Freddie Mac 2008 Annual Report Download

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
Commission File Number: 000-53330
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Freddie Mac
Federally chartered corporation
(State or other jurisdiction of
incorporation or organization)
8200 Jones Branch Drive
McLean, Virginia 22102-3110
(Address of principal executive
offices, including zip code)
52-0904874
(I.R.S. Employer
Identification No.)
(703) 903-2000
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Name of each exchange
on which registered:
Voting Common Stock, no par value per share New York Stock Exchange
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
5% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
5.1% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
5.79% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
5.81% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
6% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
5.7% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Variable Rate, Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
6.42% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
5.9% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
5.57% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
5.66% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
6.02% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
6.55% Non-Cumulative Preferred Stock, par value $1.00 per share New York Stock Exchange
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes nNo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes nNo
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes No n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. Large accelerated filer nAccelerated filer nNon-accelerated filer (Do not check if a smaller reporting company)
Smaller reporting company n
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes nNo
The aggregate market value of the common stock held by non-affiliates computed by reference to the price at which the common equity
was last sold on June 30, 2008 (the last business day of the registrant’s most recently completed second fiscal quarter) was $10.6 billion.
As of February 25, 2009, there were 647,364,714 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III (Items 10, 11, 12, 13 and 14) will be filed in
an amendment to this annual report on Form 10-K on or before April 30, 2009.

Table of contents

  • Page 1
    ...FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2008 Commission File Number: 000-53330 Federal Home Loan Mortgage Corporation (Exact name of registrant as specified in its charter) Federally chartered corporation...

  • Page 2
    ... Analysis ...Consolidated Fair Value Balance Sheets Analysis ...Liquidity and Capital Resources ...Portfolio Balances and Activities ...Off-Balance Sheet Arrangements ...Contractual Obligations ...Critical Accounting Policies and Estimates ...Credit Risks ...Operational Risks ...Risk Management...

  • Page 3
    ... 8: Debt Securities and Subordinated Borrowings ...Note 9: Stockholders' Equity (Deficit) ...Note 10: Regulatory Capital ...Note 11: Stock-Based Compensation ...Note 12: Derivatives ...Note 13: Legal Contingencies ...Note 14: Income Taxes ...Note 15: Employee Benefits ...Note 16: Segment Reporting...

  • Page 4
    ... Treasury established a new secured lending credit facility that is available to us until December 31, 2009 as a liquidity backstop. In order to borrow pursuant to the Lending Agreement, we are required to post collateral in the form of Freddie Mac or Fannie Mae mortgage-related securities to secure...

  • Page 5
    ... Treasury's plans to continue purchasing Freddie Mac mortgage-related securities and increasing the limit on our mortgage-related investments portfolio by $50 billion to $900 billion with a corresponding increase in the amount of allowable debt outstanding. As of the filing of this annual report...

  • Page 6
    ... incentive fees and the related accounting impacts, will be substantial. HASP will require us, in some cases, to modify loans when default is imminent even though the borrower's mortgage payments are current. If current loans are modified and are purchased from mortgage participation certificate, or...

  • Page 7
    ... index. The appreciation or depreciation rate for each year presented incorporates property value information on loans purchased by both Freddie Mac and Fannie Mae through December 31, 2008 and will be subject to change based on more recent purchase information. (3) Source: Inside Mortgage Finance...

  • Page 8
    ... value of the property at the time of loan origination. Our charter generally prohibits us from purchasing first-lien conventional (not guaranteed or insured by any agency or instrumentality of the U.S. government) single-family mortgages if the outstanding principal balance at the time of purchase...

  • Page 9
    ...debt financing, and managing our interest rate risk, liquidity and capital positions. We invest principally in mortgage-related securities and single-family mortgages through our mortgage-related investments portfolio. Although we are primarily a buy-and-hold investor in mortgage assets, we may sell...

  • Page 10
    ...by Freddie Mac, Fannie Mae, a similarly chartered government-sponsored enterprise, or GSE, and Ginnie Mae. As discussed in "Single-Family Guarantee Segment," our Structured Securities represent beneficial interests in pools of PCs and certain other types of mortgage-related assets. Our purchases and...

  • Page 11
    ... the Investments segment related to single-family guarantee activities, net of allocated funding costs and amounts related to net float benefits. Loan and Security Purchases Our charter establishes requirements for and limitations on the mortgages and mortgage-related securities we may purchase, as...

  • Page 12
    ...unpaid principal balance of the loans and initial upfront payments referred to as delivery fees. We recognize the fair value of the right to receive ongoing management and guarantee fees as a guarantee asset at the inception of a guarantee. We subsequently account for the guarantee asset like a debt...

  • Page 13
    ... Mac TRUST Fee Mortgage loans PC (guarantor) CASH PURCHASE CASH AUCTION OF PC Mortgage loan PC Mortgage Lender Cash Freddie Mac (administrator) Cash (Delivery fees) Cash Securities Dealers and Investors Institutional and other investors purchase our PCs, including pension funds, insurance...

  • Page 14
    ... Fee Freddie Mac (administrator) Security Classes We issue single-class Structured Securities and multi-class Structured Securities. Because the collateral underlying Structured Securities consists of other guaranteed mortgage-related securities, there are no concentrations of credit risk...

  • Page 15
    ... Guarantee Freddie Mac Trust Fee Sr. Class STC Freddie Mac (guarantor) Mortgage loan Sub. Class Mortgage Lender STC and Cash STC Cash Private Label Trust Securities Dealers and Investors Cash Investors (which may include Freddie Mac) STC = Structured Transaction Certificates Structured...

  • Page 16
    ... for purchase by us due to the increase to loan limits for certain high-cost areas under the Reform Act to constitute up to 10% of the original principal balance of TBA pools. Credit Risk Our Single-family Guarantee segment is responsible for pricing and managing credit risk related to single-family...

  • Page 17
    ...mortgage finance business. We compete on the basis of price, products, structure and service. Ginnie Mae, which has become a more significant competitor during 2008, guarantees the timely payment of principal and interest on mortgage-related securities backed by federally insured or guaranteed loans...

  • Page 18
    ... Treasury's plans to continue purchasing Freddie Mac mortgage-related securities and increasing the limit on our mortgage-related investments portfolio by $50 billion to $900 billion with a corresponding increase in the amount of allowable debt outstanding. As of the filing of this annual report...

  • Page 19
    ... incentive fees and the potential accounting impacts will be substantial. Given the important role the Obama Administration has placed on Freddie Mac in addressing housing and mortgage market conditions, we may be required to take other actions that could have a negative impact on our business...

  • Page 20
    ... business, see "MD&A - CREDIT RISKS - Mortgage Credit Risk - Loss Mitigation Activities." See also "Homeowner Affordability and Stability Plan" for information on our role in the Obama Administration's plan to help homeowners. Overview of Treasury Agreements Senior Preferred Stock Purchase Agreement...

  • Page 21
    ... on short-term debt to fund our purchases of mortgage assets and to refinance maturing debt. As a result, we have been required to refinance our debt on a more frequent basis, exposing us to an increased risk of insufficient demand, increasing interest rates and adverse credit market conditions. On...

  • Page 22
    ...Treasury established a new secured lending credit facility that is available to us until December 31, 2009 as a liquidity back-stop. In order to borrow pursuant to the Lending Agreement, we are required to post collateral in the form of Freddie Mac or Fannie Mae mortgage-related securities to secure...

  • Page 23
    ... our liabilities exceed our assets, as reflected on our GAAP balance sheet), then, if requested by the Conservator (or by our Chief Financial Officer, if we are not under conservatorship), Treasury is required to provide funds to us pursuant to the Purchase Agreement. Net worth is substantially the...

  • Page 24
    ... relating to our outstanding debt and mortgage-related securities. In a Fact Sheet dated September 7, 2008, FHFA indicated that our obligations will be paid in the normal course of business during the conservatorship. Special Powers of the Conservator Disaffirmance and Repudiation of Contracts...

  • Page 25
    ... guarantee obligation relating to Freddie Mac's mortgage-related securities because it views repudiation as incompatible with the goals of the conservatorship. In general, the liability of the Conservator for the disaffirmance or repudiation of any contract is limited to actual direct compensatory...

  • Page 26
    ... for up to one year at a time, in its sole discretion, based on adverse conditions in the U.S. mortgage market. We may elect to pay the quarterly commitment fee in cash or add the amount of the fee to the liquidation preference of the senior preferred stock. The Purchase Agreement provides that, on...

