Freddie Mac 2005 Annual Report Download - page 141

common stock held in treasury), the par value of outstanding non-cumulative perpetual preferred stock, additional paid-in
capital and retained earnings, as determined in accordance with GAAP. Total capital includes Core capital and general
reserves for mortgage and foreclosure losses and any other amounts available to absorb losses that OFHEO includes by
regulation.
Minimum Capital
The minimum capital standard requires us to hold an amount of Core capital that is generally equal to the sum of
2.50 percent of aggregate on-balance sheet assets and approximately 0.45 percent of the sum of outstanding mortgage-related
securities we guaranteed and other aggregate oÅ-balance sheet obligations. As discussed below, in 2004 OFHEO
implemented a framework for monitoring our capital adequacy, which includes a mandatory target capital surplus of
30 percent over the minimum capital requirement.
Critical Capital
The critical capital standard requires us to hold an amount of Core capital that is generally equal to the sum of
1.25 percent of aggregate on-balance sheet assets and approximately 0.25 percent of the sum of outstanding mortgage-related
securities we guaranteed and other aggregate oÅ-balance sheet obligations.
Risk-Based Capital
The risk-based capital standard requires the application of a stress test to determine the amount of Total capital that we
must hold to absorb projected losses resulting from adverse interest-rate and credit-risk conditions speciÑed by the GSE Act
and adds 30 percent additional capital to provide for management and operations risk. The adverse interest-rate conditions
prescribed by the GSE Act include one scenario in which 10-year Treasury yields rise by as much as 75 percent (up-rate
scenario) and one in which they fall by as much as 50 percent (down-rate scenario). The credit risk component of the stress
tests simulates the performance of our mortgage portfolio based on loss rates for a benchmark region. The criteria for the
benchmark region are established by the GSE Act and are intended to capture the credit-loss experience of the region that
experienced the highest historical rates of default and severity of mortgage losses for two consecutive origination years.
ClassiÑcation
OFHEO monitors our performance with respect to the three regulatory capital standards by classifying our capital
adequacy not less than quarterly.
To be classiÑed as ""adequately capitalized,'' we must meet both the risk-based and minimum capital standards. If we
fail to meet the risk-based capital standard, we cannot be classiÑed higher than ""undercapitalized.'' If we fail to meet the
minimum capital requirement but exceed the critical capital requirement, we cannot be classiÑed higher than ""signiÑcantly
undercapitalized.'' If we fail to meet the critical capital standard, we must be classiÑed as ""critically undercapitalized.'' In
addition, OFHEO has discretion to reduce our capital classiÑcation by one level if OFHEO determines that we are engaging
in conduct OFHEO did not approve that could result in a rapid depletion of Core capital or determines that the value of
property subject to mortgage loans we hold or guarantee has decreased signiÑcantly.
When we are classiÑed as adequately capitalized, we generally can pay a dividend on our common or preferred stock or
make other capital distributions (which includes common stock repurchases and preferred stock redemptions) without prior
OFHEO approval so long as the payment would not decrease Total capital to an amount less than our risk-based capital
requirement and would not decrease our Core capital to an amount less than our minimum capital requirement.
If we were classiÑed as undercapitalized, we would be prohibited from making a capital distribution that would decrease
our Core capital to an amount less than our minimum capital requirement. We also would be required to submit a capital
restoration plan for OFHEO approval, which could adversely aÅect our ability to make capital distributions.
If we were classiÑed as signiÑcantly undercapitalized, we would be able to make a capital distribution only if OFHEO
determined that the distribution satisÑed certain statutory standards. Under these circumstances, we would be prohibited
from making any capital distribution that would decrease our Core capital to less than the critical capital level, and
OFHEO also could take action to limit our growth, require us to acquire new capital or restrict us from activities that create
excessive risk. We also would be required to submit a capital restoration plan for OFHEO approval, which could adversely
aÅect our ability to make capital distributions.
If we were classiÑed as critically undercapitalized, OFHEO would be required to appoint a conservator for us unless
OFHEO made a written Ñnding that it should not do so and the Secretary of the Treasury concurred in that determination.
Performance Against Regulatory Capital Standards
OFHEO has never classiÑed us as other than ""adequately capitalized,'' the highest possible classiÑcation, reÖecting our
consistent compliance with the minimum, critical and risk-based capital requirements.
125 Freddie Mac