Freddie Mac 2010 Annual Report Download - page 105

Table 31 summarizes the changes in derivative fair values.
Table 31 — Changes in Derivative Fair Values
2010
(1)
2009
(1)
(in millions)
Beginning balance, at January 1 — Net asset (liability) ................................................ $(2,267) $(3,827)
Net change in:
Commitments
(2)
....................................................................... (31) 6
Credit derivatives . . . . . . . . . ............................................................. (8) (23)
Swap guarantee derivatives . . . ............................................................. (2) (23)
Other derivatives:
(3)
Changes in fair value . . . . . . . ............................................................. (3,508) 2,762
Fair value of new contracts entered into during the period
(4)
......................................... 444 3,148
Contracts realized or otherwise settled during the period . . .......................................... (1,188) (4,310)
Ending balance, at December 31 — Net asset (liability) ................................................ $(6,560) $(2,267)
(1) The value of derivatives on our consolidated balance sheets is reported as derivative assets, net and derivative liabilities, net, and includes derivative
interest receivable (payable), net, trade/settle receivable (payable), net and derivative cash collateral (held) posted, net. Refer to “Table 30 — Derivative
Fair Values and Maturities” for reconciliation of fair value to the amounts presented on our consolidated balance sheets as of December 31, 2010. Fair
value excludes derivative interest receivable or (payable), net of $(0.6) billion, trade/settle receivable or (payable), net of $1 million, and derivative cash
collateral posted, net of $2.5 billion at December 31, 2009.
(2) Commitments include: (a) our commitments to purchase and sell investments in securities; and (b) our commitments to purchase and extinguish or issue
debt securities of our consolidated trusts.
(3) Includes fair value changes for interest-rate swaps, option-based derivatives, futures, and foreign-currency swaps.
(4) Consists primarily of cash premiums paid or received on options.
REO, Net
As a result of borrower default on mortgage loans that we own, or for which we have issued our financial guarantee, we
acquire properties, which are recorded as REO assets on our consolidated balance sheets. The balance of our REO, net
increased to $7.1 billion at December 31, 2010 from $4.7 billion at December 31, 2009. Temporary suspensions of
foreclosure transfers of occupied homes during portions of 2009, delays associated with the HAMP process and servicer
capacity constraints generally resulted in higher balances of non-performing loans in our single-family credit guarantee
portfolio in 2010. Foreclosure activity increased during 2010 as many of the non-performing loans transitioned to REO. We
experienced the highest volume of single-family REO acquisitions in 2010 in the states of Florida, California, Illinois,
Minnesota, Georgia and Arizona. We expect our REO inventory to continue to grow in 2011. However, the pace of our REO
acquisitions could slow due to further delays in the foreclosure process, including delays related to concerns about
deficiencies in foreclosure documentation practices. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk —
Credit Performance — Non-Performing Assets” for additional information about our REO activity.
Deferred Tax Assets, Net
We recognize deferred tax assets and liabilities based upon the expected future tax consequences of existing temporary
differences between the financial reporting and the tax reporting basis of assets and liabilities using enacted statutory tax
rates. We record valuation allowances to reduce our net deferred tax assets when it is more likely than not that a tax benefit
will not be realized. The realization of our net deferred tax assets is dependent upon the generation of sufficient taxable
income or, with respect to the portion of our deferred tax assets related to our available-for-sale securities, upon our
conclusion that we have the intent and ability to hold such securities to the recovery of any temporary unrealized losses. On
a quarterly basis, we consider all evidence currently available, both positive and negative, in determining whether, based on
the weight of that evidence, the net deferred tax assets will be realized or whether a valuation allowance is necessary.
Subsequent to the date of our entry into conservatorship, we determined that it was more likely than not that a portion
of our net deferred tax assets would not be realized due to our inability to generate sufficient taxable income and, therefore,
we recorded a valuation allowance. After evaluating all available evidence, including the events and developments related to
our conservatorship, volatility in the economy, and related difficulty in forecasting future profit levels, we reached a similar
conclusion in all subsequent quarters, including in the fourth quarter of 2010. We increased our valuation allowance by
$8.3 billion in total during 2010. The $8.3 billion increase during 2010 was primarily attributable to the creation of a net
operating loss carryforward in 2010 and other temporary differences generated during the year, as well as a $3.1 billion
increase attributable to the adoption of the accounting standards for transfers of financial assets and consolidation of VIEs.
See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for additional information on our adoption of these accounting
standards. Our total valuation allowance as of December 31, 2010 was $33.4 billion. As of December 31, 2010, after
consideration of the valuation allowance, we had a net deferred tax asset of $5.5 billion, primarily representing the tax effect
of unrealized losses on our available-for-sale securities. We believe the deferred tax asset related to these unrealized losses is
more likely than not to be realized because of our conclusion that we have the intent and ability to hold our available-for-
sale securities until any temporary unrealized losses are recovered. Our view of our ability to realize the net deferred tax
assets may change in future periods, particularly if the mortgage and housing markets continue to decline.
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