Freddie Mac 2007 Annual Report Download

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ANNUAL REPORT

Table of contents

  • Page 1
    A N N U A L R E P O R T

  • Page 2
    ...company expanded our efforts to finance affordable apartment properties. Over the years, Freddie Mac has financed properties that provide homes for more than 4 million renters. n Don't Borrow Trouble® community campaigns debuted in California, New York, Pennsylvania, Texas and Virginia. Freddie...

  • Page 3
    ...2007 A N N U A L R E P O R T C O M P A N Y O V E R V I E W Freddie Mac's mission is to provide liquidity, stability and affordability to the U.S. housing and mortgage markets. That mission -- defined in our congressional charter -- forms the framework of our business lines, shapes the products...

  • Page 4
    ... a niche product and used far more indiscriminately than in the past. Housing finance was stretched beyond the breaking point by evermore exotic mortgages that enabled more home buying on the front end but carried unacceptable risks of home loss on the back end as soon as home prices stopped rising...

  • Page 5
    ... in pricing and in underwriting certain products, such as jumbo mortgages, outside the conforming space. To a large extent, only the conforming market served by the housing government-sponsored enterprises (GSEs) has continued to function normally, in the process diminishing risk and saving families...

  • Page 6
    ...milestone on Freddie Mac's road back to normalcy. With the publication of this 2007 annual report, we are again timely in our financial reporting. This has taken a lot of time, effort and resources, but the benefits are substantial. While much remains to be done, the company and its employees have...

  • Page 7
    ... period. However, clearly last year's weakening house prices and punishing deterioration of credit hurt Freddie Mac's results, along with those of other mortgage market participants. On a GAAP basis, based on the accounting policy changes I mentioned earlier, our 2007 net losses amounted to roughly...

  • Page 8
    ... of what Freddie Mac did in 2007 served our mission in ways that hurt our GAAP results in the short term. For example, the day we buy a loan and issue a credit guarantee, we have to mark the credit to market - - and in this environment, that's generating large current-period losses (commonly called...

  • Page 9
    ... sweet spot for Freddie Mac. Moreover, across a range of products, much of the irresponsibility in pricing and credit began to be wrung out of the system. The shift away from exotic mortgages and back toward long-term, fixed-rate lending and more rational underwriting standards puts your company in...

  • Page 10
    ... of the business. In recent years we have had to devote the bulk of our new spending to upgrade our accounting infrastructure and internal controls. As that effort nears completion, we will be able to reinvigorate our efforts and our spending to improve the company's products, time to market and...

  • Page 11
    ... extraordinary. As a result, Freddie Mac stepped up its mortgage purchases, and by year-end had injected nearly $580 billion in liquidity into the markets. We took early, concrete steps to stabilize the markets and cushion the negative effects of the housing downturn on borrowers and communities. In...

  • Page 12
    ...credit and the homebuying process. And continuing our efforts to rebuild the Gulf Coast, Freddie Mac helped to establish a $4.5 million home renovation reserve fund in New Orleans, which will be used to rebuild hurricanedamaged properties and get families back into their homes. A VIEW TO THE FUTURE...

  • Page 13
    ... long term will be those that have built the strongest foundation for the future. And Freddie Mac, albeit with some difficulty, has built such a foundation in the last several years - - one whose pillars include more transparent accounting; more robust internal controls; better products and systems...

  • Page 14
    2 0 07 A N N U A L R E P O R T T O S T O C K H O L D E R S

  • Page 15
    FEDERAL HOME LOAN MORTGAGE CORPORATION FREDDIE MAC INFORMATION STATEMENT AND ANNUAL REPORT TO STOCKHOLDERS For the Ã'scal year ended December 31, 2007 This Information Statement contains important Ã'nancial and other information about Freddie Mac. We will supplement this Information Statement ...

  • Page 16
    ... BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE ÏÏ PRINCIPAL ACCOUNTANT FEES AND SERVICES RATIO OF EARNINGS TO FIXED CHARGES RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS...

  • Page 17
    ... INVESTMENTS PORTFOLIO NOTE 5: MORTGAGE LOANS AND LOAN LOSS RESERVES NOTE 6: REAL ESTATE OWNED NOTE 7: DEBT SECURITIES AND SUBORDINATED BORROWINGS NOTE 8: STOCKHOLDERS' EQUITY NOTE 9: REGULATORY CAPITAL NOTE 10: STOCK-BASED COMPENSATION NOTE 11: DERIVATIVES NOTE 12: LEGAL CONTINGENCIES NOTE...

  • Page 18
    ... mortgage purchase or Ã'nancing activities or to guarantee our securities and other obligations. Our Charter and Mission The Federal Home Loan Mortgage Corporation Act, which we refer to as our charter, forms the framework for our business activities, the products we bring to market and the services...

  • Page 19
    ..., employment rates in various regions of the country, homeownership rates, home price appreciation, lender preferences regarding credit risk and borrower preferences regarding mortgage debt. The amount of residential mortgage debt available for us to purchase and the mix of available loan products...

  • Page 20
    ... debt outstanding as of September 30 for 2007 and December 31 for 2006 and 2005. Source: Federal Reserve Flow of Funds Accounts of the United States dated December 6, 2007. Following several years of substantial growth in the residential mortgage market, driven by historically low interest rates...

  • Page 21
    ...funds, insurance companies, securities dealers, money managers, commercial banks, foreign central banks and other Ã'xed-income investors. Our Structured Securities represent beneÃ'cial interests in pools of PCs and certain other types of mortgage-related assets. We guarantee the payment of principal...

  • Page 22
    ... assets into two or more classes that meet the investment criteria and portfolio needs of diÃ...erent investors. Our principal multi-class Structured Securities qualify for tax treatment as Real Estate Mortgage Investment Conduits, or REMICs. For purposes of this Information Statement, multi-class...

  • Page 23
    ... CAPITAL RESOURCES'' for a description of our funding activities. We use derivatives to: (a) regularly adjust or rebalance our funding mix in order to more closely match changes in the interest-rate characteristics of our mortgage-related assets; (b) economically hedge forecasted issuances of debt...

  • Page 24
    ... our mission to supply aÃ...ordable rental housing. We also issue guarantees that we believe oÃ...er attractive long-term returns relative to anticipated credit costs. Employees At January 31, 2008, we had 5,281 full-time and 115 part-time employees. Our principal oÇces are located in McLean, Virginia...

  • Page 25
    ... expected economic returns than our typical transactions. At times, we also relax some of our underwriting criteria to obtain goals-qualifying mortgage loans and may make additional investments in higher-risk mortgage loan products that are more likely to serve the borrowers targeted by HUD's goals...

  • Page 26
    ... mortgage products to reputable mortgage originators so that borrowers have a greater choice of Ã'nancing options. OÇce of Federal Housing Enterprise Oversight OFHEO is the safety and soundness regulator for Freddie Mac and Fannie Mae. The GSE Act established OFHEO as a separate oÇce within HUD...

  • Page 27
    ... years ended December 31, 2000 and 2001 and the revision of fourth quarter and full-year consolidated Ã'nancial statements for 2002. Under the terms of the consent order, we agreed to undertake certain remedial actions related to governance, corporate culture, internal controls, accounting practices...