  • Page 27
    ...holders of these debt securities or Freddie Mac mortgage guarantee obligations may file a claim in the United States Court of Federal Claims for relief requiring Treasury to fund to us the lesser of: (1) the amount necessary to cure the payment defaults on our debt and Freddie Mac mortgage guarantee...

  • Page 28
    ... renew or extend any loan to us. The Lending Agreement does not specify a maximum amount that may be borrowed thereunder, but any loans made to us by Treasury pursuant to the Lending Agreement must be collateralized by Freddie Mac or Fannie Mae mortgage-related securities. Further, unless amended or...

  • Page 29
    ... (which Treasury has committed to increase correspondingly to the increase in the limit on our mortgage assets discussed below), calculated based primarily on the carrying value of our indebtedness as reflected on our GAAP balance sheet; • issue any subordinated debt; • enter into a corporate...

  • Page 30
    ... Treasury, it held $94.2 billion of GSE mortgage-related securities under this program. Federal Reserve Debt and Mortgage-Related Securities Purchase Program On November 25, 2008, the Federal Reserve announced a program to purchase up to $100 billion of direct obligations of Freddie Mac, Fannie Mae...

  • Page 31
    ... costs associated with servicer and borrower incentive fees and the related accounting impacts, will be substantial. HASP will require us, in some cases, to modify loans when default is imminent even though the borrower's mortgage payments are current. If current loans are modified and are purchased...

  • Page 32
    ...the Reform Act. Federal Housing Finance Agency FHFA is an independent agency of the federal government responsible for oversight of the operations of Freddie Mac, Fannie Mae and the FHLBs. FHFA has a Director appointed by the President and confirmed by the Senate for a five-year term, removable only...

  • Page 33
    ...to the sum of 1.25% of aggregate on-balance sheet assets and approximately 0.25% of the sum of outstanding mortgage-related securities we guaranteed and other aggregate off-balance sheet obligations. • Risk-Based Capital. The risk-based capital standard required the application of a stress test to...

  • Page 34
    ... analysis to FHFA, which is reviewing our submission. In 2009, we expect that the market conditions discussed above and the tightened credit and underwriting environment will make achieving our affordable housing goals and subgoals challenging if they are kept at 2008 levels. 31 Freddie Mac

  • Page 35
    ... the product review process are automated loan underwriting systems of the enterprises in existence on July 30, 2008, including certain technical upgrades to operate the systems; any modification to mortgage terms and conditions or underwriting criteria relating to mortgages purchased or guaranteed...

  • Page 36
    ... Act requires us to set aside in each fiscal year an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of total new business purchases, and allocate or transfer such amount (i) to HUD to fund a Housing Trust Fund established and managed by HUD and (ii) to a Capital...

  • Page 37
    ... to Treasury to purchase or guarantee troubled assets from financial institutions with significant operations in the U.S. The EESA also required FHFA, as Conservator, to implement a plan for delinquent single-family and multifamily mortgage loans (including mortgage-related securities and asset...

  • Page 38
    ... this Form 10-K, contain "forward-looking statements" pertaining to the conservatorship and our current expectations and objectives for internal control remediation efforts, future business plans, capital management, economic and market conditions and trends, market share, credit losses, and...

  • Page 39
    ...the fair value of certain instruments or assets; • preferences of originators in selling into the secondary mortgage market; • changes to our underwriting requirements or investment standards for mortgage-related products; • investor preferences for mortgage loans and mortgage-related and debt...

  • Page 40
    ...the senior preferred stock. If the negative cash flows from operations exceed funding availability in the public debt markets, the alternative sources of cash available to us under our liquidity management and contingency plan, such as selling securities from our cash and other investments portfolio...

  • Page 41
    ...preferred stock. We also have substantial dividend obligations on our senior preferred stock. These changes and other factors could have material effects on, among other things, our portfolio growth, capital, credit losses, net interest income, guarantee fee income, net deferred tax assets, and loan...

  • Page 42
    ... additional assistance to the struggling housing and mortgage markets; reducing the need to draw funds from Treasury pursuant to the Purchase Agreement; returning to long-term profitability; and protecting the interests of the taxpayers. These objectives create conflicts in strategic and day-to-day...

  • Page 43
    ...distribution to holders of our common stock and other preferred stock. Warrant may substantially dilute investment of current stockholders. If Treasury exercises its warrant to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully...

  • Page 44
    ... credit losses in 2008 and 2007, respectively. See "MD&A - CONSOLIDATED BALANCE SHEETS ANALYSIS - Mortgage-Related Investments Portfolio - Higher Risk Components of our Mortgage-Related Investments Portfolio" for information on our classification of loans and asset-backed mortgage-related securities...

  • Page 45
    ... increase our losses. For more information, see "MD&A - CREDIT RISKS." Government programs designed to halt the decline in the U.S. housing market, such as the HASP, may fail. Our business volumes are closely tied to the rate of growth in total outstanding U.S. residential mortgage debt and the...

  • Page 46
    ...-related investments portfolio, cash and other investments portfolio, derivative portfolio or credit guarantee activities. See "NOTE 18: CONCENTRATION OF CREDIT AND OTHER RISKS" to our consolidated financial statements for additional information. For 2008, our ten largest mortgage seller/servicers...

  • Page 47
    ... the current liquidity crisis; • decreasing demand for our debt securities; and • increasing competition for debt funding from other debt issuers. Government Programs On November 25, 2008, the Federal Reserve announced a program to purchase up to $100 billion of direct obligations of Freddie Mac...

  • Page 48
    .... It is unclear if or when these market conditions will improve, allowing us increased access to the longer-term debt markets that is not based on support from Treasury and the Federal Reserve. During 2008, the ratings on our non-agency mortgage-related securities backed by Alt-A, subprime and MTA...

  • Page 49
    ... condition and results of operations. Changes in interest rates could negatively impact our results of operations, stockholders' equity (deficit) and fair value of net assets. Our investment activities and credit guarantee activities expose us to interest-rate and other market risks and credit risks...

  • Page 50
    ..., safeguarding or using nonpublic personal information, or from actions taken by government regulators and community organizations in response to our actual or alleged conduct. Business and Operational Risks Programs to reduce foreclosures, modify loan terms and refinance mortgages may fail to...

  • Page 51
    ... or Structured Securities, either of which could negatively affect the pricing of such PCs or Structured Securities. We may experience further write-downs and losses relating to our assets, including our investment securities, net deferred tax assets, REO properties, mortgage loans or investments in...

  • Page 52
    ... those securities are delisted from the NYSE. If we do not satisfy the minimum share price, corporate governance and other requirements of the continued listing standards of the NYSE, our common stock and NYSE-listed issues of preferred stock could be delisted from the NYSE. On November 17, 2008, we...

  • Page 53
    ... business decisions relating to strategies, initiatives, transactions and products. We use market-based information as inputs to our models. The turmoil in the housing and credit markets creates additional risk regarding the reliability of our models, particularly since we are making adjustments...

  • Page 54
    ...-related investments portfolio 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...

  • Page 55
    ... on our credit guarantee portfolio and additional other-than-temporary impairments on our non-agency mortgage-related securities, and may require us to request additional draws under the Purchase Agreement. Our financial condition and results of operations and our ability to return to long-term...

  • Page 56
    ... in the payment of substantial damages or otherwise harm our business. We are a party to various legal actions, and are subject to investigations by the SEC and the U.S. Attorney's Office for the Eastern District of Virginia. In addition, certain of our directors, officers and employees are involved...

  • Page 57
    ...,364,714 shares outstanding of our common stock. See "BUSINESS - Conservatorship and Related Developments - New York Stock Exchange Matters" for further information related to the listing status of our common stock. Table 4 sets forth the high and low sale prices of our common stock for the periods...

  • Page 58
    ...and Home Ownership Funding Corporation II. Since we are the majority owner of both the common and preferred shares of these two REITs, this action has eliminated our access through such dividend payments to the cash flows of the REITs. For a description of our capital requirements, refer to "NOTE 10...

  • Page 59
    ... "NOTE 11: STOCK-BASED COMPENSATION" to our consolidated financial statements for more information. Issuer Purchases of Equity Securities We did not repurchase any of our common or preferred stock during the three months ended December 31, 2008. Additionally, we do not currently have any outstanding...

  • Page 60
    ... that no further preferred stock dividends should be paid by Freddie Mac's REIT subsidiaries; Home Ownership Funding Corporation and Home Ownership Funding Corporation II. FHFA specifically directed Freddie Mac (as the controlling stockholder of both companies) and the boards of directors of both...

  • Page 61
    ... stock issued to Treasury as part of the Purchase Agreement. This warrant is included in basic earnings per share, because it is unconditionally exercisable by the holder at a cost of $.00001 per share. (3) Represents the unpaid principal balance and excludes mortgage loans and mortgage-related...

