefit cost is included in salaries and
employee benefits in our consolidated statements of operations.
Table 13.1
Net Periodic Benefit Cost Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
8
|
|
|
$
|
9
|
|
|
$
|
16
|
|
|
$
|
17
|
|
Interest cost on benefit obligation
|
|
|
8
|
|
|
|
9
|
|
|
|
17
|
|
|
|
17
|
|
Expected (return) loss on plan assets
|
|
|
(8
|
)
|
|
|
(11
|
)
|
|
|
(16
|
)
|
|
|
(21
|
)
|
Recognized net actuarial (gain) loss
|
|
|
3
|
|
|
|
|
|
|
|
6
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
11
|
|
|
$
|
7
|
|
|
$
|
23
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Health Care Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
4
|
|
Interest cost on benefit obligation
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows Related to Defined Benefit Plans
Our general practice is to contribute to our Pension Plan an
amount at least equal to the minimum required contribution, if
any, but no more than the maximum amount deductible for federal
income tax purposes each year. We do not expect to have a
required minimum contribution in 2009. We presently anticipate
making a 2009 contribution equal to the amount required to fully
fund the Pension Plans projected benefit obligation as of
December 31, 2009. This contribution is expected to be
between $60 million and $80 million based upon certain
economic and business assumptions. These assumptions include,
but are not limited to, financial market performance and
interest rate changes. Changes in these assumptions during the
year ended December 31, 2009 could significantly impact the
actual amount contributed.
NOTE 14:
FAIR VALUE DISCLOSURES
Fair
Value Hierarchy
Effective January 1, 2008, we adopted SFAS 157, which
established a fair value hierarchy that prioritized the inputs
to valuation techniques used to measure fair value. As required
by SFAS 157, assets and liabilities are classified in their
entirety within the fair value hierarchy based on the lowest
level input that is significant to the fair value measurement.
Table 14.1 sets forth by level within the fair value
hierarchy assets and liabilities measured and reported at fair
value on a recurring basis in our consolidated balance sheets.
Table 14.1
Assets and Liabilities Measured at Fair Value on a Recurring
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at June 30, 2009
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
Netting
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Adjustment(1)
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
|
|
|
$
|
231,509
|
|
|
$
|
22,080
|
|
|
$
|
|
|
|
$
|
253,589
|
|
Subprime
|
|
|
|
|
|
|
|
|
|
|
39,935
|
|
|
|
|
|
|
|
39,935
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
49,208
|
|
|
|
|
|
|
|
49,208
|
|
MTA Option ARM
|
|
|
|
|
|
|
|
|
|
|
6,536
|
|
|
|
|
|
|
|
6,536
|
|
Alt-A and other
|
|
|
|
|
|
|
18
|
|
|
|
12,329
|
|
|
|
|
|
|
|
12,347
|
|
Fannie Mae
|
|
|
|
|
|
|
39,658
|
|
|
|
369
|
|
|
|
|
|
|
|
40,027
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
11,617
|
|
|
|
|
|
|
|
11,617
|
|
Manufactured housing
|
|
|
|
|
|
|
|
|
|
|
809
|
|
|
|
|
|
|
|
809
|
|
Ginnie Mae
|
|
|
|
|
|
|
350
|
|
|
|
25
|
|
|
|
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
|
|
|
|
271,535
|
|
|
|
142,908
|
|
|
|
|
|
|
|
414,443
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
|
|
|
|
6,248
|
|
|
|
|
|
|
|
|
|
|
|
6,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities, at fair value
|
|
|
|
|
|
|
277,783
|
|
|
|
142,908
|
|
|
|
|
|
|
|
420,691
|
|
Trading, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
|
|
|
|
200,190
|
|
|
|
2,172
|
|
|
|
|
|
|
|
202,362
|
|
Fannie Mae
|
|
|
|
|
|
|
35,030
|
|
|
|
1,116
|
|
|
|
|
|
|
|
36,146
|
|
Ginnie Mae
|
|
|
|
|
|
|
167
|
|
|
|
26
|
|
|
|
|
|
|
|
193
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
|
|
|
|
235,387
|
|
|
|
3,344
|
|
|
|
|
|
|
|
238,731
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
540
|
|
Treasury Bills
|
|
|
11,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities
|
|
|
11,395
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
11,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities, at fair value
|
|
|
11,395
|
|
|
|
235,927
|
|
|
|
3,344
|
|
|
|
|
|
|
|
250,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
|
11,395
|
|
|
|
513,710
|
|
|
|
146,252
|
|
|
|
|
|
|
|
671,357
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for-sale, at fair value
|
|
|
|
|
|
|
|
|
|
|
223
|
|
|
|
|
|
|
|
223
|
|
Derivative assets, net
|
|
|
45
|
|
|
|
24,740
|
|
|
|
122
|
|
|
|
(24,588
|
)
|
|
|
319
|
|
Guarantee asset, at fair value
|
|
|
|
|
|
|
|
|
|
|
7,576
|
|
|
|
|
|
|
|
7,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets carried at fair value on a recurring basis
|
|
$
|
11,440
|
|
|
$
|
538,450
|
|
|
$
|
154,173
|
|
|
$
|
(24,588
|
)
|
|
$
|
679,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities denominated in foreign currencies
|
|
$
|
|
|
|
$
|
7,497
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,497
|
|
Derivative liabilities, net
|
|
|
54
|
|
|
|
25,897
|
|
|
|
769
|
|
|
|
(25,835
|
)
|
|
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities carried at fair value on a recurring
basis
|
|
$
|
54
|
|
|
$
|
33,394
|
|
|
$
|
769
|
|
|
$
|
(25,835
|
)
|
|
$
|
8,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2008
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
Netting
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Adjustment(1)
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
$
|
|
|
|
$
|
344,364
|
|
|
$
|
105,740
|
|
|
$
|
|
|
|
$
|
450,104
|
|
Non-mortgage-related securities
|
|
|
|
|
|
|
8,794
|
|
|
|
|
|
|
|
|
|
|
|
8,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal available-for-sale, at fair value
|
|
|
|
|
|
|
353,158
|
|
|
|
105,740
|
|
|
|
|
|
|
|
458,898
|
|
Trading, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
|
|
|
|
|
188,161
|
|
|
|
2,200
|
|
|
|
|
|
|
|
190,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
|
|
|
|
|
541,319
|
|
|
|
107,940
|
|
|
|
|
|
|
|
649,259
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for-sale, at fair value
|
|
|
|
|
|
|
|
|
|
|
401
|
|
|
|
|
|
|
|
401
|
|
Derivative assets, net
|
|
|
233
|
|
|
|
49,567
|
|
|
|
137
|
|
|
|
(48,982
|
)
|
|
|
955
|
|
Guarantee asset, at fair value
|
|
|
|
|
|
|
|
|
|
|
4,847
|
|
|
|
|
|
|
|
4,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets carried at fair value on a recurring basis
|
|
$
|
233
|
|
|
$
|
590,886
|
|
|
$
|
113,325
|
|
|
$
|
(48,982
|
)
|
|
$
|
655,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities denominated in foreign currencies
|
|
$
|
|
|
|
$
|
13,378
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,378
|
|
Derivative liabilities, net
|
|
|
1,150
|
|
|
|
52,577
|
|
|
|
37
|
|
|
|
(51,487
|
)
|
|
|
2,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities carried at fair value on a recurring
basis
|
|
$
|
1,150
|
|
|
$
|
65,955
|
|
|
$
|
37
|
|
|
$
|
(51,487
|
)
|
|
$
|
15,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents counterparty netting, cash collateral netting, net
trade/settle receivable or payable and net derivative interest
receivable or payable. The net cash collateral posted and net
trade/settle payable were $1.5 billion and
$24 million, respectively, at June 30, 2009. The net
cash collateral posted and net trade/settle payable were
$1.5 billion and $ million, respectively, at
December 31, 2008. The net interest receivable (payable) of
derivative assets and derivative liabilities was approximately
$(186) million and $1.1 billion at June 30, 2009
and December 31, 2008, respectively, which was mainly
related to interest rate swaps that we have entered into.
|
Fair
Value Measurements (Level 3)
Level 3 measurements consist of assets and liabilities that
are supported by little or no market activity where observable
inputs are not available. The fair value of these assets and
liabilities is measured using significant inputs that are
considered unobservable. Unobservable inputs reflect assumptions
based on the best information available under the circumstances.
We use valuation techniques that maximize the use of observable
inputs, where available, and minimize the use of unobservable
inputs.
Our Level 3 items mainly consist of non-agency residential
mortgage-related securities, CMBS, certain agency
mortgage-related securities and our guarantee asset. During the
six months ended June 30, 2009, the market for CMBS and
during the six months ended June 30, 2008 the market for
securities backed by subprime, MTA Option ARM,
Alt-A and
other loans became significantly less liquid, resulting in lower
transaction volumes, wider credit spreads and less transparency.
We transferred our holdings of these securities into the
Level 3 category as inputs that were significant to their
valuation became limited or unavailable. We concluded that the
prices on these securities received from pricing services and
dealers were reflective of significant unobservable inputs. Our
guarantee asset is valued either through obtaining dealer quotes
on similar securities or through an expected cash flow approach.
Because of the broad range of discounts for liquidity applied by
dealers to these similar securities and because the expected
cash flow valuation approach uses significant unobservable
inputs, we classified the guarantee asset as Level 3. See
NOTE 3: RETAINED INTERESTS IN MORTGAGE-RELATED
SECURITIZATIONS in our 2008 Annual Report for more
information about the valuation of our guarantee asset.
Table 14.2 provides a reconciliation of the beginning and
ending balances for assets and liabilities measured at fair
value using significant unobservable inputs (Level 3).
Table 14.2
Fair Value Measurements of Assets and Liabilities Using
Significant Unobservable Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009
|
|
|
|
|
|
|
Realized and unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
issuances,
|
|
|
Net transfers
|
|
|
|
|
|
Unrealized
|
|
|
|
Balance,
|
|
|
Included in
|
|
|
comprehensive
|
|
|
|
|
|
sales and
|
|
|
in and/or out
|
|
|
Balance,
|
|
|
gains (losses)
|
|
|
|
March 31, 2009
|
|
|
earnings(1)(2)(3)(4)
|
|
|
income(1)(2)
|
|
|
Total
|
|
|
settlements, net
|
|
|
of Level
3(5)
|
|
|
June 30, 2009
|
|
|
still
held(6)
|
|
|
|
(in millions)
|
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
17,418
|
|
|
$
|
(2
|
)
|
|
$
|
552
|
|
|
$
|
550
|
|
|
$
|
4,045
|
|
|
$
|
67
|
|
|
$
|
22,080
|
|
|
$
|
|
|
Subprime
|
|
|
46,175
|
|
|
|
(1,291
|
)
|
|
|
(1,545
|
)
|
|
|
(2,836
|
)
|
|
|
(3,404
|
)
|
|
|
|
|
|
|
39,935
|
|
|
|
(1,291
|
)
|
Commercial mortgage-backed securities
|
|
|
46,684
|
|
|
|
|
|
|
|
3,251
|
|
|
|
3,251
|
|
|
|
(727
|
)
|
|
|
|
|
|
|
49,208
|
|
|
|
|
|
MTA Option ARM
|
|
|
6,557
|
|
|
|
(470
|
)
|
|
|
921
|
|
|
|
451
|
|
|
|
(472
|
)
|
|
|
|
|
|
|
6,536
|
|
|
|
(470
|
)
|
Alt-A and other
|
|
|
11,877
|
|
|
|
(396
|
)
|
|
|
1,828
|
|
|
|
1,432
|
|
|
|
(980
|
)
|
|
|
|
|
|
|
12,329
|
|
|
|
(396
|
)
|
Fannie Mae
|
|
|
364
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
|
|
(9
|
)
|
|
|
10
|
|
|
|
369
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
11,684
|
|
|
|
1
|
|
|
|
180
|
|
|
|
181
|
|
|
|
(248
|
)
|
|
|
|
|
|
|
11,617
|
|
|
|
|
|
Manufactured housing
|
|
|
720
|
|
|
|
(45
|
)
|
|
|
164
|
|
|
|
119
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
809
|
|
|
|
(45
|
)
|
Ginnie Mae
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
7
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
141,498
|
|
|
|
(2,203
|
)
|
|
|
5,355
|
|
|
|
3,152
|
|
|
|
(1,826
|
)
|
|
|
84
|
|
|
|
142,908
|
|
|
|
(2,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities, at fair value
|
|
|
141,498
|
|
|
|
(2,203
|
)
|
|
|
5,355
|
|
|
|
3,152
|
|
|
|
(1,826
|
)
|
|
|
84
|
|
|
|
142,908
|
|
|
|
(2,202
|
)
|
Trading, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
1,636
|
|
|
|
447
|
|
|
|
|
|
|
|
447
|
|
|
|
40
|
|
|
|
49
|
|
|
|
2,172
|
|
|
|
447
|
|
Fannie Mae
|
|
|
638
|
|
|
|
166
|
|
|
|
|
|
|
|
166
|
|
|
|
312
|
|
|
|
|
|
|
|
1,116
|
|
|
|
166
|
|
Ginnie Mae
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
26
|
|
|
|
|
|
Other
|
|
|
29
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities, at fair value
|
|
|
2,331
|
|
|
|
614
|
|
|
|
|
|
|
|
614
|
|
|
|
350
|
|
|
|
49
|
|
|
|
3,344
|
|
|
|
614
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for-sale, at fair value
|
|
|
636
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
(403
|
)
|
|
|
|
|
|
|
223
|
|
|
|
(20
|
)
|
Guarantee
asset(7)
|
|
|
5,026
|
|
|
|
2,297
|
|
|
|
|
|
|
|
2,297
|
|
|
|
253
|
|
|
|
|
|
|
|
7,576
|
|
|
|
2,297
|
|
Net
derivatives(8)
|
|
|
231
|
|
|
|
(850
|
)
|
|
|
|
|
|
|
(850
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
(647
|
)
|
|
|
(766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009
|
|
|
|
|
|
|
Realized and unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
issuances,
|
|
|
Net transfers
|
|
|
|
|
|
Unrealized
|
|
|
|
Balance,
|
|
|
Included in
|
|
|
comprehensive
|
|
|
|
|
|
sales and
|
|
|
in and/or out
|
|
|
Balance,
|
|
|
gains (losses)
|
|
|
|
January 1, 2009
|
|
|
earnings(1)(2)(3)(4)
|
|
|
income(1)(2)
|
|
|
Total
|
|
|
settlements, net
|
|
|
of Level
3(5)
|
|
|
June 30, 2009
|
|
|
still
held(6)
|
|
|
|
(in millions)
|
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
18,320
|
|
|
$
|
(2
|
)
|
|
$
|
615
|
|
|
$
|
613
|
|
|
$
|
3,363
|
|
|
$
|
(216
|
)
|
|
$
|
22,080
|
|
|
$
|
|
|
Subprime
|
|
|
52,266
|
|
|
|
(5,387
|
)
|
|
|
(4,850
|
)
|
|
|
(10,237
|
)
|
|
|
(2,094
|
)
|
|
|
|
|
|
|
39,935
|
|
|
|
(5,387
|
)
|
Commercial mortgage-backed securities
|
|
|
2,861
|
|
|
|
|
|
|
|
946
|
|
|
|
946
|
|
|
|
(1,238
|
)
|
|
|
46,639
|
|
|
|
49,208
|
|
|
|
|
|
MTA Option ARM
|
|
|
7,378
|
|
|
|
(1,487
|
)
|
|
|
(3,760
|
)
|
|
|
(5,247
|
)
|
|
|
4,405
|
|
|
|
|
|
|
|
6,536
|
|
|
|
(1,487
|
)
|
Alt-A and other
|
|
|
13,236
|
|
|
|
(2,239
|
)
|
|
|
(1,467
|
)
|
|
|
(3,706
|
)
|
|
|
2,798
|
|
|
|
1
|
|
|
|
12,329
|
|
|
|
(2,239
|
)
|
Fannie Mae
|
|
|
396
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
(16
|
)
|
|
|
(14
|
)
|
|
|
369
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
10,528
|
|
|
|
1
|
|
|
|
1,464
|
|
|
|
1,465
|
|
|
|
(376
|
)
|
|
|
|
|
|
|
11,617
|
|
|
|
|
|
Manufactured housing
|
|
|
743
|
|
|
|
(45
|
)
|
|
|
(91
|
)
|
|
|
(136
|
)
|
|
|
202
|
|
|
|
|
|
|
|
809
|
|
|
|
(45
|
)
|
Ginnie Mae
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
16
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
105,740
|
|
|
|
(9,159
|
)
|
|
|
(7,140
|
)
|
|
|
(16,299
|
)
|
|
|
7,041
|
|
|
|
46,426
|
|
|
|
142,908
|
|
|
|
(9,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities, at fair value
|
|
|
105,740
|
|
|
|
(9,159
|
)
|
|
|
(7,140
|
)
|
|
|
(16,299
|
)
|
|
|
7,041
|
|
|
|
46,426
|
|
|
|
142,908
|
|
|
|
(9,158
|
)
|
Trading, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
1,575
|
|
|
|
538
|
|
|
|
|
|
|
|
538
|
|
|
|
(81
|
)
|
|
|
140
|
|
|
|
2,172
|
|
|
|
538
|
|
Fannie Mae
|
|
|
582
|
|
|
|
194
|
|
|
|
|
|
|
|
194
|
|
|
|
262
|
|
|
|
78
|
|
|
|
1,116
|
|
|
|
194
|
|
Ginnie Mae
|
|
|
14
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
13
|
|
|
|
26
|
|
|
|
1
|
|
Other
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities, at fair value
|
|
|
2,200
|
|
|
|
733
|
|
|
|
|
|
|
|
733
|
|
|
|
177
|
|
|
|
234
|
|
|
|
3,344
|
|
|
|
733
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for-sale, at fair value
|
|
|
401
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
(28
|
)
|
|
|
(150
|
)
|
|
|
|
|
|
|
223
|
|
|
|
(20
|
)
|
Guarantee
asset(7)
|
|
|
4,847
|
|
|
|
2,625
|
|
|
|
|
|
|
|
2,625
|
|
|
|
104
|
|
|
|
|
|
|
|
7,576
|
|
|
|
2,625
|
|
Net
derivatives(8)
|
|
|
100
|
|
|
|
(681
|
)
|
|
|
|
|
|
|
(681
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
(647
|
)
|
|
|
(631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008
|
|
|
|
|
|
|
Realized and unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
issuances,
|
|
|
Net transfers
|
|
|
|
|
|
Unrealized
|
|
|
|
Balance,
|
|
|
Included in
|
|
|
comprehensive
|
|
|
|
|
|
sales and
|
|
|
in and/or out
|
|
|
Balance,
|
|
|
gains (losses)
|
|
|
|
March 31, 2008
|
|
|
earnings(1)(2)(3)
|
|
|
income(1)(2)
|
|
|
Total
|
|
|
settlements, net
|
|
|
of Level
3(5)
|
|
|
June 30, 2008
|
|
|
still
held(6)
|
|
|
|
(in millions)
|
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
$
|
144,199
|
|
|
$
|
(786
|
)
|
|
$
|
1,801
|
|
|
$
|
1,015
|
|
|
$
|
(10,737
|
)
|
|
$
|
260
|
|
|
$
|
134,737
|
|
|
$
|
(826
|
)
|
Non-mortgage-related securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities, at fair value
|
|
|
144,199
|
|
|
|
(786
|
)
|
|
|
1,801
|
|
|
|
1,015
|
|
|
|
(10,738
|
)
|
|
|
265
|
|
|
|
134,741
|
|
|
|
(826
|
)
|
Trading, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
|
3,370
|
|
|
|
422
|
|
|
|
|
|
|
|
422
|
|
|
|
147
|
|
|
|
(130
|
)
|
|
|
3,809
|
|
|
|
423
|
|
Guarantee
asset(7)
|
|
|
9,134
|
|
|
|
1,591
|
|
|
|
|
|
|
|
1,591
|
|
|
|
294
|
|
|
|
|
|
|
|
11,019
|
|
|
|
1,591
|
|
Net
derivatives(8)
|
|
|
|
|
|
|
(232
|
)
|
|
|
(2
|
)
|
|
|
(234
|
)
|
|
|
27
|
|
|
|
|
|
|
|
(207
|
)
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
|
|
|
|
|
|
Purchases,
|
|
|
Net transfers
|
|
|
|
|
|
Unrealized
|
|
|
|
Balance,
|
|
|
|
|
|
Balance,
|
|
|
|
|
|
in other
|
|
|
|
|
|
issuances,
|
|
|
in and/or
|
|
|
|
|
|
gains
|
|
|
|
December 31,
|
|
|
Impact of
|
|
|
January 1,
|
|
|
Included in
|
|
|
comprehensive
|
|
|
|
|
|
sales and
|
|
|
out of
|
|
|
Balance,
|
|
|
(losses)
|
|
|
|
2007
|
|
|
SFAS 159
|
|
|
2008
|
|
|
earnings(1)(2)(3)
|
|
|
income(1)(2)
|
|
|
Total
|
|
|
settlements, net
|
|
|
Level 3(5)
|
|
|
June 30, 2008
|
|
|
still
held(6)
|
|
|
|
(in millions)
|
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
$
|
19,859
|
|
|
$
|
(443
|
)
|
|
$
|
19,416
|
|
|
$
|
(837
|
)
|
|
$
|
(16,152
|
)
|
|
$
|
(16,989
|
)
|
|
$
|
(21,717
|
)
|
|
$
|
154,027
|
|
|
$
|
134,737
|
|
|
$
|
(897
|
)
|
Non-mortgage-related securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities, at fair value
|
|
|
19,859
|
|
|
|
(443
|
)
|
|
|
19,416
|
|
|
|
(837
|
)
|
|
|
(16,152
|
)
|
|
|
(16,989
|
)
|
|
|
(21,718
|
)
|
|
|
154,032
|
|
|
|
134,741
|
|
|
|
(897
|
)
|
Trading, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
|
2,710
|
|
|
|
443
|
|
|
|
3,153
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
(22
|
)
|
|
|
772
|
|
|
|
(94
|
)
|
|
|
3,809
|
|
|
|
(33
|
)
|
Guarantee
asset(7)
|
|
|
9,591
|
|
|
|
|
|
|
|
9,591
|
|
|
|
671
|
|
|
|
|
|
|
|
671
|
|
|
|
757
|
|
|
|
|
|
|
|
11,019
|
|
|
|
671
|
|
Net
derivatives(8)
|
|
|
(216
|
)
|
|
|
|
|
|
|
(216
|
)
|
|
|
25
|
|
|
|
(1
|
)
|
|
|
24
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
(207
|
)
|
|
|
11
|
|
|
|
(1)
|
Changes in fair value for available-for-sale investments are
recorded in AOCI, net of taxes while gains and losses from sales
and credit-related impairments are recorded in gains (losses) on
investment activity on our consolidated statements of
operations. For mortgage-related securities classified as
trading, the realized and unrealized gains (losses) are recorded
in gains (losses) on investment activity on our consolidated
statements of operations.