  • Page 28
    ...to improve business Ã-exibility, we reduced our common stock dividend for the fourth quarter of 2007, issued $6.0 billion of non-cumulative, perpetual preferred stock and reduced the size of our retained and cash and investments portfolio. See ""RISK FACTORS ÃŒ Competitive and Market Risks ÃŒ Market...

  • Page 29
    ...Guidance and the Subprime Statement. These principles apply to our purchases of nontraditional mortgages and subprime short-term hybrid ARMs and our related investment activities. In response, in July 2007, we informed our customers of new underwriting and disclosure requirements for non-traditional...

  • Page 30
    ... credit proÃ'le of the borrower, the features of the mortgage loan, the type of property securing the mortgage and local and regional economic conditions, including regional unemployment rates and home price appreciation. Recent changes in mortgage pricing and uncertainty may limit borrowers' future...

  • Page 31
    ... our new business would be lower and could result in losses on guarantees at their inception. Moreover, an increase in expected future credit costs increases the fair value of our existing guarantee obligation. We are exposed to increased credit risk related to subprime and Alt-A mortgage loans that...

  • Page 32
    ... face operational and legal challenges associated with changing our mortgage purchase commitments to conform with the lower limits and there could be fewer loans available for us to purchase. In October 2007, the Federal Housing Finance Board reported that the national average price of a one-family...

  • Page 33
    ... low-cost debt funding with Fannie Mae, the Federal Home Loan Banks and other institutions that hold mortgage portfolios. Competition for debt funding from these entities can vary with changes in economic, Ã'nancial market and regulatory environments. Increased competition for low-cost debt funding...

  • Page 34
    ...Fair Value Results'' for a more detailed description of the impacts of changes in mortgage-to-debt OAS. The loss of business volume from key lenders could result in a decline in our market share and revenues. Our business depends on our ability to acquire a steady Ã-ow of mortgage loans. We purchase...

  • Page 35
    ...Ã...ective controls could also cause investors to lose conÃ'dence in our reported Ã'nancial information, which may have an adverse eÃ...ect on the trading price of our securities. We rely on internal models for Ã'nancial accounting and reporting purposes, to make business decisions, and to manage risks...

  • Page 36
    ... make poor business decisions, impacting loan purchases, guarantee fee pricing, asset and liability management, or other decisions. Furthermore, any strategies we employ to attempt to manage the risks associated with our use of models may not be eÃ...ective. See ""MD&A ÃŒ CRITICAL ACCOUNTING POLICIES...

  • Page 37
    ... activity and mortgage loan underwriting. Any failures by those vendors could disrupt our business operations. We outsource certain key functions to external parties, including but not limited to (a) processing functions for trade capture, market risk management analytics, and asset valuation...

  • Page 38
    ... our underwriting guidelines and the expanded use of targeted initiatives to reach underserved populations. For example, we may purchase loans and mortgage-related securities that oÃ...er lower expected returns on our investment and increase our exposure to credit losses. In addition, in order to meet...

  • Page 39
    ...repeal of the federal income tax deductibility of mortgage interest payments. We may be required to materially modify our disclosures or Ã'nancial statements in connection with the process of registering our common stock with the SEC. We plan to register our common stock with the SEC during 2008. We...

  • Page 40
    ... its parent corporation, First American, alleging appraisal fraud in connection with loans originated by Washington Mutual, in November 2007, the New York Attorney General demanded that we either retain an independent examiner to investigate our mortgage purchases from Washington Mutual supported by...

  • Page 41
    ...on such payments and ""NOTE 8: STOCKHOLDERS' EQUITY'' to our consolidated Ã'nancial statements for additional information regarding our preferred stock dividend rates. Stock Performance Graph The following graph compares the Ã've-year cumulative total stockholder return on our common stock with that...

  • Page 42
    ... have awards outstanding under this plan. We collectively refer to the 2004 Employee Plan and 1995 Employee Plan as the Employee Plans. During the three months ended December 31, 2007, 13,655 stock options were exercised and no stock options were granted under our Employee Plans and Directors' Plan...

  • Page 43
    ...-debt option adjusted spreads, and home prices; ‚ preferences of originators in selling into the secondary market and borrower preferences for Ã'xed-rate mortgages or ARMs; ‚ Investor preferences for mortgage loans and mortgage-related and debt securities versus other investments; 26 Freddie Mac

  • Page 44
    ... factors and their impacts; and ‚ market reactions to the foregoing. We undertake no obligation to update forward-looking statements we make to reÃ-ect events or circumstances after the date of this Information Statement or to reÃ-ect the occurrence of unanticipated events. 27 Freddie Mac

  • Page 45
    ... by the simple average of the beginning and ending balances of total assets. (11) Ratio computed as preferred stock, at redemption value divided by core capital. See ""NOTE 9: REGULATORY CAPITAL'' to our consolidated Ã'nancial statements for more information regarding core capital. 28 Freddie Mac

  • Page 46
    ... half of 2007 or stopped originating certain types of mortgages for riskier products in the market, such as some types of ARMs, resulting in higher mortgage rates. This response has adversely aÃ...ected many borrowers seeking to reÃ'nance out of ARMs scheduled to reset to higher rates, contributing to...

  • Page 47
    ... loans purchased under our guarantees. See "CONSOLIDATED RESULTS OF OPERATIONS ÃŒ Non-Interest Expenses ÃŒ Losses on Certain Credit Guarantees'' for additional information. We reported income tax expense (beneÃ't) of $(2.9) billion and $(45) million in 2007 and 2006 resulting in eÃ...ective tax rates...

  • Page 48
    .... We estimate our expected investment returns using an OAS approach. Adjusted operating income for our Investments segment declined in 2007 compared to 2006. We experienced higher funding costs in 2007 for our mortgage-related investment portfolio as our long-term debt interest expense increased, re...

  • Page 49
    ... mortgage loans while fulÃ'lling our mission to supply aÃ...ordable rental housing. We also seek to issue guarantees that we believe oÃ...er attractive long-term returns relative to anticipated credit costs. Adjusted operating income for our Multifamily segment decreased in 2007 compared to 2006...

  • Page 50
    ...expected future credit costs and increased uncertainty in the market. This increase in the single-family guarantee obligation was partially oÃ...set by a fair value increase in the singlefamily guarantee asset of approximately $2.1 billion and cash receipts related to management and guarantee fees and...

  • Page 51
    ...well into 2008. These changes include a decrease in single-family home sales that began in 2005 and deteriorating conditions in the mortgage credit markets, which have resulted in more rigorous underwriting standards, and greatly reduced originations of subprime and Alt-A mortgages. 34 Freddie Mac

  • Page 52
    ... Year Ended December 31, Adjusted 2007 2006 2005 (in millions) Net interest income Non-interest income: Management and guarantee income Gains (losses) on guarantee asset Income on guarantee obligation Derivative gains (losses Gains (losses) on investment activity Gains on debt retirement...