  • Page 62
    ... declining home prices, higher mortgage delinquency rates and higher loss severities, contributed to large credit-related expenses for the third and fourth quarters and the full year of 2008. In addition, non-cash fair value adjustments and a partial valuation allowance against our net deferred tax...

  • Page 63
    ... from operations. To date, our need for funding under the Purchase Agreement has not been caused by cash flow shortfalls but rather primarily reflects large credit-related expenses and non-cash fair value adjustments as well as a partial valuation allowance against our net deferred tax assets that...

  • Page 64
    ...FHA/VA mortgages, home equity lines of credit and other residential loans. Additionally, during the second half of 2008 there were significant negative ratings actions and sustained categorical asset price declines most notably in the mortgage-related securities backed by MTA loans, which are a type...

  • Page 65
    ... by Ginnie Mae Certificates. (2) We report single-family delinquency rate information based on the number of loans that are 90 days or more past due and those in the process of foreclosure, excluding Structured Transactions. Mortgage loans whose contractual terms have been modified under agreement...

  • Page 66
    ... of our REO inventory and credit losses since November 2008; however, this also has created a temporary increase in the number of delinquent loans that remain in our single-family mortgage portfolio, which results in higher reported delinquency rates than without our suspension of foreclosures. In...

  • Page 67
    ... days delinquent under the modified terms. (2) Excludes non-agency mortgage-related securities backed by other loans primarily comprised of securities backed by home equity lines of credit. (3) Based on the actual losses incurred on the collateral underlying these securities. Actual losses incurred...

  • Page 68
    ...annual 10% declines commencing in 2010, will likely cause our Investments segment results to decline; • our objective of assisting the mortgage market may cause us to change our pricing strategy in our core mortgage loan purchase or guarantee business, which may negatively impact our Single-family...

  • Page 69
    ... and mortgage-related securities, other investments, debt financing and managing our interest rate risk, liquidity and capital positions. We invest principally in mortgage-related securities and single-family mortgage loans. Performance comparison for 2008 versus 2007: • Segment Earnings (loss...

  • Page 70
    ...average balance of the single-family credit guarantee portfolio increased by 12% during 2008, compared to 14% during 2007. Multifamily Our Multifamily segment activities include purchases of multifamily mortgages for our mortgage-related investments portfolio, and guarantees of payments of principal...

  • Page 71
    ... and long term debt markets to fund our purchases of mortgage assets and to refinance maturing debt. As a result, we have been required to refinance our debt on a more frequent basis, exposing us to an increased risk of insufficient demand and adverse credit market conditions. We use pay-fixed swaps...

  • Page 72
    ... mortgage-related securities with a limited, but increasing amount attributable to the risk of future losses. The reduction in fair value was partially offset by higher core spread income. Core spread income on our mortgagerelated investments portfolio is a fair value estimate of the net current...

  • Page 73
    ... single-family guarantee asset of approximately $2.1 billion and cash receipts primarily related to management and guarantee fees and other up-front fees. See "CONSOLIDATED FAIR VALUE BALANCE SHEETS ANALYSIS" for additional information regarding attribution of changes in the fair value of net assets...

  • Page 74
    ... ...Non-mortgage-related securities(5) ...Cash and cash equivalents(5) ...Federal funds sold and securities purchased under agreements to resell(5) ...Total interest-earning assets ...Interest-bearing liabilities: Short-term debt ...Long-term debt(6) ...Total debt ...Due to Participation Certificate...

  • Page 75
    ... of a long-term fixed-rate debt instrument of comparable maturity. However, the use of these derivatives exposes us to additional counterparty credit risk. See "Non-Interest Income (Loss) - Derivative Gains (Losses)" for additional information about the impact of these pay-fixed swaps and other...

  • Page 76
    ... fixed over the life of the guarantee. Our average rates of management and guarantee income are affected by the mix of products we issue, competition in the market and customer preference for buy-up and buy-down fees. The appointment of FHFA as Conservator and the Conservator's subsequent directive...

  • Page 77
    ... for mortgage-related securities. Gains in fair value of management and guarantee fees in 2007 were primarily due to an increase in interest rates. Income on Guarantee Obligation Upon issuance of a guarantee of securitized assets, we record a guarantee obligation on our consolidated balance sheets...

  • Page 78
    ... the accrual of periodic cash settlements is recorded in derivative gains (losses) on our consolidated statements of operations. In the periods presented prior to 2008, we only elected cash flow hedge accounting relationships for certain commitments to sell mortgage-related securities, for which we...

  • Page 79
    ... losses in AOCI at December 31, 2008 related to closed cash flow hedges. The scheduled amortization is based on a number of assumptions. Actual amortization will differ from the scheduled amortization, perhaps materially, as we make decisions on debt funding levels or as changes in market conditions...

  • Page 80
    ... option-based contracts (including written options), interest-rate caps, swap guarantee derivatives and credit derivatives. Includes $27 million loss related to the Lehman bankruptcy for the year ended December 31, 2008. For additional information, see "CREDIT RISKS - Institutional Credit Risk...

  • Page 81
    ... debt, which is recorded in foreign-currency gains (losses), net. During 2006, fair value losses on our swaptions increased as implied volatility declined and both long-term and shortterm swap interest rates increased. During 2006, fair value changes of our pay-fixed and receive-fixed swaps...

  • Page 82
    ... On January 1, 2008, we implemented fair value option accounting pursuant to our adoption of SFAS 159 and transferred approximately $87 billion in securities, primarily ARMs and fixed-rate PCs, from available-for-sale securities to trading securities, which significantly increased the balance of our...

  • Page 83
    ... (e.g., premiums, discounts, issuance costs and hedging-related basis adjustments), in earnings in the period of extinguishment as a component of gains (losses) on debt retirement. Contemporaneous transfers of cash between us and a creditor in connection with the issuance of a new debt security and...

  • Page 84
    ... fees, trust management income, net hedging gains and losses, fees associated with servicing and technology-related programs, various fees related to multifamily loans (including application and other fees) and various other fees received from mortgage originators and servicers. Other income...

  • Page 85
    ... total delinquent loans in our single-family mortgage portfolio, based on unpaid principal balances. Similarly, as of both December 31, 2008 and 2007, approximately 14% of loans in our single-family mortgage portfolio had second lien, third-party financing at origination; however, we 82 Freddie Mac

  • Page 86
    ... on a number of factors, including changes in property values, regional economic conditions, the success of our loan modification and other loss mitigation efforts, third-party mortgage insurance coverage and recoveries and the realized rate of seller/servicer repurchases. See "Table 6 - Credit...

  • Page 87
    ...deferred tax assets. See "NOTE 14: INCOME TAXES" to our consolidated financial statements for additional information. Segment Earnings Our business operations consist of three reportable segments, which are based on the type of business activities each performs - Investments, Single-family Guarantee...

  • Page 88
    ... assets for the long term, fund our investments with debt and use derivatives to minimize interest rate risk. The business model for our credit guarantee activity is one where we are a long-term guarantor in the conforming mortgage markets, manage credit risk and generate guarantee and credit fees...

  • Page 89
    ... valuation allowance against our net deferred tax assets that are not included in Segment Earnings. (2) Based on unpaid principal balance and excludes mortgage-related securities traded, but not yet settled. (3) Excludes single-family mortgage loans. Segment Earnings for our Investments segment...

  • Page 90
    ...management and guarantee fee revenues less the related credit costs (i.e., provision for credit losses) and operating expenses. Earnings for this segment also include the interest earned on assets held in the Investments segment related to single-family guarantee activities, net of allocated funding...

  • Page 91
    ... Earnings. (3) Based on unpaid principal balance. (4) Excludes fixed-rate Structured Securities backed by non-Freddie Mac issued mortgage-related securities. (5) Includes termination of long-term standby commitments. (6) Represents the percentage of single-family loans in our single-family credit...

  • Page 92
    ... purchase mortgages originated in reliance on reduced documentation of income and assets and mortgages to borrowers with credit scores below a specified minimum. See "CREDIT RISKS - Mortgage Credit Risk - Underwriting Requirements and Quality Control Standards" for further information. During 2008...

  • Page 93
    ... different line items in our GAAP statements of operations. The delinquency rate on our single-family credit guarantee portfolio, representing those loans which are 90 days or more past due and excluding loans underlying Structured Transactions, increased to 172 basis points as of December 31, 2008...

  • Page 94
    ... net income (loss): Derivative adjustments ...Credit guarantee-related adjustments ...Investment sales, debt retirements and fair value-related adjustments . Tax-related adjustments(1) ...Total reconciling items, net of taxes(1) ...GAAP net income (loss) ...Key metrics - Multifamily: Balances and...

