e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
Commission File Number:
000-53330
Federal Home Loan Mortgage
Corporation
(Exact name of registrant as
specified in its charter)
Freddie Mac
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Federally chartered corporation
(State or other jurisdiction
of
incorporation or organization)
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8200 Jones Branch Drive
McLean, Virginia
22102-3110
(Address of principal
executive
offices, including zip code)
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52-0904874
(I.R.S. Employer
Identification No.)
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(703) 903-2000
(Registrants telephone
number,
including area code)
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Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to
Section 12(g)
of the Act:
Voting Common Stock, no par value
per share (OTC: FMCC)
Variable Rate, Non-Cumulative
Preferred Stock, par value $1.00 per share (OTC: FMCCI)
5% Non-Cumulative Preferred Stock,
par value $1.00 per share (OTC: FMCKK)
Variable Rate, Non-Cumulative
Preferred Stock, par value $1.00 per share (OTC: FMCCG)
5.1% Non-Cumulative Preferred
Stock, par value $1.00 per share (OTC: FMCCH)
5.79% Non-Cumulative Preferred
Stock, par value $1.00 per share (OTC: FMCCK)
Variable Rate, Non-Cumulative
Preferred Stock, par value $1.00 per share (OTC: FMCCL)
Variable Rate, Non-Cumulative
Preferred Stock, par value $1.00 per share (OTC: FMCCM)
Variable Rate, Non-Cumulative
Preferred Stock, par value $1.00 per share (OTC: FMCCN)
5.81% Non-Cumulative Preferred
Stock, par value $1.00 per share (OTC: FMCCO)
6% Non-Cumulative Preferred Stock,
par value $1.00 per share (OTC: FMCCP)
Variable Rate, Non-Cumulative
Preferred Stock, par value $1.00 per share (OTC: FMCCJ)
5.7% Non-Cumulative Preferred
Stock, par value $1.00 per share (OTC: FMCKP)
Variable Rate, Non-Cumulative
Perpetual Preferred Stock, par value $1.00 per share (OTC: FMCCS)
6.42% Non-Cumulative Perpetual
Preferred Stock, par value $1.00 per share (OTC: FMCCT)
5.9% Non-Cumulative Perpetual
Preferred Stock, par value $1.00 per share (OTC: FMCKO)
5.57% Non-Cumulative Perpetual
Preferred Stock, par value $1.00 per share (OTC: FMCKM)
5.66% Non-Cumulative Perpetual
Preferred Stock, par value $1.00 per share (OTC: FMCKN)
6.02% Non-Cumulative Perpetual
Preferred Stock, par value $1.00 per share (OTC: FMCKL)
6.55% Non-Cumulative Perpetual
Preferred Stock, par value $1.00 per share (OTC: FMCKI)
Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, par value $1.00 per
share (OTC: FMCKJ)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o
No x
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or
Section 15(d)
of the
Act. Yes o
No x
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. Yes x
No o
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
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 x
Non-accelerated filer
(Do not check if a smaller
reporting
company) o
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). Yes o
No x
The aggregate market value of the common stock held by
non-affiliates computed by reference to the price at which the
common equity was last sold on June 30, 2010 (the last
business day of the registrants most recently completed
second fiscal quarter) was $266.2 million.
As of February 11, 2011, there were 649,182,461 shares
of the registrants common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF
CONTENTS
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333
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334
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E-1
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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PART
I
This
Form 10-K
includes forward-looking statements that are based on current
expectations and are subject to significant risks and
uncertainties. These forward-looking statements are made as of
the date of this
Form 10-K
and we undertake no obligation to update any forward-looking
statement to reflect events or circumstances occurring after the
date of this
Form 10-K.
Actual results might differ significantly from those described
in or implied by such statements due to various factors and
uncertainties, including those described in
BUSINESS Forward-Looking Statements, and
RISK FACTORS in this
Form 10-K.
Throughout this
Form 10-K,
we use certain acronyms and terms which are defined in the
Glossary.
ITEM 1.
BUSINESS
Conservatorship
We continue to operate under the direction of FHFA as our
Conservator. We are also subject to certain constraints on our
business activities by Treasury due to the terms of, and
Treasurys rights under, the Purchase Agreement. Our
ability to access funds from Treasury under the Purchase
Agreement is critical to keeping us solvent. The conservatorship
and related matters have had a wide-ranging impact on us,
including our regulatory supervision, management, business,
financial condition and results of operations.
As our Conservator, FHFA succeeded to all rights, titles, powers
and privileges of Freddie Mac, and of any stockholder, officer
or director thereof, with respect to the company and its assets.
FHFA, as Conservator, has directed and will continue to direct
certain of our business activities and strategies. FHFA has
delegated certain authority to our Board of Directors to
oversee, and management to conduct, day-to-day operations. The
directors serve on behalf of, and exercise authority as directed
by, the Conservator.
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. Our future structure and role are
currently being considered by the Obama Administration and
Congress. We have no ability to predict the outcome of these
deliberations. While we are not aware of any current plans of
our Conservator to significantly change our business model or
capital structure in the near-term, there are likely to be
significant changes beyond the near-term that we expect to be
decided by the Obama Administration and Congress.
On February 11, 2011, the Obama Administration delivered a
report to Congress that lays out the Administrations plan
to reform the U.S. housing finance market, including
options for structuring the governments long-term role in
a housing finance system in which the private sector is the
dominant provider of mortgage credit. The report recommends
winding down Freddie Mac and Fannie Mae, stating that the Obama
Administration will work with FHFA to determine the best way to
responsibly reduce the role of Freddie Mac and Fannie Mae in the
market and ultimately wind down both institutions. The report
states that these efforts must be undertaken at a deliberate
pace, which takes into account the impact that these changes
will have on borrowers and the housing market.
The report states that the government is committed to ensuring
that Freddie Mac and Fannie Mae have sufficient capital to
perform under any guarantees issued now or in the future and the
ability to meet any of their debt obligations, and further
states that the Obama Administration will not pursue policies or
reforms in a way that would impair the ability of Freddie Mac
and Fannie Mae to honor their obligations. The report states the
Obama Administrations belief that under the
companies senior preferred stock purchase agreements with
Treasury, there is sufficient funding to ensure the orderly and
deliberate wind down of Freddie Mac and Fannie Mae, as described
in the Administrations plan.
For more information, see Executive Summary
Long-Term Financial Sustainability and Future
Status.
Our business objectives and strategies have in some cases been
altered since we were placed 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. Certain changes to our business objectives and
strategies are designed to provide support for the mortgage
market in a manner that serves our public mission and other
non-financial objectives. However, these changes to our business
objectives and strategies may not contribute to our
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, may adversely
impact our financial results, including our segment results. For
example, our current business objectives reflect, in part,
direction given to us by the Conservator. These efforts are
expected to help homeowners and the mortgage market and may help
to mitigate future credit losses. However, some of our
activities are expected to have an adverse impact on our near-
and long-term financial results. The Conservator and Treasury
also did not authorize us to engage in certain business
activities and transactions, including the sale of certain
assets, which we
believe may have had a beneficial impact on our results of
operations or financial condition, if executed. Our inability to
execute such transactions may adversely affect our
profitability, and thus contribute to our need to draw
additional funds under the Purchase Agreement.
In a letter to the Chairmen and Ranking Members of the
Congressional Banking and Financial Services Committees dated
February 2, 2010, the Acting Director of FHFA stated that
the focus of the conservatorship is on conserving assets,
minimizing corporate losses, ensuring Freddie Mac and Fannie Mae
continue to serve their mission, overseeing remediation of
identified weaknesses in corporate operations and risk
management, and ensuring that sound corporate governance
principles are followed. Specifically, the Acting Director of
FHFA stated that minimizing our credit losses is our central
goal and that we will be limited to continuing our existing core
business activities and taking actions necessary to advance the
goals of the conservatorship. The Acting Director stated that
permitting us to engage in the development of new products is
inconsistent with the goals of the conservatorship. This
directive could have an adverse effect on our business and
profitability in future periods.
We had a net worth deficit of $401 million as of
December 31, 2010, and, as a result, FHFA, as Conservator,
will submit a draw request, on our behalf, to Treasury under the
Purchase Agreement in the amount of $500 million. As a
result of draws under the Purchase Agreement, the aggregate
liquidation preference of the senior preferred stock increased
from $1.0 billion as of September 8, 2008 to
$64.2 billion as of December 31, 2010. Under the
Purchase Agreement, our ability to repay the liquidation
preference of the senior preferred stock is limited and we may
not be able to do so for the foreseeable future, if at all. The
aggregate liquidation preference of the senior preferred stock
and our related dividend obligations will increase further if we
receive additional draws under the Purchase Agreement or if any
dividends or quarterly commitment fees payable under the
Purchase Agreement are not paid in cash. The amounts we are
obligated to pay in dividends on the senior preferred stock are
substantial and will have an adverse impact on our financial
position and net worth. We expect to make additional draws under
the Purchase Agreement in future periods.
Our annual dividend obligation on the senior preferred stock,
based on the current liquidation preference, is
$6.4 billion, which is in excess of our annual historical
earnings in all but one period. Continued cash payment of senior
preferred dividends, combined with potentially substantial
quarterly commitment fees payable to Treasury under the Purchase
Agreement, will have an adverse impact on our future financial
condition and net worth. The payment of dividends on our senior
preferred stock in cash reduces our net worth. For periods in
which our earnings and other changes in equity do not result in
positive net worth, draws under the Purchase Agreement
effectively fund the cash payment of senior preferred dividends
to Treasury.
For more information on our current business objectives, see
Executive Summary Our Primary Business
Objectives. For more information on the
conservatorship and government support for our business see
Executive Summary Government Support for
Our Business and Conservatorship and Related
Matters.
Executive
Summary
You should read this Executive Summary in conjunction with
our MD&A and consolidated financial statements and related
notes for the year ended December 31, 2010.
Overview
Freddie Mac is a GSE chartered by Congress in 1970 with a public
mission to provide liquidity, stability, and affordability to
the U.S. housing market. We have maintained a consistent
market presence since our inception, providing mortgage
liquidity in a wide range of economic environments. During the
worst housing and financial crisis since the Great Depression,
we are working to support the recovery of the housing market and
the nations economy by providing essential liquidity to
the mortgage market and helping to stem the rate of
foreclosures. Taken together, we believe our actions are helping
communities across the country by providing Americas
families with access to mortgage funding at low rates while
helping distressed borrowers keep their homes and avoid
foreclosure.
Summary
of Financial Results
Our financial performance in 2010, including our net loss,
continued to be impacted by the ongoing weakness in the economy,
including the mortgage market. Our total comprehensive income
(loss) was $1.2 billion and $282 million for the
fourth quarter and full year of 2010, respectively, consisting
of: (a) a net loss of $113 million and
$14.0 billion, respectively, reflecting significant
provisions for credit losses; and (b) $1.3 billion and
$14.3 billion of changes in other comprehensive income
(loss), respectively, primarily resulting from improved fair
values on available-for-sale securities recorded in AOCI.
Our total equity (deficit) was $(401) million at
December 31, 2010 due to several contributing factors,
including our dividend payments on our senior preferred stock,
which exceeded total comprehensive income (loss) for the fourth
quarter of 2010. To address our deficit in net worth, FHFA, as
Conservator, will submit a draw request on our behalf to
Treasury under the Purchase Agreement for $500 million.
During 2010, we paid cash dividends to Treasury of
$5.7 billion on our senior preferred stock. We received
cash proceeds of $12.5 billion from draws under
Treasurys funding commitment during 2010. These draws were
driven in large part by changes in accounting principles adopted
on January 1, 2010, which resulted in a net decrease to
total equity (deficit) of $11.7 billion. As a result of
these draws from Treasury under the Purchase Agreement during
2010, the aggregate liquidation preference of Treasurys
senior preferred stock increased to $64.2 billion at
December 31, 2010. See Changes in
Accounting Standards Related to Accounting for Transfers of
Financial Assets and Consolidation of VIEs for
additional information related to our changes in accounting
principles.
Our
Primary Business Objectives
Under conservatorship, we are focused on: (a) meeting the
needs of the U.S. residential mortgage market by making home
ownership and rental housing more affordable by providing
liquidity to mortgage originators and, indirectly, to mortgage
borrowers; (b) working to reduce the number of foreclosures
and helping to keep families in their homes, including through
our role in the MHA Program initiatives, including HAMP, and our
relief refinance mortgage initiative; (c) minimizing our
credit losses; and (d) maintaining the credit quality of
the loans we purchase and guarantee. These objectives reflect,
in part, direction we have received from the Conservator. We
also have a variety of different, and potentially competing,
objectives based on our charter, public statements from Treasury
and FHFA officials, and other guidance from our Conservator. For
more information, see Conservatorship and Related
Developments Impact of Conservatorship and
Related Actions on Our Business.
Providing
Mortgage Liquidity and Conforming Loan
Availability
We provide liquidity and support to the U.S. mortgage market in
a number of important ways:
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Our support enables borrowers to have access to a variety of
conforming mortgage products, including the prepayable
30-year
fixed-rate mortgage which represents the foundation of the
mortgage market.
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Our support provides lenders with a constant source of
liquidity. We estimate that we, Fannie Mae, and Ginnie Mae
collectively guaranteed approximately 89% of the single-family
conforming mortgages originated during 2010.
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Our consistent market presence provides assurance to our
customers that there will be a buyer for their conforming loans
that meet our credit standards. We believe this provides market
stability in difficult environments.
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We are an important counter-cyclical influence as we stay in the
market even when other sources of capital have pulled out, as
evidenced by the events of the last three years.
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During 2010, we guaranteed $384.6 billion in UPB of
single-family conforming mortgage loans representing
1.8 million families who purchased homes or refinanced
their mortgages. Relief refinance mortgages with LTV ratios of
80% and above represented approximately 12% of our total
single-family credit guarantee portfolio purchases in 2010.
These mortgages comprised approximately 4% of our total
single-family credit guarantee portfolio at December 31,
2010.
Borrowers typically pay a lower interest rate on loans acquired
or guaranteed by Freddie Mac, Fannie Mae, or Ginnie Mae.
Mortgage originators are generally able to offer homebuyers
lower mortgage rates on conforming loan products, including
ours, in part because of the value investors place on
GSE-guaranteed mortgage-related securities. Prior to 2007,
mortgage markets were less volatile, home values were stable or
rising, and there were many sources of mortgage funds. We
estimate that prior to 2007 the average effective interest rates
on conforming single-family mortgage loans were about
30 basis points lower than on non-conforming loans. Since
2007, there have been fewer sources of mortgage funds, and we
estimate that interest rates on conforming loans, excluding
conforming jumbo loans, have been lower than those on
non-conforming loans by as much as 184 basis points. In
December 2010, we estimate that borrowers were paying an average
of 68 basis points less on these conforming loans than on
non-conforming loans. These estimates are based on data provided
by HSH Associates, a third-party provider of mortgage market
data.
Reducing
Foreclosures and Keeping Families in Homes
During the current housing crisis, we are focused on reducing
the number of foreclosures and helping to keep families in their
homes. In addition to our participation in HAMP, we introduced
several new initiatives to help eligible borrowers during this
crisis, including our relief refinance mortgage initiative. In
2010, we helped more than 275,000 borrowers either stay in
their homes or sell their properties and avoid foreclosure
through our various workout programs, including HAMP.
Table 1 presents our recent single-family loan workout
activities.
Table 1
Total Single-Family Loan Workout
Volumes(1)
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For the Three Months Ended
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12/31/2010
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09/30/2010
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06/30/2010
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03/31/2010
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12/31/2009
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(number of loans)
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Loan modifications
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37,203
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39,284
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49,562
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44,228
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15,805
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Repayment plans
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7,964
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7,030
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7,455
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8,761
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8,129
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Forbearance
agreements(2)
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5,945
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6,976
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12,815
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8,858
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8,780
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Short sales and
deed-in-lieu
transactions
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12,097
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10,472
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9,542
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7,064
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6,533
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Total single-family loan workouts
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63,209
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63,762
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79,374
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68,911
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39,247
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(1)
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Based on actions completed with borrowers for loans within our
single-family credit guarantee portfolio. Excludes those
modification, repayment, and forbearance activities for which
the borrower has started the required process, but the actions
have not been made permanent, or effective, such as loans in the
trial period under HAMP. Also excludes certain loan workouts
where our single-family seller/servicers have executed
agreements in the current or prior periods, but these have not
been incorporated into certain of our operational systems, due
to delays in processing. These categories are not mutually
exclusive and a loan in one category may also be included within
another category in the same period.
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(2)
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Excludes loans with long-term forbearance under a completed loan
modification. Many borrowers complete a short-term forbearance
agreement before another loan workout is pursued or completed.
We only report forbearance activity for a single loan once
during each quarterly period; however, a single loan may be
included under separate forbearance agreements in separate
periods.
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We continue to execute a high volume of loan workouts. Recent
highlights include the following:
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We completed 275,256 single-family loan workouts during
2010, including 170,277 loan modifications and 39,175 short
sales and deed-in-lieu transactions.
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Based on information provided by the MHA Program administrator,
our servicers had completed 107,073 loan modifications
under HAMP from the introduction of the initiative in 2009
through December 31, 2010 and, as of December 31,
2010, 22,352 loans were in HAMP trial periods (this figure
only includes borrowers who made at least their first payment
under the trial period).
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In addition to these efforts, we continue to focus on assisting
consumers through outreach and other efforts. These efforts
included: (a) meeting with borrowers nationwide in
foreclosure prevention workshops; (b) launching the
Borrower Help Network to provide distressed borrowers with free
one-on-one
counseling; (c) opening Borrower Help Centers in several
cities nationwide to provide free counseling to distressed
borrowers; and (d) in instances where foreclosure has
occurred, allowing affected families who qualify to rent back
their homes for a limited period of time. We have also increased
our efforts to directly assist our servicers by increasing our
servicing staff and placing
on-site
specialists at many of our mortgage servicer locations.
For more information about HAMP, other loan workout programs,
and our relief refinance mortgage initiative, and other options
to help eligible borrowers, see MD&A RISK
MANAGEMENT Credit Risk Mortgage
Credit Risk Portfolio Management
Activities MHA Program and
Loan Workout Activities.
Minimizing
Credit Losses
To help minimize the credit losses related to our guarantee
activities, we are focused on:
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pursuing a variety of loan workouts, including foreclosure
alternatives, in an effort to reduce the severity of losses we
incur;
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managing foreclosure timelines;
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managing our inventory of foreclosed properties to reduce costs
and maximize proceeds; and
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pursuing contractual remedies against originators, lenders,
servicers, and credit enhancement providers, as appropriate.
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We establish guidelines for our servicers and provide them with
software tools to determine which loan workout solution would be
expected to provide the best opportunity for minimizing our
credit losses based on each borrowers qualifications. For
example, if a borrower qualifies for a loan modification, this
often provides us a better opportunity to minimize credit losses
than a foreclosure. We rely on our servicers to pursue the best
alternative available based on our guidelines and software tools.
Our servicers pursue repayment plans and loan modifications for
borrowers facing financial or other hardships since the level of
recovery (if a loan reperforms) may often be much higher than
with foreclosure or foreclosure alternatives. In cases where
this alternative is not possible or successful, a short sale
transaction typically provides us with a comparable or higher
level of recovery than what we would receive through property
sales from our REO inventory. In large part, the benefit of
short sales arises from the avoidance of costs we would
otherwise incur to complete the foreclosure and dispose of the
property, including maintenance and other property expenses
associated with holding REO property, legal fees, commissions,
and other selling expenses of traditional real estate
transactions. The foreclosure process is a lengthy one in many
jurisdictions with significant associated costs to complete,
including, in times of home value decline, foregone recovery we
might receive from an earlier sale. The nationwide average for
completion of a foreclosure (as measured from the date of the
last scheduled payment made by the borrower) on our
single-family delinquent loans, excluding those underlying our
Other Guarantee Transactions, was 448 days for the
foreclosures we completed during 2010 and varied widely among
jurisdictions. We expect that the growth in short sales will
continue, in part due to our recent initiatives, including
offering incentives to servicers to complete short sales instead
of foreclosures as well as our implementation of HAFA.
We have contractual arrangements with our seller/servicers under
which they agree to provide us with mortgage loans that have
been originated under specified underwriting standards. If we
subsequently discover that contractual standards were not
followed, we can exercise certain contractual remedies to
mitigate our credit losses. These contractual remedies include
the ability to require the seller/servicer to repurchase the
loan at its current UPB or make us whole for any credit losses
realized with respect to the loan. As of December 31, 2010,
the UPB of loans subject to repurchase requests issued to our
single-family seller/servicers was approximately
$3.8 billion, and approximately 34% of these requests were
outstanding for more than four months since issuance of our
repurchase request. The actual amount we expect to collect on
these requests is significantly less than their UPB amounts
primarily because many of these requests are satisfied by
reimbursement of our realized losses by seller/servicers, or may
be rescinded in the course of the contractual appeals process.
During 2010 and 2009, we entered into agreements with certain
seller/servicers to release certain loans in their portfolio
from repurchase obligations in exchange for one-time cash
payments. We may enter into similar agreements or seek other
remedies in the future. See MD&A RISK
MANAGEMENT Credit Risk Institutional
Credit Risk Mortgage Seller/Servicers for
further information on our agreements with our seller/servicers.
Historically, our credit loss exposure has also been partially
mitigated by mortgage insurance, which is a form of credit
enhancement. Primary mortgage insurance is required to be
purchased, at the borrowers expense, for certain mortgages
with higher LTV ratios. We received payments under primary and
other mortgage insurance of $1.8 billion and
$952 million in the years ended December 31, 2010 and
2009, respectively, to help mitigate our credit losses.
Maintaining
the Credit Quality of New Loan Purchases and
Guarantees
We continue to focus on maintaining underwriting standards that
allow us to purchase and guarantee loans made to qualified
borrowers that we believe will provide management and guarantee
fee income, over the long-term, that exceeds our anticipated
credit-related and administrative expenses on the underlying
loans.
As of December 31, 2010, more than one-third of our
single-family credit guarantee portfolio consisted of mortgage
loans originated in 2009 and 2010. The substantial majority of
the single-family mortgages we purchased in 2010 were
30-year and
15-year
fixed-rate mortgages. We believe the credit quality of the
single-family loans we acquired in 2009 and 2010 (excluding
relief refinance mortgages) is better than that of loans we
acquired from 2005 through 2008 as measured by original LTV
ratios, FICO scores, and income documentation standards. These
newer loans have also experienced significantly better serious
delinquency trends at this stage in their lifecycle than loans
acquired from 2006 through 2008. Early serious delinquency
performance and home price declines have historically been
indicators of long-term credit performance.
We believe the improvement in credit quality we are experiencing
is primarily the result of the combination of: (a) changes
in our underwriting guidelines implemented during 2009 and 2010;
(b) fewer purchases in 2009 and 2010 of loans with
higher-risk characteristics; (c) changes in mortgage
insurers and lenders underwriting practices; and
(d) an increase in the relative amount of refinance
mortgages versus new purchase mortgages we acquired in 2009 and
2010. Approximately 80% of our purchases for the single-family
credit guarantee portfolio in both 2010 and 2009 were refinance
mortgages. Refinance mortgages typically lower the
borrowers monthly mortgage payment, and thereby reduce the
risk that the borrower will default.
Table 2 presents the composition, loan characteristics, and
serious delinquency rates of loans in our single-family credit
guarantee portfolio, by year of origination at December 31,
2010.
Table 2
Single-Family Credit Guarantee Portfolio Data by Year of
Origination
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At December 31, 2010
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|
|
|
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Serious
|
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|
% of
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Average
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Current
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Delinquency
|
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|
Portfolio(1)
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|
Credit
Score(2)
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LTV
Ratio(3)
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Rate(4)
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Year of Origination
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2010
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|
18
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%
|
|
|
755
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|
|
|
70
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%
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|
|
0.05
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%
|
2009
|
|
|
21
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755
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|
|
70
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|
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0.26
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|
2008
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|
9
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728
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|
86
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|
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4.89
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|
2007
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|
11
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707
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|
104
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11.63
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2006
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|
|
9
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|
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|
712
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|
|
104
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10.46
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2005
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10
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|
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719
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|
91
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6.04
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2004 and prior
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22
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|
722
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|
58
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2.46
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|
|
|
|
|
|
|
|
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|
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Total
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100
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%
|
|
|
733
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|
|
78
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|
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3.84
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(1)
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Based on the UPB of the single-family credit guarantee portfolio.
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(2)
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Based on FICO credit score of the borrower as of the date of
loan origination.
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(3)
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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.
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(4)
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See MD&A RISK MANAGEMENT
Credit Risk Mortgage Credit Risk
Credit Performance Delinquencies for
further information about our reported serious delinquency rates.
|
During 2010, the guarantee-related revenue from the mortgage
loans originated in 2009 and 2010 exceeded the credit-related
and administrative expenses associated with these loans.
Credit-related expenses consist of our provision for credit
losses and REO operations expense. These new vintages are
replacing the older vintages that have a higher composition of
mortgages with higher-risk characteristics. We currently expect
that, over time, this should positively impact the serious
delinquency rates and credit expenses of our single-family
credit guarantee portfolio. See Table 19
Segment Earnings Composition Single-Family Guarantee
Segment for an analysis of the contribution to Segment
Earnings by loan origination year.
Single-Family
Credit Guarantee Portfolio
Since the beginning of 2008, on an aggregate basis, we recorded
provision for credit losses associated with single-family loans
of approximately $62.3 billion, and an additional
$4.7 billion in losses on loans purchased from our PCs, net
of recoveries. The majority of these losses are associated with
loans originated in 2005 through 2008. While loans we acquired
in 2005 through 2008 will give rise to additional credit losses
that we have not yet provisioned for, we believe, as of
December 31, 2010, that we have reserved for or charged-off
the majority of the total expected credit losses for these
loans. Nevertheless, various factors, including continued high
unemployment rates or further declines in home prices, could
require us to provide for losses on these loans beyond our
current expectations.
Table 3 provides certain credit statistics for our
single-family credit guarantee portfolio. The UPB of our
single-family credit guarantee portfolio decreased 5% during
2010 to $1.81 trillion at December 31, 2010 from
$1.90 trillion at
December 31, 2009. Liquidations have significantly exceeded
our new guarantee activity during 2010, which drove the decline
in UPB of this portfolio.
Table 3
Credit Statistics, Single-Family Credit Guarantee
Portfolio
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As of
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12/31/2010
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09/30/2010
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06/30/2010
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03/31/2010
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12/31/2009
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Payment status
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One month past due
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2.07
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%
|
|
|
2.11
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%
|
|
|
2.02
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%
|
|
|
1.89
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%
|
|
|
2.24
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%
|
Two months past due
|
|
|
0.78
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%
|
|
|
0.80
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%
|
|
|
0.77
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%
|
|
|
0.79
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%
|
|
|
0.95
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%
|
Seriously
delinquent(1)
|
|
|
3.84
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%
|
|
|
3.80
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%
|
|
|
3.96
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%
|
|
|
4.13
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%
|
|
|
3.98
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%
|
Non-performing loans (in
millions)(2)
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|
$
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115,478
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|
|
$
|
112,746
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|
|
$
|
111,758
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|
|
$
|
110,079
|
|
|
$
|
98,689
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|
Single-family loan loss reserve (in
millions)(3)
|
|
$
|
39,098
|
|
|
$
|
37,665
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|
|
$
|
37,384
|
|
|
$
|
35,969
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|
|
$
|
33,026
|
|
REO inventory (in units)
|
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|
72,079
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|
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|
74,897
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|
|
|
62,178
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|
|
|
53,831
|
|
|
|
45,047
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|
REO assets, net carrying value (in millions)
|
|
$
|
6,961
|
|
|
$
|
7,420
|
|
|
$
|
6,228
|
|
|
$
|
5,411
|
|
|
$
|
4,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
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|
12/31/2010
|
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09/30/2010
|
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06/30/2010
|
|
03/31/2010
|
|
12/31/2009
|
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|
(in units, unless noted)
|
|
Seriously delinquent loan
additions(1)
|
|
|
113,235
|
|
|
|
115,359
|
|
|
|
123,175
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|
|
|
150,941
|
|
|
|
166,459
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|
Loan
modifications(4)
|
|
|
37,203
|
|
|
|
39,284
|
|
|
|
49,562
|
|
|
|
44,228
|
|
|
|
15,805
|
|
Foreclosure starts
ratio(5)
|
|
|
0.73
|
%
|
|
|
0.75
|
%
|
|
|
0.61
|
%
|
|
|
0.64
|
%
|
|
|
0.57
|
%
|
REO
acquisitions(6)
|
|
|
23,771
|
|
|
|
39,053
|
|
|
|
34,662
|
|
|
|
29,412
|
|
|
|
24,749
|
|
REO disposition severity
ratio:(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
|
43.9
|
%
|
|
|
41.9
|
%
|
|
|
42.0
|
%
|
|
|
43.9
|
%
|
|
|
44.4
|
%
|
Florida
|
|
|
53.0
|
%
|
|
|
54.9
|
%
|
|
|
53.8
|
%
|
|
|
56.2
|
%
|
|
|
54.3
|
%
|
Arizona
|
|
|
49.5
|
%
|
|
|
46.6
|
%
|
|
|
44.3
|
%
|
|
|
45.3
|
%
|
|
|
43.9
|
%
|
Nevada
|
|
|
53.1
|
%
|
|
|
51.6
|
%
|
|
|
49.4
|
%
|
|
|
50.7
|
%
|
|
|
50.4
|
%
|
Michigan
|
|
|
49.7
|
%
|
|
|
49.2
|
%
|
|
|
47.2
|
%
|
|
|
47.6
|
%
|
|
|
48.9
|
%
|
Total U.S.
|
|
|
41.3
|
%
|
|
|
41.5
|
%
|
|
|
39.2
|
%
|
|
|
40.5
|
%
|
|
|
40.1
|
%
|
Single-family credit losses (in
millions)(6)
|
|
$
|
3,086
|
|
|
$
|
4,216
|
|
|
$
|
3,851
|
|
|
$
|
2,907
|
|
|
$
|
2,498
|
|
|
|
(1)
|
See MD&A RISK MANAGEMENT
Credit Risk Mortgage Credit Risk
Credit Performance Delinquencies for
further information about our reported serious delinquency rates.
|
(2)
|
Consists of the UPB of loans in our single-family credit
guarantee portfolio that have undergone a TDR or that are
seriously delinquent.
|
(3)
|
Consists of the combination of: (a) our allowance for loan
losses on mortgage loans held for investment; and (b) our
reserve for guarantee losses associated with non-consolidated
single-family mortgage securitization trusts and other guarantee
commitments.
|
(4)
|
Represents the number of completed modifications under agreement
with the borrower during the quarter. Excludes forbearance
agreements, repayment plans, and loans in the trial period under
HAMP.
|
(5)
|
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 Other Guarantee Transactions and mortgages covered
under other guarantee commitments.
|
(6)
|
Our REO acquisition volume temporarily slowed in the fourth
quarter of 2010 due to delays in the foreclosure process,
including delays related to concerns about deficiencies in
foreclosure documentation practices, and reducing our credit
losses for the period.
|
(7)
|
Calculated as the amount of our losses recorded on disposition
of REO properties during the respective quarterly period,
excluding those subject to repurchase requests made to our
seller/servicers, divided by the aggregate UPB of the related
loans. The amount of losses recognized on disposition of the
properties is equal to the amount by which the UPB of the loans
exceeds the amount of sales proceeds from disposition of the
properties. Excludes sales commissions and other expenses, such
as property maintenance and costs, as well as related recoveries
from credit enhancements, such as mortgage insurance.
|
Our REO disposition severity ratio was impacted in the fourth
quarter of 2010, particularly in the state of Florida, by
temporary suspensions of REO sales by us and our
seller/servicers related to concerns about deficiencies in
foreclosure documentation practices. We believe that these
suspensions caused our REO disposition severity ratio in Florida
to decline in the fourth quarter of 2010, as compared to the
third quarter of 2010, while most other states experienced an
increase in this ratio for the same periods.
As shown in Table 3 above, the number of seriously
delinquent loan additions declined in each quarter of 2010.
However, our single-family credit guarantee portfolio continued
to experience a high level of serious delinquencies and
foreclosure starts, as compared to periods before 2009. The
credit losses of our single-family credit guarantee portfolio
increased in 2010, compared to 2009, due in part to the ongoing
weakness in the U.S. economy. Other factors affecting credit
losses during the year include:
|
|
|
|
|
Losses associated with an increase in the volume of foreclosures
and foreclosure alternatives. These actions related to efforts
to resolve our significant inventory of seriously delinquent
loans. This inventory accumulated in prior periods, primarily
during 2009, due to the lengthening in the foreclosure and
modification timelines caused by various suspensions of
foreclosure transfers, process requirements for the
implementation of HAMP, and constraints in servicers
capabilities to process large volumes of problem loans. Due to
the length of time necessary for servicers either to complete
the foreclosure process or pursue foreclosure alternatives on
seriously delinquent loans still in our portfolio, we expect our
credit losses will continue to rise even as the volume of new
serious delinquencies declines.
|
|
|
|
|
|
The impact of certain loan groups within the single-family
credit guarantee portfolio, such as those underwritten with
certain lower documentation standards and interest-only loans,
as well as other 2005 through 2008 vintage loans. These groups
continue to be large contributors to our credit losses.
|
|
|
|
Continued declines in home prices in many geographic areas,
based on our own index, which resulted in continued high loss
severity ratios on our dispositions of REO inventory.
|
Some of our loss mitigation activities create fluctuations in
our delinquency statistics. For example, loans that we report as
seriously delinquent before they enter the HAMP trial period
continue to be reported as seriously delinquent until the
modifications become effective and the loans are removed from
delinquent status by our servicers. See
MD&A RISK MANAGEMENT Credit
Risk Mortgage Credit Risk Credit
Performance Delinquencies for further
information about factors affecting our reported delinquency
rates during 2010 and 2009.
Government
Support for our Business
We are dependent upon the continued support of Treasury and FHFA
in order to continue operating our business. 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. While the conservatorship has benefited us, we are
subject to certain constraints on our business activities
imposed by Treasury due to the terms of, and Treasurys
rights under, the Purchase Agreement and by FHFA, as our
Conservator.
Under the Purchase Agreement, Treasury made a commitment to
provide funding, under certain conditions, to eliminate deficits
in our net worth. The $200 billion cap on the funding
commitment from Treasury will increase as necessary to eliminate
any net worth deficits during 2010, 2011, and 2012. We believe
that the support provided by Treasury pursuant to the Purchase
Agreement currently enables us to maintain our access to the
debt markets and to have adequate liquidity to conduct our
normal business activities, although the costs of our debt
funding could vary.
On December 30, 2010, we received $100 million in
funding from Treasury under the Purchase Agreement relating to
our net worth deficit as of September 30, 2010. The draws
received during 2010 increased the aggregate liquidation
preference of the senior preferred stock to $64.2 billion
at December 31, 2010 from $51.7 billion at
December 31, 2009. To address our net worth deficit of
$401 million as of December 31, 2010, FHFA, as
Conservator, will submit a draw request, on our behalf, to
Treasury under the Purchase Agreement in the amount of
$500 million. Upon funding of the draw request:
(a) our aggregate funding received from Treasury under the
Purchase Agreement will increase to $63.7 billion; and
(b) the aggregate liquidation preference on the senior
preferred stock owned by Treasury will increase from
$64.2 billion to $64.7 billion and the corresponding
annual cash dividend owed to Treasury will increase to
$6.47 billion. We have paid cash dividends to Treasury of
$10.0 billion to date, an amount equal to 16% of our
aggregate draws under the Purchase Agreement. As of
December 31, 2010, our annual cash dividend obligation to
Treasury on the senior preferred stock exceeded our annual
historical earnings in all but one period. As a result, we
expect to make additional draws in future periods.
Neither the U.S. government nor any other agency or
instrumentality of the U.S. government is obligated to fund our
mortgage purchase or financing activities or to guarantee our
securities or other obligations.
For more information on the Purchase Agreement, see
Conservatorship and Related Matters.
Long-Term
Financial Sustainability and Future Status
It is unlikely that we will generate net income or comprehensive
income in excess of our annual dividends payable to Treasury
over the long term, although we may experience period-to-period
variability in earnings and comprehensive income. As a result,
there is uncertainty as to our long-term financial
sustainability.
We expect to request additional draws under the Purchase
Agreement in future periods. Over time, our dividend obligation
to Treasury will increasingly drive future draws. In addition,
we are required under the Purchase Agreement to pay a quarterly
commitment fee to Treasury, which could also contribute to
future draws if the fee is not waived in the future. Treasury
waived the fee for the first quarter of 2011, but it has
indicated that it remains committed to protecting taxpayers and
ensuring that our future positive earnings are returned to
taxpayers as compensation for their investment. The amount of
the quarterly commitment fee has not yet been established and
could be substantial.