|
(2)
|
Changes in fair value of derivatives are recorded in derivative
gains (losses) on our consolidated statements of operations for
those not designated as accounting hedges, and AOCI, net of
taxes for those accounted for as a cash flow hedge to the extent
the hedge is effective. See NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES in our 2008 Annual Report
for additional information.
|
(3)
|
Changes in fair value of the guarantee asset are recorded in
gains (losses) on guarantee asset on our consolidated statements
of operations. See NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES in our 2008 Annual Report for
additional information.
|
(4)
|
For held-for-sale mortgage loans with fair value option elected,
gains (losses) on fair value changes and sale of mortgage loans
are recorded in gains (losses) on investment activities on our
consolidated statements of operations.
|
(5)
|
Transfer in
and/or out
of Level 3 during the period is disclosed as if the
transfer occurred at the beginning of the period.
|
(6)
|
Represents the amount of total gains or losses for the period,
included in earnings, attributable to the change in unrealized
gains (losses) related to assets and liabilities classified as
Level 3 that are still held at June 30, 2009 and 2008,
respectively. Included in these amounts are credit-related
other-than-temporary impairments recorded on available-for-sale
securities.
|
(7)
|
We estimate that all amounts recorded for unrealized gains and
losses on our guarantee asset relate to those amounts still in
position. Cash received on our guarantee asset is presented as
settlements in the table. The amounts reflected as included in
earnings represent the periodic mark-to-fair value of our
guarantee asset.
|
(8)
|
Net derivatives include derivative assets and derivative
liabilities prior to counterparty netting, cash collateral
netting, net trade/settle receivable or payable and net
derivative interest receivable or payable.
|
Nonrecurring
Fair Value Changes
Certain assets are measured at fair value on our consolidated
balance sheets only if certain conditions exist as of the
balance sheet date. We consider the fair value measurement
related to these assets to be nonrecurring. These assets include
single-family held-for-sale mortgage loans, REO net, as well as
impaired held-for-investment multifamily mortgage loans. These
assets are not measured at fair value on an ongoing basis but
are subject to fair value adjustments in certain circumstances.
These adjustments to fair value usually result from the
application of lower-of-cost-or-fair-value accounting or the
write-down of individual assets to current fair value amounts
due to impairments.
For a discussion related to our fair value measurement of
single-family held-for-sale mortgage loans see Valuation
Methods and Assumptions Subject to Fair Value
Hierarchy Mortgage Loans,
Held-for-Sale. Since the fair values of these mortgage
loans are derived from observable prices with adjustments that
may be significant, they are classified as Level 3 under
the fair value hierarchy.
The fair value of multifamily held-for-investment mortgage loans
is generally based on market prices obtained from a third-party
pricing service provider for similar mortgages, adjusted for
differences in contractual terms. However, given the relative
illiquidity in the marketplace for these loans, and differences
in contractual terms, we classified these loans as Level 3
in the fair value hierarchy.
REO is subsequently carried at the lower of its carrying amount
or fair value less cost to sell. The subsequent fair value less
cost to sell is an estimated value based on relevant historical
factors, which are considered to be unobservable inputs. As a
result, REO is classified as Level 3 under the fair value
hierarchy.
Table 14.3 presents assets measured and reported at fair
value on a non-recurring basis in our consolidated balance
sheets by level within the fair value hierarchy at June 30,
2009 and December 31, 2008, respectively.
Table 14.3
Assets Measured at Fair Value on a Non-Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at June 30, 2009
|
|
|
Fair Value at December 31, 2008
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets measured at fair value on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for-investment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
142
|
|
|
$
|
142
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
72
|
|
|
$
|
72
|
|
Held-for-sale
|
|
|
|
|
|
|
|
|
|
|
852
|
|
|
|
852
|
|
|
|
|
|
|
|
|
|
|
|
1,022
|
|
|
|
1,022
|
|
REO,
net(2)
|
|
|
|
|
|
|
|
|
|
|
2,328
|
|
|
|
2,328
|
|
|
|
|
|
|
|
|
|
|
|
2,029
|
|
|
|
2,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value on a non-recurring
basis
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,322
|
|
|
$
|
3,322
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,123
|
|
|
$
|
3,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains (Losses)
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,(3)
|
|
|
June 30,(3)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Assets measured at fair value on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for-investment
|
|
$
|
(25
|
)
|
|
$
|
(2
|
)
|
|
$
|
(39
|
)
|
|
$
|
(4
|
)
|
Held-for-sale
|
|
|
(34
|
)
|
|
|
(3
|
)
|
|
|
(50
|
)
|
|
|
(3
|
)
|
REO,
net(2)
|
|
|
275
|
|
|
|
(117
|
)
|
|
|
243
|
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses)
|
|
$
|
216
|
|
|
$
|
(122
|
)
|
|
$
|
154
|
|
|
$
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represent carrying value and related write-downs of loans for
which adjustments are based on the fair value amounts. These
loans include held-for-sale mortgage loans where the fair value
is below cost and impaired multifamily mortgage loans, which are
classified as held-for-investment and have a related valuation
allowance.
|
(2)
|
Represents the fair value and related losses of foreclosed
properties that were measured at fair value subsequent to their
initial classification as REO, net. The carrying amount of REO,
net was written down to fair value of $2.3 billion, less
cost to sell of $174 million (or approximately
$2.1 billion) at June 30, 2009. The carrying amount of
REO, net was written down to fair value of $2.0 billion,
less cost to sell of $169 million (or approximately
$1.8 billion) at December 31, 2008.
|
(3)
|
Represents the total gains (losses) recorded on items measured
at fair value on a non-recurring basis as of June 30, 2009
and 2008, respectively.
|
Fair
Value Election
On January 1, 2008, we adopted SFAS 159, which permits
entities to choose to measure many financial instruments and
certain other items at fair value that are not required to be
measured at fair value. We elected the fair value option for
certain available-for-sale mortgage-related securities,
investments in securities classified as available-for-sale
securities and identified as in the scope of
EITF 99-20
and foreign-currency denominated debt. In addition, we elected
the fair value option for multifamily held-for-sale mortgage
loans in the third quarter of 2008.
Certain
Available-For-Sale Securities with Fair Value Option
Elected
We elected the fair value option for certain available-for-sale
securities held in our mortgage-related investments portfolio to
better reflect the natural offset these securities provide to
fair value changes recorded on our guarantee asset. We record
fair value changes on our guarantee asset through our
consolidated statements of operations. However, we historically
classified virtually all of our securities as available-for-sale
and recorded those fair value changes in AOCI. The securities
selected for the fair value option include principal only strips
and certain pass-through and Structured Securities that contain
positive duration features that provide an offset to the
negative duration associated with our guarantee asset. We will
continually evaluate new security purchases to identify the
appropriate security mix to classify as trading to match the
changing duration features of our guarantee asset and the
securities that provide offset.
For available-for-sale securities identified as within the scope
of
EITF 99-20,
we elected the fair value option to better reflect the valuation
changes that occur subsequent to impairment write-downs recorded
on these instruments. Under
EITF 99-20
for available-for-sale securities, when an impairment is
considered other-than-temporary, the impairment amount is
recorded in our consolidated statements of operations and
subsequently accreted back through interest income as long as
the contractual cash flows occur. Any subsequent periodic
increases in the value of the security are recognized through
AOCI. By electing the fair value option for these instruments,
we will instead reflect valuation changes through our
consolidated statements of operations in the period they occur,
including any such increases in value.
For mortgage-related securities and investments in securities
that are selected for the fair value option and subsequently
classified as trading securities, the change in fair value was
recorded in gains (losses) on investment activity in our
consolidated statements of operations. See NOTE 4:
INVESTMENTS IN SECURITIES for additional
information regarding the net unrealized gains (losses) on
trading securities, which include gains (losses) for other items
that are not selected for the fair value option. Related
interest income continues to be reported as interest income in
our consolidated statements of operations using effective
interest methods. See NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Investments in Securities
in our 2008 Annual Report for additional information about the
measurement and recognition of interest income on investments in
securities.
Foreign-Currency
Denominated Debt with Fair Value Option Elected
In the case of foreign-currency denominated debt, we have
entered into derivative transactions that effectively convert
these instruments to U.S. dollar denominated floating rate
instruments. We have historically recorded the fair value
changes on these derivatives through our consolidated statements
of operations in accordance with SFAS 133. However, the
corresponding offsetting change in fair value that occurred in
the debt as a result of changes in interest rates was not
permitted to be recorded in our consolidated statements of
operations unless we pursued hedge accounting. As a result, our
consolidated statements of operations reflected only the fair
value changes of the derivatives and not the offsetting fair
value changes in the debt resulting from changes in interest
rates. Therefore, we have elected the fair value option on the
debt instruments to better reflect the economic offset that
naturally results from the debt due to changes in interest
rates. We currently do not issue foreign-currency denominated
debt and use of the fair value option in the future for these
types of instruments will be evaluated on a
case-by-case
basis for any new issuances of this type of debt.
The changes in fair value of foreign-currency denominated debt
of $(797) million and $(330) million for the three and
six months ended June 30, 2009, respectively, were recorded
in gains (losses) on debt recorded at fair value in our
consolidated statements operations. The changes in fair value
related to fluctuations in exchange rates and interest rates
were $(520) million and $(134) million for the three
and six months ended June 30, 2009, respectively. The
remaining changes in the fair value of $(277) million and
$(196) million were attributable to changes in the
instrument-specific credit risk, respectively. We were not
significantly affected by fair value changes included in
earnings that were attributable to changes in the
instrument-specific credit risk for the three and six months
ended June 30, 2008.
The changes in fair value attributable to changes in
instrument-specific credit risk were determined by comparing the
total change in fair value of the debt to the total change in
fair value of the interest rate and foreign currency derivatives
used to hedge the debt. Any difference in the fair value change
of the debt compared to the fair value change in the derivatives
is attributed to instrument-specific credit risk.
The difference between the aggregate fair value and aggregate
unpaid principal balance for foreign-currency denominated debt
due after one year was $310 million and $445 million
at June 30, 2009 and December 31, 2008, respectively.
Related interest expense continues to be reported as interest
expense in our consolidated statements of operations. See
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Debt Securities Issued in our 2008
Annual Report for additional information about the measurement
and recognition of interest expense on debt securities issued.
Multifamily
Held-For-Sale Mortgage Loans with Fair Value Option
Elected
Beginning in the third quarter of 2008, we elected the fair
value option for multifamily mortgage loans that were purchased
through our Capital Market Execution program to reflect our
strategy in this program. Under this program, we acquire loans
that we intend to sell. While this is consistent with our
overall strategy to expand our multifamily loan holdings, it
differs from the traditional
buy-and-hold
strategy that we have used with respect to multifamily loans.
These multifamily mortgage loans were classified as
held-for-sale mortgage loans in our consolidated balance sheets
to reflect our intent to sell in the future.
We recorded fair value changes of $(71) million and
$(89) million in gains (losses) on investment activity in
our consolidated statements of operations for the three and six
months ended June 30, 2009, respectively. The fair value
changes that were attributable to changes in the
instrument-specific credit risk were $(26) million
$(43) million for the three and six months ended
June 30, 2009, respectively. The gains and losses
attributable to changes in instrument specific credit risk were
determined primarily from the changes in OAS level.
The differences between the aggregate fair value and the
aggregate unpaid principal balance for multifamily held-for-sale
loans with the fair value option elected was $21 million
and $14 million at June 30, 2009 and December 31,
2008, respectively. Related interest income continues to be
reported as interest income in our consolidated statements of
operations. See NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Mortgage Loans in our 2008
Annual Report for additional information about the measurement
and recognition of interest income on our mortgage loans.
Valuation
Methods and Assumptions Subject to Fair Value
Hierarchy
We categorize assets and liabilities in the scope of
SFAS 157 within the fair value hierarchy based on the
valuation process used to derive the fair value and our judgment
regarding the observability of the related inputs. Those
judgments are based on our knowledge and observations of the
markets relevant to the individual assets and liabilities and
may vary based on current market conditions. In applying our
judgments, we look to ranges of third party prices, transaction
volumes and discussions with dealers and pricing service vendors
to understand and assess the extent of market benchmarks
available and the judgments or modeling required in their
processes. Based on these factors, we determine whether the fair
values are observable in active markets or that the markets are
inactive.
On April 1, 2009, we adopted
FSP FAS 157-4,
which provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of
activities have significantly decreased. The adoption of this
FSP had no impact on our consolidated financial statements. See
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Change in Accounting Principles
Additional Guidance and Disclosures for Fair Value
Measurements and Change in the Impairment Model for Debt
Securities for additional information.
Our Level 1 financial instruments consist of
exchange-traded derivatives where quoted prices exist for the
exact instrument in an active market and our investment in
Treasury Bills. Our Level 2 instruments generally consist
of high credit quality agency mortgage-related securities,
non-mortgage-related asset-backed securities, interest-rate
swaps, option-based derivatives and foreign-currency denominated
debt. These instruments are generally valued through one of the
following methods: (a) dealer or pricing service values
derived by comparison to recent transactions of similar
securities and adjusting for differences in prepayment or
liquidity characteristics; or (b) modeled through an
industry standard modeling technique that relies upon observable
inputs such as discount rates and prepayment assumptions.
Our Level 3 assets primarily consist of non-agency
residential mortgage-related securities, commercial
mortgage-backed securities, certain agency mortgage-related
securities our guarantee asset and multifamily mortgage loans
held-for-sale. While the non-agency mortgage-related securities
market has become significantly less liquid, resulting in lower
transaction volumes, wider credit spreads and less transparency
in 2008 and the first half of 2009, we value our non-agency
mortgage-related securities based primarily on prices received
from third party pricing services and prices received from
dealers. The techniques used to value these instruments
generally are either (a) a comparison to transactions of
instruments with similar collateral and risk profiles; or
(b) industry standard modeling such as the discounted cash
flow model. For a description of how we determine the fair value
of our guarantee asset, see NOTE 3: RETAINED
INTERESTS IN MORTGAGE-RELATED SECURITIZATIONS in our 2008
Annual Report.
Mortgage
Loans, Held-for-Investment
Mortgage loans, held for investment include impaired multifamily
mortgage loans, which are not measured at fair value on an
ongoing basis but have been written down to fair value due to
impairment. We classify these impaired multifamily mortgage
loans as Level 3 in the fair value hierarchy as their
valuation includes significant unobservable inputs.
Mortgage
Loans, Held-for-Sale
Mortgage loans, held-for-sale represent single-family and
multifamily mortgage loans held in our mortgage-related
investments portfolio. For single-family mortgage loans, we
determine the fair value of these mortgage loans to calculate
lower-of-cost-or-fair-value adjustments for mortgages classified
as held-for-sale for GAAP purposes, therefore they are measured
at fair value on a non-recurring basis and subject to
classification under the fair value hierarchy. Beginning in the
third quarter of 2008, we elected the fair value option for
multifamily mortgage loans that were purchased through our
Capital Market Execution program to reflect our strategy in this
program. Thus, these multifamily mortgage loans are measured at
fair value on a recurring basis.
