Freddie Mac 2010 Annual Report Download - page 86

mortgage-related securities, partially offset by a decrease in funding costs as a result of the replacement of higher-cost long-
term debt at lower rates.
Segment Earnings non-interest loss increased $5.6 billion in 2010, compared to 2009. Included in other non-interest
income (loss) are gains (losses) on trading securities of $(1.4) billion in 2010, compared to $4.8 billion in 2009. In 2010, the
losses on trading securities was primarily due to the movement of securities with unrealized gains towards maturity,
particularly interest-only securities, partially offset by fair value gains on our non-interest-only securities classified as trading
primarily due to decreased interest rates. The net gains on trading securities during 2009 related primarily to tightening OAS
levels.
Impairments recorded in our Investments segment decreased by $6.1 billion during 2010, compared to 2009.
Impairments for 2010 and 2009 are not comparable because the adoption of the amendment to the accounting standards for
investments in debt and equity securities on April 1, 2009 significantly impacted both the identification and measurement of
other-than-temporary impairments. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities —
Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities” for
additional information on our impairments.
We recorded derivative gains (losses) for this segment of $(1.9) billion in 2010, compared to $4.7 billion in 2009. While
derivatives are an important aspect of our management of interest-rate risk, they generally increase the volatility of reported
Segment Earnings, because, while fair value changes in derivatives affect Segment Earnings, fair value changes in several of
the types of assets and liabilities being hedged do not affect Segment Earnings. During 2010, longer-term swap interest rates
declined, resulting in fair value losses on our pay-fixed swaps that were partially offset by fair value gains on our receive-
fixed swaps and gains on our purchased call swaptions. See “Non-Interest Income (Loss) — Derivative Gains (Losses)” for
additional information on our derivatives.
The objectives set forth for us under our charter and conservatorship, restrictions set forth in the Purchase Agreement
and restrictions imposed by FHFA have negatively impacted, and will continue to negatively impact, our Investments
segment results. For example, our mortgage-related investments portfolio is subject to a cap that decreases by 10% each year
until the portfolio reaches $250 billion. This will likely cause a corresponding reduction in our net interest income from
these assets and therefore negatively affect our Investments segment results. FHFA also stated its expectation that any net
additions to our mortgage-related investments portfolio would be related to purchasing seriously delinquent mortgages out of
PC pools. We are also subject to limits on the amount of mortgage assets we can sell in any calendar month without review
and approval by FHFA and, if FHFA so determines, Treasury.
For information on the impact of the requirement to reduce the mortgage-related investments portfolio limit by 10%
annually, see “NOTE 3: CONSERVATORSHIP AND RELATED MATTERS — Impact of the Purchase Agreement and
FHFA Regulation on the Mortgage-Related Investments Portfolio.”
Segment Earnings for our Investments segment increased $34.5 billion in 2009 compared to 2008. Impairments recorded
in our Investments segment decreased by $7.3 billion during 2009, compared to 2008. As noted above, impairments for 2009
and 2008 are not comparable because of the adoption of the amendment to the accounting standards for investments in debt
and equity securities on April 1, 2009. We recorded derivative gains of $4.7 billion in 2009, primarily due to increases in
longer-term swap interest rates and implied volatility. Segment Earnings non-interest expense for 2008 includes a loss of
$1.1 billion related to short-term lending transactions with Lehman. Segment Earnings net interest income increased
$5.3 billion and Segment Earnings net interest yield increased 66 basis points to 108 basis points for 2009 compared to
2008. The increases in Segment Earnings net interest income and Segment Earnings net interest yield were primarily due to
decreased funding costs due to the replacement of higher cost short- and long-term debt with lower cost debt issuances, and
increases in the average balance of interest-earning assets.
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