Freddie Mac 2009 Annual Report Download

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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, 2009
Commission File Number: 000-53330
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Freddie Mac
Federally chartered corporation
(State or other jurisdiction of
incorporation or organization)
8200 Jones Branch Drive
McLean, Virginia 22102-3110
(Address of principal executive
offices, including zip code)
52-0904874
(I.R.S. Employer
Identification No.)
(703) 903-2000
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Name of each exchange
on which registered:
Voting Common Stock, no par value per share New York Stock Exchange
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
5% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
5.1% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
5.79% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
5.81% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
6% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
5.7% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Variable Rate, Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
6.42% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
5.9% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
5.57% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
5.66% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
6.02% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
6.55% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes nNo
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 nNo
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 No n
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). nYe s nNo
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 registrant’s 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.
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 nAccelerated filer
Non-accelerated filer (Do not check if a smaller reporting company) nSmaller reporting company n
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes nNo
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, 2009 (the last business day of the registrant’s most recently completed second fiscal quarter) was
$401.9 million.
As of February 11, 2010, there were 648,377,977 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III (Items 10, 11, 12, 13 and 14) will be
filed in an amendment to this annual report on Form 10-K on or before April 30, 2010.

Table of contents

  • Page 1
    ...File Number: 000-53330 Federal Home Loan Mortgage Corporation (Exact name of registrant as specified in its charter) Federally chartered corporation (State or other jurisdiction of incorporation or organization) Freddie Mac 8200 Jones Branch Drive McLean, Virginia 22102-3110 (Address of principal...

  • Page 2
    ... Corporate Governance...Item 11. Executive Compensation ...Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Item 13. Certain Relationships and Related Transactions, and Director Independence ...Item 14. Principal Accounting Fees and Services...

  • Page 3
    ... Interest Entities ...Note 6: Investments in Securities ...Note 7: Mortgage Loans and Loan Loss Reserves ...Note 8: Real Estate Owned ...Note 9: Debt Securities and Subordinated Borrowings...Note 10: Freddie Mac Stockholders' Equity (Deficit) ...Note 11: Regulatory Capital ...Note 12: Stock-Based...

  • Page 4
    ... on our consolidated balance sheets the mortgage loans underlying our issued single-family PCs and certain Structured Transactions as mortgage loans held-for investment by consolidated trusts, at amortized cost. Correspondingly, we will also prospectively recognize single-family PCs and certain...

  • Page 5
    ... Mac to pay senior preferred stock dividends by waiving the right to claim future tax benefits of the LIHTC investments. However, after further consultation with Treasury and consistent with the terms of the Purchase Agreement, the Acting Director informed us we may not sell or transfer the assets...

  • Page 6
    ... 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...

  • Page 7
    ... Bureau news release dated January 27, 2010 (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 mortgage portfolio to obtain a national index. The depreciation rate...

  • Page 8
    ... Freddie Mac: Buys Mortgages Guarantees PCs Retains Investments in PCs and Mortgages Sells PCs to Investors PC Trusts We guarantee the payment of principal and interest of PCs created in this process in exchange for a combination of monthly management and guarantee fees and initial upfront cash...

  • Page 9
    ... Agreement expired on December 31, 2009. We did not make any borrowings under the Lending Agreement. For information on the potential impact of the completion of the Federal Reserve's mortgage-related securities and debt purchase programs on our business, see "MD&A - LIQUIDITY AND CAPITAL RESOURCES...

  • Page 10
    ...loans in PCs. As of December 31, 2009, the total unpaid principal balance of such mortgages was approximately $70.2 billion. Debt Financing We fund our on balance sheet investment activities in our Investments and Multifamily segments by issuing short-term and long-term debt. Competition for funding...

  • Page 11
    ... one- to four-family properties. A majority of the single-family mortgages we purchased in 2009 were 30-year and 15-year fixed-rate mortgages. Our charter places an upper limitation, called the "conforming loan limit," on the original principal balance of singlefamily mortgage loans we purchase. No...

  • Page 12
    ... securities in exchange for compensation. We seek to generally hold PCs instead of single-family mortgage loans for investment purposes, primarily to provide us with flexibility in determining what to sell or hold and to allow for more cost effective interest-rate risk management. 9 Freddie Mac

  • Page 13
    ...unpaid principal balance of the loans and initial upfront payments referred to as delivery fees. We recognize the fair value of the right to receive ongoing management and guarantee fees as a guarantee asset at the inception of a guarantee. We subsequently account for the guarantee asset like a debt...

  • Page 14
    ...PURCHASE CASH AUCTION OF PC Mortgage loan PC Mortgage Lender Cash Freddie Mac (administrator) Cash (Delivery fees) Cash Securities Dealers and Investors Institutional and other fixed-income investors, including pension funds, insurance companies, securities dealers, money managers, commercial...

  • Page 15
    ...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...

  • Page 16
    ... U.S. HOUSING MARKET" for further information. We enter into long-term standby commitments for mortgage assets held by third parties that require us to purchase loans from lenders when the loans subject to these commitments meet certain delinquency criteria. During 2009 and 2008, we 13 Freddie Mac

  • Page 17
    ... accounting standards for transfers of financial assets and the consolidation of VIEs, the cost of purchasing most delinquent loans from PCs will be less than the cost of continued guarantee payments to security holders. As of December 31, 2009, the total unpaid principal balance of such mortgages...

  • Page 18
    ... to loan limits for certain high-cost areas under the Reform Act, which we refer to as "superconforming" mortgages, to constitute up to 10% of the original principal balance of TBA pools. Credit Risk Our Single-family Guarantee segment is responsible for pricing and managing credit risk related to...

  • Page 19
    ... that file electronically with the SEC. Our corporate governance guidelines, codes of conduct for employees and members of the Board of Directors (and any amendments or waivers that would be required to be disclosed) and the charters of the Audit, Business and Risk, Compensation, Executive and...

  • Page 20
    ... the systemic risk that has contributed directly to the instability in the current market." These actions included the following: • placing us and Fannie Mae in conservatorship; • the execution of the Purchase Agreement, pursuant to which we issued to Treasury both senior preferred stock and...

  • Page 21
    ... as of September 8, 2008 to $51.7 billion as of December 31, 2009. Our annual dividend obligation on the senior preferred stock, based on that liquidation preference, is $5.2 billion, which is in excess of our annual historical earnings in most periods. Under the Purchase Agreement, our ability to...

  • Page 22
    ... Mac to pay senior preferred stock dividends by waiving the right to claim future tax benefits of the LIHTC investments. However, after further consultation with Treasury and consistent with the terms of the Purchase Agreement, the Acting Director informed us we may not sell or transfer the assets...

  • Page 23
    ... 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. In a Fact Sheet dated September 7, 2008...

  • Page 24
    ...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...

  • Page 25
    ... 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 Treasury's temporary authority to purchase obligations and other securities issued by Freddie Mac does not affect Treasury's funding...

  • Page 26
    ..., 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: (1) the amount necessary to cure the payment defaults on our debt and Freddie Mac mortgage...

  • Page 27
    ...); • 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); • terminate the...

  • Page 28
    ...dividends on common or preferred stock (other than the senior preferred stock) without the prior written consent of Treasury; and • 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...

  • Page 29
    ... transition in markets and anticipates that its purchases under this program will be completed by the end of the first quarter of 2010. On November 4, 2009, the Federal Reserve announced that it was reducing the maximum amount of its purchases of direct obligations of Freddie Mac, Fannie Mae and the...

  • Page 30
    ... that are expressed as percentages of the total number of mortgages we purchased that finance the purchase of single-family, owner-occupied properties located in metropolitan areas. On July 28, 2009, FHFA issued a final rule that adjusted our goals for 2009 to the levels set forth in the table below...

  • Page 31
    ... and flexible underwriting guidelines to facilitate a secondary market for mortgages for very low-, low- and moderate-income families in those markets. Effective for 2010, FHFA is required to establish a manner for annually: (1) evaluating whether and to what extent Freddie Mac and Fannie Mae have...

  • Page 32
    ...points for each dollar of the unpaid principal balance of total new business purchases, and allocate or transfer such amount (i) to HUD to fund a Housing Trust Fund established and managed by HUD and (ii) to a Capital Magnet Fund established and managed by Treasury. FHFA has the authority to suspend...

  • Page 33
    ... 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...

  • Page 34
    ... actions FHFA, Treasury, the Federal Reserve and our management may take; • the impact of the restrictions and other terms of the conservatorship, the Purchase Agreement, the senior preferred stock and the warrant on our business, including our ability to pay the dividend on the senior preferred...

  • Page 35
    ...the fair value of certain instruments or assets; • preferences of originators in selling into the secondary mortgage market; • changes to our underwriting requirements or investment standards for mortgage-related products; • investor preferences for mortgage loans and mortgage-related and debt...

  • Page 36
    ... yield curve, implied volatility or mortgage-to-debt OAS, which could increase realized and unrealized mark-to-fair value losses recorded in earnings or AOCI; • limitations in our access to the public debt markets, or increases in our debt funding costs; • establishment of a valuation allowance...

  • Page 37
    ... 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...

  • Page 38
    Freddie Mac to pay senior preferred stock dividends by waiving the right to claim future tax benefits of the LIHTC investments. However, after further consultation with Treasury and consistent with the terms of the Purchase Agreement, the Acting Director informed us we may not sell or transfer the ...

  • Page 39
    ... and our role in the secondary mortgage market. 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 and others in management. For example...

  • Page 40
    ... 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...

  • Page 41
    ... 31, 2009, the unpaid principal balance of PCs and Structured Securities held by third parties was $1.5 trillion. 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...

  • Page 42
    ...Higher Risk Single-Family Mortgage Loans on our Consolidated Balance Sheets" for information on our classification of loans and mortgage-related securities as Alt-A. For a significant percentage of the mortgages we purchase, we have agreed to permit our seller/servicers to underwrite the loans using...

  • Page 43
    ... counterparty risk are with: • mortgage seller/servicers; • mortgage insurers; • issuers, guarantors or third-party providers of other credit enhancements (including bond insurers); • counterparties to short-term lending and other investment-related agreements and cash equivalent...

  • Page 44
    ... actions that could restrict the mortgage insurer's ability, in certain states, to write new business, and thus could negatively impact our access to mortgage insurance for high LTV loans. In addition, if a regulator determined that a mortgage insurer lacked sufficient capital to pay 41 Freddie Mac

  • Page 45
    ...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 the current environment, many mortgage insurers are restricting the issuance of insurance on new mortgages with higher LTV ratios...

  • Page 46
    ... 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. Since 2008, the ratings on our non-agency mortgage-related securities backed by...

  • Page 47
    ... by the end of the first quarter of 2010. It is difficult at this time to predict the impact that the completion of the Federal Reserve's mortgage-related securities purchase program will have on our business and the U.S. mortgage market. It is possible that interest-rate spreads on mortgage-related...

  • Page 48
    ... mortgage-related securities purchase program or other events could materially impact our fair value of net assets and affect future results of operations, stockholders' equity (deficit) and fair value of net assets. OAS is an estimate of the yield spread between a given security and an agency debt...

