Freddie Mac 2009 Annual Report Download - page 69

slow the pace of purchases under the program in order to promote a smooth transition in markets and anticipates that
the purchases under this program will be completed by the end of the first quarter of 2010; and
• on December 24, 2009, the Purchase Agreement was amended to, among other items, provide that the $200 billion
cap on Treasury’s funding commitment will increase as necessary to accommodate any cumulative reduction in
Freddie Mac’s net worth during 2010, 2011 and 2012.
We believe that the increased support provided by Treasury pursuant to the December 2009 amendment to the Purchase
Agreement will be sufficient to enable us to maintain our access to the debt markets and ensure that we have adequate
liquidity to conduct our normal business activities over the next three years, although the costs of our debt funding could
vary. The completion of the Federal Reserve’s debt purchase program could negatively affect the availability of longer-term
debt funding as well as the spreads on our debt, and thus increase our debt funding costs. Debt spreads generally refer to the
difference between the yields on our debt securities and the yields on a benchmark index or security, such as LIBOR or
Treasury bonds of similar maturity. We do not believe we have experienced any adverse impacts on our access to the debt
markets from the expiration of the Lending Agreement, which occurred after the December 2009 amendment to the Purchase
Agreement. See “RISK FACTORS” for a discussion of the risks to our business posed by our reliance on the issuance of
debt to fund our operations.
Due to the expiration of the Lending Agreement, we no longer have a liquidity backstop available to us (other than
draws from Treasury under the Purchase Agreement and Treasury’s ability to purchase up to $2.25 billion of our obligations
under its permanent statutory authority) if we are unable to obtain funding from issuances of debt or other conventional
sources. At present, we are not able to predict the likelihood that a liquidity backstop will be needed, or to identify the
alternative sources of liquidity that might be available to us if needed, other than draws from Treasury under the Purchase
Agreement or Treasury’s ability to purchase up to $2.25 billion of our obligations under its permanent statutory 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, which exceeds our annual historical earnings in most periods. To date, we have paid $4.3 billion in
cash dividends on the senior preferred stock. Continued cash payment of senior preferred dividends combined with
potentially substantial quarterly commitment fees payable to Treasury beginning in 2011 (the amounts of which must be
determined by December 31, 2010), will have an adverse impact on our future financial condition and net worth.
The payment of dividends on our senior preferred stock in cash reduces our net worth. For periods in which our
earnings and other changes in equity do not result in positive net worth, draws under the Purchase Agreement effectively
fund the cash payment of senior preferred dividends to Treasury.
Capital Resources
FHFA suspended capital classification of us during conservatorship in light of the Purchase Agreement. The Purchase
Agreement provides that, if FHFA, as Conservator, determines as of quarter end that our liabilities have exceeded our assets
under GAAP, upon FHFA’s request on our behalf, Treasury will contribute funds to us in an amount equal to the difference
between such liabilities and assets, up to the maximum aggregate amount that may be funded under the Purchase Agreement.
At December 31, 2009, our assets exceeded our liabilities by $4.4 billion. Because we had positive net worth as of
December 31, 2009, FHFA has not submitted a draw request on our behalf to Treasury for any additional funding under the
Purchase Agreement. The aggregate liquidation preference of the senior preferred stock was $51.7 billion as of December 31,
2009.
As previously discussed, due to the implementation of changes to the accounting standards for transfers of financial
assets and consolidation of VIEs, we recognized a decrease of approximately $11.7 billion to total equity (deficit) on
January 1, 2010, which will increase the likelihood that we will require a draw from Treasury under the Purchase Agreement
for the first quarter of 2010.
We expect to make additional draws under the Purchase Agreement in future periods, due to a variety of factors that
could materially affect the level and volatility of our net worth. For additional information concerning the potential impact of
the Purchase Agreement, including the impact of making additional draws, see “RISK FACTORS.” For additional
information on our capital management during conservatorship and factors that could affect the level and volatility of our net
worth, see “LIQUIDITY AND CAPITAL RESOURCES — Capital Resources” and “NOTE 11: REGULATORY CAPITAL”
to our consolidated financial statements.
Risk Management
Our total mortgage portfolio is subject primarily to two types of credit risk: mortgage credit risk and institutional credit
risk. Mortgage credit risk is the risk that a borrower will fail to make timely payments on a mortgage we own or guarantee.
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