In addition, continued high levels of unemployment, adverse
changes in home prices, interest rates, mortgage security prices
and spreads and other factors could lead to additional draws.
For additional discussion of other factors that could result in
additional draws, see MD&A LIQUIDITY AND
CAPITAL RESOURCES Capital Resources.
On February 11, 2011, the Obama Administration delivered a
report to Congress that lays out the Administrations plan
to reform the U.S. housing finance market, including
options for structuring the governments long-term role in
a housing finance system in which the private sector is the
dominant provider of mortgage credit. The report recommends
winding down Freddie Mac and Fannie Mae, stating that the Obama
Administration will work with FHFA to determine the best way
to responsibly reduce the role of Freddie Mac and Fannie Mae in
the market and ultimately wind down both institutions. The
report states that these efforts must be undertaken at a
deliberate pace, which takes into account the impact that these
changes will have on borrowers and the housing market.
The report states that the government is committed to ensuring
that Freddie Mac and Fannie Mae have sufficient capital to
perform under any guarantees issued now or in the future and the
ability to meet any of their debt obligations, and further
states that the Obama Administration will not pursue policies or
reforms in a way that would impair the ability of Freddie Mac
and Fannie Mae to honor their obligations. The report states the
Obama Administrations belief that under the
companies senior preferred stock purchase agreements with
Treasury, there is sufficient funding to ensure the orderly and
deliberate wind down of Freddie Mac and Fannie Mae, as described
in the Administrations plan.
The report identifies a number of policy levers that could be
used to wind down Freddie Mac and Fannie Mae, shrink the
governments footprint in housing finance, and help bring
private capital back to the mortgage market, including
increasing guarantee fees, phasing in a 10% down payment
requirement, reducing conforming loan limits, and winding down
Freddie Mac and Fannie Maes investment portfolios,
consistent with the senior preferred stock purchase agreements.
These recommendations, if implemented, would have a material
impact on our business volumes, market share, results of
operations and financial condition. We cannot predict the extent
to which these recommendations will be implemented or when any
actions to implement them may be taken. However, we are not
aware of any current plans of our Conservator to significantly
change our business model or capital structure in the near-term.
Changes
in Accounting Standards Related to Accounting for Transfers of
Financial Assets and Consolidation of VIEs
In June 2009, the FASB issued two new accounting standards that
amended the guidance applicable to the accounting for transfers
of financial assets and the consolidation of VIEs. Effective
January 1, 2010, we adopted these new accounting standards
prospectively for all existing VIEs. The adoption of these two
standards had a significant impact on our consolidated financial
statements and other financial disclosures beginning in the
first quarter of 2010. As a result of our adoption of these
standards, our consolidated balance sheets reflect the
consolidation of our single-family PC trusts and certain of our
Other Guarantee Transactions. This consolidation resulted in an
increase to our assets and liabilities of $1.5 trillion and
a net decrease to total equity (deficit) as of January 1,
2010 of $11.7 billion.
Because our results of operations for the year ended
December 31, 2010 (on both a GAAP and Segment Earnings
basis) include the activities of the consolidated VIEs, they are
not directly comparable with the results of operations for the
years ended December 31, 2009 and 2008, which reflect the
accounting policies in effect during that time (i.e.,
when the majority of the securitization entities were accounted
for off-balance sheet).
See NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES for
more information regarding the new accounting standards and the
impact to our financial statements.
Consolidated
Results 2010 versus 2009
Net loss was $14.0 billion and $21.6 billion for 2010
and 2009, respectively. Key highlights of our financial results
for 2010 include:
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Net interest income for 2010 decreased slightly to
$16.9 billion from $17.1 billion in 2009, mainly due
to a decrease in the average balance of mortgage-related
securities, partially offset by lower funding costs.
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Provision for credit losses for 2010 decreased to
$17.2 billion from $29.5 billion for 2009. The
provision for credit losses in 2010 primarily reflects a
substantial slowdown in the rate of growth of our non-performing
single-family loans. The provision for credit losses in 2009
reflected significant increases in non-performing loans and
serious delinquency rates in that period.
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Non-interest income (loss) was $(11.6) billion for 2010,
compared to $(2.7) billion for 2009. This decline was
primarily due to higher derivative losses, lower gains on
investment securities, and a decrease in other income in 2010.
Other income declined primarily due to a significant decrease in
income recognized on our guarantee activities, which was
substantially eliminated as a result of our adoption of the new
accounting standards for consolidation of VIEs on
January 1, 2010. These declines were partially offset by
reduced impairments of available-for-sale securities in 2010,
compared to 2009.
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Non-interest expense declined to $2.9 billion in 2010,
compared to $7.2 billion in 2009, primarily due to lower
losses on loans purchased, which was substantially eliminated as
a result of our adoption of the new accounting standards for
consolidation of VIEs on January 1, 2010.
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Total comprehensive income (loss) was $282 million for 2010
compared to $(2.9) billion for 2009. Total comprehensive
income for 2010 reflects the net result of the
$14.0 billion net loss for 2010, and an increase of
$14.3 billion in AOCI primarily resulting from fair value
improvements on available-for-sale securities.
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Our
Business
We conduct business in the U.S. residential mortgage market
and the global securities market under the direction of our
Conservator, FHFA, and under regulatory supervision of FHFA, the
SEC, HUD, and Treasury. The size of the U.S. residential
mortgage market is affected by many factors, including changes
in interest rates, home ownership rates, home prices, the supply
of housing and lender preferences regarding credit risk and
borrower preferences regarding mortgage debt. The amount of
residential mortgage debt available for us to purchase and the
mix of available loan products are also affected by several
factors, including the volume of mortgages meeting the
requirements of our charter (which is affected by changes in the
conforming loan limit by FHFA), our own preference for credit
risk reflected in our purchase standards and the mortgage
purchase and securitization activity of other financial
institutions. We conduct our operations solely in the U.S. and
its territories, and do not generate any revenue from or have
assets in geographic locations outside of the U.S. and its
territories.
Our charter forms the framework for our business activities, the
initiatives we bring to market and the services we provide to
the nations residential housing and mortgage industries.
Our charter also determines the types of mortgage loans that we
are permitted to purchase. Our statutory mission as defined in
our charter is to:
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provide stability in the secondary market for residential
mortgages;
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respond appropriately to the private capital market;
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provide ongoing assistance to the secondary market for
residential mortgages (including activities relating to
mortgages for low- and moderate-income families, involving a
reasonable economic return that may be less than the return
earned on other activities); and
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promote access to mortgage credit throughout the U.S. (including
central cities, rural areas, and other underserved areas).
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Our charter does not permit us to originate mortgage loans or
lend money directly to consumers in the primary mortgage market.
We provide liquidity, stability and affordability to the
U.S. housing market primarily by providing our credit
guarantee for residential mortgages originated by mortgage
lenders and investing in mortgage loans and mortgage-related
securities. We use mortgage securitization as an integral part
of our activities. Mortgage securitization is a process by which
we purchase mortgage loans that lenders originate, and pool
these loans into guaranteed mortgage securities that are sold in
global capital markets, generating proceeds that support future
loan origination activity by lenders. The primary Freddie Mac
guaranteed mortgage-related security is the
single-class PC. We also aggregate and resecuritize
mortgage-related securities that are issued by us, other GSEs,
HFAs, or private (non-agency) entities, and issue other
single-class and multiclass mortgage-related securities to
third-party investors. We also enter into other guarantee
commitments for multifamily mortgage loans, certain HFA bonds
under the HFA initiative, and housing revenue bonds held by
third parties.
Our charter limits our purchases of single-family loans to the
conforming loan market. The conforming loan market is defined by
loans originated with UPBs at or below limits determined
annually based on changes in FHFAs housing price index, a
method established and maintained by FHFA for determining the
national average single-family home price. Since 2006, the base
conforming loan limit for a one-family residence has been set at
$417,000 with higher limits in certain high-cost
areas. Higher limits also apply to two- to four-family
residences. The conforming loan limits are 50% higher for
mortgages secured by properties in Alaska, Guam, Hawaii and the
U.S. Virgin Islands.
Our charter generally prohibits us from purchasing first-lien
single-family mortgages if the outstanding UPB of the mortgage
at the time of our purchase exceeds 80% of the value of the
property securing the mortgage unless we have one of the
following credit protections:
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mortgage insurance from a mortgage insurer that we determine is
qualified on the portion of the UPB of the mortgage that exceeds
80%;
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a sellers agreement to repurchase or replace any mortgage
that has defaulted; or
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retention by the seller of at least a 10% participation interest
in the mortgage.
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Under our charter, our mortgage purchase operations are
confined, so far as practicable, to mortgages which we deem to
be of such quality, type and class as to meet generally the
purchase standards of other private institutional mortgage
investors. This is a general marketability standard.
Our charter requirement for credit protection on mortgages with
LTV ratios greater than 80% does not apply to multifamily
mortgages or to mortgages that have the benefit of any
guarantee, insurance or other obligation by the U.S. or any of
its agencies or instrumentalities (e.g., the FHA, the VA
or the USDA Rural Development).
Until June 2011, as part of the MHA Program, we may purchase
single-family
mortgages that refinance borrowers whose mortgages we currently
own or guarantee without obtaining additional credit enhancement
in excess of that already in
place for any such loan, provided that the current LTV ratio of
the loan at the time of refinance does not exceed 125%. The
relief refinance mortgage initiative is our implementation of
this refinance program.
We also focus on maintaining underwriting standards that allow
us to purchase and guarantee loans made to qualified borrowers
that we believe will provide management and guarantee fee
income, over the long-term, that exceeds our anticipated
credit-related and administrative expenses on the underlying
loans.
Our
Business Segments
Our operations consist of three reportable segments, which are
based on the type of business activities each
performs Single-family Guarantee, Investments, and
Multifamily. Certain activities that are not part of a
reportable segment are included in the All Other category.
We evaluate segment performance and allocate resources based on
a Segment Earnings approach. Beginning January 1, 2010, we
revised our method for presenting Segment Earnings to reflect
changes in how management measures and assesses the financial
performance of each segment and the company as a whole. For more
information on our segments, including financial information,
see MD&A CONSOLIDATED RESULTS OF
OPERATIONS Segment Earnings and
NOTE 17: SEGMENT REPORTING.
Single-Family
Guarantee Segment
The Single-family Guarantee segment reflects results from our
single-family credit guarantee activities. In our Single-family
Guarantee segment, we purchase single-family mortgage loans
originated by our seller/servicers in the primary mortgage
market. In most instances, we use the mortgage securitization
process to package the purchased mortgage loans into guaranteed
mortgage-related securities. We guarantee the payment of
principal and interest on the mortgage-related security in
exchange for management and guarantee fees.
Our
Customers
Our customers are predominantly lenders in the primary mortgage
market that originate mortgages for homeowners. These lenders
include mortgage banking companies, commercial banks, savings
banks, community banks, credit unions, HFAs, and savings and
loan associations.
We acquire a significant portion of our mortgages from several
large lenders. These lenders are among the largest mortgage loan
originators in the U.S. Due to the mortgage and financial market
crisis during 2008 and 2009, a number of larger mortgage
originators failed or were acquired and, as a result, mortgage
origination volume during 2010 was concentrated in a smaller
number of institutions. See RISK FACTORS
Competitive and Market Risks for further information.
During 2010, three mortgage lenders (Wells Fargo
Bank, N.A., Bank of America, N.A. and Chase Home
Finance LLC) each accounted for more than 10% of our
single-family mortgage purchase volume and collectively
accounted for approximately 50% of our single-family mortgage
purchase volume. Our top ten lenders accounted for approximately
78% of our single-family mortgage purchase volume during 2010.
Our
Competition
Historically, our principal competitors have been Fannie Mae,
Ginnie Mae and FHA, and other financial institutions that retain
or securitize mortgages, such as commercial and investment
banks, dealers, and thrift institutions. Since 2008, most of our
competitors, other than Fannie Mae and Ginnie Mae, have ceased
their activities in the residential mortgage securitization
business or severely curtailed these activities relative to
their previous levels. We compete on the basis of price,
products, the structure of our securities, and service.
Ginnie Mae, which has become a more significant competitor since
2008, guarantees the timely payment of principal and interest on
mortgage-related securities backed by federally insured or
guaranteed loans, primarily those insured by FHA or guaranteed
by VA. Ginnie Mae increased its share of the securitization
market in 2010, in large part due to favorable pricing of loans
insured by FHA, the increase in the FHA loan limit and the
availability, through FHA, of a mortgage product for borrowers
seeking greater than 80% financing who could not otherwise
qualify for a conventional mortgage.
The conservatorship, including direction provided to us by our
Conservator, and the restrictions on our activities under the
Purchase Agreement may affect our ability to compete in the
business of securitizing mortgages. On a number of occasions,
FHFA has directed us and Fannie Mae to confer and consider
uniform approaches to particular issues and problems, and FHFA
has in a few cases directed the two GSEs to adopt common
approaches. For example, in January 2011, FHFA announced that it
has directed Freddie Mac and Fannie Mae to work on a joint
initiative, in coordination with HUD, to consider alternatives
for future mortgage servicing structures and servicing
compensation, including the possibility of reducing or
eliminating the minimum servicing fee for performing loans, or
other structures. FHFA has also directed Freddie Mac and Fannie
Mae to discuss with FHFA and with each other, and wherever
feasible to develop consistent requirements, policies and
processes for, the servicing of non-performing mortgages, and to
discuss joint standards for the evaluation of the servicing
performance of servicers. It is possible that FHFA could require
us and Fannie Mae to take a common approach
that, because of differences in our respective businesses, could
place Freddie Mac at a competitive disadvantage to Fannie Mae.
Overview
of the Mortgage Securitization Process
Mortgage securitization is a process by which we purchase
mortgage loans that lenders originate, and pool these loans into
mortgage securities that are sold in global capital markets,
generating proceeds that support future purchases from lenders.
The following diagram illustrates how we support mortgage market
liquidity when we create PCs through mortgage securitizations.
These PCs can be sold to investors or held by us:
The U.S. residential mortgage market consists of a primary
mortgage market that links homebuyers and lenders and a
secondary mortgage market that links lenders and investors. We
participate in the secondary mortgage market by purchasing
mortgage loans and mortgage-related securities for investment
and by issuing guaranteed mortgage-related securities. In the
Single-family Guarantee segment, we purchase and securitize
single-family mortgages, which are mortgages that
are secured by one- to four-family properties.
In general, the securitization and Freddie Mac guarantee process
works as follows: 1) a lender originates a mortgage loan to
a borrower purchasing a home or refinancing an existing mortgage
loan, 2) we purchase the loan from the lender and place it
with other mortgages that are pooled into a security
that can be sold to investors, 3) the lender may then use
the proceeds from the sale to originate another mortgage loan,
4) we provide a credit guarantee, for a fee (generally a
small portion of the interest collected on the mortgage loan),
to those who invest in the security, 5) the borrowers
monthly payment of mortgage principal and interest is passed
through to the investors in the security, and 6) if the
borrower stops making monthly payments because a
family member loses a job, for example we step in
and make the applicable payments to investors in the security.
In the event a borrower defaults on the mortgage, our servicer
works with the borrower to find a solution to help them stay in
the home, if possible, through our many different workout
options, or we ultimately foreclose and sell the home.
The terms of single-family mortgages that we purchase or
guarantee allow borrowers to prepay these loans, thereby
allowing borrowers to refinance their loans when mortgage rates
decline. Because of the nature of long-term, fixed-rate
mortgages, borrowers are protected against rising interest
rates, but are able to take advantage of declining rates through
refinancing. When a borrower prepays a mortgage that we have
securitized, the outstanding balance of the security owned by
investors is reduced by the amount of the prepayment.
Unscheduled reductions in loan principal, regardless of whether
they are voluntary or involuntary (e.g. foreclosure),
result in prepayments of security balances. Consequently, the
owners of our guaranteed securities are subject to prepayment
risk on the related mortgage loans, which is principally that
the investor will receive an unscheduled return of the
principal, and therefore may not earn the rate of return
originally expected on the investment.
We guarantee these mortgage-related securities in exchange for
compensation, which consists primarily of a combination of
management and guarantee fees paid on a monthly basis as a
percentage of the UPB of the underlying loans and initial
upfront payments referred to as delivery fees. We may also make
upfront payments to
buy-up the
monthly management and guarantee fee rate, or receive upfront
payments to buy-down the monthly management and guarantee fee
rate. These fees are paid in conjunction with the formation of a
PC to provide for a uniform coupon rate for the mortgage pool
underlying the issued PC.
We enter into mortgage purchase volume commitments with many of
our larger customers in order to have a supply of loans for our
guarantee business. These commitments provide for the lenders to
deliver us a specified dollar amount of mortgages during a
specified period of time. Some commitments may also provide for
the lender to deliver to us a minimum percentage of their total
sales of conforming loans. The purchase and securitization of
mortgage loans from customers under these longer-term contracts
have pricing schedules for our management and guarantee fees
that are negotiated at the outset of the contract with initial
terms that may range from one month to one year. We call these
transactions flow activity and they represent the
majority of our purchase volumes. The remainder of our purchases
and securitizations of mortgage loans occurs in cash, or
bulk, transactions for which purchase prices and
management and guarantee fees are negotiated on an individual
transaction basis. Mortgage purchase volumes from individual
customers can fluctuate significantly. If a mortgage lender
fails to meet its contractual commitment, we have a variety of
contractual remedies, which may include the right to assess
certain fees. Our mortgage purchase contracts contain no penalty
or liquidated damages clauses based on our inability to take
delivery of presented mortgage loans. However, if we were to
fail to meet our contractual commitment, we could be deemed to
be in breach of our contract and could be liable for damages in
a lawsuit.
We seek to issue guarantees on our PCs with fee terms that we
believe will, over the long-term, provide management and
guarantee fee income that exceeds our anticipated credit-related
and administrative expenses on the underlying loans. Our
Single-family Guarantee segment is responsible for determining
prices of our guarantee and delivery fees based on our
assessment of credit risk and loss mitigation related to
single-family loans, including single-family loans underlying
our guaranteed mortgage-related securities. We vary our
guarantee and delivery fee pricing for different mortgage
products and mortgage or borrower underwriting characteristics.
We implemented several increases in delivery fees that became
effective in 2009 applicable to mortgages with certain
higher-risk loan characteristics. We announced additional
delivery fee increases in the fourth quarter of 2010 that become
effective March 1, 2011 (or later, as outstanding contracts
permit) for loans with higher LTV ratios. Given the uncertainty
of the housing market in 2009 and 2010, we entered into
arrangements with certain existing customers at their renewal
dates that allow us to change credit and pricing terms more
quickly than in the past.
For information on how we account for our securitization
activities, see NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES and NOTE 2: CHANGE IN
ACCOUNTING PRINCIPLES.
Securitization
Activities
The types of mortgage-related securities we issue and guarantee
include the following:
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PCs;
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REMICs and Other Structured Securities; and
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Other Guarantee Transactions.
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PCs
Our PCs are pass-through securities that represent undivided
beneficial interests in trusts that hold pools of mortgages we
have purchased. Holding single-family loans in the form of PCs
rather than as unsecuritized loans gives us greater flexibility
in managing the composition of our mortgage portfolio, as it is
generally easier to purchase and sell PCs than unsecuritized
mortgage loans, and allows more cost effective interest-rate
risk management. For our fixed-rate PCs, we guarantee the timely
payment of principal and interest. For our ARM PCs, we guarantee
the timely payment of the weighted average coupon interest rate
for the underlying mortgage loans. We also guarantee the full
and final payment of principal for ARM PCs; however, we do not
guarantee the timely payment of principal on ARM PCs. We issue
most of
our PCs in transactions in which our customers exchange mortgage
loans for PCs. We refer to these transactions as guarantor
swaps. The following diagram illustrates a guarantor swap
transaction:
Guarantor
Swap
We also issue PCs in exchange for cash. The following diagram
illustrates an exchange for cash in a cash auction
of PCs:
Cash
Auction of PCs
Institutional and other fixed-income investors, including
pension funds, insurance companies, securities dealers, money
managers, commercial banks and foreign central banks, purchase
our PCs. Treasury and the Federal Reserve have also purchased
mortgage-related securities issued by us, Fannie Mae and Ginnie
Mae under their purchase programs. Treasurys purchase
program ended in December 2009. The Federal Reserves
purchase program ended in March 2010.
PCs differ from U.S. Treasury securities and other fixed-income
investments in two ways. First, they can be prepaid at any time.
Homeowners have the right to prepay their mortgage at any time
(known as the prepayment option), and homeowner mortgage
payments are passed through to the PC holder. Consequently, our
securities implicitly have a call option that significantly
reduces the average life of the security from the contractual
loan maturity. As a result, our PCs generally provide a higher
nominal yield than certain other fixed-income products. Second,
PCs are not backed by the full faith and credit of the United
States, as are U.S. Treasury securities.
In addition, we seek to support the liquidity of the market for
our PCs through a variety of activities, including educating
dealers and investors about the merits of PCs, and enhancing
disclosures related to the collateral underlying our securities.
REMICs
and Other Structured Securities
We issue single-class and multiclass securities. Single-class
securities involve the straight pass-through of all of the cash
flows of the underlying collateral to holders of the beneficial
interests. Our principal multiclass securities qualify for tax
treatment as REMICs. Multiclass securities divide all of the
cash flows of the underlying mortgage-related assets into two or
more classes designed to meet the investment criteria and
portfolio needs of different investors by creating classes of
securities with varying maturities, payment priorities and
coupons, each of which represents a beneficial ownership
interest in a separate portion of the cash flows of the
underlying collateral. Usually, the cash flows are divided to
modify the relative exposure of different classes to
interest-rate risk, or to create various coupon structures. The
simplest division of cash flows is into principal-only and
interest-only classes. Other securities we issue can involve the
creation of sequential payment and planned or targeted
amortization classes. In a sequential payment class structure,
one or more classes receive all or a disproportionate percentage
of the principal payments on the underlying mortgage assets for
a period of time until that class or classes is retired,
following which the principal payments are directed to other
classes. Planned or targeted amortization classes involve the
creation of classes that have relatively more predictable
amortization schedules across different prepayment scenarios,
thus reducing prepayment risk, extension risk, or both.
Our REMICs and Other Structured Securities represent beneficial
interests in pools of PCs and/or certain other types of
mortgage-related assets. We create these securities primarily by
using PCs or previously issued REMICs and Other Structured
Securities as the underlying collateral. Similar to our PCs, we
guarantee the payment of principal and interest to the holders
of tranches of our REMICs and Other Structured Securities. We do
not charge a management and guarantee fee for these securities
if the underlying collateral is already guaranteed by us since
no additional credit risk is introduced. Because the collateral
underlying nearly all of our single-family REMICs and Other
Structured Securities consists of other mortgage-related
securities that we guarantee, there are no concentrations of
credit risk in any of the classes of these securities that are
issued, and there are no economic residual interests in the
related securitization trust. The following diagram provides a
general example of how we create REMICs and Other Structured
Securities.
REMICs
and Other Structured Securities
We issue many of our REMICs and Other Structured Securities in
transactions in which securities dealers or investors sell us
mortgage-related assets or we use our own mortgage-related
assets (e.g., PCs and REMICs and Other Structured
Securities) in exchange for the REMICs and Other Structured
Securities. Since the creation of REMICs and Other Structured
Securities allows for setting differing terms for specific
classes of investors, our issuance of these securities can
expand the range of investors in our mortgage-related securities
to include those seeking specific security attributes. For
REMICs and Other Structured Securities that we issue to third
parties, we typically receive a transaction, or
resecuritization, fee. This transaction fee is compensation for
facilitating the transaction, as well as future administrative
responsibilities.
Other
Guarantee Transactions
We also issue mortgage-related securities to third parties in
exchange for non-Freddie Mac mortgage-related securities. We
refer to these as Other Guarantee Transactions. The non-Freddie
Mac mortgage-related securities are transferred to trusts that
were specifically created for the purpose of issuing securities,
or certificates, in the Other Guarantee Transactions. The
following diagram illustrates an example of an Other Guarantee
Transaction:
Other
Guarantee Transaction
Other Guarantee Transactions can generally be segregated into
two different types. In one type, we purchase only senior
tranches from a non-Freddie Mac senior-subordinated
securitization, place the senior tranches into securitization
trusts, and issue Other Guarantee Transaction certificates
guaranteeing the principal and interest payments on those
certificates. In this type of transaction, our credit risk is
reduced by the credit protections from the related subordinated
tranches, which we neither purchase nor guarantee. In the second
type, we purchase single-class pass-through securities, place
them in securitization trusts and issue Other Guarantee
Transaction certificates guaranteeing the principal and interest
payments on those certificates. Our single-family Other
Guarantee Transactions backed by single-class pass-through
securities do not benefit from structural or other credit
enhancement protections.
Although Other Guarantee Transactions generally have underlying
mortgage loans with varying risk characteristics, we do not
issue tranches that have concentrations of credit risk beyond
those embedded in the underlying assets, as all cash flows of
the underlying collateral are passed through to the holders of
the securities and there are no economic residual interests in
the securitization trusts. Additionally, there may be other
credit enhancements and structural features retained by the
seller, such as excess interest or overcollateralization, that
provide credit protection to our interests, and reduce the
likelihood that we will have to perform under our guarantee of
the senior tranches. In exchange for providing our guarantee, we
may receive a management and guarantee fee or other delivery
fees, if the underlying collateral is not already guaranteed by
us.
In 2010 and 2009, we entered into transactions under
Treasurys NIBP with HFAs, for the partial guarantee of
certain single-family and multifamily HFA bonds, which were
Other Guarantee Transactions with significant credit enhancement
provided by Treasury. The securities issued by us pursuant to
the NIBP were purchased by Treasury. See NOTE 3:
CONSERVATORSHIP AND RELATED MATTERS for further
information.
For information about the amount of mortgage-related securities
we have issued, see Table 34 Freddie Mac
Mortgage-Related Securities. For information about the
relative performance of mortgages underlying these securities,
refer to our MD&A RISK
MANAGEMENT Credit Risk section.
PC
Trust Documents
We establish trusts for all of our issued PCs pursuant to our PC
master trust agreement. In accordance with the terms of our PC
trust documents, we have the option, and in some instances the
requirement, to purchase specified mortgage loans from the
trust. We purchase these mortgages at an amount equal to the
current UPB, less any outstanding advances of principal on the
mortgage that have been distributed to PC holders. From time to
time, we reevaluate our delinquent loan purchase practices and
alter them if circumstances warrant. Our practice is to purchase
mortgages that are 120 days or more delinquent from pools
underlying our PCs when:
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the mortgages have been modified;
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foreclosure sales occur;
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the mortgages are delinquent for 24 months; or
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the cost of guarantee payments to PC holders, including advances
of interest at the PC coupon rate, exceeds the expected cost of
holding the nonperforming loans.
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On February 10, 2010, we announced that we would purchase
substantially all single-family mortgage loans that are
120 days or more delinquent underlying our issued PCs. This
change in practice was made based on a determination that the
cost of guarantee payments to the security holders will exceed
the cost of holding unsecuritized non-performing loans on our
consolidated balance sheets. The cost of holding unsecuritized
non-performing loans on our consolidated balance sheets was
significantly affected by our January 1, 2010 adoption of
amendments to certain accounting standards and changing
economics pursuant to which the recognized cost of purchasing
most delinquent loans from PC trusts was less than the
recognized cost of continued guarantee payments to security
holders. See Executive Summary Changes in
Accounting Standards Related to Accounting for Transfers of
Financial Assets and Consolidation of VIEs for
additional information.
In accordance with the terms of our PC trust documents, we are
required to purchase a mortgage loan (or, in some cases,
substitute a comparable mortgage loan) from a PC trust in the
following situations:
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if a court of competent jurisdiction or a federal government
agency, duly authorized to oversee or regulate our mortgage
purchase business, determines that our purchase of the mortgage
was unauthorized and a cure is not practicable without
unreasonable effort or expense, or if such a court or government
agency requires us to repurchase the mortgage;
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if a borrower exercises its option to convert the interest rate
from an adjustable-rate to a fixed-rate on a convertible ARM; and
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in the case of balloon-reset loans, shortly before the mortgage
reaches its scheduled balloon-reset date.
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The To
Be Announced Market
Because our fixed-rate PCs are homogeneous, issued in high
volume and highly liquid, they trade on a generic
basis by PC coupon rate, also referred to as trading in the TBA
market. A TBA trade in Freddie Mac securities represents a
contract for the purchase or sale of PCs to be delivered at a
future date; however, the specific PCs that will be delivered to
fulfill the trade obligation, and thus the specific
characteristics of the mortgages underlying those PCs, are not
known (i.e., announced) at the time of the
trade, but only shortly before the trade is settled. The use of
the TBA market increases the liquidity of mortgage investments
and improves the distribution of investment capital available
for residential mortgage financing, thereby helping us to
accomplish our statutory mission. The Securities Industry and
Financial Markets Association publishes guidelines pertaining to
the types of mortgages that are eligible for TBA trades.
Underwriting
Requirements and Quality Control Standards
We use a process of delegated underwriting for the single-family
mortgages we purchase or securitize. In this process, our
contracts with seller/servicers describe mortgage underwriting
standards and the seller/servicers represent and warrant to us
that the mortgages sold to us meet these standards. In our
contracts with individual seller/servicers, we sometimes waive
or modify selected underwriting standards. 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, the
original LTV ratio, the type of mortgage product and the
occupancy type of the loan. 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. In lieu of a
repurchase, we may agree to allow a seller/servicer to indemnify
us against loss in the event of a default by the borrower or
enter into some other remedy. During the year ended
December 31, 2010, we reviewed a
significant number of loans that defaulted in order to assess
the sellers compliance with our purchase contracts. For
more information on our seller/servicers repurchase
obligations, including recent performance under those
obligations, see MD&A RISK
MANAGEMENT Credit Risk Institutional
Credit Risk Mortgage Seller/Servicers.
The majority of our single-family mortgage purchase volume is
evaluated using automated underwriting software tools, either
our tool (Loan Prospector), the seller/servicers own
tools, or Fannie Maes tool. The percentage of our
single-family mortgage purchase flow activity volume evaluated
by the loan originator using Loan Prospector prior to being
purchased by us was 39%, 45%, and 42% during 2010, 2009, and
2008, respectively. Since 2008, we have added a number of
additional credit standards for loans evaluated by other
underwriting tools to improve the quality of loans we purchase
that are evaluated using these other tools. Consequently, we do
not believe the use of a tool other than Loan Prospector
significantly increases our loan performance risk.
As discussed above, our charter requires that single-family
mortgages with LTV ratios above 80% at the time of purchase be
covered by specified credit enhancements or participation
interests. In addition, we employ other types of credit
enhancements to further manage certain credit risk, including
pool insurance, indemnification agreements, collateral pledged
by lenders and subordinated security structures.
Loss
Mitigation and Loan Workout Activities
Loan workout activities are a key component of our loss
mitigation strategy for managing and resolving troubled assets
and lowering credit losses. Our single-family loss mitigation
strategy emphasizes early intervention in seriously delinquent
mortgages and provides alternatives to foreclosure. Other
single-family loss mitigation activities include providing our
single-family servicers with default management tools designed
to help them manage non-performing loans more effectively and to
assist borrowers in retaining home ownership where possible, or
facilitate foreclosure alternatives when continued homeownership
is not an option. Loan workouts are intended to reduce the
number of seriously 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 additional credit losses
that we would likely incur in a REO sale.
Our loan workouts include:
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Repayment plans, which are contractual plans to make up past due
amounts. They mitigate our credit losses because they assist
borrowers in returning to compliance with the original terms of
their mortgages.
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Loan modifications, which may involve changing the terms of the
loan, or adding outstanding indebtedness, such as delinquent
interest, to the UPB of the loan, or a combination of both. We
require our servicers to examine the borrowers capacity to
make payments under the new terms by reviewing the
borrowers qualifications, including income. Loan
modifications either: (a) result in a concession to the
borrower, such as a reduction in interest rate; or (b) do
not result in a concession to the borrower, such as those which
add the past due amounts to the balance of the loan, extend the
term or a combination of both. Loan modifications that result in
a concession to the borrower are situations in which we do not
expect to recover the full original principal or interest due
under the original loan terms. Such modifications are accounted
for as TDRs. During 2010, we granted principal forbearance but
did not utilize principal forgiveness for our loan modifications.
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Forbearance agreements, where reduced payments or no payments
are required during a defined period. They provide additional
time for the borrower to return to compliance with the original
terms of the mortgage or to implement another loan workout.
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Short sales, in which the borrower, working with the servicer,
sells the home and pays off part of the outstanding loan,
accrued interest and other expenses from the sale proceeds, in
satisfaction of the full amount of the loan.
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For more information regarding credit risk, see
MD&A RISK MANAGEMENT Credit
Risk, NOTE 5: MORTGAGE LOANS AND LOAN LOSS
RESERVES, and NOTE 6: INDIVIDUALLY IMPAIRED AND
NON-PERFORMING LOANS.
Investments
Segment
The Investments segment reflects results from our investment,
funding and hedging activities. In our Investments segment, we
invest principally in mortgage assets funded by debt issuances
and hedged using derivatives. We are not currently a substantial
buyer or seller of mortgage assets, except for purchases of
delinquent mortgages out of PC pools.
Our
Customers
Our customers for our debt securities predominantly include
insurance companies, money managers, central banks, depository
institutions, and pension funds. Within the Investments segment,
we buy securities through various market sources. We also invest
in performing single-family mortgage loans, a significant
portion of which is from several large lenders, as discussed in
Single-Family Guarantee Segment Our
Customers.
Our
Competition
Historically, our principal competitors have been Fannie Mae and
other financial institutions that invest in mortgage-related
securities and mortgage loans, such as commercial and investment
banks, dealers, thrift institutions, and insurance companies.
The conservatorship, including direction provided to us by our
Conservator, and the restrictions on our activities under the
Purchase Agreement has affected and will continue to affect our
ability to compete in the business of investing in
mortgage-related securities and mortgage loans.
We compete for low-cost debt funding with Fannie Mae, the FHLBs
and other institutions. Competition for debt funding from these
entities can vary with changes in economic, financial market and
regulatory environments.
Assets
Historically, we have primarily been a
buy-and-hold
investor in mortgage-related securities and single-family
mortgage loans. We may sell assets to reduce risk, provide
liquidity, and improve our returns. However, due to limitations
under the Purchase Agreement and those imposed by FHFA, our
ability to acquire and sell mortgage assets is significantly
constrained. For more information, see Conservatorship and
Related Matters and MD&A
CONSOLIDATED RESULTS OF OPERATIONS Segment
Earnings Segment Earnings-Results
Investments.
We may purchase assets for a variety of reasons, including to
improve investment returns. We estimate our expected investment
returns using an OAS approach, which is an estimate of the yield
spread between a given financial instrument and a benchmark
(LIBOR, agency or Treasury) yield curve. In this approach, we
consider potential variability in the instruments cash
flows resulting from any options embedded in the instrument,
such as the prepayment option. Additionally, in this segment we
maintain a cash and other investments portfolio, comprised
primarily of cash and cash equivalents,
non-mortgage-related
securities, federal funds sold and securities purchased under
agreements to resell, to help manage our liquidity needs.
Debt
Financing
We fund our investment activities by issuing short-term and
long-term debt. The conservatorship, and the resulting support
we receive from Treasury, has enabled us to access debt funding
on terms sufficient for our needs. The support we received from
the Federal Reserve through its debt purchase program, which was
completed in March 2010, also contributed to our ability to
access debt funding. While we believe that the support provided
by Treasury pursuant to the Purchase Agreement currently enables
us to maintain our access to the debt markets and to have
adequate liquidity to conduct our normal business activities,
the costs of our debt funding could vary due to the uncertainty
about the future of the GSEs and potential investor concerns
about the adequacy of funding available under the Purchase
Agreement after 2012. Additionally, the Purchase Agreement
limits the amount of indebtedness we can incur.
For more information, see Conservatorship and Related
Matters and MD&A LIQUIDITY AND
CAPITAL RESOURCES Liquidity.
Risk
Management
Our Investments segment has responsibility for managing our
interest rate risk and liquidity risk. Derivatives are an
important part of our strategy to manage certain risks. We use
derivatives primarily to: (a) regularly adjust or rebalance
our funding mix in order to more closely match changes in the
interest rate characteristics of our mortgage-related assets;
(b) hedge forecasted issuances of debt;
(c) synthetically create callable and non-callable funding;
and (d) hedge foreign-currency exposure. For more
information regarding our use of derivatives, see
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK and NOTE 12: DERIVATIVES. For
information regarding our liquidity management, see
MD&A LIQUIDITY AND CAPITAL
RESOURCES.