  • Page 49
    ... FAIR VALUE BALANCE SHEETS ANALYSIS - Discussion of Fair Value Results" for a more detailed description of the impacts of changes in mortgage-to-debt OAS. The Federal Reserve's program to purchase GSE mortgage-related securities is expected to be completed by the end of the first quarter of...

  • Page 50
    ... increase in losses and write-downs relating to our assets during 2008 and 2009, 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...

  • Page 51
    ... for financial accounting and reporting purposes and to manage risk. For example, we use models in determining the fair value of financial instruments for which independent price quotes are not available or reliable, or in extrapolating third-party values to certain of our assets and liabilities...

  • Page 52
    ... 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 - Valuation...

  • Page 53
    ... 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 but not limited to: (a) processing functions for trade capture, market risk...

  • Page 54
    ... including changes to our underwriting guidelines and the expanded use of targeted initiatives to reach underserved populations. For example, we may purchase loans and mortgage-related securities that offer lower expected returns on our investment and increase our exposure to credit losses. Doing so...

  • Page 55
    ...pending legal proceedings and "NOTE 15: INCOME TAXES" to our consolidated financial statements for information about IRS examinations. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES As of February 11, 2010, our principal offices consist of five office buildings in McLean, Virginia. We...

  • Page 56
    ... not pay any dividends on Freddie Mac's common stock or on any series of Freddie Mac's 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. See also...

  • Page 57
    ...and with Treasury's consent, FHFA directed us and the boards of directors of our REIT subsidiaries to (i) declare and pay dividends for one quarter on the preferred shares of our REIT subsidiaries during the fourth quarter of 2009 which the REITs paid for the quarter ended September 30, 2008 and (ii...

  • Page 58
    ... three months ended December 31, 2009, under the Employee Plans and Directors' Plan, no restricted stock units were granted and restrictions lapsed on 58,446 restricted stock units. See "NOTE 12: STOCK-BASED COMPENSATION" to our consolidated financial statements for more information. 55 Freddie Mac

  • Page 59
    ... ended December 31, 2009. Additionally, we do not currently have any outstanding authorizations to repurchase common or preferred stock. Under the Purchase Agreement, we cannot repurchase our common or preferred stock without Treasury's prior consent, and we may only purchase or redeem the senior...

  • Page 60
    ... in the form of a PC, such as long-term standby commitments and credit enhancements for multifamily housing revenue bonds. (5) Ratio computed as net income (loss) attributable to Freddie Mac divided by the simple average of the beginning and ending balances of total assets. (6) Ratio computed as non...

  • Page 61
    ...home price appreciation in most states, higher mortgage delinquency rates and higher loss severities, contributed to large credit-related expenses during 2009. Except for the first quarter of 2009, we maintained positive net worth for the year. We received cash proceeds from two draws under Treasury...

  • Page 62
    ... Mac to pay senior preferred stock dividends by waiving the right to claim future tax benefits of the LIHTC investments. However, after further consultation with Treasury and consistent with the terms of the Purchase Agreement, the Acting Director informed us we may not sell or transfer the assets...

  • Page 63
    ... standby commitments to purchase single-family and multifamily mortgages from a financial institution that provides short-term loans, known as warehouse lines of credit, to mortgage originators. In October 2009, we announced a pilot program to help our single-family and multifamily seller/servicers...

  • Page 64
    ... quarterly beginning March 31, 2011. To date, we received an aggregate of $50.7 billion in funding under the Purchase Agreement; • in November 2008, the Federal Reserve established a program to purchase: (i) our direct obligations and those of Fannie Mae and the FHLBs; and (ii) mortgage-related...

  • Page 65
    ... these trusts at their unpaid principal balances. As such, we will prospectively recognize on our consolidated balance sheets the mortgage loans underlying our issued single-family PCs and certain Structured Transactions as mortgage loans held-for-investment by consolidated trusts, at amortized cost...

  • Page 66
    ... 2009, reflected $4.1 billion of dividends on the senior preferred stock. Net interest income was $17.1 billion for 2009, compared to $6.8 billion for 2008. In 2009, we held higher amounts of fixed-rate mortgage loans and investments in agency mortgage-related securities and had lower funding costs...

  • Page 67
    ... Earnings, net of taxes: Investments ...Single-family Guarantee ...Multifamily ...All Other ...Reconciliation to GAAP net income (loss) attributable to Freddie Mac: Derivative- and debt-related adjustments ...Credit guarantee-related adjustments ...Investment sales, debt retirements and fair value...

  • Page 68
    ...dividends paid to Treasury on our senior preferred stock during 2009 under the Purchase Agreement. The increase in the fair value of our net assets, before capital transactions, during 2009 was principally related to an increase in the fair value of our mortgage loans and our investments in mortgage...

  • Page 69
    ... authority. In addition, market conditions could limit the availability of our investments in mortgage-related assets as a significant source of funding. Based on the current aggregate liquidation preference of the senior preferred stock, Treasury is entitled to annual cash dividends of $5.2 billion...

  • Page 70
    ... credit risk exposure arises from agreements with: • mortgage seller/servicers; • mortgage insurers; • issuers, guarantors or third-party providers of other credit enhancements (including bond insurers); • counterparties to short-term lending and other investment-related agreements and cash...

  • Page 71
    ... purchase program, which will make it less affordable to buy a home; and • the likelihood of continued high unemployment rates. Single-Family Mortgage Portfolio The following statistics illustrate the credit deterioration of loans in our single-family mortgage portfolio, which consists of single...

  • Page 72
    ...portfolios. (2) Single-family delinquency rate information is based on the number of loans that are 90 days or more past due and those in the process of foreclosure, excluding Structured Transactions. Mortgage loans whose contractual terms have been modified under agreement with the borrower are not...

  • Page 73
    ... credit quality of the single-family loans we acquired in 2009 improved, as compared to loans acquired in recent years, as measured by original LTV ratios and FICO scores. We believe this improvement was the result of: (i) changes in underwriting guidelines we implemented during 2008 and into 2009...

  • Page 74
    ...of our mortgage servicers. To the extent servicers do not complete loan modifications with eligible borrowers or are unable to process the increasing volume of foreclosures, our credit losses could increase. Investments in Non-Agency Mortgage-Related Securities Our investments in non-agency mortgage...

  • Page 75
    ... of the amounts currently recorded on our consolidated balance sheets. Our maximum potential off-balance sheet exposure to credit losses relating to our PCs, Structured Securities and other mortgage-related guarantees is primarily represented by the unpaid principal balance of the related loans and...

  • Page 76
    ...) on investments ...Total gains (losses) on investments...Gains (losses) on debt recorded at fair value ...Gains (losses) on debt retirement ...Recoveries on loans impaired upon purchase ...Foreign-currency gains (losses), net ...Low-income housing tax credit partnerships ...Trust management income...

  • Page 77
    ... 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...

  • Page 78
    ...-earning assets: Mortgage loans ...Mortgage-related securities(5) ...Non-mortgage related securities(5) ...Cash and cash equivalents ...Federal funds sold and securities purchased under agreements to resell . Total interest-earning assets ...Interest-bearing liabilities: Short-term debt ...Long-term...

  • Page 79
    ...rate assets. These items were partially offset by the impact of declining short-term interest rates on floating-rate mortgage-related and non-mortgage-related securities. Net interest income and net interest yield during 2009 also benefited from the funds we received from Treasury under the Purchase...

  • Page 80
    ... income and net interest yield on a fully taxable-equivalent basis increased during 2008 compared to 2007 primarily due to purchases of fixed-rate assets at wider spreads relative to our funding costs, a decrease in funding costs due to the replacement of higher cost short- and long-term debt...

  • Page 81
    ... our PCs or Structured Securities. Subsequent changes in the fair value of the future cash flows of the guarantee asset are reported in current period income as gains (losses) on guarantee asset. Gains (losses) on guarantee asset reflects: • reductions related to the management and guarantee fees...

  • Page 82
    ... in fair value of future management and guarantee fees are driven by expected changes in interest rates that affect the estimated life of the mortgages underlying our PCs and Structured Securities issued and the related discount rates used to determine the net present value of the cash flows. For...

  • Page 83
    ... from higher refinance activity. We estimate that home prices decreased nationwide by approximately 0.8% during 2009, based on our own index of our single-family mortgage portfolio, compared to an estimated decrease of 11.7% during 2008. Amortization income increased in 2008 compared to 2007. This...

  • Page 84
    ... not designated as hedging instruments and our overall risk management strategies. (3) Primarily represents purchased interest rate caps and floors, purchased put options on agency mortgage-related securities, as well as certain written options, including guarantees of stated final maturity...

  • Page 85
    ...the substantive economic equivalent of callable debt. However, the use of these derivatives may expose us to additional counterparty credit risk. Due to limits on our ability to issue long-term and callable debt in the second half of 2008 and the first few months of 2009, we pursued these strategies...

  • Page 86
    ... of the net deferred losses in AOCI at December 31, 2009 related to closed cash flow hedges. The scheduled amortization is based on a number of assumptions. Actual amortization will differ from the scheduled amortization, perhaps materially, as we make decisions on debt funding levels or as...

  • Page 87
    ... 31, 2008, primarily due to the increased balance of agency mortgage-related securities. The increased balance in our investments in trading securities, combined with a steepening yield curve and tightening OAS levels, contributed $3.3 billion to the gains on these trading securities during 2009. In...

  • Page 88
    ...of amortized cost or fair value, which is evaluated each period by aggregating loans based on the mortgage product type. During 2009, we transferred $10.6 billion of single-family mortgage loans from held-for-sale to held-for-investment. The majority of these loans were originally purchased with the...

  • Page 89
    ...where the property is located in states and regions where home prices have remained weak during 2009, which has limited our recoveries. Commencing January 1, 2010, we no longer recognize losses on loans purchased from PC pools related to our singlefamily PC trusts and certain Structured Transactions...

  • Page 90
    ... Mac to pay senior preferred stock dividends by waiving the right to claim future tax benefits of the LIHTC investments. However, after further consultation with Treasury and consistent with the terms of the Purchase Agreement, the Acting Director informed us we may not sell or transfer the assets...

  • Page 91
    ...which we believe were positively affected by the impact of state and federal government actions, including incentives to first time homebuyers and foreclosure suspensions, led to a stabilization in loss severity used to estimate our single-family loan loss reserves in the last half of 88 Freddie Mac

  • Page 92
    ... on loans purchased from PC pools related to our single-family PC trusts and certain Structured Transactions due to adoption of the amendments to the accounting standards for transfers of financial assets and consolidation of VIEs. See "NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Recently...

  • Page 93
    ... accounting standards for transfers of financial assets and the consolidation of VIEs, the cost of purchasing most delinquent loans from PCs will be less than the cost of continued guarantee payments to security holders. As of December 31, 2009, the total unpaid principal balance of such mortgages...