  • Page 95
    ... in mortgage assets. We invest principally in mortgage loans and mortgagerelated securities, which consist of securities issued by us, Fannie Mae, Ginnie Mae and other financial institutions. We refer to these investments that are recorded on our consolidated balance sheet as our mortgage-related...

  • Page 96
    ...96% of total non-agency mortgage-related securities held at December 31, 2008 and 2007, respectively, were AAA-rated as of those dates, based on the unpaid principal balance and the lowest rating available. (11) See "CREDIT RISKS - Mortgage Credit Risk - Loan Loss Reserves" for information about our...

  • Page 97
    ...half of 2008, single-family refinance mortgage originations increased and the volume of deliveries of single-family mortgage loans to us for cash purchase rather than for guarantor swap transactions also increased. We provide liquidity to our seller/servicers through our cash purchase program. Loans...

  • Page 98
    ... of high LTV ratios, low credit scores or originations using lower underwriting standards such as limited or no documentation of a borrower's income. At December 31, 2008 and 2007, we held investments of $74.9 billion and $101.3 billion, respectively, of non-agency mortgage-related securities backed...

  • Page 99
    ... of December 31, 2008 Unpaid Gross Principal Amortized Unrealized Balance Cost Losses (dollars in millions) Collateral Delinquency(1) Original % AAA(2) December 31, 2008 % AAA Current % AAA(3) Current Investment Grade(4) Non-agency mortgage-related securities backed by: Subprime loans: First lien...

  • Page 100
    ...2008 Amortized Cost Gross Gross Unrealized Unrealized Gains Losses (in millions) Fair Value Mortgage-related investments portfolio: Available-for-sale mortgage-related securities: Freddie Mac ...Subprime ...Commercial mortgage-backed securities ...Alt-A and other ...MTA ...Fannie Mae ...Obligations...

  • Page 101
    ... impacting the performance of our guarantee portfolio led to a considerably more pessimistic outlook for the performance of our mortgage-related securities in our mortgage-related investments portfolio. Rising unemployment, accelerating home price declines, tight credit conditions, 98 Freddie Mac

  • Page 102
    ... claims. In the case of monoline insurers, we considered our own analysis as well as additional qualitative factors, such as the ability of each monoline to access capital and to generate new business, pending regulatory actions, ratings, security prices and credit default swap levels traded on the...

  • Page 103
    ... on our Investments in Non-Agency Mortgage-Related Securities We present hypothetical scenarios based on the key assumptions in our analyses designed to simulate the distribution of cash flows from the underlying loans to the securities that we hold considering different default rate and severity...

  • Page 104
    ... Reflects the current subordination credit enhancement of the lowest security in each quartile. (4) Reflects the present value of projected principal losses based on the disclosed hypothetical cumulative default and loss severity rates against the outstanding collateral balance. (5) Represents the...

  • Page 105
    Investments in Non-Agency Mortgage-Related Securities Backed by Alt-A Loans The hypothetical scenarios for our non-agency mortgage-related securities backed by Alt-A loans use cumulative default rates of 20% to 65% and severities of 45% to 65%. Since different market participants could arrive at ...

  • Page 106
    Table 29 - Investments in Non-Agency Mortgage-Related Securities Backed by Alt-A Loans December 31, 2008 Underlying Collateral Performance Delinquency Quartile Unpaid Principal Balance Collateral Delinquency(1) Credit Enhancement Statistics Average Credit Enhancement(2) Minimum Current Subordination...

  • Page 107
    Investments in Non-Agency Mortgage-Related Securities Backed by MTA Loans The hypothetical scenarios for our non-agency mortgage-related securities backed by MTA loans use cumulative default rates and severities of 50% to 70%. Since different market participants could arrive at materially different ...

  • Page 108
    Table 30 - Investments in Non-Agency Mortgage-Related Securities Backed by MTA Loans December 31, 2008 Underlying Collateral Performance Unpaid Principal Collateral Balance Delinquency(1) Credit Enhancement Statistics Average Minimum Credit Current Enhancement(2) Subordination(3) (dollars in ...

  • Page 109
    ... Non-Agency Mortgage-Related Securities backed by Subprime Loans at December 31, 2008 Credit Rating as of December 31, 2008 Unpaid Principal Balance Gross Amortized Unrealized Cost Losses (in millions) Monoline Insurance Coverage(1) AAA-rated ...Other investment grade Below investment grade Total...

  • Page 110
    ... Mortgage-Related Securities backed by Alt-A and Other Loans and MTA Loans at December 31, 2008 Credit Ratings as of December 31, 2008 Unpaid Principal Balance Amortized Cost (in millions) Gross Unrealized Losses Monoline Insurance Coverage(1) Alt-A and other loans: AAA-rated ...Other investment...

  • Page 111
    ... Minimum Collateral Current Average Credit Delinquency Subordination(3) Enhancement(2) %(1) Current Investment Grade(6) Collateral Type Amortized Fair Cost Value (dollars in millions) Original % AAA-rated(4) Current % AAA-rated(5) Non-mortgage-related securities: Asset-backed securities: Credit...

  • Page 112
    ... mortgage-related assets. Our mix of notional or contractual amounts changed year-over-year as we responded to the declining interest rate environment. In 2008, we responded to the declining availability of longer-term debt by maintaining our pay-fixed swap position even as rates decreased. We used...

  • Page 113
    ...that type. See "CREDIT RISKS - Institutional Credit Risk - Table 75 - Derivative Counterparty Credit Exposure" for additional information regarding derivative counterparty credit exposure. Table 41 also provides the weighted average fixed rate of our pay-fixed and receivefixed swaps. 110 Freddie Mac

  • Page 114
    ...guarantee asset balance. Table 42 - Changes in Guarantee Asset December 31, 2008 2007 (in millions) Beginning balance ...Additions ...Other(1) ...Components of fair value gains (losses): Return of investment on guarantee asset ...Change in fair value of management and guarantee fees . Gains (losses...

  • Page 115
    ... the housing market slowed and seller/servicers increasingly utilized FHA and Ginnie Mae programs for newly originated mortgages. Fair value losses on guarantee asset increased for 2008 compared to 2007, primarily due to significant declines in interest rates during 2008, particularly in the fourth...

  • Page 116
    ... Year Weighted Average (3) Balance, Net Effective Rate(4) (dollars in millions) Maximum Balance, Net Outstanding at Any Month End Reference BillsË› securities and discount notes ...Medium-term notes ...Federal funds purchased and securities sold under agreements to repurchase ...Subtotal ...Current...

  • Page 117
    ... for the purchase of our common stock representing 79.9% of our common stock outstanding on a fully diluted basis at the time of exercise at a price of $0.00001 per share. • We paid dividends of $172 million in cash on the senior preferred stock to Treasury on December 31, 2008 at the direction of...

  • Page 118
    ... the long-term value of our mortgage-related investments portfolio. Our estimate of the effect of changes in OAS excludes the impact of other market risk factors we actively manage, or economically hedge, to keep interest-rate risk exposure within prescribed limits. Asset-Liability Management Return...

  • Page 119
    ..., our fair value results may be affected. We hedge interest-rate exposure related to net buy-ups (up-front payments we make that increase the management and guarantee fee that we will receive over the life of the pool) and float (expected gains or losses resulting from our mortgage security program...

  • Page 120
    ...a single period should not be used to extrapolate long-term fair value returns. We believe the potential fair value return of our business over the long term depends primarily on our ability to add new assets at attractive mortgage-to-debt OAS and to effectively manage over time the risks associated...

  • Page 121
    ... PCs and Structured Securities; make net payments on derivative instruments; pay dividends on our senior preferred stock; purchase mortgage-related securities and other investments; and purchase mortgage loans. See "RISK MANAGEMENT AND DISCLOSURE COMMITMENTS" for a discussion of our agreement with...

  • Page 122
    ...NOTE 5: INVESTMENTS IN SECURITIES - Collateral Pledged" to our consolidated financial statements for further information. Depending on market conditions and the mix of derivatives we employ in connection with our ongoing risk management activities, our derivative portfolio can be either a net source...

  • Page 123
    .... We currently do not have plans to sell our mortgage assets at a loss. In addition, while the senior preferred stock is outstanding, we are prohibited from paying dividends (other than on the senior preferred stock) or issuing equity securities without Treasury's consent. The terms of the Purchase...

  • Page 124
    ... $790,437 (1) Excludes federal funds purchased and securities sold under agreements to repurchase and lines of credit. (2) Includes $3.8 billion and $- of medium-term notes - non-callable issued for the years ended December 31, 2008 and 2007, respectively, which were accounted for as debt exchanges...