PC
Support Activities
Our PCs are an integral part of our mortgage purchase program.
Our Single-family Guarantee segment purchases many of our
mortgages by issuing PCs in exchange for those mortgage loans in
guarantor swap transactions. We also issue PCs backed by
mortgage loans that we purchased for cash. Our competitiveness
in purchasing single-family mortgages from our seller/servicers,
and thus the volume and profitability of new single-family
business, can be directly affected by the relative price
performance of our PCs and comparable Fannie Mae securities. We
seek to support the price performance of our PCs through a
variety of strategies, including the purchase and sale of PCs
and other agency securities, as well as through the issuance of
REMICs and Other Structured Securities. Our purchases and sales
of mortgage-related securities influence the relative supply and
demand for these securities, and the issuance of REMICs and
Other Structured Securities helps support the price performance
of our PCs. Depending upon market conditions, including the
relative prices, supply of and demand for PCs and comparable
Fannie Mae securities, as well as other factors, there may be
substantial variability in any period in the total amount of
securities we purchase or sell, and in the success of our
efforts to support the liquidity and price performance of our
PCs. We may increase, reduce or discontinue these or other
related activities at any time, which could
affect the liquidity of the market for PCs. For more
information, see RISK FACTORS Competitive and
Market Risks Any decline in the price performance
of or demand for our PCs could have an adverse effect on the
volume and profitability of our new single-family guarantee
business.
Multifamily
Segment
The Multifamily segment reflects results from our investments
and guarantee activities in multifamily mortgage loans and
securities. Our new purchases of multifamily mortgage loans are
primarily made for purposes of aggregation and then
securitization, which supports the availability of financing for
multifamily properties. Our Multifamily segment does not issue
REMIC securities but does issue Other Structured Securities,
Other Guarantee Transactions, and other guarantee commitments.
We also purchase non-agency CMBS for investment; however we have
not purchased significant amounts of non-agency CMBS for
investment since 2008.
Prior to 2008, we principally purchased and held multifamily
loans for investment purposes. Beginning in 2008, we also began
purchasing certain multifamily mortgages for securitization
purposes. In 2010, we purchased $10.3 billion of loans as
part of our CME initiative and subsequently issued
$6.4 billion of Other Guarantee Transaction certificates.
Subject to market conditions, we expect to continue purchasing
multifamily loans as part of our further expansion of the
multifamily securitization business in 2011. We may also sell
multifamily loans from time to time.
The multifamily property market is affected by general economic
factors, such as employment rates, construction cycles, and
relative affordability of single-family home prices, all of
which influence the supply and demand for multifamily properties
and pricing for apartment rentals. Our multifamily loan volume
is largely sourced through established institutional channels
where we are generally providing post-construction financing to
larger apartment project operators with established performance
records. Our lending decisions are primarily based on an
assessment of the propertys ability to generate sufficient
operating cash flows to support payment of debt service
obligations as measured by the expected DSCR.
Prior to 2010, our Multifamily segment also included investments
in LIHTC partnerships formed for the purpose of providing equity
funding for affordable multifamily rental properties. In these
investments, we provided equity contributions to partnerships
designed to sponsor the development and ongoing operations for
low- and moderate-income multifamily apartments. We planned to
realize a return on our investment through reductions in income
tax expense that result from federal income tax credits and the
deductibility of operating losses generated by the partnerships.
However, we no longer invest in these partnerships because we do
not expect to be able to use the underlying federal income tax
credits or the operating losses generated from the partnerships
as a reduction to our taxable income because of our inability to
generate sufficient taxable income or to sell these interests to
third parties. See NOTE 4: VARIABLE INTEREST
ENTITIES for additional information.
Our
Customers
We acquire a significant portion of our multifamily mortgage
loans from several large seller/servicers. Our top three
multifamily lenders, CBRE Capital Markets, Inc., Wells Fargo
Multifamily Capital and Berkadia Commercial Mortgage LLC,
each accounted for more than 10%, and collectively represented
approximately 44% of our multifamily purchase volume during 2010.
We also enter into other guarantee commitments for multifamily
mortgage loans, HFA bonds, and housing revenue bonds held by
third parties. By engaging in these activities, we provide
liquidity to this sector of the mortgage market.
Our
Competition
Historically, our principal competitors have been Fannie Mae,
FHA, and other financial institutions that retain or securitize
multifamily mortgages, such as commercial and investment banks,
dealers, thrift institutions, and insurance companies. Since
2008, most of our competitors, other than Fannie Mae and FHA,
have ceased their activities in the multifamily mortgage
business or severely curtailed these activities relative to
their previous levels. Some market participants began to
re-enter the market on a limited basis in 2010. We compete on
the basis of price, products, structure and service.
Underwriting
Requirements and Quality Control Standards
For our purchase or guarantee of multifamily mortgage loans, we
rely significantly on pre-purchase underwriting, which includes
third-party appraisals and cash flow analysis. The underwriting
standards we provide to our seller/servicers focus on loan
quality measurement based, in part, on the LTV ratio and DSCR at
origination. The DSCR is one indicator of future credit
performance. The DSCR estimates a multifamily borrowers
ability to service its mortgage obligation using the secured
propertys cash flow, after deducting non-mortgage expenses
from income. The higher the DSCR, the more likely a multifamily
borrower will be able to continue servicing its mortgage
obligation. Our standards for multifamily loans specify maximum
original LTV ratio and minimum DSCR that vary based on the loan
characteristics, such as loan type (new acquisition or
supplemental financing), loan term (intermediate or
longer-term), and loan features (interest-only or amortizing,
fixed- or variable-rate). Since the beginning of 2009, our
multifamily loans are generally underwritten with
requirements for a maximum original LTV ratio of 80% and a DSCR
of greater than 1.25. In certain circumstances, our standards
for multifamily loans allow for certain types of loans to have
an original LTV ratio over 80% and/or a DSCR of less than 1.25,
typically where this will serve our mission and contribute to
achieving our affordable housing goals. In cases where we commit
to purchase or guarantee a permanent loan upon completion of
construction or rehabilitation, we generally require additional
credit enhancements, since underwriting for these loans
typically requires estimates of future cash flows for
calculating the DSCR that is expected after construction or
rehabilitation is completed. We previously allowed delegated
underwriting of multifamily loans in limited circumstances for
approved lenders that deliver loans meeting targeted affordable
housing goals criteria. Loans outside of certain criteria were
subject to our underwriting review prior to closing and all
loans we acquired with delegated underwriting were reviewed
after closing for compliance with our underwriting guidelines.
In addition, we required loss sharing or credit enhancement on
loans we acquired with delegated underwriting. In the fourth
quarter of 2009, we announced that we would discontinue such
delegated underwriting, except for mortgages already in approved
lenders pipelines.
We generally require multifamily seller/servicers to service
mortgage loans they have sold to us in order to mitigate
potential losses. We do not oversee servicing with respect to
multifamily loans underlying our Other Guarantee Transactions as
that task is performed by subordinated bondholders. For loans
over $1 million and where we have servicing oversight,
servicers must generally submit an annual assessment of the
mortgaged property to us based on the servicers analysis
of financial and other information about the property. Because
the activities of multifamily seller/servicers are an important
part of our loss mitigation process, we rate their performance
regularly and may conduct on-site reviews of their servicing
operations in an effort to confirm compliance with our standards.
For loans for which we oversee servicing, if a borrower is in
distress, we may offer a workout option to the borrower. For
example, we may modify the terms of a multifamily mortgage loan,
which gives the borrower an opportunity to bring the loan
current and retain ownership of the property. These arrangements
are made with the expectation that we will recover our initial
investment or minimize our losses. We do not enter into these
arrangements in situations where we believe we would experience
a loss in the future that is greater than or equal to the loss
we would experience if we foreclosed on the property at the time
of the agreement.
Conservatorship
and Related Matters
Overview
We have been operating under conservatorship, with FHFA acting
as our conservator, since September 6, 2008. The
conservatorship and related matters have had a wide-ranging
impact on us, including our regulatory supervision, management,
business, financial condition and results of operations.
On September 7, 2008, the then Secretary of the Treasury
and the then Director of FHFA announced several actions taken by
Treasury and FHFA regarding Freddie Mac and Fannie Mae. At that
time, FHFA set forth the purpose and goals of the
conservatorship as follows: The purpose of appointing the
Conservator is to preserve and conserve the companys
assets and property and to put the company in a sound and
solvent condition. The goals of the conservatorship are to help
restore confidence in Fannie Mae and Freddie Mac, enhance their
capacity to fulfill their mission, and mitigate the systemic
risk that has contributed directly to the instability in the
current market. These actions included the following:
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placing us and Fannie Mae in conservatorship;
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the execution of the Purchase Agreement, pursuant to which we
issued to Treasury both senior preferred stock and a warrant to
purchase common stock; and
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the establishment of a temporary secured lending credit facility
that was available to us until December 31, 2009, which was
effected through the execution of a lending agreement (this
agreement expired on December 31, 2009).
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We refer to the Purchase Agreement and the warrant as the
Treasury Agreements.
Entry
Into Conservatorship
Upon its appointment, FHFA, as Conservator, immediately
succeeded to all rights, titles, powers and privileges of
Freddie Mac, and of any stockholder, officer or director of
Freddie Mac with respect to Freddie Mac and its assets, and
succeeded to the title to all books, records and assets of
Freddie Mac held by any other legal custodian or third party.
During the conservatorship, the Conservator delegated certain
authority to the Board of Directors to oversee, and management
to conduct, day-to-day operations so that the company can
continue to operate in the ordinary course of business. The
directors serve on behalf of, and exercise authority as directed
by, the Conservator. We describe the terms of the
conservatorship and the powers of our Conservator in detail
below under Supervision of our Business During
Conservatorship and Powers of the
Conservator.
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. While we are not
aware of any current plans of our Conservator to significantly
change our business model or capital structure in the near-term,
there are likely to be significant changes beyond the near-term
that we expect to be decided by the Obama Administration and
Congress. Our future structure and role will be determined by
the Obama Administration and Congress. We have no ability to
predict the outcome of these deliberations. On February 11,
2011, the Obama Administration delivered a report to Congress
that lays out the Administrations plan to reform the
U.S. housing finance market. The report recommends winding
down Freddie Mac and Fannie Mae. For more information, see
Executive Summary Long-Term Financial
Sustainability and Future Status.
We receive substantial support from Treasury and FHFA, as our
Conservator and regulator, and are dependent upon their
continued support in order to continue operating our business.
Our ability to access funds from Treasury under the Purchase
Agreement is critical to: (a) keeping us solvent;
(b) allowing us to focus on our primary business objectives
under conservatorship; and (c) avoiding the appointment of
a receiver by FHFA under statutory mandatory receivership
provisions.
For a description of certain risks to our business relating to
the conservatorship and Treasury Agreements, see RISK
FACTORS.
Impact
of Conservatorship and Related Actions on Our
Business
We conduct our business under the direction of FHFA as our
Conservator. While the conservatorship has benefited us through,
for example, improved access to the debt markets because of the
support we receive from Treasury, we are also subject to certain
constraints on our business activities by Treasury due to the
terms of, and Treasurys rights under, the Purchase
Agreement.
Our business objectives and strategies have in some cases been
altered since we were placed 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:
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providing liquidity, stability and affordability in the mortgage
market;
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continuing to provide additional assistance to the struggling
housing and mortgage markets;
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reducing the need to draw funds from Treasury pursuant to the
Purchase Agreement;
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returning to long-term profitability; and
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protecting the interests of taxpayers.
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These objectives create conflicts in strategic and day-to-day
decision making that will likely lead to suboptimal outcomes for
one or more, or possibly all, of these objectives. We regularly
receive direction from our Conservator on how to pursue these
objectives, including direction to focus our efforts on
assisting homeowners in the housing and mortgage markets. Given
the important role the Obama Administration and our Conservator
have placed on Freddie Mac in addressing housing and mortgage
market conditions and our public mission, we may be required to
take additional actions that could have a negative impact on our
business, operating results or financial condition. Because we
expect many of these objectives and related initiatives to
result in significant costs, there is significant uncertainty as
to the ultimate impact these initiatives will have on our future
capital or liquidity needs. Certain of these objectives are
expected to help homeowners and the mortgage market and may help
to mitigate future credit losses. However, some of our
initiatives are expected to have an adverse impact on our near-
and long-term financial results.
Certain changes to our business objectives and strategies are
designed to provide support for the mortgage market in a manner
that serves our public mission and other non-financial
objectives, but may not contribute to profitability. Our efforts
to help struggling homeowners and the mortgage market, in line
with our mission, may help to mitigate credit losses, but in
some cases may increase our expenses or require us to forego
revenue opportunities in the near term. As a result, in some
cases the objectives of reducing the need to draw funds from
Treasury and returning to long-term profitability will be
subordinated as we provide this assistance. There is significant
uncertainty as to the ultimate impact that our efforts to aid
the housing and mortgage markets will have on our future capital
or liquidity needs and we cannot estimate whether, and the
extent to which, costs we incur in the near term as a result of
these efforts, which for the most part we are not reimbursed
for, will be offset by the prevention or reduction of potential
future costs.
In a letter to the Chairmen and Ranking Members of the
Congressional Banking and Financial Services Committees dated
February 2, 2010, the Acting Director of FHFA stated that
the focus of the conservatorship is on conserving assets,
minimizing corporate losses, ensuring Freddie Mac and Fannie Mae
continue to serve their mission, overseeing remediation of
identified weaknesses in corporate operations and risk
management, and ensuring that sound corporate governance
principles are followed. Specifically, the Acting Director of
FHFA stated that minimizing our credit losses is our central
goal and that we will be limited to continuing our existing core
business activities and taking actions necessary to advance the
goals of the conservatorship. The Acting Director stated that
permitting us to engage in new products is inconsistent with the
goals of the conservatorship. This could limit our ability to
return to profitability in future periods.
The conservatorship has also impacted our investment activity.
FHFA has stated that we will not be a substantial buyer or
seller of mortgages for our mortgage-related investments
portfolio, except for purchases of delinquent mortgages out of
PC pools. FHFA also stated that, given the size of our current
mortgage-related investments portfolio and the potential volume
of delinquent mortgages to be purchased out of PC pools, it
expects that any net additions to our mortgage-related
investments portfolio would be related to that activity.
The Conservator and Treasury also did not authorize us to engage
in certain business activities and transactions, including the
sale of certain assets, some of which we believe may have had a
beneficial impact on our results of operations or financial
condition, if executed. Our inability to execute such
transactions may adversely affect our profitability, and thus
contribute to our need to draw additional funds from Treasury.
We believe that the support provided by Treasury pursuant to the
Purchase Agreement currently enables us to maintain our access
to the debt markets and to have adequate liquidity to conduct
our normal business activities, although the costs of our debt
funding could vary.
Management is continuing its efforts to identify and evaluate
actions that could be taken to reduce the significant
uncertainties surrounding our business, as well as the level of
future draws under the Purchase Agreement; however, our ability
to pursue such actions may be limited by market conditions and
other factors. Any actions we take will likely require approval
by FHFA and Treasury before they are implemented. In addition,
FHFA, Treasury or Congress may have a different perspective than
management and 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.
These actions and objectives also create risks and uncertainties
that we discuss in RISK FACTORS. For more
information on the impact of conservatorship and our current
business objectives, see NOTE 3: CONSERVATORSHIP AND
RELATED MATTERS and Executive Summary
Our Primary Business Objectives.
Limits
on Mortgage-Related Investments Portfolio Under the Purchase
Agreement and by FHFA
Under the terms of the Purchase Agreement and FHFA regulation,
our mortgage-related investments portfolio is subject to a cap
that decreases by 10% each year until the portfolio reaches
$250 billion. As a result, the UPB of our mortgage-related
investments portfolio could not exceed $810 billion as of
December 31, 2010 and may not exceed $729 billion as
of December 31, 2011.
Table 4 presents the UPB of our mortgage-related
investments portfolio, for purposes of the limit imposed by the
Purchase Agreement and FHFA regulation. We disclose our mortgage
assets on this basis monthly under the caption
Mortgage-Related Investments Portfolio Ending
Balance in our Monthly Volume Summary reports, which are
available on our website and in current reports on
Form 8-K
we file with the SEC.
The UPB of our mortgage-related investments portfolio declined
from December 31, 2009 to December 31, 2010, primarily
due to liquidations, partially offset by the purchase of
$127.5 billion of seriously delinquent loans from PC trusts.
Table
4 Mortgage-Related Investments
Portfolio(1)
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December 31, 2010
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December 31, 2009
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(in millions)
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Investments segment Mortgage investments portfolio
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$
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481,677
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$
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597,827
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Single-family Guarantee segment Single-family
unsecuritized mortgage
loans(2)
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69,766
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10,743
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Multifamily segment Mortgage investments portfolio
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145,431
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146,702
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Total mortgage-related investments portfolio
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$
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696,874
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$
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755,272
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(1)
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Based on UPB and excludes mortgage loans and mortgage-related
securities traded, but not yet settled.
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(2)
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Represents unsecuritized non-performing single-family loans for
which the Single-family Guarantee segment is actively pursuing a
problem loan workout.
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Supervision
of our Business During Conservatorship
We experienced a change in control when we were placed into
conservatorship on September 6, 2008. Under
conservatorship, we have additional heightened supervision and
direction from our regulator, FHFA, which is also acting as our
Conservator. As Conservator, FHFA has succeeded to the powers of
our Board of Directors and management, as well as the powers of
our stockholders. During the conservatorship, the Conservator
delegated certain authority to the Board of Directors to
oversee, and management to conduct, day-to-day operations so
that the company can continue to operate in the ordinary course
of business. The Conservator retains the authority to withdraw
or revise its delegations of authority at any time. The
directors serve on behalf of, and exercise authority as directed
by, the Conservator.
Because the Conservator succeeded to the powers, including
voting rights, of our stockholders, who therefore do not
currently have voting rights of their own, we do not expect to
hold stockholders meetings during the conservatorship, nor
will we prepare or provide proxy statements for the solicitation
of proxies.
Our
Board of Directors and Management During
Conservatorship
While in conservatorship, we can, and have continued to, enter
into and enforce contracts with third parties. The Conservator
continues to work with the Board of Directors and management to
address and determine the strategic direction for the company.
The Conservator instructed the Board of Directors that it should
consult with and obtain the approval of the Conservator before
taking action in the following areas:
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actions involving capital stock, dividends, the Purchase
Agreement, increases in risk limits, material changes in
accounting policy, and reasonably foreseeable material increases
in operational risk;
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the creation of any subsidiary or affiliate or any substantial
transaction between Freddie Mac and any of its subsidiaries or
affiliates, except for transactions undertaken in the ordinary
course (e.g., the creation of a REMIC, REIT, or similar
vehicle);
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matters that relate to conservatorship, such as, but not limited
to, the initiation and material actions in connection with
significant litigation addressing the actions or authority of
the Conservator, repudiation of contracts, qualified financial
contracts in dispute due to our conservatorship, and
counterparties attempting to nullify or amend contracts due to
our conservatorship;
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actions involving hiring, compensation and termination benefits
of directors and officers at the executive vice president level
and above (including, regardless of title, executive positions
with the functions of Chief Operating Officer, Chief Financial
Officer, General Counsel, Chief Business Officer, Chief
Investment Officer, Treasurer, Chief Compliance Officer, Chief
Risk Officer and Chief/General/Internal Auditor);
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actions involving the retention and termination of external
auditors and law firms serving as consultants to the Board of
Directors;
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settlements in excess of $50 million of litigation, claims,
regulatory proceedings or tax-related matters;
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any merger with or purchase or acquisition of a business
involving consideration in excess of $50 million; and
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any action that in the reasonable business judgment of the Board
of Directors at the time that the action is taken is likely to
cause significant reputational risk.
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Government
Support for Our Business During Conservatorship
We receive substantial support from Treasury and FHFA, as our
Conservator and regulator, and are dependent upon their
continued support in order to continue operating our business.
This support includes our ability to access funds from Treasury
under the Purchase Agreement. Since being placed into
conservatorship, we also received support from Treasury and the
Federal Reserve under their programs to purchase
mortgage-related securities and, in the case of the Federal
Reserve, debt securities. Treasurys program ended in
December 2009 and the Federal Reserves program ended in
March 2010.
Powers
of the Conservator
Under the GSE Act, the conservatorship provisions applicable to
Freddie Mac are based generally on federal banking law. As
discussed below, FHFA has broad powers when acting as our
conservator. For more information on the GSE Act, see
Regulation and Supervision.
General
Powers of the Conservator
Upon its appointment, the Conservator immediately succeeded to
all rights, titles, powers and privileges of Freddie Mac, and of
any stockholder, officer or director of Freddie Mac with respect
to Freddie Mac and its assets. The Conservator also succeeded to
the title to all books, records and assets of Freddie Mac held
by any other legal custodian or third party.
Under the GSE Act, the Conservator may take any actions it
determines are necessary and appropriate to carry on our
business, support public mission objectives, and preserve and
conserve our assets and property. The Conservators powers
include the ability to transfer or sell any of our assets or
liabilities (subject to certain limitations and post-transfer
notice provisions for transfers of qualified financial
contracts, as defined below under Special Powers of the
Conservator Security Interests Protected;
Exercise of Rights Under Qualified Financial
Contracts) without any approval, assignment of rights
or consent of any party. The GSE Act, however, provides that
mortgage loans and mortgage-related assets that have been
transferred to a Freddie Mac securitization trust must be held
for the beneficial owners of the trust and cannot be used to
satisfy our general creditors.
Under the GSE Act, in connection with any sale or disposition of
our assets, the Conservator must conduct its operations to
maximize the NPV return from the sale or disposition of such
assets, to minimize the amount of any loss realized, and to
ensure adequate competition and fair and consistent treatment of
offerors. The Conservator is required to maintain a full
accounting of the conservatorship and make its reports available
upon request to stockholders and members of the public.
We remain liable for all of our obligations relating to our
outstanding debt and mortgage-related securities. FHFA has
stated that our obligations will be paid in the normal course of
business during the conservatorship.
Special
Powers of the Conservator
Disaffirmance
and Repudiation of Contracts
Under the GSE Act, the Conservator may disaffirm or repudiate
contracts (subject to certain limitations for qualified
financial contracts) that we entered into prior to its
appointment as Conservator if it determines, in its sole
discretion, that performance of the contract is burdensome and
that disaffirmance or repudiation of the contract promotes the
orderly administration of our affairs. The GSE Act requires FHFA
to exercise its right to disaffirm or repudiate most contracts
within a reasonable period of time after its appointment as
Conservator. The Conservator has advised us that it has no
intention of repudiating any guarantee obligation relating to
Freddie Macs mortgage-related securities because it views
repudiation as incompatible with the goals of the
conservatorship. We can, and have continued to, enter into,
perform and enforce contracts with third parties.
Limitations
on Enforcement of Contractual Rights by Counterparties
The GSE Act provides that the Conservator may enforce most
contracts entered into by us, notwithstanding any provision of
the contract that provides for termination, default,
acceleration, or exercise of rights upon the appointment of, or
the exercise of rights or powers by, a conservator.
Security
Interests Protected; Exercise of Rights Under Qualified
Financial Contracts
Notwithstanding the Conservators powers under the GSE Act
described above, the Conservator must recognize legally
enforceable or perfected security interests, except where such
an interest is taken in contemplation of our insolvency or with
the intent to hinder, delay or defraud us or our creditors. In
addition, the GSE Act provides that no person will be stayed or
prohibited from exercising specified rights in connection with
qualified financial contracts, including termination or
acceleration (other than solely by reason of, or incidental to,
the appointment of the Conservator), rights of offset, and
rights under any security agreement or arrangement or other
credit enhancement relating to such contract. The term qualified
financial contract means any securities contract, commodity
contract, forward contract, repurchase agreement, swap
agreement, and any similar agreement as determined by FHFA by
regulation, resolution or order.
Avoidance
of Fraudulent Transfers
Under the GSE Act, the Conservator may avoid, or refuse to
recognize, a transfer of any property interest of Freddie Mac or
of any of our debtors, and also may avoid any obligation
incurred by Freddie Mac or by any debtor of Freddie Mac, if the
transfer or obligation was made: (a) within five years of
September 6, 2008; and (b) with the intent to hinder,
delay, or defraud Freddie Mac, FHFA, the Conservator or, in the
case of a transfer in connection with a qualified financial
contract, our creditors. To the extent a transfer is avoided,
the Conservator may recover, for our benefit, the property or,
by court order, the value of that property from the initial or
subsequent transferee, other than certain transfers that were
made for value, including satisfaction or security of a present
or antecedent debt, and in good faith. These rights are superior
to any rights of a trustee or any other party, other than a
federal agency, under the U.S. bankruptcy code.
Modification
of Statutes of Limitations
Under the GSE Act, notwithstanding any provision of any
contract, the statute of limitations with regard to any action
brought by the Conservator is: (a) for claims relating to a
contract, the longer of six years or the applicable period under
state law; and (b) for tort claims, the longer of three
years or the applicable period under state law, in each case,
from the later of September 6, 2008 or the date on which
the cause of action accrues. In addition, notwithstanding the
state law statute of limitation for tort claims, the Conservator
may bring an action for any tort claim that arises from fraud,
intentional misconduct resulting in unjust enrichment, or
intentional misconduct resulting in substantial loss to us, if
the states statute of limitations expired not more than
five years before September 6, 2008.
Suspension
of Legal Actions
Under the GSE Act, in any judicial action or proceeding to which
we are or become a party, the Conservator may request, and the
applicable court must grant, a stay for a period not to exceed
45 days.
Treatment
of Breach of Contract Claims
Under the GSE Act, any final and unappealable judgment for
monetary damages against the Conservator for breach of an
agreement executed or approved in writing by the Conservator
will be paid as an administrative expense of the Conservator.
Attachment
of Assets and Other Injunctive Relief
Under the GSE Act, the Conservator may seek to attach assets or
obtain other injunctive relief without being required to show
that any injury, loss or damage is irreparable and immediate.
Subpoena
Power
The GSE Act provides the Conservator, with the approval of the
Director of FHFA, with subpoena power for purposes of carrying
out any power, authority or duty with respect to Freddie Mac.
Treasury
Agreements
The Reform Act granted Treasury temporary authority (through
December 31, 2009) to purchase any obligations and
other securities issued by Freddie Mac on such terms and
conditions and in such amounts as Treasury may determine, upon
mutual agreement between Treasury and Freddie Mac. Pursuant to
this authority, Treasury entered into several agreements with
us, as described below.
Purchase
Agreement and Related Issuance of Senior Preferred Stock and
Common Stock Warrant
Purchase
Agreement
On September 7, 2008, we, through FHFA, in its capacity as
Conservator, and Treasury entered into the Purchase Agreement.
The Purchase Agreement was subsequently amended and restated on
September 26, 2008, and further amended on May 6, 2009
and December 24, 2009. Pursuant to the Purchase Agreement,
on September 8, 2008 we issued to Treasury: (a) one
million shares of Variable Liquidation Preference Senior
Preferred Stock (with an initial liquidation preference of
$1 billion), which we refer to as the senior preferred
stock; and (b) a warrant to purchase, for a nominal price,
shares of our common stock equal to 79.9% of the total number of
shares of our common stock outstanding on a fully diluted basis
at the time the warrant is exercised, which we refer to as the
warrant. The terms of the senior preferred stock and warrant are
summarized in separate sections below. We did not receive any
cash proceeds from Treasury as a result of issuing the senior
preferred stock or the warrant. However, deficits in our net
worth have made it necessary for us to make substantial draws on
Treasurys funding commitment under the Purchase Agreement.
As a result, the aggregate liquidation preference of the senior
preferred stock has increased from $1.0 billion as of
September 8, 2008 to $64.2 billion at
December 31, 2010 (this figure reflects the receipt of
funds requested in the draw to address our net worth deficit as
of September 30, 2010). Our dividend obligation on the
senior preferred stock, based on that liquidation preference, is
$6.42 billion, which exceeds our annual earnings in all but
one period.
The senior preferred stock and warrant were issued to Treasury
as an initial commitment fee in consideration of the initial
commitment from Treasury to provide up to $100 billion
(subsequently increased to $200 billion) in funds to us
under the terms and conditions set forth in the Purchase
Agreement. Under the Purchase Agreement, the $200 billion
maximum amount of the commitment from Treasury will increase as
necessary to accommodate any cumulative reduction in our net
worth during 2010, 2011 and 2012. If we do not have a capital
surplus (i.e., positive net worth) at the end of 2012,
then the amount of funding available after 2012 will be
$149.3 billion ($200 billion funding commitment
reduced by cumulative draws for net worth deficits through
December 31, 2009). In the event we have a capital surplus
at the end of 2012, then the amount of funding available after
2012 will depend on the size of that surplus relative to
cumulative draws needed for deficits during 2010 to 2012, as
follows:
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If the year-end 2012 surplus is lower than the cumulative draws
needed for 2010 to 2012, then the amount of available funding is
$149.3 billion less the surplus.
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If the year-end 2012 surplus exceeds the cumulative draws for
2010 to 2012, then the amount of available funding is
$149.3 billion less the amount of those draws.
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In addition to the issuance of the senior preferred stock and
warrant, we are required under the Purchase Agreement to pay a
quarterly commitment fee to Treasury. Under the Purchase
Agreement, the fee is to be determined in an amount mutually
agreed to by us and Treasury with reference to the market value
of Treasurys funding commitment as then in effect, and
reset every five years. We may elect to pay the quarterly
commitment fee in cash or add the amount of the fee to the
liquidation preference of the senior preferred stock. Treasury
may waive the quarterly commitment fee for up to one year at a
time, in its sole discretion, based on adverse conditions in the
U.S. mortgage market. The fee was originally scheduled to
commence on March 31, 2010, but was delayed until
March 31, 2011 pursuant to an amendment to the Purchase
Agreement. Treasury waived the fee for the first quarter of
2011, but has indicated that it remains committed to protecting
taxpayers and ensuring that our future positive earnings are
returned to taxpayers as compensation for their investment.
Treasury stated that it would reevaluate whether the quarterly
commitment fee should be set in the second quarter of 2011.
Absent Treasury waiving the commitment fee in the second quarter
of 2011, this quarterly commitment fee will begin accruing on
April 1, 2011 and must be paid each quarter for as long as
the Purchase Agreement is in effect. The amount of the fee has
not yet been determined and could be substantial.
The Purchase Agreement provides that, on a quarterly basis, we
generally may draw funds up to the amount, if any, by which our
total liabilities exceed our total assets, as reflected on our
GAAP balance sheet for the applicable fiscal quarter (referred
to as the deficiency amount), provided that the aggregate amount
funded under the Purchase Agreement may not exceed
Treasurys commitment. The Purchase Agreement provides that
the deficiency amount will be calculated differently if we
become subject to receivership or other liquidation process. The
deficiency amount may be increased above the otherwise
applicable amount upon our mutual written agreement with
Treasury. In addition, if the Director of FHFA determines that
the Director will be mandated by law to appoint a receiver for
us unless our capital is increased by receiving funds under the
commitment in an amount up to the deficiency amount (subject to
the maximum amount that may be funded under the agreement), then
FHFA, in its capacity as our Conservator, may request that
Treasury provide funds to us in such amount. The Purchase
Agreement also provides that, if we have a deficiency amount as
of the date of completion of the liquidation of our assets, we
may request funds from Treasury in an amount up to the
deficiency amount (subject to the maximum amount that may be
funded under the agreement). Any amounts that we draw under the
Purchase Agreement will be added to the liquidation preference
of the senior preferred stock. No additional shares of senior
preferred stock are required to be issued under the Purchase
Agreement. As a result, the expiration on December 31, 2009
of Treasurys temporary authority to purchase obligations
and other securities issued by Freddie Mac did not affect
Treasurys funding commitment under the Purchase Agreement.
Under the Purchase Agreement, our ability to repay the
liquidation preference of the senior preferred stock is limited
and we may not be able to do so for the foreseeable future, if
at all. The amounts payable for dividends on the senior
preferred stock are substantial and will have an adverse impact
on our financial position and net worth. The payment of
dividends on our senior preferred stock in cash reduces our net
worth. For periods in which our earnings and other changes in
equity do not result in positive net worth, draws under the
Purchase Agreement effectively fund the cash payment of senior
preferred dividends to Treasury. It is unlikely that, over the
long-term, we will generate net income or comprehensive income
in excess of our annual dividends payable to Treasury, although
we may experience period-to-period variability in earnings and
comprehensive income. As a result, we expect to make additional
draws in future periods.
The Purchase Agreement provides that the Treasurys funding
commitment will terminate under any of the following
circumstances: (a) the completion of our liquidation and
fulfillment of Treasurys obligations under its funding
commitment at that time; (b) the payment in full of, or
reasonable provision for, all of our liabilities (whether or not
contingent, including mortgage guarantee obligations); and
(c) the funding by Treasury of the maximum amount of the
commitment under the Purchase Agreement. In addition, Treasury
may terminate its funding commitment and declare the Purchase
Agreement null and void if a court vacates, modifies, amends,
conditions, enjoins, stays or otherwise affects the appointment
of the Conservator or otherwise curtails the Conservators
powers. Treasury may not terminate its funding commitment under
the Purchase Agreement solely by reason of our being in
conservatorship, receivership or other insolvency proceeding, or
due to our financial condition or any adverse change in our
financial condition.
The Purchase Agreement provides that most provisions of the
agreement may be waived or amended by mutual written agreement
of the parties; however, no waiver or amendment of the agreement
is permitted that would decrease Treasurys aggregate
funding commitment or add conditions to Treasurys funding
commitment if the waiver or amendment would adversely affect in
any material respect the holders of our debt securities or
Freddie Mac mortgage guarantee obligations.
In the event of our default on payments with respect to our debt
securities or Freddie Mac mortgage guarantee obligations, if
Treasury fails to perform its obligations under its funding
commitment and if we
and/or the
Conservator are not diligently pursuing remedies in respect of
that failure, the holders of these debt securities or Freddie
Mac mortgage guarantee obligations may file a claim in the
United States Court of Federal Claims for relief requiring
Treasury to fund to us the lesser of: (a) the amount
necessary to cure the payment defaults on our debt and Freddie
Mac mortgage guarantee obligations; and (b) the lesser of:
(i) the deficiency amount; and (ii) the maximum amount
of the commitment less the aggregate amount of funding
previously provided under the commitment. Any payment that
Treasury makes under those circumstances will be treated for all
purposes as a draw under the Purchase Agreement that will
increase the liquidation preference of the senior preferred
stock.
The Purchase Agreement has an indefinite term and can terminate
only in limited circumstances, which do not include the end of
the conservatorship. The Purchase Agreement therefore could
continue after the conservatorship ends.
Issuance
of Senior Preferred Stock
Shares of the senior preferred stock have a par value of $1, and
have a stated value and initial liquidation preference equal to
$1,000 per share. The liquidation preference of the senior
preferred stock is subject to adjustment. Dividends that are not
paid in cash for any dividend period will accrue and be added to
the liquidation preference of the senior preferred stock. In
addition, any amounts Treasury pays to us pursuant to its
funding commitment under the Purchase Agreement and any
quarterly commitment fees that are not paid in cash to Treasury
nor waived by Treasury will be added to the liquidation
preference of the senior preferred stock. As described below, we
may make payments to reduce the liquidation preference of the
senior preferred stock in limited circumstances.
Treasury, as the holder of the senior preferred stock, is
entitled to receive, when, as and if declared by our Board of
Directors, cumulative quarterly cash dividends at the annual
rate of 10% per year on the then-current liquidation preference
of the senior preferred stock. Through December 31, 2010,
we have paid cash dividends of $10.0 billion at the
direction of the Conservator. If at any time we fail to pay cash
dividends in a timely manner, then immediately following such
failure and for all dividend periods thereafter until the
dividend period following the date on which we have paid in cash
full cumulative dividends (including any unpaid dividends added
to the liquidation preference), the dividend rate will be 12%
per year.
The senior preferred stock is senior to our common stock and all
other outstanding series of our preferred stock, as well as any
capital stock we issue in the future, as to both dividends and
rights upon liquidation. The senior preferred stock provides
that we may not, at any time, declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire,
or make a liquidation payment with respect to, any common stock
or other securities ranking junior to the senior preferred stock
unless: (a) full cumulative dividends on the outstanding
senior preferred stock (including any unpaid dividends added to
the liquidation preference) have been declared and paid in cash;
and (b) all amounts required to be paid with the net
proceeds of any issuance of capital stock for cash (as described
in the following paragraph) have been paid in cash. Shares of
the senior preferred stock are not convertible. Shares of the
senior preferred stock have no general or special voting rights,
other than those set forth in the certificate of designation for
the senior preferred stock or otherwise required by law. The
consent of holders of at least two-thirds of all outstanding
shares of senior preferred stock is generally required to amend
the terms of the senior preferred stock or to create any class
or series of stock that ranks prior to or on parity with the
senior preferred stock.