  • Page 94
    ... responsible for investment activity in single-family mortgages and mortgage-related securities, other investments, debt financing, and managing our interest rate risk, liquidity and capital positions. We invest principally in mortgage-related securities and single-family mortgages. 91 Freddie Mac

  • Page 95
    ... long-term debt with lower cost debt and (b) an increase in the average size of our investments in single-family mortgage loans and mortgage-related securities, including an increase in our holdings of fixed-rate assets. In addition, net interest income and net interest yield during 2009 benefited...

  • Page 96
    ...cost short- and long-term debt with lower cost debt issuances, and growth in the mortgage-related investments portfolio. Partially offsetting these increases in Segment Earnings net interest income and Segment Earnings net interest yield were the impact of declining rates on our floating rate assets...

  • Page 97
    ... of estimates of float, net of our cost of funding advances, and compensating interest. Float is the income earned from the temporary investment of cash payments received from loan servicers for borrower payments and prepayments in advance of the date that payments are due to PC holders. The cost of...

  • Page 98
    ... from interest earned on principal and interest cash flows between the time they were remitted to us by servicers and the date of distribution to our PCs and Structured Securities holders was recorded to net interest income. (2) 2009 and 2008 includes an allocation of the non-cash charge related to...

  • Page 99
    ... higher average FICO scores and lower original LTV ratios (for which we receive a lower fee), and a reduction in our purchases of interest-only and lower documentation mortgage loans. During 2009, 2008 and 2007 our Segment Earnings provision for credit losses for the Single-family Guarantee segment...

  • Page 100
    ... loans in our single-family credit guarantee portfolio had estimated current LTV ratios above 90%, excluding second liens held by third parties, at December 31, 2009 as compared to 23% and 10% at December 31, 2008 and 2007, respectively. In general, higher total LTV ratios indicate that the borrower...

  • Page 101
    .... (2) 2009 and 2008 include an allocation of the non-cash charge related to the establishment of the partial valuation allowance against our deferred tax assets, net that are not included in Segment Earnings. (3) Consists of unpaid principal balance of all multifamily mortgage loan purchases, net of...

  • Page 102
    ... management and guarantee income and, to a lesser extent, an increase in bond application fees during 2008 compared to 2007. The multifamily mortgage market differs from the residential single-family market in several respects. The likelihood that a multifamily borrower will make scheduled payments...

  • Page 103
    ... the last three quarters of 2009 for mortgage-related investments. Federal Funds Sold and Securities Purchased Under Agreements to Resell Federal funds sold and securities purchased under agreements to resell is an important aspect to our cash flow and asset and liability management and our ability...

  • Page 104
    ... millions) Fair Value Available-for-sale mortgage-related securities: Freddie Mac ...Subprime ...Commercial mortgage-backed securities ...Option ARM ...Alt-A and other ...Fannie Mae ...Obligations of states and political subdivisions ...Manufactured housing ...Ginnie Mae ...Total available-for-sale...

  • Page 105
    ..., $14.8 billion of Treasury bills and $0.5 billion of FDIC-guaranteed corporate medium-term notes that we could sell to meet mortgage-funding needs, provide diverse sources of liquidity or help manage the interest rate risk inherent in mortgage-related assets. We recorded net impairment of available...

  • Page 106
    ... Director's February 2, 2010 letter 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 has stated that, given the size of our current mortgage-related investments portfolio...

  • Page 107
    ... Rate 2009 Variable Rate Fixed Total Rate (in millions) 2008 Variable Rate Total PCs and Structured Securities:(1) Single-family(2) ...Multifamily ...Total PCs and Structured Securities ...Non-Freddie Mac mortgage-related securities: Agency mortgage-related securities:(3) Fannie Mae: Single-family...

  • Page 108
    ... information on certain higher risk categories of single-family loans underlying our PCs and Structured Securities, see "RISK MANAGEMENT - Credit Risks - Mortgage Credit Risk." • Single-family non-agency mortgage-related securities: We hold non-agency mortgage-related securities backed by subprime...

  • Page 109
    ... time during the fourth quarter of 2009. In addition, $656 million of the total other-than-temporary impairments primarily related to our non-agency securities for the fourth quarter of 2009 were non-credit-related and, thus, recognized in AOCI. We currently estimate that the future 106 Freddie Mac

  • Page 110
    ...-A and other loans. Many of the same economic factors impacting the performance of our single-family mortgage portfolio also impact the performance of our investments in non-agency mortgage-related securities. Rising unemployment, an increasing inventory of unsold homes, tight credit conditions, and...

  • Page 111
    ... 32 use the lowest rating available for each security. Table 31 - Ratings of Available-For-Sale Non-Agency Mortgage-Related-Securities backed by Subprime, Option ARM and Alt-A and Other Loans at December 31, 2009 and 2008 Credit Rating as of December 31, 2009 Unpaid Principal Balance Gross Amortized...

  • Page 112
    ... American Home Mortgage Investment Trust 2005-2 with a fair value of $370 million and a book value of $548 million; • Argent Securities, Inc. 2006-M1 with a fair value of $252 million and a book value of $476 million; • Countrywide Commercial Real Estate Financial 2007-MF1 with a fair value of...

  • Page 113
    .../FHA/VA...Total single-family ...Multifamily(2) ...Total unpaid principal balance of mortgage loans ...Premiums, discounts, deferred fees and other basis adjustments ...Lower of cost or fair value adjustments on loans held-for-sale ...Allowance for loan losses on mortgage loans held-for-investment...

  • Page 114
    ...purchases of delinquent and modified loans from the mortgage pools underlying our PCs and Structured Securities and increased cash purchase activity. As mortgage interest rates declined during 2009, single-family refinance mortgage originations increased and the volume of deliveries of single-family...

  • Page 115
    ... 31, 2009 and December 31, 2008, respectively, of loans with both original LTV ratios greater than 90% and FICO credit scores less than 620 at the time of loan origination. See "RISK MANAGEMENT - Credit Risks - Mortgage Credit Risk" for further information on single-family mortgage product types and...

  • Page 116
    ... Rate(4) Current LTV(1) All Loans Percentage Percentage Delinquency of Loans(2) Modified(3) Rate(4) Table 35 - Single-Family Mortgage Loans by Attribute Combination at December 31, 2009 By Product Type FICO Ͻ 620: 30-year amortizing fixed-rate 15-year amortizing fixed-rate ARMs/adjustable-rate...

  • Page 117
    ... loans on our consolidated balance sheet at December 31, 2009. (3) See endnote (3) to "Table 60 - Credit Performance of Certain Higher Risk Categories in the Single-Family Mortgage Portfolio." (4) Based on the number of mortgages 90 days or more delinquent or in foreclosure. See "RISK MANAGEMENT...

  • Page 118
    ... fair value and record losses on loans purchased on our consolidated statements of operations in order to reduce our net investment in acquired loans to their fair value. Commencing January 1, 2010, we no longer recognize losses on loans purchased from PC pools related to our single-family PC trusts...

  • Page 119
    ... December 2007, we have principally purchased loans that have undergone significant loss mitigation efforts prior to our purchase. Consequently, we also began purchasing an increasing number of foreclosed single-family properties directly out of PC pools during these years as compared to before 2008...

  • Page 120
    ... in 2009, supplemental loans were generally required to have a maximum total LTV of 75% and a minimum debt service coverage ratio of 1.25 when combined with the first lien mortgage. Supplemental loans generally provide the borrower with a lower cost option to obtain additional financing without...

  • Page 121
    ... amounts and related fair values of our total derivative portfolio by product type at December 31, 2009 and December 31, 2008. We record changes in fair values of our derivatives in current income or, where applicable, to the extent our cash-flow hedge accounting relationships are effective...

  • Page 122
    ... from less than one year to ten years. (6) Primarily represents purchased interest rate caps and floors, as well as certain written options, including guarantees of stated final maturity of issued Structured Securities and written call options on agency mortgage-related securities. 119 Freddie Mac

  • Page 123
    ..., 2009 2008 (in millions) Beginning balance ...Additions, net ...Other(1) ...Components of gains (losses) on guarantee asset: Return of investment on guarantee asset ...Change in fair value of future management and guarantee fees . Gains (losses) on guarantee asset ...Ending balance ... ...$ 4,847...

  • Page 124
    ... of our inability to generate sufficient taxable income. On February 18, 2010, we received a letter from the Acting Director of FHFA stating that FHFA has determined that any sale of the LIHTC investments by Freddie Mac would require Treasury's consent under the terms of the Purchase 121 Freddie Mac

  • Page 125
    ... Mac to pay senior preferred stock dividends by waiving the right to claim future tax benefits of the LIHTC investments. However, after further consultation with Treasury and consistent with the terms of the Purchase Agreement, the Acting Director informed us we may not sell or transfer the assets...

  • Page 126
    ... Rate(4) (dollars in millions) Maximum Balance, Net Outstanding at Any Month End Reference BillsË› securities and discount notes ...Medium-term notes ...Federal funds purchased and securities sold under agreements to repurchase ...Subtotal ...Current portion of long-term debt ...Short-term debt...

  • Page 127
    ... are the key components of the attribution analysis: Core Spread Income Core spread income on our investments in mortgage loans and mortgage-related securities is a fair value estimate of the net current period accrual of income from the spread between our mortgage-related investments and our debt...

  • Page 128
    ... fair value of net assets for 2009 and 2008. Table 45 - Summary of Change in the Fair Value of Net Assets 2009 2008 (in billions) Beginning balance ...Changes in fair value of net assets, before capital transactions Capital transactions: Dividends, share repurchases and issuances, net(1) ...Ending...

  • Page 129
    ... or repurchase of our debt securities; make net payments on derivative instruments; pay dividends on our senior preferred stock; purchase mortgage-related securities and other investments; and purchase mortgage loans, including modified or delinquent loans from PC pools. Under an agreement with...

  • Page 130
    ... System in our business activities. For use of the Fedwire system, the Federal Reserve requires that we fully fund our account in the system to the extent necessary to cover payments on our debt and mortgage-related securities each day, before the Federal Reserve Bank of New York, acting as our...

  • Page 131
    ... on our access to the debt markets from the expiration of the Lending Agreement. In September 2008, in an effort to conserve capital, FHFA, as Conservator, eliminated dividends on Freddie Mac common stock and preferred stock, excluding the senior preferred stock issued to Treasury under the Purchase...

  • Page 132
    ... to this improvement in our access to debt financing, as noted above in "Actions of Treasury, the Federal Reserve and FHFA." In particular, during 2009, the Federal Reserve was an active purchaser in the secondary market of our long-term debt under its purchase program and, as a result, spreads on...

  • Page 133
    ...(1) Excludes federal funds purchased and securities sold under agreements to repurchase and lines of credit. (2) Includes $536 million and $3.8 billion of medium-term notes - non-callable issued for the years ended December 31, 2009 and 2008, respectively, which were accounted for as debt exchanges...

  • Page 134
    ... investments in mortgage-related securities decrease, reducing the need for long-term debt. We use a number of different means to shorten the effective weighted average lives of our outstanding debt securities and thereby manage the duration gap, including retiring long-term debt through repurchases...