  • Page 53
    ... Excludes mortgage loans and mortgage-related securities traded, but not yet settled. (2) For securities in our retained and investment portfolios, we calculated average balances based on their unpaid principal balance plus their associated deferred fees and costs (e.g., premiums and discounts), but...

  • Page 54
    ... result of changes in interest rates on variable-rate assets acquired in 2004 and 2005. Also, we adjusted our funding mix in 2006 by increasing the proportion of callable debt outstanding, which we use to manage prepayment risk associated with our mortgage-related investments and which generally has...

  • Page 55
    ...Structured Securities issued and the related discount rates used to determine the net present value of the cash Ã-ows. For example, an increase in interest rates extends the life of the guarantee asset and increases the fair value of future management and guarantee fees. Our valuation 38 Freddie Mac

  • Page 56
    ... fees vary based on customer compensation payment preferences. Compensation also includes various types of seller-provided credit enhancements related to the underlying mortgage loans. See ""NOTE 20: CHANGES IN ACCOUNTING PRINCIPLES'' to our consolidated Ã'nancial statements for further information...

  • Page 57
    ... Ã-ow hedge and fair value hedge accounting relationships. At December 31, 2007, we did not have any derivatives in hedge accounting relationships. From time to time, we designate as cash Ã-ow hedges certain commitments to forward sell mortgage-related securities. See ""NOTE 11: DERIVATIVES'' to our...

  • Page 58
    ... of the net deferred losses in AOCI at December 31, 2007 related to closed cash Ã-ow hedges. The scheduled amortization is based on a number of assumptions. Actual amortization will diÃ...er from the scheduled amortization, perhaps materially, as we make decisions on debt funding levels or as changes...

  • Page 59
    ... true when interest rates increase). We use swaptions and other option-based derivatives to adjust the characteristics of our debt in response to changes in the expected lives of mortgage-related assets in our retained portfolio. Purchased call and put swaptions, where we make premium payments, are...

  • Page 60
    ... qualifying hedge accounting relationships increased in 2007 compared to 2006 due to the increase in our net pay-Ã'xed swap position as we responded to the changing interest rate environment. During 2006, fair value losses on our swaptions increased as implied volatility declined and both long-term...

  • Page 61
    ... value of the loan. During 2007, we recognized recoveries on loans impaired upon purchase of $505 million. During 2006, we recaptured $58 million on impaired loans, which reduced losses on loans purchased. For impaired loans where the borrower has made required payments that return to current...

  • Page 62
    ... employees to support our Ã'nancial reporting and infrastructure activities. Certain long-term employee incentive compensation costs also increased as we worked to attract and retain key talent to reduce reliance on external resources. Professional services decreased in 2007 compared to 2006...

  • Page 63
    ... support our aÃ...ordable housing mission. We negotiate contracts with our customers based on the volume and types of mortgage loans to be delivered to us, and our estimates of the net present value of related future guarantee fees, credit costs and other associated cash Ã-ows. However, the accounting...

  • Page 64
    ... recorded in 2005 to increase our reserves for legal settlements, net of expected insurance proceeds. See ""NOTE 12: LEGAL CONTINGENCIES'' to our consolidated Ã'nancial statements for more information. Income Tax Expense (BeneÃ't) For 2007, 2006 and 2005, we reported income tax expense (beneÃ't) of...

  • Page 65
    ... duration, convexity and volatility. We actively manage these risks through asset selection and structuring, Ã'nancing asset purchases with a broad range of both callable and non-callable debt and the use of interest-rate derivatives designed to economically hedge a signiÃ'cant portion of our...

  • Page 66
    ... closely reÃ-ect the economic impact of our risk management activities. Thus, we amortize the impact of terminated derivatives as well as gains and losses on asset sales and debt retirements into Adjusted operating income. Although our interest-rate risk and asset/liability management processes...

  • Page 67
    ... respectively. In 2007, wider mortgageto-debt OAS resulted in favorable investment opportunities, particularly in the second half of the year. In response to these market conditions, we took advantage of these opportunities by increasing our purchase activities in CMBS and agency 50 Freddie Mac

  • Page 68
    ...debt that we issued at lower interest rates during the past few years. Increases in our funding costs were oÃ...set by a decline in our mortgage-related securities amortization expense as purchases in 2007 largely consisted of securities purchased at a discount. During the year ended December 31, 2007...

  • Page 69
    ...same time, the expected future credit costs associated with our new credit guarantee business increased. We negotiated increases in our contractual fee rates for securitization issuances through bulk activity channels throughout 2007 in response to increases in market pricing of mortgage credit risk...

  • Page 70
    ... December 31, 2007, compared to 2% at December 31, 2006. However, as home prices increased during 2006 and prior years, many borrowers used second liens at the time of purchase to potentially reduce the LTV ratio to below 80%, thus avoiding requirements to have private mortgage insurance. Including...

  • Page 71
    ... to 2006, as higher funding costs more than oÃ...set the increase in our loan portfolio balances. We experienced higher funding costs in 2007 versus 2006, reÃ-ecting the replacement of maturing long-term debt that was issued at lower rates in prior years. Despite market volatility and credit concerns...

  • Page 72
    ... Ì Voluntary, Temporary Growth Limit.'' The average unpaid principal balance of our retained portfolio for the six months ended December 31, 2007, calculated using cumulative average month-end portfolio balances, was $26.9 billion below our voluntary growth limit of $742.4 billion. 55 Freddie Mac

  • Page 73
    ... mortgage loans include only those loans that, as of the reporting date, have a contractual coupon rate that is subject to change. (3) For our PCs and Structured Securities, we are subject to the credit risk associated with the underlying mortgage loan collateral. (4) Agency mortgage-related...

  • Page 74
    ...-mortgage-related securities were rated A or better. During 2007, we reduced the balance of our cash and investments portfolio in order to take advantage of investment opportunities in mortgage-related securities as OAS widened. In addition, eÃ...ective in December 2007 we established 57 Freddie Mac

  • Page 75
    ...in our cash and investment balances on our consolidated balance sheets. During 2006, we made a decision to maintain higher levels of liquid investments to ensure that we could appropriately service our outstanding debt and PCs and Structured Securities while operating under the Federal Reserve Board...

  • Page 76
    ... and interest-rate caps. (3) Consists primarily of cash premiums paid or received on options. Table 27 provides information on our outstanding written and purchased swaption and option premiums at December 31, 2007 and 2006, based on the original premium receipts or payments. We use written options...

  • Page 77
    ... interest-rate swap agreements that are scheduled to begin on future dates ranging from less than one year to ten years. (5) Primarily represents written options, including guarantees of stated Ã'nal maturity of issued Structured Securities and written call options on PCs we issued. 60 Freddie Mac

  • Page 78
    ...volume in 2007. The losses on guarantee assets in 2007 increased as compared to 2006. This increase is due to the return of investment associated with a higher guarantee asset balance. Gains on fair value of management and guarantee fees in 2007 resulted from an increase in interest rates during the...

  • Page 79
    ... Year Weighted Average Balance, Net(3) EÃ...ective Rate(4) (dollars in millions) Maximum Balance, Net Outstanding at Any Month End Reference Bills» securities and discount notes Medium-term notes Securities sold under agreements to repurchase and federal funds purchased Short-term debt securities...