We are not permitted to redeem the senior preferred stock prior
to the termination of Treasurys funding commitment set
forth in the Purchase Agreement; however, we are permitted to
pay down the liquidation preference of the outstanding shares of
senior preferred stock to the extent of: (a) accrued and
unpaid dividends previously added to the liquidation preference
and not previously paid down; and (b) quarterly commitment
fees previously added to the liquidation preference and not
previously paid down. In addition, if we issue any shares of
capital stock for cash while the senior preferred stock is
outstanding, the net proceeds of the issuance must be used to
pay down the liquidation preference of the senior preferred
stock; however, the liquidation preference of each share of
senior preferred stock may not be paid down below $1,000 per
share prior to the termination of Treasurys funding
commitment. Following the termination of Treasurys funding
commitment, we may pay down the liquidation preference of all
outstanding shares of senior preferred stock at any time, in
whole or in part. If, after termination of Treasurys
funding commitment, we pay down the liquidation preference of
each outstanding share of senior preferred stock in full, the
shares will be deemed to have been redeemed as of the payment
date.
Issuance
of Common Stock Warrant
The warrant gives Treasury the right to purchase shares of our
common stock equal to 79.9% of the total number of shares of our
common stock outstanding on a fully diluted basis on the date of
exercise. The warrant may be exercised in whole or in part at
any time on or before September 7, 2028, by delivery to us
of: (a) a notice of exercise; (b) payment of the
exercise price of $0.00001 per share; and (c) the warrant.
If the market price of one share of our common stock is greater
than the exercise price, then, instead of paying the exercise
price, Treasury may elect to receive shares equal to the value
of the warrant (or portion thereof being canceled) pursuant to
the formula specified in the warrant. Upon exercise of the
warrant, Treasury may assign the right to receive the shares of
common stock issuable upon exercise to any other person.
As of February 24, 2011, Treasury has not exercised the
warrant.
Covenants
Under Treasury Agreements
The Purchase Agreement and warrant contain covenants that
significantly restrict our business activities. For example, as
a result of these covenants, we can no longer obtain additional
equity financing (other than pursuant to the Purchase Agreement)
and we are limited in the amount and type of debt financing we
may obtain.
Purchase
Agreement Covenants
The Purchase Agreement provides that, until the senior preferred
stock is repaid or redeemed in full, we may not, without the
prior written consent of Treasury:
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declare or pay any dividend (preferred or otherwise) or make any
other distribution with respect to any Freddie Mac equity
securities (other than with respect to the senior preferred
stock or warrant);
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redeem, purchase, retire or otherwise acquire any Freddie Mac
equity securities (other than the senior preferred stock or
warrant);
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sell or issue any Freddie Mac equity securities (other than the
senior preferred stock, the warrant and the common stock
issuable upon exercise of the warrant and other than as required
by the terms of any binding agreement in effect on the date of
the Purchase Agreement);
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terminate the conservatorship (other than in connection with a
receivership);
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sell, transfer, lease or otherwise dispose of any assets, other
than dispositions for fair market value: (a) to a limited
life regulated entity (in the context of a receivership);
(b) of assets and properties in the ordinary course of
business, consistent with past practice; (c) in connection
with our liquidation by a receiver; (d) of cash or cash
equivalents for cash or cash equivalents; or (e) to the
extent necessary to comply with the covenant described below
relating to the reduction of our mortgage-related investments
portfolio;
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issue any subordinated debt;
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enter into a corporate reorganization, recapitalization, merger,
acquisition or similar event; or
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engage in transactions with affiliates unless the transaction
is: (a) pursuant to the Purchase Agreement, the senior
preferred stock or the warrant; (b) upon arms length
terms; or (c) a transaction undertaken in the ordinary
course or pursuant to a contractual obligation or customary
employment arrangement in existence on the date of the Purchase
Agreement.
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These covenants also apply to our subsidiaries.
The Purchase Agreement also provides that we may not own
mortgage assets with UPB in excess of:
(a) $900 billion on December 31, 2009; or
(b) on December 31 of each year thereafter, 90% of the
aggregate amount of mortgage assets we are permitted to own as
of December 31 of the immediately preceding calendar year,
provided that we are not required to own less than
$250 billion in mortgage assets. Under the Purchase
Agreement, we also may not incur indebtedness that would result
in the par value of our aggregate indebtedness exceeding 120% of
the amount of mortgage assets we are permitted to own on
December 31 of the immediately preceding calendar year. The
mortgage asset and indebtedness limitations are determined
without giving effect to any change in the accounting standards
related to transfers of financial assets and consolidation of
VIEs or any similar accounting standard. Therefore, these
limitations were not affected by our implementation of the
changes to the accounting standards for transfers of financial
assets and consolidation of VIEs, under which we consolidated
our single-family PC trusts and certain of our Other Guarantee
Transactions in our financial statements as of January 1,
2010.
In addition, the Purchase Agreement provides that we may not
enter into any new compensation arrangements or increase amounts
or benefits payable under existing compensation arrangements of
any named executive officer or other executive officer (as such
terms are defined by SEC rules) without the consent of the
Director of FHFA, in consultation with the Secretary of the
Treasury.
As of February 24, 2011, we believe we were in compliance
with the covenants under the Purchase Agreement.
Warrant
Covenants
The warrant we issued to Treasury includes, among others, the
following covenants: (a) we may not permit any of our
significant subsidiaries to issue capital stock or equity
securities, or securities convertible into or exchangeable for
such securities, or any stock appreciation rights or other
profit participation rights; (b) we may not take any action
to avoid the observance or performance of the terms of the
warrant and we must take all actions necessary or appropriate to
protect Treasurys rights against impairment or dilution;
and (c) we must provide Treasury with prior notice of
specified actions relating to our common stock, such as setting
a record date for a dividend payment, granting subscription or
purchase rights, authorizing a recapitalization,
reclassification, merger or similar transaction, commencing a
liquidation of the company or any other action that would
trigger an adjustment in the exercise price or number or amount
of shares subject to the warrant.
As of February 24, 2011, we believe we were in compliance
with the covenants under the warrant.
Effect
of Conservatorship and Treasury Agreements on Existing
Stockholders
The conservatorship, the Purchase Agreement and the senior
preferred stock and warrant issued to Treasury have materially
limited the rights of our common and preferred stockholders
(other than Treasury as holder of the senior preferred stock)
and had the following adverse effects on our common and
preferred stockholders:
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the rights and powers of the stockholders are suspended during
the conservatorship, and our common stockholders do not have the
ability to elect directors or to vote on other matters;
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because we are in conservatorship, we are no longer managed with
a strategy to maximize stockholder returns. In a letter to the
Chairmen and Ranking Members of the Congressional Banking and
Financial Services Committees dated February 2, 2010, the
Acting Director of FHFA stated that the focus of the
conservatorship is on conserving assets, minimizing corporate
losses, ensuring Freddie Mac and Fannie Mae continue to serve
their mission, overseeing
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remediation of identified weaknesses in corporate operations and
risk management, and ensuring that sound corporate governance
principles are followed;
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the senior preferred stock ranks senior to the common stock and
all other series of preferred stock as to both dividends and
distributions upon dissolution, liquidation or winding up of the
company;
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the Conservator has eliminated dividends on Freddie Mac common
and preferred stock (other than dividends on the senior
preferred stock) during conservatorship. In addition, the
Purchase Agreement prohibits the payment of dividends on common
or preferred stock (other than the senior preferred stock)
without the prior written consent of Treasury; and
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the warrant provides Treasury with the right to purchase shares
of our common stock equal to up to 79.9% of the total number of
shares of our common stock outstanding on a fully diluted basis
on the date of exercise for a nominal price, thereby
substantially diluting the ownership in Freddie Mac of our
common stockholders at the time of exercise. Until Treasury
exercises its rights under the warrant, or its right to exercise
the warrant expires on September 7, 2028 without having
been exercised, the holders of our common stock continue to have
the risk that, as a group, they will own no more than 20.1% of
the total voting power of the company. Under our charter, bylaws
and applicable law, 20.1% is insufficient to control the outcome
of any vote that is presented to the common stockholders.
Accordingly, existing common stockholders have no assurance
that, as a group, they will be able to control the election of
our directors or the outcome of any other vote after the time,
if any, that the conservatorship ends.
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As described above, the conservatorship and Treasury Agreements
also impact our business in ways that indirectly affect our
common and preferred stockholders. By their terms, the Purchase
Agreement, senior preferred stock and warrant will continue to
exist even if we are released from the conservatorship. For a
description of the risks to our business relating to the
conservatorship and Treasury Agreements, see RISK
FACTORS.
Regulation
and Supervision
In addition to our oversight by FHFA as our Conservator, we are
subject to regulation and oversight by FHFA under our charter
and the GSE Act, which was modified substantially by the Reform
Act. We are also subject to certain regulation by other
government agencies.
Federal
Housing Finance Agency
FHFA is an independent agency of the federal government
responsible for oversight of the operations of Freddie Mac,
Fannie Mae and the FHLBs. The Director of FHFA is appointed by
the President and confirmed by the Senate for a five-year term,
removable only for cause. In the discussion below, we refer to
Freddie Mac and Fannie Mae as the enterprises.
The Federal Housing Finance Oversight Board, or the Oversight
Board, is responsible for advising the Director of FHFA with
respect to overall strategies and policies. The Oversight Board
consists of the Director of FHFA as Chairperson, the Secretary
of the Treasury, the Chair of the SEC and the Secretary of HUD.
Under the GSE Act, FHFA has safety and soundness authority that
is comparable to, and in some respects, broader than that of the
federal banking agencies. The GSE Act also provides FHFA with
powers that, even if we were not in conservatorship, include the
authority to raise capital levels above statutory minimum
levels, regulate the size and content of our mortgage-related
investments portfolio, and approve new mortgage products.
FHFA is responsible for implementing the various provisions of
the GSE Act that were added by the Reform Act. In general, we
remain subject to existing regulations, orders and
determinations until new ones are issued or made.
Receivership
Under the GSE Act, FHFA must place us into receivership if FHFA
determines in writing that our assets are 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 also 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.
In addition, we could be put into receivership at the discretion
of the Director of FHFA at any time for other reasons, including
conditions that FHFA has already asserted existed at the time
the then Director of FHFA placed us into conservatorship. These
include: (a) a substantial dissipation of assets or
earnings due to unsafe or unsound practices; (b) the
existence of an unsafe or unsound condition to transact
business; (c) an inability to meet our obligations in the
ordinary course of business; (d) a weakening of our
condition due to unsafe or unsound practices or conditions;
(e) critical undercapitalization; (f) the likelihood
of losses that will deplete substantially all of our capital; or
(g) by consent.
On July 9, 2010, FHFA published in the Federal Register a
proposed rule to codify certain terms of conservatorship and
receivership operations for Fannie Mae, Freddie Mac and the
FHLBs. FHFA noted that among the key issues addressed in the
proposed rule are the status and priority of claims and the
relationships among various classes of creditors and
equity-holders under conservatorships or receiverships. The
Acting Director of FHFA stated that publication of this rule for
comment has no impact on the current conservatorship operations
and is not a reflection of the condition of Freddie Mac, Fannie
Mae, or the FHLBs.
Capital
Standards
FHFA has suspended capital classification of us during
conservatorship in light of the Purchase Agreement. The existing
statutory and FHFA-directed regulatory capital requirements are
not binding during the conservatorship. We continue to provide
submissions to FHFA on both minimum and risk-based capital. FHFA
continues to publish relevant capital figures (minimum capital
requirement, core capital, and GAAP net worth) but does not
publish our critical capital, risk-based capital or subordinated
debt levels during conservatorship.
On October 9, 2008, FHFA also announced that it will engage
in rule-making to revise our minimum capital and risk-based
capital requirements. The GSE Act provides that FHFA may
increase minimum capital levels from the existing statutory
percentages either by regulation or on a temporary basis by
order. On February 8, 2010, FHFA issued a notice of
proposed rulemaking setting forth procedures and standards for
such a temporary increase in minimum capital levels. FHFA may
also, by regulation or order, establish capital or reserve
requirements with respect to any product or activity of an
enterprise, as FHFA considers appropriate. In addition, under
the GSE Act, FHFA must, by regulation, establish risk-based
capital requirements to ensure the enterprises operate in a safe
and sound manner, maintaining sufficient capital and reserves to
support the risks that arise in their operations and management.
In developing the new risk-based capital requirements, FHFA is
not bound by the risk-based capital standards in effect prior to
the amendment of the GSE Act by the Reform Act.
Our regulatory minimum capital is a leverage-based measure that
is generally calculated based on GAAP and reflects a 2.50%
capital requirement for on-balance sheet assets and 0.45%
capital requirement for off-balance sheet obligations. Pursuant
to regulatory guidance from FHFA, our minimum capital
requirement was not automatically affected by our
January 1, 2010 adoption of new accounting standards for
transfers of financial assets and consolidation of VIEs.
Specifically, upon adoption of these new accounting standards,
FHFA directed us, for purposes of minimum capital, to continue
reporting our PCs held by third parties and other aggregate
off-balance sheet obligations using a 0.45% capital requirement.
Notwithstanding this guidance, FHFA reserves the authority under
the GSE Act to raise the minimum capital requirement for any of
our assets or activities.
For additional information, see MD&A
LIQUIDITY AND CAPITAL RESOURCES Capital
Resources and NOTE 18: REGULATORY
CAPITAL. Also, see RISK FACTORS Legal
and Regulatory Risks for more information.
New
Products
The GSE Act requires the enterprises to obtain the approval of
FHFA before initially offering any product, subject to certain
exceptions. The GSE Act provides for a public comment process on
requests for approval of new products. FHFA may temporarily
approve a product without soliciting public comment if delay
would be contrary to the public interest. FHFA may condition
approval of a product on specific terms, conditions and
limitations. The GSE Act also requires the enterprises to
provide FHFA with written notice of any new activity that we or
Fannie Mae consider not to be a product.
On July 2, 2009, FHFA published an interim final rule on
prior approval of new products, implementing the new product
provisions for us and Fannie Mae in the GSE 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. On
August 31, 2009, Freddie Mac and Fannie Mae filed joint
public comments on the interim final rule with FHFA. FHFA has
stated that permitting us to engage in new products is
inconsistent with the goals of conservatorship and has
instructed us not to submit such requests under the interim
final rule. This could have an adverse effect on our business
and profitability in future periods. We cannot currently predict
when or if FHFA will permit us to engage in new products under
the interim final rule, nor when the rule will be finalized.
Affordable
Housing Goals
We are subject to annual affordable housing goals. In light of
these housing goals, we may make adjustments to our mortgage
loan sourcing and purchase strategies, which could further
increase our credit losses. These strategies could include
entering into some purchase and securitization transactions with
lower expected economic returns than our typical transactions.
Prior to 2010, we at times relaxed some of our underwriting
criteria to obtain goal-qualifying mortgage loans and made
additional investments in higher risk mortgage loan products
that we believed were more likely to serve the borrowers
targeted by the goals.
If the Director of FHFA finds that we failed to meet a housing
goal and that achievement of the housing goal was feasible, the
GSE Act states that the Director may require the submission of a
housing plan with respect to the housing goal for approval by
the Director. The housing plan must describe the actions we
would take to achieve the unmet goal in the future. FHFA has the
authority to take actions against us, including issuing a cease
and desist order or assessing civil money penalties, if we:
(a) fail to submit a required housing plan or fail to make
a good faith effort to comply with a plan approved by FHFA; or
(b) fail to submit certain data relating to our mortgage
purchases, information or reports as required by law. See
RISK FACTORS Legal and Regulatory Risks.
Affordable
Housing Goals for 2010 and 2011
Effective beginning calendar year 2010, the Reform Act requires
that FHFA establish, by regulation, four single-family housing
goals, one multifamily special affordable housing goal and
requirements relating to multifamily housing for very low-income
families.
On September 14, 2010, FHFA published in the Federal
Register a final rule establishing new affordable housing goals
for Freddie Mac and Fannie Mae for 2010 and 2011. The final rule
was effective on October 14, 2010. The rule establishes
four goals and one subgoal for single-family owner-occupied
housing, one multifamily special affordable housing goal, and
one multifamily special affordable housing subgoal. Three of the
single-family housing goals and the subgoal target purchase
money mortgages for: (a) low-income families; (b) very
low-income families;
and/or
(c) families that reside in low-income areas. The
single-family housing goals also include one that targets
refinancing mortgages for low-income families. The multifamily
special affordable housing goal targets multifamily rental
housing affordable to low-income families. The multifamily
special affordable housing subgoal targets multifamily rental
housing affordable to very low-income families. In addition, the
rule states that Freddie Mac and Fannie Mae must continue to
report on their acquisition of mortgages involving low-income
units in small (5- to
50-unit)
multifamily properties.
Our housing goals for 2010 and 2011 are set forth in
Table 5 below.
Table
5 Affordable Housing Goals for 2010 and
2011
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Goals for 2010 and 2011
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Single-family purchase money goals (benchmark levels):
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Low-income
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27
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%
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Very low-income
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8
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%
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Low-income
areas(1)
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24
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%
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Low-income areas subgoal
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13
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%
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Single-family refinance low-income goal (benchmark level)
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21
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%
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Multifamily low-income goal
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161,250 units
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Multifamily very low-income subgoal
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21,000 units
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(1) |
FHFA will annually set the benchmark level for the low-income
areas goal based on the benchmark level for the low-income areas
subgoal, plus an adjustment factor reflecting the additional
incremental share of mortgages for moderate-income families in
designated disaster areas in the most recent year for which such
data is available. For 2010, FHFA set the benchmark level for
the low-income areas goal at 24%.
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The single-family goals are expressed as a percentage of the
total number of eligible mortgages underlying our total
single-family mortgage purchases. The multifamily goals are
expressed in terms of minimum numbers of units financed.
With respect to the single-family goals, the rule includes:
(a) an assessment of performance as compared to the actual
share of the market that meets the criteria for each goal; and
(b) a benchmark level to measure performance. Where our
performance on a single-family goal falls short of the benchmark
for a goal, we still could achieve the goal if our performance
meets or exceeds the actual share of the market that meets the
criteria for the goal for that year. For example, if the actual
market share of mortgages to low-income families relative to all
mortgages originated to finance owner-occupied single-family
properties is lower than the 27% benchmark rate, we would still
satisfy this goal if we achieve that actual market percentage.
The rule makes a number of changes to the previous counting
methods for goals credit, including prohibiting housing goals
credit for purchases of private-label securities. However, the
rule allows credit under the low-income refinance goal for
permanent MHA Program loan modifications. The rule also states
that FHFA does not intend for the enterprises to undertake
economically adverse or high-risk activities in support of the
goals, nor does it intend for the enterprises state of
conservatorship to be a justification for withdrawing support
from these important market segments.
In addition, as noted in the rule, FHFA expects to take future
regulatory action to address the housing goals treatment of
purchases of multifamily loans that aid the conversion of
properties that have affordable rents to properties that have
less affordable, market rate rents. FHFA also may solicit
further comments on how the housing goals can further promote
sustainable homeownership and how multifamily subordinate liens
can be structured to benefit low-income residents.
We expect to report our performance with respect to the 2010
affordable housing goals in March 2011. At this time, based on
preliminary information, we believe we did not achieve certain
of the goals for 2010. We and FHFA are in discussions concerning
whether achievement of such goals was infeasible under the terms
of the GSE Act, due to market and
economic conditions and our financial condition. For more
information, see EXECUTIVE COMPENSATION
Compensation Discussion and Analysis Executive
Management Compensation Program Determination of the
Performance-Based Portion of 2010 Deferred Base Salary.
We anticipate that the difficult market conditions and our
financial condition will continue to affect our affordable
housing activities in 2011. See also RISK
FACTORS Legal and Regulatory Risks. However,
we view the purchase of mortgage loans that are eligible to
count toward our affordable housing goals to be a principal part
of our mission and business and we are committed to facilitating
the financing of affordable housing for low- and moderate-income
families.
Duty to
Serve Underserved Markets
The GSE 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:
(a) evaluating whether and to what extent Freddie Mac and
Fannie Mae have complied with the duty to serve underserved
markets; and (b) rating the extent of compliance.
On June 7, 2010, FHFA published in the Federal Register a
proposed rule regarding the duty of Freddie Mac and Fannie Mae
to serve the underserved markets. Comments were due on
July 22, 2010. We provided comments on the proposed rule to
FHFA, but we cannot predict the contents of any final rule that
FHFA may release, or the impact that the final rule will have on
our business or operations.
Affordable
Housing Goals and Reported Results for 2009 and 2008
Prior to 2010, we were subject to affordable housing goals
related to mortgages for low- and moderate-income families,
low-income families living in low-income areas, very low-income
families and families living in defined underserved areas. These
goals were set as a percentage of the total number of dwelling
units underlying our total mortgage purchases. The goal relating
to low-income families living in low-income areas and very
low-income families was referred to as the special
affordable housing goal. This special affordable housing
goal also included a multifamily annual minimum dollar volume
target of qualifying multifamily mortgage purchases. In
addition, from 2005 to 2009, we were subject to three subgoals
that were expressed as percentages of the total number of
mortgages we purchased that financed the purchase of
single-family, owner-occupied properties located in metropolitan
areas.
Our housing goals and results for 2009 and 2008 are set forth in
Table 6 below.
Table
6 Affordable Housing Goals and Reported Results for
2009 and
2008(1)
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Year Ended December 31,
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2009
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2008
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Goal
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Results
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Goal
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Results
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Housing goals and actual results:
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Low- and moderate-income
goal(2)
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43
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%
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44.7
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%
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56
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%
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51.5
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%
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Underserved areas
goal(3)(4)
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32
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26.8
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39
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37.7
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Special affordable
goal(2)(5)
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18
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17.8
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27
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23.1
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Multifamily special affordable volume target
(in billions)(4)
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$
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4.60
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$
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3.69
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$
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3.92
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$
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7.49
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Home purchase subgoals and actual results:
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Low- and moderate-income
subgoal(2)
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40
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%
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48.4
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%
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47
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%
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39.3
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%
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Underserved areas
subgoal(2)(5)
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30
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27.9
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34
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30.3
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Special affordable
subgoal(2)
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14
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20.6
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18
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15.1
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(1)
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An individual mortgage may qualify for more than one of the
goals or subgoals. Each of the goal and subgoal percentages and
each of our percentage results is determined independently and
cannot be aggregated to determine a percentage of total
purchases that qualifies for these goals or subgoals.
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(2)
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These 2008 goals and subgoals were determined to be infeasible.
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(3)
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FHFA concluded that achievement by us of this 2008 goal was
feasible, but challenging. Accordingly, FHFA decided not to
require us to submit a housing plan.
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(4)
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These 2009 goals were determined to be infeasible.
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(5)
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FHFA concluded that achievement by us of these 2009 goals and
subgoals was feasible, but decided not to require us to submit a
housing plan.
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Affordable
Housing Allocations
The GSE Act requires us to set aside in each fiscal year an
amount equal to 4.2 basis points for each dollar of the UPB
of total new business purchases, and allocate or transfer such
amount to: (a) HUD to fund a Housing Trust Fund
established and managed by HUD; and (b) a Capital Magnet
Fund established and managed by Treasury. FHFA has the authority
to suspend our allocation upon finding that the payment would
contribute to our financial instability, cause us to be
classified as undercapitalized or prevent us from successfully
completing a capital restoration plan. In November 2008, FHFA
advised us that it has suspended the requirement to set aside or
allocate funds for the Housing Trust Fund and the Capital
Magnet Fund until further notice.
Prudential
Management and Operations Standards
The GSE Act requires FHFA to establish prudential standards, by
regulation or by guideline, for a broad range of operations of
the enterprises. These standards must address internal controls,
information systems, independence and adequacy of internal audit
systems, management of interest rate risk exposure, management
of market risk, liquidity and reserves, management of asset and
investment portfolio growth, overall risk management processes,
investments and asset acquisitions, management of credit and
counterparty risk, and recordkeeping. FHFA may also establish
any additional operational and management standards the Director
of FHFA determines appropriate.
Portfolio
Activities
The GSE Act requires FHFA to establish, by regulation, criteria
governing portfolio holdings to ensure the holdings are backed
by sufficient capital and consistent with the enterprises
mission and safe and sound operations. In establishing these
criteria, FHFA must consider the ability of the enterprises to
provide a liquid secondary market through securitization
activities, the portfolio holdings in relation to the mortgage
market and the enterprises compliance with the prudential
management and operations standards prescribed by FHFA.
On December 28, 2010, FHFA issued a final rule adopting the
portfolio holdings criteria established in the Purchase
Agreement, as it may be amended from time to time, for so long
as we remain subject to the Purchase Agreement.
See NOTE 3: CONSERVATORSHIP AND RELATED
MATTERS Impact of the Purchase Agreement and FHFA
Regulation on the Mortgage-Related Investments Portfolio
for additional information on restrictions to our portfolio
activities.
Anti-Predatory
Lending
Predatory lending practices are in direct opposition to our
mission, our goals and our practices. We have instituted anti-
predatory lending policies intended to prevent the purchase or
assignment of mortgage loans with unacceptable terms or
conditions or resulting from unacceptable practices. These
policies include processes related to the delivery, validation
and certification of loans sold to us. In addition to the
purchase policies we have instituted, we promote consumer
education and financial literacy efforts to help borrowers avoid
abusive lending practices and we provide competitive mortgage
products to reputable mortgage originators so that borrowers
have a greater choice of financing options.
Subordinated
Debt
FHFA directed us to 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. In
addition, the requirements in the agreement we entered into with
FHFA in September 2005 with respect to issuance, maintenance,
and reporting and disclosure of Freddie Mac subordinated debt
have been suspended during the term of conservatorship and
thereafter until directed otherwise. See NOTE 18:
REGULATORY CAPITAL Subordinated Debt
Commitment for more information regarding subordinated
debt.
Department
of Housing and Urban Development
HUD has regulatory authority over Freddie Mac with respect to
fair lending. Our mortgage purchase activities are subject to
federal anti-discrimination laws. In addition, the GSE Act
prohibits discriminatory practices in our mortgage purchase
activities, requires us to submit data to HUD to assist in its
fair lending investigations of primary market lenders with which
we do business and requires us to undertake remedial actions
against such lenders found to have engaged in discriminatory
lending practices. In addition, HUD periodically reviews and
comments on our underwriting and appraisal guidelines for
consistency with the Fair Housing Act and the
anti-discrimination provisions of the GSE Act.
Department
of the Treasury
Treasury has significant rights and powers with respect to our
company as a result of the Purchase Agreement. In addition,
under our charter, the Secretary of the Treasury has approval
authority over our issuances of notes, debentures and
substantially identical types of unsecured debt obligations
(including the interest rates and maturities of these
securities), as well as new types of mortgage-related securities
issued subsequent to the enactment of the Financial Institutions
Reform, Recovery and Enforcement Act of 1989. The Secretary of
the Treasury has performed this debt securities approval
function by coordinating GSE debt offerings with Treasury
funding activities. In addition, our charter authorizes Treasury
to purchase Freddie Mac debt obligations not exceeding
$2.25 billion in aggregate principal amount at any time.
The Reform Act granted the Secretary of the Treasury authority
to purchase any obligations and securities issued by us and
Fannie Mae until December 31, 2009 on such terms and
conditions and in such amounts as the Secretary may determine,
provided that the Secretary determined the purchases were
necessary to provide stability to the financial markets, prevent
disruptions in the availability of mortgage finance, and protect
taxpayers. See Conservatorship and Related
Matters Treasury Agreements.
Securities
and Exchange Commission
We are subject to the financial reporting requirements
applicable to registrants under the Exchange Act, including the
requirement to file with the SEC annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K.
Although our common stock is required to be registered under the
Exchange Act, we continue to be exempt from certain federal
securities law requirements, including the following:
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Securities we issue or guarantee are exempted
securities under the Securities Act and may be sold
without registration under the Securities Act;
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We are excluded from the definitions of government
securities broker and government securities
dealer under the Exchange Act;
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The Trust Indenture Act of 1939 does not apply to
securities issued by us; and
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We are exempt from the Investment Company Act of 1940 and the
Investment Advisers Act of 1940, as we are an agency,
authority or instrumentality of the U.S. for purposes of
such Acts.
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Legislative
and Regulatory Developments
Dodd-Frank
Act
The Dodd-Frank Act, which was signed into law on July 21,
2010, significantly changed the regulation of the financial
services industry, including by creating new standards related
to regulatory oversight of systemically important financial
companies, derivatives, capital requirements, asset-backed
securitization, mortgage underwriting, and consumer financial
protection. The Dodd-Frank Act will directly affect the business
and operations of Freddie Mac by subjecting us to new and
additional regulatory oversight and standards, including with
respect to our activities and products. We may also be affected
by provisions of the Dodd-Frank Act and implementing regulations
that affect the activities of banks, savings institutions,
insurance companies, securities dealers, and other regulated
entities that are our customers and counterparties.
At this time, it is difficult to assess fully the impact of the
Dodd-Frank Act on Freddie Mac and the financial services
industry. Implementation of the Dodd-Frank Act is being
accomplished through numerous rulemakings, many of which are
still in process. The final effects of the legislation will not
be known with certainty until these rulemakings are complete.
The Dodd-Frank Act also mandates the preparation of studies on a
wide range of issues, which could lead to additional legislation
or regulatory changes.
Recently initiated rulemakings that may have an impact on
Freddie Mac include the following:
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The Financial Stability Oversight Council has published a notice
of proposed rulemaking inviting public comment on the criteria
that will inform the Councils designation of nonbank
financial companies as subject to enhanced supervision and
prudential standards pursuant to the provisions of the
Dodd-Frank Act, as well as the Councils processes and
procedures for such designation. If Freddie Mac is so
designated, it would be subject to Federal Reserve supervision
and to prudential standards that may include risk-based capital
and leverage requirements, liquidity requirements, resolution
plan and credit exposure reporting requirements, concentration
limits, contingent capital requirements, enhanced public
disclosures, short-term debt limits, and overall risk management
requirements, as well as other requirements and restrictions.
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The U.S. Commodity Futures Trading Commission, or CFTC, and
the SEC recently published a proposed rule regarding certain
definitions in the Dodd-Frank Act, including the definitions of
swap dealer and major swap participant.
If Freddie Mac is deemed to be a major swap participant, FHFA,
in consultation with the CFTC and the SEC, will be required to
establish new rules with respect to our activities as a major
swap participant regarding capital requirements, and margin
requirements for certain derivatives transactions. In addition,
Freddie Mac would be required to register with the CFTC and to
comply with certain business conduct standards and reporting
requirements. Even if we are not deemed a major swap
participant, we could become subject to new rules related to
clearing, trading, and reporting requirements for derivatives
transactions.
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We continue to review and assess the impact of these proposals.
For more information, see RISK FACTORS Legal
and Regulatory Risks The Dodd-Frank Act and
related regulation may adversely affect our business activities
and financial results.
SEC
Regulation on Disclosure for Asset-Backed
Securities
On January 20, 2011, the SEC adopted a rule requiring
issuers of asset-backed securities to disclose specified
information concerning fulfilled and unfulfilled repurchase
requests relating to the assets backing such securities,
including certain historical information. This disclosure will
first be required to be reported by February 14, 2012
(containing
information covering the three year period ended
December 31, 2011), with subsequent filings due each
quarter thereafter. While we are assessing the rules
impact on us, we currently believe compliance with the
disclosure requirements will likely present significant
operational challenges for us.
Conforming
Loan Limits
On September 30, 2010, Congress temporarily extended the
current higher loan limits in certain high-cost areas through
September 30, 2011. The higher loan limits in certain
high-cost areas were set to expire on December 31, 2010.
Actual conforming loan limits are established by FHFA for each
county (or equivalent) and the loan limits for specific
high-cost areas may be lower than the maximum amounts. For a
further discussion of conforming loan limits, see Our
Business.
Energy
Loan Tax Assessment Programs
A number of states have enacted laws allowing localities to
create energy loan assessment programs for the purpose of
financing energy efficient home improvements. These programs are
typically denominated as Property Assessed Clean Energy, or
PACE, programs. While the specific terms may vary, these laws
generally treat the new energy assessments like property tax
assessments, which generally create a new lien to secure the
assessment that is senior to any existing first mortgage lien.
These laws could have a negative impact on Freddie Macs
credit losses, to the extent a large number of borrowers obtain
this type of financing.
On July 6, 2010, FHFA announced that it had determined that
certain of these programs present significant safety and
soundness concerns that must be addressed by the GSEs. FHFA
directed Freddie Mac and Fannie Mae to waive the uniform
mortgage document prohibitions against senior liens for any
homeowner who obtained a PACE or PACE-like loan with a first
priority lien before July 6, 2010 and, in addressing PACE
programs with first liens, to undertake actions that protect
their safe and sound operation.
On August 31, 2010, we released a new directive to our
seller/servicers in which we reinforced our long-standing
requirement that mortgages sold to us must be and remain in the
first-lien position, while also providing guidance on our
requirements for refinancing loans that were originated with
PACE obligations before July 6, 2010.
We are subject to lawsuits relating to PACE programs. See
NOTE 21: LEGAL CONTINGENCIES for additional
information. Legislation has been introduced in the Senate and
the House of Representatives that would require Freddie Mac and
Fannie Mae to adopt standards that support PACE programs.
For more information regarding legislative and regulatory
developments that could impact our business, see RISK
FACTORS Legal and Regulatory Risks.
Employees
At February 11, 2011, we had 5,231 full-time and
78 part-time employees. Our principal offices are located
in McLean, Virginia.
Available
Information
SEC
Reports
We file reports and other information with the SEC. In view of
the Conservators succession to all of the voting power of
our stockholders, we do not expect to prepare or provide proxy
statements for the solicitation of proxies from stockholders
during the conservatorship. We make available free of charge
through our website at www.freddiemac.com our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all other SEC reports and amendments to those reports as
soon as reasonably practicable after we electronically file the
material with, or furnish it to, the SEC. In addition, materials
that we filed with the SEC are available for review and copying
free of charge at the SECs Public Reference Room at
100 F Street, N.E., Washington, D.C. 20549. The
public may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an internet site (www.sec.gov) that
contains reports, proxy and information statements, and other
information regarding companies that file electronically with
the SEC.
We are providing our website addresses and the website address
of the SEC here or elsewhere in this annual report on
Form 10-K
solely for your information. Information appearing on our
website or on the SECs website is not incorporated into
this annual report on
Form 10-K.
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.
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-K,
contain forward-looking statements, including
statements pertaining to the conservatorship, our current
expectations and objectives for our efforts under the MHA
Program and other programs to assist the U.S. residential
mortgage market, future business plans, liquidity, capital
management, economic and market conditions and trends, market
share, the effect of legislative and regulatory developments,
implementation of new accounting standards, credit losses,
internal control remediation efforts, 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,
anticipate, 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. Actual results may differ
significantly from those described in or implied by such
forward-looking statements due to various factors and
uncertainties, including those described in the RISK
FACTORS section of this
Form 10-K
and:
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the actions FHFA, Treasury, the Federal Reserve, the Obama
Administration, Congress, and our management may take;
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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 our ability to
pay the dividend on the senior preferred stock;
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our ability to maintain adequate liquidity to fund our
operations, including following changes in any support provided
to us by Treasury or FHFA;
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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 or continue to exist and whether we
will be wound down or placed under receivership, regulations
under the GSE Act, the Reform Act, or the Dodd-Frank Act,
changes to affordable housing goals regulation, reinstatement of
regulatory capital requirements, or the exercise or assertion of
additional regulatory or administrative authority;
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changes in the regulation of the mortgage and financial services
industries, including changes caused by the Dodd-Frank Act, or
any other legislative, regulatory, or judicial action at the
federal or state level;
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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, expenses, and
the size and composition of our mortgage-related investments
portfolio;
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the impact of any deficiencies in foreclosure documentation
practices and related delays in the foreclosure process;
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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;
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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;
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changes in general regional, national, or international
economic, business, or market conditions and competitive
pressures, including changes in employment rates and interest
rates, and changes in the federal governments fiscal and
monetary policy;
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changes in the U.S. residential mortgage market, including
changes in the rate of growth in total outstanding U.S.
residential mortgage debt, the size of the U.S. residential
mortgage market, and home prices;
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our ability to effectively implement our business strategies,
including our efforts to improve the supply and liquidity of,
and demand for, our products;
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our ability to recruit and retain executive officers and other
key employees;
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our ability to effectively identify and manage credit,
interest-rate, operational, and other risks in our business,
including changes to the credit environment and the levels and
volatilities of interest rates, as well as the shape and slope
of the yield curves;
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the effects of internal control deficiencies and our ability to
effectively identify, assess, 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;
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incomplete or inaccurate information provided by customers and
counterparties;
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consolidation among, or adverse changes in the financial
condition of, our customers and counterparties;
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the failure of our customers and counterparties to fulfill their
obligations to us, including the failure of seller/servicers to
meet their obligations to repurchase loans sold to us in breach
of their representations and warranties;
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changes in our judgments, assumptions, forecasts, or estimates
regarding the volume of our business and spreads we expect to
earn;
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the availability of options, interest-rate and currency swaps,
and other derivative financial instruments of the types and
quantities, on acceptable terms, and with acceptable
counterparties needed for investment funding and risk management
purposes;
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changes in pricing, valuation or other methodologies, models,
assumptions, judgments, estimates and/or other measurement
techniques, or their respective reliability;
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changes in mortgage-to-debt OAS;
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the potential impact on the market for our securities resulting
from any future sales by the Federal Reserve or Treasury of
Freddie Mac debt and mortgage-related securities they have
purchased;
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adverse judgments or settlements in connection with legal
proceedings, governmental investigations, and IRS examinations;
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volatility of reported results due to changes in the fair value
of certain instruments or assets;
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the development of different types of mortgage servicing
structures and servicing compensation;
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preferences of originators in selling into the secondary
mortgage market;
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changes to our underwriting requirements or investment standards
for mortgage-related products;
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investor preferences for mortgage loans and mortgage-related and
debt securities compared to other investments;
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borrower preferences for fixed-rate mortgages or adjustable-rate
mortgages;
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the occurrence of a major natural or other disaster in
geographic areas in which our offices or portions of our total
mortgage portfolio are concentrated;
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other factors and assumptions described in this
Form 10-K,
including in the MD&A section;
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our assumptions and estimates regarding the foregoing and our
ability to anticipate the foregoing factors and their impacts;
and
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market reactions to the foregoing.