  • Page 135
    ... BALANCE SHEETS ANALYSIS - Cash and Cash Equivalents," "- Federal Funds Sold and Securities Purchased Under Agreements to Resell" and "- Investments in Securities - Non-Mortgage-Related Securities." The non-mortgage-related asset-backed investments may expose us to institutional credit risk...

  • Page 136
    ...balance of federal funds sold and eurodollars, partially offset by an increase in cash used to purchase held-for-investment mortgage loans. Cash flows used for financing activities in 2007 were $4.9 billion, which primarily resulted from a decrease in debt securities, net, preferred and common stock...

  • Page 137
    ... uses specified requirements for borrower eligibility. The program seeks to provide a uniform, consistent regime that all participating servicers must use in modifying loans held or guaranteed by all types of investors: Freddie Mac, Fannie Mae, banks and trusts backing non-agency mortgage-related...

  • Page 138
    ... the borrower's income, we will not receive such subsidies on modified mortgages owned or guaranteed by us. Table 49 presents the number of single-family loans that completed or were in process of modification under HAMP as of December 31, 2009. Table 49 - Single-Family Home Affordable Modification...

  • Page 139
    ... payments and fixed-rate terms. Under the Home Affordable Refinance Program, we allow eligible borrowers who have mortgages with high current LTV ratios to refinance their mortgages without obtaining new mortgage insurance in excess of what was already in place. The Freddie Mac Relief Refinance...

  • Page 140
    ... of additional servicer incentive fees and borrower incentive fees per modification as long as the borrower remains current on a loan modified under HAMP. We accrued $106 million in 2009 for both initial fees and recurring incentive fees not yet due. The MHA Program administrator reported that more...

  • Page 141
    ... in this program. Warehouse Lines of Credit Initiative. During the second quarter of 2009, we entered into standby commitments to purchase single-family mortgages from a financial institution that provides short-term loans, known as warehouse lines of credit, to mortgage originators. This commitment...

  • Page 142
    ... balance sheet. In lieu of repurchase, we may choose to allow a seller/servicer to indemnify us against losses on such mortgages. During 2009 and 2008, the aggregate unpaid principal balance of single-family mortgages repurchased by our seller/servicers (without regard to year of original purchase...

  • Page 143
    ... mortgage purchase volume activity for 2009 and 2008, respectively. On August 24, 2009, TBW filed for bankruptcy and announced its plan to wind down its operations. Our estimate of potential exposure to TBW at December 31, 2009 for loan repurchase obligations, excluding the estimated fair value...

  • Page 144
    ... rating and outlook of the legal entity is stated in terms of the S&P equivalent. (2) Represents the amount of unpaid principal balance at the end of the period for our single-family mortgage portfolio covered by the respective insurance type. (3) Represents the remaining aggregate contractual limit...

  • Page 145
    ... with regulatory capital requirements, which may result in regulatory actions that could restrict the insurer's ability to write new business, at least in certain states, and negatively impact our access to mortgage insurance for high LTV loans. In 2009, several mortgage insurers requested that...

  • Page 146
    ... instruments are investment grade at the time of purchase and primarily short-term in nature, thereby substantially mitigating institutional credit risk for these instruments. To minimize counterparty risk of our on-balance-sheet assets, we access government programs and initiatives designed to...

  • Page 147
    ... 31, 2008. (6) Represents the non-mortgage assets managed by us, excluding cash held at the Federal Reserve, on behalf of securitization trusts created for administration of remittances for our PCs and Structured Securities. (7) Consists of highly liquid investments that have an original maturity of...

  • Page 148
    ... obligated to deliver cash, securities or a combination of both having that market value necessary to satisfy its obligation to us under the derivative. We seek to manage our exposure to institutional credit risk related to our OTC derivative counterparties using several tools, including: • review...

  • Page 149
    ... posting threshold, as well as market movements during the time period between when a derivative was marked to fair value and the date we received the related collateral. Collateral is typically transferred within one business day based on the values of the related derivatives. 146 Freddie Mac

  • Page 150
    ... and the use of credit enhancements. Our single-family underwriting process evaluates mortgage loans using several critical risk characteristics, including the borrower's credit score, original LTV ratio and occupancy type. See "BUSINESS - Regulation and Supervision - Federal Housing Finance Agency...

  • Page 151
    ...2009 2008 (in billions) 2007 Market Data - all market participants: Total single-family mortgage originations(1) ...Non-agency mortgage-related security issuance: Backed by subprime mortgage loans(3) ...Backed by other mortgage loans(4) ...Total ...Freddie Mac Data: Purchases for our total mortgage...

  • Page 152
    ...ratio of the number of loans that entered the foreclosure process during the respective quarter divided by the number of loans in the portfolio at the end of the quarter. Excludes Structured Transactions and mortgages covered under long-term standby commitment agreements. Single-Family Underwriting...

  • Page 153
    ... mortgage or borrower underwriting characteristics. Our underwriting process evaluates mortgage loans using several critical risk characteristics, such as credit score, LTV ratio and occupancy type. Table 58 provides characteristics of our single-family new business purchases in 2009, 2008 and 2007...

  • Page 154
    ... mortgage borrower's purchase price. Second liens not owned or guaranteed by us are excluded from the LTV ratio calculation. Including secondary financing at origination, the total original LTV ratios above 90% were approximately 13% and 14% at December 31, 2009 and 2008, respectively. (3) Current...

  • Page 155
    ...as of December 31, 2009 and 2008, for the loans in our single-family mortgage portfolio with greater than 80% estimated current LTV ratios, the borrowers had a weighted average credit score at origination of 719 and 714, respectively. Credit Score Credit scores are a useful measure for assessing the...

  • Page 156
    ... borrower's monthly income relative to debt payments, LTV ratio, type of mortgage product and occupancy type. For information on our exposure to option ARM and adjustablerate loans through our holdings of non-agency mortgage-related securities, see "CONSOLIDATED BALANCE SHEETS ANALYSIS - Investments...

  • Page 157
    ... or 6%, of our investments in single-family mortgage loans on our consolidated balance sheets were classified as Alt-A at December 31, 2009 and 2008, respectively. For all of these Alt-A loans combined, the average credit score was 721, and the estimated current average LTV ratio, based on our first...

  • Page 158
    ... an original LTV ratio greater than 90%). Table 60 - Credit Performance of Certain Higher Risk(1) Categories in the Single-Family Mortgage Portfolio As of December 31, 2009 Unpaid Principal Balance Estimated Percentage Current LTV(2) Modified(3) (dollars in billions) Delinquency Rate(4) Loans with...

  • Page 159
    ...31, 2009 and 2008, approximately 14% of loans in our single-family mortgage portfolio had second lien, third-party financing at the time of origination and we estimate that these loans comprised 21% and 25%, respectively, of our delinquent loans, based on unpaid principal balances. 156 Freddie Mac

  • Page 160
    ... Current LTV(1) All Loans Percentage Percentage Delinquency of Portfolio(2) Modified(3) Rate(4) Table 61 - Single-Family Mortgage Portfolio by Attribute Combinations at December 31, 2009 By Product Type FICO Ͻ 620: 30-year amortizing fixed-rate 15-year amortizing fixed-rate ARMs/adjustable-rate...

  • Page 161
    ...loan balance of the single-family mortgage portfolio at December 31, 2009. See endnote (3) to "Table 60 - Credit Performance of Certain Higher Risk Categories in the Single-Family Mortgage Portfolio." Based on the number of mortgages 90 days or more delinquent or in foreclosure, excluding Structured...

  • Page 162
    ...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 and debt service coverage ratios at origination...

  • Page 163
    ... are excluded from the LTV ratio calculation. (3) Original debt service coverage ratio is calculated by dividing the annual net operating income ("NOI") of the property by the borrower's scheduled annual mortgage payments on the loan at the time of purchase. NOI is the amount of funds available for...

  • Page 164
    ... above, our charter generally requires that single-family mortgages with LTV ratios above 80% at the time of purchase must be covered by specified credit enhancements or participation interests. In addition, for some mortgage loans, we elect to share the default risk by transferring a portion of...

  • Page 165
    ... and pool mortgage insurance policies and other credit enhancements as discussed below related to our single-family mortgage portfolio. In 2009, there has been a significant decline in our credit enhancement coverage for new purchases compared to 2008 that is primarily a result of the high refinance...

  • Page 166
    ... certain loan-level credit enhancements, such as private mortgage insurance, that may also afford additional protection to us. In addition, we have excluded unpaid principal balances of $3.1 billion related to single-family Structured Transactions backed by HFA bonds for which delinquency data on...

  • Page 167
    ... in delinquent mortgages and providing 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...

  • Page 168
    ..., 2008 and 2007. Table 64 - Single-Family Foreclosure Alternatives(1) 2009 2008 2007 (number of loans) Loan modifications: with no change in terms(2) ...with change in terms ...with change in terms and principal forbearance . Total loan modifications(3) ...Repayment plans ...Forbearance agreements...

  • Page 169
    .... Credit Performance Delinquencies We report single-family delinquency rate information based on the number of loans that are 90 days or more past due and those in the process of foreclosure. For multifamily loans, we report delinquency rates based on net carrying values of mortgage loans 90 days or...

  • Page 170
    ...bonds. Single-family percentages are based on unpaid principal balances and multifamily percentages are based on net carrying values. (3) See "Portfolio Management Activities - Credit Performance - Delinquencies" for further information about our reported delinquency rates. During 2009, home prices...

  • Page 171
    ... unpaid principal balance outstanding as of December 31, 2009 and 99% percent of these loans were amortizing fixed-rate mortgage products where the weighted average credit score of borrowers at origination was 756. Increases in delinquency rates occurred for all single-family mortgage product types...

  • Page 172
    ... balance sheets and those that underlie our PCs and Structured Securities, categorized by product type. Table 67 - Single-Family - Delinquency Rates - By Product 2009 Percent of Number of Single-Family Loans Non-Credit-Enhanced, December 31, 2008 2007 Percent of Percent of Number of Number of Single...

  • Page 173
    ... our PC agreements to purchase mortgage loans from the related PC pools that underlie our guarantees under certain circumstances to resolve an existing or impending delinquency or default. Our practice is to purchase the loans from pools when: (a) the loans are modified; (b) foreclosure transfers...

  • Page 174
    ... Assets(1) 2009 December 31, 2008 2007 2006 (dollars in millions) 2005 Non-performing mortgage loans(2) - on balance sheet: Single-family troubled debt restructurings: Reperforming or less than 90 days delinquent ...90 days or more delinquent ...Multifamily troubled debt restructurings(3) ...Total...

  • Page 175
    ... 65 - Delinquency Rates" for a description of these regions. Our REO property inventory increased 54% during 2009 and more than doubled during 2008 as the impact of the continuing declines in single-family home prices and increasing rates of unemployment lessened the alternatives to foreclosure for...