  • Page 80
    ...value of available-for-sale securities as medium- and long-term rates declined since December 31, 2006 and the reclassiÃ'cation to earnings of deferred losses related to closed cash Ã-ow hedge relationships. See ""CREDIT RISKS ÃŒ Mortgage Credit Risk'' for more information regarding mortgage-related...

  • Page 81
    ... and market conditions. This estimate considers both contractual guarantee fees collected over the life of the credit guarantee portfolio and credit-related delivery fees collected up-front when pools are formed, and associated costs and obligations, which include default costs. 64 Freddie Mac

  • Page 82
    ... rates and other market factors on the unhedged portion of the projected cash Ã-ows from the credit guarantee business. The fair value changes associated with net buy-ups and Ã-oat are considered in asset-liability management return (described above) because they relate to hedged positions. Fee...

  • Page 83
    ...AND CAPITAL RESOURCES Liquidity Our business activities require that we maintain adequate liquidity to make payments upon the maturity, redemption or repurchase of our debt securities; purchase mortgage loans, mortgage-related securities and other investments; make payments of principal and interest...

  • Page 84
    ... their use of the Fedwire system. The revised policy also includes a requirement that the GSEs fully fund their accounts in the system to the extent necessary to cover payments on their debt and mortgage-related securities each day, before the Federal Reserve Bank of New York, acting as Ã'scal agent...

  • Page 85
    ...access to the debt markets under a variety of market conditions. Table 34 Ì Debt Security Issuances by Product, at Par Value(1) Year Ended December 31, 2007 2006 (in millions) Short-term debt: Reference Bills» securities and discount notes 597,587 Medium-term notes Ì callable 4,100 Medium-term...

  • Page 86
    ...Ì Freddie Mac Credit Ratings Nationally Recognized Statistical Rating Organization S&P Moody's Fitch Senior long-term debt(1 AAA Aaa Short-term debt(2 A-1° P-1 (3) Subordinated debt AA¿/Negative Aa2 Preferred stock AA¿/Negative Aa3 (1) Includes medium-term notes, U.S. dollar Reference Notes...

  • Page 87
    ...capital reserves to meet mortgage funding needs, provide diverse sources of liquidity or help manage the interest-rate risk inherent in mortgage-related assets. For additional information on our cash and investments portfolio, see ""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Cash and Investments.'' The...

  • Page 88
    ... of cash dividends on preferred stock and common stock, and payments of housing tax credit partnerships notes payable. Capital Resources Capital Management Our primary objective in managing capital is preserving our safety and soundness. We also seek to have suÇcient capital to support our business...

  • Page 89
    ... of 2007, our board of directors also approved quarterly preferred stock dividends that were consistent with the contractual rates and terms of the preferred stock. See ""NOTE 8: STOCKHOLDERS' EQUITY'' to our consolidated Ã'nancial statements for information regarding our outstanding issuances...

  • Page 90
    ... and Multifamily segments manage and receive associated guarantee fees. In 2007 and 2006, our total mortgage portfolio grew at a rate of 15% and 8%, respectively. Our new business purchases consist of mortgage loans and non-Freddie Mac mortgage-related securities that are purchased for our retained...

  • Page 91
    ...(1) 2007 Amount New business purchases: Single-family mortgage purchases: Conventional: 30-year amortizing Ã'xed-rate(2 326,455 15-year amortizing Ã'xed-rate 28,910 ARMs/adjustable-rate(3 12,465 Interest-only(4 97,778 Option ARMs Balloon/resets(5 125 FHA/VA(6 157 Rural Housing Service and...

  • Page 92
    ...ARMs/adjustable-rate Option ARMs Interest-only(4 Balloon/resets FHA/VA Rural Housing Service and other federally guaranteed loans Total single-family Multifamily: Conventional and other Total multifamily Structured Securities backed by non-Freddie Mac mortgage-related securities: Ginnie Mae...

  • Page 93
    ... program executed with various lenders. We may issue such PCs to these lenders in exchange for the mortgage loans we purchase from them or, to the extent these loans are pooled with loans purchased for cash, we may sell them to third parties for cash consideration through an auction. 76 Freddie Mac

  • Page 94
    ... during the year ended December 31, 2007 and 2006, respectively. The increase of our principal credit risk exposure on Structured Securities relates only to that portion of resecuritized assets that consists of nonFreddie Mac mortgage-related securities. For information about our purchase and...

  • Page 95
    ... a contribution is required for 2008. See ""NOTE 14: EMPLOYEE BENEFITS'' to our consolidated Ã'nancial statements for additional information about contributions to our Pension Plan; ‚ future cash settlements on derivative agreements not yet accrued, because the amount and timing of such payments...

  • Page 96
    ...balance sheets and statements of income as well as our consolidated fair value balance sheets. Fair value is deÃ'ned as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date. The selection of a technique...

  • Page 97
    ... instruments have signiÃ'cant data inputs that cannot be validated by reference to the market. These instruments are typically illiquid or unique in nature and require the use of management's judgment of market-based assumptions. The use of diÃ...erent pricing models or assumptions could produce...

  • Page 98
    ... Overview'' and ""NOTE 11: DERIVATIVES'' to our consolidated Ã'nancial statements. Allowance for Loan Losses and Reserve for Guarantee Losses We maintain an allowance for loan losses on mortgage loans held-for-investment and a reserve for guarantee losses on PCs, collectively referred to as our loan...

  • Page 99
    ... in fair value, credit ratings, the length of time the investment has been in an unrealized loss position, and the likelihood of sale in the near term. While market prices and rating agency actions are factors that are considered in the impairment analysis, cash Ã-ow analysis based on default and...

  • Page 100
    ...generally hedge mortgage-related investments with debt securities. We do not actively manage the basis risk arising from funding retained portfolio investments with our debt securities, also referred to as mortgage-to-debt OAS risk. See ""MD&A Ì CONSOLIDATED FAIR VALUE BALANCE SHEETS 83 Freddie Mac

  • Page 101
    ... return characteristics while selling oÃ... the cash Ã-ows that do not meet our investment proÃ'le. Through our asset and liability management process, we mitigate interest-rate risk by issuing a wide variety of debt products. The prepayment option held by mortgage borrowers drives the fair value...

  • Page 102
    ... in interest rates of the fair value of all interest-earning assets, interest-bearing liabilities and derivatives on a pre-tax basis. When we calculate the expected loss in portfolio market value and duration gap, we also take into account the cash Ã-ows related to certain credit guaranteerelated...

  • Page 103
    ... after the date of the commitment. To facilitate larger and more predictable debt issuances that contribute to lower funding costs, we use interest-rate derivatives to economically hedge the interest-rate risk exposure from the time we commit to purchase a mortgage to the time the related debt is...

  • Page 104
    ...-rate swaps used to mitigate interest-rate risk. Credit Derivatives We entered into credit derivatives during 2007, including risk-sharing agreements. Under these risk-sharing agreements, default losses on speciÃ'c mortgage loans delivered by sellers are compared to default losses on reference pools...