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We undertake no obligation to update any forward-looking
statements we make to reflect events or circumstances occurring
after the date of this
Form 10-K.
ITEM 1A.
RISK FACTORS
Before you invest in our securities, you should know that making
such an investment involves risks, including the risks described
below and in BUSINESS, MD&A, and
elsewhere in this
Form 10-K.
These risks and uncertainties could, directly or indirectly,
adversely affect our business, financial condition, results of
operations, cash flows, strategies
and/or
prospects.
Conservatorship
and Related Matters
The
future status and role of Freddie Mac could be materially
adversely affected by legislative and regulatory action that
alters the ownership, structure and mission of the
company.
Future legislation will likely materially affect the role of the
company, our business model, our structure and future results of
operations. Some or all of our functions could be transferred to
other institutions, and we could cease to exist as a
stockholder-owned company or at all. If any of these events were
to occur, our shares could further diminish in value, or
cease to have any value, and there can be no assurance that our
stockholders would receive any compensation for such loss in
value.
On February 11, 2011, the Obama Administration delivered a
report to Congress that lays out the Administrations plan
to reform the U.S. housing finance market, including
options for structuring the governments long-term role in
a housing finance system in which the private sector is the
dominant provider of mortgage credit. The report recommends
winding down Freddie Mac and Fannie Mae, stating that the Obama
Administration will work with FHFA to determine the best way to
responsibly reduce the role of Freddie Mac and Fannie Mae in the
market and ultimately wind down both institutions. The report
identifies a number of policy levers that could be used to wind
down Freddie Mac and Fannie Mae, shrink the governments
footprint in housing finance, and help bring private capital
back to the mortgage market, including increasing guarantee
fees, phasing in a 10% down payment requirement, reducing
conforming loan limits, and winding down Freddie Mac and Fannie
Maes investment portfolios, consistent with the senior
preferred stock purchase agreements. For more information, see
BUSINESS Executive Summary
Long-Term Financial Sustainability and Future
Status.
In addition to legislative actions, FHFA has expansive
regulatory authority over us, and the manner in which FHFA will
use its authority in the future is unclear. FHFA could take a
number of regulatory actions that could materially adversely
affect our company, such as changing or reinstating our current
capital requirements, which are not binding during
conservatorship.
The
conservatorship is indefinite in duration and the timing,
conditions and likelihood of our emerging from conservatorship
are uncertain. Even if the conservatorship is terminated, we
would remain subject to the Purchase Agreement, senior preferred
stock and warrant.
FHFA has stated that there is no exact time frame as to when the
conservatorship may end. Termination of the conservatorship
(other than in connection with receivership) also requires
Treasurys consent under the Purchase Agreement. There can
be no assurance as to when, and under what circumstances,
Treasury would give such consent. There is also significant
uncertainty as to what changes may occur to our business
structure during or following our conservatorship, including
whether we will continue to exist. It is possible that the
conservatorship will end with us being placed into receivership.
As discussed above, on February 11, 2011, the Obama
Administration delivered a report to Congress that lays out the
Administrations plan to reform the U.S. housing
finance market. The report recommends winding down Freddie Mac
and Fannie Mae. For more information, see
BUSINESS Executive Summary
Long-Term Financial Sustainability and Future
Status.
In addition, Treasury has the ability to acquire almost 80% of
our common stock for nominal consideration by exercising the
warrant we issued to it pursuant to the Purchase Agreement.
Consequently, the company could effectively remain under the
control of the U.S. government even if the conservatorship
was ended and the voting rights of common stockholders restored.
The warrant held by Treasury, the restrictions on our business
contained in the Purchase Agreement and the senior status of the
senior preferred stock issued to Treasury under the Purchase
Agreement, if the senior preferred stock has not been redeemed,
also could adversely affect our ability to attract new private
sector capital in the future should the company be in a position
to seek such capital. Moreover, our draws under Treasurys
funding commitment, the senior preferred dividend obligation,
and commitment fees paid to Treasury could permanently impair
our ability to build independent sources of capital.
We
expect to make additional draws under the Purchase Agreement in
future periods, which will adversely affect our future results
of operations and financial condition.
It is unlikely that we will generate net income or comprehensive
income in excess of our annual dividends payable to Treasury
over the long-term, which will lead us to require additional
draws under the Purchase Agreement. A variety of factors could
lead us to make additional draws under the Purchase Agreement in
the future, including:
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dividend obligations on the senior preferred stock, which are
cumulative and accrue at an annual rate of 10% (or 12% in any
quarter in which dividends are not paid in cash) until all
accrued dividends are paid in cash and which at their current
level exceed our annual historical earnings in all but one
period;
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future losses, driven by ongoing weak economic conditions, which
could cause, among other things, continued high provision for
credit losses, increased REO operations expense and additional
unrealized losses on the non-agency mortgage-related securities
we hold;
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required reductions in the size of our mortgage-related
investments portfolio and other limitations on our investment
activities that reduce the earnings capacity of our investment
activities;
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pursuit of public mission-oriented objectives that could produce
suboptimal financial returns, such as our efforts under the MHA
Program, the continued use or expansion of foreclosure
suspensions, and other foreclosure prevention efforts, including
any future requirements to reduce the principal amount of loans;
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adverse changes in interest rates, the yield curve, implied
volatility or mortgage-to-debt OAS, which could reduce net
interest income and increase realized and unrealized
mark-to-fair-value losses recorded in earnings or AOCI;
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limitations in our access to the public debt markets, or
increases in our debt funding costs;
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establishment of a valuation allowance for our remaining
deferred tax asset;
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limitations on our ability to develop new products;
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changes in business practices and requirements resulting from
legislative or regulatory developments;
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changes in accounting practices or standards; and
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the quarterly commitment fee we must pay to Treasury under the
Purchase Agreement (Treasury has waived the fee for the first
quarter of 2011). The amount of the fee has not yet been
established and could be substantial. Treasury has indicated
that it remains committed to protecting taxpayers and ensuring
that our future positive earnings are returned to taxpayers as
compensation for their investment.
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Under the Purchase Agreement, the $200 billion cap on
Treasurys funding commitment will increase as necessary to
accommodate any cumulative reduction in our net worth during
2010, 2011 and 2012. Although additional draws under the
Purchase Agreement will allow us to remain solvent and avoid
mandatory receivership, they will also increase the liquidation
preference of, and the dividends we owe on, the senior preferred
stock. Based on the aggregate liquidation preference of the
senior preferred stock of $64.2 billion as of
December 31, 2010, Treasury is entitled to annual cash
dividends of $6.42 billion, which exceeds our annual
historical earnings in all but one period. Increases in the
already substantial liquidation preference and senior preferred
dividend obligation, along with limited flexibility to redeem
the senior preferred stock, will adversely affect our results of
operations and financial condition and add to the significant
uncertainty regarding our long-term financial sustainability.
Our
business objectives and strategies have in some cases been
significantly altered since we were placed into conservatorship,
and may continue to change, in ways that negatively affect our
future financial condition and results of
operations.
FHFA, as Conservator, has directed the company to focus on
managing to a positive stockholders equity. At the
direction of the Conservator, we have made changes to certain
business practices that are designed to provide support for the
mortgage market in a manner that serves our public mission and
other non-financial objectives but may not contribute to our
goal of managing to a positive stockholders equity. Some
of these changes have increased our expenses or caused us to
forego revenue opportunities. For example, FHFA has directed
that we implement various initiatives under the MHA Program. We
expect to incur significant costs associated with the
implementation of these initiatives and we cannot currently
estimate whether, or the extent to which, costs incurred in the
near term from these initiatives may be offset, if at all, by
the prevention or reduction of potential future costs of serious
delinquencies and foreclosures due to these initiatives. The
Conservator and Treasury have also not authorized us to engage
in certain business initiatives and transactions, including the
purchase or sale of certain assets, which we believe may have
had a beneficial impact on our results of operations or
financial condition, if executed. Our inability to execute such
initiatives and transactions may adversely affect our
profitability. Other agencies of the U.S. government, as
well as Congress, also have an interest in the conduct of our
business. We do not know what actions they may request us to
take.
In view of the conservatorship and the reasons stated by FHFA
for its establishment, it is likely that our business model and
strategic objectives will continue to change, possibly
significantly, including in pursuit of our public mission and
other non-financial objectives. Among other things, we could
experience significant changes in the size, growth and
characteristics of our guarantee and investment activities, and
we could further change our operational objectives, including
our pricing strategy in our core mortgage guarantee business.
Accordingly, our strategic and operational focus may not always
be consistent with the generation of net income. It is possible
that we will make material changes to our capital strategy and
to our accounting policies, methods, and estimates. It is also
possible that the company could be restructured and its
statutory mission revised. In addition, we may be directed to
engage in initiatives that are operationally difficult or costly
to implement.
In a letter to the Chairmen and Ranking Members of the
Congressional Banking and Financial Services Committees dated
February 2, 2010, the Acting Director of FHFA stated that
minimizing our credit losses is our central goal and that we
will be limited to continuing our existing core business
activities and taking actions necessary to advance the goals of
the conservatorship. The Acting Director stated that FHFA does
not expect we will be a substantial buyer or seller of mortgages
for our mortgage-related investments portfolio, except for
purchases of delinquent mortgages out of PC pools. The Acting
Director also stated that permitting us to engage in new
products is inconsistent with the goals of the conservatorship.
These restrictions could also adversely affect our financial
results in future periods.
As our Conservator, FHFA possesses all of the powers of our
stockholders, officers and directors. During the
conservatorship, the Conservator has delegated certain authority
to the Board of Directors to oversee, and management to conduct,
day-to-day
operations so that the company can continue to operate in the
ordinary course of business. FHFA has the ability to withdraw or
revise its delegations of authority and override actions of our
Board of Directors at any time. The directors serve on behalf
of, and exercise authority as directed by, the Conservator. In
addition, FHFA has the power to take actions without our
knowledge that could be material to investors and could
significantly affect our financial performance.
FHFA is also Conservator of Fannie Mae, our primary competitor,
and FHFAs actions as Conservator of both companies could
affect competition between us and Fannie Mae. On a number of
occasions, FHFA has directed us and Fannie Mae to confer and
consider uniform approaches to particular issues and problems,
and FHFA has in a few cases directed the two GSEs to adopt
common approaches. For example, in January 2011, FHFA announced
that it has directed Freddie Mac and Fannie Mae to work on a
joint initiative, in coordination with HUD, to consider
alternatives for future mortgage servicing structures and
servicing compensation, including the possibility of reducing or
eliminating the minimum servicing fee for performing loans, or
other structures. FHFA has also directed Freddie Mac and Fannie
Mae to discuss with FHFA and with each other, and wherever
feasible to develop consistent requirements, policies and
processes for, the servicing of non-performing mortgages, and to
discuss joint standards for the evaluation of the servicing
performance of servicers. We cannot predict the impact on our
business of these actions or any similar actions FHFA may
require us and Fannie Mae to take in the future. It is possible
that FHFA could require us and Fannie Mae to take a common
approach that, because of differences in our respective
businesses, could place Freddie Mac at a competitive
disadvantage to Fannie Mae.
These changes and other factors could have material adverse
effects on, among other things, our portfolio growth, net worth,
credit losses, net interest income, guarantee fee income, net
deferred tax assets, and loan loss reserves, and could have a
material adverse effect on our future results of operations and
financial condition. In light of the significant uncertainty
surrounding these changes, there can be no assurances regarding
when, or if, we will return to profitability.
We are
subject to significant limitations on our business under the
Purchase Agreement that could have a material adverse effect on
our results of operations and financial condition.
The Purchase Agreement includes significant restrictions on our
ability to manage our business, including limitations on the
amount of indebtedness we may incur, the size of our
mortgage-related investments portfolio and the circumstances in
which we may pay dividends, raise capital and pay down the
liquidation preference on the senior preferred stock. In
addition, the Purchase Agreement provides that we may not enter
into any new compensation arrangements or increase amounts or
benefits payable under existing compensation arrangements of any
executive officers without the consent of the Director of FHFA,
in consultation with the Secretary of the Treasury. In deciding
whether or not to consent to any request for approval it
receives from us under the Purchase Agreement, Treasury has the
right to withhold its consent for any reason and is not required
by the agreement to consider any particular factors, including
whether or not management believes that the transaction would
benefit the company. The limitations under the Purchase
Agreement could have a material adverse effect on our future
results of operations and financial condition.
Our
regulator may, and in some cases must, place us into
receivership, which would result in the liquidation of our
assets and terminate all rights and claims that our stockholders
and creditors may have against our assets or under our charter;
if we are liquidated, there may not be sufficient funds to pay
the secured and unsecured claims of the company, repay the
liquidation preference of any series of our preferred stock or
make any distribution to the holders of our common
stock.
Under the GSE Act, FHFA must place us into receivership if FHFA
determines in writing that our assets are 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 also 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.
In addition, we could be put into receivership at the discretion
of the Director of FHFA at any time for other reasons, including
conditions that FHFA has already asserted existed at the time
the then Director of FHFA placed us into conservatorship. These
include: a substantial dissipation of assets or earnings due to
unsafe or unsound practices; the existence of an unsafe or
unsound condition to transact business; an inability to meet our
obligations in the ordinary course of business; a weakening of
our condition due to unsafe or unsound practices or conditions;
critical undercapitalization; the likelihood of losses that will
deplete substantially all of our capital; or by consent. A
receivership would terminate the conservatorship. The
appointment of FHFA (or any other entity) as our receiver would
terminate all rights and claims that our stockholders and
creditors may have against our assets or under our charter
arising as a result of their status as
stockholders or creditors, other than the potential ability to
be paid upon our liquidation. Unlike a conservatorship, the
purpose of which is to conserve our assets and return us to a
sound and solvent condition, the purpose of a receivership is to
liquidate our assets and resolve claims against us.
In the event of a liquidation of our assets, there can be no
assurance that there would be sufficient proceeds to pay the
secured and unsecured claims of the company, repay the
liquidation preference of any series of our preferred stock or
make any distribution to the holders of our common stock. To the
extent that we are placed in receivership and do not or cannot
fulfill our guarantee to the holders of our mortgage-related
securities, such holders could become unsecured creditors of
ours with respect to claims made under our guarantee. Only after
paying the secured and unsecured claims of the company, the
administrative expenses of the receiver and the liquidation
preference of the senior preferred stock, which ranks senior to
our common stock and all other series of preferred stock upon
liquidation, would any liquidation proceeds be available to
repay the liquidation preference on any other series of
preferred stock. Finally, only after the liquidation preference
on all series of preferred stock is repaid would any liquidation
proceeds be available for distribution to the holders of our
common stock. The aggregate liquidation preference on the senior
preferred stock owned by Treasury was $64.2 billion as of
December 31, 2010. The liquidation preference will increase
further if we make additional draws under the Purchase
Agreement, if we do not pay dividends owed on the senior
preferred stock in cash or if we do not pay the quarterly
commitment fee to Treasury under the Purchase Agreement.
We
have a variety of different, and potentially competing,
objectives that may adversely affect our financial results and
our ability to maintain positive net worth.
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. These
objectives include providing liquidity, stability and
affordability in the mortgage market; continuing to provide
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. These objectives
create conflicts in strategic and day-to-day decision making
that will likely lead to suboptimal outcomes for one or more, or
possibly all, of these objectives. Current portfolio investment
and mortgage guarantee activities, liquidity support, and loan
modification and foreclosure forbearance initiatives, including
our efforts under the MHA Program, are intended to provide
support for the mortgage market in a manner that serves our
public mission and other non-financial objectives under
conservatorship, but may negatively impact our financial results
and net worth.
We
have experienced significant management changes and internal
reorganizations which could increase our control risks and have
a material adverse effect on our ability to do business and our
results of operations.
Since September 2008, we have had numerous changes in our senior
management and governance structure, including FHFA becoming our
Conservator, a reconstituted Board of Directors, three changes
in our Chief Executive Officer, three changes in our Chief
Financial Officer and a new Chief Operating Officer (who
resigned in February 2011). We have recently experienced several
significant internal reorganizations. The magnitude of these
changes and the short time interval in which they have occurred,
particularly during the ongoing housing and economic crisis, add
to the risks of control failures, including a failure in the
effective operation of our internal control over financial
reporting or our disclosure controls and procedures. Control
failures could result in material adverse effects on our
financial condition and results of operations.
This turnover of key management positions could further harm our
financial performance and results of operations. Management
attention may be diverted from regular business concerns by
these and future reorganizations and the need to operate under
the framework of conservatorship.
The
conservatorship and uncertainty concerning our future may have
an adverse effect on the retention and recruitment of management
and other valuable employees.
Our ability to recruit, retain, and engage management and other
valuable employees with the necessary skills to conduct our
business may be adversely affected by the conservatorship, the
uncertainty regarding its duration, the potential for future
legislative or regulatory actions that could significantly
affect our existence and our role in the secondary mortgage
market, and the negative publicity concerning the GSEs. The
actions taken by Treasury and the Conservator to date, or that
may be taken by them or other government agencies in the future,
may have an adverse effect on the retention and recruitment of
senior executives, management, and other valuable employees. For
example, we are subject to restrictions on the amount and type
of compensation we may pay our executives under conservatorship.
The Conservator has also directed us to maintain individual
salaries and wage rates for all employees at 2010 levels for
2011 (except in the case of promotions or significant changes in
responsibilities). In addition, statutory and regulatory
requirements restricting executive compensation at institutions
that have received federal financial assistance, even if not
expressly applicable to us, may be interpreted by FHFA or
Treasury as limiting the compensation that we are able to
provide to our executive officers and other employees. Although
we have established compensation programs designed to help
retain key employees, we are not currently in a
position to offer employees financial incentives that are
equity-based and, as a result of this and other factors relating
to the conservatorship that may affect our attractiveness as an
employer, we may be at a competitive disadvantage compared to
other potential employers. Uncertainty about the future of the
GSEs affects all of our operations and heightens the risks
related to retention of management and other valuable employees.
A recovering economy is likely to put additional pressures on
turnover in 2011, as other attractive opportunities may become
available to people we want to retain. Accordingly, we may not
be able to retain or replace executives or other employees with
key skills, and may lose institutional knowledge, that could
adversely affect our ability to conduct our business
effectively. We may also face increased operational risk if key
employees leave the company.
The
conservatorship and investment by Treasury has had, and will
continue to have, a material adverse effect on our common and
preferred stockholders.
Prior to our entry into conservatorship, the market price for
our common stock declined substantially. After our entry into
conservatorship, the market price of our common stock continued
to decline (to less than $1 per share for an extended period
immediately following our entry into conservatorship, and again
following the delisting of our common stock from the NYSE at the
direction of FHFA). As a result, the investments of our common
and preferred stockholders lost substantial value, which they
may never recover. There is significant uncertainty as to what
changes may occur to our business structure during or following
our conservatorship, including whether we will continue to
exist. Therefore, it is likely that our shares could further
diminish in value, or cease to have any value.
The conservatorship and investment by Treasury has had, and will
continue to have, other material adverse effects on our common
and preferred stockholders, including the following:
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No voting rights during conservatorship. The
rights and powers of our stockholders are suspended during the
conservatorship and our common stockholders do not have the
ability to elect directors or to vote on other matters.
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No longer managed to maximize stockholder
returns. Because we are in conservatorship, we
are no longer managed with a strategy to maximize stockholder
returns. In a letter to the Chairmen and Ranking Members of the
Congressional Banking and Financial Services Committees dated
February 2, 2010, the Acting Director of FHFA stated that
the focus of the conservatorship is on conserving assets,
minimizing corporate losses, ensuring Freddie Mac and Fannie Mae
continue to serve their mission, overseeing remediation of
identified weaknesses in corporate operations and risk
management, and ensuring that sound corporate governance
principles are followed.
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Priority of Senior Preferred Stock. The senior
preferred stock ranks senior to the common stock and all other
series of preferred stock as to both dividends and distributions
upon dissolution, liquidation or winding up of the company.
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Dividends have been eliminated. The
Conservator has eliminated dividends on Freddie Mac common and
preferred stock (other than dividends on the senior preferred
stock) during the conservatorship. In addition, under the terms
of the Purchase Agreement, dividends may not be paid to common
or preferred stockholders (other than on the senior preferred
stock) without the consent of Treasury, regardless of whether or
not we are in conservatorship.
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Warrant may substantially dilute investment of current
stockholders. If Treasury exercises its warrant
to purchase shares of our common stock equal to 79.9% of the
total number of shares of our common stock outstanding on a
fully diluted basis, the ownership interest in the company of
our then existing common stockholders will be substantially
diluted. It is possible that stockholders, other than Treasury,
will not own more than 20.1% of our total common stock for the
duration of our existence. Under our charter, bylaws and
applicable law, 20.1% is insufficient to control the outcome of
any vote that is presented to the common stockholders.
Accordingly, existing common stockholders have no assurance
that, as a group, they will be able to control the election of
our directors or the outcome of any other vote after the time,
if any, that the conservatorship ends.
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Competitive
and Market Risks
Our
investment activity is significantly limited under the Purchase
Agreement and by FHFA, which will likely reduce our earnings
from investment activities and result in greater reliance on our
guarantee activities to generate revenue.
We are subject to significant limitations on our investment
activity, which will adversely affect the earnings capacity of
our mortgage-related investments portfolio. These limitations
include: (a) a requirement to reduce the size of our
mortgage-related investments portfolio; and (b) significant
constraints on our ability to purchase or sell mortgage assets.
Under the terms of the Purchase Agreement and FHFA regulation,
our mortgage-related investments portfolio is subject to a cap
that decreases by 10% each year until the portfolio reaches
$250 billion. As a result, the UPB of our mortgage-related
investments portfolio could not exceed $810 billion as of
December 31, 2010 and may not exceed $729 billion as
of December 31, 2011. Treasury has stated it does not
expect us to be an active buyer to increase the size of our
mortgage-related investments portfolio, but also does not expect
that active selling will be necessary to meet the required
portfolio reduction targets. In addition, FHFA has stated that,
given the size of our current mortgage-related investments
portfolio and
the potential volume of delinquent mortgages to be purchased out
of PC pools, it expects that any net additions to our
mortgage-related investments portfolio would be related to that
activity. Therefore, our ability to take advantage of
opportunities to purchase or sell mortgage assets at attractive
prices has been, and likely will continue to be, limited. In
addition, notwithstanding the expectations expressed by Treasury
and FHFA regarding future selling activity, we can provide no
assurance that the cap on our mortgage-related investments
portfolio will not, over time, force us to sell mortgage assets
at unattractive prices, particularly given the potential in
coming periods for continued high volumes of loan modifications
and purchases of seriously delinquent loans, both of which
result in the purchase of mortgage loans from our PCs for our
mortgage-related investments portfolio.
These limitations will reduce the earnings capacity of our
mortgage-related investments portfolio business and require us
to place greater emphasis on our guarantee activities to
generate revenue. However, under conservatorship, our ability to
generate revenue through guarantee activities may be limited, as
we may be required to adopt business practices that provide
support for the mortgage market in a manner that serves our
public mission and other non-financial objectives, but that may
negatively impact our future financial results. The combination
of the restrictions on our business activities under the
Purchase Agreement and FHFA regulation, combined with our
potential inability to generate sufficient revenue through our
guarantee activities to offset the effects of those
restrictions, may have an adverse effect on our results of
operations and financial condition. There can be no assurance
that the current profitability levels on our new single-family
business would be sufficient to attract new private sector
capital in the future, should the company be in a position to
seek such capital.
We are
subject to mortgage credit risks, including mortgage credit risk
relating to off-balance sheet arrangements; increased credit
costs related to these risks could adversely affect our
financial condition and/or results of operations.
Mortgage credit risk is the risk that a borrower will fail to
make timely payments on a mortgage we own or guarantee, exposing
us to the risk of credit losses and credit-related expenses. We
are primarily exposed to mortgage credit risk with respect to
the single-family and multifamily loans that we hold on our
consolidated balance sheets. We are also exposed to mortgage
credit risk with respect to securities and guarantee
arrangements that are not reflected as assets on our
consolidated balance sheets. These relate primarily to:
(a) Freddie Mac mortgage-related securities backed by
multifamily loans; (b) certain single-family Other
Guarantee Transactions; and (c) other guarantee
commitments, including long-term standby commitments.
Factors that affect the level of our mortgage credit risk
include the credit profile of the borrower, home prices, the
features of the mortgage loan, the type of property securing the
mortgage, and local and regional economic conditions, including
unemployment rates. We continue to face significant mortgage
credit risk, and our credit losses will likely increase in the
near term and remain significantly above historical levels for
the foreseeable future due to the substantial number of mortgage
loans in our single-family credit guarantee portfolio on which
borrowers owe more than their home is currently worth, as well
as the substantial backlog of seriously delinquent loans.
While mortgage interest rates remained low in 2010, many
borrowers may not have been able to refinance into lower
interest mortgages due to substantial declines in home values,
market uncertainty and continued high unemployment rates.
Therefore, there can be no assurance that continued low mortgage
interest rates or efforts to modify and refinance mortgages
pursuant to the MHA Program will reduce our overall mortgage
credit risk.
We also continue to have significant amounts of mortgage loans
in our single-family credit guarantee portfolio with certain
characteristics, such as Alt-A, interest-only, option ARMs,
loans with original LTV ratios greater than 90%, and loans where
borrowers had FICO scores less than 620 at the time of
origination, that expose us to greater credit risk than do other
types of mortgage loans. See Table 44 Certain
Higher Risk Categories in the Single-Family Credit
Guarantee Portfolio for more information.
Beginning in 2008, the conforming loan limits were significantly
increased for mortgages originated in certain high
cost areas (the initial increases applied to loans
originated after July 1, 2007). Due to our relative lack of
experience with these larger loans, purchases pursuant to the
high cost conforming loan limits may also expose us to greater
credit risks.
We also face the risk that multifamily borrowers will default if
they are unable to refinance their loans at an affordable rate.
This risk is particularly important with respect to multifamily
loans because such loans generally have a balloon payment and
typically have a shorter contractual term than single-family
mortgages. Borrowers may be less able to refinance their
obligations during periods of rising interest rates, which could
lead to default if the borrower is unable to find affordable
refinancing. This risk is significant given the state of the
economy, lower levels of liquidity, property cash flows, and
property market values. Of the $108.7 billion in UPB of
loans in our multifamily mortgage portfolio as of
December 31, 2010, approximately 2% and 4% will reach their
maturity during 2011 and 2012, respectively.
We are
exposed to significant credit risk related to the subprime,
Alt-A and
option ARM loans that back the non-agency mortgage-related
securities we hold.
Our investments in non-agency mortgage-related securities have
included securities that are backed by subprime,
Alt-A and
option ARM loans. Since 2007, mortgage loan delinquencies and
credit losses in the U.S. mortgage market have substantially
increased, particularly in the subprime,
Alt-A and
option ARM sectors of the residential mortgage market. In
addition, home prices declined significantly, after extended
periods during which home prices appreciated. As a result, the
fair value of these investments has declined significantly since
2007 and we have incurred substantial losses through
other-than-temporary impairments. In addition, many of these
investments do not trade in a liquid secondary market and the
size of our holdings relative to normal market activity is such
that, if we were to attempt to sell a significant quantity of
these securities, the pricing in such markets could be
significantly disrupted and the price we ultimately realize may
be materially lower than the value at which we carry these
investments on our consolidated balance sheets.
We could experience additional GAAP losses due to
other-than-temporary impairments on our investments in these
non-agency mortgage-related securities if, among other things:
(a) interest rates change; (b) delinquency and loss
rates on subprime,
Alt-A and
option ARM loans increase; or (c) there is a further
decline in actual or forecasted home prices. In addition, the
fair value of these investments may decline further due to
additional ratings downgrades or market events. Any credit
enhancements covering these securities, including subordination,
may not prevent us from incurring losses. During 2010, we
continued to experience the depletion of credit enhancements on
selected securities backed by subprime first lien, option ARM
and Alt-A
loans due to poor performance in the underlying collateral. See
MD&A CONSOLIDATED BALANCE SHEETS
ANALYSIS Investments in Securities for
information about the credit ratings for these securities and
the extent to which these securities have been downgraded.
Certain
strategies to mitigate our losses as an investor in non-agency
mortgage-related securities may adversely affect our
relationships with some of our largest
seller/servicers.
On July 12, 2010, FHFA, as Conservator of Freddie Mac and
Fannie Mae, announced that it had issued subpoenas to various
entities seeking loan files and other transaction documents
related to non-agency mortgage-related securities in which the
two enterprises invested. FHFA stated that the documents will
enable it to determine whether issuers of these securities and
others are liable to Freddie Mac and Fannie Mae for certain
losses they have suffered on the securities. We are assisting
FHFA in this effort.
We also have joined an investor group that has delivered a
notice of non-performance to Bank of New York Mellon, as
Trustee, and Countrywide Home Loans Servicing LP (now known as
BAC Home Loans Servicing, LP). The notice related to the
possibility that certain mortgage pools backing certain
mortgage-related securities issued by Countrywide Financial and
related entities include mortgages that may have been ineligible
for inclusion in the pools due to breaches of representations or
warranties.
These and other loss mitigation efforts may lead to disputes
with some of our largest seller/servicers and counterparties
that may result in litigation. The effectiveness of these loss
mitigation efforts is highly uncertain and any potential
recoveries may take significant time to realize.
The
credit losses we experience in future periods as a result of the
housing and economic crisis are likely to be larger, perhaps
substantially larger, than our current loan loss
reserves.
Our loan loss reserves, as reflected on our consolidated balance
sheets, do not reflect our estimate of the total of all future
credit losses inherent in our single-family and multifamily
mortgage loans, including those underlying our financial
guarantees. Rather, pursuant to GAAP, our reserves only reflect
probable losses we believe we have already incurred as of the
balance sheet date. Accordingly, although we believe that our
credit losses may exceed the amounts we have already reserved
for loans currently identified as impaired, and that additional
credit losses will be incurred in the future due to the housing
and economic crisis, we are not permitted under GAAP to reflect
the potential impact of these future trends in our loan loss
reserves. As a result of the depth and extent of the housing and
economic crisis, there is significant uncertainty regarding the
full extent of future credit losses. Therefore, such credit
losses are likely to be larger, perhaps substantially larger,
than our current loan loss reserves. These additional credit
losses we incur in future periods will adversely affect our
business, results of operations, financial condition, liquidity
and net worth.
Further
declines in U.S. home prices or other adverse changes in the
U.S. housing market could negatively impact our business and
increase our losses.
Throughout 2010, the U.S. housing market continued to
experience adverse trends, including continued price
depreciation, and continued high serious delinquency and default
rates. Home sales declined significantly following the
expiration of the federal homebuyer tax credit program in April
2010, which increased the supply of unsold homes and placed
further downward pressure on home prices. These conditions,
coupled with high continued unemployment, led to
increases in credit losses and continued high loan delinquencies
and provisioning for loan losses, all of which have adversely
affected our financial condition and results of operations. We
expect that national home prices in 2011 will likely be lower
than in 2010, which could result in a continued high rate of
serious delinquencies or defaults and a level of credit-related
losses higher than our expectations when our guarantees were
issued. It is possible that home price declines could be
significantly greater than we anticipate, or that a sustained
recovery in home prices would not begin until much later than we
anticipate, which could result in higher losses due to
other-than-temporary impairments on our investments in
non-agency mortgage-related securities than would otherwise be
recognized in earnings. Government programs designed to
strengthen the U.S. housing market, such as the MHA
Program, may fail to achieve expected results, and new programs
could be instituted that cause our credit losses to increase.
For more information, see MD&A RISK
MANAGEMENT Credit Risk.
Our business volumes are closely tied to the rate of growth in
total outstanding U.S. residential mortgage debt and the
size of the U.S. residential mortgage market. Total
residential mortgage debt declined approximately 2.3% in the
first nine months of 2010 compared to a decline of 1.9% in 2009.
If total outstanding U.S. residential mortgage debt were to
continue to decline, there could be fewer mortgage loans
available for us to purchase, and we could face more competition
to purchase a smaller number of loans.
While major national multifamily market fundamentals
(i.e., vacancy rates and effective rents) improved during
2010, there can be no assurance that this trend will continue.
Additionally, certain local markets continue to exhibit weak
fundamentals. We expect that our multifamily non-performing
assets may increase due to the continuation of the challenging
economic conditions particularly in certain geographical areas.
Improvements in loan performance have historically lagged
improvements in broader economic and market trends during market
recoveries. As a result, we may continue to experience elevated
credit losses related to multifamily activities in the first
half of 2011, even if market conditions continue to improve. In
addition, given the significant weakness currently being
experienced in the U.S. economy, it is also possible that
apartment fundamentals could deteriorate during 2011, which
could cause delinquencies and credit losses relating to our
multifamily activities to increase beyond our current
expectations.
Our
refinance volumes could decline if interest rates rise, which
could cause our overall new issuance volumes to
decline.
We continued to experience a high composition of refinance
mortgages in our purchase volume during 2010, due to continued
low interest rates and the impact of our relief refinance
mortgages. Interest rates have been at historically low levels
for an extended period of time, but have recently begun to
increase. Overall originations of refinance mortgages, and our
purchases of them, will likely decrease if interest rates
continue to rise. Originations of refinance mortgages will also
likely decline after the Home Affordable Refinance Program
expires in June 2011. It is possible that our overall issuance
volumes could decline if our volumes of purchase money mortgages
do not increase to offset any such decrease in refinance
mortgages. This could adversely affect the amount of revenue we
receive from our guarantee activities.
We
depend on our institutional counterparties to provide services
that are critical to our business, and our results of operations
or financial condition may be adversely affected if one or more
of our institutional counterparties do not meet their
obligations to us.
We face the risk that one or more of the institutional
counterparties that has entered into a business contract or
arrangement with us may fail to meet its obligations. We face
similar risks with respect to contracts or arrangements we
benefit from indirectly or that we enter into on behalf of our
securitization trusts. Our primary exposures to institutional
counterparty risk are with:
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mortgage seller/servicers;
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mortgage insurers;
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issuers, guarantors or third-party providers of other credit
enhancements (including bond insurers);
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counterparties to short-term lending and other
investment-related agreements and cash equivalent transactions,
including such agreements and transactions we manage for our PC
trusts;
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derivative counterparties;
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hazard and title insurers;
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mortgage investors and originators; and
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document custodians and funds custodians.
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Many of our counterparties provide several types of services to
us. In some cases, our business with institutional
counterparties is concentrated. A significant failure by a major
institutional counterparty could harm our business and financial
results in a variety of ways and have a material adverse effect
on our investments in mortgage loans, investments in securities,
our derivative portfolio or our credit guarantee activities. See
NOTE 19: CONCENTRATION OF CREDIT AND OTHER
RISKS for additional information.
Some of our counterparties may become subject to serious
liquidity problems affecting, either temporarily or permanently,
their businesses, which may adversely affect their ability to
meet their obligations to us. 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, including some seller/servicers, mortgage
insurers and bond insurers. In the past few years, some of our
largest seller/servicers have experienced ratings downgrades and
liquidity constraints, and certain large lenders have failed.
