Freddie Mac 2009 Annual Report Download - page 246

generate operating losses, we planned to realize a return on our investment through reductions in income tax expense that
result from the tax credits, as well as the deductibility of operating losses for tax purposes.
The LIHTC partnership agreements are typically structured to meet a required 15-year period of occupancy by qualified
low-income tenants. The investments in LIHTC partnerships, in which we were either the primary beneficiary or had a
significant variable interest, were made between 1989 and 2007. At December 31, 2009 and 2008, we did not guarantee any
obligations of these LIHTC partnerships and our exposure was limited primarily to the amount of our investment. As
discussed below, we currently have no ability to use the tax credits in our own tax return and accordingly did not buy or sell
any LIHTC partnership investments in 2009 or 2008.
During the third quarter of 2009, we expected that our ability to realize the carrying value in our LIHTC investments
was limited to our ability to execute sales or other transactions related to our partnership interests. This determination is
based upon a number of factors, including continued uncertainty in our future business structure and our inability to generate
sufficient taxable income in order to use the tax credits and operating losses generated. See “NOTE 15: INCOME TAXES”
for additional information. As a result, we determined that individual partnerships whose carrying value exceeded fair value
were other-than-temporarily impaired and should be written down to their fair value. Fair value is determined based on
reference to market transactions. As a result, we recognized other-than-temporary impairments on our LIHTC investments of
$370 million for the three months ended September 30, 2009.
During 2009, we requested approval from Treasury pursuant to the Purchase Agreement of a proposed transaction that
was designed to recover substantially all of the carrying value of our LIHTC investments. In November 2009, FHFA notified
us that Treasury, based on broad overall taxpayer issues, would decline to authorize the transaction. However, we were
encouraged by FHFA to consider other options that would allow us to realize the carrying value of our investments
consistent with our mission and to minimize our losses from carrying these investments. We estimated that our LIHTC
investments had a total fair value of $3.4 billion at December 31, 2009, absent any restriction on sale of the assets.
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
Agreement. The letter further stated that FHFA had presented other options for Treasury to consider, including allowing
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 assets and that he sees no other disposition options. As a result,
we wrote down the carrying value of our LIHTC investments to zero as of December 31, 2009, as we will not be able to
realize any value either through reductions to our taxable income and related tax liabilities or through a sale to a third party.
We recognized the write-down of the LIHTC investments as a loss of $3.4 billion for accounting purposes in our
consolidated statements of operations because the value associated with the non-use of the tax credits transfers to Treasury
indirectly. The write-down was recorded to low-income housing tax credit partnerships on our consolidated statements of
operations. This write-down reduces our net worth at December 31, 2009 and, as such, increases the likelihood that we will
require additional draws from Treasury under the Purchase Agreement and, as a consequence, increases the likelihood that
our dividend obligation on the senior preferred stock will increase.
We will fulfill all contractual obligations under the LIHTC partnership agreements, and continue to hold and manage
the LIHTC assets in support of multifamily affordable housing as directed by FHFA. As of December 31, 2009, we have
obligations in the amount of $217 million to continue to fund our existing LIHTC partnership interests over time that we are
contractually obligated to make even though we do not expect to receive any returns from these investments.
As further described in “NOTE 15: INCOME TAXES” to our consolidated financial statements, we determined that it
was more likely than not that a portion of our deferred tax assets, net would not be realized. As a result, we are not
recognizing a significant portion of the tax benefits associated with tax credits and deductible operating losses generated by
our investments in LIHTC partnerships in our consolidated financial statements.
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