  • Page 105
    ... they continue to meet our internal standards. We assign internal ratings, credit capital and exposure limits to each counterparty based on quantitative and qualitative analysis, which we update and monitor on a regular basis. We conduct additional reviews when market conditions dictate or events...

  • Page 106
    ...less $1 million or less (1) We use the lower of S&P and Moody's ratings to manage collateral requirements. In this table, the rating of the legal entity is stated in terms of the S&P equivalent. (2) Based on legal entities. AÇliated legal entities are reported separately. (3) For each counterparty...

  • Page 107
    ... the mortgage, home price trends, apartment demand in the area, the number of competing properties in the area (including properties under construction) and the general economy. To manage our mortgage credit risk, we focus on three key areas: underwriting requirements and quality control standards...

  • Page 108
    ... quality control. For multifamily mortgage loans, we use an intensive pre-purchase underwriting process for the mortgages we purchase, unless the mortgage loans have signiÃ'cant credit enhancements. Our underwriting process includes assessments of the local market, the borrower, the property manager...

  • Page 109
    ... payment of principal and interest; for Freddie Mac pass-through certiÃ'cates that are backed by tax-exempt multifamily housing revenue bonds and related taxable bonds and/or loans; and for multifamily mortgage loans that are originated and held by state and municipal agencies to support tax-exempt...

  • Page 110
    ...31, 2007 that contain adjustable payment terms. The reported balances in the table are based on the unpaid principal balances of these loans, aggregated by adjustable-rate loan product type and categorized by year of the next scheduled contractual reset date. The timing of the actual reset dates may...

  • Page 111
    ... 31, 2007 and 2006, respectively, were classiÃ'ed as subprime mortgage loans. To support our mission, we announced in April 2007 that we will purchase up to $20 billion in Ã'xed-rate and hybrid ARM products that will provide lenders with more choices to oÃ...er subprime borrowers. The products are...

  • Page 112
    ... using our underwriting and quality control processes. Our underwriting process evaluates mortgage loans using several critical risk characteristics, such as credit score, LTV ratio and occupancy type. Table 46 provides characteristics of our single-family new business purchases in 2007 and 2006...

  • Page 113
    ... 31, 2007, 2006 and 2005, respectively. (2) Original LTV ratios are calculated as the amount of the mortgage we guarantee divided by the lesser of the appraised value of the property at time of mortgage origination or the mortgage borrower's purchase price. (3) Current market values are estimated...

  • Page 114
    ...family mortgage loans where the average credit score at origination was less than 660, the average estimated current LTV ratios were 71% and 63% at December 31, 2007 and 2006, respectively. As home prices increased during 2006 and prior years, many borrowers used second liens at the time of purchase...

  • Page 115
    ... costs related to foreclosed properties and avoiding the credit loss in REO. Our foreclosure alternatives include: ‚ Repayment plans are contractual plans to make up past due amounts. They mitigate our credit losses because they assist borrowers in returning to compliance with the original terms...

  • Page 116
    ...of single-family loans 90 days or more delinquent or in foreclosure and multifamily loans 60 days or more delinquent at period end. Delinquency status does not apply to REO; however, REO is included in non-performing assets. (5) Represents those loans purchased from the mortgage pools underlying our...

  • Page 117
    ... LTV ratios for mortgage loans originated in those years. In addition, the average size of the unpaid principal balance related to non-performing assets in our portfolio rose in 2007. As a result, the balance of our REO, net, increased 134% in 2007. Until nationwide home prices return to historical...

  • Page 118
    ...-traditional mortgage products that have higher inherent credit risk than traditional Ã'xed-rate mortgage products. Table 51 presents the delinquency rates of our single-family retained mortgages and those that underlie our PCs and Structured Securities categorized by product type. 101 Freddie Mac

  • Page 119
    ...18 billion of option ARM loans that are underlying our Structured Transactions as of December 31, 2007, 2006 and 2005, respectively. (4) Credit-enhanced loans are primarily those mortgage loans for which a third party has primary default risk. The total credit-enhanced unpaid principal balance as of...

  • Page 120
    ... Purchased Under Financial Guarantees(1) Unpaid Principal Balance 2007 Purchase Loan Loss Discount Reserves (in millions) Net Investment Beginning balance Purchases of loans Provision for credit losses Principal repayments Troubled debt restructurings(2 Foreclosures, transferred to REO Ending...

  • Page 121
    ...balance of a loan at the date it is discharged less the estimated value in Ã'nal disposition. (5) Equal to REO operations income (expense) plus charge-oÃ...s, net. (6) Calculated as credit losses divided by the average total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities and...

  • Page 122
    ...economic condition of the residential mortgage market does not improve. Higher volumes of foreclosures and higher average loan balances resulted in higher charge-oÃ...s, on a per property basis, during 2007. We maintain two loan loss reserves ÃŒ reserve for losses on mortgage loans held-for-investment...

  • Page 123
    ... losses on Participation CertiÃ'cates. (5) Consist of: (a) the transfer of reserves associated with non-performing loans purchased from mortgage pools underlying our PCs, Structured Securities and long-term standby agreements to establish the initial recorded investment in these loans at the date...

  • Page 124
    ... non-agency securities rated AAA (based on the S&P or equivalent rating scale of other nationally recognized statistical rating organizations). We seek to manage institutional credit risk on non-Freddie Mac mortgage-related securities by only purchasing securities that meet our investment guidelines...

  • Page 125
    ... 62% of our total bond insurer coverage, have been downgraded below AAA by at least one rating agency. We manage institutional credit risk on non-Freddie Mac mortgage-related securities by only purchasing securities that meet our investment guidelines and performing ongoing analysis to evaluate the...

  • Page 126
    ... place through the enterprise risk management framework. Business areas retain primary responsibility for identifying, assessing and reporting their operational risks. Our business processes are highly dependent on our use of technology and business and Ã'nancial models. While we believe that we...

  • Page 127
    ...-annual subordinated debt management plans to OFHEO. ‚ We have in place a liquidity contingency plan, upon which we report to OFHEO on a weekly basis. We periodically test this plan in accordance with our agreement with OFHEO. ‚ For the year ended December 31, 2007, our duration gap averaged...

  • Page 128
    ... certain assumptions about counterparty default rates. (3) Based on single-family total mortgage portfolio, excluding Structured Securities backed by Ginnie Mae CertiÃ'cates. (4) Calculated as the ratio of NPV of the increase in credit losses to the single-family total mortgage portfolio, deÃ'ned in...

  • Page 129
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 112 Freddie Mac

  • Page 130
    ... of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Ã'nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the...

  • Page 131
    FREDDIE MAC CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, Adjusted 2007 2006 2005 (dollars in millions, except sharerelated amounts) Interest income Mortgage loans Mortgage-related securities Cash and investments Total interest income Interest expense Short-term debt Long-term debt...

  • Page 132
    ...-mortgage-related securities: Available-for-sale, at fair value 35,101 Securities purchased under agreements to resell and federal funds sold 6,562 Cash and investments 50,237 Accounts and other receivables, net 5,003 Derivative assets, net 827 Guarantee asset, at fair value 9,591 Real estate...