These challenging market conditions could also increase the
likelihood that we will have disputes with our counterparties
concerning their obligations to us, especially with respect to
counterparties that have experienced financial strain and/or
have large exposures to us. A default by a counterparty with
significant obligations to us could adversely affect our ability
to conduct our operations efficiently and at cost-effective
rates, which in turn could adversely affect our results of
operations or our financial condition. See
MD&A RISK MANAGEMENT Credit
Risk Institutional Credit Risk for
additional information regarding our credit risks to our
counterparties and how we seek to manage them.
Our
financial condition or results of operations may be adversely
affected if mortgage seller/servicers fail to repurchase loans
sold to us in breach of representations and warranties or fail
to honor any related indemnification or any recourse
obligations. We also face the risk that seller/servicers may
fail to perform their obligations to service loans in our
single-family and multifamily mortgage portfolios or that their
servicing performance could decline.
We require seller/servicers to make certain representations and
warranties regarding the loans they sell to us. If loans are
sold to us in breach of those representations and warranties, we
have the contractual right to require the seller/servicer to
repurchase those loans from us. In lieu of repurchase, we may
agree to allow a seller/servicer to indemnify us against losses
on such mortgages or otherwise compensate us for the risk of
continuing to hold the mortgages. Sometimes a seller/servicer
sells us mortgages with recourse, meaning that the
seller/servicer agrees to repurchase any mortgage that is
delinquent for more than a specified period (usually
120 days), regardless of whether there has been a breach of
representations and warranties.
Some of our seller/servicers have failed to fully perform their
repurchase obligations due to lack of financial capacity, while
others, including many of our larger seller/servicers, have not
fully performed their repurchase obligations in a timely manner.
As of December 31, 2010 and December 31, 2009, the UPB
of loans subject to repurchase requests issued to our
single-family seller/servicers was approximately
$3.8 billion and $4.2 billion, respectively. Our
contracts require that a seller/servicer repurchase a mortgage
within 30 days after we issue a repurchase request, unless
the seller/servicer avails itself of an appeal process provided
for in our contracts, in which case the deadline for repurchase
is extended until we decide the appeal. As of December 31,
2010, approximately 34% of these repurchase requests were
outstanding more than four months since issuance of our
repurchase request. The actual amount we collect on these
requests and others we may make in the future could be
significantly less than their UPB amounts because we expect many
of these requests will be satisfied by reimbursement of our
realized losses by seller/servicers, instead of repurchase of
loans at their UPB, or may be rescinded in the course of the
contractual appeals process. Based on our historical loss
experience and the fact that many of these loans are covered by
credit enhancement, we expect the actual credit losses
experienced by us should we fail to collect on these repurchase
requests would also be less than the UPB of the loans. We may
also enter into agreements with seller/servicers to resolve
claims for repurchases. The amounts we receive under any such
agreements may be less than the losses we ultimately incur. Our
credit losses may increase to the extent our seller/servicers do
not fully perform their repurchase obligations. Enforcing
repurchase obligations of seller/servicers who have the
financial capacity to perform those obligations could also
negatively impact our relationships with such customers and
ability to retain market share.
We also have exposure to seller/servicers with respect to
mortgage insurance. When a mortgage insurer rescinds coverage,
the seller/servicer generally is in breach of representations
and warranties made to us when we purchased the affected
mortgage. Consequently, we may require the seller/servicer to
repurchase the mortgage or to indemnify us for additional loss.
The volume of rescissions of claims under mortgage insurance
remains high.
If a servicer is unable to fulfill its repurchase or other
responsibilities, we may seek to recover the amounts that such
servicer owes us, such as by attempting to sell the applicable
mortgage servicing rights to a different servicer and applying
the proceeds to such owed amounts, or by contracting the
servicing responsibilities to a different servicer and retaining
the net servicing fee. The ongoing weakness in the housing
market has negatively affected the market for mortgage servicing
rights, which increases the risk that we may be unable to sell
such rights or may not receive a sufficient price for them.
Increased industry consolidation, bankruptcies of mortgage
bankers or bank failures may also make it more difficult for us
to sell such rights, because there may not be sufficient
capacity in the market, particularly in the event of multiple
failures. This option may be difficult to accomplish with
respect to our larger seller/servicers, as it may be difficult
to transfer a large servicing portfolio. The financial stress on
servicers and increased costs of servicing may lead to strategic
defaults (i.e., defaults done deliberately as a financial
strategy, and not involuntarily) by servicers, which would also
require us to seek a successor servicer.
Our seller/servicers have a significant role in servicing loans
in our single-family credit guarantee portfolio, which includes
an active role in our loss mitigation efforts. Therefore, a
decline in their performance could impact the overall quality of
our credit performance, which could adversely affect our
financial condition or results of operations and have
significant impacts on our ability to mitigate credit losses.
The risk of such a decline in performance remains high as
servicers continue to face challenges in building capacity to
process the large volumes of problem loans and as weak economic
conditions continue to affect the liquidity and financial
condition of many of our seller/servicers, including some of our
largest seller/servicers. Any efforts we take to attempt to
improve our servicers performance could adversely affect
our relationships with such servicers, many of which also sell
loans to us.
The inability to realize the anticipated benefits of our loss
mitigation plans, a lower realized rate of seller/servicer
repurchases or default rates and severity that exceed our
current projections could cause our losses to be significantly
higher than those currently estimated.
Our seller/servicers also have a significant role in servicing
loans in our multifamily mortgage portfolio. We are exposed to
the risk that multifamily seller/servicers could come under
financial pressure due to the current stressful economic
environment, which could potentially cause degradation in the
quality of servicing they provide or, in certain cases, reduce
the likelihood that we could recover losses through lender
repurchases or through recourse agreements or other credit
enhancements, where applicable.
See MD&A RISK MANAGEMENT
Credit Risk Institutional Credit Risk
Mortgage Seller/Servicers for additional information
on our institutional credit risk related to our mortgage
seller/servicers.
Our
financial condition or results of operations may be adversely
affected by the financial distress of our counterparties to
derivatives, funding and other transactions.
We use derivatives for several purposes, including to rebalance
our funding mix in order to more closely match changes in the
interest rate characteristics of our mortgage-related assets and
to hedge forecasted issuances of debt. The relative
concentration of our derivative exposure among our primary
derivative counterparties remains high. This concentration
increased in the last several years due to industry
consolidation and the failure of certain counterparties, and
could further increase. One of our derivative counterparties
accounted for greater than 10% of our net uncollateralized
exposure, excluding commitments, at December 31, 2010. For
a further discussion of our derivative counterparty exposure,
see MD&A RISK MANAGEMENT
Credit Risk Institutional Credit Risk
Derivative Counterparties and NOTE 19:
CONCENTRATION OF CREDIT AND OTHER RISKS.
Some of our derivative and other capital markets counterparties
have experienced various degrees of financial distress in the
past few years, including liquidity constraints, credit
downgrades and bankruptcy. Our financial condition and results
of operations may be adversely affected by the financial
distress of these derivative and other capital markets
counterparties to the extent that they fail to meet their
obligations to us. For example, we may incur losses if
collateral held by us cannot be liquidated at prices that are
sufficient to recover the full amount of the loan or derivative
exposure due us.
In addition, our ability to engage in routine derivatives,
funding and other transactions could be adversely affected by
the actions of other financial institutions. Financial services
institutions are interrelated as a result of trading, clearing,
counterparty or other relationships. As a result, defaults by,
or even rumors or questions about, one or more financial
services institutions, or the financial services industry
generally, could lead to market-wide disruptions in which it may
be difficult for us to find acceptable counterparties for such
transactions.
We also use derivatives to synthetically create the substantive
economic equivalent of various debt funding structures. Thus, if
our access to the derivative markets were disrupted, it may
become more difficult or expensive to fund our business
activities and achieve the funding mix we desire, which could
adversely affect our business and results of operations.
Our
credit and other losses could increase if our mortgage or bond
insurers become insolvent or fail to perform their obligations
to us.
We are exposed to risk relating to the potential insolvency or
non-performance of mortgage insurers that insure single-family
mortgages we purchase or guarantee and bond insurers that insure
bonds we hold as investment securities on our consolidated
balance sheets. The weakened financial condition and liquidity
position of these counterparties increases the risk that these
entities will fail to reimburse us for claims under insurance
policies. This risk could increase if home prices deteriorate
further or if the economy worsens.
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. Thus, if any of our
mortgage insurers that provide credit enhancement fails to
fulfill its obligation, we could experience increased credit
losses. In addition, if a regulator determined that a mortgage
insurer lacked sufficient capital to pay all claims when due,
the regulator could take action that might impact the timing and
amount of claim payments made to us. We independently assess the
financial condition, including the claims-paying resources, of
each of our mortgage insurers. Based on our analysis of the
financial condition of a mortgage insurer and pursuant to our
eligibility requirements for mortgage insurers, we could take
action against a mortgage insurer intended to protect our
interests that may impact the timing and amount of claims
payments received from that insurer.
In the event one or more of our 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 investments
in
non-agency
mortgage-related securities. We expect to receive substantially
less than full payment of our claims from Financial Guaranty
Insurance Company, or FGIC, and Ambac Assurance Corporation, or
Ambac, due to adverse developments concerning these companies.
We believe that, in addition to FGIC and Ambac, some of our
other bond insurers lack sufficient ability to fully meet all of
their expected lifetime claims-paying obligations to us as such
claims emerge. For more information on the developments
concerning FGIC and Ambac, see MD&A RISK
MANAGEMENT Credit Risk Institutional
Credit Risk Bond Insurers.
If
mortgage insurers were to further tighten their standards or
fall out of compliance with regulatory capital requirements, the
volume of high LTV ratio mortgages available for us to purchase
could be reduced, which could negatively affect our business and
make it more difficult for us to meet our affordable housing
goals. Mortgage insurance standards could constrain our ability
to increase our purchases of high LTV loans in the future,
should we want to do so.
Our charter requires that single-family mortgages with LTV
ratios above 80% at the time of purchase be covered by specified
credit enhancements or participation interests. Our purchases of
mortgages with LTV ratios above 80% (other than relief refinance
mortgages) have declined in recent years, in part because
mortgage insurers tightened their eligibility requirements with
respect to the issuance of insurance on new mortgages with
higher LTV ratios. Recently, mortgage insurers have loosened
some of these requirements. However, if mortgage insurers
further restrict their eligibility requirements for high LTV
ratio loans, or if we are no longer willing or able to obtain
mortgage insurance from these counterparties, and we are not
able to avail ourselves of suitable alternative methods of
obtaining credit enhancement for these loans, we may be further
restricted in our ability to purchase or securitize loans with
LTV ratios over 80% at the time of purchase.
If a mortgage insurance company were to fall out of compliance
with regulatory capital requirements and not obtain appropriate
waivers, it could become subject to regulatory actions that
restrict its ability to write new business in certain, or in
some cases all, states. At least one of our mortgage insurers
has fallen out of compliance with regulatory capital
requirements, and others may do so in the future.
A mortgage insurer may attempt a corporate restructuring
designed to enable it to continue to write new business through
a new entity in the event the insurer falls out of compliance
with regulatory capital requirements. Several insurers have
completed such a restructuring. However, there can be no
assurance that an insurer would be able to effect such a
restructuring in the future, as the restructured entity would be
required to satisfy regulatory requirements as well as our own
conditions. These restructuring plans generally involve
contributing capital to a subsidiary or affiliate. This could
result in less liquidity available to the mortgage insurer to
pay claims on its existing book of business, and an increased
risk that the mortgage insurer would not pay its claims in full
in the future.
Where mortgage insurance or another charter-acceptable credit
enhancement is not available, it may be more difficult for us to
purchase high LTV ratio (above 80%) loans that refinance
mortgages into more affordable loans. The unavailability of
suitable credit enhancement could also negatively impact our
ability to pursue new business opportunities relating to high
LTV ratio and other higher risk loans, should we seek, or be
directed, to pursue such business opportunities. This could also
impact our ability to meet our affordable housing goals, as
purchases of loans with high LTV ratios can contribute to our
performance under those goals.
The
loss of business volume from key lenders could result in a
decline in our market share and revenues.
Our business depends on our ability to acquire a steady flow of
mortgage loans. We purchase a significant percentage of our
single-family mortgages from several large mortgage originators.
During 2010 and 2009, approximately 78% and 74%, respectively,
of our guaranteed mortgage securities issuances originated from
purchase volume associated with our ten largest customers.
During 2010, three mortgage lenders (Wells Fargo
Bank, N.A., Bank of America, N.A. and Chase Home
Finance LLC) each accounted for more than 10% of our
single-family mortgage purchase volume and collectively
accounted for approximately 50% of our single-family mortgage
purchase volume. Similarly, we acquire a significant portion of
our multifamily mortgage loans from several large lenders. We
enter into mortgage purchase volume commitments with many of our
single-family customers that provide for the customers to
deliver to us a specified dollar amount of mortgages during a
specified period of time. Some commitments may also provide for
the lender to deliver to us a minimum percentage of their total
sales of conforming loans. There is a risk that we will not be
able to enter into a new commitment with a key customer that
will maintain mortgage purchase volume following the expiration
of the existing commitment. Since 2007, the mortgage industry
has consolidated significantly and a smaller number of large
lenders originate most single-family mortgages. The
loss of business from any one of our major lenders could
adversely affect our market share and our revenues. Many of our
seller/servicers also have tightened their lending criteria in
recent years, which has reduced their loan volume, thus reducing
the volume of loans available for us to purchase.
Ongoing
weak business and economic conditions in the U.S. and abroad may
adversely affect our business and results of
operations.
Our business and results of operations are significantly
affected by general business and economic conditions, including
conditions in the international markets for our investments or
our mortgage-related and debt securities. These conditions
include employment rates, fluctuations in both debt and equity
capital markets, the value of the U.S. dollar as compared
to foreign currencies, the strength of the U.S. financial
markets and national economy and the local economies in which we
conduct business, and the economies of other countries that
purchase our mortgage-related and debt securities. There is
significant uncertainty regarding the strength of the
U.S. economic recovery. While the financial markets appear
to have stabilized, there can be no assurance that this will
continue. If the U.S. economy remains weak, we could
experience continued high serious delinquencies and credit
losses, which will adversely affect our results of operations
and financial condition.
The mortgage credit markets have experienced very difficult
conditions and volatility since 2007. This has resulted in a
decrease in availability of corporate credit and liquidity
within the mortgage industry, causing disruptions to normal
operations of major mortgage originators, including some of our
largest customers, and contributed to the insolvency, closure or
acquisition of a number of major financial institutions. These
conditions also resulted in significant volatility, wide credit
spreads and a lack of price transparency and could contribute to
further consolidation within the financial services industry. We
continue to be subject to adverse effects on our financial
condition and results of operations due to our activities
involving securities, mortgages, derivatives and other mortgage
commitments with our customers.
Competition
from banking and non-banking companies may harm our
business.
Competition in the secondary mortgage market combined with a
decline in the amount of residential mortgage debt outstanding
may make it more difficult for us to purchase mortgages.
Furthermore, competitive pricing pressures may make our products
less attractive in the market and negatively impact our
financial results. Increased competition from Fannie Mae and
Ginnie Mae may alter our product mix, lower volumes and reduce
revenues on new business. FHFA is also Conservator of Fannie
Mae, our primary competitor, and FHFAs actions as
Conservator of both companies could affect competition between
us and Fannie Mae. Efforts we may make to increase the
profitability of new single-family guarantee business, such as
by tightening credit standards or raising guarantee fees, could
cause our market share to decrease and the volume of our
single-family guarantee business to decline. Historically, we
also competed with other financial institutions that retain or
securitize mortgages, such as commercial and investment banks,
dealers, thrift institutions, and insurance companies. While
many of these institutions have ceased or substantially reduced
their activities in the secondary market since 2008, it is
possible that these institutions will reenter the secondary
market.
Our
business may be adversely affected by limited availability of
financing and increased funding costs.
The amount, type and cost of our funding, including financing
from other financial institutions and the capital markets,
directly impacts our interest expense and results of operations.
A number of factors could make such financing more difficult to
obtain, more expensive or unavailable on any terms, both
domestically and internationally, including:
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termination of, or future restrictions or other adverse changes
with respect to, government support programs that may benefit us;
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reduced demand for our debt securities; and
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competition for debt funding from other debt issuers.
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Our ability to obtain funding in the public debt markets or by
pledging mortgage-related securities as collateral to other
financial institutions could cease or change rapidly, and the
cost of available funding could increase significantly due to
changes in market confidence and other factors. For example, in
the fall of 2008, we experienced significant deterioration in
our access to the unsecured medium- and long-term debt markets,
and were forced to rely on short-term debt to fund our purchases
of mortgage assets and refinance maturing debt and to rely on
derivatives to synthetically create the substantive economic
equivalent of various debt funding structures.
We follow certain liquidity management practices and procedures.
However, in the event we were unable to obtain funding from the
public debt markets, there can be no assurance that such
practices and procedures would provide us with sufficient
liquidity to meet ongoing cash obligations for an extended
period.
Since 2008, the ratings on the non-agency mortgage-related
securities we hold backed by Alt-A, subprime and option ARM
loans have decreased, limiting their availability as a
significant source of liquidity for us through sales or use as
collateral in secured lending transactions. In addition, adverse
market conditions have negatively impacted our ability to enter
into secured lending transactions using agency securities as
collateral. These trends are likely to continue in the future.
Government
Support
Changes or perceived changes in the governments support of
us could have a severe negative effect on our access to the debt
markets and our debt funding costs. Under the Purchase
Agreement, the $200 billion cap on Treasurys funding
commitment will increase as necessary to accommodate any
cumulative reduction in our net worth during 2010, 2011 and
2012. While we believe that the support provided by Treasury
pursuant to the Purchase Agreement currently enables us to
maintain our access to the debt markets and to have adequate
liquidity to conduct our normal business activities, the costs
of our debt funding could vary due to the uncertainty about the
future of the GSEs and potential investor concerns about the
adequacy of funding available to us under the Purchase Agreement
after 2012. The cost of our debt funding could increase if debt
investors believe that the risk that we could be placed into
receivership is increasing. In addition, under the Purchase
Agreement, without the prior consent of Treasury, we may not
increase our total indebtedness above a specified limit or
become liable for any subordinated indebtedness.
We do not currently have a liquidity backstop available to us
(other than draws from Treasury under the Purchase Agreement and
Treasurys ability to purchase up to $2.25 billion of
our obligations under its permanent statutory authority) if we
are unable to obtain funding from issuances of debt or other
conventional sources. At present, we are not able to predict the
likelihood that a liquidity backstop will be needed, or to
identify the alternative sources of liquidity that might be
available to us if needed, other than from Treasury as
referenced above.
Demand
for Debt Funding
The willingness of domestic and foreign investors to purchase
and hold our debt securities can be influenced by many factors,
including changes in the world economy, changes in
foreign-currency exchange rates, regulatory and political
factors, as well as the availability of and preferences for
other investments. If investors were to divest their holdings or
reduce their purchases of our debt securities, our funding costs
could increase. The willingness of investors to purchase or hold
our debt securities, and any changes to such willingness, may
materially affect our liquidity, our business and results of
operations.
Competition
for Debt Funding
We compete for low-cost debt funding with Fannie Mae, the FHLBs
and other institutions. Competition for debt funding from these
entities can vary with changes in economic, financial market and
regulatory environments. Increased competition for low-cost debt
funding may result in a higher cost to finance our business,
which could negatively affect our financial results. An
inability to issue debt securities at attractive rates in
amounts sufficient to fund our business activities and meet our
obligations could have an adverse effect on our liquidity,
financial condition and results of operations. See
MD&A LIQUIDITY AND CAPITAL
RESOURCES Liquidity Other Debt
Securities for a description of our debt issuance
programs.
Our funding costs may also be affected by changes in the amount
of, and demand for, debt issued by Treasury.
Line
of Credit
We maintain a secured intraday line of credit to provide
additional intraday liquidity to fund our activities through the
Fedwire system. This line of credit requires us to post
collateral to a third party. In certain circumstances, this
secured counterparty may be able to repledge the collateral
underlying our financing without our consent. In addition,
because the secured intraday line of credit is uncommitted, we
may not be able to continue to draw on it if and when needed.
Any
decline in the price performance of or demand for our PCs could
have an adverse effect on the volume and profitability of our
new single-family guarantee business.
Our PCs are an integral part of our mortgage purchase program.
We purchase many mortgages by issuing PCs in exchange for them
in guarantor swap transactions. We also issue PCs backed by
mortgage loans that we purchased for cash. Our competitiveness
in purchasing single-family mortgages from our seller/servicers,
and thus the volume and profitability of new single-family
business, can be directly affected by the relative price
performance of our PCs and comparable Fannie Mae securities.
Increasing demand for our PCs helps support the price
performance of our PCs, which in turn helps us compete with
Fannie Mae and others in purchasing mortgages.
Our PCs typically trade at a discount to comparable Fannie Mae
securities, which creates an incentive for customers to conduct
a disproportionate share of their guarantor business with Fannie
Mae. Various factors, including market conditions and the
relative rates at which the underlying mortgages prepay, affect
the price performance of our PCs. While we employ a variety of
strategies to support the price performance of our PCs, any such
strategies may fail or adversely affect our business. For
example, we may attempt to compensate customers for the
difference in price between our PCs and comparable
Fannie Mae securities by reducing guarantee fees. However, this
could adversely affect the profitability of our single-family
guarantee business.
We may be unable to maintain a liquid and deep market for our
PCs, which could also adversely affect the price performance of
PCs. A significant reduction in the volume of mortgage loans
that we securitize could reduce the liquidity of our PCs.
A
reduction in the credit ratings for our debt could adversely
affect our liquidity.
Nationally recognized statistical rating organizations play an
important role in determining, by means of the ratings they
assign to issuers and their debt, the availability and cost of
debt funding. We currently receive ratings from three nationally
recognized statistical rating organizations for our unsecured
borrowings. Our credit ratings are important to our liquidity.
Actions by governmental entities or others, including changes in
government support for us, additional GAAP losses, additional
draws under the Purchase Agreement, a reduction in the credit
ratings of or outlook on the U.S. Government, and other factors
could adversely affect the credit ratings on our debt. A
reduction in our credit ratings could adversely affect our
liquidity, competitive position, or the supply or cost of debt
financing available to us. A reduction in our credit ratings
could also trigger additional collateral requirements under our
derivatives contracts. A significant increase in our borrowing
costs could cause us to sustain additional GAAP losses or impair
our liquidity by requiring us to seek other sources of
financing, which may be difficult to obtain.
Mortgage
fraud could result in significant financial losses and harm to
our reputation.
We rely on representations and warranties by seller/servicers
about the characteristics of the single-family mortgage loans we
purchase and securitize, and we do not independently verify most
of the information that is provided to us before we purchase the
loan. This exposes us to the risk that one or more of the
parties involved in a transaction (such as the borrower, seller,
broker, appraiser, title agent, loan officer, lender or
servicer) will engage in fraud by misrepresenting facts about a
mortgage loan or a borrower. While we subsequently review a
sample of these loans to determine if such loans are in
compliance with our contractual standards, there can be no
assurance that this would detect or deter mortgage fraud, or
otherwise reduce our exposure to the risk of fraud. We are also
exposed to fraud by third parties in the mortgage servicing
function, particularly with respect to sales of REO properties
and other dispositions of non-performing assets. We may
experience significant financial losses and reputational damage
as a result of such fraud.
The
value of mortgage-related securities guaranteed by us and held
as investments may decline if we were unable to perform under
our guarantee or if investor confidence in our ability to
perform under our guarantee were to diminish.
A portion of our investments in mortgage-related securities are
securities guaranteed by us. Our valuation of these securities
is consistent with GAAP and the legal structure of the guarantee
transaction, which includes the Freddie Mac assets transferred
to the securitization trusts that serve as collateral for the
mortgage-related securities issued by the trusts (i.e.:
(a) multifamily PCs; (b) REMICs and Other Structured
Securities; and (c) certain Other Guarantee Transactions).
The valuation of our guaranteed mortgage securities necessarily
reflects investor confidence in our ability to perform under our
guarantee and the liquidity that our guarantee provides. If we
were unable to perform under our guarantee or if investor
confidence in our ability to perform under our guarantee were to
diminish, the value of our guaranteed securities may decline,
thereby reducing the value of the securities reported on our
consolidated balance sheets, which could have an adverse affect
on our financial condition and results of operations. This could
also adversely affect our ability to sell or otherwise use these
securities for liquidity purposes.
Changes
in interest rates could negatively impact our results of
operations, stockholders equity (deficit) and fair value
of net assets.
Our investment activities and credit guarantee activities expose
us to interest rate and other market risks. Changes in interest
rates, up or down, could adversely affect our net interest
yield. Although the yield we earn on our assets and our funding
costs tend to move in the same direction in response to changes
in interest rates, either can rise or fall faster than the
other, causing our net interest yield to expand or compress. For
example, due to the timing of maturities or rate reset dates on
variable-rate instruments, when interest rates rise, our funding
costs may rise faster than the yield we earn on our assets. This
rate change could cause our net interest yield to compress until
the effect of the increase is fully reflected in asset yields.
Changes in the slope of the yield curve could also reduce our
net interest yield.
Our GAAP results can be significantly affected by changes in
interest rates, and adverse changes in interest rates could
increase our GAAP net loss or deficit in total equity (deficit)
materially. For example, changes in interest rates affect the
fair value of our derivatives portfolio. Since we generally
record changes in fair values of our derivatives in current
income, such changes could significantly impact our GAAP
results. While derivatives are an important aspect of our
management of interest-rate risk, they generally increase the
volatility of reported net income (loss), because, while fair
value changes in derivatives affect net income, fair value
changes in several of the types of assets and liabilities being
hedged do not affect net
income. Additionally, increases in interest rates could increase
other-than-temporary impairments on our investments in
non-agency mortgage-related securities.
Changes in interest rates may also affect prepayment
assumptions, thus potentially impacting the fair value of our
assets, including our investments in mortgage-related assets.
When interest rates fall, borrowers are more likely to prepay
their mortgage loans by refinancing them at a lower rate. An
increased likelihood of prepayment on the mortgages underlying
our mortgage-related securities may adversely impact the value
of these securities.
Interest rates can fluctuate for a number of reasons, including
changes in the fiscal and monetary policies of the federal
government and its agencies, such as the Federal Reserve.
Federal Reserve policies directly and indirectly influence the
yield on our interest-earning assets and the cost of our
interest-bearing liabilities. The availability of derivative
financial instruments (such as options and interest rate and
foreign currency swaps) from acceptable counterparties of the
types and in the quantities needed could also affect our ability
to effectively manage the risks related to our investment
funding. Our strategies and efforts to manage our exposures to
these risks may not be effective. In particular, various
factors, including uncertainty concerning trends in home prices,
have made it more difficult for us to estimate future
prepayments. This could make it more difficult for us to manage
prepayment risk, and could cause our hedging-related losses to
increase. See QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK for a description of the types of market
risks to which we are exposed and how we seek to manage those
risks.
Changes
in OAS could materially impact our fair value of net assets and
affect future results of operations and stockholders
equity (deficit).
OAS is an estimate of the yield spread between a given security
and an agency debt yield curve. This includes consideration of
potential variability in the securitys cash flows
resulting from any options embedded in the security, such as
prepayment options. The OAS between the mortgage and agency debt
sectors can significantly affect the fair value of our net
assets. The fair value impact of changes in OAS for a given
period represents an estimate of the net unrealized increase or
decrease in the fair value of net assets arising from net
fluctuations in OAS during that period. We do not attempt to
hedge or actively manage the impact of changes in
mortgage-to-debt OAS.
Changes in market conditions, including changes in interest
rates, may cause fluctuations in OAS. A widening of the OAS on a
given asset, which typically causes a decline in the current
fair value of that asset, may cause significant mark-to-fair
value losses, and may adversely affect our financial results and
stockholders equity (deficit), but may increase the number
of attractive investment opportunities in mortgage loans and
mortgage-related securities. Conversely, a narrowing or
tightening of the OAS typically causes an increase in the
current fair value of that asset, but may reduce the number of
attractive investment opportunities in mortgage loans and
mortgage-related securities. Consequently, a tightening of the
OAS may adversely affect our future financial results and
stockholders equity (deficit). See
MD&A FAIR VALUE MEASUREMENTS AND
ANALYSIS Discussion of Fair Value Results for
a more detailed description of the impacts of changes in
mortgage-to-debt OAS.
While wider spreads might create favorable investment
opportunities, we are limited in our ability to take advantage
of any such opportunities because, under the Purchase Agreement
and FHFA regulation, the UPB of our mortgage-related investments
portfolio is subject to a cap that declines by 10% per year
beginning in 2010 until it reaches $250 billion. FHFA has
stated its expectation in the Acting Directors
February 2, 2010 letter that any net additions to our
mortgage-related investments portfolio would be related to
purchasing delinquent mortgages out of PC pools.
We
could experience significant reputational harm, which could
affect the future of our company, if our efforts under the MHA
Program, and other initiatives to support the U.S. residential
mortgage market do not succeed.
We are focused on the MHA Program and other initiatives to
support the U.S. residential mortgage market. If these
initiatives do not achieve their desired results, or are
otherwise perceived to have failed to achieve their objectives,
we may experience damage to our reputation, which may impact the
extent of future government support for our business and
government decisions with respect to the future status and role
of Freddie Mac.
Negative
publicity causing damage to our reputation could adversely
affect our business prospects, financial results or net
worth.
Reputation risk, or the risk to our financial results and net
worth from negative public opinion, is inherent in our business.
Negative public opinion could adversely affect our ability to
keep and attract customers or otherwise impair our customer
relationships, adversely affect our ability to obtain financing,
impede our ability to hire and retain qualified personnel,
hinder our business prospects or adversely impact the trading
price of our securities. Perceptions regarding the practices of
our competitors, our seller/servicers or the financial services
and mortgage industries as a whole, particularly as they relate
to the current economic downturn, may also adversely impact our
reputation. Adverse reputation impacts on third parties with
whom we have important relationships may impair market
confidence or investor confidence in our business
operations as well. In addition, negative publicity could expose
us to adverse legal and regulatory consequences, including
greater regulatory scrutiny or adverse regulatory or legislative
changes, and could affect what changes may occur to our business
structure during or following conservatorship, including whether
we will continue to exist. These adverse consequences could
result from perceptions concerning our activities and role in
addressing the mortgage market crisis, the concerns about
deficiencies in foreclosure documentation practices or our
actual or alleged action or failure to act in any number of
areas, including corporate governance, regulatory compliance,
financial reporting and disclosure, purchases of products
perceived to be predatory, safeguarding or using nonpublic
personal information, or from actions taken by government
regulators in response to our actual or alleged conduct.
The
MHA Program and other efforts to reduce foreclosures, modify
loan terms and refinance mortgages may fail to mitigate our
credit losses and may adversely affect our results of operations
or financial condition.
The MHA Program and other loss mitigation activities are a key
component of our strategy for managing and resolving troubled
assets and lowering credit losses. However, there can be no
assurance that any of our loss mitigation strategies will be
successful and that credit losses will not continue to escalate.
To the extent that borrowers participate in HAMP in large
numbers, it is likely that the costs we incur related to loan
modifications and other activities under HAMP will be
substantial because we 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. We will
not be reimbursed for these costs by Treasury.
FHFA has directed us to implement HAMP for troubled mortgages we
own or guarantee. It is possible that Treasury could make
changes to HAMP that, to the extent we were required to or
elected to implement them, could make the program more costly to
us, both in terms of credit expenses and the cost of
implementing and operating the program. We could also be
required or elect to make changes to our implementation of our
other loss mitigation activities that could make these
activities more costly to us. For example, we could be required
to, or elect to, use principal reduction to achieve reduced
payments for borrowers. This could further increase our losses,
as we could bear the full costs of such reductions.
In June 2010, Treasury announced an initiative under which
servicers will be required to consider an alternative
modification approach that includes a possible reduction of
principal for loans with LTV ratios over 115%. Mortgage
investors will receive incentives based on the amount of reduced
principal. In October 2010, Treasury provided guidance with
respect to applying this alternative for borrowers who have
already received permanent modifications or are in trial plans.
Holders of mortgages and mortgage-related securities are not
required to agree to a reduction of principal, but servicers
must have a process for considering the approach. We do not
currently have plans to apply these changes to mortgages that we
own or guarantee. However, it is possible that FHFA might direct
us to implement some or all of these changes. Our credit losses
could increase to the extent we apply these changes.
A significant number of loans are in the trial period of HAMP.
Although the ultimate completion rate remains uncertain, a large
number of loans have failed to complete the trial period or
qualify for any of our other loan modification and loss
mitigation programs. It is possible that, in the future,
additional loans will fail to complete the trial period or
qualify for these other programs. For these loans, HAMP will
have effectively delayed the foreclosure process and could
increase our losses, to the extent the prices we ultimately
receive for the foreclosed properties are less than the prices
we could have received had we foreclosed upon the properties
earlier, due to continued home price declines. These delays in
foreclosure could also cause our REO operations expense to
increase, perhaps substantially.
Our seller/servicers have a key role in the success of our loss
mitigation activities. The continued increases in seriously
delinquent loan volume, the ongoing weak conditions of the
mortgage market during 2009 and 2010, and the number and variety
of additions and changes to HAMP have placed a strain on the
loss mitigation resources of many of our seller/servicers. This
has also increased the operational complexity of the servicing
function, as well as the risk that errors will occur. A decline
in the performance of seller/servicers in mitigation efforts
could result in missed opportunities for successful loan
modifications, an increase in our credit losses and damage to
our reputation.
Mortgage modifications on the scale of HAMP, particularly any
new focus on principal reductions, have the potential to change
borrower behavior and mortgage underwriting. This, coupled with
the phenomenon of widespread underwater mortgages, could
significantly affect borrower attitudes towards homeownership,
the commitment of borrowers to making their mortgage payments,
the way the market values residential mortgage assets, the way
in which we conduct business and, ultimately, our financial
results.
Depending on the type of loss mitigation activities we pursue,
those activities could result in accelerating or slowing
prepayments on our PCs and REMICs and Other Structured
Securities, either of which could negatively affect the pricing
of such securities.
We are devoting significant internal resources to the
implementation of the various initiatives under the MHA Program,
which has, and will continue to, increase our expenses. The size
and scope of our effort under the MHA Program may also limit our
ability to pursue other business opportunities or corporate
initiatives.
Our
relationships with our customers could be harmed by our actions
as the compliance agent under HAMP, which could negatively
affect our ability to purchase loans from them in the
future.
We are the compliance agent for certain foreclosure avoidance
activities under HAMP by mortgage holders other than Freddie Mac
or Fannie Mae. In this role, we conduct examinations and review
servicer compliance with the published requirements for the
program. It is unclear how servicers will perceive our actions
as compliance agent. It is possible that this could impair our
relationships with our seller/servicers, which could negatively
affect our ability to purchase loans from them in the future.
We may experience further write-downs and losses relating
to our assets, including our investment securities, net deferred
tax assets, REO properties or mortgage loans, that could
materially adversely affect our business, results of operations,
financial condition, liquidity and net worth.
We experienced significant losses and write-downs relating to
certain of our assets during 2008, 2009, and 2010, including
significant declines in market value, impairments of our
investment securities, market-based write-downs of REO
properties, losses on non-performing loans purchased out of PC
pools, and impairments on other assets. The fair value of our
assets may be further adversely affected by continued weakness
in the economy, further deterioration in the housing and
financial markets, additional ratings downgrades or other events.
We increased our valuation allowance for our net deferred tax
assets by $8.3 billion during 2010. The future status and
role of Freddie Mac could be affected by actions of the
Conservator, and legislative and regulatory action that alters
the ownership, structure and mission of the company. The
uncertainty of these developments could materially affect our
operations, which could in turn affect our ability or intent to
hold investments until the recovery of any temporary unrealized
losses. If future events significantly alter our current
outlook, a valuation allowance may need to be established for
the remaining deferred tax asset.
Due to the ongoing weaknesses in the economy and in the housing
and financial markets, we may experience additional write-downs
and losses relating to our assets, including those that are
currently
AAA-rated,
and the fair values of our assets may continue to decline. This
could adversely affect our results of operations, financial
condition, liquidity and net worth.
We could also incur losses related to our REO properties due to
the occurrence of a major natural or other disaster, such as
hurricanes in Florida or earthquakes in California.
There
may not be an active, liquid trading market for our equity
securities.
Our common stock and classes of preferred stock that previously
were listed and traded on the NYSE were delisted from the NYSE
effective July 8, 2010, and now trade on the OTC market.
The market price of our common stock declined significantly
between June 16, 2010, the date we announced our intention
to delist these securities, and July 8, 2010, the first day
the common stock traded exclusively on the OTC market, and may
decline further. Trading volumes on the OTC market have been,
and will likely continue to be, less than those on the NYSE,
which would make it more difficult for investors to execute
transactions in our securities and could make the prices of our
securities decline or be more volatile.
