Freddie Mac 2010 Annual Report Download - page 92

future cash flows. This generally results in a higher allowance for loan losses than for loans that are not TDRs. In 2010, we
experienced increased volumes of TDRs and REO acquisitions, compared to 2009. Refinance risk, which is the risk that a
multifamily borrower with a maturing balloon mortgage will not be able to refinance and will instead default, is significant
given the state of the economy, lower levels of liquidity, property cash flows, and property market values. This is also likely
to lead to an increase in the volume of TDRs and REO acquisitions. REO and loss mitigation activities resulted in net
charge-offs of $103 million in 2010. In 2011, we expect our charge-offs will continue to increase, driven by a higher level of
REO acquisitions and loss mitigation activities, as we continue to work with borrowers to resolve troubled loans.
The UPB of the total multifamily portfolio increased to $169.5 billion at December 31, 2010 from $164.0 billion at
December 31, 2009, due to increased guarantees of securities issued during 2010 as part of our CME initiative as well as
increased purchases of loans, which we expect to securitize in 2011. Subject to market conditions, we expect to continue to
purchase loans and subsequently securitize these loans in 2011 under our CME initiative, which supports liquidity for the
multifamily market.
CONSOLIDATED BALANCE SHEETS ANALYSIS
The following discussion of our consolidated balance sheets should be read in conjunction with our consolidated
financial statements, including the accompanying notes. Also, see “CRITICAL ACCOUNTING POLICIES AND
ESTIMATES” for more information concerning our more significant accounting policies and estimates applied in
determining our reported financial position.
Change in Accounting Principles
As a result of our adoption of two new accounting standards that amended the guidance applicable to the accounting for
transfers of financial assets and the consolidation of VIEs, our consolidated balance sheets as of December 31, 2010 reflect
the consolidation of our single-family PC trusts and certain Other Guarantee Transactions. The cumulative effect of these
changes in accounting principles was an increase of $1.5 trillion to assets and liabilities, and a net decrease of $11.7 billion
to total equity (deficit) as of January 1, 2010, which included changes to the opening balances of retained earnings
(accumulated deficit) and AOCI. This net decrease was driven principally by: (a) the elimination of unrealized gains resulting
from the extinguishment of PCs held as investment securities upon consolidation of the PC trusts, representing the difference
between the UPB of the loans underlying the PC trusts and the fair value of the PCs, including premiums, discounts, and
other basis adjustments; (b) the elimination of the guarantee asset and guarantee obligation established for guarantees issued
to securitization trusts we consolidated; and (c) the application of our non-accrual policy to single-family seriously
delinquent mortgage loans consolidated as of January 1, 2010.
See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Consolidation and Equity Method of
Accounting,” “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES,” “NOTE 4: VARIABLE INTEREST ENTITIES,” and
“NOTE 23: SELECTED FINANCIAL STATEMENT LINE ITEMS” for additional information regarding these changes.
Cash and Cash Equivalents, Federal Funds Sold and Securities Purchased Under Agreements to Resell
Cash and cash equivalents, federal funds sold and securities purchased under agreements to resell, and other liquid
assets discussed in “Investments in Securities — Non-Mortgage-Related Securities,” are important to our cash flow and asset
and liability management, and our ability to provide liquidity and stability to the mortgage market. We use these assets to
help manage recurring cash flows and meet our other cash management needs. We consider federal funds sold to be
overnight unsecured trades executed with commercial banks that are members of the Federal Reserve System. Securities
purchased under agreements to resell principally consist of short-term contractual agreements such as reverse repurchase
agreements involving Treasury and agency securities. As discussed above, commencing January 1, 2010, we consolidated the
assets of our single-family PC trusts and certain Other Guarantee Transactions. These short-term assets are comprised
primarily of restricted cash and cash equivalents and investments in securities purchased under agreements to resell.
Excluding amounts related to our consolidated VIEs, we held $37.0 billion and $64.7 billion of cash and cash
equivalents, $1.4 billion and $0 billion of federal funds sold, and $15.8 billion and $7.0 billion of securities purchased under
agreements to resell at December 31, 2010 and December 31, 2009, respectively. The aggregate decrease in these assets is
largely related to using such assets for debt calls and maturities, as well as purchases of delinquent mortgages from PC pools
during 2010. In addition, excluding amounts related to our consolidated VIEs, we held on average $42.2 billion and
$55.8 billion of cash and cash equivalents and $29.4 billion and $28.5 billion of federal funds sold and securities purchased
under agreements to resell during the years ended December 31, 2010 and 2009, respectively.
Investments in Securities
Tables 21 and 22 provide detail regarding our investments in securities as of December 31, 2010, 2009, and 2008. Due
to the accounting changes noted above, Tables 21 and 22 do not include our holdings of single-family PCs and certain Other
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