  • Page 176
    ... with mortgage loans underlying our issued PCs and Structured Securities as well as mortgage loans recognized on our consolidated balance sheets. Table 71 - Credit Loss Performance December 31, 2009 2008 2007 (dollars in millions) REO REO balances, net: Single-family ...Multifamily...Total...REO...

  • Page 177
    ... 65 - Delinquency Rates" for a description of these regions. (2) Recoveries of charge-offs primarily result from foreclosure alternatives and REO acquisitions on loans where a share of default risk has been assumed by mortgage insurers, servicers or other third parties through credit enhancements...

  • Page 178
    ... purchased from mortgage pools underlying our PCs, Structured Securities and long-term standby agreements to establish the initial recorded investment in these loans at the date of our purchase; (b) approximately $375 million during 2009 related to agreements with seller/servicers where the transfer...

  • Page 179
    ... default rates. Based on the single-family mortgage portfolio, excluding Structured Securities backed by Ginnie Mae Certificates. Calculated as the ratio of NPV of increase in credit losses to the single-family mortgage portfolio, defined in note (3) above. Interest Rate and Other Market Risks...

  • Page 180
    .... We began to purchase refinance mortgages originated under the Freddie Mac Relief Refinance MortgageSM program in April 2009 and purchased $34.7 billion in unpaid principal balance of these loans during 2009, which is included in our total 2009 refinance purchases noted above. 177 Freddie Mac

  • Page 181
    ... loans. Mortgage loans held in our mortgage-related investments portfolio reflect the unpaid principal balance of the loan. (2) Includes FHA/VA and other federally guaranteed loans in the amounts of $3.1 billion, $1.4 billion and $1.2 billion for single-family for the years 2009, 2008 and 2007...

  • Page 182
    ... 2009 December 31, 2008 (in millions) 2007 Segment Portfolios: Investments - Mortgage-related investments portfolio: Single-family mortgage loans ...Guaranteed PCs and Structured Securities in the mortgage-related investments portfolio . . Non-Freddie Mac mortgage-related securities in the mortgage...

  • Page 183
    ...net additions to the mortgage-related investments portfolio for delinquent mortgage loans and balloon/reset mortgages purchased out of PC pools. (2) Includes amortizing ARMs with 1-, 3-, 5-, 7- and 10-year initial fixed-rate periods. We did not purchase any option ARM loans during 2007, 2008 or 2009...

  • Page 184
    ... Single-Family Guarantee Segment" and "RISK MANAGEMENT - Credit Risks - Mortgage Credit Risk" for information on our PCs and Structured Securities, including Structured Transactions. We provide long-term stand-by commitments to certain of our customers, which obligate us to purchase delinquent loans...

  • Page 185
    ... principal balances and excludes mortgage-related securities traded, but not yet settled. Also includes long-term standby commitments for mortgage assets held by third parties that require that we purchase loans from lenders when these loans meet certain delinquency criteria. (2) Excludes option ARM...

  • Page 186
    ... Structured Securities during 2009, 2008 and 2007, respectively. The increase of our principal credit risk exposure on Structured Securities relates only to that portion of resecuritized assets that consists of non-Freddie Mac mortgage-related securities. In addition, we enter into long-term standby...

  • Page 187
    ... are accounted for as derivatives and their fair values are reported as either derivative assets, net or derivative liabilities, net on our consolidated balance sheets. We also have purchase commitments primarily related to mortgage purchase flow business which we principally fulfill by executing PC...

  • Page 188
    ... is required for 2010. See "NOTE 16: EMPLOYEE BENEFITS" to our consolidated financial statements for additional information about contributions to our Pension Plan; • future cash settlements on derivative agreements not yet accrued, because the amount and timing of such payments are dependent...

  • Page 189
    ... consolidated balance sheets at fair value, changes in fair value are recognized in current period earnings. These include: - mortgage-related securities classified as trading, which are recorded in gains (losses) on investment activity; - derivatives with no hedge designation, which are recorded in...

  • Page 190
    ... multifamily mortgage loans held for sale purchased through our Capital Market Execution program and account for these loans at fair value. Changes in fair value are recorded through earnings in gains (losses) on investments. • REO is initially recorded at fair value less estimated costs to sell...

  • Page 191
    ... the non-agency mortgage-related securities market remained weak during 2009 with low transaction volumes, wide credit spreads and limited transparency, we value our non-agency mortgage-related securities based primarily on prices received from pricing services and dealers. The techniques used by...

  • Page 192
    ... how we determine the fair value of our guarantee asset, see "NOTE 4: RETAINED INTERESTS IN MORTGAGE-RELATED SECURITIZATIONS" to our consolidated financial statements. At December 31, 2009 and 2008, the total unpaid principal balance of PCs and Structured Securities outstanding was $1.9 trillion and...

  • Page 193
    ... Fair Value Level 1 Level 2 (dollars in millions) Level 3 Assets: Investments in securities: Available-for-sale, at fair value: Mortgage-related securities: Freddie Mac ...Subprime ...Commercial mortgage-backed securities ...Option ARM ...Alt-A and other ...Fannie Mae ...Obligations of states and...

  • Page 194
    .... For discussion of types and characteristics of mortgage loans underlying our mortgage-related securities, see "RISK MANAGEMENT - Credit Risks" and "CONSOLIDATED BALANCE SHEETS ANALYSIS - Table 28 - Characteristics of Mortgage-Related Securities." Controls over Fair Value Measurement To ensure that...

  • Page 195
    ... expected repurchases by sellers for breach of selling representations and warranties; • counterparty credit of mortgage insurers and seller/servicers; and • identification and impact assessment of macroeconomic factors, such as home price declines, rental rates and unemployment rates. No single...

  • Page 196
    ... factors include: • loan level default modeling for single-family residential mortgages that considers individual loan characteristics, including current LTV ratio, FICO score and delinquency status, requires assumptions about future home prices and interest rates, and employs internal default and...

  • Page 197
    ... is deemed to be other than temporary. Our review considers a number of factors, including but not limited to the severity and duration of the decline in fair value, remaining estimated federal income tax credits and losses relative to the recorded investment, our intent and ability to hold the...

  • Page 198
    ... likely than not that the net deferred tax assets will be realized. For more information about the evidence that management considers, see "NOTE 15: INCOME TAXES" to our consolidated financial statements. The consideration of this evidence requires significant estimates, assumptions and judgments...

  • Page 199
    ...balance sheets was significantly affected by the required adoption of new amendments to accounting standards and changing economics. Due to our January 1, 2010 adoption of new accounting standards for transfers of financial assets and the consolidation of VIEs, the cost of purchasing most delinquent...

  • Page 200
    ... as the number of delinquent loans divided by the total number of loans in the relevant PC category. (4) Represents loan-level UPB. The loan-level UPB may vary from the Fixed-rate PC UPB primarily due to guaranteed principal payments made by Freddie Mac on the PCs. In the case of Fixed-rate Initial...

  • Page 201
    ...earned by the securitization trusts on payments received from mortgage borrowers and paid to us as trust management income. With our adoption of the accounting standard for the fair value option for financial assets and liabilities on January 1, 2008, we began to designate certain of our investments...

  • Page 202
    ...spread risk. See "MD&A - CONSOLIDATED FAIR VALUE BALANCE SHEETS ANALYSIS - Key Components of Changes in Fair Value of Net Assets - Changes in Mortgage-To-Debt OAS " for additional information. We also incur basis risk when we use LIBOR- or Treasury-based instruments in our risk management activities...

  • Page 203
    ... market of our long-term debt under its purchase program and spreads on our debt and our access to the debt markets have improved in 2009 as a result of this activity. To further reduce our exposure to changes in interest rates, we hedge a significant portion of the remaining prepayment risk...

  • Page 204
    ... future business activities and strategic actions that management may take to manage interest rate risk. As such, these analyses are not intended to provide precise forecasts of the effect a change in market interest rates would have on the estimated fair value of our net assets. 201 Freddie Mac

  • Page 205
    ...daily values during the twelve months ended December 31, 2009 and 2008. Table 83 also provides PMVS-L estimates assuming an immediate 100 basis point shift in the LIBOR yield curve. Because of our expectations for higher mortgage refinance activity, in part due to our introduction of the Freddie Mac...

  • Page 206
    ... hedge the interest-rate risk exposure from the time we commit to purchase a mortgage to the time the related debt is issued. We also use derivatives to synthetically create the substantive economic equivalent of various debt funding structures. For example, the combination of a series of short-term...

  • Page 207
    ... we enter into agreements whereby we assume credit risk for mortgage loans held by third parties in exchange for a monthly fee, where we are obligated to purchase delinquent mortgage loans in certain circumstances. In addition, we purchase mortgage loans containing debt cancellation contracts, which...

  • Page 208
    ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 205 Freddie Mac

  • Page 209
    ... Company Accounting Oversight Board (United States) the supplemental consolidated fair value balance sheets of the Company as of December 31, 2009 and 2008. As explained in "Note 18: Fair Value Disclosures", the supplemental consolidated fair value balance sheets have been prepared by management to...

  • Page 210
    ... company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that...

  • Page 211
    FREDDIE MAC CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2009 2008 2007 (in millions, except share-related amounts) Interest income Investments in securities ...Mortgage loans ...Other: Cash and cash equivalents ...Federal funds sold and securities purchased under agreements to ...

  • Page 212
    FREDDIE MAC CONSOLIDATED BALANCE SHEETS December 31, 2009 2008 (in millions, except sharerelated amounts) Assets Cash and cash equivalents ...Restricted cash ...Federal funds sold and securities purchased under agreements to resell ...Investments in securities: Available-for-sale, at fair value (...

  • Page 213
    ... Freddie Mac ...Senior preferred stock dividends declared ...Preferred stock dividends declared ...Common stock dividends declared ...Dividends equivalent payments on expired stock options ...Transfer to additional paid-in capital ...Retained earnings (accumulated deficit), end of year ...AOCI, net...

  • Page 214
    ... Ended December 31, 2009 2008 2007 (in millions) Cash flows from operating activities Net loss ...Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Derivative (gains) losses ...Asset related amortization - premiums, discounts and basis adjustments ...Debt...

  • Page 215
    ...or charge for the activities separately. The management and guarantee fee is paid to us over the life of the related PCs and Structured Securities and reflected in earnings as management and guarantee income is accrued. Basis of Presentation Our financial reporting and accounting policies conform to...

  • Page 216
    ... current loan-to-value ratios, original FICO scores, geographic region, loan product, delinquency status, loan age, sourcing channel, occupancy type, and unpaid principal balance at origination. We estimate that these changes in methodology decreased our provision for credit losses and increased net...

  • Page 217
    ... have the right to purchase mortgage loans from PC pools, we recognize the mortgage loans as held-forinvestment with a corresponding payable to the trust. For periods prior to the third quarter of 2009, the right to purchase the loans was included in net cash provided by investing activities and the...

  • Page 218
    ...upfront creditrelated fees. Other investors purchase our PCs, including pension funds, insurance companies, securities dealers, money managers, commercial banks, foreign central banks and other fixed-income investors. PCs differ from U.S. Treasury securities and other fixed-income investments in two...