Operational
Risks
We
have incurred and will continue to incur expenses and we may
otherwise be adversely affected by deficiencies in foreclosure
practices, as well as related delays in the foreclosure
process.
In the fall of 2010, several large seller/servicers announced
issues relating to the improper preparation and execution of
certain documents used in foreclosure proceedings, including
affidavits. These announcements have raised various concerns
relating to foreclosure practices. The integrity of the
foreclosure process is critical to our business, and our
financial results could be adversely affected by deficiencies in
the conduct of that process.
A number of our seller/servicers, including several of our
largest ones, temporarily suspended foreclosure proceedings in
certain states in which they do business while they evaluated
and addressed these issues. A number of these companies continue
to address these issues, and certain of these suspensions remain
in effect. In addition, a group consisting of state attorneys
general and state bank and mortgage regulators in all
50 states and the District of Columbia is reviewing
foreclosure practices. Some seller/servicers have announced
issues relating to the improper execution of the documents used
in foreclosure proceedings. In November 2010, we terminated the
eligibility of one law firm to serve as counsel in foreclosures
of Freddie Mac mortgages, due to issues with respect to the
firms foreclosure practices. That firm had been
responsible for handling a significant number of foreclosures
for our servicers in Florida. It is possible that additional
deficiencies in foreclosure practices will be identified,
including relating to the foregoing.
These issues and the related foreclosure suspensions could
prolong the foreclosure process regionally or nationwide and
could delay sales of our REO properties. The deficiencies in the
conduct of the foreclosure process potentially affect the
validity of a number of actions that have already been taken,
including foreclosure transfers through which we acquired some
of our REO properties and sales of some of our REO properties.
It will take time for seller/servicers to complete their
evaluations of these issues and implement remedial actions. It
is possible that different procedures will need to be developed
and implemented for individual states because of differences in
applicable state laws. In addition, a number of parties involved
in residential real estate transactions as well as various
federal, state and local regulatory authorities, may need to
agree to any remedial actions, which could further complicate
and delay the process of resolving these issues. These parties
potentially include seller/servicers, Freddie Mac, Fannie Mae,
FHFA, state or local authorities, mortgage insurers and title
insurance companies. In many cases, the remedial actions will
require court approval. It is possible that courts in different
states, as well as individual courts within the same state, may
come to different conclusions with respect to what remedial
actions are acceptable.
Any delays in the foreclosure process could cause properties
awaiting foreclosure to deteriorate until we acquire ownership
of them through foreclosure. Such deterioration would increase
our expenses to repair and maintain the properties when we do
acquire them. Delays in selling REO properties could cause our
REO operations expense for current REO properties to increase
because those properties will stay in REO status for a longer
period of time, which would increase the ongoing costs we incur
to maintain or protect them. In addition, our disposition
losses, which are a component of REO operations expense, could
increase to the extent home prices decline during this period of
delay and the prices we ultimately receive for the REO
properties are less than the prices we could have received had
we acquired and sold them earlier.
Concerns about the impact of deficient foreclosure practices on
title to REO properties may create additional uncertainty among
mortgage investors and potential home buyers about future trends
in home prices. Over the long term, concerns about foreclosure
practices may adversely affect trends in home prices regionally
or nationally, which could also adversely affect our financial
results. These concerns could increase both the uncertainty
about the results of our models and the risk of errors in the
implementation, operation or use of our models, in part because
greater management judgment will need to be applied.
Any delays in the foreclosure process could also create
fluctuations in our single-family credit statistics, including
our credit loss statistics and reported serious delinquency
rates. Our realization of credit losses, which consists of REO
operations income (expense) plus charge-offs, net, could be
delayed because we record charge-offs at the time we take
ownership of a property through foreclosure. Delays in the
foreclosure process could reduce the rate at which delinquent
loans proceed to foreclosure, which could cause a temporary
decline in our REO acquisitions and the rate of growth of our
REO inventory. This could also temporarily increase the number
of seriously delinquent loans that remain in our single-family
mortgage portfolio, which could result in higher reported
serious delinquency rates and a larger number of non-performing
loans than would otherwise have been the case.
It also is possible that mortgage insurance claims could be
denied if delays caused by servicers deficient foreclosure
practices prevent servicers from completing foreclosures within
required timelines defined by mortgage insurers.
We have incurred, and will continue to incur, expenses related
to deficiencies in foreclosure documentation practices and the
costs of remediating them, which may be significant. These costs
will include expenses to remediate issues relating to practices
of certain legal counsel that will increase our expenses in
future periods. We may also incur costs if we become involved in
litigation or investigations relating to these issues. While we
believe that our seller/servicers would be in violation of their
servicing contracts with us to the extent that they improperly
executed documents in foreclosure or bankruptcy proceedings, as
such contracts require that foreclosure proceedings be conducted
in accordance with applicable law, it may be difficult,
expensive, and time consuming for us to enforce our contractual
rights. Our efforts to enforce our contractual rights may
negatively impact our relationships with these seller/servicers,
some of which are among our largest sources of mortgage loans.
We expect that remedying the document execution issues affecting
the foreclosure process and related developments will likely
place further strain on the resources of our seller/servicers,
possibly including seller/servicers where such issues have not
been identified to date. This could negatively affect their
ability to service loans in our single-family mortgage portfolio
or the quality of service they provide to us. Since our
seller/servicers have an active role in our loss mitigation
efforts, this could impact the overall quality of our credit
performance and our ability to mitigate credit losses.
Delays in the foreclosure process may also adversely affect the
values of, and our losses on, the non-agency mortgage-related
securities we hold. Foreclosure delays may increase the
administrative expenses of the securitization trusts for the
non-agency mortgage-related securities, thereby reducing the
amount of funds available for distribution to investors. In
addition, the subordinate classes of securities issued by the
securitization trusts will continue to receive interest payments
while the defaulted loans remain in the trusts, rather than
absorbing the default losses. This may reduce the amount of
funds available for the senior tranches we own. The prospect of
losses due to these impacts could adversely affect the market
value of non-agency mortgage-related securities we own.
It has been difficult for us to determine the potential scope of
these issues, in part because we must rely on our
seller/servicers for much of the pertinent information and these
companies have not yet completed their assessments of these
issues. Our evaluation of these issues, as well as the
evaluations made by the seller/servicers, is complicated by the
fact that state law governs the foreclosure process and, thus,
the laws and regulations of a large number of different states
must be examined.
Issues
related to mortgages recorded through MERS could delay or
disrupt foreclosure activities and have an adverse effect on our
business.
The Mortgage Electronic Registration System, or the
MERS®
System, is an electronic registry that is widely used by
seller/servicers, Freddie Mac, and other participants in the
mortgage finance industry, to maintain records of beneficial
ownership of mortgages. The MERS System is maintained by
MERSCORP, Inc., a privately held company, the shareholders of
which include a number of organizations in the mortgage
industry, including Freddie Mac, Fannie Mae, and certain
seller/servicers, mortgage insurance companies and title
insurance companies.
Mortgage Electronic Registration Systems, Inc., or MERS, a
wholly-owned subsidiary of MERSCORP, Inc., has the ability to
serve as a nominee for the owner of a mortgage loan and in that
role become the mortgagee of record for the loan in local land
records. Freddie Mac seller/servicers may choose to use MERS as
a nominee, and to initiate foreclosures in MERS name.
Approximately 39% of the loans Freddie Mac owns or guarantees
are registered in MERS name; the beneficial ownership and
the ownership of the servicing rights related to those loans are
tracked in the MERS System.
MERS has been the subject of numerous lawsuits challenging
foreclosures on mortgages for which MERS is mortgagee of record
as nominee for the beneficial owner. It is possible that adverse
judicial decisions, regulatory proceedings or action, or
legislative action related to MERS, could delay or disrupt
foreclosure of mortgages that are registered on the MERS System.
Publicity concerning regulatory or judicial decisions, even if
such decisions were not adverse, or MERS-related concerns about
the integrity of the assignment process, could adversely affect
the mortgage industry and negatively impact public confidence in
the foreclosure process, which could lead to legislative or
regulatory action. Because MERS often executes legal documents
in connection with foreclosure proceedings, it is possible that
investigations by governmental authorities and others into
deficiencies in foreclosure practices may negatively impact MERS
and the MERS System.
Federal or state legislation or regulatory action also could
prevent us from using the MERS System for mortgages that we
currently own, guarantee, and securitize and for mortgages
acquired in the future, or could create additional requirements
for the transfer of mortgages that could affect the process for
and costs of acquiring, transferring, servicing, and foreclosing
mortgages. Such legislation or regulatory action could increase
our costs or otherwise adversely affect our business. For
example, we could be required to transfer mortgages out of the
MERS System. There is also uncertainty regarding the extent to
which seller/servicers will choose to use the MERS System in the
future.
Failures by MERS to apply prudent and effective process controls
and to comply with legal and other requirements in the
foreclosure process could pose legal, operational and
reputational risks for us.
We cannot predict the impact that such events or actions may
have on our business.
Weaknesses
in internal control over financial reporting and in disclosure
controls could result in errors and inadequate disclosures,
affect operating results and cause investors to lose confidence
in our reported results.
We face continuing challenges because of deficiencies in our
controls. Control deficiencies could result in errors, and lead
to inadequate or untimely disclosures, affect operating results
and cause investors to lose confidence in our reported financial
results. For information about our ineffective disclosure
controls and remaining material weakness in internal control
over financial reporting, see CONTROLS AND
PROCEDURES.
There are a number of factors that may impede our efforts to
establish and maintain effective disclosure controls and
internal control over financial reporting, including: the nature
of the conservatorship and our relationship with FHFA; the
complexity of, and significant changes in, our business
activities and related GAAP requirements; significant management
changes and internal reorganizations in 2010; uncertainty
regarding the sustainability of newly established controls; data
quality or servicing-related issues; and the uncertain impacts
of the ongoing housing and credit market volatility on the
results of our models, which are used for financial accounting
and reporting purposes. We cannot be certain that our efforts to
improve and maintain our internal control over financial
reporting will ultimately be successful.
Effectively designed and operated internal control over
financial reporting provides only reasonable assurance that
material errors in our financial statements will be prevented or
detected on a timely basis. A failure to maintain effective
internal control over financial reporting increases the risk of
a material error in our reported financial results and delay in
our financial reporting timeline. Depending on the nature of a
control failure and any required remediation, ineffective
controls could have a material adverse effect on our business.
Ineffective controls could also cause investors to lose
confidence in our reported financial information, which may have
an adverse effect on the trading price of our securities.
We face risks and uncertainties associated with the
internal models that we use for financial accounting and
reporting purposes, to make business decisions and to manage
risks. Market conditions have raised these risks and
uncertainties.
We make significant use of business and financial models for
financial accounting and reporting purposes and to manage risk.
We face risk associated with our use of models. First, there is
inherently some uncertainty associated with model results.
Second, we could fail to properly implement, operate or use our
models. Either of these situations could adversely affect our
financial statements and our ability to manage risks.
We use market-based information as inputs to our models.
However, it can take time for data providers to prepare
information, and thus the most recent market information may not
be available for the preparation of our financial statements.
When market conditions change quickly and in unforeseen ways,
there is an increased risk that the inputs reflected in our
models are not representative of current market conditions.
The severe deterioration of the housing and credit markets
beginning several years ago and, more recently, the extended
period of economic weakness and uncertainty has increased the
risks associated with our use of models. Our models may not
perform as well in situations for which there are few or no
recent historical precedents. We have adjusted our models in
response to recent events, but there remains some uncertainty
about model results.
Models are inherently imperfect predictors of actual results.
Our models rely on various assumptions that may be incorrect,
including that historical experience can be used to predict
future results. It has been more difficult to predict the
behaviors of the housing and credit capital markets and market
participants over the past several years, due to, among other
factors: (a) the uncertainty concerning trends in home
prices; (b) the lack of historical evidence about the
behavior of deeply underwater borrowers, the effect of an
extended period of extremely low interest rates on prepayments,
and the impact of widespread loan modification programs,
including the potential for the extensive use of principal
reductions; and (c) the impact of the concerns about
deficiencies in foreclosure documentation practices and related
delays in the foreclosure process.
We face the risk that we could fail to implement, operate or use
our models properly. For example, the assumptions underlying a
model could be invalid, or we could apply a model to events or
products outside the models intended use. We may fail to
code a model correctly, or we could use incorrect data. The
complexity and interconnectivity of our models create additional
risk regarding the accuracy of model output. While we have
processes and controls in place designed to mitigate these
risks, there can be no assurances that such processes and
controls will be successful.
Management often needs to exercise judgment to interpret or
adjust modeled results to take into account new information or
changes in conditions. The dramatic changes in the housing and
credit capital markets in recent years have required frequent
adjustments to our models and the application of greater
management judgment in the interpretation and adjustment of the
results produced by our models. This further increases both the
uncertainty about model results and the risk of errors in the
implementation, operation or use of the models.
We face the risk that the valuations, risk metrics, amortization
results, loan loss reserve estimations and security impairment
charges produced by our internal models may be different from
actual results, which could adversely affect our business
results, cash flows, fair value of net assets, business
prospects and future financial results. Changes in, or
replacements of, any of our models or in any of the assumptions,
judgments or estimates used in the models may cause the results
generated by the model to be materially different from those
generated by the prior model. The different results could cause
a revision of previously reported financial condition or results
of operations, depending on when the change to the model,
assumption, judgment or estimate is implemented. Any such
changes may also cause difficulties in comparisons of the
financial condition or results of operations of prior or future
periods.
Due to increased uncertainty about model results, we also face
increased risk that we could make poor business decisions in
areas where model results are an important factor, including
loan purchases, management and guarantee fee pricing and asset
and liability management. Furthermore, any strategies we employ
to attempt to manage the risks associated with our use of models
may not be effective. See MD&A CRITICAL
ACCOUNTING POLICIES AND ESTIMATES and QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest-Rate Risk and Other Market Risks for more
information on our use of models.
Changes
in our accounting policies, as well as estimates we make, could
materially affect how we report our financial condition or
results of operations.
Our accounting policies are fundamental to understanding our
financial condition and results of operations. 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 they require management to make particularly
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. For a
description of our critical accounting policies, see
MD&A CRITICAL ACCOUNTING POLICIES AND
ESTIMATES.
From time to time, the FASB and the SEC change the financial
accounting and reporting standards that govern the preparation
of our financial statements. These changes are beyond our
control, can be difficult to predict and could materially impact
how we report our financial condition and results of operations.
We could be required to apply a new or revised standard
retrospectively, which may result in the revision of prior
period financial statements by material amounts. The
implementation of new or revised accounting standards could
result in material adverse effects to our stockholders
equity (deficit) and result in or contribute to the need for
additional draws under the Purchase Agreement.
See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES and NOTE 2: CHANGE IN ACCOUNTING
PRINCIPLES for more information.
A
failure in our operational systems or infrastructure, or those
of third parties, could impair our liquidity, disrupt our
business, damage our reputation and cause losses.
Shortcomings or failures in our internal processes, people or
systems could lead to impairment of our liquidity, financial
loss, errors in our financial statements, disruption of our
business, liability to customers, further legislative or
regulatory intervention or reputational damage. We experienced a
number of operational problems in 2010 related to inadequately
designed or improperly executed systems. Servicing and loss
mitigation processes are currently under considerable stress,
which increases the risk that we may experience further
operational problems in the future. Corporate reorganizations,
inability to retain key staff members, and our efforts to reduce
administrative expenses may increase the stress on existing
processes.
Our business is highly dependent on our ability to process a
large number of transactions on a daily basis and manage and
analyze significant amounts of information, much of which is
provided by third parties. The transactions we process are
complex and are subject to various legal, accounting and
regulatory standards. The types of transactions we process and
the standards relating to those transactions can change rapidly
in response to external events, such as the implementation of
government-mandated programs and changes in market conditions.
Our financial, accounting, data processing or other operating
systems and facilities may fail to operate properly or become
disabled, adversely affecting our ability to process these
transactions. The information provided by third parties may be
incorrect, or we may fail to properly manage or analyze it.
Our core systems and technical architecture include many legacy
systems and applications that lack scalability and flexibility,
which increases the risk of system failure. The inability of our
systems to accommodate an increasing volume of transactions or
new types of transactions or products could constrain our
ability to pursue new business initiatives. We are investing
considerable resources in a long-term project to improve our
existing systems infrastructure. There can be no assurance that
we will be able to complete this project successfully, or that
it will reduce our operational risk. In the past, we have had
difficulty in conducting similar large-scale infrastructure
improvement projects.
Our employees could act improperly for their own gain and cause
unexpected losses or reputational damage. While we have
processes and systems in place to prevent and detect fraud,
there can be no assurance that such processes and systems will
be successful.
We also face the risk of operational failure or termination of
any of the clearing agents, exchanges, clearinghouses or other
financial intermediaries we use to facilitate our securities and
derivatives transactions. Any such failure or termination could
adversely affect our ability to effect transactions, service our
customers and manage our exposure to risk.
Most of our key business activities are conducted in our
principal offices located in McLean, Virginia. Despite the
contingency plans and facilities we have in place, our ability
to conduct business may be adversely impacted by a disruption in
the infrastructure that supports our business and the
communities in which we are located. Potential disruptions may
include those involving electrical, communications,
transportation or other services we use or that are provided to
us. If a disruption occurs and our employees are unable to
occupy our offices or communicate with or travel to other
locations, our ability to service and interact with our
customers or counterparties may suffer and we may not be able to
successfully implement contingency plans that depend on
communication or travel.
We are exposed to the risk that a catastrophic event, such as a
terrorist event or natural disaster, could result in a
significant business disruption and an inability to process
transactions through normal business processes. Any measures we
take to mitigate this risk may not be sufficient to respond to
the full range of catastrophic events that may occur.
We may
not be able to protect the confidentiality of our
information.
Our operations rely on the secure processing, storage and
transmission of confidential and other information in our
computer systems and networks. Our computer systems, software
and networks may be vulnerable to unauthorized access, computer
viruses or other malicious code and other events that could have
a security impact. If one or more of such events occur, this
potentially could jeopardize confidential and other information,
including nonpublic personal information and
sensitive business data, processed and stored in, and
transmitted through, our computer systems and networks, or
otherwise cause interruptions or malfunctions in our operations
or the operations of our customers or counterparties, which
could result in significant losses or reputational damage. We
may be required to expend significant additional resources to
modify our protective measures or to investigate and remediate
vulnerabilities or other exposures, and we may be subject to
litigation and financial losses that are not fully insured.
We
rely on third parties for certain important functions, including
some that are critical to financial reporting, our
mortgage-related investment activity and mortgage loan
underwriting. Any failures by those vendors could disrupt our
business operations.
We outsource certain key functions to external parties,
including: (a) processing functions for trade capture,
market risk management analytics, and financial instrument
valuation; (b) custody and recordkeeping for our
mortgage-related investments; (c) processing functions for
mortgage loan underwriting and servicing; and (d) certain
services we provide to Treasury in our role as program
compliance agent under HAMP. We may enter into other key
outsourcing relationships in the future. If one or more of these
key external parties were not able to perform their functions
for a period of time, at an acceptable service level, or for
increased volumes, our business operations could be constrained,
disrupted or otherwise negatively impacted. Our use of vendors
also exposes us to the risk of a loss of intellectual property
or of confidential information or other harm. We may also be
exposed to reputational harm, to the extent vendors do not
conduct their activities under appropriate ethical standards.
Financial or operational difficulties of an outside vendor could
also hurt our operations if those difficulties interfere with
the vendors ability to provide services to us.
Our
risk management efforts may not effectively mitigate the risks
we seek to manage.
We could incur substantial losses and our business operations
could be disrupted if we are unable to effectively identify,
manage, monitor and mitigate operational risks, interest rate
and other market risks and credit risks related to our business.
Our risk management policies, procedures and techniques may not
be sufficient to mitigate the risks we have identified or to
appropriately identify additional risks to which we are subject.
See QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK and MD&A RISK MANAGEMENT
for a discussion of our approach to managing the risks we face.
Legal and
Regulatory Risks
The
Dodd-Frank Act and related regulation may adversely affect our
business activities and financial results.
The Dodd-Frank Wall Street Reform and Consumer Protection Act,
which was signed into law on July 21, 2010, significantly
changed the regulation of the financial services industry and
could affect us in substantial and unforeseeable ways and have
an adverse effect on our business, results of operations,
financial condition, liquidity and net worth. For example, the
Dodd-Frank Act and related future regulatory changes could
impact the value of assets that we hold, require us to change
certain of our business practices, impose significant additional
costs on us, limit the products we offer, require us to increase
our regulatory capital, or make it more difficult for us to
retain and recruit management and other valuable employees. We
will also face a more complicated regulatory environment due to
the Dodd-Frank Act and related future regulatory changes, which
will increase compliance costs and could divert management
attention or other resources. The Dodd-Frank Act and related
future regulatory changes will also significantly affect many
aspects of the financial services industry and potentially
change the business practices of our customers and
counterparties; it is possible that any such changes could
adversely affect our business and financial results.
Implementation of the Dodd-Frank Act is being accomplished
through numerous rulemakings, many of which are expected to be
finalized in 2011. The final effects of the legislation will not
be known with certainty until these rulemakings are complete.
The Dodd-Frank Act also mandates the preparation of studies of a
wide range of issues, which could lead to additional legislative
or regulatory changes. It could be difficult for us to comply
with any future regulatory changes in a timely manner, due to
the potential scope and number of such changes, which could
limit our operations and expose us to liability.
The long-term impact of the Dodd-Frank Act and related future
regulatory changes on our business and the financial services
industry will depend on a number of factors that are difficult
to predict, including our ability to successfully implement any
changes to our business, changes in consumer behavior and our
competitors and customers responses to the
Dodd-Frank Act and related future regulatory changes.
Examples of aspects of the Dodd-Frank Act that may significantly
affect us include the following:
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The new Financial Stability Oversight Council could designate
Freddie Mac as a non-bank financial company to be subject to
supervision and regulation by the Federal Reserve. If this
occurs, the Federal Reserve will have authority to examine
Freddie Mac and we may be required to meet more stringent
prudential standards than those applicable to
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other non-bank financial companies. New prudential standards
potentially could include capital requirements that are based on
standards applicable to insured depository institutions.
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The Dodd-Frank Act will have a significant impact on the
derivatives market, including by subjecting large derivatives
users, which may include Freddie Mac, to extensive new oversight
and regulation. These new regulatory standards could impose
significant additional costs on us relating to derivatives
transactions and it may become more difficult for us to enter
into desired hedging transactions with acceptable counterparties
on favorable terms.
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The Dodd-Frank Act will create new standards and requirements
related to asset-backed securities, including requiring
securitizers and potentially originators to retain a portion of
the underlying loans credit risk. Any such new standards
and requirements could weaken or remove incentives for financial
institutions to sell mortgage loans to us.
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The Dodd-Frank Act and related future regulatory changes could
negatively impact the volume of mortgage originations, and thus
adversely affect the number of mortgages available for us to
purchase.
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Under the Dodd-Frank Act, new minimum mortgage underwriting
standards will be required for residential mortgages, including
a requirement that lenders make a reasonable and good faith
determination based on verified and documented
information that the consumer has a reasonable
ability to repay the mortgage. The Act requires regulators
to establish a class of qualified loans that will receive
certain protections from legal liability, such as the
borrowers right to rescind the loan and seek damages.
Mortgage originators and assignees, including Freddie Mac, may
be subject to increased legal risk for loans that do not meet
these requirements.
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Under the Dodd-Frank Act, federal regulators, including FHFA,
are directed to promulgate regulations, to be applicable to
financial institutions, including Freddie Mac, that will
prohibit incentive-based compensation structures that the
regulators determine encourage inappropriate risks by providing
excessive compensation or benefits or that could lead to
material financial loss. It is possible that any such
regulations will have an adverse effect on our ability to retain
and recruit management and other valuable employees, as we may
be at a competitive disadvantage as compared to other potential
employers not subject to these or similar regulations.
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For more information on the Dodd-Frank Act, see
BUSINESS Regulation and
Supervision Legislative and Regulatory
Developments.
Legislative
or regulatory actions could adversely affect our business
activities and financial results.
In addition to possible GSE reform legislation and the
Dodd-Frank Act discussed above, our business initiatives may be
directly adversely affected by other legislative and regulatory
actions at the federal, state and local levels. We could be
negatively affected by legislation or regulatory action that
changes the foreclosure process of any individual state. For
example, various states and local jurisdictions have implemented
mediation programs designed to bring servicers and borrowers
together to negotiate workout options. These actions could delay
the foreclosure process and increase our expenses, including by
potentially delaying the final resolution of delinquent mortgage
loans and the disposition of non-performing assets. We could
also be affected by any legislative or regulatory changes to
existing bankruptcy laws or proceedings or foreclosure
processes, including any changes that would allow bankruptcy
judges to unilaterally change the terms of mortgage loans or
otherwise require principal reductions. Our business could also
be adversely affected by any modification, reduction or repeal
of the federal income tax deductibility of mortgage interest
payments.
Legislation or regulatory actions could indirectly adversely
affect us to the extent such legislation or actions affect the
activities of banks, savings institutions, insurance companies,
securities dealers and other regulated entities that constitute
a significant part of our customer base or counterparties, or
could indirectly affect us to the extent that they modify
industry practices. Legislative or regulatory provisions that
create or remove incentives for these entities to sell mortgage
loans to us, purchase our securities or enter into derivatives
or other transactions with us could have a material adverse
effect on our business results and financial condition.
The Basel Committee on Banking Supervision is in the process of
substantially revising capital guidelines for financial
institutions and has recently finalized portions of the
so-called Basel III guidelines, which would set
new capital and liquidity requirements for banks. Phase-in of
Basel III is expected to take several years and there is
significant uncertainty about how regulators might implement
these guidelines or how the resulting regulations might impact
us. For example, it is possible that any new regulations on the
capital treatment of mortgage servicing rights, risk-based
capital requirements for credit risk, and liquidity treatment of
our debt and guarantee obligations could adversely affect our
business results and financial condition.
We may
make certain changes to our business in an attempt to meet the
housing goals and subgoals set for us by FHFA that may increase
our losses.
We may make adjustments to our mortgage loan sourcing and
purchase strategies in an effort to meet our housing goals and
subgoals, including changes to our underwriting guidelines and
the expanded use of targeted initiatives to reach
underserved populations. For example, we may purchase loans that
offer lower expected returns on our investment and increase our
exposure to credit losses. Doing so could cause us to forgo
other purchase opportunities that we would expect to be more
profitable. If our current efforts to meet the goals and
subgoals prove to be insufficient, we may need to take
additional steps that could further increase our losses. FHFA
has not yet published a final rule with respect to our duty to
serve underserved markets. However, it is possible that we could
also make changes to our business in the future in response to
this duty. If we do not meet our housing goals or duty to serve
requirements, and FHFA finds that the goals or requirements were
feasible, we may become subject to a housing plan that could
require us to take additional steps that could have an adverse
effect on our results of operations and financial condition.
We are
involved in legal proceedings, governmental investigations and
IRS examinations that could result in the payment of substantial
damages or otherwise harm our business.
We are a party to various legal actions, including litigation in
the U.S. Tax Court as result of a dispute of certain tax matters
with the IRS related to our 1998 through 2005 federal income tax
returns. We are also subject to investigations by the SEC and
the U.S. Attorneys Office for the Eastern District of
Virginia. In addition, certain of our current and former
directors, officers and employees are involved in legal
proceedings for which they may be entitled to reimbursement by
us for costs and expenses of the proceedings. The defense of
these or any future claims or proceedings could divert
managements attention and resources from the needs of the
business. We may be required to establish reserves and to make
substantial payments in the event of adverse judgments or
settlements of any such claims, investigations, proceedings or
examinations. Any legal proceeding, governmental investigation
or examination issue, even if resolved in our favor, could
result in negative publicity or cause us to incur significant
legal and other expenses. Furthermore, developments in, outcomes
of, impacts of, and costs, expenses, settlements and judgments
related to these legal proceedings and governmental
investigations and examinations may differ from our expectations
and exceed any amounts for which we have reserved or require
adjustments to such reserves. We are also cooperating with other
investigations, such as the review being conducted by state
attorneys general and state bank and mortgage regulators into
foreclosure practices. These proceedings could divert
managements attention or other resources. See LEGAL
PROCEEDINGS for information about our pending legal
proceedings and NOTE 14: INCOME TAXES for
information about our litigation with the IRS relating to
potential additional income taxes and penalties for the 1998 to
2005 tax years and other tax-related matters.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our principal offices consist of five office buildings in
McLean, Virginia. We own four of the office buildings,
comprising approximately 1.3 million square feet. We occupy
the fifth building, comprising approximately 200,000 square
feet, under a lease from a third party.
ITEM 3.
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 21: LEGAL CONTINGENCIES for more
information regarding our involvement as a party to various
legal proceedings.
ITEM 4.
RESERVED
PART
II
ITEM 5.
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market
Information
Our common stock, par value $0.00 per share, trades in the OTC
market and is quoted on the OTC Bulletin Board under the ticker
symbol FMCC. As of February 11, 2011, there
were 649,182,461 shares of our common stock outstanding.
On July 8, 2010, our common stock and 20 previously-listed
classes of preferred securities were delisted from the NYSE. We
delisted such securities pursuant to a directive by the
Conservator. The classes of preferred stock that were previously
listed on the NYSE also now trade in the OTC market.
Table 7 sets forth the high and low prices of our common
stock on the NYSE and the high and low bid information for our
common stock on the OTC Bulletin Board for the indicated
periods. The OTC Bulletin Board quotations reflect inter-dealer
prices, without retail
mark-up,
mark-down, or commission and may not necessarily represent
actual transactions.
Table 7
Quarterly Common Stock Information
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High
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Low
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2010 Quarter Ended
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December
31(1)
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$
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0.50
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$
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0.29
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September
30(2)
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0.44
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|
0.24
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June 30(3)
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1.68
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|
0.40
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March
31(3)
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1.52
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1.12
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2009 Quarter
Ended(3)
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December 31
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$
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1.86
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$
|
1.02
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September 30
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2.50
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|
|
|
0.54
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June 30
|
|
|
1.05
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|
|
|
0.53
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March 31
|
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1.50
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0.35
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(1)
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Based on bid information for our common stock on the OTC
Bulletin Board.
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(2)
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Based on the prices of our common stock on the NYSE prior to
July 8, 2010 and bid information for our common stock on
the OTC Bulletin Board on and after July 8, 2010.
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(3)
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Based on the prices of our common stock on the NYSE.
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Holders
As of February 11, 2011, we had 2,153 common
stockholders of record.
Dividends
and Dividend Restrictions
We did not pay any cash dividends on our common stock during
2010 or 2009.
Our payment of dividends is subject to the following
restrictions:
Restrictions
Relating to the Conservatorship
As Conservator, FHFA announced on September 7, 2008 that we
would not pay any dividends on Freddie Macs common stock
or on any series of Freddie Macs preferred stock (other
than the senior preferred stock). FHFA has instructed our Board
of Directors that it should consult with and obtain the approval
of FHFA before taking actions involving dividends.
Restrictions
Under the Purchase Agreement
The Purchase Agreement prohibits us and any of our subsidiaries
from declaring or paying any dividends on Freddie Mac equity
securities (other than the senior preferred stock) without the
prior written consent of Treasury.
Restrictions
Under the GSE Act
Under the GSE Act, FHFA has authority to prohibit capital
distributions, including payment of dividends, if we fail to
meet applicable capital requirements. Under the GSE Act, we are
not permitted to make a capital distribution if, after making
the distribution, we would be undercapitalized, except the
Director of FHFA may permit us to repurchase shares if the
repurchase is made in connection with the issuance of additional
shares or obligations in at least an equivalent amount and will
reduce our financial obligations or otherwise improve our
financial condition. If FHFA classifies us as undercapitalized,
we are not permitted to make a capital distribution that would
result in our being reclassified as significantly
undercapitalized or critically undercapitalized. If FHFA
classifies us as significantly undercapitalized, approval of the
Director of FHFA is required for any dividend payment; the
Director may approve a capital distribution only if the Director
determines that the distribution will enhance the ability of the
company to meet required capital levels promptly, will
contribute to the long-term financial
safety-and-soundness
of the company or is otherwise in the public interest. Our
capital requirements have been suspended during conservatorship.
Restrictions
Under our Charter
Without regard to our capital classification, we must obtain
prior written approval of FHFA to make any capital distribution
that would decrease total capital to an amount less than the
risk-based capital level or that would decrease core capital to
an amount less than the minimum capital level. As noted above,
our capital requirements have been suspended during
conservatorship.
Restrictions
Relating to Subordinated Debt
During any period in which we defer payment of interest on
qualifying subordinated debt, we may not declare or pay
dividends on, or redeem, purchase or acquire, our common stock
or preferred stock. Our qualifying subordinated debt provides
for the deferral of the payment of interest for up to five years
if either: (a) our core capital is below 125% of our
critical capital requirement; or (b) our core capital is
below our statutory minimum capital requirement, and the
Secretary of the Treasury, acting on our request, exercises his
or her discretionary authority pursuant to
Section 306(c)
of our charter to purchase our debt obligations. FHFA has
directed us 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. As noted above, our
capital requirements have been suspended during conservatorship.
Restrictions
Relating to Preferred Stock
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 December 31, 2010. Payment
of dividends on all outstanding preferred stock, other than the
senior preferred stock, is subject to the prior payment of
dividends on the senior preferred stock. On December 31,
2010, we paid dividends of $1.6 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 in 2010.
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 suspended the
operation of, and ceased making grants under, equity
compensation plans. 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.
No stock options were exercised during the three months ended
December 31, 2010. However, restrictions lapsed on 23,137
restricted stock units.
See NOTE 13: FREDDIE MAC STOCKHOLDERS EQUITY
(DEFICIT) for more information.
Issuer
Purchases of Equity Securities
We did not repurchase any of our common or preferred stock
during the three months ended December 31, 2010.
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.
Transfer
Agent and Registrar
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Telephone: 781-575-2879
http://www.computershare.com/investors
ITEM 6.
SELECTED FINANCIAL
DATA(1)
The selected financial data presented below should be reviewed
in conjunction with MD&A and our consolidated financial
statements and related notes for the year ended
December 31, 2010.