  • Page 133
    ...year Common stock, par value Balance, beginning of year Common stock, end of year Additional paid-in capital Balance, beginning of year Stock-based compensation Income tax beneÃ't from stock-based compensation Preferred stock issuance costs Common stock issuances Real Estate Investment Trust...

  • Page 134
    ... mortgage insurance and sales of real estate owned Net (increase) decrease in securities purchased under agreements to resell and Federal funds sold Derivative premiums and terminations and swap collateral, net Investments in low-income housing tax credit partnerships Net cash provided by (used...

  • Page 135
    ... Government National Mortgage Association, or Ginnie Mae, as well as non-agency entities. We also guarantee multifamily mortgage loans that support housing revenue bonds issued by third parties and we guarantee other mortgage loans held by third parties. Securitized mortgage-related assets that back...

  • Page 136
    ... invest as a limited partner in qualiÃ'ed low-income housing tax credit, or LIHTC, partnerships that are eligible for federal tax credits and that mostly are VIEs. We are the primary beneÃ'ciary for certain of these LIHTC partnerships. We use the equity method of accounting for entities over...

  • Page 137
    ... the life of the PC. We may also receive upfront, cash-based payments as additional compensation for our guarantee of mortgage loans, referred to as credit fees. As additional consideration received on swap-based exchanges, we may receive various types of seller-provided credit enhancements related...

  • Page 138
    ... management fees on the trust's assets which was recorded as other non-interest income. The funds are maintained in this separate custodial account until they are due to the PC and Structured Securities holders on their respective security payment dates. Prior to December 2007, we managed the timing...

  • Page 139
    ... Held-for-investment mortgage loans are reported at their outstanding unpaid principal balances, net of deferred fees and cost basis adjustments (including unamortized premiums and discounts). These deferred items are amortized into interest income over the estimated lives of the mortgages using the...

  • Page 140
    ... of the acquired property, less costs to sell, exceeds the carrying value of the loan. For impaired loans where the borrower has made required payments that return to current status, the basis adjustments are accreted into interest income over time, as periodic payments are received. 123 Freddie Mac

  • Page 141
    ... in fair value, credit ratings, the length of time the investment has been in an unrealized loss position, and the likelihood of sale in the near term. While market prices and rating agency actions are factors that are considered in the impairment analysis, cash Ã-ow analysis based on default and...

  • Page 142
    ...-term or long-term is based on the original contractual maturity of the debt security. Debt securities denominated in a foreign currency are translated into U.S. dollars using foreign exchange spot rates at the balance sheet dates and any resulting gains or losses are reported in non-interest income...

  • Page 143
    ...market. When a loan is transferred to REO, losses arise when the carrying basis of the loan (including accrued interest) exceeds the fair value of the foreclosed property, net of estimated costs to sell and credit enhancements. Losses are charged-oÃ... against the allowance for loan losses at the time...

  • Page 144
    ... our consolidated Ã'nancial statements. See ""NOTE 15: SEGMENT REPORTING'' for additional information. Recently Adopted Accounting Standards Accounting for Employers' DeÃ'ned BeneÃ't Pension and Other Postretirement Plans On December 31, 2006, we adopted SFAS 158, ""Employers' Accounting for DeÃ'ned...

  • Page 145
    ... derivatives requiring bifurcation at fair value, with changes in fair value reÃ-ected in our consolidated statements of income. See ""NOTE 4: RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO'' for additional information. OÃ...setting of Amounts Related to Certain Contracts On October 1, 2007, we...

  • Page 146
    ... As discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,'' we issue two types of mortgage-related securities: PCs and Structured Securities. We guarantee the payment of principal and interest on issued PCs and Structured Securities that are backed by pools of mortgage loans, and we are...

  • Page 147
    ... loans, we use capital markets information and rating agency models to estimate subordination levels and dealer price quotes on proxy non-agency securities with collateral characteristics matched to our portfolio to value the expected credit losses and the risk premium for unexpected losses related...

  • Page 148
    ... market prices were not readily available. This portion of the guarantee asset was valued using an expected cash Ã-ow approach with market input assumptions extracted from the dealer quotes provided on the more liquid products, reduced by an estimated liquidity discount. Key Assumptions Used...

  • Page 149
    ... analysis presented in Table 2.3 relate solely to the guarantee asset associated with PCs and other Ã'nancial guarantees backed by single-family mortgage loans. Table 2.2 ÃŒ Key Assumptions Utilized in Fair Value Measurements of the Guarantee Asset Mean Valuation Assumptions(1) 2007 Adjusted 2006...

  • Page 150
    ... of Cash Flows Year Ended December 31, Adjusted 2007 2006 2005 (in millions) Cash Ã-ows from: Transfers of Freddie Mac securities that were accounted for as sales 62,644 $79,565 $93,828 Cash Ã-ows received on the guarantee asset(1 2,288 1,873 1,565 Other retained interests principal and interest...

  • Page 151
    ...primary beneÃ'ciary of any asset-backed investment trusts. Structured Transactions We periodically issue securities in Structured Transactions, which are backed by mortgage loans or non-Freddie Mac mortgage-related securities using collateral pools transferred to a trust speciÃ'cally created for the...

  • Page 152
    ...security type. Table 4.1 Ì Available-For-Sale Securities Amortized Cost December 31, 2007 Gross Gross Unrealized Unrealized Gains Losses (in millions) Fair Value Retained portfolio: Mortgage-related securities issued by: Freddie Mac 346,569 Federal National Mortgage Association, or Fannie Mae 45...

  • Page 153
    ... Value Losses (in millions) Total Fair Value Gross Unrealized Losses December 31, 2007 Retained portfolio: Mortgage-related securities issued by: Freddie Mac Fannie Mae Ginnie Mae Other Obligations of states and political subdivisions Total mortgage-related securities Cash and investments...

  • Page 154
    ...equivalent scale). For the years ended December 31, 2007, 2006 and 2005, we recorded impairments related to investments in securities of $399 million, $404 million and $292 million, respectively. Table 4.3 below illustrates the gross realized gains and gross realized losses received from the sale of...

  • Page 155
    ... 31, 2007 Weighted Amortized Cost Fair Value Average Yield(1) (dollars in millions) Retained portfolio: Total mortgage-related securities(2) Due 1 year or less Due after 1 through 5 years Due after 5 through 10 years Due after 10 years Total Cash and investments portfolio: Non-mortgage-related...

  • Page 156
    ... on our consolidated statements of income as impairment losses on available-for-sale securities of $234 million, $193 million and $180 million, net of taxes, for the years ended December 31, 2007, 2006 and 2005, respectively. Table 4.6 summarizes the estimated fair values by major security type for...

  • Page 157
    ... principal balance of mortgage loans 82,158 65,847 Deferred fees, unamortized premiums, discounts and other cost basis adjustments 1,868) (171) Lower of cost or market adjustments on loans held-for-sale 2) (2) Allowance for loan losses on loans held-for-investment 256) (69) Total mortgage loans...