  • Page 219
    ... we may receive the following types of seller-provided credit enhancements related to the underlying mortgage loans. These credit enhancements are initially measured at fair value and recognized as follows: (a) pool insurance is recognized as an other asset; (b) recourse and/or indemnifications that...

  • Page 220
    ... value of the guarantee. See "NOTE 18: FAIR VALUE DISCLOSURES," for disclosure of the fair values of our mortgage-related securities, guarantee asset, and guarantee obligation. Upon subsequent sale of a Freddie Mac PC or Structured Security, we continue to account for any outstanding 217 Freddie Mac

  • Page 221
    ...-term investments and are entitled to trust management fees on the trust's assets which are recorded as other non-interest income. The funds are maintained in this separate custodial account until they are due to the PC and Structured Securities holders on their respective security payment dates...

  • Page 222
    ... single-family loans at the balance sheet date, we evaluate factors including, but not limited to: • current LTV ratios and trends in house prices; • loan product type; • geographic location; • delinquency status; • loan age; • sourcing channel; • occupancy type; • unpaid principal...

  • Page 223
    ...information. According to the initial measurement requirements in accounting standards for loans and debt securities acquired with deteriorated credit quality, loans that are purchased from PC pools are recorded on our consolidated balance sheets at the lesser of our acquisition cost 220 Freddie Mac

  • Page 224
    ... credit quality acquired from PC pools are also reported in mortgage loan interest income. Investments in Securities Investments in securities consist primarily of mortgage-related securities. We classify securities as "available-for-sale" or "trading." On January 1, 2008, we elected the fair value...

  • Page 225
    ... to fair value, with the loss recorded to gains (losses) on investment activity. Based on the new cost basis, the deferred amounts related to the impaired security were amortized over the security's remaining life in a manner consistent with the amount and timing of the future estimated cash flows...

  • Page 226
    ... Accounting Standards" and "NOTE 18: FAIR VALUE DISCLOSURES." Prior to 2008, foreign-currency denominated debt issuances were recorded at amortized cost and translated into U.S. dollars using foreign exchange spot rates at the balance sheet dates and any resulting gains or losses were reported...

  • Page 227
    ... third-party insurance or other credit enhancements are recorded when the asset is acquired. The receivable is adjusted when the actual claim is filed, and is a component of accounts and other receivables, net on our consolidated balance sheets. Material development and improvement costs relating to...

  • Page 228
    ... quoted prices for the identical liability when traded as an asset in an active market are Level 1 fair value measurements, when no adjustments to the quoted price of the asset are required. The amendment is effective for the reporting periods, including interim periods, beginning after 225 Freddie...

  • Page 229
    ... from retained earnings to AOCI. The difference between these adjustments of $5.1 billion primarily represents the release of the valuation allowance previously recorded against the deferred tax asset that is no longer required upon adoption of this amendment. See "NOTE 6: INVESTMENTS IN SECURITIES...

  • Page 230
    ..., we no longer record estimates of deferred gains or immediate "day one" losses on most guarantees. Effective January 1, 2008, we adopted an amendment to the measurement date provisions in accounting requirements for defined benefit pension and other post retirement plans. In accordance with the...

  • Page 231
    ... were recorded on our consolidated balance sheets in accounts and other receivables, net, accrued interest payable, other assets and short-term debt, as applicable. The change resulted in a decrease to total assets and total liabilities of $8.7 billion at the date of adoption, October 1, 2007, and...

  • Page 232
    ...may only be used to settle the obligations of our consolidated trusts. (2) We will no longer account for single-family PCs and certain Structured Transactions as investments in securities because we will prospectively recognize the underlying mortgage loans on our consolidated balance sheets through...

  • Page 233
    ... loans held-for-investment by consolidated trusts to unsecuritized mortgage loans held-for-investment and will record the cash tendered as an extinguishment of the related PC and Structured Transaction debt. We will continue to recognize losses on loans purchased related to our long-term standby...

  • Page 234
    ... 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...

  • Page 235
    ... year at a time, in its sole discretion, based on adverse conditions in the U.S. mortgage market. 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. Under the terms of the Purchase Agreement, Treasury is...

  • Page 236
    ... of the Treasury. We are required under the Purchase Agreement to provide annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K to Treasury in accordance with the time periods specified in the SEC's rules. In addition, our designated representative (which...

  • Page 237
    ..., 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: (i) the amount necessary to cure the payment defaults on our debt and Freddie Mac mortgage...

  • Page 238
    ... with Treasury discussed above in "Government Support for our Business" and "Housing Finance Agency Initiative - Temporary Credit and Liquidity Facilities Initiative" and "- New Issue Bond Initiative" as well as in "NOTE 9: DEBT SECURITIES AND SUBORDINATED BORROWINGS," and "NOTE 10: FREDDIE MAC...

  • Page 239
    ...servicing directly on the loans within PCs; however, we assist our seller/servicers in their loss mitigation activities on loans within PCs that become delinquent, or past due. During 2009 and 2008, we executed foreclosure alternatives on approximately 143,000 and 88,000 single-family mortgage loans...

  • Page 240
    ... Finance Agency Initiative." The assets that underlie issued PCs and Structured Securities as of December 31, 2009 consisted of approximately $1,832.3 billion in unpaid principal balance of mortgage loans or mortgage-related securities and $22.5 billion of cash and short-term investments, which...

  • Page 241
    ...In connection with our PCs, Structured Securities and other mortgage-related guarantees, we have credit protection in the form of primary mortgage insurance, pool insurance, recourse to lenders indemnification agreements with seller/servicers and other forms of credit enhancements. The total maximum...

  • Page 242
    ... balance of single-family Structured Transactions at December 31, 2009 and 2008, respectively, have pass-through structures with no additional credit enhancement. We use credit enhancements to mitigate risk on certain multifamily mortgages and mortgage revenue bonds. The types of credit enhancements...

  • Page 243
    ... products for which comparable market prices were not readily available. These amounts relate specifically to ARM products, highly seasoned loans or fixed-rate loans with coupons that are not consistent with current market rates. This portion of the guarantee asset was valued using an expected cash...

  • Page 244
    Table 4.2 - Key Assumptions Used in Measuring the Fair Value of Guarantee Asset(1) Mean Valuation Assumptions For the Year Ended December 31, 2009 2008 2007 IRRs(2) ...13.8% 12.3% 6.4% Prepayment rates(3) ...26.4% 15.5% 17.1% Weighted average lives (years) ...3.3 5.6 5.2 (1) Estimates based solely ...

  • Page 245
    ... fair value at the date of sale. We recognized net pre-tax gains (losses) on transfers of mortgage loans, PCs and Structured Securities that were accounted for as sales of approximately $1.5 billion, $151 million and $141 million for the years ended December 31, 2009, 2008 and 2007, respectively...

  • Page 246
    ... Mac to pay senior preferred stock dividends by waiving the right to claim future tax benefits of the LIHTC investments. However, after further consultation with Treasury and consistent with the terms of the Purchase Agreement, the Acting Director informed us we may not sell or transfer the assets...

  • Page 247
    ... 31, 2009 and 2008, respectively, and are included in low-income housing tax credit partnership equity investments on our consolidated balance sheets. As a limited partner, our maximum exposure to loss equals the undiscounted book value of our equity investment. Our investments in unconsolidated...

  • Page 248
    ...Fair Value Mortgage-related securities: Freddie Mac ...Subprime ...Commercial mortgage-backed securities ...Option ARM ...Alt-A and other ...Fannie Mae ...Obligations of states and political subdivisions Manufactured housing ...Ginnie Mae ...Total mortgage-related securities ...Non-mortgage-related...

  • Page 249
    ... Value Total Gross Unrealized Losses Other-ThanTemporary Temporary Impairment(1) Impairment(2) December 31, 2009 Total Total Total Mortgage-related securities: Freddie Mac ...Subprime ...Commercial mortgagebacked securities ...Option ARM ...Alt-A and other ...Fannie Mae ...Obligations of states...

  • Page 250
    ... factors include: • loan level default modeling for single-family residential mortgages that considers individual loan characteristics, including current LTV ratio, FICO score and delinquency status, requires assumptions about future home prices and interest rates, and employs internal default and...

  • Page 251
    ... case of monoline insurers, we also consider factors such as the availability of capital, generation of new business, pending regulatory action, ratings, security prices and credit default swap levels traded on the insurers. We consider loan level information including estimated current LTV ratios...

  • Page 252
    ...value since December 31, 2009 to assess if they were indicative of potential future cash shortfalls. In this assessment, we put greater emphasis on categorical pricing information than on individual prices. We use multiple pricing services and dealers to price the majority of our non-agency mortgage...

  • Page 253
    ..., option ARM, Alt-A and other ...Freddie Mac ...Fannie Mae ...Commercial mortgage-backed securities ...Obligations of states and political subdivisions ...Manufactured housing ...Total other-than-temporary impairments on mortgagerelated securities ...Non-mortgage-related securities: Asset-backed...

  • Page 254
    ... bonds owned by us, in exchange for a one-time cash payment of $113 million. (4) The balances at December 31, 2009 exclude increases in cash flows expected to be collected that will be recognized in earnings over the remaining life of the security of $709 million, net of amortization. 251 Freddie...

  • Page 255
    ... Year Ended December 31, 2009 2008 2007 (in millions) Gross Realized Gains Mortgage-related securities: Freddie Mac...Fannie Mae ...Subprime ...Commercial mortgage-backed securities ...Manufactured housing ...Obligations of states and political subdivisions ...Total mortgage-related securities...

  • Page 256
    ... of (a) the year-end interest coupon rate multiplied by the year-end unpaid principal balance and (b) the annualized amortization income or expense calculated for December 2009 (excluding the accretion of non-credit-related other-than-temporary impairments and any adjustments recorded for changes in...

  • Page 257
    ... any similar accounting standard. The unpaid principal balance of our mortgage-related investments portfolio, as defined under the Purchase Agreement and FHFA regulation, was $755.3 billion at December 31, 2009. Collateral Pledged Collateral Pledged to Freddie Mac Our counterparties are required to...

  • Page 258
    ... units. We principally purchase single-family loans as held-for-sale in cash-based exchanges where our intent is to securitize and sell our PCs at auction to investors. We purchase single-family loans designated as held-for-investment when we make required or optional repurchases of mortgages out of...

  • Page 259
    Table 7.1 - Mortgage Loans December 31, 2009 2008 (in millions) Single-family(1): Conventional Fixed-rate ...Adjustable-rate ...Total conventional ...FHA/VA - Fixed-rate ...U.S. Department of Agriculture Rural Development and other federally guaranteed Total single-family ...Multifamily(1): ...

  • Page 260
    ... for guaranteed losses related to PC pools associated with delinquent or modified loans purchased from mortgage pools underlying our PCs, Structured Securities and long-term standby agreements to establish the initial recorded investment in these loans at the date of our purchase, and (c) amounts...

