Freddie Mac 2010 Annual Report Download - page 34

On July 9, 2010, FHFA published in the Federal Register a proposed rule to codify certain terms of conservatorship and
receivership operations for Fannie Mae, Freddie Mac and the FHLBs. FHFA noted that among the key issues addressed in
the proposed rule are the status and priority of claims and the relationships among various classes of creditors and equity-
holders under conservatorships or receiverships. The Acting Director of FHFA stated that publication of this rule for
comment has no impact on the current conservatorship operations and is not a reflection of the condition of Freddie Mac,
Fannie Mae, or the FHLBs.
Capital Standards
FHFA has suspended capital classification of us during conservatorship in light of the Purchase Agreement. The existing
statutory and FHFA-directed regulatory capital requirements are not binding during the conservatorship. We continue to
provide 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.
On October 9, 2008, FHFA also announced that it will engage in rule-making to revise our minimum capital and risk-
based capital requirements. The GSE Act provides that FHFA may increase minimum capital levels from the existing
statutory percentages either by regulation or on a temporary basis by order. 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. FHFA
may also, by regulation or order, establish capital or reserve requirements with respect to any product or activity of an
enterprise, as FHFA considers appropriate. In addition, under the GSE Act, FHFA must, by regulation, establish risk-based
capital requirements to ensure the enterprises operate in a safe and sound manner, maintaining sufficient capital and reserves
to support the risks that arise in their operations and management. In developing the new risk-based capital requirements,
FHFA is not bound by the risk-based capital standards in effect prior to the amendment of the GSE Act by the Reform Act.
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.
Pursuant to regulatory guidance from FHFA, our minimum capital requirement was not automatically affected by our
January 1, 2010 adoption of new accounting standards for transfers of financial assets and consolidation of VIEs.
Specifically, upon adoption of these new accounting standards, FHFA directed us, for purposes of minimum capital, to
continue reporting our PCs held by third parties and other aggregate off-balance sheet obligations using a 0.45% capital
requirement. Notwithstanding this guidance, FHFA reserves the authority under the GSE Act to raise the minimum capital
requirement for any of our assets or activities.
For additional information, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES — Capital Resources” and
“NOTE 18: REGULATORY CAPITAL.” Also, see “RISK FACTORS — Legal and Regulatory Risks” for more information.
New Products
The GSE Act requires the enterprises to obtain the approval of FHFA before initially offering any product, subject to
certain exceptions. The GSE Act provides for a public comment process on requests for approval of new products. FHFA
may temporarily approve a product without soliciting public comment if delay would be contrary to the public interest.
FHFA may condition approval of a product on specific terms, conditions and limitations. The GSE Act also requires the
enterprises to provide FHFA with written notice of any new activity that we or Fannie Mae consider not to be a product.
On July 2, 2009, FHFA published an interim final rule on prior approval of new products, implementing the new
product provisions for us and Fannie Mae in the GSE Act. The rule establishes a process for Freddie Mac and Fannie Mae to
provide prior notice to the Director of FHFA of a new activity and, if applicable, to obtain prior approval from the Director
if the new activity is determined to be a new product. On August 31, 2009, Freddie Mac and Fannie Mae filed joint public
comments on the interim final rule with FHFA. FHFA has stated that permitting us to engage in new products is inconsistent
with the goals of conservatorship and has instructed us not to submit such requests under the interim final rule. This could
have an adverse effect on our business and profitability in future periods. We cannot currently predict when or if FHFA will
permit us to engage in new products under the interim final rule, nor when the rule will be finalized.
Affordable Housing Goals
We are subject to annual affordable housing goals. In light of these housing goals, we may make adjustments to our
mortgage loan sourcing and purchase strategies, which could further increase our credit losses. These strategies could include
entering into some purchase and securitization transactions with lower expected economic returns than our typical
transactions. Prior to 2010, we at times relaxed some of our underwriting criteria to obtain goal-qualifying mortgage loans
and made additional investments in higher risk mortgage loan products that we believed were more likely to serve the
borrowers targeted by the goals.
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