  • Page 158
    ... time of resolution. Charge-oÃ...s exclude $156 million in 2007 related to reserve amounts previously transferred to reduce the carrying value of loans purchased under Ã'nancial guarantees. (3) Consist of: (a) the transfer of reserves associated with non-performing loans purchased from mortgage pools...

  • Page 159
    ... are recorded at fair value. We recognize losses on loans purchased in our consolidated statements of income if our net investment in the acquired loan is higher than its fair value. At December 31, 2007 and 2006, the unpaid principal balances of these loans were $7.0 billion and $3.0 billion...

  • Page 160
    ...2007, 2006 and 2005. NOTE 6: REAL ESTATE OWNED We obtain REO properties when we are the highest bidder at foreclosure sales of properties that collateralize nonperforming single-family and multifamily mortgage loans owned by us. Upon acquiring single-family properties, we establish a marketing plan...

  • Page 161
    ... from commercial banks that are members of the Federal Reserve System. At both December 31, 2007 and 2006, the balance of securities sold under agreements to repurchase and federal funds purchased was $Ì. Table 7.2 provides additional information related to our debt securities due within one year...

  • Page 162
    ...Ã'cial owners to require us to repay principal prior to the contractual maturity date. (5) Includes callable Estate NotesSM securities and FreddieNotes» securities of $6.3 billion and $7.8 billion at December 31, 2007 and 2006. (6) The eÃ...ective rates for zero-coupon medium-term notes ÃŒ callable...

  • Page 163
    ... speciÃ'ed dates, at their redemption price plus dividends accrued through the redemption date. In addition, all 24 classes of preferred stock are perpetual and non-cumulative, and carry no signiÃ'cant voting rights or rights to purchase additional Freddie Mac stock or securities. Costs incurred in...

  • Page 164
    ... less common stock held in treasury), the par value of outstanding non-cumulative, perpetual preferred stock, additional paid-in capital and retained earnings, as determined in accordance with GAAP. Total capital includes core capital and general reserves for mortgage and foreclosure losses and any...

  • Page 165
    ... a written agreement with OFHEO that updated those commitments and set forth a process for implementing them. Under the terms of this agreement, we committed to issue qualifying subordinated debt for public secondary market trading and rated by no fewer than two nationally recognized 148 Freddie Mac

  • Page 166
    ... the terms of the 1995 Stock Compensation Plan, or 1995 Employee Plan. Although grants are no longer made under the 1995 Employee Plan, we currently have awards outstanding under this plan. We collectively refer to the 2004 Employee Plan and 1995 Employee Plan as the Employee Plans. 149 Freddie Mac

  • Page 167
    ... requirements. Stock Options Stock options granted allow for the purchase of our common stock at an exercise price equal to the fair market value of our common stock on the grant date. During 2006, the 2004 Employee Plan was amended to change the deÃ'nition of fair market value to the closing sales...

  • Page 168
    ... life of 5.1 years and (d) risk-free interest rate of 4.34%. Subsequent to November 30, 2005, dividend equivalent rights are no longer granted in connection with new awards of stock options to grantees. Table 10.2 provides a summary of activity under the ESPP for the year ended December 31, 2007...

  • Page 169
    ... 31, 2007. Table 10.3 Ì Employee Plans and Directors' Plan Option Activity Stock Options Weighted Average Weighted Average Remaining Exercise Price Contractual Term (dollars in millions, except share-related amounts) Aggregate Intrinsic Value Outstanding at January 1, 2007 Granted Exercised...

  • Page 170
    ... issuances of short-term debt over the required time period or longer-term debt, such as Reference Notes» securities. Table 11.1 presents the changes in AOCI, net of taxes, related to derivatives designated as cash Ã-ow hedges. Net change in fair value related to cash Ã-ow hedging activities...

  • Page 171
    ... fair value of open derivative contracts (i.e., net unrealized gains and losses) and net deferred gains and losses on closed (i.e., terminated or redesignated) cash Ã-ow hedges. (2) Net of tax (beneÃ't) expense of $(16) million, $(5) million, and $36 million for years ended December 31, 2007, 2006...

  • Page 172
    ... its parent corporation, First American, alleging appraisal fraud in connection with loans originated by Washington Mutual, in November 2007, the New York Attorney General demanded that we either retain an independent examiner to investigate our mortgage purchases from Washington Mutual supported by...

  • Page 173
    ...Adjusted) 2007 2006 (in millions) Deferred tax assets: Deferred fees related to securitizations 3,680 Basis diÃ...erences related to derivative instruments 3,477 Credit related items and reserve for loan losses 1,013 Employee compensation and beneÃ't plans 196 Unrealized (gains) losses related to...

  • Page 174
    ...ts are based on an employee's years of service and highest average compensation, up to legal plan limits, over any consecutive 36 months of employment. Pension Plan assets are held in trust and the investments consist primarily of funds consisting of listed stocks and corporate bonds. In addition to...

  • Page 175
    ... beneÃ'ts as employees render the services necessary to earn their pension and postretirement health beneÃ'ts. Our pension and postretirement health care costs related to these deÃ'ned beneÃ't plans for 2007, 2006 and 2005 presented in the following tables were calculated using assumptions as of...

  • Page 176
    ... Used to Determine Net Periodic BeneÃ't Cost Pension BeneÃ'ts Year Ended December 31, 2007 2006 Postretirement Health BeneÃ'ts Year Ended December 31, 2007 2006 2005 2005 Discount rate 6.00% Rate of future compensation increase 5.10% to 6.50% Expected long-term rate of return on plan assets...

  • Page 177
    ... 30, 2007 and 2006. Cash Flows Related to DeÃ'ned BeneÃ't Plans Our general practice is to contribute to our Pension Plan an amount equal to at least the minimum required contribution, if any, but no more than the maximum amount deductible for federal income tax purposes each year. During 2007, we...

  • Page 178
    ... deferrals of eligible compensation under our Executive Deferred Compensation Plan. We incurred costs of $36 million, $34 million and $31 million for the years ended December 31, 2007, 2006 and 2005, respectively, related to these plans. These expenses were included in salaries and employee beneÃ'ts...

  • Page 179
    ..., fund the investments with debt and derivatives to minimize interest rate risk, and generate net interest income in line with our return on equity objectives. The business model for our credit guarantee activity is one where we are a long-term guarantor of the conforming mortgage markets, manage...

  • Page 180
    ... duration, convexity and volatility. We actively manage these risks through asset selection and structuring, Ã'nancing asset purchases with a broad range of both callable and non-callable debt and the use of interest-rate derivatives, designed to economically hedge a signiÃ'cant portion of our...

  • Page 181
    ... closely reÃ-ect the economic impact of our risk management activities. Thus, we amortize the impact of terminated derivatives, as well as gains and losses on asset sales and debt retirements, into Adjusted operating income. Although our interest-rate risk and asset/liability management processes...

  • Page 182
    ... credit guarantee business. Table 15.1 reconciles Adjusted operating income to GAAP net income (loss). Table 15.1 Ì Reconciliation of Adjusted Operating Income to GAAP Net Income (Loss) 2007 Year Ended December 31, 2006 2005 (in millions) Adjusted operating income (loss) after taxes: Investments...