We determine the fair value of single-family mortgage loans,
excluding delinquent single-family loans purchased out of pools,
based on comparisons to actively traded mortgage-related
securities with similar characteristics. For single-family
mortgage loans, we include adjustments for yield, credit and
liquidity differences to calculate the fair value. For
single-family mortgage loans, part of the adjustments for yield,
credit and liquidity differences represents an implied
management and guarantee fee. To accomplish this, the fair value
of the single-family mortgage loans, excluding delinquent
single-family loans purchased out of pools, includes an
adjustment representing the estimated present value of the
additional cash flows on the mortgage coupon in excess of the
coupon expected on the notional mortgage-related securities. The
implied management and guarantee fee for single-family mortgage
loans is also net of the related credit and other components
inherent in our guarantee obligation. The process for estimating
the related credit and other guarantee obligation components is
described in the Guarantee Obligation section
below. The valuation methodology of single-family mortgage loans
that were never securitized was enhanced during the three months
ended June 30, 2009 to reflect delinquency status based on
non-performing loan values from dealers and
transition rates to default. Since the fair values are derived
from observable prices with adjustments that may be significant,
they are classified as Level 3 under the fair value
hierarchy.
The fair value of multifamily mortgage loans is generally based
on market prices obtained from a third-party pricing service
provider for similar mortgages, adjusted for differences in
contractual terms. However, given the relative illiquidity in
the marketplace for these loans, and differences in contractual
terms, we classified these loans as Level 3 in the fair
value hierarchy.
Investments
in Securities
Investments in securities consist of mortgage-related and
non-mortgage-related securities. Mortgage-related securities
represent pass-throughs and other mortgage-related securities
issued by us, Fannie Mae and Ginnie Mae, as well as non-agency
mortgage-related securities. They are classified as
available-for-sale or trading, and are already reflected at fair
value on our GAAP consolidated balance sheets. Effective
January 1, 2008, we elected the fair value option for
selected mortgage-related securities that were classified as
available-for-sale securities and securities identified as in
the scope of impairment analysis under
EITF 99-20
and classified as available-for-sale securities. In conjunction
with our adoption of SFAS 159 we reclassified these
securities from available-for-sale securities to trading
securities on our GAAP consolidated balance sheets and recorded
the changes in fair value during the period for such securities
to gains (losses) on investment activities as incurred.
The fair value of securities with readily available third-party
market prices is generally based on market prices obtained from
broker/dealers or reliable third-party pricing service
providers. Such fair values may be measured by using third-party
quotes for similar instruments, adjusted for differences in
contractual terms. Generally, these fair values are classified
as Level 2 in the fair value hierarchy. For other
securities, a market OAS approach based on observable market
parameters is used to estimate fair value. OAS for certain
securities are estimated by deriving the OAS for the most
closely comparable security with an available market price,
using proprietary interest-rate and prepayment models. If
necessary, our judgment is applied to estimate the impact of
differences in prepayment uncertainty or other unique cash flow
characteristics related to that particular security. Fair values
for these securities are then estimated by using the estimated
OAS as an input to the interest-rate and prepayment models and
estimating the net present value of the projected cash flows.
The remaining instruments are priced using other modeling
techniques or by using other securities as proxies. These
securities may be classified as Level 2 or 3 depending on
the significance of the inputs that are not observable. In
addition, the fair values of the retained interests in our PCs
and Structured Securities reflect that they are considered to be
of high credit quality due to our guarantee. Our exposure to
credit losses on loans underlying these securities is recorded
within our reserve for guarantee losses on Participation
Certificates. See NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES AND ESTIMATES Investments in
Securities in our 2008 Annual Report for additional
information.
Certain available-for-sale mortgage-related securities whose
fair value is determined by reference to prices obtained from
broker/dealers or pricing services were changed from a
Level 2 classification to a Level 3 classification in
both the three months ended March 31, 2009 and 2008.
Previously, these valuations relied on observed trades, as
evidenced by both activity observed in the market, and similar
prices obtained from multiple sources. In late 2007, however,
the divergence among prices obtained from these sources
increased, and became significant in the first quarter of 2008.
This, combined with the observed significant reduction in
transaction volumes and widening of credit spreads, led us to
conclude that the prices received from pricing services and
dealers were reflective of significant unobservable inputs.
During the six months ended June 30, 2009, our Level 3
assets increased because the market for non-agency CMBS
continued to experience a significant reduction in liquidity and
wider spreads, as investor demand for these assets decreased. As
a result, we observed more variability in the quotes received
from dealers and third-party pricing services. These transfers
into Level 3 were primarily within non-agency CMBS where
inputs that are significant to their valuation became limited or
unavailable. We concluded that the prices on these securities
received from pricing services and dealers were reflective of
significant unobservable inputs, as the markets have become
significantly less active, requiring higher degrees of judgment
to extrapolate fair values from limited market benchmarks.
Derivative
Assets, Net
Derivative assets largely consist of interest-rate swaps,
option-based derivatives, futures and forward purchase and sale
commitments that we account for as derivatives. The carrying
value of our derivatives on our consolidated balance sheets is
equal to their fair value, including net derivative interest
receivable or payable, trade/settle receivable or payable and is
net of cash collateral held or posted, where allowable by a
master netting agreement. Derivatives in a net unrealized gain
position are reported as derivative assets, net. Similarly,
derivatives in a net unrealized loss position are reported as
derivative liabilities, net.
The fair values of interest-rate swaps are determined by using
the appropriate yield curves to calculate and discount the
expected cash flows for both the fixed-rate and variable-rate
components of the swap contracts. Option-based derivatives,
which principally include call and put swaptions, are valued
using an option-pricing model. This model uses market interest
rates and market-implied option volatilities, where available,
to calculate the options fair value. Market-implied option
volatilities are based on information obtained from
broker/dealers. Since swaps and option-based derivatives fair
values are determined through models that use observable inputs,
these are generally classified as Level 2 under the fair
value hierarchy. To the extent we have determined that any of
the significant inputs are considered unobservable, these
amounts have been classified as Level 3 under the fair
value hierarchy.
The fair value of exchange-traded futures and options is based
on end-of-day closing prices obtained from third-party pricing
services, therefore they are classified as Level 1 under
the fair value hierarchy.
The fair value of derivative assets considers the impact of
institutional credit risk in the event that the counterparty
does not honor its payment obligation. Additionally, the fair
value of derivative liabilities considers the impact of our
institutional credit risk. Our fair value of derivatives is not
adjusted for credit risk because we obtain collateral from, or
post collateral to, most counterparties, typically within one
business day of the daily market value calculation, and
substantially all of our credit risk arises from counterparties
with investment-grade credit ratings of A or above.
Certain purchase and sale commitments are also considered to be
derivatives and are classified as Level 2 or Level 3
under the fair value hierarchy, depending on the fair value
hierarchy classification of the purchased or sold item, whether
security or loan. Such valuation methodologies and fair value
hierarchy classifications are further discussed in the
Investments in Securities and the
Mortgage Loans, Held-for-Sale sections above.
Guarantee
Asset, at Fair Value
For a description of how we determine the fair value of our
guarantee asset, see NOTE 3: RETAINED INTERESTS IN
MORTGAGE-RELATED SECURITIZATIONS in our 2008 Annual
Report. Since its valuation technique is model based with
significant inputs that are not observable, our guarantee asset
is classified as Level 3 in the fair value hierarchy.
REO,
Net
For GAAP purposes, REO is subsequently carried at the lower of
its carrying amount or fair value less cost to sell. The
subsequent fair value less cost to sell is an estimated value
based on relevant historical factors, which are considered to be
unobservable inputs. As a result REO is classified as
Level 3 under the fair value hierarchy.
Debt
Securities Denominated in Foreign Currencies
Foreign-currency denominated debt instruments are measured at
fair value pursuant to our fair value option election. We
determine the fair value of these instruments by obtaining
multiple quotes from dealers. Since the prices provided by the
dealers consider only observable data such as interest rates and
exchange rates, these fair values are classified as Level 2
under the fair value hierarchy.
Derivative
Liabilities, Net
See discussion under Derivative Assets, Net
above.
Consolidated
Fair Value Balance Sheets
The supplemental consolidated fair value balance sheets in
Table 14.4 present our estimates of the fair value of our
recorded financial assets and liabilities and off-balance sheet
financial instruments at June 30, 2009 and
December 31, 2008. The valuations of financial instruments
on our consolidated fair value balance sheets are in accordance
with GAAP fair value guidelines prescribed by SFAS 107 and
other relevant pronouncements.
To reflect changing market conditions, our revised outlook of
future economic conditions and the changes in composition of our
guarantee loan portfolio, we changed our methodology to value
the guarantee obligation for fair value balance sheet purposes
during the three months ended March 31, 2009. Our revised
methodology continues to use entry-pricing information to the
fullest extent possible. However, where entry pricing
information is either not available or not relevant because
credit characteristics of seasoned loans differ significantly
from origination, we use our internal credit models, which use
factors such as loan characteristics, expected losses and risk
premiums without further adjustment. In addition, during the
three months ended June 30, 2009 we enhanced the valuation
methodology of single-family mortgage loans that were never
securitized to reflect delinquency status based on
non-performing loan values from dealers and transition rates to
default.
Table 14.4
Consolidated Fair Value Balance
Sheets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount(2)
|
|
|
Fair Value
|
|
|
Amount(2)
|
|
|
Fair Value
|
|
|
|
(in billions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
46.7
|
|
|
$
|
46.7
|
|
|
$
|
45.3
|
|
|
$
|
45.3
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
8.5
|
|
|
|
8.5
|
|
|
|
10.2
|
|
|
|
10.2
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value
|
|
|
420.7
|
|
|
|
420.7
|
|
|
|
458.9
|
|
|
|
458.9
|
|
Trading, at fair value
|
|
|
250.7
|
|
|
|
250.7
|
|
|
|
190.4
|
|
|
|
190.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
|
671.4
|
|
|
|
671.4
|
|
|
|
649.3
|
|
|
|
649.3
|
|
Mortgage loans
|
|
|
121.9
|
|
|
|
113.8
|
|
|
|
107.6
|
|
|
|
100.7
|
|
Derivative assets, net
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
1.0
|
|
|
|
1.0
|
|
Guarantee
asset(3)
|
|
|
7.6
|
|
|
|
8.1
|
|
|
|
4.8
|
|
|
|
5.4
|
|
Other assets
|
|
|
35.9
|
|
|
|
37.6
|
|
|
|
32.8
|
|
|
|
34.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
892.3
|
|
|
$
|
886.4
|
|
|
$
|
851.0
|
|
|
$
|
846.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt, net
|
|
$
|
837.0
|
|
|
$
|
854.5
|
|
|
$
|
843.0
|
|
|
$
|
870.6
|
|
Guarantee obligation
|
|
|
12.0
|
|
|
|
92.0
|
|
|
|
12.1
|
|
|
|
59.7
|
|
Derivative liabilities, net
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
2.3
|
|
|
|
2.3
|
|
Reserve for guarantee losses on Participation Certificates
|
|
|
24.4
|
|
|
|
|
|
|
|
14.9
|
|
|
|
|
|
Other liabilities
|
|
|
9.8
|
|
|
|
9.5
|
|
|
|
9.3
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
884.1
|
|
|
|
956.9
|
|
|
|
881.6
|
|
|
|
941.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets attributable to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior preferred stockholders
|
|
|
51.7
|
|
|
|
51.7
|
|
|
|
14.8
|
|
|
|
14.8
|
|
Preferred stockholders
|
|
|
14.1
|
|
|
|
0.4
|
|
|
|
14.1
|
|
|
|
0.1
|
|
Common stockholders
|
|
|
(57.7
|
)
|
|
|
(122.6
|
)
|
|
|
(59.6
|
)
|
|
|
(110.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets attributable to Freddie Mac
|
|
|
8.1
|
|
|
|
(70.5
|
)
|
|
|
(30.7
|
)
|
|
|
(95.6
|
)
|
Noncontrolling interest
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
|
8.2
|
|
|
|
(70.5
|
)
|
|
|
(30.6
|
)
|
|
|
(95.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and net assets
|
|
$
|
892.3
|
|
|
$
|
886.4
|
|
|
$
|
851.0
|
|
|
$
|
846.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The consolidated fair value balance sheets do not purport to
present our net realizable, liquidation or market value as a
whole. Furthermore, amounts we ultimately realize from the
disposition of assets or settlement of liabilities may vary
significantly from the fair values presented.
|
(2)
|
Equals the amount reported on our GAAP consolidated balance
sheets.
|
(3)
|
The fair value of our guarantee asset reported exceeds the
carrying value primarily because the fair value includes our
guarantee asset related to PCs that were issued prior to the
implementation of FIN 45 in 2003 and thus are not
recognized on our GAAP consolidated balance sheets.
|
Limitations
Our consolidated fair value balance sheets do not capture all
elements of value that are implicit in our operations as a going
concern because our consolidated fair value balance sheets only
capture the values of the current investment and securitization
portfolios. For example, our consolidated fair value balance
sheets do not capture the value of new investment and
securitization business that would likely replace prepayments as
they occur. Thus, the fair value of net assets attributable to
stockholders presented on our consolidated fair value balance
sheets does not represent an estimate of our net realizable,
liquidation or market value as a whole.
We report certain assets and liabilities that are not financial
instruments (such as property and equipment and real estate
owned), as well as certain financial instruments that are not
covered by the SFAS 107 disclosure requirements (such as
pension liabilities) at their carrying amounts in accordance
with GAAP on our consolidated fair value balance sheets. We
believe these items do not have a significant impact on our
overall fair value results. Other non-financial assets and
liabilities on our GAAP consolidated balance sheets represent
deferrals of costs and revenues that are amortized in accordance
with GAAP, such as deferred debt issuance costs and deferred
credit fees. Cash receipts and payments related to these items
are generally recognized in the fair value of net assets when
received or paid, with no basis reflected on our fair value
balance sheets.
Valuation
Methods and Assumptions Not Subject to Fair Value
Hierarchy
The following are valuation assumptions and methods for items
not subject to the fair value hierarchy either because they are
not measured at fair value other than on the fair value balance
sheet or are only measured at fair value at inception.
Mortgage
Loans
Mortgage loans represent single-family and multifamily mortgage
loans held in our mortgage-related investments portfolio,
however only our population of held-for-investment single-family
mortgage loans are not subject to the fair value hierarchy. For
GAAP purposes, we must determine the fair value of our
single-family mortgage loans to calculate
lower-of-cost-or-fair-value adjustments for mortgages classified
as held-for-sale. For fair value balance sheet purposes, we use
a similar approach when determining the fair value of mortgage
loans, including those held-for-investment. The fair value of
multifamily mortgage loans is generally based on market prices
obtained from a reliable third-party pricing service provider
for similar mortgages, adjusted for differences in contractual
terms.
Cash
and Cash Equivalents
Cash and cash equivalents largely consists of highly liquid
investment securities with an original maturity of three months
or less used for cash management purposes, as well as cash held
at financial institutions and cash collateral posted by our
derivative counterparties. Given that these assets are
short-term in nature with limited market value volatility, the
carrying amount on our GAAP consolidated balance sheets is
deemed to be a reasonable approximation of fair value.
Federal
Funds Sold and Securities Purchased Under Agreements to
Resell
Federal funds sold and securities purchased under agreements to
resell principally consists of short-term contractual agreements
such as reverse repurchase agreements involving Treasury and
agency securities, federal funds sold and Eurodollar time
deposits. Given that these assets are short-term in nature, the
carrying amount on our GAAP consolidated balance sheets is
deemed to be a reasonable approximation of fair value.
Other
Assets
Other assets consists of investments in qualified LIHTC
partnerships that are eligible for federal tax credits, credit
enhancement contracts related to PCs and Structured Securities
(pool insurance and recourse
and/or
indemnification agreements), financial guarantee contracts for
additional credit enhancements on certain manufactured housing
asset-backed securities, REO, property and equipment and other
miscellaneous assets.
Our investments in LIHTC partnerships, reported as consolidated
entities or equity method investments in the GAAP financial
statements, are not within the scope of SFAS 107 disclosure
requirements. However, we present the fair value of these
investments in other assets on our consolidated fair value
balance sheets. For the LIHTC partnerships, the fair value of
expected tax benefits is estimated using expected cash flows
discounted at our cost of funds.
For the credit enhancement contracts related to PCs and
Structured Securities (pool insurance and recourse
and/or
indemnification agreements), fair value is estimated using an
expected cash flow approach, and is intended to reflect the
estimated amount that a third party would be willing to pay for
the contracts. On our consolidated fair value balance sheets,
these contracts are reported at fair value at each balance sheet
date based on current market conditions. On our GAAP
consolidated balance sheets, these contracts are initially
recorded at fair value at inception, then amortized to expense.
For the credit enhancements on manufactured housing asset-backed
securities, the fair value is based on the difference between
the market price of non-credit-impaired manufactured housing
securities and credit-impaired manufactured housing securities
that are likely to produce future credit losses, as adjusted for
our estimate of a risk premium attributable to the financial
guarantee contracts. The value of the contracts, over time, will
be determined by the actual credit-related losses incurred and,
therefore, may have a value that is higher or lower than our
market-based estimate. On our GAAP consolidated financial
statements, these contracts are recognized as cash is received.
The other categories of assets that comprise other assets are
not financial instruments required to be valued at fair value
under SFAS 107, such as property and equipment. For the
majority of these non-financial instruments in other assets, we
use the carrying amounts from our GAAP consolidated balance
sheets as the reported values on our consolidated fair value
balance sheets, without any adjustment. These assets represent
an insignificant portion of our GAAP consolidated balance
sheets. Certain non-financial assets in other assets on our GAAP
consolidated balance sheets are assigned a zero value on our
consolidated fair value balance sheets. This treatment is
applied to deferred items such as deferred debt issuance costs.
We adjust the GAAP-basis deferred taxes reflected on our
consolidated fair value balance sheets to include estimated
income taxes on the difference between our consolidated fair
value balance sheets net assets attributable to common
stockholders, including deferred taxes from our GAAP
consolidated balance sheets, and our GAAP consolidated balance
sheets equity attributable to common stockholders. To the extent
the adjusted deferred taxes are a net asset, this amount is
included in other assets. In addition, if our net deferred tax
assets on our consolidated fair value balance sheet, calculated
as described above, exceed our net deferred tax assets on our
GAAP consolidated balance sheet that have been reduced by a
valuation allowance, our net deferred tax assets on our
consolidated fair value balance sheet are limited to the amount
of our net deferred tax assets on our GAAP consolidated balance
sheet. If the adjusted deferred taxes are a net liability, this
amount is included in other liabilities.
Total
Debt, Net
Total debt, net represents short-term and long-term debt used to
finance our assets. On our consolidated GAAP balance sheets,
total debt, net, excluding debt securities denominated in
foreign currencies, is reported at amortized cost, which is net
of deferred items, including premiums, discounts and
hedging-related basis adjustments. This item includes both
non-callable and callable debt, as well as short-term
zero-coupon discount notes. The fair value of the short-term
zero-coupon discount notes is based on a discounted cash flow
model with market inputs. The valuation of other debt securities
represents the proceeds that we would receive from the issuance
of debt and is generally based on market prices obtained from
broker/dealers, reliable third-party pricing service providers
or direct market observations. We elected the fair value option
for debt securities denominated in foreign currencies and
reported them at fair value on our GAAP consolidated balance
sheets effective January 1, 2008.