  • Page 125
    ... weighted average lives of our outstanding debt securities and thereby manage the duration gap, including retiring long-term debt through repurchases or calls; changing our debt funding mix between short- and long-term debt; or using derivative instruments, such as entering into receive-fixed swaps...

  • Page 126
    ... in interest rates and other market conditions. See "CREDIT RISKS - Institutional Credit Risk" for more information. Mortgage-Related Investments Portfolio Historically, our mortgage-related investments portfolio assets have been a significant capital resource and a potential source of funding, if...

  • Page 127
    ...-investment mortgages. Cash flows used for financing activities in 2006 were $3.0 billion and were primarily due to repayments of debt securities, repurchases of common stock, payment of cash dividends on preferred stock and common stock, and payments of housing tax credit partnerships notes payable...

  • Page 128
    ... our minimum capital and risk-based capital requirements. See "NOTE 10: REGULATORY CAPITAL" to our consolidated financial statements for our minimum capital requirement, core capital and GAAP net worth results as of December 31, 2008. FHFA has directed us to focus our risk and capital management...

  • Page 129
    ... security guarantees, during 2008 and 2007, we entered into $1.6 billion and $32.2 billion, respectively, of long-term standby commitments for mortgage assets held by third parties that require us to purchase loans from lenders when the loans subject to these commitments meet certain delinquency...

  • Page 130
    ... investments portfolio: Single-family mortgage loans ...Multifamily mortgage loans ...Total mortgage loans ...Guaranteed PCs and Structured Securities in the mortgage-related investments portfolio . Non-Freddie Mac mortgage-related securities, agency ...Non-Freddie Mac mortgage-related securities...

  • Page 131
    ...: Single-family: Fixed-rate ...Variable-rate ...Multifamily: Fixed-rate ...Total Freddie Mac securities repurchased into the mortgage-related investments portfolio ...21% ...$319,546 ...15% ...$192,701 ...26,344 ...111 ...$219,156 (1) Based on unpaid principal balances. Excludes mortgage loans and...

  • Page 132
    ... conventional fixed-rate, amortizing mortgage products to continue. See "CREDIT RISKS - Mortgage Credit Risks" for additional information on characteristics and types of mortgage loans underlying our guaranteed PCs and Structured Securities as well as historical performance data. 129 Freddie Mac

  • Page 133
    ... guarantee the payment of principal and interest on PCs and Structured Securities we issue. Mortgage-related assets that back PCs and Structured Securities held by third parties are not reflected as assets on our consolidated balance sheets. In some cases, we share the risks of our credit guarantee...

  • Page 134
    ... Credit Risk - Mortgage Seller/Servicers" for further information. Such commitments are not accounted for as derivatives and are not recorded on our consolidated balance sheets. These mortgage purchase contracts contain no penalty or liquidated damages clauses based on our inability to take delivery...

  • Page 135
    ... compensation plan are included in the Total and 2009 columns. However, the timing of payments due under these obligations is uncertain. See "NOTE 15: EMPLOYEE BENEFITS" to our consolidated financial statements for additional information. (5) As of December 31, 2008, we have recorded tax liabilities...

  • Page 136
    ... statements based on fair value, including (i) mortgage-related and non-mortgage related securities, (ii) mortgage loans held-for-sale, (iii) derivative instruments, (iv) guarantee asset, (v) guarantee obligation, (vi) debt securities denominated in foreign currencies and (vii) REO less cost to sell...

  • Page 137
    ... where quoted prices exist for the exact instrument in an active market. Our Level 2 instruments generally consist of high credit quality agency mortgage-related securities, commercial mortgage-backed securities, non-mortgage-related asset-backed securities, interest-rate swaps, optionbased...

  • Page 138
    ...credit risk. For a description of how we determine the fair value of our guarantee asset, see "NOTE 3: RETAINED INTERESTS IN MORTGAGE-RELATED SECURITIZATIONS" to our consolidated financial statements. At December 31, 2008 and 2007, the total unpaid principal balances of PCs and Structured Securities...

  • Page 139
    ...types and characteristics of mortgage loans underlying our mortgage-related securities, see "CREDIT RISKS" and "CONSOLIDATED BALANCE SHEETS ANALYSIS - Table 24 - Characteristics of Mortgage Loans and Mortgage-Related Securities in our Mortgage-Related Investments Portfolio." Controls over Fair Value...

  • Page 140
    ...; • counterparty credit of mortgage insurers and seller/servicers; and • identification and impact assessment of macroeconomic factors, such as home price declines, rental rates and unemployment rates. No single statistic or measurement determines the adequacy of the loan loss reserves. Changes...

  • Page 141
    ... of the decline in fair value, credit ratings, the length of time the investment has been in an unrealized loss position, loan level default modeling 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...

  • Page 142
    ... different impairment loss recognition. See "NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" to our consolidated financial statements and "CONSOLIDATED BALANCE SHEETS ANALYSIS - Mortgage-Related Investments Portfolio" for more information on impairment recognition on securities. In addition...

  • Page 143
    ... quality control processes. Our underwriting process evaluates mortgage loans and the borrowers' ability to repay the loans using several critical risk characteristics, including the borrower's credit score, the borrower's monthly income relative to debt payments, LTV ratio, type of mortgage product...

  • Page 144
    ... Mortgage Finance estimates. Based on unpaid principal balance of securities issued. Consists of loans categorized as subprime based solely on the credit score of the borrower at the time of origination. Includes securities backed by loans with original loan amounts above the conforming loan limits...

  • Page 145
    ... volatile home price markets, (b) required borrower documentation of income and assets, (c) limits on cash-out refinancing amounts and (d) a maximum original LTV ratio of 90%. We began purchasing and securitizing these "conforming jumbo" mortgages in April 2008. Our purchases of these loans into...

  • Page 146
    ...Credit Enhancements Our charter generally requires that single-family mortgages with LTV ratios above 80% at the time of purchase must be covered by one of the following: (a) mortgage insurance from a mortgage insurer that we determine is qualified on the portion above 80% of the outstanding balance...

  • Page 147
    ... loans, excluding the loans that are underlying single-family Structured Transactions, we had maximum coverage totaling $3.8 billion in pool insurance. Other forms of credit enhancements on our single-family mortgage portfolio include government guarantees, collateral (including cash or high-quality...

  • Page 148
    ... higher or new upfront fees for certain mortgages deemed to be higher-risk based on product type, property type, loan purpose, LTV ratio and/or borrower credit scores. We negotiated increases in our contractual fee rates for PC issuances through bulk channels throughout 2008 in response to increases...

  • Page 149
    ... and by 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 58 provides characteristics of our single-family new business purchases in 2008, 2007...

  • Page 150
    ...secondary financing, the total LTV ratios above 90% were 14% at both December 31, 2008 and 2007. (4) Credit score data is as of mortgage loan origination and is based on FICO scores. Loan-to-Value Ratios An important safeguard against credit losses for mortgage loans in our single-family non-credit...

  • Page 151
    ...and 25% of single-family mortgage loans with greater than 80% estimated current LTV ratios, the borrowers had a weighted average credit score at origination of 714 and 708 at December 31, 2008 and 2007, respectively. Credit Score Credit scores are a useful measure for assessing the credit quality of...

  • Page 152
    ... information for single-family mortgage loans underlying our PCs and Structured Securities, excluding Structured Transactions, at December 31, 2008 that contain adjustable payment terms. The reported balances in the table are aggregated by adjustable-rate loan product type and categorized by year...

  • Page 153
    ... half of 2008. See "CONSOLIDATED BALANCE SHEET ANALYSIS - Mortgage-Related Investments Portfolio" for more information, including discussion of our evaluation of these securities for impairment. Alt-A Loans Many mortgage market participants classify single-family loans with credit characteristics...

  • Page 154
    ... "CONSOLIDATED BALANCE SHEET ANALYSIS - Mortgage-Related Investments Portfolio" for credit statistics and other information, including discussion of our evaluation of these securities for impairment. Delinquencies We report single-family delinquency rate information based on the number of loans that...

  • Page 155
    ... mortgage loans originated in 2008 remain relatively high due to deteriorating home prices and increasing unemployment rates, despite having a greater proportion of higher quality, fixed-rate mortgages. Table 61 presents delinquency information for our single-family mortgage portfolio based on year...

  • Page 156
    ... the delinquency rates of our single-family mortgages on our consolidated balance sheets and those that underlie our PCs and Structured Securities, categorized by product type. Table 62 - Single-Family - Delinquency Rates - By Product 2008 Percent of Number of Single-Family Loans Non-Credit-Enhanced...