  • Page 183
    ... information for our reportable segments and All Other. Table 15.2 Ì Adjusted Operating Income Results and Reconciliation to GAAP Results Year Ended December 31, 2007 Net Interest Income (Expense) Management and Guarantee Income Other Non-Interest Income (Loss) Provision for Credit Losses REO...

  • Page 184
    ... adjustmentsÏÏÏ Credit guarantee-related adjustments Investment sales, debt retirements and fair value-related adjustments Fully taxable-equivalent adjustments ReclassiÃ'cations(1 Tax-related adjustments Total reconciling items, net of taxes Total per consolidated statement of income...

  • Page 185
    ..., 2007 Carrying Amount(2) Fair Value 2006 (adjusted) Carrying Amount(2) Fair Value (in billions) Assets Mortgage loans Mortgage-related securities Retained portfolio Cash and cash equivalents Investments Securities purchased under agreements to resell and federal funds sold Derivative assets...

  • Page 186
    ... the expected cost of funding and securitizing a multifamily whole loan of a comparable maturity and credit rating from the coupon on the whole loan at the time of purchase. The implied guarantee fee for both single-family and multifamily mortgage loans is also net of the related credit and other...

  • Page 187
    ... model uses market interest rates and market-implied option volatilities, where available, to calculate the option's fair value. Market-implied option volatilities are based on information obtained from broker/dealers. The fair value of exchange-traded futures is based on endof-day closing prices...

  • Page 188
    ...zero-coupon discount notes. The fair value of the short-term zero-coupon discount notes is based on a discounted cash Ã-ow model with market inputs. The valuation of other debt securities is generally based on market prices obtained from broker/dealers, reliable third-party pricing service providers...

  • Page 189
    ...) as a primary means of managing credit risk. See ""NOTE 4: RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO'' and ""NOTE 5: MORTGAGE LOANS AND LOAN LOSS RESERVES'' for more information about the securities and loans, respectively, we hold on our consolidated balance sheets. 172 Freddie Mac

  • Page 190
    ... we have guaranteed have been made to borrowers with credit scores below 620 at mortgage origination. As home prices increased during 2006 and prior years, many borrowers used second liens at the time of purchase to potentially reduce their LTV ratio to below 80%. Including this secondary Ã'nancing...

  • Page 191
    ... tied to a counterparty's credit rating. Derivative exposures and collateral amounts are monitored on a daily basis using both internal pricing models and dealer price quotes. Collateral is typically transferred within one business day based on the values of the related derivatives. This time lag in...

  • Page 192
    ... shares outstanding Ì basic. Table 19.1 Ì Earnings (Loss) Per Common Share Ì Basic and Diluted Year Ended December 31, Adjusted 2007 2006 2005 (dollars in millions, except per share amounts) Net income (loss 3,094) Preferred stock dividends and issuance costs on redeemed preferred stock 404...

  • Page 193
    ...to all PCs outstanding (whether held by third parties or us). Consequently, all credit losses, except for initial losses on loans purchased as impaired loans under SOP 03-3, stemming from guarantee-related activities are now accounted for in our provision for credit losses using a single measurement...

  • Page 194
    ... at January 1, 2007. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for more information. At December 31, 2006, we adopted SFAS 158 which requires the recognition of our pension and other postretirement plans' overfunded or underfunded status in the statement of Ã'nancial position...

  • Page 195
    ... credit guarantees(1 Losses on loans purchased(1 Other expenses Income tax (expense) beneÃ't Net income (loss Basic earnings (loss) per common share ÏÏÏÏÏ Diluted earnings (loss) per common share ÏÏÏ 2007 As reported with changes in accounting principles Year Ended December 31, 2006...

  • Page 196
    ... 2006 EÃ...ect of As Previously Changes Reported (in millions) As Adjusted EÃ...ect of Changes Assets: Mortgage loans, net Total mortgage-related securities Accounts and other receivables, net Derivative assets, net Guarantee asset, at fair value Deferred tax asset Other assets Total assets...

  • Page 197
    ...(330) 322 (1) 2007 As reported with changes in accounting principles and 2006 and 2005 As Adjusted amounts exclude adjustments which were made to our consolidated Statement of Cash Flows to conform to current period presentation. END OF FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 180 Freddie Mac

  • Page 198
    QUARTERLY SELECTED FINANCIAL DATA The unaudited Ã'nancial data for each quarter and full-year 2007 and 2006 reÃ-ects the reconciliation of previously reported to adjusted captions on the consolidated statements of income. See ""NOTE 20: CHANGES IN ACCOUNTING PRINCIPLES'' to our consolidated Ã'...

  • Page 199
    ...Ã'ciencies in IT General Controls in connection with testing the controls implemented by the company; ‚ implemented new Ã'nancial accounting applications for guarantee asset valuation in the fourth quarter of 2007 and for our entire mortgage-related securities portfolio and credit guarantees as of...

  • Page 200
    ...to our reporting them. Information Technology General Controls Ì Access to Data and Security Administration. Our controls over information systems security administration and management functions needed to improve in the following areas: (a) granting and revoking user access rights; (b) segregation...

  • Page 201
    ... Financial Close Process ‚ Complex Transactions Processing ‚ Accounting Policy Linkage Monitoring Controls within Financial Operations Information Technology General Controls Ì Access to Data and Security Administration Information Technology General Controls Ì Change Management Remediated...

  • Page 202
    Information Technology General Controls Ì Change Management We developed and deployed a new change management process and a new systems development life cycle process that are based on methodologies acquired from a third party. We now require adherence to these processes and related controls for ...

  • Page 203
    ... basis balance sheet to support deferred tax accounting under GAAP, which could result in balance sheet misclassiÃ'cations and potential income statement adjustments. Controls over Data Quality Controls over the quality of data used in our Ã'nancial reporting process were not eÃ...ective. Simplifying...

  • Page 204
    ... of charge upon request from our Investor Relations department. We intend to disclose on our website any amendments to, or waivers from, the employee code of conduct on behalf of the chief executive oÇcer, chief Ã'nancial oÇcer, controller and persons performing similar functions. 187 Freddie Mac

  • Page 205
    ... Human Resources Committee is set forth in our proxy statement and is incorporated here by reference. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Securities Authorized for Issuance Under Equity Compensation Plans Information about our common stock...

  • Page 206
    ...June 6, 2008 8000 Jones Branch Drive McLean, Virginia 22102 Proxy materials will be mailed to stockholders of record in accordance with Freddie Mac's bylaws and NYSE Euronext requirements. DIVIDEND PAYMENTS Approved by Freddie Mac's board of directors, dividends on the company's common stock and non...

  • Page 207
    ... presented in this Information Statement. Date: February 28, 2008 Richard F. Syron Chairman and Chief Executive OÇcer CERTIFICATION* I, Anthony S. Piszel, certify that: 1. I have reviewed this Information Statement of the Federal Home Loan Mortgage Corporation, or Freddie Mac; 2. Based on my...

  • Page 208
    8200 Jones Branch Drive, McLean, Virginia 22102 n FreddieMac.com