Guarantee
Obligation
We did not establish a guarantee obligation for GAAP purposes
for PCs and Structured Securities that were issued through our
guarantor swap program prior to adoption of FIN 45. In
addition, after it is initially recorded at fair value the
guarantee obligation is not subsequently carried at fair value
for GAAP purposes. On our consolidated fair value balance
sheets, the guarantee obligation reflects the fair value of our
guarantee obligation on all PCs regardless of when they were
issued. Additionally, for fair value balance sheet purposes, our
guarantee obligation is valued using a model that is calibrated
to entry pricing information to estimate the fair value on our
seasoned guarantee obligation. Entry pricing information used in
our model includes the spot delivery fee and management and
guarantee fee used to determine the amount charged to customers
for executing our new securitizations. For information
concerning our valuation approach and accounting policies
related to our guarantees of mortgage assets for GAAP purposes,
see NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES and NOTE 2: FINANCIAL GUARANTEES AND
MORTGAGE SECURITIZATIONS in our 2008 Annual Report.
Reserve
for Guarantee Losses on PCs
The carrying amount of the reserve for guarantee losses on PCs
on our GAAP consolidated balance sheets represents the estimated
losses inherent in the loans that back our PCs. This line item
has no basis on our consolidated fair value balance sheets,
because the estimated fair value of all expected default losses
(both contingent and non-contingent) is included in the
guarantee obligation reported on our consolidated fair value
balance sheets.
Other
Liabilities
Other liabilities principally consist of funding liabilities
associated with investments in LIHTC partnerships, accrued
interest payable on debt securities and other miscellaneous
obligations of less than one year. We believe the carrying
amount of these liabilities is a reasonable approximation of
their fair value, except for funding liabilities associated with
investments in LIHTC partnerships, for which fair value is
estimated using expected cash flows discounted at a market-based
yield. Furthermore, certain deferred items reported as other
liabilities on our GAAP consolidated balance sheets are assigned
zero value on our consolidated fair value balance sheets, such
as deferred credit fees. Also, as discussed in Other
Assets, other liabilities may include a deferred tax
liability adjusted for fair value balance sheet purposes.
Net
Assets Attributable to Senior Preferred
Stockholders
Our senior preferred stock held by Treasury in connection with
the Purchase Agreement is recorded at the stated liquidation
preference for purposes of the consolidated fair value balance
sheets. As the senior preferred stock is restricted as to its
redemption, we consider the liquidation preference to be the
most appropriate measure for purposes of the consolidated fair
value balance sheets.
Net
Assets Attributable to Preferred Stockholders
To determine the preferred stock fair value, we use a
market-based approach incorporating quoted dealer prices.
Net
Assets Attributable to Common Stockholders
Net assets attributable to common stockholders is equal to the
difference between the fair value of total assets and the sum of
total liabilities reported on our consolidated fair value
balance sheets, less the value of net assets attributable to
senior preferred stockholders, the fair value attributable to
preferred stockholders and the fair value of noncontrolling
interests.
Noncontrolling
Interests in Consolidated Subsidiaries
Noncontrolling interests in consolidated subsidiaries primarily
represent preferred stock interests that third parties hold in
our two majority-owned REIT subsidiaries. In accordance with
GAAP, we consolidated the REITs. The preferred stock interests
are not within the scope of SFAS 107 disclosure
requirements. However, we present the fair
value of these interests on our consolidated fair value balance
sheets. Since the REIT preferred stock dividend suspension, the
fair value of the third-party noncontrolling interests in these
REITs is based on Freddie Macs preferred stock quotes. On
September 19, 2008, FHFA, as Conservator, advised us of
FHFAs determination that no further common or preferred
stock dividends should be paid by our REIT subsidiaries until
such time as otherwise directed by the Conservator.
NOTE 15:
CONCENTRATION OF CREDIT AND OTHER RISKS
Mortgages
and Mortgage-Related Securities
Our business activity is to participate in and support the
residential mortgage market in the United States, which we
pursue by both issuing guaranteed mortgage securities and
investing in mortgage loans and mortgage-related securities. We
primarily invest in and securitize single-family mortgage loans.
However, we also invest in and securitize multifamily mortgage
loans, which totaled $93.0 billion and $87.6 billion
in unpaid principal balance as of June 30, 2009 and
December 31, 2008, respectively. Approximately 29% and 30%
of these loans related to properties located in the Northeast
region of the U.S. and 26% and 25% of these loans related
to properties located in the West region of the U.S. as of
June 30, 2009 and December 31, 2008, respectively.
Table 15.1 summarizes the geographical concentration of
single-family mortgages that are held by us or that underlie our
issued PCs and Structured Securities, excluding
$1.0 billion and $1.1 billion of mortgage-related
securities issued by Ginnie Mae that back Structured Securities
at June 30, 2009 and December 31, 2008, respectively,
because these securities do not expose us to meaningful amounts
of credit risk. See NOTE 4: INVESTMENTS IN
SECURITIES for information about credit concentrations in
other mortgage-related securities that we hold.
Table 15.1
Concentrations of Credit Risk Single-Family
Loans(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
Single-Family Loans:
|
|
Amount(1)
|
|
|
Delinquency
Rate(2)
|
|
|
Amount(1)
|
|
|
Delinquency
Rate(2)
|
|
|
|
(dollars in millions)
|
|
By
Region(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West
|
|
$
|
500,873
|
|
|
|
3.74
|
%
|
|
$
|
482,832
|
|
|
|
1.99
|
%
|
Northeast
|
|
|
458,363
|
|
|
|
2.10
|
|
|
|
447,482
|
|
|
|
1.27
|
|
North Central
|
|
|
350,888
|
|
|
|
2.26
|
|
|
|
348,748
|
|
|
|
1.50
|
|
Southeast
|
|
|
342,324
|
|
|
|
4.03
|
|
|
|
339,515
|
|
|
|
2.60
|
|
Southwest
|
|
|
233,163
|
|
|
|
1.52
|
|
|
|
231,498
|
|
|
|
1.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,885,611
|
|
|
|
2.78
|
%
|
|
$
|
1,850,075
|
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
273,343
|
|
|
|
4.23
|
%
|
|
$
|
259,295
|
|
|
|
2.27
|
%
|
Florida
|
|
|
124,844
|
|
|
|
7.73
|
|
|
|
125,124
|
|
|
|
4.92
|
|
Illinois
|
|
|
96,398
|
|
|
|
2.81
|
|
|
|
93,870
|
|
|
|
1.66
|
|
Arizona
|
|
|
52,469
|
|
|
|
5.12
|
|
|
|
52,248
|
|
|
|
2.83
|
|
Nevada
|
|
|
23,110
|
|
|
|
7.87
|
|
|
|
23,190
|
|
|
|
4.11
|
|
All others
|
|
|
1,315,447
|
|
|
|
N/A
|
|
|
|
1,296,348
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,885,611
|
|
|
|
2.78
|
%
|
|
$
|
1,850,075
|
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on the unpaid principal balance of single-family mortgage
loans held by us and those underlying our issued PCs and
Structured Securities less Structured Securities backed by
Ginnie Mae Certificates.
|
(2)
|
Based on the number of single-family mortgages 90 days or
more delinquent or in foreclosure. Delinquencies on mortgage
loans underlying certain Structured Securities and long-term
standby commitments may be reported on a different schedule due
to variances in industry practice. Excludes loans underlying our
Structured Transactions.
|
(3)
|
Region designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR,
UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH, NJ, NY, PA, RI,
VT, VA, WV); North Central (IL, IN, IA, MI, MN, ND, OH, SD, WI);
Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI); Southwest
(AR, CO, KS, LA, MO, NE, NM, OK, TX, WY).
|
Higher
Risk Mortgage Loans
There are several residential loan products that are designed to
offer borrowers greater choices in their payment terms. For
example, interest-only mortgages allow the borrower to pay only
interest for a fixed period of time before the loan begins to
amortize. Option ARM loans permit a variety of repayment
options, which include minimum, interest-only, fully amortizing
30-year and
fully amortizing
15-year
payments. The minimum payment alternative for option ARM loans
allows the borrower to make monthly payments that may be less
than the interest accrued for the period. The unpaid interest,
known as negative amortization, is added to the principal
balance of the loan, which increases the outstanding loan
balance. In addition to these products, there are also types of
residential mortgage loans with lower or alternative income or
asset documentation requirements than full documentation
mortgage loans. These reduced documentation mortgages have been
categorized in the mortgage industry as
Alt-A loans.
We have classified mortgage loans as
Alt-A if the
lender that delivers them to us has classified the loans as
Alt-A, or if
the loans had reduced documentation requirements that indicate
that the loans should be classified as
Alt-A.
Participants in the mortgage market often characterize
single-family loans based upon their overall credit quality at
the time of origination, generally considering them to be prime
or subprime. However, there is no universally accepted
definition of subprime. We own investments in mortgage-related
securities that are backed by subprime and
Alt-A
mortgage loans. See NOTE 4: INVESTMENTS IN
SECURITIES for further information on these investments.
Although we have not categorized single-family mortgage loans
purchased or guaranteed as prime or subprime, we recognize that
there are a number of mortgage loan types with certain
characteristics that indicate a higher degree of credit risk.
For example, since the U.S. mortgage market has experienced
declining home prices and home sales for an extended period,
there are mortgage loans with higher LTV ratios that have a
higher risk of default. In addition, a borrowers credit
score is a useful measure for assessing the credit quality of
the borrower. Statistically, borrowers with higher credit scores
are more likely to repay or have the ability to refinance than
those with lower scores. The industry has viewed those borrowers
with credit scores below 620 based on the FICO scale as having a
higher risk of default. Presented below is a summary of the
composition of single-family mortgage loans held by us as well
as those underlying our PCs, Structured Securities and other
mortgage-related financial guarantees with these and other
higher-risk characteristics.
Table
15.2 Higher-Risk Single-Family Mortgage
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Single-Family
|
|
|
|
|
|
|
Mortgage
Portfolio(1)
|
|
|
Delinquency
Rate(2)
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
Interest-only loans
|
|
|
8
|
%
|
|
|
9
|
%
|
|
|
13.31
|
%
|
|
|
7.59
|
%
|
Option ARM loans
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
14.06
|
%
|
|
|
8.70
|
%
|
Alt-A loans
|
|
|
9
|
%
|
|
|
10
|
%
|
|
|
9.44
|
%
|
|
|
5.61
|
%
|
Original LTV greater than
90%(3)
loans
|
|
|
8
|
%
|
|
|
8
|
%
|
|
|
6.74
|
%
|
|
|
4.76
|
%
|
Lower FICO scores (less than 620)
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
10.74
|
%
|
|
|
7.81
|
%
|
|
|
(1)
|
Based on unpaid principal balance of the single-family loans
held by us and underlying our PCs, Structured Securities,
Structured Transactions and other mortgage-related guarantees.
|
(2)
|
Based on the number of mortgages 90 days or more delinquent
or in foreclosure.
|
(3)
|
Based on our first lien exposure on the property and excludes
loans purchased during each respective period. Includes the
credit-enhanced portion of the loan and excludes any secondary
financing by third parties.
|
During 2008 and continuing in the six months ended June 30,
2009, an increasing percentage of our charge-offs and REO
acquisition activity was associated with these higher-risk
characteristic loans. The percentages in the table above are not
exclusive. In other words, loans that are included in the
interest-only loan category may also be included in the Alt-A
loan category. Loans with a combination of these attributes will
have an even higher risk of default than those with isolated
characteristics.
Mortgage
Lenders, or Seller/Servicers
A significant portion of our single-family mortgage purchase
volume is generated from several large mortgage lenders, or
seller/servicers, with whom we have entered into mortgage
purchase volume commitments that provide for a specified dollar
amount or minimum level of mortgage volume that these customers
will deliver to us. Our top 10 single-family
seller/servicers provided approximately 71% of our single-family
purchase volume during the six months ended June 30, 2009.
Wells Fargo Bank, N.A. and Bank of America, N.A.
accounted for 26% and 10% of our single-family mortgage purchase
volume and were the only single-family seller/servicers that
comprised 10% or more of our purchase volume during the six
months ended June 30, 2009. Our top seller/servicers are
among the largest mortgage loan originators in the U.S. in
the single-family market. We are exposed to the risk that we
could lose purchase volume to the extent these arrangements are
terminated without replacement from other lenders.
We are exposed to institutional credit risk arising from the
potential insolvency or non-performance by our seller/servicers,
including non-performance of their repurchase obligations
arising from the breaches of representations and warranties made
to us for loans that they underwrote and sold to us. Our
seller/servicers also service single-family loans in our
mortgage-related investments portfolio and those underlying our
PCs, which includes having an active role in our loss mitigation
efforts. We also have exposure to seller/servicers to the extent
we fail to realize the anticipated benefits of our loss
mitigation plans, or experience a lower realized rate of
seller/servicer repurchases. Either of these conditions could
lead to default rates that exceed our current estimates and
could cause our losses to be significantly higher than those
estimated within our loan loss reserves.
Due to strain on the mortgage finance industry, the financial
condition and performance of many of our seller/servicers have
been adversely affected. Many institutions, some of which were
our customers, have failed, been acquired, received assistance
from the U.S. government, received multiple ratings
downgrades or experienced liquidity constraints. In July 2008,
IndyMac Bancorp, Inc., or IndyMac, announced that the FDIC
had been made a conservator of the bank. In March 2009, we
entered into an agreement with the FDIC with respect to the
transfer of loan servicing from IndyMac to a third-party, under
which we received an amount to partially recover our future
losses incurred from
IndyMacs repurchase obligations. We retain our remaining
claims against IndyMac for loan repurchases that are in excess
of the amount received under the agreement.
Lehman Brothers Holdings Inc., or Lehman, and its
affiliates also service single-family loans for us. We have
potential exposure to Lehman for servicing-related obligations
due to us, including repurchase obligations, which we currently
estimate to be approximately $850 million. Lehman has
suspended its repurchases from us since declaring bankruptcy in
September 2008. The estimates of potential exposure to Lehman
and other of our counterparties are higher than our estimates
for probable loss as we consider the range of possible outcomes
as well as the passage of time, which can change the indicators
of incurred, or probable losses. We also consider the estimated
value of related mortgage servicing rights in determining our
estimates of probable loss, which reduce our potential exposures.
In September 2008, Washington Mutual Bank was acquired by
JPMorgan Chase Bank, N.A. We have agreed to JPMorgan Chase
becoming the servicer of mortgages previously serviced by
Washington Mutual in return for JPMorgan Chases agreement
to assume Washington Mutuals recourse obligations to
repurchase any of such mortgages that were sold to us with
recourse. With respect to mortgages that Washington Mutual sold
to us without recourse, JPMorgan Chase made a one-time payment
to us in the first quarter of 2009 with respect to obligations
of Washington Mutual to repurchase any of such mortgages that
are inconsistent with certain representations and warranties
made at the time of sale. The amounts associated with the
JPMorgan Chase agreement and IndyMac servicing transfer have
been recorded within other liabilities in our consolidated
balance sheets and will be reclassified to our loan loss reserve
to partially offset losses as incurred on related loans covered
by these agreements.
On August 4, 2009, we notified Taylor, Bean &
Whitaker Mortgage Corp., or TBW, that we had terminated its
eligibility, for cause, as a seller and servicer for us
effective immediately. TBW accounted for approximately 5.2% and
2.7% of our single-family mortgage purchase volume activity for
full-year 2008 and the six months ended June 30, 2009,
respectively. We are in the process of determining our total
exposure to TBW in the event it cannot perform its contractual
obligations to us. The amount of our losses in such event could
be significant.
Our estimate of probable incurred losses for exposure to
seller/servicers for their repurchase obligations to us is a
component of our allowance for loan losses as of June 30,
2009 and December 31, 2008. We believe we have adequately
provided for these exposures, based upon our estimates of
incurred losses, in our loan loss reserves at June 30, 2009
and December 31, 2008; however, our actual losses may
exceed our estimates.
During the six months ended June 30, 2009, our top four
multifamily lenders, CBRE Melody & Company, Deutsche
Bank Berkshire Mortgage, Capmark Finance Inc. and Wells
Fargo Multifamily Capital, each accounted for more than 10% of
our multifamily mortgage purchase volume, and represented
approximately 57% of our multifamily purchase volume. These top
lenders are among the largest mortgage loan originators in the
U.S. in the multifamily markets. We are exposed to the risk
that we could lose purchase volume to the extent these
arrangements are terminated without replacement from other
lenders.
Mortgage
Insurers
We have institutional credit risk relating to the potential
insolvency or non-performance of mortgage insurers that insure
mortgages we purchase or guarantee. For our exposure to mortgage
insurers, we evaluate the recovery from insurance policies for
mortgage loans in our mortgage-related investments portfolio as
well as loans underlying our PCs and Structured Securities as
part of the estimate of our loan loss reserves. At June 30,
2009, these insurers provided coverage, with maximum loss limits
of $64.3 billion, for $325.3 billion of unpaid
principal balance in connection with our single-family mortgage
portfolio, excluding mortgage loans backing Structured
Transactions. Our top six mortgage insurer counterparties,
Mortgage Guaranty Insurance Corporation (or MGIC), Radian
Guaranty Inc., Genworth Mortgage Insurance Corporation, PMI
Mortgage Insurance Co., United Guaranty Residential
Insurance Co. and Republic Mortgage Insurance each
accounted for more than 10% and collectively represented
approximately 94% of our overall mortgage insurance coverage at
June 30, 2009. All of our mortgage insurance counterparties
received credit rating downgrades in the first half of 2009 and
all are rated below A, based on the S&P rating scale. On
June 1, 2009, Triad Guaranty Insurance Corporation (or
Triad) began paying valid claims 60% in cash and 40% in deferred
payment obligations. Triad remains in voluntary run-off. MGIC
has announced a plan to underwrite new business through a
wholly-owned subsidiary, and that it is engaged in discussions
to have the subsidiary approved as an eligible mortgage insurer
by Freddie Mac and Fannie Mae. According to MGIC, this plan was
driven by MGICs concern that in the future MGIC might not
meet regulatory capital requirements to continue to write new
business. Any final proposal is subject to the receipt of
necessary approvals and authority, including obtaining Freddie
Macs and Fannie Maes approval of the subsidiary as
an eligible mortgage insurer. We are currently in discussions
with MGIC concerning its plans. We believe that several other of
our mortgage insurance counterparties are at risk of falling out
of compliance with regulatory capital requirements, which may
result in regulatory actions that could threaten our ability to
receive
future claims payments, and negatively impact our access to
mortgage insurance for high LTV loans. Further, we believe one
or more of these mortgage insurers, over the remainder of 2009,
could be found to be lacking sufficient capital and could face
suspension per Freddie Macs eligibility requirements for
mortgage insurers. A reduction in the number of eligible
mortgage insurers could further concentrate our exposure to the
remaining insurers.
Bond
Insurers
Bond insurance, including primary and secondary policies, is an
additional credit enhancement covering non-agency securities
held in our mortgage-related investments portfolio or
non-mortgage-related investments held in our cash and other
investments portfolio. Primary policies are owned by the
securitization trust issuing securities we purchase, while
secondary policies are acquired directly by us. At June 30,
2009, we had coverage, including secondary policies on
securities, totaling $13.9 billion of unpaid principal
balance of our investments in securities. At June 30, 2009,
the top four of our bond insurers, Ambac Assurance Corporation,
Financial Guaranty Insurance Company (or FGIC), MBIA
Insurance Corp., and Financial Security Assurance Inc.
(or FSA), each accounted for more than 10% of our overall bond
insurance coverage and collectively represented approximately
83% of our total coverage. All but one of our bond insurers have
had their credit rating downgraded by at least one major rating
agency during the first half of 2009 and all but one are rated
below A, based on the S&P rating scale.