  • Page 261
    ... by our standby commitments) are recorded at the lesser of our acquisition cost or the loan's fair value at the date of purchase. Our estimate of the fair value of loans purchased from PC pools is determined by obtaining indicative market prices from large, experienced dealers and using an average...

  • Page 262
    ...and excludes that portion of Structured Securities backed by Ginnie Mae Certificates and financial guarantees backed by HFA bonds. Table 7.6 - Delinquency Performance 2009 At December 31, 2008 2007 Delinquencies: Single-family:(1) Non-credit-enhanced portfolio(2) Delinquency rate ...Total number of...

  • Page 263
    ...multifamily mortgage loans owned by us or when a delinquent borrower chooses to transfer the mortgaged property to us in lieu of going through the foreclosure process. Upon acquiring single-family properties, we establish a marketing plan to sell the property as soon as practicable by either listing...

  • Page 264
    ... balance sheets and we reported $3.1 billion in such non-cash transfers in our consolidated statement of cash flows for that period. In contrast, the majority of our REO acquisitions during 2008 and 2009 resulted from cash payment for extinguishments of mortgage loans within PC pools at the time...

  • Page 265
    ...commercial banks that are members of the Federal Reserve System. At both December 31, 2009 and 2008, we had no balances in federal funds purchased and securities sold under agreements to repurchase. Table 9.2 provides additional information related to our short-term debt. Table 9.2 - Short-Term Debt...

  • Page 266
    ... ...Medium-term notes - non-callable ...Zero-coupon: Medium-term notes - callable(6) ...Medium-term notes - non-callable (7) ...Hedging-related basis adjustments ...Total senior debt ...Subordinated debt: Fixed-rate(8) ...Zero-coupon(9) ...Total subordinated debt ...Total long-term debt ... ... 2011...

  • Page 267
    ..., 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. Total dividends paid in cash during 2009 and 2008 at the direction of the Conservator were $4.1 billion and...

  • Page 268
    ...2009. See "Stock Repurchase and Issuance Programs" for additional information about our draws on the Purchase Agreement with Treasury during 2009. Table 10.1 - Senior Preferred Stock Draw Date Initial Liquidation Total Shares Shares Total Par Preference Liquidation Authorized Outstanding Value Price...

  • Page 269
    Freddie Mac stock or securities. Costs incurred in connection with the issuance of preferred stock are charged to additional paid-in capital. Table 10.2 - Preferred Stock Issue Date Shares Authorized Redemption Total Shares Total Par Price per Outstanding Outstanding Value Share Balance(1) (in ...

  • Page 270
    ... on-balance sheet assets and approximately 0.25% of the sum of our PCs and Structured Securities outstanding and other aggregate off-balance sheet obligations. Risk-Based Capital The risk-based capital standard required the application of a stress test to determine the amount of total capital that...

  • Page 271
    ...and minimum capital figures for December 31, 2009 are estimates. FHFA is the authoritative source for our regulatory capital. (3) Core capital as of December 31, 2009 and 2008 excludes certain components of GAAP total equity (deficit) (i.e., AOCI, liquidation preference of the senior preferred stock...

  • Page 272
    ..., on the senior preferred stock in cash on March 31, 2009, June 30, 2009, September 30, 2009 and December 31, 2009 at the direction of the Conservator. Subordinated Debt Commitment In October 2000, we announced our adoption of a series of commitments designed to enhance market discipline, liquidity...

  • Page 273
    ... upon service requirements. Stock Options Stock options allow for the purchase of our common stock at an exercise price equal to the fair market value of our common stock on the grant date. The 2004 Employee Plan was amended to change the definition of fair market value to the closing sales price of...

  • Page 274
    ... Directors' Plan 2008 2007 2009(3) 2008(3) 2007(3) (dollars in millions, except share-related amounts) ESPP Assumptions: Expected volatility ...Weighted average: Volatility ...Expected dividend yield ...Expected life ...Risk-free interest rate ...Valuations: Weighted average grant-date fair value...

  • Page 275
    ... after the date of the commitment. To facilitate larger and more predictable debt issuances that contribute to lower funding costs, we use interest-rate derivatives to economically hedge the interest-rate risk exposure from the time we commit to purchase a mortgage to the time the related debt is...

  • Page 276
    ... used to mitigate interest-rate risk. Credit Derivatives We have entered into credit derivatives, including risk-sharing agreements. Under these risk-sharing agreements, default losses on specific mortgage loans delivered by sellers are compared to default losses on reference pools of mortgage loans...

  • Page 277
    ... value of derivatives on our consolidated balance sheets is reported as derivative assets, net and derivative liabilities, net. (2) See "Use of Derivatives" for additional information about the purpose of entering into derivatives not designated as hedging instruments and our overall risk management...

  • Page 278
    ... in the fair value of commitments to purchase securities that are designated as cash flow hedges are recognized as basis adjustments to the related assets which are amortized in earnings as interest income. Amounts linked to interest payments on long-term debt are recorded in long-term debt interest...

  • Page 279
    ... transaction will not occur, then the deferred gain or loss associated with the hedge related to the forecasted transaction would be reclassified into earnings immediately. For further information on our deferred tax assets, net valuation allowance see "NOTE 15: INCOME TAXES." 276 Freddie Mac

  • Page 280
    ... Year Ended December 31, 2009 2008 2007 (in millions) Beginning balance(1) ...Cumulative effect of change in accounting principle(2) ...Net change in fair value related to cash flow hedging activities, net of tax(3) Net reclassifications of losses to earnings, net of tax(4) ...Ending balance...

  • Page 281
    ... subprime financing market, our risk management and our internal controls. The plaintiff seeks unspecified damages, declaratory relief, an accounting, injunctive relief, disgorgement, punitive damages, attorneys' fees, interest and costs. On November 20, 2008, the court transferred the case to the...

  • Page 282
    ... of New York, regarding the company's November 29, 2007 public offering of 8.375% Fixed to Floating Rate Non-Cumulative Perpetual Preferred Stock. On April 30, 2009, the Court consolidated the Mark case with the Kreysar case discussed below, and the plaintiffs filed a consolidated class action...

  • Page 283
    ... Mortgage Corp., or TBW, filed for bankruptcy. Prior to that date, Freddie Mac had terminated TBW's status as a seller/servicer of loans. Our current estimate of potential exposure to TBW at December 31, 2009 for loan repurchase obligations, excluding the estimated fair value of servicing rights...

  • Page 284
    ... accounting standards for investments in debt and equity securities. In 2008 and 2009, our effective tax rate differs from the federal statutory tax rate of 35% primarily due to the establishment of a partial valuation allowance against our net deferred tax assets in the third quarter of 2008. Those...

  • Page 285
    ... fees ...Basis differences related to derivative instruments ...Credit related items and reserve for loan losses ...Basis differences related to assets held for investment ...Unrealized (gains) losses related to available-for-sale securities LIHTC and AMT credit carryforward ...Other items, net...

  • Page 286
    ... to declare or pay any dividends on the preferred stock of the REITs until FHFA directs otherwise. However, at our request and with Treasury's consent, FHFA directed us and the boards of directors of our REIT subsidiaries during fourth quarter 2009 to (i) declare and pay a preferred 283 Freddie Mac

  • Page 287
    ...requirements for defined benefit pension and other post retirement plans. See "NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" for further information regarding the change to our measurement date. We accrue the estimated cost of retiree benefits as employees render the services necessary to earn...

  • Page 288
    ...accounting requirements for defined benefit pension and other post retirement plans: Service cost and interest cost(1) ...Benefits paid(1) ...Service cost ...Interest cost ...Net actuarial gain ...Benefits paid ...Curtailments ...Benefit obligation at December 31 ...Change in plan assets: Fair value...

  • Page 289
    ... Assumptions Used to Determine Net Periodic Benefit Cost Pension Benefits Year Ended December 31, 2008 Postretirement Health Benefits Year Ended December 31, 2009 2008 2007 2009 2007 Discount rate ...Rate of future compensation increase ...Expected long-term rate of return on plan assets... 6.00...

  • Page 290
    ... used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan characteristics, such as benefit commitments, demographics and actuarial funding policies. In 2009, the investment committee changed the Pension Plan...

  • Page 291
    ... at the net asset value of fund shares held by the Pension Plan. Fixed Income • Government/Corporate Bonds: Investments in this category consist of a passively managed bond fund constructed to correspond to the characteristics of the Barclays Capital Government/Credit index. These investments are...

  • Page 292
    ... salary, cash bonus and accrued interest, as applicable, net of any related distributions made to plan participants. NOTE 17: SEGMENT REPORTING Effective December 1, 2007, management determined that our operations consist of three reportable segments. As discussed below, we use Segment Earnings...

  • Page 293
    ... interest earned on each segment's assets and off-balance sheet obligations, net of allocated funding costs (i.e. debt expenses) related to such assets and obligations. These allocations, however, do not include the effects of dividends paid on our senior preferred stock. The tax benefits generated...

  • Page 294
    ... buy and hold our investments in mortgage-related assets for the long term, fund our investments with debt and use derivatives to minimize interest rate risk. The business model for our credit guarantee activity is one where we are a long-term guarantor in the conforming mortgage markets, manage...

  • Page 295
    ... management of derivatives, asset sales and debt retirements, we believe that Segment Earnings, although it differs significantly from, and should not be used as a substitute for GAAP-basis results, is indicative of the longer-term time horizon inherent in our investment-related activities. Credit...

  • Page 296
    ...with how we manage and evaluate the performance of the credit guarantee business. We purchase mortgages from seller/servicers in order to securitize and issue PCs and Structured Securities. See "NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" for a discussion of the accounting treatment of these...

  • Page 297
    ... to Freddie Mac Table 17.1 reconciles Segment Earnings to GAAP net income (loss) attributable to Freddie Mac. Table 17.1 - Reconciliation of Segment Earnings to GAAP Net Income (Loss) Year Ended December 31, 2009 2008 2007 (in millions) Segment Earnings, net of taxes: Investments ...Single-family...

  • Page 298
    ...Investments ...Single-family Guarantee ...Multifamily ...All Other ...Total Segment Earnings (loss), net of taxes . Reconciliation to GAAP net income (loss): Derivative- and debt-related adjustments . . Credit guarantee-related adjustments ...Investment sales, debt retirements and fair value-related...

  • Page 299
    ... for credit losses within our Single-family Guarantee segment; and (e) certain hedged interest benefit (cost) amounts related to trust management income from other noninterest income (loss) to net interest income within our Investments segment. (2) 2009 and 2008 include a non-cash charge related to...

  • Page 300
    ... techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Observable inputs reflect market data obtained from independent sources. Unobservable...

  • Page 301
    ... Quoted Prices in Active Markets for Identical Assets (Level 1) Assets: Investments in securities: Available-for-sale, at fair value: Mortgage-related securities: Freddie Mac ...Subprime ...Commercial mortgage-backed securities ...Option ARM ...Alt-A and other ...Fannie Mae ...Obligations of states...

