Freddie Mac 2009 Annual Report Download - page 21

On February 18, 2009, the Obama Administration announced the MHA Program. Participation in the MHA Program is
an integral part of our mission of providing stability to the housing market, including helping families maintain ownership
whenever possible and helping maintain the stability of communities. The MHA Program and related initiatives include:
• Home Affordable Modification Program, or HAMP, which commits U.S. government, Freddie Mac and Fannie Mae
funds to help eligible homeowners avoid foreclosure and keep their homes through mortgage modifications;
• Home Affordable Refinance Program, which gives eligible homeowners with loans owned or guaranteed by Freddie
Mac or Fannie Mae an opportunity to refinance into loans with more affordable monthly payments; and
• Housing Finance Agency Initiative, which is a collaborative effort of Treasury, FHFA, Freddie Mac, and Fannie Mae
to provide credit and liquidity support to state and local housing finance agencies.
For more information on these programs, see “MD&A — MHA PROGRAM AND OTHER EFFORTS TO ASSIST THE
U.S. HOUSING MARKET.”
Because we expect many of these objectives and related initiatives to result in significant costs, there is significant
uncertainty as to the ultimate impact these activities will have on our future capital or liquidity needs. However, we believe
that the support provided by Treasury, as described in “MD&A — LIQUIDITY AND CAPITAL RESOURCES — Liquidity,”
is sufficient to ensure that we maintain our access to the debt markets, maintain positive net worth and have adequate
liquidity to continue to conduct our normal business activities over the next three years. Management is continuing its efforts
to identify and evaluate actions that could be taken to reduce the significant uncertainties surrounding our business, as well
as the level of future draws under the Purchase Agreement; however, our ability to pursue such actions may be limited by
market conditions and other factors. Any actions we take will likely require approval by FHFA and Treasury before they are
implemented. In addition, FHFA, Treasury or Congress may have a different perspective than management and may direct us
to focus our efforts on supporting the mortgage markets in ways that make it more difficult for us to implement any such
actions. These actions and objectives also create risks and uncertainties that we discuss in “RISK FACTORS.”
Overview of the Purchase Agreement
The Conservator, acting on our behalf, entered into the Purchase Agreement on September 7, 2008. The Purchase
Agreement was subsequently amended and restated on September 26, 2008, and further amended on May 6, 2009 and
December 24, 2009. Under the Purchase Agreement, Treasury made a commitment to provide up to $200 billion in funding
under specified conditions. The $200 billion cap on Treasury’s funding commitment will increase as necessary to
accommodate any cumulative reduction in our net worth during 2010, 2011 and 2012. The Purchase Agreement requires
Treasury, upon the request of the Conservator, to provide funds to us after any quarter in which we have a negative net worth
(that is, our total liabilities exceed our total assets, as reflected on our GAAP balance sheet). In addition, the Purchase
Agreement requires Treasury, upon the request of the Conservator, to provide funds to us if the Conservator determines, at
any time, that it will be mandated by law to appoint a receiver for us unless we receive these funds from Treasury. In
exchange for Treasury’s funding commitment, we issued to Treasury, as an aggregate initial commitment fee: (1) one million
shares of Variable Liquidation Preference Senior Preferred Stock (with an initial liquidation preference of $1 billion), which
we refer to as the senior preferred stock; and (2) a warrant to purchase, for a nominal price, shares of our common stock
equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis at the time the
warrant is exercised, which we refer to as the warrant. We received no other consideration from Treasury for issuing the
senior preferred stock or the warrant.
Under the terms of the Purchase Agreement, Treasury is entitled to a dividend of 10% per year, paid on a quarterly
basis (which increases to 12% per year if not paid timely and in cash) on the aggregate liquidation preference of the senior
preferred stock, consisting of the initial liquidation preference of $1 billion plus funds we receive from Treasury and any
dividends and commitment fees not paid in cash. To the extent we draw on Treasury’s funding commitment, the liquidation
preference of the senior preferred stock is increased by the amount of funds we receive. The senior preferred stock is senior
in liquidation preference to our common stock and all other series of preferred stock. In addition, beginning on March 31,
2011, we are required to pay a quarterly commitment fee to Treasury, which will accrue beginning on January 1, 2011. We
are required to pay this fee each quarter for as long as the Purchase Agreement is in effect. The amount of this fee must be
determined on or before December 31, 2010.
As a result of draws under the Purchase Agreement, the aggregate liquidation preference of the senior preferred stock
has increased from $1.0 billion 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 repay the liquidation preference of the senior preferred stock is limited
and we may not be able to do so for the foreseeable future, if at all. The aggregate liquidation preference of the senior
preferred stock and our related dividend obligations will increase further as a result of any additional draws under the
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