  • Page 157
    ... with Statement of Position No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer," or SOP 03-3. (2) Excludes modifications involving capitalization, or addition, of past due amounts to the balance of the loan to return to current status during 2008. (3) Includes loans...

  • Page 158
    ... of delinquent loans purchased during 2008 that remain delinquent should decline during 2009 since these cure rates do not fully reflect our current modification efforts due to the significant time required to complete the loan resolution process. We believe that a quarterly and annual presentation...

  • Page 159
    ... higher rates of delinquency in our single-family mortgage portfolio in 2008, we significantly increased our use of loan modifications and repayment plans as compared to 2007. In August 2008, we implemented a plan designed to increase the efforts of our servicers to execute foreclosure alternatives...

  • Page 160
    ... alternatives to foreclosure. For more information, see "EXECUTIVE SUMMARY - Conservatorship." We require multifamily seller/servicers to manage mortgage loans they have sold to us in order to mitigate potential losses. For loans over $1 million, servicers must generally submit an annual assessment...

  • Page 161
    ... during 2008. See "BUSINESS - Our Business and Statutory Mission - Our Business Segments - Single-Family Guarantee Segment - PC Trust Documents" for further information. (6) For more information about REO balances, see "NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" and "NOTE 7: REAL ESTATE...

  • Page 162
    ... loans purchased and losses on certain credit guarantees. (4) Calculated as annualized credit losses divided by the average total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities and the portion of Structured Securities that is backed by Ginnie Mae Certificates. Our credit...

  • Page 163
    ...60 - Single-Family - Delinquency Rates, Excluding Structured Transactions - By Region" for a description of these regions. (2) Includes recoveries of charge-offs primarily resulting from foreclosure alternatives and REO acquisitions on loans where a share of default risk has been assumed by mortgage...

  • Page 164
    ... on single-family mortgage portfolio excluding Structured Securities backed by Ginnie Mae Certificates. (2) Credit losses consist of the aggregate amount of charge-offs, net of recoveries, and the amount of REO operations expense in each of the respective periods. (3) Our reported delinquency rates...

  • Page 165
    ...: (a) the transfer of a proportional amount of the recognized reserves for guarantee losses related to PC pools associated with nonperforming loans purchased from mortgage pools underlying our PCs, Structured Securities and long-term standby agreements to establish the initial recorded investment in...

  • Page 166
    ... the unpaid principal balance of the mortgage loans. However, on an exception basis, we allow a lower minimum servicing amount. The credit risk associated with servicing fees relates to whether, if a servicer is unable to fulfill its repurchase or other responsibilities, we could sell the applicable...

  • Page 167
    ... significant seller/ servicers and accounted for 20% of our single-family mortgage purchase volume during 2008. Given the uncertainty of the current housing market we have entered into arrangements with existing customers at their renewal dates that allow us to change credit and pricing terms faster...

  • Page 168
    ... they were Freddie Mac-Type I insurers. We are currently reviewing the remediation plans of RMIC, UGRI and Genworth. We consider the recovery from mortgage insurance policies as part of the estimate of our provision for credit losses. To date, downgrades of insurer financial strength ratings and our...

  • Page 169
    ... to manage institutional credit risk on non-agency mortgage-related securities by only purchasing securities that meet our investment guidelines and performing ongoing analysis to evaluate the creditworthiness of the issuers and servicers of these securities and the bond insurers that guarantee them...

  • Page 170
    ... trusts that are created with our issuance of PCs and Structured Securities. See "BUSINESS - Our Business and Statutory Mission - Our Business Segments - Single-Family Guarantee Segment - Securitization Activities " for further information on these off-balance sheet transactions. 167 Freddie Mac

  • Page 171
    ..., 2008. (5) Represents the non-mortgage assets managed by us, excluding cash held at the Federal Reserve Bank, on behalf of securitization trusts created for administration of remittances for our PCs and Structured Securities. (6) Consists of highly-liquid investments that have an original maturity...

  • Page 172
    ... 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 affecting...

  • Page 173
    ... rating of the legal entity is stated in terms of the S&P equivalent. (2) Based on legal entities. Affiliated legal entities are reported separately. (3) For each counterparty, this amount includes derivatives with a net positive fair value (recorded as derivative assets, net), including the related...

  • Page 174
    ... the management of our operational risks takes 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...

  • Page 175
    ...core capital plus general allowance for losses) and the outstanding balance of "Qualifying subordinated debt" will equal or exceed the sum of (i) 0.45% of outstanding PCs and Structured Securities we guaranteed; and (ii) 4% of total on-balance sheet assets. Qualifying subordinated debt is discounted...

  • Page 176
    ... an immediate 5% decline in single-family home prices for the entire U.S. We will disclose the impact in present value terms and measure our estimated losses both before and after receipt of private mortgage insurance claims and other credit enhancements. • Since we do not use this analysis for...

  • Page 177
    ... guarantee asset. See "NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Recently Adopted Accounting Standards" to our consolidated financial statements for more information. The market environment was increasingly volatile throughout 2008. Throughout 2008, Freddie Mac adjusted interest rate risk...

  • Page 178
    ...-term value of our mortgage-related investments portfolio. See "MD&A - CONSOLIDATED FAIR VALUE BALANCE SHEETS ANALYSIS - Key Components of Changes in Fair Value of Net Assets - Changes in Mortgage-To-Debt OAS " for additional information. We also incur basis risk when we use LIBOR- or Treasury-based...

  • Page 179
    ... of the fair value of the credit guarantee portfolio to changes in interest rates except for the guarantee-related items mentioned above (i.e., net buy-ups and float), because we believe the expected benefits from replacement business provide an adequate hedge against interest-rate changes over time...

  • Page 180
    ...to purchase a mortgage to the time the related debt is issued. We also use derivatives to synthetically create the substantive economic equivalent of various debt funding structures. For example, the combination of a series of short-term debt issuances over a defined period and a pay-fixed swap with...

  • Page 181
    ... assets in our mortgage-related investments portfolio. As market conditions dictate, we take rebalancing actions to keep our interest-rate risk exposure within management-set limits. In a declining interest-rate environment, we typically enter into receive-fixed swaps or purchase Treasury-based...

  • Page 182
    ..., asset securitization activities, callable debt and short-term debt to rebalance our portfolio. We limit our duration and convexity exposure to each counterparty. At December 31, 2008, the largest single uncollateralized exposure of our 21 approved OTC counterparties listed in "MD&A - CREDIT RISKS...

  • Page 183
    ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 180 Freddie Mac

  • Page 184
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Freddie Mac: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows, and of stockholders' equity (deficit) present fairly, ...

  • Page 185
    FREDDIE MAC CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2008 2007 2006 (dollars in millions, except share-related amounts) Interest income Investments in securities ...Mortgage loans ...Other: Cash and cash equivalents ...Federal funds sold and securities purchased under Total ...

  • Page 186
    ...-investment, at amortized cost (net of allowances for loan losses of $690 and $256, respectively) ...Total mortgage loans, net ...Accounts and other receivables, net ...Derivative assets, net ...Guarantee asset, at fair value ...Real estate owned, net ...Deferred tax assets, net...Low-income housing...

  • Page 187
    ... capital Balance, beginning of year ...Stock-based compensation ...Income tax benefit from stock-based compensation ...Preferred stock issuance costs ...Common stock issuances ...Real Estate Investment Trust, or REIT, preferred stock repurchase ...Adjustment to common stock par value ...Common stock...

  • Page 188
    ... of real estate Net (increase) decrease in Federal funds sold and securities purchased under agreements to resell Derivative premiums and terminations and swap collateral, net ...Investments in low-income housing tax credit partnerships ...Net cash (used for) provided by investing activities ...Cash...

  • Page 189
    .... The management and guarantee fee is paid to us over the life of the related PCs and Structured Securities and reflected in earnings as management and guarantee income is accrued. Our financial results for the year ended December 31, 2008 reflect the adverse conditions in the U.S. mortgage markets...

  • Page 190
    ... costs associated with servicer and borrower incentive fees and the related accounting impacts, will be substantial. HASP will require us, in some cases, to modify loans when default is imminent even though the borrower's mortgage payments are current. If current loans are modified and are purchased...

  • Page 191
    ..., or Fannie Mae, and the Federal Home Loan Banks, or FHLBs, and up to $500 billion of mortgage-related securities issued by Freddie Mac, Fannie Mae and Ginnie Mae by the end of the second quarter of 2009. Since that time, we have experienced improved demand for our issuances of long-term debt...

