Freddie Mac 2009 Annual Report Download - page 141

being commercially reasonable and safe and sound. Treasury’s participation in these assistance programs does not affect the
amount of funding that Treasury can provide to Freddie Mac under the terms of our Purchase Agreement with Treasury.
Since October 19, 2009 and prior to December 31, 2009, we, Treasury, Fannie Mae and participating HFAs entered into
definitive agreements setting forth the respective parties’ obligations under this initiative. The initiatives are as follows:
•Temporary Credit and Liquidity Facilities Initiative. In December 2009, on a 50-50 pro rata basis, Freddie Mac and
Fannie Mae agreed to provide $8.2 billion of credit and liquidity support, including outstanding interest at the date of
the guarantee, for VRDOs previously issued by HFAs. This support was provided through the issuance of guarantees,
which provides credit enhancement to the holders of such VRDOs and also creates an obligation to provide funds to
purchase any VRDOs that are put by their holders and are not remarketed. Treasury provided a credit and liquidity
backstop on the TCLFI. These guarantees, each of which expires on or before December 31, 2012, replace existing
liquidity facilities from other providers. At the expiration of each of these facilities, any VRDOs purchased by
Freddie Mac and Fannie Mae will be securitized by the companies and the resulting securities will be held by
Treasury. Prior to expiration of each of these facilities, the VRDOs purchased by Freddie Mac and Fannie Mae may
be securitized at the option of the companies or at Treasury’s request.
•New Issue Bond Initiative. In December 2009, on a 50-50 pro rata basis, Freddie Mac and Fannie Mae agreed to
issue in total $15.3 billion of partially guaranteed pass-through securities backed by new single-family and certain
new multifamily housing bonds issued by HFAs. Treasury agreed to purchase all of the pass-through securities issued
by Freddie Mac and Fannie Mae. Treasury has completed its purchases of such securities. This initiative provided
financing for HFAs to issue new housing bonds.
Treasury will bear the initial losses of principal up to 35% of total principal for the two initiatives combined, and
thereafter Freddie Mac and Fannie Mae each will be responsible only for losses of principal on the securities that it issues to
the extent that such losses are in excess of 35% of all losses under both initiatives. Treasury will bear all losses of unpaid
interest. Under both initiatives, we and Fannie Mae were paid fees at the time bonds are securitized and will be paid on-
going fees. It is difficult for us to predict our profitability or potential credit losses on these transactions; however, with the
significant loss coverage provided by Treasury, we believe our ultimate losses should be minimal.
The third initiative under the HFA initiative is described below:
•Multifamily Credit Enhancement Initiative. Using existing housing bond credit enhancement products, Freddie Mac
is providing a guarantee of new housing bonds issued by HFAs, which Treasury purchased from the HFAs. Treasury
will not be responsible for a share of any losses incurred by us 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 is contingent upon the default of a specific mortgage originator, which is
one of our single-family seller/servicers. We may enter into additional such single-family commitments in the future. In
October 2009, we announced a pilot program to help our single-family and multifamily seller/servicers obtain warehouse
lines of credit with certain lenders, and entered into a standby purchase commitment for multifamily loans with the same
warehouse lender noted above. Currently, our standby purchase commitments to support single-family and multifamily
lenders may not exceed $800 million and $450 million, respectively. Expansion beyond these limits or entering into
additional such commitments with a new multifamily warehouse lender counterparty is subject to FHFA approval.
RISK MANAGEMENT
Our investment and credit guarantee activities expose us to three broad categories of risk: (a) credit risks; (b) interest
rate risk and other market risks; and (c) operational risks. See “RISK FACTORS” for further information regarding these and
other risks. See “CONTROLS AND PROCEDURES” for further discussion of disclosure controls and procedures and
internal control over financial reporting.
Risk management is a critical aspect of our business. We manage risk through a framework that recognizes primary risk
ownership and management by our business areas. Within this framework, our executive management responsible for
independent risk oversight monitors performance against our risk management strategies and established risk limits and
reporting thresholds, identifies and assesses potential issues and provides oversight regarding changes in business processes
and activities.
Credit Risks
Our total mortgage portfolio is subject primarily to two types of credit risk: institutional credit risk and mortgage credit
risk. Institutional credit risk is the risk that a counterparty that has entered into a business contract or arrangement with us
will fail to meet its obligations. Mortgage credit risk is the risk that a borrower will fail to make timely payments on a
mortgage we own or guarantee. We are exposed to mortgage credit risk on our total mortgage portfolio because we either
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