In March 2009, FGIC issued its 2008 financial statements, which
expressed substantial doubt concerning the ability to operate as
a going concern. Consequently, in April 2009, S&P withdrew
its ratings of FGIC and discontinued coverage. In April 2009,
Syncora Guarantee Inc., or SGI, a bond insurer for which we
have $1.1 billion of exposure to unpaid principal balances
on our investments in securities, announced that under an order
from the New York State Insurance Department, it suspended
payment of all claims in order to complete a comprehensive
restructuring of its business. Consequently, S&P assigned
an R rating, reflecting that the company is under
regulatory supervision. During the second quarter of 2009, as
part of its comprehensive restructuring, SGI pursued a
settlement with certain policyholders. In July 2009, we agreed
to terminate our rights under certain policies with SGI, which
provided credit coverage for certain of the bonds owned by us,
in exchange for a one-time cash payment of $113 million. We
continue to own certain securities insured under other policies
issued by SGI. We believe that, except for FSA, the remaining
bond insurers to which we currently have significant exposure
lack sufficient ability to fully meet all of their expected
lifetime claims paying obligations to us as they emerge.
We evaluate the recovery from primary monoline bond insurance
policies as part of our impairment analysis for our investments
in securities. If a monoline bond insurer fails to meet its
obligations on securities in our mortgage-related investments
portfolio, then the fair values of our securities would further
decline, which could have a material adverse effect on our
results and financial condition. We recognized
other-than-temporary impairment losses during 2008 and in the
first half of 2009 related to investments in mortgage-related
securities covered by bond insurance as a result of our
uncertainty over whether or not certain insurers will meet our
future claims in the event of a loss on the securities. See
NOTE 4: INVESTMENTS IN SECURITIES for further
information on our evaluation of impairment on securities
covered by bond insurance.
Securitization
Trusts
Effective December 2007, we established securitization trusts
for the administration of cash remittances received on the
underlying assets of our PCs and Structured Securities. In
accordance with the trust agreements, we invest the funds of the
trusts in eligible short-term financial instruments that are
mainly the highest-rated debt types as classified by a
nationally-recognized statistical rating organization. To the
extent there is a loss related to an eligible investment for a
trust, we, as the administrator, are responsible for making up
that shortfall. As of June 30, 2009 and December 31,
2008, there were $35.5 billion and $11.6 billion,
respectively, of cash and other non-mortgage assets in these
trusts. As of June 30, 2009, these consisted of:
(a) $16.8 billion of cash equivalents invested in
seven counterparties that had short-term credit ratings of
A-1+ on
S&Ps or equivalent scale, (b) $8.7 billion
of cash deposited with the Federal Reserve Bank, and
(c) $10.0 billion of securities sold under agreements
to resell with four counterparties, which had short-term
S&P ratings of
A-1 or above.
Derivative
Portfolio
On an ongoing basis, we review the credit fundamentals of all of
our derivative counterparties to confirm that they continue to
meet our internal standards. We assign internal ratings, credit
capital and exposure limits to each counterparty based on
quantitative and qualitative analysis, which we update and
monitor on a regular basis. We conduct additional reviews when
market conditions dictate or events affecting an individual
counterparty occur.
Derivative
Counterparties
Our use of derivatives exposes us to counterparty credit risk,
which arises from the possibility that the derivative
counterparty will not be able to meet its contractual
obligations. Exchange-traded derivatives, such as futures
contracts, do not measurably increase our counterparty credit
risk because changes in the value of open exchange-traded
contracts are settled daily through a financial clearinghouse
established by each exchange. OTC derivatives, however, expose
us to counterparty credit risk because transactions are executed
and settled between our counterparty and us. Our use of OTC
interest-rate swaps, option-based derivatives and
foreign-currency swaps is subject to rigorous internal credit
and legal reviews. All of these counterparties are major
financial institutions and are experienced participants in the
OTC derivatives market.
Master
Netting and Collateral Agreements
We use master netting and collateral agreements to reduce our
credit risk exposure to our active OTC derivative counterparties
for interest-rate swaps, option-based derivatives and
foreign-currency swaps. Master netting agreements provide for
the netting of amounts receivable and payable from an individual
counterparty, which reduces our exposure to a single
counterparty in the event of default. On a daily basis, the
market value of each counterpartys derivatives outstanding
is calculated to determine the amount of our net credit
exposure, which is equal to derivatives in a net gain position
by counterparty after giving consideration to collateral posted.
Our collateral agreements require most counterparties to post
collateral for the amount of our net exposure to them above the
applicable threshold. Bilateral collateral agreements are in
place for the majority of our counterparties. Collateral posting
thresholds are tied to a counterpartys credit rating.
Derivative exposures and collateral amounts are monitored on a
daily basis using both internal pricing models and dealer price
quotes. Collateral is typically transferred within one business
day based on the values of the related derivatives. This time
lag in posting collateral can affect our net uncollateralized
exposure to derivative counterparties.
Collateral posted by a derivative counterparty is typically in
the form of cash, although Treasury securities, our PCs and
Structured Securities or our debt securities may also be posted.
In the event a counterparty defaults on its obligations under
the derivatives agreement and the default is not remedied in the
manner prescribed in the agreement, we have the right under the
agreement to direct the custodian bank to transfer the
collateral to us or, in the case of non-cash collateral, to sell
the collateral and transfer the proceeds to us.
Our uncollateralized exposure to counterparties for OTC
interest-rate swaps, option-based derivatives and
foreign-currency swaps, after applying netting agreements and
collateral, was $131 million and $181 million at
June 30, 2009 and December 31, 2008, respectively. In
the event that all of our counterparties for these derivatives
were to have defaulted simultaneously on June 30, 2009, our
maximum loss for accounting purposes would have been
approximately $131 million. Four of our derivative
counterparties each accounted for greater than 10% and
collectively accounted for 88% of our net uncollateralized
exposure, excluding commitments, at June 30, 2009. These
counterparties were Barclays Bank PLC, Royal Bank of Canada,
JPMorgan Chase Bank and Merrill Lynch Capital
Services, Inc., all of which were rated A or higher at
July 31, 2009.
The total exposure on our OTC forward purchase and sale
commitments of $142 million and $537 million at
June 30, 2009 and December 31, 2008, respectively,
which are treated as derivatives, was uncollateralized. Because
the typical maturity of our forward purchase and sale
commitments is less than 60 days and they are generally
settled through a clearinghouse, we do not require master
netting and collateral agreements for the counterparties of
these commitments. However, we monitor the credit fundamentals
of the counterparties to our forward purchase and sale
commitments on an ongoing basis to ensure that they continue to
meet our internal risk-management standards.
NOTE 16:
SEGMENT REPORTING
As discussed below, we use Segment Earnings to measure and
assess the financial performance of our segments. Segment
Earnings is calculated for the segments by adjusting GAAP net
income (loss) for certain investment-related activities and
credit guarantee-related activities. The Segment Earnings
measure is provided to the chief operating decision maker. We
conduct our operations solely in the U.S. and its
territories. Therefore, we do not generate any revenue from
geographic locations outside of the U.S. and its
territories.
Segments
Our operations include three reportable segments, which are
based on the type of business activities each
performs Investments, Single-family Guarantee and
Multifamily. Certain activities that are not part of a segment
are included in the All Other category. We evaluate our
performance and allocate resources based on Segment Earnings,
which we describe and present in this note, subject to the
conduct of our business under the direction of the Conservator.
See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Conservatorship and
Related Developments for further information about the
conservatorship. We do not consider our assets by segment when
making these evaluations or allocations.
Investments
In this segment, we invest principally in mortgage-related
securities and single-family mortgage loans through our
mortgage-related investments portfolio. Segment Earnings
consists primarily of the returns on these investments, less the
related financing costs and administrative expenses. Within this
segment, our activities may include the purchase of mortgage
loans and mortgage-related securities with less attractive
investment returns and with incremental risk in order to achieve
our affordable housing goals and subgoals. We maintain a cash
and other investments portfolio in this segment to help manage
our liquidity. We fund our investment activities, including
investing activities in our Multifamily segment, primarily
through issuances of short- and long-term debt in the capital
markets. Results also include derivative transactions we enter
into to help manage interest-rate and other market risks
associated with our debt financing and mortgage-related
investments portfolio.
Single-Family
Guarantee
In our Single-family guarantee segment, we purchase
single-family mortgages originated by our lender customers in
the primary mortgage market, primarily through our guarantor
swap program. We securitize certain of the mortgages we have
purchased and issue mortgage-related securities that can be sold
to investors or held by us in our Investments segment. In this
segment, we also guarantee the payment of principal and interest
on single-family mortgage-related securities, including those
held in our mortgage-related investments portfolio, in exchange
for management and guarantee fees received over time and other
up-front compensation. Earnings for this segment consist
primarily of management and guarantee fee revenues, including
amortization of upfront payments, less the related credit costs
(i.e., provision for credit losses) and operating
expenses. Also included is the interest earned on assets held in
the Investments segment related to single-family guarantee
activities, net of allocated funding costs.
Multifamily
In this segment, we primarily purchase multifamily mortgages for
our mortgage-related investments portfolio and guarantee the
payment of principal and interest on multifamily
mortgage-related securities and mortgages underlying multifamily
housing revenue bonds. These activities support our mission to
supply financing for affordable rental housing. This segment
also includes certain equity investments in various limited
partnerships that sponsor low- and moderate-income multifamily
rental apartments, that provide LIHTCs to their equity
investors. Also included is the interest earned on assets held
in the Investments segment related to multifamily activities,
net of allocated funding costs.
All
Other
All Other includes corporate-level expenses not allocated to any
of our reportable segments, such as costs associated with
remediating our internal controls and near-term restructuring
costs, costs related to the resolution of certain legal matters
and certain income tax items.
Segment
Allocations
Results of each reportable segment include directly attributable
revenues and expenses. Administrative expenses that are not
directly attributable to a segment are allocated ratably using
alternative quantifiable measures such as headcount distribution
or segment usage if considered semi-direct or on a
pre-determined basis if considered indirect. Expenses not
allocated to segments consist primarily of costs associated with
remediating our internal controls and near-term restructuring
costs and are included in the All Other category. Net interest
income for each segment includes an allocation related to the
interest earned on each segments assets and off-balance
sheet obligations, net of allocated funding costs (i.e.
debt expenses) related to such assets and obligations. These
allocations, however, do not include the effects of dividends
paid on our senior preferred stock. The tax credits generated by
the LIHTC partnerships are allocated to the Multifamily segment.
All remaining taxes are calculated based on a 35% federal
statutory rate as applied to pre-tax Segment Earnings.
Segment
Earnings
In managing our business, we present the operating performance
of our segments using Segment Earnings. Segment Earnings differs
significantly from, and should not be used as a substitute for,
net income (loss) as determined in accordance with GAAP. There
are important limitations to using Segment Earnings as a measure
of our financial performance. Among them, the need to obtain
funding under the Purchase Agreement is based on our GAAP
results, as are our regulatory capital requirements (which are
suspended during conservatorship). Segment Earnings adjusts for
the effects of certain gains and losses and mark-to-fair value
items which, depending on market circumstances, can
significantly affect, positively or negatively, our GAAP results
and which, in recent periods, have contributed to our
significant GAAP net losses. GAAP net losses will adversely
impact our GAAP equity (deficit), as well as our need for
funding under the Purchase Agreement, regardless of results
reflected in Segment Earnings. Also, our definition of Segment
Earnings may differ from similar measures used by other
companies. However, we believe that the presentation of Segment
Earnings highlights the results from ongoing operations and the
underlying results of the segments in a manner that is useful to
the way we manage and evaluate the performance of our business.
Segment Earnings presents our results on an accrual basis as the
cash flows from our segments are earned over time. The objective
of Segment Earnings is to present our results in a manner more
consistent with our business models. The business model for our
investment activity is one where we generally buy and hold our
investments in mortgage-related assets for the long term, fund
our investments with debt and use derivatives to minimize
interest rate risk. The business model for our credit guarantee
activity is one where we are a long-term guarantor in the
conforming mortgage markets, manage credit risk and generate
guarantee and credit fees, net of incurred credit losses. We
believe it is meaningful to measure the performance of our
investment and guarantee businesses using long-term returns, not
short-term value. As a result of these business models, we
believe that an accrual-based metric is a meaningful way to
present our results as actual cash flows are realized, net of
credit losses and impairments. We believe Segment Earnings
provides us with a view of our financial results that is more
consistent with our business objectives and helps us better
evaluate the performance of our business, both from
period-to-period and over the longer term.
As described below, Segment Earnings is calculated for the
segments by adjusting GAAP net income (loss) for certain
investment-related activities and credit guarantee-related
activities. Segment Earnings includes certain reclassifications
among income and expense categories that have no impact on net
income (loss) but provide us with a meaningful metric to assess
the performance of each segment and our company as a whole.
Segment earnings does not include the effect of the
establishment of the valuation allowance against our deferred
tax assets, net.
Investment
Activity-Related Adjustments
The most significant risk inherent in our investing activities
is interest rate risk, including duration, convexity and
volatility. We actively manage these risks through asset
selection and structuring, financing asset purchases with a
broad range of both callable and non-callable debt and the use
of interest rate derivatives, designed to economically hedge a
significant portion of our interest rate exposure. Our interest
rate derivatives include interest rate swaps, exchange-traded
futures and both purchased and written options (including
swaptions). GAAP-basis earnings related to investment activities
of our Investments segment are subject to significant
period-to-period variability, which we believe is not
necessarily indicative of the risk management techniques that we
employ and the performance of this segment.
Our derivative instruments not in hedge accounting relationships
are adjusted to fair value under GAAP with resulting gains or
losses recorded in GAAP-basis results. Certain other assets are
also adjusted to fair value under GAAP with resulting gains or
losses recorded in GAAP-basis results. These assets consist
primarily of mortgage-related securities classified as trading
and mortgage-related securities classified as available-for-sale
when a decline in fair value of available-for-sale securities is
deemed to be other than temporary.
In preparing Segment Earnings, we make the following adjustments
to earnings as determined under GAAP. We believe Segment
Earnings enhances the understanding of operating performance for
specific periods, as well as trends in results over multiple
periods, as this measure is consistent with assessing our
performance against our investment objectives and the related
risk-management activities.
|
|
|
|
|
Derivative and foreign currency denominated debt-related
adjustments:
|
|
|
|
|
|
Fair value adjustments on derivative positions, recorded
pursuant to GAAP, are not recognized in Segment Earnings as
these positions economically hedge the volatility in fair value
of our investment activities and debt financing that are not
recognized in GAAP earnings.
|
|
|
|
Payments or receipts to terminate derivative positions are
amortized prospectively into Segment Earnings on a straight-line
basis over the associated term of the derivative instrument.
|
|
|
|
The accrual of periodic cash settlements of all derivatives not
in qualifying hedge accounting relationships is reclassified
from derivative gains (losses) into net interest income for
Segment Earnings as the interest component of the derivative is
used to economically hedge the interest associated with the debt.
|
|
|
|
Payments of up-front premiums (e.g., payments made to
third parties related to purchased swaptions) are amortized
prospectively on a straight-line basis into Segment Earnings
over the contractual life of the
|
|
|
|
|
|
instrument. The up-front payments, primarily for option
premiums, are amortized to reflect the periodic cost associated
with the protection provided by the option contract.
|
|
|
|
|
|
Foreign-currency translation gains and losses as well as the
unrealized fair value adjustments associated with
foreign-currency denominated debt along with the foreign
currency derivatives gains and losses are excluded from Segment
Earnings because the fair value adjustments on the
foreign-currency swaps that we use to manage foreign-currency
exposure are also excluded through the fair value adjustment on
derivative positions as described above as the foreign currency
exposure is economically hedged.
|
|
|
|
|
|
Investment sales, debt retirements and fair value-related
adjustments:
|
|
|
|
|
|
Gains and losses on investment sales and debt retirements that
are recognized at the time of the transaction pursuant to GAAP
are not immediately recognized in Segment Earnings. Gains and
losses on securities sold out of our mortgage-related
investments portfolio and cash and other investments portfolio
are amortized prospectively into Segment Earnings on a
straight-line basis over five years and three years,
respectively. Gains and losses on debt retirements are amortized
prospectively into Segment Earnings on a straight-line basis
over the original terms of the repurchased debt.
|
|
|
|
Trading losses or impairments that reflect expected or realized
credit losses are realized immediately pursuant to GAAP and in
Segment Earnings since they are not economically hedged. Fair
value adjustments to trading securities related to investments
that are economically hedged are not included in Segment
Earnings. Similarly, impairments on securities we intend to sell
or more likely than not will be required to sell prior to the
anticipated recovery and non-credit related impairments on
securities recorded in our GAAP results in AOCI as well as
GAAP-basis accretion income that may result from impairment
adjustments are not included in Segment Earnings.
|
|
|
|
|
|
Fully taxable-equivalent adjustment:
|
|
|
|
|
|
Interest income generated from tax-exempt investments is
adjusted in Segment Earnings to reflect its equivalent yield on
a fully taxable basis.
|
We fund our investment assets with debt and derivatives to
manage interest rate risk as evidenced by our PMVS and duration
gap metrics. As a result, in situations where we record gains
and losses on derivatives, securities or debt buybacks, these
gains and losses are offset by economic hedges that we do not
mark-to-fair-value for GAAP purposes. For example, when we
realize a gain on the sale of a security, the debt which is
funding the security has an embedded loss that is not recognized
under GAAP, but instead over time as we realize the interest
expense on the debt. As a result, in Segment Earnings, we defer
and amortize the security gain to interest income to match the
interest expense on the debt that funded the asset. Because of
our risk management strategies, we believe that amortizing gains
or losses on economically hedged positions in the same periods
as the offsetting gains or losses is a meaningful way to assess
performance of our investment activities.
The adjustments we make to present our Segment Earnings are
consistent with the financial objectives of our investment
activities and related hedging transactions and provide us with
a view of expected investment returns and effectiveness of our
risk management strategies that we believe is useful in managing
and evaluating our investment-related activities. Although we
seek to mitigate the interest rate risk inherent in our
investment-related activities, our hedging and portfolio
management activities do not eliminate risk. We believe that a
relevant measure of performance should closely reflect the
economic impact of our risk management activities. Thus, we
amortize the impact of terminated derivatives, as well as gains
and losses on asset sales and debt retirements, into Segment
Earnings. Although our interest rate risk and asset/liability
management processes ordinarily involve active management of
derivatives, asset sales and debt retirements, we believe that
Segment Earnings, although it differs significantly from, and
should not be used as a substitute for GAAP-basis results, is
indicative of the longer-term time horizon inherent in our
investment-related activities.
Credit
Guarantee Activity-Related Adjustments
Credit guarantee activities consist largely of our guarantee of
the payment of principal and interest on mortgages and
mortgage-related securities in exchange for management and
guarantee and other fees. Over the longer-term, earnings consist
almost entirely of the management and guarantee fee revenues,
which include management guarantee fees collected throughout the
life of the loan and up-front compensation received, trust
management fees less related credit costs (i.e.,
provision for credit losses) and operating expenses. Our measure
of Segment Earnings for these activities consists primarily of
these elements of revenue and expense. We believe this measure
is a relevant indicator of operating performance for specific
periods, as well as trends in results over multiple periods
because it more closely aligns with how we manage and evaluate
the performance of the credit guarantee business.