  • Page 192
    ... debt; • establishing the allowance for loan losses on loans held-for-investment and the reserve for guarantee losses on PCs; • applying the static effective yield method of amortizing our guarantee obligation into earnings based on forecasted unpaid principal balances, which requires adjustment...

  • Page 193
    ... balance sheets. During 2008, in order to meet new clearing fund diversification requirements as a participant of the Mortgage-Backed Securities Clearing Division of the Fixed Income Clearing Corporation, we posted cash collateral to the Fixed Income Clearing Corporation and recorded this cash...

  • Page 194
    ... receive management and guarantee fees, discounted using market input assumptions extracted from the dealer quotes provided on the more liquid products. See "NOTE 3: RETAINED INTERESTS IN MORTGAGE-RELATED SECURITIZATIONS" for more information on how we determine the fair value of our guarantee asset...

  • Page 195
    ... mortgage loans, referred to as delivery fees. These fees are charged to compensate us for any additional credit risk not contemplated in the management and guarantee fee initially negotiated with customers. Cash payments that are made or received at inception of a swap-based exchange related to buy...

  • Page 196
    ... to third parties in exchange for non-Freddie Mac mortgage-related securities are referred to as Structured Transactions. We recognize a guarantee asset, to the extent a management and guarantee fee is charged, and we recognize our guarantee obligation at fair value. We do not receive transaction...

  • Page 197
    ...reflected through charging-off such balances (net of recoveries) when realized losses are recorded or as a reduction in the provision for credit losses. For both single-family and multifamily mortgages where the original terms of the mortgage loan agreement are modified, resulting in 194 Freddie Mac

  • Page 198
    ... and warranties made at the time of sale; • counterparty credit of mortgage insurers and seller/servicers; • pre-foreclosure real estate taxes and insurance; • estimated selling costs should the underlying property ultimately be sold; and • trends in the timing of foreclosures. Our loan loss...

  • Page 199
    ... made required payments that return to current status, the basis adjustments are recognized as interest income over time, as periodic payments are received. Gains resulting from the prepayment of currently performing SOP 03-3 loans are also reported in mortgage loan interest income. Investments in...

  • Page 200
    ... guaranteed investments. Therefore, the fair values of these securities reflect that they are considered to be of high credit quality and the securities are not subject to credit-related impairments. They are subject to the credit risk associated with the underlying mortgage loan collateral...

  • Page 201
    ... were recorded at amortized cost and translated into U.S. dollars using foreign exchange spot rates at the balance sheet dates and any resulting gains or losses were reported in non-interest income (loss) - foreign-currency gains (losses), net. When we repurchase or call outstanding debt securities...

  • Page 202
    ... credit enhancements are recorded when the asset is acquired. The receivable is adjusted when the actual claim is filed, and is a component of accounts and other receivables, net on our consolidated balance sheets. Material development and improvement costs relating to REO are capitalized. Operating...

  • Page 203
    ... are excess tax benefits from previous stock-based awards remaining in additional paid-in capital, with any remainder reported as part of income tax expense (benefit). Earnings Per Common Share Because we have participating securities, we use the "two-class" method of computing earnings per common...

  • Page 204
    ... "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106 and 132(R)," or SFAS 158. In accordance with the standard, we are required to measure our defined plan assets and obligations as of the date of our consolidated balance...

  • Page 205
    ... the Fair Value Option - Impact on Financial Statements Balance Sheet January 1, 2008 prior to Adoption Net Gain/(Losses) upon Adoption (in millions) Balance Sheet January 1, 2008 after Adoption Investments in securities(1) ...Total debt, net(2) ...Cumulative-effect adjustment (pre-tax) ...Impact...

  • Page 206
    ... in "NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES," we securitize substantially all the single-family mortgage loans we have purchased and issue securities which we guarantee. We enter into other financial agreements, including credit enhancements on mortgage-related assets and derivative...

  • Page 207
    ...PCs and Structured Securities as of December 31, 2008 consisted of approximately $1,796.0 billion in unpaid principal balance of mortgage loans or mortgage-related securities and $11.6 billion of cash and short-term investments, which we invest on behalf of the PC trusts until the time of payment to...

  • Page 208
    ... in such Structured Securities, we are obligated to fund such principal. Our maximum exposure on these guarantees represents the outstanding unpaid principal balance of the underlying mortgage loans. Servicing-Related Premium Guarantees We provided guarantees to reimburse servicers for premiums...

  • Page 209
    ...mortgage seller, third-party guarantees or letters of credit, cash escrows, subordinated participations in mortgage loans or structured pools, sharing of losses with sellers, and cross-default and cross-collateralization provisions. Cross-default and cross-collateralization provisions typically work...

  • Page 210
    ... guarantee asset at December 31, 2008 used third-party market data as practicable. For approximately 75% of the fair value of the guarantee asset, which relates to fixed-rate loan products that reflect current market rates, the valuation approach involved obtaining dealer quotes on proxy securities...

  • Page 211
    ... refinance their loan. Expectations of continued low rates resulted in an increase in average prepayment assumptions on Mortgage-Related Securities retained interests. As noted above, our guarantee asset can be effectively equated with the market values for excess servicing interest-only securities...

  • Page 212
    ... from: Proceeds from transfers of Freddie Mac securities that were accounted for as sales(1) ...Cash flows received on the guarantee asset(2) ...Principal and interest from retained securitization interests(3) ...Purchases of delinquent or foreclosed loans and required purchase of balloon mortgages...

  • Page 213
    ... included in low-income housing tax credit partnerships equity investments on our consolidated balance sheets. As a limited partner, our maximum exposure to loss equals the undiscounted book value of our equity investment. At December 31, 2008 and 2007, our maximum exposure to loss on unconsolidated...

  • Page 214
    ... 31, 2008 Amortized Cost Gross Gross Unrealized Unrealized Gains Losses (in millions) Fair Value Mortgage-related investments portfolio: Mortgage-related securities: Freddie Mac ...Subprime ...Commercial mortgage-backed securities ...Alt-A and other ...Moving Treasury Average, or MTA ...Fannie Mae...

  • Page 215
    ... Losses December 31, 2008 Fair Value Mortgage-related investments portfolio: Mortgage-related securities: Freddie Mac ...Subprime ...Commercial mortgage-backed securities ...Alt-A and other ...MTA ...Fannie Mae ...Obligations of states and political subdivisions Manufactured housing ...Ginnie Mae...

  • Page 216
    ... be recovered from primary monoline insurers. In the case of monoline insurers, we also consider factors such as the availability of capital, generation of new business, pending regulatory action, ratings, security prices and credit default swap levels traded on the insurers. In order to determine...

  • Page 217
    ... of private-label or non-agency issuers. During 2008, we recorded impairments related to investments in mortgage-related securities of $16.6 billion primarily related to non-agency securities backed by subprime loans, Alt-A and other loans and MTA loans, due to the combination of 214 Freddie Mac

  • Page 218
    ...charges will be recognized as net interest income in future periods. Our cash and other investments portfolio is comprised of our cash and cash equivalents, federal funds sold and securities purchased under agreements to resell and investments in non-mortgage-related securities. We recorded security...

  • Page 219
    ... losses relate to a discrete number of resecuritization transactions involving seasoned agency securities, which were in response to facts and circumstances arising after the previous balance sheet date related to our voluntary portfolio growth limit and unanticipated extraordinary market conditions...

  • Page 220
    ... the changes in AOCI, net of taxes, related to available-for-sale securities. The net unrealized holding losses, net of tax, represents the net fair value adjustments recorded on available-for-sale securities throughout the year, after the effects of our federal statutory tax rate of 35%. The...

  • Page 221
    ... fair values by major security type for trading securities held in our mortgage-related investments portfolio. Table 5.7 - Trading Securities in our Mortgage-Related Investments Portfolio December 31, 2008 2007 (in millions) Mortgage-related securities issued by: Freddie Mac ...Fannie Mae ...Ginnie...

  • Page 222
    ...net of allowance for loan losses ...$107,591 (1) Based on unpaid principal balances and excludes mortgage loans traded, but not yet settled. For the years ended December 31, 2008 and 2007, we transferred $- million and $41 million, respectively, of held-forsale mortgage loans to held-for-investment...

  • Page 223
    ... transfer of a proportional amount of the recognized reserves for guaranteed losses related to PC pools associated with delinquent or modified loans purchased from mortgage pools underlying our PCs, Structured Securities and long-term standby agreements to establish the initial recorded investment...

  • Page 224
    ... and using an average of these market prices to estimate the initial fair value. We recognize losses on loans purchased in our consolidated statements of operations if our net investment in the acquired loan is higher than its fair value. At December 31, 2008 and 2007, the unpaid principal balances...

