Freddie Mac 2009 Annual Report Download - page 270

based on discretionary authority provided by statute. FHFA noted that although our capital calculations as of June 30, 2008
reflected that we met the statutory and FHFA-directed requirements for capital, the continued market downturn in July and
August of 2008 raised significant questions about the sufficiency of our capital.
FHFA continues to closely monitor our capital levels, but the existing statutory and FHFA-directed regulatory capital
requirements are not binding during conservatorship. We continue to provide our regular submissions to FHFA on both
minimum and risk-based capital. FHFA continues to publish relevant capital figures (minimum capital requirement, core
capital, and GAAP net worth) but does not publish our critical capital, risk-based capital or subordinated debt levels during
conservatorship. Additionally, FHFA announced it will engage in rule-making to revise our minimum capital and risk-based
capital requirements.
Our regulatory minimum capital is a leverage-based measure that is generally calculated based on GAAP and reflects a
2.50% capital requirement for on-balance sheet assets and 0.45% capital requirement for off-balance sheet obligations. Based
upon our adoption of amendments to the accounting standards for transfers of financial assets and consolidation of VIEs, we
determined that, under the new consolidation guidance, we are the primary beneficiary of our single-family PC trusts and
certain Structured Transactions and, therefore, effective January 1, 2010, we consolidated on our balance sheet the assets and
liabilities of these trusts. Pursuant to regulatory guidance from FHFA, our minimum capital requirement will not
automatically be affected by adoption of these amendments on January 1, 2010. Specifically, upon adoption of these
amendments, FHFA directed us, for purposes of minimum capital, to continue reporting single-family PCs and certain
Structured Transactions held by third parties using a 0.45% capital requirement. Notwithstanding this guidance, FHFA
reserves the authority under the Reform Act to raise the minimum capital requirement for any of our assets or activities. On
February 8, 2010, FHFA issued a notice of proposed rulemaking setting forth procedures and standards for such a temporary
increase in minimum capital levels.
Our regulatory capital standards in effect prior to our entry into conservatorship on September 6, 2008 are described
below.
Regulatory Capital Standards
The GSE Act established minimum, critical and risk-based capital standards for us.
Prior to our entry into conservatorship, those standards determined the amounts of core capital and total capital that we
were to maintain to meet regulatory capital requirements. Core capital consisted of the par value of outstanding common
stock (common stock issued less common stock held in treasury), the par value of outstanding non-cumulative, perpetual
preferred stock, additional paid-in capital and retained earnings (accumulated deficit), as determined in accordance with
GAAP. Total capital included core capital and general reserves for mortgage and foreclosure losses and any other amounts
available to absorb losses that FHFA included by regulation.
Minimum Capital
The minimum capital standard required us to hold an amount of core capital that was generally equal to the sum of
2.50% of aggregate on-balance sheet assets and approximately 0.45% of the sum of our PCs and Structured Securities
outstanding and other aggregate off-balance sheet obligations. As discussed below, in 2004 FHFA implemented a framework
for monitoring our capital adequacy, which included a mandatory target capital surplus over the minimum capital
requirement.
Critical Capital
The critical capital standard required us to hold an amount of core capital that was generally equal to the sum of 1.25%
of aggregate 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 we
were to hold to absorb projected losses resulting from adverse interest-rate and credit-risk conditions specified by the GSE
Act prior to enactment of the Reform Act and added 30% additional capital to provide for management and operations risk.
The adverse interest-rate conditions prescribed by the GSE Act included an “up-rate scenario” in which 10-year Treasury
yields rise by as much as 75% and a “down-rate scenario” in which they fall by as much as 50%. The credit risk component
of the stress tests simulated the performance of our mortgage portfolio based on loss rates for a benchmark region. The
criteria for the benchmark region were intended to capture the credit-loss experience of the region that experienced the
highest historical rates of default and severity of mortgage losses for two consecutive origination years.
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