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At or for the Year Ended December 31,
|
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2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(dollars in millions, except share-related amounts)
|
|
Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
16,856
|
|
|
$
|
17,073
|
|
|
$
|
6,796
|
|
|
$
|
3,099
|
|
|
$
|
3,412
|
|
Provision for credit losses
|
|
|
(17,218
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)
|
|
|
(29,530
|
)
|
|
|
(16,432
|
)
|
|
|
(2,854
|
)
|
|
|
(296
|
)
|
Non-interest income (loss)
|
|
|
(11,588
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)
|
|
|
(2,732
|
)
|
|
|
(29,175
|
)
|
|
|
(275
|
)
|
|
|
1,679
|
|
Non-interest expense
|
|
|
(2,932
|
)
|
|
|
(7,195
|
)
|
|
|
(5,753
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)
|
|
|
(5,959
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)
|
|
|
(2,513
|
)
|
Net income (loss) attributable to Freddie Mac
|
|
|
(14,025
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)
|
|
|
(21,553
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)
|
|
|
(50,119
|
)
|
|
|
(3,094
|
)
|
|
|
2,327
|
|
Net income (loss) attributable to common stockholders
|
|
|
(19,774
|
)
|
|
|
(25,658
|
)
|
|
|
(50,795
|
)
|
|
|
(3,503
|
)
|
|
|
2,051
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(6.09
|
)
|
|
|
(7.89
|
)
|
|
|
(34.60
|
)
|
|
|
(5.37
|
)
|
|
|
3.01
|
|
Diluted
|
|
|
(6.09
|
)
|
|
|
(7.89
|
)
|
|
|
(34.60
|
)
|
|
|
(5.37
|
)
|
|
|
3.00
|
|
Cash dividends per common share
|
|
|
|
|
|
|
|
|
|
|
0.50
|
|
|
|
1.75
|
|
|
|
1.91
|
|
Weighted average common shares outstanding (in
thousands)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,249,369
|
|
|
|
3,253,836
|
|
|
|
1,468,062
|
|
|
|
651,881
|
|
|
|
680,856
|
|
Diluted
|
|
|
3,249,369
|
|
|
|
3,253,836
|
|
|
|
1,468,062
|
|
|
|
651,881
|
|
|
|
682,664
|
|
Balance Sheets Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held-for-investment, at amortized cost by
consolidated trusts (net of allowance for loan losses)
|
|
$
|
1,646,172
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total assets
|
|
|
2,261,780
|
|
|
|
841,784
|
|
|
|
850,963
|
|
|
|
794,368
|
|
|
|
804,910
|
|
Debt securities of consolidated trusts held by third parties
|
|
|
1,528,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt
|
|
|
713,940
|
|
|
|
780,604
|
|
|
|
843,021
|
|
|
|
738,557
|
|
|
|
744,341
|
|
All other liabilities
|
|
|
19,593
|
|
|
|
56,808
|
|
|
|
38,576
|
|
|
|
28,906
|
|
|
|
33,139
|
|
Total Freddie Mac stockholders equity (deficit)
|
|
|
(401
|
)
|
|
|
4,278
|
|
|
|
(30,731
|
)
|
|
|
26,724
|
|
|
|
26,914
|
|
Portfolio
Balances(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related investments portfolio
|
|
$
|
696,874
|
|
|
$
|
755,272
|
|
|
$
|
804,762
|
|
|
$
|
720,813
|
|
|
$
|
703,959
|
|
Total Freddie Mac Mortgage-Related
Securities(4)
|
|
|
1,712,918
|
|
|
|
1,854,813
|
|
|
|
1,807,553
|
|
|
|
1,701,207
|
|
|
|
1,470,481
|
|
Total mortgage
portfolio(5)
|
|
|
2,164,859
|
|
|
|
2,250,539
|
|
|
|
2,207,476
|
|
|
|
2,102,676
|
|
|
|
1,826,720
|
|
Non-performing
assets(6)
|
|
|
125,405
|
|
|
|
104,984
|
|
|
|
46,620
|
|
|
|
16,119
|
|
|
|
7,761
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average
assets(7),
(12)
|
|
|
(0.6
|
)%
|
|
|
(2.5
|
)%
|
|
|
(6.1
|
)%
|
|
|
(0.4
|
)%
|
|
|
0.3
|
%
|
Non-performing assets
ratio(8)
|
|
|
6.4
|
|
|
|
5.2
|
|
|
|
2.4
|
|
|
|
0.9
|
|
|
|
0.5
|
|
Return on common
equity(9),
(12)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(21.0
|
)
|
|
|
9.8
|
|
Dividend payout ratio on common
stock(10)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
63.9
|
|
Equity to assets
ratio(11),
(12)
|
|
|
(0.2
|
)
|
|
|
(1.6
|
)
|
|
|
(0.2
|
)
|
|
|
3.4
|
|
|
|
3.3
|
|
|
|
(1)
|
See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES and NOTE 2: CHANGE IN ACCOUNTING
PRINCIPLES for more information regarding our accounting
policies and adjustments made to previously reported results due
to changes in accounting principles.
|
(2)
|
Includes the weighted average number of shares during 2008, 2009
and 2010 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 earnings per share, because it is
unconditionally exercisable by the holder at a cost of $0.00001
per share.
|
(3)
|
Represents the UPB and excludes mortgage loans and
mortgage-related securities traded, but not yet settled.
Effective in December 2007, we established trusts for the
administration of cash remittances received related to the
underlying assets of our PCs and REMICs and Other Structured
Securities issued. As a result, after 2006, we report the
balance of our mortgage portfolios to reflect the
publicly-available security balances of Freddie Mac
mortgage-related securities. For 2006, we report these balances
based on the UPB of the underlying mortgage loans. We reflected
this change as an increase in the UPB of our mortgage-related
investments portfolio by $2.8 billion at December 31,
2007.
|
(4)
|
See Table 34 Freddie Mac Mortgage-Related
Securities for the composition of this line item.
|
(5)
|
See Table 16 Segment Mortgage Portfolio
Composition for the composition of our total mortgage
portfolio.
|
(6)
|
See Table 54 Non-Performing Assets
for a description of our non-performing assets.
|
(7)
|
Ratio computed as net income (loss) attributable to Freddie Mac
divided by the simple average of the beginning and ending
balances of total assets.
|
(8)
|
Ratio computed as non-performing assets divided by the ending
UPB of our total mortgage portfolio, excluding non-Freddie Mac
mortgage-related securities.
|
(9)
|
Ratio computed as net income (loss) attributable to common
stockholders divided by the simple average of the beginning and
ending balances of total Freddie Mac stockholders equity
(deficit), net of preferred stock (at redemption value). Ratio
is not presented for periods in which the simple average of the
beginning and ending balances of total Freddie Mac
stockholders equity (deficit) is less than zero.
|
(10)
|
Ratio computed as common stock dividends declared divided by net
income (loss) attributable to common stockholders. Ratio is not
presented for periods in which net income (loss) attributable to
common stockholders was a loss.
|
(11)
|
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.
|
(12)
|
To calculate the simple averages for 2010, the beginning
balances of total assets, total Freddie Mac stockholders
equity, net of preferred stock (at redemption value), and total
Freddie Mac stockholders equity are based on the
January 1, 2010 balances included in NOTE 2:
CHANGE IN ACCOUNTING PRINCIPLES
Table 2.1 Impact of the Change in Accounting
for Transfers of Financial Assets and Consolidation of Variable
Interest Entities on Our Consolidated Balance Sheet so
that both the beginning and ending balances reflect changes in
accounting principles.
|
ITEM
7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read this MD&A in conjunction with
BUSINESS Executive Summary and our
consolidated financial statements and related notes for the year
ended December 31, 2010.
MORTGAGE
MARKET AND ECONOMIC CONDITIONS, AND OUTLOOK
Mortgage
Market and Economic Conditions
Overview
Mortgage and credit market conditions remained weak in 2010 due
primarily to a continued weak labor market. The pace of economic
recovery increased slightly in the fourth quarter of 2010, with
the U.S. gross domestic product rising by 3.2% on an
annualized basis during the period, compared to 2.6% during the
third quarter of 2010, according to the Bureau of Economic
Analysis advance estimate. Unemployment was 9.4% in December
2010, down slightly compared to 9.9% at December 2009, based on
data from the U.S. Bureau of Labor Statistics.
Table 8 provides important indicators for the U.S.
residential mortgage market.
Table 8
Mortgage Market Indicators
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Home sale units (in
thousands)(1)
|
|
|
5,229
|
|
|
|
5,531
|
|
|
|
5,398
|
|
Home price
depreciation(2)
|
|
|
(4.1
|
)%
|
|
|
(2.4
|
)%
|
|
|
(11.9
|
)%
|
Single-family originations (in
billions)(3)
|
|
$
|
1,570
|
|
|
$
|
1,815
|
|
|
$
|
1,500
|
|
Adjustable-rate mortgage
share(4)
|
|
|
10
|
%
|
|
|
7
|
%
|
|
|
13
|
%
|
Refinance
share(5)
|
|
|
73
|
%
|
|
|
68
|
%
|
|
|
50
|
%
|
U.S. single-family mortgage debt outstanding
(in billions)(6)
|
|
$
|
10,612
|
|
|
$
|
10,861
|
|
|
$
|
11,072
|
|
U.S. multifamily mortgage debt outstanding
(in billions)(6)
|
|
$
|
847
|
|
|
$
|
851
|
|
|
$
|
841
|
|
|
|
(1)
|
Includes sales of new and existing homes in the U.S. Source:
National Association of Realtors news release dated
January 20, 2011 (sales of existing homes) and U.S. Census
Bureau news release dated January 26, 2011 (sales of new
homes).
|
(2)
|
Calculated internally using estimates of changes in
single-family home prices by state, which are weighted using the
property values underlying our single-family credit guarantee
portfolio to obtain a national index. The depreciation rate for
each year presented incorporates property value information on
loans purchased by both Freddie Mac and Fannie Mae through
December 31, 2010 and the percentage change will be subject
to revision based on more recent purchase information. Other
indices of home prices may have different results, as they are
determined using different pools of mortgage loans and
calculated under different conventions than our own.
|
(3)
|
Source: Inside Mortgage Finance estimates of originations of
single-family first-and second liens dated January 28, 2011.
|
(4)
|
Adjustable-rate mortgage share of the dollar amount of total
mortgage applications. Source: Mortgage Bankers
Associations Mortgage Applications Survey. Data reflect
annual average of weekly figures.
|
(5)
|
Refinance share of the number of conventional mortgage
applications. Source: Mortgage Bankers Associations
Mortgage Applications Survey. Data reflect annual average of
weekly figures.
|
(6)
|
Source: Federal Reserve Flow of Funds Accounts of the United
States dated December 9, 2010. The outstanding amounts for
2010 presented above reflect balances as of September 30,
2010, which is the latest information available.
|
Single-Family
Housing Market
We believe the level of home sales in the U.S. is a significant
driver of the direction of home prices. Within the industry,
existing home sales are important for assessing the rate at
which the mortgage market might absorb the inventory of listed,
but unsold, homes in the U.S. (including listed REO properties),
while we believe new home sales can be an indicator of other
economic trends, such as the potential for growth in total U.S.
mortgage debt outstanding. We believe that the end of the
federal homebuyer tax credit program in April 2010 contributed
to a decline in home sales mid-year, and the market slowly
improved in the fourth quarter. New home sales fell 31.9% in May
2010 to a seasonally adjusted annual rate of 282,000, reflecting
the fourth lowest level since the U.S. Census Bureaus
series began in 1963. New home sales recovered modestly in the
second half of 2010, but ended the year at an annual rate of
329,000 in December. Because existing home sales are reported at
closing, typically a month or more after the contract is signed,
the full effect of the expiration of the federal homebuyer tax
credit program was not felt until July 2010, when existing home
sales decreased by 27.0%, as compared to June 2010 sales. Sales
of existing homes rose 37.5% over the remainder of 2010, to an
annual rate of 5.3 million in December.
We estimate that home prices decreased 4.1% nationwide during
2010, as a slight increase in home prices during the first half
of 2010 was more than offset by a decrease in home prices during
the second half of 2010, including a 1.4% decrease in the fourth
quarter of 2010. These estimates are based on our own index of
our single-family credit guarantee portfolio. Other indices of
home prices may have different results, as they are determined
using different pools of mortgage loans and calculated under
different conventions than our own. We believe home prices in
the first half of the year were positively impacted by the
availability of the federal homebuyer tax credit, as well as
strong home sales in the spring and summer months of 2010, which
is consistent with historical trends.
Serious delinquency rates on single-family loans declined during
2010, but remain at historically high levels for all major
product types. The MBA reported in its National Delinquency
Survey that delinquency rates on all single-family loans in
their survey dipped to 8.6% as of December 31, 2010, down
from the record 9.7% at year-end 2009. Residential loan
performance was generally better in areas with lower
unemployment rates and where property prices have fallen
slightly or not declined at all in the last two years. In its
survey, the MBA presents delinquency rates both for mortgages it
classifies as subprime and for mortgages it classifies as prime
conventional. The delinquency rates of subprime mortgages are
markedly higher than those of prime conventional loan products
in the MBA survey; however, the delinquency experience in prime
conventional mortgage loans during the last two years has been
significantly worse than in any year since the 1930s.
Based on data from the Federal Reserves Flow of Funds
Accounts, there was a sustained and significant increase in
single-family mortgage debt outstanding from 2001 to 2006. This
increase in mortgage debt was driven by increasing sales of new
and existing single-family homes during this same period. As
reported by FHFA in its Conservators Report on the
Enterprises Financial Condition, dated August 26,
2010, the market share of mortgage-backed securities issued by
the GSEs and Ginnie Mae declined significantly from 2001 to 2006
while the market share of non-GSE securities peaked.
Non-traditional mortgage types, such as interest-only, Alt-A,
and option ARMs, also increased in market share during these
years, which we believe introduced greater risk into the market.
We believe these shifts in market activity, in part, help
explain the significant differentiation in delinquency
performance of securitized
non-GSE and
GSE mortgage loans as discussed below.
We estimate that we owned or guaranteed approximately one-fourth
of the outstanding single-family mortgages in the U.S. at
December 31, 2010. At December 31, 2010, we held or
guaranteed approximately 462,000 seriously delinquent
single-family loans, representing approximately one-tenth of the
seriously delinquent single-family mortgages in the market as of
December 31, 2010. We estimate that loans backing
non-GSE
securities comprised approximately one-tenth of the
single-family mortgages in the U.S. and represented
approximately one-fourth of the seriously delinquent
single-family mortgages at December 31, 2010. As of
December 31, 2010, we held
non-GSE
securities with a UPB of $158.4 billion as investments.
Concerns
Regarding Deficiencies in Foreclosure Documentation
Practices
In the fall of 2010, several large seller/servicers announced
issues relating to the improper preparation and execution of
certain documents used in foreclosure proceedings, including
affidavits. These announcements raised various concerns relating
to foreclosure practices. A number of our seller/servicers,
including several of our largest ones, temporarily suspended
foreclosure proceedings in certain states in which they do
business while they evaluated and addressed these issues. A
number of these companies continue to address these issues, and
certain of these suspensions remain in effect. We temporarily
suspended certain foreclosure proceedings, and certain REO sales
and eviction proceedings for REO properties for certain
servicers during the fourth quarter of 2010 while we evaluated
the impact of these issues. We resumed REO sales in November
2010.
In November 2010, we terminated the eligibility of one law firm
to serve as counsel in foreclosures of Freddie Mac mortgages,
due to issues with respect to the firms foreclosure
practices. That firm had been responsible for handling a
significant number of foreclosures for our servicers in Florida.
We expect that these issues and the related foreclosure
suspensions could prolong the foreclosure process in many states
and may delay sales of our REO properties.
On October 13, 2010, FHFA made public a four-point policy
framework detailing FHFAs plan to address these issues,
including guidance for consistent remediation of identified
foreclosure process deficiencies, and directed Freddie Mac and
Fannie Mae to implement this plan.
We have incurred, and will continue to incur, expenses related
to these deficiencies in foreclosure documentation practices and
the costs of remediating them, which may be significant. For
more information regarding how these deficiencies in foreclosure
documentation practices could impact our business, see
RISK FACTORS Operational Risks
Our expenses could increase and we may otherwise be adversely
affected by deficiencies in foreclosure practices, as well as
related delays in the foreclosure process and
RISK MANAGEMENT Credit Risk
Institutional Credit Risk Mortgage
Seller/Servicers. Throughout this
Form 10-K,
we generally refer to these matters as the concerns about
foreclosure documentation practices.
Issues have also been raised with respect to the MERS System.
For more information, see RISK FACTORS
Operational Risks Issues related to mortgages
recorded through MERS could delay or disrupt foreclosure
activities and have an adverse effect on our business.
Multifamily
Housing Market
Major national multifamily market fundamentals improved during
2010 with several consecutive quarters apartment
statistics reflecting positive trends. Vacancy rates, which had
climbed to record levels in early 2010, improved, and effective
rents, the principal source of income for property owners,
stabilized and began to increase on a national basis. Vacancy
rates and effective rents are important to loan performance
because multifamily loans are generally repaid from the cash
flows generated by the underlying property. These improving
fundamentals helped to stabilize property values in a number of
markets. However, the multifamily market continues to be
negatively impacted by high unemployment and ongoing weakness in
the economy. Since 2008, most of our competitors, other than
Fannie Mae and FHA, ceased their activities in the multifamily
mortgage business or severely curtailed these activities
relative to their previous levels. However, some market
participants began to re-enter the market on a limited basis in
2010.
Outlook
Forward-looking statements involve known and unknown risks and
uncertainties, some of which are beyond our control. These
statements are not historical facts, but rather represent our
expectations based on current information, plans, judgments,
assumptions, estimates, and projections. Actual results may
differ significantly from those described in or implied by such
forward-looking statements due to various factors and
uncertainties. For example, a number of factors could cause the
actual performance of the housing and mortgage markets and the
U.S. economy during 2011 to be significantly worse than we
expect, including adverse changes in consumer confidence,
national or international economic conditions and changes in the
federal governments fiscal policies. See
BUSINESS Forward-Looking Statements for
additional information.
Overview
As in the past, we expect key macroeconomic drivers of the
economy such as income growth, unemployment rate,
and inflation will affect the performance of the
housing and mortgage markets in 2011. With the federal
governments fiscal policy supporting aggregate demand for
goods and services and a monetary policy that provides low
interest rates and ample liquidity to capital markets, we
believe the economic recovery will continue and gradually
accelerate during 2011, with the second half of 2011 exhibiting
stronger fundamentals than the early part of the year.
Single-Family
Market
Below are four features that we believe will influence the 2011
housing and mortgage markets. The likelihood that any or all of
these features will occur depends on a variety of factors,
including the pace of the economic recovery.
|
|
|
|
|
Mortgage rates By November 2010, fixed-rate
mortgage rates had declined to their lowest level since the
early 1950s. This allowed for the continuation of the refinance
boom that began in 2009. If the federal funds rate remains under
0.5% for most of 2011, relatively low mortgage rates should be a
feature of the 2011 mortgage market.
|
|
|
|
Home prices We believe those local markets
that have relatively large inventories of for-sale homes and REO
dispositions will continue to see home price declines in 2011.
We also believe that while certain markets may experience modest
home price increases in 2011, home prices for the U.S. as a
whole are likely to be lower than in 2010.
|
|
|
|
Homebuyer affordability The three primary
factors that affect buyer affordability are: (a) mortgage
rates; (b) home prices; and (c) income. We believe
buyer affordability is higher than the past several years. We
believe that many first-time buyers will be attracted to the
housing market in 2011, which should translate into more home
sales in 2011 than in 2010 and a slight increase in mortgage
debt outstanding.
|
|
|
|
Lower mortgage origination volume More home
sales in 2011 would generally result in increased purchase-money
originations, and that is expected to be a feature of
2011s mortgage market. However, refinance activity is
expected to decline during 2011 as a result of at least three
factors: (a) many borrowers have refinanced over the past
year or are currently in the midst of refinancing, and hence
will have little need to do so again in 2011;
(b) MHAs Home Affordable Refinance Program is
scheduled to expire on June 30, 2011, which is expected to
further dampen refinance volume during the second half of 2011;
and (c) we expect interest rates will move up during 2011,
reducing the financial incentive to refinance for those
borrowers who have not done so already. As a result, we believe
the anticipated decline in refinance originations should offset
the potential increase in purchase-money originations, which
should lead to lower total mortgage lending volume in 2011.
|
Multifamily
Market
While major multifamily market fundamentals improved on a
national basis during 2010, certain local markets continue to
exhibit weak fundamentals. We expect that our multifamily
non-performing assets may increase due to the continuation of
challenging economic conditions, particularly in certain
geographical areas. Improvements in loan performance have
historically lagged improvements in broader economic and market
trends during market recoveries. As a result, we may continue to
experience elevated credit losses in the first half of 2011,
even if market conditions continue to improve.
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 results of
operations.
Change in
Accounting Principles
As discussed in BUSINESS Executive
Summary, our adoption of two new accounting standards that
amended the guidance applicable to the accounting for transfers
of financial assets and the consolidation of VIEs had a
significant impact on our consolidated financial statements and
other financial disclosures beginning in the first quarter of
2010.
The cumulative effect of these changes in accounting principles
was a net decrease of $11.7 billion to total equity
(deficit) as of January 1, 2010, which included changes to
the opening balances of retained earnings (accumulated deficit)
and AOCI. See NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Consolidation and Equity Method
of Accounting, NOTE 2: CHANGE IN ACCOUNTING
PRINCIPLES, NOTE 4: VARIABLE INTEREST
ENTITIES, and NOTE 23: SELECTED FINANCIAL
STATEMENT LINE ITEMS for additional information regarding
these changes.
As these changes in accounting principles were applied
prospectively, our results of operations for the year ended
December 31, 2010 (on both a GAAP and Segment Earnings
basis), which reflect the consolidation of trusts that issue our
single-family PCs and certain Other Guarantee Transactions, are
not directly comparable with the results of operations for the
years ended December 31, 2009 and 2008, which reflect the
accounting policies in effect during that time (i.e.,
when the majority of the securitization entities were accounted
for off-balance sheet).
Table
9 Summary Consolidated Statements of
Operations GAAP
Results(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Net interest income
|
|
$
|
16,856
|
|
|
$
|
17,073
|
|
|
$
|
6,796
|
|
Provision for credit losses
|
|
|
(17,218
|
)
|
|
|
(29,530
|
)
|
|
|
(16,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for credit losses
|
|
|
(362
|
)
|
|
|
(12,457
|
)
|
|
|
(9,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on extinguishment of debt securities of
consolidated trusts
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
Gains (losses) on retirement of other debt
|
|
|
(219
|
)
|
|
|
(568
|
)
|
|
|
209
|
|
Gains (losses) on debt recorded at fair value
|
|
|
580
|
|
|
|
(404
|
)
|
|
|
406
|
|
Derivative gains (losses)
|
|
|
(8,085
|
)
|
|
|
(1,900
|
)
|
|
|
(14,954
|
)
|
Impairment of available-for-sale
securities:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment of available-for-sale
securities
|
|
|
(1,778
|
)
|
|
|
(23,125
|
)
|
|
|
(17,682
|
)
|
Portion of other-than-temporary impairment recognized in AOCI
|
|
|
(2,530
|
)
|
|
|
11,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment of available-for-sale securities recognized in
earnings
|
|
|
(4,308
|
)
|
|
|
(11,197
|
)
|
|
|
(17,682
|
)
|
Other gains (losses) on investment securities recognized in
earnings
|
|
|
(1,252
|
)
|
|
|
5,965
|
|
|
|
1,501
|
|
Other income
|
|
|
1,860
|
|
|
|
5,372
|
|
|
|
1,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income (loss)
|
|
|
(11,588
|
)
|
|
|
(2,732
|
)
|
|
|
(29,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses
|
|
|
(1,546
|
)
|
|
|
(1,651
|
)
|
|
|
(1,505
|
)
|
REO operations expense
|
|
|
(673
|
)
|
|
|
(307
|
)
|
|
|
(1,097
|
)
|
Other expenses
|
|
|
(713
|
)
|
|
|
(5,237
|
)
|
|
|
(3,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
(2,932
|
)
|
|
|
(7,195
|
)
|
|
|
(5,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit (expense)
|
|
|
(14,882
|
)
|
|
|
(22,384
|
)
|
|
|
(44,564
|
)
|
Income tax benefit (expense)
|
|
|
856
|
|
|
|
830
|
|
|
|
(5,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(14,026
|
)
|
|
|
(21,554
|
)
|
|
|
(50,116
|
)
|
Less: Net (income) loss attributable to noncontrolling interest
|
|
|
1
|
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Freddie Mac
|
|
$
|
(14,025
|
)
|
|
$
|
(21,553
|
)
|
|
$
|
(50,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES for
information regarding accounting changes impacting the current
period.
|
(2)
|
We adopted an amendment to the accounting standards for
investments in debt and equity securities effective
April 1, 2009. See NOTE 2: CHANGE IN ACCOUNTING
PRINCIPLES Other Changes in Accounting
Principles for additional information regarding the impact
of this amendment.
|
Net
Interest Income
Table 10 summarizes our net interest income and net
interest yield and provides an attribution of changes in annual
results to changes in interest rates or changes in volumes of
our interest-earning assets and interest-bearing liabilities.
Average balance sheet information is presented because we
believe end-of-period balances are not representative of
activity throughout the periods presented. For most components
of the average balances, a daily weighted average balance was
calculated for the period. When daily weighted average balance
information was not available, a simple monthly average balance
was calculated.
Table 10
Average Balance, Net Interest Income and Rate/Volume
Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
|
(dollars in millions)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
48,803
|
|
|
$
|
77
|
|
|
|
0.16
|
%
|
|
$
|
55,764
|
|
|
$
|
193
|
|
|
|
0.35
|
%
|
|
$
|
29,311
|
|
|
$
|
618
|
|
|
|
2.11
|
%
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
46,739
|
|
|
|
79
|
|
|
|
0.17
|
|
|
|
28,524
|
|
|
|
48
|
|
|
|
0.17
|
|
|
|
23,018
|
|
|
|
423
|
|
|
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related
securities(3)
|
|
|
526,748
|
|
|
|
25,366
|
|
|
|
4.82
|
|
|
|
675,167
|
|
|
|
32,563
|
|
|
|
4.82
|
|
|
|
661,756
|
|
|
|
34,263
|
|
|
|
5.18
|
|
Extinguishment of PCs held by Freddie Mac
|
|
|
(213,411
|
)
|
|
|
(11,182
|
)
|
|
|
(5.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities, net
|
|
|
313,337
|
|
|
|
14,184
|
|
|
|
4.53
|
|
|
|
675,167
|
|
|
|
32,563
|
|
|
|
4.82
|
|
|
|
661,756
|
|
|
|
34,263
|
|
|
|
5.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related
securities(3)
|
|
|
27,995
|
|
|
|
191
|
|
|
|
0.68
|
|
|
|
16,471
|
|
|
|
727
|
|
|
|
4.42
|
|
|
|
19,757
|
|
|
|
804
|
|
|
|
4.07
|
|
Mortgage loans held by consolidated
trusts(4)(5)
|
|
|
1,722,387
|
|
|
|
86,698
|
|
|
|
5.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecuritized mortgage
loans(4)(6)
|
|
|
206,116
|
|
|
|
8,727
|
|
|
|
4.23
|
|
|
|
127,429
|
|
|
|
6,815
|
|
|
|
5.35
|
|
|
|
93,649
|
|
|
|
5,369
|
|
|
|
5.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
2,365,377
|
|
|
$
|
109,956
|
|
|
|
4.65
|
|
|
$
|
903,355
|
|
|
$
|
40,346
|
|
|
|
4.47
|
|
|
$
|
827,491
|
|
|
$
|
41,477
|
|
|
|
5.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities of consolidated trusts including PCs held by
Freddie Mac
|
|
$
|
1,738,330
|
|
|
$
|
(86,398
|
)
|
|
|
(4.97
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Extinguishment of PCs held by Freddie Mac
|
|
|
(213,411
|
)
|
|
|
11,182
|
|
|
|
5.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities of consolidated trusts held by third
parties
|
|
|
1,524,919
|
|
|
|
(75,216
|
)
|
|
|
(4.93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
219,654
|
|
|
|
(552
|
)
|
|
|
(0.25
|
)
|
|
|
287,259
|
|
|
|
(2,234
|
)
|
|
|
(0.78
|
)
|
|
|
244,569
|
|
|
|
(6,800
|
)
|
|
|
(2.78
|
)
|
Long-term
debt(7)
|
|
|
543,306
|
|
|
|
(16,363
|
)
|
|
|
(3.01
|
)
|
|
|
557,184
|
|
|
|
(19,916
|
)
|
|
|
(3.57
|
)
|
|
|
561,261
|
|
|
|
(26,532
|
)
|
|
|
(4.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other debt
|
|
|
762,960
|
|
|
|
(16,915
|
)
|
|
|
(2.22
|
)
|
|
|
844,443
|
|
|
|
(22,150
|
)
|
|
|
(2.62
|
)
|
|
|
805,830
|
|
|
|
(33,332
|
)
|
|
|
(4.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
2,287,879
|
|
|
|
(92,131
|
)
|
|
|
(4.03
|
)
|
|
|
844,443
|
|
|
|
(22,150
|
)
|
|
|
(2.62
|
)
|
|
|
805,830
|
|
|
|
(33,332
|
)
|
|
|
(4.14
|
)
|
Income (expense) related to
derivatives(8)
|
|
|
|
|
|
|
(969
|
)
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
(1,123
|
)
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
(1,349
|
)
|
|
|
(0.17
|
)
|
Impact of net non-interest-bearing funding
|
|
|
77,498
|
|
|
|
|
|
|
|
0.13
|
|
|
|
58,912
|
|
|
|
|
|
|
|
0.17
|
|
|
|
21,661
|
|
|
|
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding of interest-earning assets
|
|
$
|
2,365,377
|
|
|
$
|
(93,100
|
)
|
|
|
(3.94
|
)
|
|
$
|
903,355
|
|
|
$
|
(23,273
|
)
|
|
|
(2.58
|
)
|
|
$
|
827,491
|
|
|
$
|
(34,681
|
)
|
|
|
(4.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/yield
|
|
|
|
|
|
$
|
16,856
|
|
|
|
0.71
|
|
|
|
|
|
|
$
|
17,073
|
|
|
|
1.89
|
|
|
|
|
|
|
$
|
6,796
|
|
|
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009 Variance Due to
|
|
|
2009 vs. 2008 Variance Due to
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Rate(9)
|
|
|
Volume(9)
|
|
|
Change
|
|
|
Rate(9)
|
|
|
Volume(9)
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
(83
|
)
|
|
$
|
(33
|
)
|
|
$
|
(116
|
)
|
|
$
|
(740
|
)
|
|
$
|
315
|
|
|
$
|
(425
|
)
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
(1
|
)
|
|
|
32
|
|
|
|
31
|
|
|
|
(457
|
)
|
|
|
82
|
|
|
|
(375
|
)
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related
securities(3)
|
|
|
(50
|
)
|
|
|
(7,147
|
)
|
|
|
(7,197
|
)
|
|
|
(2,384
|
)
|
|
|
684
|
|
|
|
(1,700
|
)
|
Extinguishment of PCs held by Freddie Mac
|
|
|
|
|
|
|
(11,182
|
)
|
|
|
(11,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities, net
|
|
|
(50
|
)
|
|
|
(18,329
|
)
|
|
|
(18,379
|
)
|
|
|
(2,384
|
)
|
|
|
684
|
|
|
|
(1,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related
securities(3)
|
|
|
(850
|
)
|
|
|
314
|
|
|
|
(536
|
)
|
|
|
65
|
|
|
|
(142
|
)
|
|
|
(77
|
)
|
Mortgage loans held by consolidated
trusts(4)(5)
|
|
|
|
|
|
|
86,698
|
|
|
|
86,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecuritized mortgage
loans(4)(6)
|
|
|
(1,641
|
)
|
|
|
3,553
|
|
|
|
1,912
|
|
|
|
(381
|
)
|
|
|
1,827
|
|
|
|
1,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
(2,625
|
)
|
|
$
|
72,235
|
|
|
$
|
69,610
|
|
|
$
|
(3,897
|
)
|
|
$
|
2,766
|
|
|
$
|
(1,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities of consolidated trusts including PCs held by
Freddie Mac
|
|
$
|
|
|
|
$
|
(86,398
|
)
|
|
$
|
(86,398
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Extinguishment of PCs held by Freddie Mac
|
|
|
|
|
|
|
11,182
|
|
|
|
11,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities of consolidated trusts held by third
parties
|
|
|
|
|
|
|
(75,216
|
)
|
|
|
(75,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
1,248
|
|
|
|
434
|
|
|
|
1,682
|
|
|
|
5,587
|
|
|
|
(1,021
|
)
|
|
|
4,566
|
|
Long-term
debt(7)
|
|
|
3,068
|
|
|
|
485
|
|
|
|
3,553
|
|
|
|
6,424
|
|
|
|
192
|
|
|
|
6,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other debt
|
|
|
4,316
|
|
|
|
919
|
|
|
|
5,235
|
|
|
|
12,011
|
|
|
|
(829
|
)
|
|
|
11,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
4,316
|
|
|
|
(74,297
|
)
|
|
|
(69,981
|
)
|
|
|
12,011
|
|
|
|
(829
|
)
|
|
|
11,182
|
|
Income (expense) related to
derivatives(8)
|
|
|
154
|
|
|
|
|
|
|
|
154
|
|
|
|
226
|
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding of interest-earning assets
|
|
$
|
4,470
|
|
|
$
|
(74,297
|
)
|
|
$
|
(69,827
|
)
|
|
$
|
12,237
|
|
|
$
|
(829
|
)
|
|
$
|
11,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,845
|
|
|
$
|
(2,062
|
)
|
|
$
|
(217
|
)
|
|
$
|
8,340
|
|
|
$
|
1,937
|
|
|
$
|
10,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes mortgage loans and mortgage-related securities traded,
but not yet settled.
|
(2)
|
We calculate average balances based on their amortized cost.
|
(3)
|
Interest income (expense) includes accretion of the portion of
impairment charges recognized in earnings expected to be
recovered.
|
(4)
|
Non-performing loans, where interest income is generally
recognized when collected, are included in average balances.
|
(5)
|
Loan fees, primarily consisting of delivery fees, included in
interest income for mortgage loans held by consolidated trusts
were $127 million, $0 million, and $0 million for
2010, 2009 and 2008, respectively.
|
(6)
|
Loan fees, primarily consisting of delivery fees and multifamily
prepayment fees, included in unsecuritized mortgage loan
interest income were $130 million, $78 million, and
$102 million for 2010, 2009 and 2008, respectively.
|
(7)
|
Includes current portion of long-term debt.
|
(8)
|
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 affects earnings. 2008 also includes
the accrual of periodic cash settlements of all derivatives in
qualifying hedge accounting relationships.
|
(9)
|
Rate and volume changes are calculated on the individual
financial statement line item level. Combined rate/volume
changes were allocated to the individual rate and volume change
based on their relative size.
|
Table 11 summarizes components of our net interest income.
Table 11
Net Interest
Income(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Contractual amounts of net interest
income(2)
|
|
$
|
17,684
|
|
|
$
|
18,907
|
|
|
$
|
9,001
|
|
Amortization income (expense),
net:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of impairments on available-for-sale
securities(4)
|
|
|
392
|
|
|
|
1,180
|
|
|
|
551
|
|
Asset-related amortization expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held by consolidated trusts
|
|
|
(712
|
)
|
|
|
|
|
|
|
|
|
Unsecured mortgage loans
|
|
|
311
|
|
|
|
233
|
|
|
|
52
|
|
Mortgage-related securities
|
|
|
(272
|
)
|
|
|
(1,345
|
)
|
|
|
(311
|
)
|
Other assets
|
|
|
36
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-related amortization expense, net
|
|
|
(637
|
)
|
|
|
(1,082
|
)
|
|
|
(259
|
)
|
Debt-related amortization expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities of consolidated trusts
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
Other long-term debt securities
|
|
|
(766
|
)
|
|
|
(809
|
)
|
|
|
(1,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt-related amortization expense, net
|
|
|
386
|
|
|
|
(809
|
)
|
|
|
(1,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization income (expense), net
|
|
|
141
|
|
|
|
(711
|
)
|
|
|
(856
|
)
|
Expense related to
derivatives(5)
|
|
|
(969
|
)
|
|
|
(1,123
|
)
|
|
|
(1,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
16,856
|
|
|
|
17,073
|
|
|
|
6,796
|
|
Provision for credit losses
|
|
|
(17,218
|
)
|
|
|
(29,530
|
)
|
|
|
(16,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for credit losses
|
|
$
|
(362
|
)
|
|
$
|
(12,457
|
)
|
|
$
|
(9,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Our prospective adoption of the changes in accounting standards
related to transfers of financial assets and consolidation of
VIEs significantly impacted the presentation of our financial
results. Consequently, our financial results for 2010 are not
directly comparable to our financial results for 2009 and 2008.
For more information, see NOTE 2: CHANGE IN
ACCOUNTING PRINCIPLES.
|
(2)
|
Includes the reversal of interest income accrued, net of
interest received on a cash basis related to mortgage loans that
are on non-accrual status.
|
(3)
|
Represents amortization related to premiums, discounts, deferred
fees and other adjustments to the carrying value of our
financial instruments, and the reclassification of previously
deferred balances from AOCI for certain derivatives in cash flow
hedge relationships related to individual debt issuances and
mortgage purchase transactions.
|
(4)
|
The portion of the impairment charges recognized in earnings
expected to be recovered is recognized as net interest income.
Upon our adoption of an amendment to the accounting standards
for investments in debt and equity securities on April 1,
2009, previously recognized non-credit-related
other-than-temporary impairments are no longer accreted into net
interest income.
|
(5)
|
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 affects earnings. 2008 also includes
the accrual of periodic cash settlements of all derivatives in
qualifying hedge accounting relationships.
|
Our adoption of the change to the accounting standards for
transfers of financial assets and consolidation of VIEs, as
discussed above, had the following impact on net interest income
and net interest yield for the year ended December 31,
2010, and will have similar effects on those items in future
periods:
|
|
|
|
|
we now include in net interest income both: (a) the
interest income earned on the assets held in our consolidated
single-family trusts, comprised primarily of mortgage loans,
restricted cash and cash equivalents and investments in
securities purchased under agreements to resell (the average
balance of such assets was $1.7 trillion for the year ended
December 31, 2010); and (b) the interest expense
related to the debt in the form of PCs and Other Guarantee
Transactions issued by consolidated trusts that are held by
third parties (the average balance of such debt was
$1.5 trillion for the year ended December 31, 2010).
Prior to January 1, 2010, we reflected the earnings impact
of these securitization activities as management and guarantee
income, recorded within non-interest income on our consolidated
statements of operations, and as interest income on
single-family PCs and on certain Other Guarantee Transactions
held for investment; and
|
|
|
|
we reverse accrued but uncollected interest income recognized in
prior periods on non-performing loans, where the collection of
principal and interest is not reasonably assured, and do not
recognize any further interest |