  • Page 302
    ..., and minimize the use of unobservable inputs. Our Level 3 items mainly consist of non-agency residential mortgage-related securities, CMBS, certain agency mortgage-related securities and our guarantee asset. During 2009 the market for CMBS and during 2008 the market for securities backed by...

  • Page 303
    ...income(1)(2) Purchases, Unrealized Net transfers in Balance, issuances, sales and and/or out of December 31, gains (losses) (5) (6) settlements, net still held(7) Level 3 2009 (in millions) Total Investments in securities: Available-for-sale, at fair value: Mortgage-related securities: Freddie Mac...

  • Page 304
    ... classified as Level 3 under the fair value hierarchy. The fair value of multifamily held-for-investment mortgage loans is generally based on market prices obtained from a third-party pricing service provider for similar mortgages, considering the current credit risk profile for each loan, adjusted...

  • Page 305
    ... on a case-by-case basis for any new issuances of this type of debt. The changes in fair value of foreign-currency denominated debt of $(405) million and $406 million for the year ended December 31, 2009 and 2008, respectively, were recorded in gains (losses) on debt recorded at fair value in our...

  • Page 306
    ... investment in Treasury bills. Our Level 2 instruments generally consist of high credit quality agency mortgage-related securities, non-mortgagerelated asset-backed securities, interest-rate swaps, option-based derivatives and foreign-currency denominated debt. These instruments are generally valued...

  • Page 307
    ... adjustment representing the estimated present value of the additional cash flows on the mortgage coupon in excess of the coupon expected on the notional mortgage-related securities. The implied management and guarantee fee for single-family mortgage loans is also net of the related credit and other...

  • Page 308
    ... based on end-of-day closing prices obtained from third-party pricing services, therefore they are classified as Level 1 under the fair value hierarchy. The fair value of derivative assets considers the impact of institutional credit risk in the event that the counterparty does not honor its payment...

  • Page 309
    ... use state-level house price growth data and forecasts instead of national house price growth data. • We changed our valuation technique for single-family mortgage loans that were never securitized to reflect delinquency status based on non-performing loan values from dealers and transition rates...

  • Page 310
    ... - Consolidated Fair Value Balance Sheets(1) December 31, 2009 December 31, 2008 Carrying Carrying Fair Value Amount(2) Fair Value Amount(2) (in billions) Assets Cash and cash equivalents ...Federal funds sold and securities purchased under agreements to resell Investments in securities: Available...

  • Page 311
    ...fair value. Other Assets Other assets consists of investments in qualified LIHTC partnerships that generate federal income tax credits and deductible operating losses, credit enhancement contracts related to PCs and Structured Securities (pool insurance and recourse and/or indemnification agreements...

  • Page 312
    ... balance sheet purposes. Net Assets Attributable to Senior Preferred Stockholders Our senior preferred stock held by Treasury in connection with the Purchase Agreement is recorded at the stated liquidation preference for purposes of the consolidated fair value balance sheets. As the senior preferred...

  • Page 313
    ... bonds. (2) Based on the number of single-family mortgages 90 days or more delinquent or in foreclosure. Delinquencies on mortgage loans underlying certain Structured Securities and long-term standby commitments may be reported on a different schedule due to variances in industry practice. Excludes...

  • Page 314
    ... mortgage guarantees. Table 19.2 - Concentration of Credit Risk - Multifamily Loans December 31, 2009 2008 Delinquency Delinquency (2) (1) Rate Rate(2) Amount (dollars in millions) Amount(1) Original Loan-to-Value (OLTV) OLTV Ͻ 75% ...75% to 80% ...OLTV Ͼ 80% ...Original Debt Service Coverage...

  • Page 315
    ...default than other borrowers, regardless of the borrower's financial condition. The delinquency rate for single-family loans with estimated current LTV ratios greater than 100% was 14.80% and 8.08% as of December 31, 2009 and 2008, respectively. We also own investments in non-agency mortgage-related...

  • Page 316
    ... 5.2% of our single-family mortgage purchase volume activity for 2009 and 2008, respectively. On August 24, 2009, TBW filed for bankruptcy and announced its plan to wind down its operations. We estimate that the amount of potential exposure, excluding the fair value of related servicing rights, to...

  • Page 317
    ...ACCOUNTING POLICIES - Allowance for Loan Losses and Reserve for Guaranty Losses" for additional information. At December 31, 2009, these insurers provided coverage, with maximum loss limits of $62.3 billion, for $312.4 billion of unpaid principal balance in connection with our single-family mortgage...

  • Page 318
    ... earned on principal and interest cash flows held in the trust between the time funds are remitted to the trust by servicers and the date of distribution to our PC and Structured Securities holders. The trust management income is offset by interest expense we incur when a borrower prepays a mortgage...

  • Page 319
    ... tied to a counterparty's credit rating. Derivative exposures and collateral amounts are monitored on a daily basis using both internal pricing models and dealer price quotes. Collateral is typically transferred within one business day based on the values of the related derivatives. This time lag in...

  • Page 320
    ... are excluded from the weighted average common shares outstanding - basic. Table 21.1 - Earnings (Loss) Per Common Share - Basic and Diluted 2009 Year Ended December 31, 2008 2007 (dollars in millions, except per share amounts) Net loss attributable to Freddie Mac ...Preferred stock dividends and...

  • Page 321
    ... holders. We will continue to review the economics of purchasing loans 120 days or more delinquent in the future and we may reevaluate our delinquent loan purchase practices and alter them if circumstances warrant. END OF CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES 318 Freddie Mac

  • Page 322
    QUARTERLY SELECTED FINANCIAL DATA As Previously Reported: 1Q 2009 2Q 3Q (in millions, except share-related amounts) Net interest income ...Non-interest income (loss) ...Provision for credit losses ...All other non-interest expense ...Income tax benefit (expense) ...Net (income) loss attributable to...

  • Page 323
    ... over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by the Board of Directors, management and other...

  • Page 324
    ... Risk Analysis During the quarter ended December 31, 2008, we identified a material weakness related to our counterparty credit risk analysis processes. Our counterparty credit risk analysis processes impact significant estimates and judgments in our financial reporting affecting single-family loan...

  • Page 325
    ...for defaulted loans did not take into account that loss data and corresponding unpaid principal on a single loan may be reported to us over multiple periods. This had the effect of understating the estimated loss severity and, consequently, the provision for credit losses related to those Structured...

  • Page 326
    ... certain relationships and related transactions and director independence will be included in an amendment to this annual report on Form 10-K on or before April 30, 2010. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information regarding principal accountant fees and services will be included...

  • Page 327
    ... required to be filed in this annual report on Form 10-K are included in Part II, Item 8. (2) Financial Statement Schedules None. (3) Exhibits An Exhibit Index has been filed as part of this annual report on Form 10-K beginning on page E-1 and is incorporated herein by reference. 324 Freddie Mac

  • Page 328
    ...by the undersigned thereunto duly authorized. Federal Home Loan Mortgage Corporation By: /s/ Charles E. Haldeman, Jr. Charles E. Haldeman, Jr. Chief Executive Officer Date: February 24, 2010 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the...

  • Page 329
    ... Federal Home Loan Bank Generally accepted accounting principles Housing Finance Agency Internal Rate of Return Internal Revenue Service London Interbank Offered Rate Management's Discussion and Analysis of Financial Condition and Results of Operations New Issue Bond Initiative New York Stock...

  • Page 330
    ...of the original principal balance of single-family mortgage loans we are permitted by law to purchase or securitize. The conforming loan limit is determined annually based on changes in FHFA's housing price index. Any decreases in the housing price index are accumulated and used to offset any future...

  • Page 331
    ... partnerships invest directly in limited partnerships that own and operate multifamily rental properties that generate federal income tax credits and deductible operating losses. Loan-to-value (LTV) ratio - The ratio of the unpaid principal amount of a mortgage loan to the value of the property that...

  • Page 332
    ... rate to a qualified borrower exclusive of the fees and points required by the lender. This commitment rate applies only to conventional financing on conforming mortgages with LTV ratios of 80% or less. Purchase Agreement / Senior Preferred Stock Purchase Agreement - An agreement with Treasury...

  • Page 333
    ... for investment and by issuing guaranteed mortgage-related securities, principally PCs. Senior preferred stock - The shares of Variable Liquidation Preference Senior Preferred Stock issued to Treasury under the Purchase Agreement. Single-family mortgage - A mortgage loan secured by a property...

  • Page 334
    ... dates for bonds of the same credit quality. The slope of the yield curve is an important factor in determining the level of net interest yield on a new mortgage asset, both initially and over time. For example, if a mortgage asset is purchased when the yield curve is inverted, with short-term rates...

  • Page 335
    ... 14, 2008) Bylaws of the Federal Home Loan Mortgage Corporation, as amended and restated October 9, 2009 (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K as filed on October 9, 2009) Eighth Amended and Restated Certificate of Designation, Powers, Preferences...

  • Page 336
    ... filed on July 18, 2008) Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated December 4, 2007 (incorporated...

  • Page 337
    ... Preference Senior Preferred Stock (par value $1.00 per share), dated September 7, 2008 (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K as filed on September 11, 2008) Federal Home Loan Mortgage Corporation Global Debt Facility Agreement, dated April 3, 2009...

  • Page 338
    ... on Form 10 as filed on July 18, 2008)†Resolution of the Board of Directors, dated November 30, 2005, concerning certain outstanding options granted to non-employee directors under the Federal Home Loan Mortgage Corporation 1995 Directors' Stock Compensation Plan (incorporated by reference to...

  • Page 339
    ... 7, 2009)†Officer Severance Policy, dated August 17, 2009 (incorporated by reference to Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, as filed on November 6, 2009)†Federal Home Loan Mortgage Corporation Severance Plan (as...

  • Page 340
    ... on Form 10 as filed on July 18, 2008) Amended and Restated Senior Preferred Stock Purchase Agreement dated as of September 26, 2008, between the United States Department of the Treasury and Federal Home Loan Mortgage Corporation, acting through the Federal Housing Finance Agency as its duly...

  • Page 341
    ... Federal Housing Finance Agency, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation, dated October 19, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, as filed on October 23, 2009) New Issue Bond Program Agreement...

  • Page 342
    .... RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 2009(1) Year Ended December 31, 2008(1) 2007(1) 2006 (dollars in millions) 2005 Net income (loss) before income tax benefit (expense) and cumulative changes in accounting principles ...Add: Low-income housing tax credit...

  • Page 343
    ... Jr., certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2009 of the Federal Home Loan Mortgage Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make...

  • Page 344
    ...Kari, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2009 of the Federal Home Loan Mortgage Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make...

  • Page 345
    ... 2002 In connection with the Annual Report on Form 10-K for the year ended December 31, 2009 of the Federal Home Loan Mortgage Corporation (the "Company"), as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Charles E. Haldeman, Jr., Chief Executive Officer of...

  • Page 346
    ... In connection with the Annual Report on Form 10-K for the year ended December 31, 2009 of the Federal Home Loan Mortgage Corporation (the "Company"), as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ross J. Kari, Executive Vice President - Chief Financial...

  • Page 347