We purchase mortgages from seller/servicers in order to
securitize and issue PCs and Structured Securities. See
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES in our 2008 Annual Report for a discussion of the
accounting treatment of these transactions. In addition to the
components of earnings noted above, GAAP-basis earnings for
these activities include gains or losses upon the execution of
such transactions, subsequent fair value adjustments to the
guarantee asset and amortization of the guarantee obligation.
Our credit guarantee activities also include the purchase of
significantly past due mortgage loans from loan pools that
underlie our guarantees. Pursuant to GAAP, at the time of our
purchase the loans are recorded at fair value. To the extent the
adjustment of a purchased loan to fair value exceeds our own
estimate of the losses we will ultimately realize on the loan,
as reflected in our loan loss reserve, an additional loss is
recorded in our GAAP-basis results.
When we determine Segment Earnings for our credit
guarantee-related activities, the adjustments we apply to
earnings computed on a GAAP-basis include the following:
|
|
|
|
|
Amortization and valuation adjustments pertaining to the
guarantee asset and guarantee obligation are excluded from
Segment Earnings. Cash compensation exchanged at the time of
securitization, excluding
buy-up and
buy-down fees, is amortized into earnings.
|
|
|
|
The initial recognition of gains and losses prior to
January 1, 2008 and in connection with the execution of
either securitization transactions that qualify as sales or
guarantor swap transactions, such as losses on certain credit
guarantees, is excluded from Segment Earnings.
|
|
|
|
Fair value adjustments recorded upon the purchase of delinquent
loans from pools that underlie our guarantees are excluded from
Segment Earnings. However, for Segment Earnings reporting, our
GAAP-basis loan loss provision is adjusted to reflect our own
estimate of the losses we will ultimately realize on such items.
|
While both GAAP-basis results and Segment Earnings include a
provision for credit losses determined in accordance with
SFAS 5, GAAP-basis results also include, as noted above,
measures of future cash flows (the guarantee asset) that are
recorded at fair value and, therefore, are subject to
significant adjustment from period-to-period as market
conditions, such as interest rates, change. Over the
longer-term, Segment Earnings and GAAP-basis results both
capture the aggregate cash flows associated with our
guarantee-related activities. Although Segment Earnings differs
significantly from, and should not be used as a substitute for
GAAP-basis results, we believe that excluding the impact of
changes in the fair value of expected future cash flows from our
Segment Earnings provides a meaningful measure of performance
for a given period as well as trends in performance over
multiple periods because it more closely aligns with how we
manage and evaluate the performance of the credit guarantee
business.
Table 16.1 reconciles Segment Earnings to GAAP net income (loss).
Table 16.1
Reconciliation of Segment Earnings to GAAP Net Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Segment Earnings, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
158
|
|
|
$
|
793
|
|
|
$
|
(1,414
|
)
|
|
$
|
906
|
|
Single-family Guarantee
|
|
|
(3,552
|
)
|
|
|
(1,388
|
)
|
|
|
(9,037
|
)
|
|
|
(1,846
|
)
|
Multifamily
|
|
|
50
|
|
|
|
118
|
|
|
|
190
|
|
|
|
216
|
|
All Other
|
|
|
(8
|
)
|
|
|
144
|
|
|
|
(8
|
)
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
(3,352
|
)
|
|
|
(333
|
)
|
|
|
(10,269
|
)
|
|
|
(584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
2,800
|
|
|
|
527
|
|
|
|
4,358
|
|
|
|
(667
|
)
|
Credit guarantee-related adjustments
|
|
|
2,354
|
|
|
|
1,818
|
|
|
|
956
|
|
|
|
1,644
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
900
|
|
|
|
(3,096
|
)
|
|
|
928
|
|
|
|
(1,571
|
)
|
Fully taxable-equivalent adjustments
|
|
|
(98
|
)
|
|
|
(105
|
)
|
|
|
(198
|
)
|
|
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax adjustments
|
|
|
5,956
|
|
|
|
(856
|
)
|
|
|
6,044
|
|
|
|
(809
|
)
|
Tax-related
adjustments(1)
|
|
|
(1,836
|
)
|
|
|
368
|
|
|
|
(4,858
|
)
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
4,120
|
|
|
|
(488
|
)
|
|
|
1,186
|
|
|
|
(388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Freddie Mac
|
|
$
|
768
|
|
|
$
|
(821
|
)
|
|
$
|
(9,083
|
)
|
|
$
|
(972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes a non-cash charge, net related to the establishment of
a partial valuation allowance against our deferred tax assets,
net of approximately $(184) million and $2.9 billion
that is not included in Segment Earnings for the three and six
months ended June 30, 2009, respectively.
|
Table 16.2 presents certain financial information for our
reportable segments and All Other.
Table 16.2
Segment Earnings and Reconciliation to
GAAP Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
Net (Income)
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
Other
|
|
|
|
|
|
Provision
|
|
|
REO
|
|
|
Other
|
|
|
LIHTC
|
|
|
Tax
|
|
|
|
|
|
Loss
|
|
|
Net Income
|
|
|
|
Net Interest
|
|
|
and Guarantee
|
|
|
LIHTC
|
|
|
Non-Interest
|
|
|
Administrative
|
|
|
for Credit
|
|
|
Operations
|
|
|
Non-Interest
|
|
|
Partnerships
|
|
|
(Expense)
|
|
|
Net
|
|
|
Noncontrolling
|
|
|
(Loss)
|
|
|
|
Income
|
|
|
Income
|
|
|
Partnerships
|
|
|
Income (Loss)
|
|
|
Expenses
|
|
|
Losses
|
|
|
Expense
|
|
|
Expense
|
|
|
Tax Credit
|
|
|
Benefit
|
|
|
Income (Loss)
|
|
|
Interests
|
|
|
Freddie Mac
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
2,454
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(2,084
|
)
|
|
$
|
(119
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
$
|
|
|
|
$
|
(85
|
)
|
|
$
|
158
|
|
|
$
|
|
|
|
$
|
158
|
|
Single-family Guarantee
|
|
|
28
|
|
|
|
942
|
|
|
|
|
|
|
|
88
|
|
|
|
(206
|
)
|
|
|
(6,285
|
)
|
|
|
(1
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
1,912
|
|
|
|
(3,552
|
)
|
|
|
|
|
|
|
(3,552
|
)
|
Multifamily
|
|
|
112
|
|
|
|
22
|
|
|
|
(167
|
)
|
|
|
5
|
|
|
|
(52
|
)
|
|
|
(57
|
)
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
148
|
|
|
|
54
|
|
|
|
50
|
|
|
|
|
|
|
|
50
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
2,594
|
|
|
|
964
|
|
|
|
(167
|
)
|
|
|
(1,986
|
)
|
|
|
(383
|
)
|
|
|
(6,342
|
)
|
|
|
(9
|
)
|
|
|
(44
|
)
|
|
|
148
|
|
|
|
1,872
|
|
|
|
(3,353
|
)
|
|
|
1
|
|
|
|
(3,352
|
)
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
2,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,800
|
|
|
|
|
|
|
|
2,800
|
|
Credit guarantee-related adjustments
|
|
|
51
|
|
|
|
(315
|
)
|
|
|
|
|
|
|
2,796
|
|
|
|
|
|
|
|
1,074
|
|
|
|
|
|
|
|
(1,252
|
)
|
|
|
|
|
|
|
|
|
|
|
2,354
|
|
|
|
|
|
|
|
2,354
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900
|
|
|
|
|
|
|
|
900
|
|
Fully taxable-equivalent adjustments
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
|
|
|
|
(98
|
)
|
Reclassifications(1)
|
|
|
1,019
|
|
|
|
61
|
|
|
|
|
|
|
|
(1,149
|
)
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-related
adjustments(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,836
|
)
|
|
|
(1,836
|
)
|
|
|
|
|
|
|
(1,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
1,661
|
|
|
|
(254
|
)
|
|
|
|
|
|
|
4,658
|
|
|
|
|
|
|
|
1,143
|
|
|
|
|
|
|
|
(1,252
|
)
|
|
|
|
|
|
|
(1,836
|
)
|
|
|
4,120
|
|
|
|
|
|
|
|
4,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per consolidated statements of operations
|
|
$
|
4,255
|
|
|
$
|
710
|
|
|
$
|
(167
|
)
|
|
$
|
2,672
|
|
|
$
|
(383
|
)
|
|
$
|
(5,199
|
)
|
|
$
|
(9
|
)
|
|
$
|
(1,296
|
)
|
|
$
|
148
|
|
|
$
|
36
|
|
|
$
|
767
|
|
|
$
|
1
|
|
|
$
|
768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
Net (Income)
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
Other
|
|
|
|
|
|
Provision
|
|
|
REO
|
|
|
Other
|
|
|
LIHTC
|
|
|
Tax
|
|
|
|
|
|
Loss
|
|
|
Net Income
|
|
|
|
Net Interest
|
|
|
and Guarantee
|
|
|
LIHTC
|
|
|
Non-Interest
|
|
|
Administrative
|
|
|
for Credit
|
|
|
Operations
|
|
|
Non-Interest
|
|
|
Partnerships
|
|
|
(Expense)
|
|
|
Net
|
|
|
Noncontrolling
|
|
|
(Loss)
|
|
|
|
Income
|
|
|
Income
|
|
|
Partnerships
|
|
|
Income (Loss)
|
|
|
Expenses
|
|
|
Losses
|
|
|
Expense
|
|
|
Expense
|
|
|
Tax Credit
|
|
|
Benefit
|
|
|
Income (Loss)
|
|
|
Interests
|
|
|
Freddie Mac
|
|
|
|
(in millions)
|
|
|
Investments
|
|
$
|
4,468
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(6,390
|
)
|
|
$
|
(239
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(15
|
)
|
|
$
|
|
|
|
$
|
762
|
|
|
$
|
(1,414
|
)
|
|
$
|
|
|
|
$
|
(1,414
|
)
|
Single-family Guarantee
|
|
|
53
|
|
|
|
1,864
|
|
|
|
|
|
|
|
171
|
|
|
|
(406
|
)
|
|
|
(15,226
|
)
|
|
|
(307
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
4,866
|
|
|
|
(9,037
|
)
|
|
|
|
|
|
|
(9,037
|
)
|
Multifamily
|
|
|
230
|
|
|
|
43
|
|
|
|
(273
|
)
|
|
|
8
|
|
|
|
(101
|
)
|
|
|
(57
|
)
|
|
|
(8
|
)
|
|
|
(12
|
)
|
|
|
299
|
|
|
|
60
|
|
|
|
189
|
|
|
|
1
|
|
|
|
190
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
4,751
|
|
|
|
1,907
|
|
|
|
(273
|
)
|
|
|
(6,204
|
)
|
|
|
(755
|
)
|
|
|
(15,283
|
)
|
|
|
(315
|
)
|
|
|
(77
|
)
|
|
|
299
|
|
|
|
5,680
|
|
|
|
(10,270
|
)
|
|
|
1
|
|
|
|
(10,269
|
)
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
|
3,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,358
|
|
|
|
|
|
|
|
4,358
|
|
Credit guarantee-related adjustments
|
|
|
85
|
|
|
|
(535
|
)
|
|
|
|
|
|
|
3,580
|
|
|
|
|
|
|
|
1,135
|
|
|
|
|
|
|
|
(3,309
|
)
|
|
|
|
|
|
|
|
|
|
|
956
|
|
|
|
|
|
|
|
956
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
1,014
|
|
|
|
|
|
|
|
|
|
|
|
(86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
928
|
|
|
|
|
|
|
|
928
|
|
Fully taxable-equivalent adjustments
|
|
|
(198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(198
|
)
|
|
|
|
|
|
|
(198
|
)
|
Reclassifications(1)
|
|
|
1,887
|
|
|
|
118
|
|
|
|
|
|
|
|
(2,163
|
)
|
|
|
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-related
adjustments(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,858
|
)
|
|
|
(4,858
|
)
|
|
|
|
|
|
|
(4,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
3,363
|
|
|
|
(417
|
)
|
|
|
|
|
|
|
5,114
|
|
|
|
|
|
|
|
1,293
|
|
|
|
|
|
|
|
(3,309
|
)
|
|
|
|
|
|
|
(4,858
|
)
|
|
|
1,186
|
|
|
|
|
|
|
|
1,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per consolidated statements of operations
|
|
$
|
8,114
|
|
|
$
|
1,490
|
|
|
$
|
(273
|
)
|
|
$
|
(1,090
|
)
|
|
$
|
(755
|
)
|
|
$
|
(13,990
|
)
|
|
$
|
(315
|
)
|
|
$
|
(3,386
|
)
|
|
$
|
299
|
|
|
$
|
822
|
|
|
$
|
(9,084
|
)
|
|
$
|
1
|
|
|
$
|
(9,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
Net (Income)
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
Other
|
|
|
|
|
|
Provision
|
|
|
REO
|
|
|
Other
|
|
|
LIHTC
|
|
|
Tax
|
|
|
|
|
|
Loss
|
|
|
Net Income
|
|
|
|
Net Interest
|
|
|
and Guarantee
|
|
|
LIHTC
|
|
|
Non-Interest
|
|
|
Administrative
|
|
|
for Credit
|
|
|
Operations
|
|
|
Non-Interest
|
|
|
Partnerships
|
|
|
(Expense)
|
|
|
Net
|
|
|
Noncontrolling
|
|
|
(Loss)
|
|
|
|
Income
|
|
|
Income
|
|
|
Partnerships
|
|
|
Income (Loss)
|
|
|
Expenses
|
|
|
Losses
|
|
|
Expense
|
|
|
Expense
|
|
|
Tax Credit
|
|
|
Benefit
|
|
|
Income (Loss)
|
|
|
Interests
|
|
|
Freddie Mac
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
1,481
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(125
|
)
|
|
$
|
(130
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(7
|
)
|
|
$
|
|
|
|
$
|
(426
|
)
|
|
$
|
793
|
|
|
$
|
|
|
|
$
|
793
|
|
Single-family Guarantee
|
|
|
58
|
|
|
|
840
|
|
|
|
|
|
|
|
103
|
|
|
|
(212
|
)
|
|
|
(2,630
|
)
|
|
|
(265
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
747
|
|
|
|
(1,388
|
)
|
|
|
|
|
|
|
(1,388
|
)
|
Multifamily
|
|
|
98
|
|
|
|
17
|
|
|
|
(108
|
)
|
|
|
7
|
|
|
|
(49
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
149
|
|
|
|
17
|
|
|
|
117
|
|
|
|
1
|
|
|
|
118
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
175
|
|
|
|
147
|
|
|
|
(3
|
)
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
1,637
|
|
|
|
857
|
|
|
|
(108
|
)
|
|
|
(18
|
)
|
|
|
(404
|
)
|
|
|
(2,637
|
)
|
|
|
(265
|
)
|
|
|
(55
|
)
|
|
|
149
|
|
|
|
513
|
|
|
|
(331
|
)
|
|
|
(2
|
)
|
|
|
(333
|
)
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
(482
|
)
|
|
|
|
|
|
|
|
|
|
|
1,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
527
|
|
|
|
|
|
|
|
527
|
|
Credit guarantee-related adjustments
|
|
|
14
|
|
|
|
(156
|
)
|
|
|
|
|
|
|
2,054
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
|
1,818
|
|
|
|
|
|
|
|
1,818
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
(3,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,096
|
)
|
|
|
|
|
|
|
(3,096
|
)
|
Fully taxable-equivalent adjustments
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105
|
)
|
|
|
|
|
|
|
(105
|
)
|
Reclassifications(1)
|
|
|
392
|
|
|
|
56
|
|
|
|
|
|
|
|
(469
|
)
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368
|
|
|
|
368
|
|
|
|
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(108
|
)
|
|
|
(100
|
)
|
|
|
|
|
|
|
(575
|
)
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
(173
|
)
|
|
|
|
|
|
|
368
|
|
|
|
(488
|
)
|
|
|
|
|
|
|
(488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per consolidated statements of operations
|
|
$
|
1,529
|
|
|
$
|
757
|
|
|
$
|
(108
|
)
|
|
$
|
(593
|
)
|
|
$
|
(404
|
)
|
|
$
|
(2,537
|
)
|
|
$
|
(265
|
)
|
|
$
|
(228
|
)
|
|
$
|
149
|
|
|
$
|
881
|
|
|
$
|
(819
|
)
|
|
$
|
(2
|
)
|
|
$
|
(821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
Net (Income)
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
Other
|
|
|
|
|
|
Provision
|
|
|
REO
|
|
|
Other
|
|
|
LIHTC
|
|
|
Tax
|
|
|
|
|
|
Loss
|
|
|
Net Income
|
|
|
|
Net Interest
|
|
|
and Guarantee
|
|
|
LIHTC
|
|
|
Non-Interest
|
|
|
Administrative
|
|
|
for Credit
|
|
|
Operations
|
|
|
Non-Interest
|
|
|
Partnerships
|
|
|
(Expense)
|
|
|
Net
|
|
|
Noncontrolling
|
|
|
(Loss)
|
|
|
|
Income
|
|
|
Income
|
|
|
Partnerships
|
|
|
Income (Loss)
|
|
|
Expenses
|
|
|
Losses
|
|
|
Expense
|
|
|
Expense
|
|
|
Tax Credit
|
|
|
Benefit
|
|
|
Income (Loss)
|
|
|
Interests
|
|
|
Freddie Mac
|
|
|
|
(in millions)
|
|
|
Investments
|
|
$
|
1,780
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(110
|
)
|
|
$
|
(261
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(16
|
)
|
|
$
|
|
|
|
$
|
(487
|
)
|
|
$
|
906
|
|
|
$
|
|
|
|
$
|
906
|
|
Single-family Guarantee
|
|
|
135
|
|
|
|
1,735
|
|
|
|
|
|
|
|
207
|
|
|
|
(416
|
)
|
|
|
(3,979
|
)
|
|
|
(473
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
993
|
|
|
|
(1,846
|
)
|
|
|
|
|
|
|
(1,846
|
)
|
Multifamily
|
|
|
173
|
|
|
|
34
|
|
|
|
(225
|
)
|
|
|
15
|
|
|
|
(98
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
(11
|
)
|
|
|
298
|
|
|
|
45
|
|
|
|
215
|
|
|
|
1
|
|
|
|
216
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
182
|
|
|
|
145
|
|
|
|
(5
|
)
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
2,088
|
|
|
|
1,769
|
|
|
|
(225
|
)
|
|
|
113
|
|
|
|
(801
|
)
|
|
|
(3,995
|
)
|
|
|
(473
|
)
|
|
|
(87
|
)
|
|
|
298
|
|
|
|
733
|
|
|
|
(580
|
)
|
|
|
(4
|
)
|
|
|
(584
|
)
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
(492
|
)
|
|
|
|
|
|
|
|
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(667
|
)
|
|
|
|
|
|
|
(667
|
)
|
Credit guarantee-related adjustments
|
|
|
30
|
|
|
|
(317
|
)
|
|
|
|
|
|
|
2,058
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
(279
|
)
|
|
|
|
|
|
|
|
|
|
|
1,644
|
|
|
|
|
|
|
|
1,644
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
(1,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,571
|
)
|
|
|
|
|
|
|
(1,571
|
)
|
Fully taxable-equivalent adjustments
|
|
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(215
|
)
|
|
|
|
|
|
|
(215
|
)
|
Reclassifications(1)
|
|
|
740
|
|
|
|
94
|
|
|
|
|
|
|
|
(900
|
)
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421
|
|
|
|
421
|
|
|
|
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
239
|
|
|
|
(223
|
)
|
|
|
|
|
|
|
(764
|
)
|
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
(279
|
)
|
|
|
|
|
|
|
421
|
|
|
|
(388
|
)
|
|
|
|
|
|
|
(388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per consolidated statements of operations
|
|
$
|
2,327
|
|
|
$
|
1,546
|
|
|
$
|
(225
|
)
|
|
$
|
(651
|
)
|
|
$
|
(801
|
)
|
|
$
|
(3,777
|
)
|
|
$
|
(473
|
)
|
|
$
|
(366
|
)
|
|
$
|
298
|
|
|
$
|
1,154
|
|
|
$
|
(968
|
)
|
|
$
|
(4
|
)
|
|
$
|
(972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes the reclassification of: (a) the accrual of
periodic cash settlements of all derivatives not in qualifying
hedge accounting relationships from other non-interest income
(loss) to net interest income within the Investments segment;
(b) implied management and guarantee fees from net interest
income to other non-interest income (loss) within our
Single-family Guarantee and Multifamily segments; (c) net
buy-up and
buy-down fees from management and guarantee income to net
interest income within the Investments segment;
(d) interest income foregone on impaired loans from net
interest income to provision for credit losses within our
Single-family Guarantee segment; and (e) certain hedged
interest benefit (cost) amounts related to trust management
income from other non-interest income (loss) to net interest
income within our Investments segment.
|
(2)
|
Includes a non-cash charge, net related to the establishment of
a partial valuation allowance against our deferred tax assets,
net of approximately $(184) million and $2.9 billion
that is not included in Segment Earnings for the three and six
months ended June 30, 2009, respectively.
|
NOTE 17:
EARNINGS (LOSS) PER SHARE
We have participating securities related to options with
dividend equivalent rights that receive dividends as declared on
an equal basis with common shares, but are not obligated to
participate in undistributed net losses. Consequently, in
accordance with
EITF 03-6
we use the two-class method of computing earnings
per share. Basic earnings per common share are computed by
dividing net loss attributable to common stockholders by
weighted average common shares outstanding basic for
the period. The weighted average common shares
outstanding basic during the three and six months
ended June 30, 2009 includes the weighted average number of
shares during the periods that are associated with the warrant
for our common stock issued to Treasury as part of the Purchase
Agreement since it is unconditionally exercisable by the holder
at a minimal cost. See NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Conservatorship for
further information. On January 1, 2009, we adopted
FSP EITF 03-6-1.
