Freddie Mac 2014 Annual Report Download - page 141

136 Freddie Mac
includes the enactment date. The realization of these net deferred tax assets is dependent upon the generation of sufficient
taxable income of the appropriate character (i.e., ordinary income or capital gains) in the available carryback and carryforward
years under the tax law, which would include reversals of existing taxable temporary differences and liabilities associated with
unrecognized tax benefits. Valuation allowances are recorded to reduce net deferred tax assets when it is more likely than not
that all or part of our tax benefits will not be realized.
On a quarterly basis, we determine whether a valuation allowance is necessary on our net deferred tax asset. In doing so,
we consider all evidence available, both positive and negative, in determining whether, based on the weight of the evidence, it
is more likely than not that the deferred tax assets will be realized. In conducting our assessment, we evaluate all available
objective evidence including, but not limited to: (a) our three-year cumulative income position; (b) the trend of our financial
and tax results; (c) the amount of taxable income reported in our federal income tax return; (d) our tax credit carryforward and
the length of the carryforward period available to utilize this asset under current tax law; and (e) our access to capital under the
agreements associated with conservatorship. Furthermore, we evaluate all available subjective evidence including, but not
limited to: (a) difficulty in predicting unsettled circumstances related to the conservatorship; (b) our estimated taxable income;
and (c) forecasts of future book and tax income. Our consideration of the evidence requires significant judgment regarding
estimates and assumptions that are inherently uncertain, particularly about our future business structure and financial results.
We are not permitted to consider the impacts proposed legislation may have on our business operations or the mortgage
industry in our valuation allowance assessment because the timing and certainty of those actions are unknown and beyond our
control. On February 2, 2015, the Administration submitted the full year 2016 U.S. budget to Congress. Included within the
budget is a proposal to reduce the top U.S. corporate tax rate. If enacted, a reduction in the corporate tax rate would result in a
charge representing the reduction in the realizable value of our net deferred tax asset.
RISK MANAGEMENT AND DISCLOSURE COMMITMENTS
In October 2000, we adopted a series of commitments designed to enhance our market discipline, liquidity and capital. In
September 2005, we updated these commitments and set forth a process for implementing them. A copy of the written
agreement between us and OFHEO dated September 1, 2005 has been filed as an exhibit to our Registration Statement on Form
10, filed with the SEC on July 18, 2008, and is available on the Investor Relations page of our web site at
www.freddiemac.com/investors/sec_filings/index.html.
FHFA suspended the disclosure commitments under the September 1, 2005 agreement until further notice, except that:
(a) FHFA will continue to monitor our adherence to the substance of the liquidity management and contingency planning
commitment through normal supervision activities; and (b) we are required to continue providing interest-rate and credit risk
disclosures in our periodic public reports. In January 2015, FHFA suspended the commitment that we provide credit risk
disclosures in our periodic public reports.
Our monthly average PMVS results, duration gap, and related disclosures are provided in our Monthly Volume Summary
reports, which are available on our web site, www.freddiemac.com and in current reports on Form 8-K we file with the SEC.
For disclosures concerning our PMVS and duration gap, see “QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK — Interest-Rate Risk and Other Market Risks — PMVS and Duration Gap.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest-Rate Risk and Other Market Risks
Our mortgage-related investments portfolio (i.e., mortgage loans and mortgage-related securities), non-mortgage
investments, and unsecured debt expose us to interest-rate risk and other market risks, including spread risk, and prepayment
risk arising from credit risk primarily from: (a) the uncertainty as to when borrowers will pay the outstanding principal balance
of mortgage loans and mortgage-related securities; and (b) unexpected prepayments or differences in expected cash flows due
to default of the underlying borrower or modification of loan terms by the servicer. For a majority of our mortgage-related
investments, the mortgage borrower has the option to make unscheduled payments of additional principal or to completely pay
off a mortgage loan at any time before its scheduled maturity date (without having to pay a prepayment penalty) or make
principal payments in accordance with the contractual obligation. For more information on credit risk, see "MD&A — RISK
MANAGEMENT — Credit Risk Overview."
Our credit guarantee activities expose us to interest-rate and other market risks because changes in interest rates can
cause fluctuations in the fair value of our existing credit guarantees. We generally do not hedge these changes in fair value
except for interest-rate exposure related to buy-ups and float. Float, which arises from timing differences between the
borrower's principal payments on the loan and the reduction of the PC balance, can lead to significant interest expense if the
interest rate paid to a PC investor is higher than the reinvestment rate earned by the securitization trusts on payments received
from borrowers and paid to us as trust management income. Changes in prepayments, defaults, spreads, or unexpected
prepayments can adversely affect our earnings and net worth. In addition, these risks could result in realized losses upon the
sale of assets. While we manage interest-rate risk, we have limited ability to manage spread risk. We use derivatives as an
important part of our strategy to manage interest-rate risk. When deciding to use derivatives to mitigate our exposures, we
consider a number of factors, including cost, exposure to counterparty risks, and our overall risk management strategy. See
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