Freddie Mac 2010 Annual Report Download - page 151

While we believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to
maintain our access to the debt markets and to have adequate liquidity to conduct our normal business activities, the costs of
our debt funding could vary due to the uncertainty about the future of the GSEs and potential investor concerns about the
adequacy of funding available to us under the Purchase Agreement after 2012. Upon funding of the draw request that FHFA
will submit to eliminate our net worth deficit at December 31, 2010, our aggregate funding received from Treasury under the
Purchase Agreement will increase to $63.7 billion. This aggregate funding amount does not include the initial $1.0 billion
liquidation preference of senior preferred stock that we issued to Treasury in September 2008 as an initial commitment fee
and for which no cash was received.
The GSE Act requires us to set aside in each fiscal year an amount equal to 4.2 basis points for each dollar of the UPB
of total new business purchases, and allocate or transfer such amount to: (a) HUD to fund a Housing Trust Fund established
and managed by HUD; and (b) a Capital Magnet Fund established and managed by Treasury. FHFA has the authority to
suspend our allocation upon finding that the payment would contribute to our financial instability, cause us to be classified as
undercapitalized or prevent us from successfully completing a capital restoration plan. In November 2008, FHFA advised us
that it had suspended the requirement to set aside or allocate funds for the Housing Trust Fund and the Capital Magnet Fund
until further notice.
We are required to pay a quarterly commitment fee to Treasury under the Purchase Agreement. Treasury waived the fee
for the first quarter of 2011. The amount of the fee has not yet been established and could be substantial.
For more information on these actions, see “BUSINESS — Conservatorship and Related Matters” and “— Regulation
and Supervision.”
Dividend Obligation on the Senior Preferred Stock
Following funding of the draw request related to our net worth deficit at December 31, 2010 that FHFA will submit on
our behalf, our annual cash dividend obligation to Treasury on the senior preferred stock will increase from $6.42 billion to
$6.47 billion, which exceeds our annual historical earnings in all but one period. The senior preferred stock accrues quarterly
cumulative dividends at a rate of 10% per year or 12% per year in any quarter in which dividends are not paid in cash until
all accrued dividends have been paid in cash. We paid a quarterly dividend of $1.6 billion in cash on the senior preferred
stock on December 31, 2010 at the direction of our Conservator. We have paid cash dividends to Treasury of $10.0 billion to
date, an amount equal to 16% of our aggregate draws under the Purchase Agreement. Continued cash payment of senior
preferred dividends will have an adverse impact on our future financial condition and net worth and will increasingly drive
future draws. In addition, we are required under the Purchase Agreement to pay a quarterly commitment fee to Treasury,
which could also contribute to future draws if the fee is not waived in the future. Treasury has waived the fee for the first
quarter of 2011, but it has indicated that it remains committed to protecting taxpayers and ensuring that our future positive
earnings are returned to taxpayers as compensation for their investment.
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. Under the Purchase Agreement, our ability to repay the
liquidation preference of the senior preferred stock is limited and we will not be able to do so for the foreseeable future, if at
all.
As discussed in “Capital Resources,” we expect to make additional draws under the Purchase Agreement in future
periods. Further draws will increase the liquidation preference of and the dividends we owe on the senior preferred stock.
Other Debt Securities
We fund our business activities primarily through the issuance of short- and long-term debt. Competition for funding
can vary with economic, financial market, and regulatory environments. Historically, we have mainly competed for funds in
the debt issuance markets with Fannie Mae and the FHLBs. We repurchase or call our outstanding debt securities from time
to time to help support the liquidity and predictability of the market for our debt securities and to manage our mix of
liabilities funding our assets.
To fund our business activities, we depend on the continuing willingness of investors to purchase our debt securities.
Changes or perceived changes in the government’s support of us could have a severe negative effect on our access to the
debt markets and on our debt funding costs. In addition, any change in applicable legislative or regulatory exemptions,
including those described in “BUSINESS — Regulation and Supervision,” could adversely affect our access to some debt
investors, thereby potentially increasing our debt funding costs.
Spreads on our debt and our access to the debt markets remained favorable relative to historical levels during 2010, due
largely to support from the U.S. government. As a result, we were able to replace certain higher cost debt with lower cost
148 Freddie Mac