Our adoption of this FSP had no significant impact on our
earnings (loss) per share.
Diluted earnings (loss) per share are computed as net loss
attributable to common stockholders divided by weighted average
common shares outstanding diluted for the period,
which considers the effect of dilutive common equivalent shares
outstanding. For periods with net income, the effect of dilutive
common equivalent shares outstanding includes: (a) the
weighted average shares related to stock options (including our
employee stock purchase plan); and (b) the weighted average
of non-vested restricted shares and non-vested restricted stock
units. Such items are included in the calculation of weighted
average common shares outstanding diluted during
periods of net income, when the
assumed conversion of the share equivalents has a dilutive
effect. Such items are excluded from the weighted average common
shares outstanding basic.
Table 17.1
Earnings (Loss) Per Common Share Basic and
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(dollars in millions, except per share amounts)
|
|
|
Net income (loss) attributable to Freddie Mac
|
|
$
|
768
|
|
|
$
|
(821
|
)
|
|
$
|
(9,083
|
)
|
|
$
|
(972
|
)
|
Preferred stock
dividends(1)
|
|
|
(1,142
|
)
|
|
|
(231
|
)
|
|
|
(1,520
|
)
|
|
|
(503
|
)
|
Amount allocated to participating security option
holders(2)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(374
|
)
|
|
$
|
(1,053
|
)
|
|
$
|
(10,603
|
)
|
|
$
|
(1,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic (in
thousands)(3)
|
|
|
3,253,716
|
|
|
|
646,868
|
|
|
|
3,254,815
|
|
|
|
646,603
|
|
Dilutive potential common shares (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
(in thousands)
|
|
|
3,253,716
|
|
|
|
646,868
|
|
|
|
3,254,815
|
|
|
|
646,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive potential common shares excluded from the
computation of dilutive potential common shares (in thousands)
|
|
|
7,191
|
|
|
|
11,933
|
|
|
|
8,099
|
|
|
|
10,265
|
|
Basic earnings (loss) per common share
|
|
$
|
(0.11
|
)
|
|
$
|
(1.63
|
)
|
|
$
|
(3.26
|
)
|
|
$
|
(2.28
|
)
|
Diluted earnings (loss) per common share
|
|
$
|
(0.11
|
)
|
|
$
|
(1.63
|
)
|
|
$
|
(3.26
|
)
|
|
$
|
(2.28
|
)
|
|
|
(1)
|
Consistent with the covenants of the Purchase Agreement, we paid
dividends on our senior preferred stock, but did not declare
dividends on any other series of preferred stock outstanding
during the three and six months ended June 30, 2009.
|
(2)
|
Represents distributed earnings during periods of net losses.
Effective January 1, 2009, we adopted FSP
EITF 03-06-1
and began including distributed and undistributed earnings
associated with unvested stock awards, net of amounts included
in compensation expense associated with these awards.
|
(3)
|
Includes the weighted average number of shares during the three
and six months ended June 30, 2009 that are associated with
the warrant for our common stock issued to Treasury as part of
the Purchase Agreement. This warrant is included in shares
outstanding basic, since it is unconditionally
exercisable by the holder at a minimal cost of $.00001 per share.
|
NOTE 18:
NONCONTROLLING INTERESTS
The equity and net earnings attributable to the noncontrolling
interests in consolidated subsidiaries are reported on our
consolidated balance sheets as noncontrolling interest and on
our consolidated statements of operations as net income (loss)
attributable to noncontrolling interest. There is no material
AOCI associated with the noncontrolling interests recorded on
our consolidated balance sheets. The majority of the balances in
these accounts relate to our two majority-owned REITs.
In February 1997, we formed two majority-owned REIT subsidiaries
funded through the issuance of common stock (99.9% of which is
held by us) and a total of $4.0 billion of perpetual,
step-down preferred stock issued to third party investors. The
dividend rate on the step-down preferred stock was 13.3% from
initial issuance through December 2006 (the initial term).
Beginning in 2007, the dividend rate on the step-down preferred
stock was reduced to 1.0%. Dividends on this preferred stock
accrue in arrears. The balance of the two step-down preferred
stock issuances as recorded within noncontrolling interest on
our consolidated balance sheets totaled $88 million and
$89 million at June 30, 2009 and December 31,
2008, respectively. The preferred stock continues to be
redeemable by the REITs under certain circumstances described in
the preferred stock offering documents as a tax event
redemption.
On September 19, 2008, the Director of FHFA, as
Conservator, advised us of FHFAs determination that no
further common or preferred stock dividends should be paid by
our REIT subsidiaries. FHFA specifically directed us, as the
controlling stockholder of both REIT subsidiaries and the boards
of directors of both companies, not to declare or pay any
dividends on the step-down preferred stock of the REITs until
FHFA directs otherwise. With regard to dividends on the
step-down
preferred stock of the REITs held by third parties, there were
$6 million of dividends in arrears as of June 30, 2009.
PART
II OTHER INFORMATION
Throughout PART II of this
Form 10-Q,
we use certain acronyms and terms and refer to certain
accounting pronouncements which are defined in the Glossary.
ITEM 1.
LEGAL PROCEEDINGS
We are involved as a party to a variety of legal proceedings
arising from time to time in the ordinary course of business.
See NOTE 11: LEGAL CONTINGENCIES to our
consolidated financial statements for more information regarding
our involvement as a party to various legal proceedings.
ITEM 1A.
RISK FACTORS
This
Form 10-Q
should be read together with the RISK FACTORS
sections in our
Form 10-Q
for the quarter ended March 31, 2009 and our 2008 Annual
Report, which describe various risks and uncertainties to which
we are or may become subject. These risks and uncertainties
could, directly or indirectly, adversely affect our business,
financial condition, results of operations, cash flows,
strategies
and/or
prospects.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Recent
Sales of Unregistered Securities
The securities we issue are exempted securities
under the Securities Act of 1933, as amended. As a result, we do
not file registration statements with the SEC with respect to
offerings of our securities. Following our entry into
conservatorship, we have suspended the operation of our Employee
Stock Purchase Plan, or ESPP, and are no longer making grants
under our 2004 Stock Compensation Plan, or 2004 Employee Plan,
or our 1995 Directors Stock Compensation Plan, as amended
and restated, or Directors Plan. Under the Purchase
Agreement, we cannot issue any new options, rights to purchase,
participations or other equity interests without Treasurys
prior approval. However, grants outstanding as of the date of
the Purchase Agreement remain in effect in accordance with their
terms. We collectively refer to the 2004 Employee Plan and 1995
Employee Plan as the Employee Plans.
During the three months ended June 30, 2009, no stock
options were granted or exercised under our Employee Plans or
Directors Plan. Under our ESPP, no options to purchase
shares of common stock were exercised and no options to purchase
shares of common stock were granted during the three months
ended June 30, 2009. Further, for the three months ended
June 30, 2009, under the Employee Plans and Directors
Plan, no restricted stock units were granted and restrictions
lapsed on 175,777 restricted stock units.
See NOTE 11: STOCK-BASED COMPENSATION in our
2008 Annual Report for more information.
Dividend
Restrictions
Our payment of dividends is subject to certain restrictions as
described in MARKET FOR REGISTRANTS COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES Dividend Restrictions in our 2008
Annual Report. Payment of dividends on our common stock is also
subject to the prior payment of dividends on our 24 series
of preferred stock and one series of senior preferred stock,
representing an aggregate of 464,170,000 shares and
1,000,000 shares, respectively, outstanding as of
June 30, 2009. Payment of dividends on all outstanding
preferred stock, other than the senior preferred stock, is also
subject to the prior payment of dividends on the senior
preferred stock. On June 30, 2009, we paid dividends of
$1.1 billion in cash on the senior preferred stock at the
direction of the Conservator. We did not declare or pay
dividends on any other series of preferred stock outstanding
during the three months ended June 30, 2009.
Issuer
Purchases of Equity Securities
We did not repurchase any of our common or preferred stock
during the three months ended June 30, 2009. Additionally,
we do not currently have any outstanding authorizations to
repurchase common or preferred stock. Under the Purchase
Agreement, we cannot repurchase our common or preferred stock
without Treasurys prior consent, and we may only purchase
or redeem the senior preferred stock in certain limited
circumstances set forth in the Certificate of Creation,
Designation, Powers, Preferences, Rights, Privileges,
Qualifications, Limitations, Restrictions, Terms and Conditions
of Variable Liquidation Preference Senior Preferred Stock.
Information
about Certain Securities Issuances by Freddie Mac
Pursuant to SEC regulations, public companies are required to
disclose certain information when they incur a material direct
financial obligation or become directly or contingently liable
for a material obligation under an off-balance sheet
arrangement. The disclosure must be made in a current report on
Form 8-K
under Item 2.03 or, if the obligation is incurred in
connection with certain types of securities offerings, in
prospectuses for that offering that are filed with the SEC.
Freddie Macs securities offerings are exempted from SEC
registration requirements. As a result, we are not required to
and do not file registration statements or prospectuses with the
SEC with respect to our securities offerings. To comply with the
disclosure requirements of
Form 8-K
relating to the incurrence of material financial obligations, we
report our incurrence of these types of obligations either in
offering circulars (or supplements thereto) that we post on our
website or in a current report on
Form 8-K,
in accordance with a no-action letter we received
from the SEC staff. In cases where the information is disclosed
in an offering circular posted on our website, the document will
be posted on our website within the same time period that a
prospectus for a non-exempt securities offering would be
required to be filed with the SEC.
The website address for disclosure about our debt securities is
www.freddiemac.com/debt. From this address, investors can access
the offering circular and related supplements for debt
securities offerings under Freddie Macs global debt
facility, including pricing supplements for individual issuances
of debt securities.
Disclosure about our off-balance sheet obligations pursuant to
some of the mortgage-related securities we issue can be found at
www.freddiemac.com/mbs. From this address, investors can access
information and documents about our mortgage-related securities,
including offering circulars and related offering circular
supplements.
We are providing our website addresses solely for your
information. Information appearing on our website is not
incorporated into this
Form 10-Q.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
On September 19, 2008, the Director of FHFA, acting as
Conservator of Freddie Mac, advised the company of FHFAs
determination that no further preferred stock dividends should
be paid by Freddie Macs REIT subsidiaries, Home Ownership
Funding Corporation and Home Ownership Funding
Corporation II. FHFA specifically directed Freddie Mac (as
the controlling shareholder of both companies) and the boards of
directors of both companies not to declare or pay any dividends
on the Step-Down Preferred Stock of the REITs until FHFA directs
otherwise. As a result, these companies are in arrears in the
payment of dividends with respect to the preferred stock. As of
the date of the filing of this report, the total arrearage with
respect to such preferred stock held by third parties was
$6 million. For more information, see NOTE 18:
NONCONTROLLING INTERESTS to our consolidated financial
statements.
ITEM 6.
EXHIBITS
The exhibits are listed in the Exhibit Index at the end of
this
Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Federal Home Loan Mortgage Corporation
John A. Koskinen
Interim Chief Executive Officer
(and principal financial officer)
Date: August 7, 2009
GLOSSARY
The Glossary includes acronyms, accounting pronouncements and
defined terms that are used throughout this
Form 10-Q.
|
|
|
Acronyms
|
AMT
|
|
Alternative Minimum Tax
|
AOCI
|
|
Accumulated other comprehensive income (loss), net of taxes
|
ARB
|
|
Accounting Research Bulletin
|
EITF
|
|
Emerging Issues Task Force of FASB
|
Euribor
|
|
Euro Interbank Offered Rate
|
FASB
|
|
Financial Accounting Standards Board
|
FHA
|
|
Federal Housing Administration
|
FHLB
|
|
Federal Home Loan Bank
|
FIN
|
|
Financial Interpretation Number
|
FSP
|
|
FASB Staff Position
|
GAAP
|
|
Generally accepted accounting principles
|
IRR
|
|
Internal Rate of Return
|
IRS
|
|
Internal Revenue Service
|
LIBOR
|
|
London Interbank Offered Rate
|
MD&A
|
|
Managements Discussion and Analysis of Financial Condition
and Results of Operations
|
NYSE
|
|
New York Stock Exchange
|
OTC
|
|
Over-the-counter
|
REIT
|
|
Real Estate Investment Trust
|
S&P
|
|
Standard & Poors
|
SEC
|
|
Securities and Exchange Commission
|
SFAS
|
|
Statement of Financial Accounting Standards
|
SOP
|
|
Statement of Position
|
VA
|
|
Department of Veteran Affairs
|
|
Accounting Pronouncements
|
EITF
03-6
|
|
Participating Securities and the Two-Class Method under FASB
Statement No. 128
|
EITF
99-20
|
|
Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transferor in Securitized Financial Assets
|
FIN 45
|
|
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including indirect Guarantees of Indebtedness of
Others an interpretation of FASB Statements
No. 5, 57 and 107 and rescission of FASB Interpretation
No. 34
|
FIN 46(R)
|
|
Consolidation of Variable Interest Entities an
interpretation of ARB No. 51
|
FSP
EITF 03-6-1
|
|
Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities
|
FSP FAS
157-4
|
|
Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
|
FSP FAS
115-2 and
FAS 124-2
|
|
Recognition and Presentation of Other-Than-Temporary Impairments
|
SFAS 5
|
|
Accounting for Contingencies
|
SFAS 107
|
|
Disclosures about Fair Value of Financial Instruments
|
SFAS 109
|
|
Accounting for Income Taxes
|
SFAS 133
|
|
Accounting for Derivative Instruments and Hedging Activities
|
SFAS 140
|
|
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities a replacement of FASB
Statement No. 125
|
SFAS 155
|
|
Accounting for Certain Hybrid Financial Instruments
an amendment of FASB Statements No. 133 and 140
|
SFAS 157
|
|
Fair Value Measurements
|
SFAS 159
|
|
The Fair Value Option for Financial Assets and Financial
Liabilities, including an Amendment of FASB Statement
No. 115
|
SFAS 160
|
|
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
|
SFAS 161
|
|
Disclosure about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133
|
SFAS 165
|
|
Subsequent Events
|
SFAS 166
|
|
Accounting for Transfers of Financial Assets an
amendment of FASB Statement No. 140
|
SFAS 167
|
|
Amendments to FASB Interpretation No. 46(R)
|
SOP
03-3
|
|
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
|
Defined
Terms
Agency securities Generally refers to
mortgage-related securities issued by the GSEs or government
agencies.
Alt-A
loan Although there is no universally accepted
definition of an
Alt-A loan,
industry participants have used this classification principally
to describe loans for which the underwriting process has been
streamlined in order to reduce the income documentation
requirements of the borrower or allow alternative documentation.
In determining our
Alt-A
exposure in loans underlying our single-family mortgage
portfolio, we have classified mortgage loans as
Alt-A if the
lender that delivers them to us has classified the loans as
Alt-A, or if
the loans had reduced documentation requirements, which indicate
that the loan should be classified as
Alt-A.
Adjustable-rate mortgage (ARM) A mortgage
loan with an interest rate that adjusts periodically over the
life of the mortgage loan based on changes in a benchmark index.
Basis points (BPS) One one-hundredth of 1%.
This term is commonly used to quote the yields of debt
instruments or movements in interest rates.
Buy-downs Up-front payments that are made to
us in connection with the formation of a PC that decrease
(i.e., partially prepay) the guarantee fee we will
receive over the life of the PC.
Buy-ups
Up-front payments made by us in connection with the formation of
a PC that increase the guarantee fee we will receive over the
life of the PC.
Call swaptions Purchased call swaptions,
where we make premium payments, are options for us to enter into
receive-fixed swaps. Conversely, written call swaptions, where
we receive premium payments, are options for our counterparty to
enter into receive-fixed swaps.
Cash and other investments portfolio Our cash
and other investments portfolio is comprised of our cash and
cash equivalents, federal funds sold and securities purchased
under agreements to resell and investments in
non-mortgage-related securities.
Charter The Federal Home Loan Mortgage
Corporation Act, as amended, 12 U.S.C. § 1451 et
seq.
Commercial mortgage-backed security (CMBS) A
security backed by mortgages on commercial property (often
including multifamily rental properties) rather than one-to-four
family residential real estate.
Conforming loan A conventional single-family
mortgage loan with an original principal balance that is equal
to or less than the applicable conforming loan limit, which is a
dollar amount cap on the size of the original principal balance
of single-family mortgage loans we are permitted by law to
purchase or securitize. The conforming loan limit is determined
annually based on changes in FHFAs housing price index.
Any decreases in the housing price index are accumulated and
used to offset any future increases in the housing price index
so that conforming loan limits do not decrease from
year-to-year. For 2006 to 2009, the base conforming loan limit
for a one-unit single-family residence was set at $417,000 with
higher limits in certain high-cost areas.
Conservator The Federal Housing Finance
Agency, acting in its capacity as conservator of Freddie Mac.
For information regarding the rights and powers of our
Conservator, see BUSINESS in our 2008 Annual Report.
Conventional mortgage A mortgage loan not
guaranteed or insured by the U.S. government.
Convexity A measure of how much a financial
instruments duration changes as interest rates change.
Convexity is used to measure the sensitivity of a financial
instruments value to changes in interest rates.
Core spread income Refers to a fair value
estimate of the net current period accrual of income from the
spread between mortgage-related investments and debt, calculated
on an option-adjusted basis.
Credit enhancement Any number of different
financial arrangements that are designed to reduce credit risk
by partially or fully compensating an investor in the event of
certain financial losses. Examples of credit enhancements
include mortgage insurance, overcollateralization,
indemnification agreements, and government guarantees.
Delinquency A failure to make timely payments
of principal or interest on a mortgage loan. We report
single-family delinquency information based on the number of
single-family mortgages that are 90 days or more past due
or in foreclosure. For multifamily loans, we report delinquency
based on the net carrying value of loans that are 90 days
or more past due or in foreclosure.
Department of Housing and Urban Development
(HUD) The government agency that was previously
responsible for regulation of our mission prior to the Reform
Act, when FHFA became our regulator. HUD still has authority
over Freddie Mac with respect to fair lending.
Derivative A financial instrument whose value
depends upon the characteristics and value of an underlying
financial asset or index, such as a security or commodity price,
interest or currency rates, or other financial indices.
Duration The weighted average maturity of a
financial instruments cash flows. Duration is used as a
measure of a financial instruments price sensitivity to
changes in interest rates.
Duration gap A measure of the difference
between the estimated durations of our interest rate sensitive
assets and liabilities. We present the duration gap of our
financial instruments in units expressed as months. A duration
gap of zero implies that the change in value of our interest
rate sensitive assets from an instantaneous change in interest
rates will be accompanied by an equal and offsetting change in
the value of our debt and derivatives, thus leaving the net fair
value of equity unchanged.
Fannie Mae Federal National Mortgage
Association.
Federal Housing Finance Agency (FHFA) FHFA
became our regulator as part of the Reform Act. For further
information regarding FHFA, see BUSINESS in our 2008
Annual Report.
Federal Reserve Board of Governors of the
Federal Reserve System.
FICO score A credit scoring system developed
by Fair, Isaac and Co. FICO scores are the most commonly used
credit scores today. FICO scores are ranked on a scale of
approximately 300 to 850 points with a higher value
indicating a lower likelihood of credit default.
Fixed-rate mortgage Refers to a mortgage
originated at a specific rate of interest that remains constant
over the life of the loan.
Foreclosure transfer Refers to our completion
of a transaction provided for by the foreclosure laws of the
applicable state, in which the delinquent borrowers
ownership interest in the property is terminated and title to
the property is transferred to us or to a third party. State
foreclosure laws commonly refer to such transactions as
foreclosure sales, sheriffs sales, or trustees
sales, among other terms. When we, as mortgage holder, acquire a
property in this manner, we pay for it by extinguishing some or
all of the mortgage debt.
Ginnie Mae Government National Mortgage
Association.
Government sponsored enterprises (GSEs)
Refers to certain legal entities created by the government,
including Freddie Mac, Fannie Mae and the Federal Home Loan
Banks.
Guarantee fee The fee that we receive for
guaranteeing the timely payment of principal and interest to
mortgage security investors.
Higher-priced mortgage loan, or HPML Refers
to a mortgage loan meeting the criteria within the Federal
Reserve Boards Regulation Z. This regulation
classifies loans as HPML if the annual percentage rate, or APR,
of the first-lien loan is at least 1.5% higher than the average
prime offer rate, or APOR, of comparable loans at the date the
interest rate on the loan is set, or locked. Second lien loans
are deemed HPML if the corresponding interest rate is at least
3.5% higher than the APOR. The APOR is calculated and published
by the FRB on a weekly basis.
Home affordable modification program (HAMP)
Refers to the effort under the MHA Program to help mortgage
borrowers that are either delinquent or at risk of imminent
default. The program requires servicers to follow specified
guidelines offering a consistent regime to modify a mortgage
loan. The program provides for incentive payments to investors
(other than Freddie Mac and Fannie Mae), servicers and
borrowers. The program is effective for loans originated on or
before January 1, 2009 and the new borrowers will be
accepted until on December 31, 2012.
Implied volatility A measurement of how the
value of a financial instrument changes due to changes in the
markets expectation of the magnitude of future variations
in interest rates. A decrease in implied volatility generally
increases the estimated fair value of our mortgage assets and
decreases the estimated fair value of our callable debt and
options-based derivatives, while an increase in implied
volatility generally has the opposite effect.
Interest-only loan / interest-only
mortgage A mortgage loan that allows the
borrower to pay only interest (either fixed-rate or
adjustable-rate) for a fixed period of time before principal
amortization payments are required to begin. After the end of
the interest-only period, the borrower can choose to refinance
the loan, pay the principal balance in total, or begin paying
the monthly scheduled principal due on the loan.
Lending Agreement An agreement entered into
with Treasury in September 2008, which established a secured
lending facility that is available until December 31, 2009.
For further information regarding the Lending Agreement, see
BUSINESS in our 2008 Annual Report.
Liquidation preference Generally refers to an
amount that holders of preferred securities are entitled to
receive out of available assets, upon liquidation of a company.
The initial liquidation preference of our senior preferred stock
was $1.0 billion. The aggregate liquidation preference of
our senior preferred stock includes the initial liquidation
preference plus amounts funded by Treasury under the Purchase
Agreement. In addition, dividends and periodic commitment fees
not paid in cash are added to the liquidation preference of the
senior preferred stock. We may make payments to reduce the
liquidation preference of the senior preferred stock only in
limited circumstances.
Low-income housing tax credit (LIHTC)
partnerships We invest as a limited partner in
LIHTC partnerships, which are formed for the purpose of
providing funding for affordable multifamily rental properties.
These LIHTC partnerships invest directly in limited partnerships
that own and operate multifamily rental properties that are
eligible for federal low-income housing tax credits. Although
the LIHTC partnerships generate operating losses, we could
realize a return on our investment through reductions in income
tax expense that result from low-income housing tax credits and
the deductibility of the operating losses of these partnerships.
Loan-to-value (LTV) ratio The ratio of the
unpaid principal amount of a mortgage loan to the value of the
property that serves as collateral for the loan, expressed as a
percentage. Loans with high LTV ratios generally tend to have a
higher risk of default and, if a default occurs, a greater risk
that the amount of the gross loss will be high compared to loans
with lower LTV ratios. We report LTV ratios based solely on the
amount of a loan purchased or guaranteed by us, generally
excluding any second lien mortgages.
Mandatory target capital surplus A surplus
over our statutory minimum capital requirement imposed by FHFA.
The mandatory target capital surplus, established in January
2004, was originally 30% and subsequently reduced to 20% in
March 2008. As announced by FHFA on October 9, 2008, this
FHFA-directed capital requirement will not be binding during the
term of conservatorship.
Monolines Companies that provide credit
insurance principally covering securitized assets in both the
primary issuance and secondary markets.
Mortgage assets Refers to both mortgage loans
and the mortgage-related securities we hold in our
mortgage-related investments portfolio.
Making Home Affordable Program (MHA Program)
Formerly known as the Housing Affordability and Stability Plan,
the MHA Program was announced by the Obama Administration in
February 2009. The MHA Program is designed to help in the
housing recovery by promoting liquidity and housing
affordability, and expanding foreclosure prevention efforts and
setting market standards. The MHA Program includes (i) the
Home Affordable Refinance Program, which gives eligible
homeowners with loans owned or guaranteed by Freddie Mac or
Fannie Mae an opportunity to refinance into more affordable
monthly payments, and (ii) the Home Affordable Modification
Program (HAMP).
Mortgage-related investments portfolio Our
investment portfolio, which consists principally of
mortgage-related securities and mortgage loans. For further
information regarding our mortgage-related investments
portfolio, see MD&A CONSOLIDATED BALANCE
SHEETS ANALYSIS Mortgage-Related Investments
Portfolio in our 2008 Annual Report.
Mortgage-to-debt option-adjusted spread (OAS)
The net option-adjusted spread between the mortgage and agency
debt sectors. This is an important factor in determining the
level of net interest yield on a new mortgage asset. Higher
mortgage-to-debt OAS means that a newly purchased mortgage asset
is expected to provide a greater return relative to the cost of
the debt issued to fund the purchase of the asset and,
therefore, a higher net interest yield. Mortgage-to-debt OAS
tends to be higher when there is weak demand for mortgage assets
and lower when there is strong demand for mortgage assets.
Moving Treasury Average (MTA) Option ARM loan
These are a type of option ARM, indexed to the MTA. The MTA
provides an average of the previous 12 monthly values of
the one-year U.S. Treasury constant maturity index.
Multifamily mortgage A mortgage loan secured
by a property with five or more residential rental units.
Net worth The amount by which our total
assets exceed our total liabilities as reflected on our
consolidated balance sheets prepared in conformity with GAAP.
With our adoption of SFAS 160 on January 1, 2009, our
net worth is now equal to our total equity (deficit).
Office of Federal Housing Enterprise Oversight
(OFHEO) Our former safety and soundness
regulator, prior to FHFAs establishment under the Reform
Act.
Option-adjusted spread (OAS) An estimate of
the incremental yield spread between a particular financial
instrument (e.g., a security, loan or derivative
contract) and a benchmark yield curve (e.g., LIBOR or
agency or Treasury securities). This includes consideration of
potential variability in the instruments cash flows
resulting from any options embedded in the instrument, such as
prepayment options.
Option ARM loan Mortgage loans that permit a
variety of repayment options, including minimum, interest only,
fully amortizing
30-year and
fully amortizing
15-year
payments. The minimum payment alternative for option ARM loans
allows the borrower to make monthly payments that may be less
than the interest accrued for the period. The unpaid interest,
known as negative amortization, is added to the principal
balance of the loan, which increases the outstanding loan
balance.
Participation Certificates (PCs) Securities
that we issue as part of a securitization transaction. Typically
we purchase mortgage loans from parties who sell mortgage loans,
place a pool of loans into a PC trust and issue PCs from that
trust. The PC trust agreement includes a guarantee that we will
supplement the mortgage payments received by the PC trust in
order to make timely payments of interest and scheduled
principal to fixed-rate PC holders and timely payments of
interest and ultimate payment of principal to adjustable-rate PC
holders. The PCs are generally transferred to the seller of the
mortgage loans in consideration of the loans or are sold to
outside third party investors if we purchased the mortgage loans
for cash.
Portfolio Market Value Sensitivity (PMVS) Our
primary interest rate risk measurement. PMVS measures are
estimates of the amount of average potential pre-tax loss in the
market value of our net assets due to parallel
(PMVS-L) and
non-parallel
(PMVS-YC)
changes in LIBOR.
Primary mortgage market The market where
lenders originate mortgage loans and lend funds to borrowers. We
do not lend money directly to homeowners, and do not participate
in this market.
Primary Mortgage Market Survey (PMMS)
Represents the national average mortgage commitment rate to a
qualified borrower exclusive of the fees and points required by
the lender. This commitment rate applies only to conventional
financing on conforming mortgages with LTV ratios of 80% or less.
Purchase Agreement / Senior Preferred Stock
Purchase Agreement An agreement with Treasury
entered into on September 7, 2008, which was subsequently
amended and restated on September 26, 2008 and further
amended on May 6, 2009. For further information regarding
our Purchase Agreement, see BUSINESS in our 2008
Annual Report.
Put swaptions Purchased put swaptions, where
we make premium payments, are options for us to enter into
pay-fixed swaps. Conversely, written put swaptions, where we
receive premium payments, are options for our counterparty to
enter into pay-fixed swaps.
Qualifying Special Purpose Entity (QSPE) A
term used within SFAS 140 to describe a particular trust or
other legal vehicle that is demonstrably distinct from the
transferor, has significantly limited permitted activities and
may only hold certain types of assets, such as passive financial
assets. The securitization trusts that are used for the
administration of cash remittances received on the underlying
assets of our PCs and Structured Securities are QSPEs.
Generally, the trusts classification as QSPEs exempts them
from the scope of FIN 46(R) and therefore they are not
recorded on our consolidated balance sheets.
Real Estate Mortgage Investment Conduit
(REMIC) A type of multi-class mortgage-related
security that divides the cash flows (principal and interest) of
the underlying mortgage-related assets into two or more classes
that meet the investment criteria and portfolio needs of
different investors.
Real estate owned (REO) Real estate which we
have acquired through foreclosure or through a deed in lieu of
foreclosure.
Reform Act The Federal Housing Finance
Regulatory Reform Act of 2008, which, among other things,
amended the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992 by establishing a single regulator, FHFA,
for the GSEs.
Secondary mortgage market A market consisting
of institutions engaged in buying and selling mortgages in the
form of whole loans (i.e., mortgages that have not been
securitized) and mortgage-related securities. We participate in
the secondary mortgage market by purchasing mortgage loans and
mortgage-related securities for investment and by issuing
guaranteed mortgage-related securities, principally PCs.
Senior preferred stock The shares of Variable
Liquidation Preference Senior Preferred Stock issued to Treasury
under the Purchase Agreement.
Single-family mortgage A mortgage loan
secured by a property containing four or fewer residential
dwelling units.
Single-family mortgage portfolio Consists of
single-family mortgage loans for which we actively manage credit
risk. These include single-family loans held in our
mortgage-related investments portfolio as well as those
underlying our PCs, Structured Securities and other
mortgage-related guarantees and excluding certain Structured
Transactions and that portion of our Structured Securities that
are backed by Ginnie Mae Certificates.
Spread The difference between the yields of
two debt securities, or the difference between the yield of a
debt security and a benchmark yield, such as LIBOR.
Strips Mortgage pass-through securities
created by separating the principal and interest payments on a
pool of mortgage loans. A principal-only strip entitles the
security holder to principal cash flows, but no interest cash
flows, from the underlying mortgages. An interest-only strip
entitles the security holder to interest cash flows, but no
principal cash flows, from the underlying mortgages.
Structured Securities Single- and multi-class
securities issued by Freddie Mac that represent beneficial
interests in pools of PCs and certain other types of
mortgage-related assets. Single-class Structured Securities pass
through the cash flows (principal and interest) on the
underlying mortgage-related assets. Multi-class Structured
Securities divide the cash flows of the underlying
mortgage-related assets into two or more classes that meet the
investment criteria and portfolio needs of different investors.
Our principal multi-class Structured Securities qualify for tax
treatment as REMICs.
Structured Transactions Transactions in which
Structured Securities are issued to third parties in exchange
for non-Freddie Mac mortgage-related securities, which are
transferred to trusts specifically created for the purpose of
issuing securities or certificates in the Structured
Transaction. These trusts issue various senior interests,
subordinated interests or both. We purchase interests, including
senior interests, of the trusts and simultaneously issue
guaranteed Structured Securities backed by these interests.
Although Structured Transactions generally have underlying
mortgage loans with higher risk characteristics, they may afford
us credit protection from losses due to the underlying structure
employed and additional credit enhancement features.
Subprime Subprime generally refers to the
credit risk classification of a loan. There is no universally
accepted definition of subprime. The subprime segment of the
mortgage market primarily serves borrowers with poorer credit
payment histories and such loans typically have a mix of credit
characteristics that indicate a higher likelihood of default and
higher loss severities than prime loans. Such characteristics
might include a combination of high LTV ratios, low credit
scores or originations using lower underwriting standards such
as limited or no documentation of a borrowers income.
Swaption An option contract to enter into an
interest rate swap. In exchange for an option premium, a buyer
obtains the right but not the obligation to enter into a
specified swap agreement with the issuer on a specified future
date.
Total mortgage portfolio Includes mortgage
loans and mortgage-related securities held on our consolidated
balance sheet as well as the balances of PCs, Structured
Securities and other financial guarantees on mortgage loans and
securities held by third parties. Guaranteed PCs and Structured
Securities held by third parties are not included on our
consolidated balance sheets.
Treasury U.S. Department of the Treasury.
Variable Interest Entity (VIE) A VIE is an
entity: (a) that has a total equity investment at risk that
is not sufficient to finance its activities without additional
subordinated financial support provided by another party; or
(b) where the group of equity holders does not have:
(i) the ability to make significant decisions about the
entitys activities; (ii) the obligation to absorb the
entitys expected losses; or (iii) the right to
receive the entitys expected residual returns.
Warrant Refers to the warrant we issued to
Treasury on September 8, 2008 as part of the Purchase
Agreement. The warrant provides Treasury the ability to purchase
shares of our common stock equal to 79.9% of the total number of
shares of Freddie Mac common stock outstanding on a fully
diluted basis on the date of exercise.
Yield curve A graphical display of the
relationship between yields and maturity dates for bonds of the
same credit quality. The slope of the yield curve is an
important factor in determining the level of net interest yield
on a new mortgage asset, both initially and over time. For
example, if a mortgage asset is purchased when the yield curve
is inverted, with short-term rates higher than long-term rates,
our net interest yield on the asset will tend to be lower
initially and then increase over time. Likewise, if a mortgage
asset is purchased when the yield curve is steep, with
short-term rates lower than long-term rates, our net interest
yield on the asset will tend to be higher initially and then
decrease over time.
EXHIBIT
INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
3
|
.1
|
|
Bylaws of the Federal Home Loan Mortgage Corporation, as amended
and restated June 5, 2009 (incorporated by reference to
Exhibit 3.1 to the Registrants Current Report on
Form 8-K
as filed on June 8, 2009)
|
|
4
|
.1
|
|
Federal Home Loan Mortgage Corporation Global Debt Facility
Agreement, dated April 3, 2009 (incorporated by reference
to Exhibit 4.1 to the Registrants Quarterly Report on
Form 10-Q
for the period ended March 31, 2009, as filed on
May 12, 2009)
|
|
10
|
.1
|
|
Amendment to Amended and Restated Senior Preferred Stock
Purchase Agreement, dated as of May 6, 2009, between the
United States Department of the Treasury and Federal Home Loan
Mortgage Corporation, acting through the Federal Housing Finance
Agency as its duly appointed Conservator (incorporated by
reference to Exhibit 10.6 to the Registrants
Quarterly Report on
Form 10-Q
for the period ended March 31, 2009, as filed on
May 12, 2009)
|
|
10
|
.2
|
|
Memorandum Agreement, dated July 20, 2009, between Freddie
Mac and Charles E. Haldeman, Jr. (incorporated by
reference to Exhibit 10.1 to the Registrants Current
Report on
Form 8-K,
as filed on July 21, 2009)*
|
|
10
|
.3
|
|
Recapture Agreement, dated July 21, 2009, between Freddie
Mac and Charles E. Haldeman, Jr. (incorporated by
reference to Exhibit 10.2 to the Registrants Current
Report on
Form 8-K,
as filed on July 21, 2009)*
|
|
10
|
.4
|
|
|
|
10
|
.5
|
|
|
|
10
|
.6
|
|
|
|
12
|
.1
|
|
|
|
31
|
.1
|
|
|
|
32
|
.1
|
|
|
|
|
* |
This exhibit is a management contract or compensatory plan or
arrangement.
|