  • Page 225
    ... other mortgage-related financial guarantees and excludes that portion of Structured Securities backed by Ginnie Mae Certificates. Table 6.6 - Delinquency Performance 2008 At December 31, 2007 2006 Delinquencies: Single-family:(1) Non-credit-enhanced portfolio(2) Delinquency rate ...Total number of...

  • Page 226
    ... to account for declines in home prices during these periods. NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS Debt securities are classified as either short-term (due within one year) or long-term (due after one year) based on their remaining contractual maturity. The Purchase Agreement provides...

  • Page 227
    ... of hedge-related basis adjustments. (3) Certain prior period amounts have been revised to conform to the current year presentation. Long-Term Debt Table 8.3 summarizes our long-term debt. Table 8.3 - Long-Term Debt December 31, Contractual Maturity(1) 2008 Balance, Net(2) Interest Rates Par Value...

  • Page 228
    ... maximum amount that may be borrowed thereunder, but any loans made to us by Treasury pursuant to the Lending Agreement must be collateralized by Freddie Mac or Fannie Mae mortgage-related securities. As of December 31, 2008, we held approximately $484 billion of fair value in Freddie Mac and Fannie...

  • Page 229
    ...the senior preferred stock in limited circumstances. Treasury, as the holder of the senior preferred stock, is entitled to receive, when, as and if declared by our Board of Directors, cumulative quarterly cash dividends at the annual rate of 10% per year on the then-current liquidation preference of...

  • Page 230
    ... certificate of designation for the senior preferred stock or otherwise required by law. The consent of holders of at least two-thirds of all outstanding shares of senior preferred stock is generally required to amend the terms of the senior preferred stock or to create any class or series of stock...

  • Page 231
    ...holders of these debt securities or Freddie Mac mortgage guarantee obligations may file a claim in the United States Court of Federal Claims for relief requiring Treasury to fund to us the lesser of: (1) the amount necessary to cure the payment defaults on our debt and Freddie Mac mortgage guarantee...

  • Page 232
    ... stock and preferred stock outstanding at December 31, 2008. We have the option to redeem our preferred stock on specified dates, at their redemption price plus dividends accrued through the redemption date. However, without the consent of Treasury, we are restricted from making payments to purchase...

  • Page 233
    ... "NOTE 10: REGULATORY CAPITAL" for more information. (3) Preferred stock is listed on the New York Stock Exchange, or NYSE, unless otherwise noted. (4) Dividends on the senior preferred stock are cumulative, and the dividend rate is 10% per year. However, if at any time we fail to pay cash dividends...

  • Page 234
    ... and soundness weaknesses, especially with regard to our credit risk, earnings outlook and capitalization, (b) continued and substantial deterioration in equity, debt and mortgage-related securities market conditions, (c) our current and projected financial performance, (d) our inability to raise...

  • Page 235
    ... common stock repurchases and preferred stock redemptions) without prior FHFA approval so long as the payment would not decrease total capital to an amount less than our risk-based capital requirement and would not decrease our core capital to an amount less than our minimum capital requirement...

  • Page 236
    ... outstanding and 4% of our on-balance sheet assets at the end of each quarter. Qualifying subordinated debt is defined as subordinated debt that contains a deferral of interest payments for up to five years if our core capital falls below 125% of our critical capital requirement or 233 Freddie Mac

  • Page 237
    ... is a description of each of our stock-based compensation plans under which grants were made prior to our entry into conservatorship on September 6, 2008. After such date, we suspended operation of our ESPP and will no longer make grants under the Employee Plans or Director's Plan. 234 Freddie Mac

  • Page 238
    ... the weighted average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. Changes in the assumptions used to calculate the fair value of stock options could result in materially different fair value estimates. The actual value of stock options will...

  • Page 239
    ... Plans and Directors' Plan 2007 2006 2008(2) 2007(2) 2006 (dollars in millions, except share-related amounts) Assumptions: Expected volatility ...Weighted average: Volatility ...Expected dividend yield ...Expected life ...Risk-free interest rate ...Valuations: Weighted average grant-date fair value...

  • Page 240
    ... our forecasted issuances of debt consistent with our risk management goals. We expanded this hedge accounting strategy in 2008 in an effort to reduce volatility in our consolidated statements of operations. For a derivative accounted for as a cash flow hedge, changes in fair value were reported in...

  • Page 241
    ... of forecasted transactions may be satisfied by either periodic issuances of short-term debt over the required time period or longer-term debt, such as Reference NotesË› securities. Table 12.1 presents the changes in AOCI, net of taxes, related to derivatives designated as cash flow hedges. Net...

  • Page 242
    ...Class Action Lawsuits. Reimer vs. Freddie Mac, Syron, Cook, Piszel and McQuade, or Reimer. and Ohio Public Employees Retirement System vs. Freddie Mac, Syron, et al, or OPERS. Two virtually identical putative securities class action lawsuits were filed against Freddie Mac and certain former officers...

  • Page 243
    ...and improper speculation in high risk mortgages to boost near term profits, report growth in the company's mortgage-related investments portfolio and guarantee business, and take market share away from its primary competitor, Fannie Mae." Plaintiff asserts claims for alleged breach of fiduciary duty...

  • Page 244
    ...% Fixed to Floating Rate Non-Cumulative Perpetual Preferred Stock. The plaintiff filed suit against the underwriters claiming that the Offering Circular was materially false in its failure to disclose and properly warn of Freddie Mac's exposure to "massive mortgage-related losses"; its underwriting...

  • Page 245
    ...-cumulative, non-convertible, perpetual fixed-rate preferred stock, and that such statements "grossly overstated Freddie Mac's capitalization" and "failed to disclose Freddie Mac's exposure to mortgage-related losses, poor underwriting standards and risk management procedures." The complaint further...

  • Page 246
    ...31, 2008 Adjust for Valuation Adjusted Allowance December 31, 2008 (in millions) December 31, 2007 Deferred tax assets: Deferred fees ...Basis differences related to derivative instruments ...Credit related items and reserve for loan losses ...Basis differences related to assets held for investment...

  • Page 247
    ... under the statute of limitations for federal income tax purposes is open on corporate income tax returns filed for years 1985 to 2007. Tax years 1985 to 1997 are before the U.S. Tax Court. In June 2008, we reached agreement with the IRS on a settlement regarding the tax treatment of the customer...

  • Page 248
    ... our employees. Pension Plan benefits 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...

  • Page 249
    ... the global securities markets during 2008. See "Plan Assets" for additional information regarding the types of assets in which the Pension Plan invests as well as the investment policies and objectives of our Pension Plan. The accumulated benefit obligation for all defined benefit pension plans was...

  • Page 250
    ... the year, after the effects of our federal statutory tax rate of 35%. However, we recorded a valuation allowance against our net deferred tax assets of $44 million related to our defined benefit plans in 2008. See "NOTE 14: INCOME TAXES" for further information on our deferred tax assets valuation...

  • Page 251
    ... our Pension Plan's investment strategy on an ongoing basis. In 2008 and 2007, our Pension Plan employed a total return investment approach whereby a diversified blend of equities and fixed income investments was used to maximize the long-term return of plan assets for a prudent level of risk. Risk...

  • Page 252
    ... segments by adjusting GAAP net income (loss) for certain investment-related activities and credit guarantee-related activities. The Segment Earnings measure is provided to the chief operating decision maker. Prior to December 1, 2007, we reported as a single segment using GAAP-basis income. We have...

  • Page 253
    ... assets for the long term, fund our investments with debt and use derivatives to minimize interest rate risk. The business model for our credit guarantee activity is one where we are a long-term guarantor in the conforming mortgage markets, manage credit risk and generate guarantee and credit fees...

  • Page 254
    ...line basis over the original terms of the repurchased debt. • Trading losses or impairments that reflect expected or realized credit losses are realized immediately pursuant to GAAP and in Segment Earnings since they are not economically hedged. Fair value adjustments to trading securities related...

  • Page 255
    ...-term time horizon inherent in our investment-related activities. Credit Guarantee Activity-Related Adjustments Credit guarantee activities consist largely of our guarantee of the payment of principal and interest on mortgages and mortgage-related securities in exchange for management and guarantee...

  • Page 256
    ...debt-related adjustments Credit guarantee-related adjustments ...Investment sales, debt retirements and fair value-related adjustments . . Fully taxable-equivalent adjustments ...Total pre-tax adjustments ...Tax-related adjustments(1) ...Total reconciling items, net of taxes ...GAAP net income (loss...

  • Page 257
    ...Single-family Guarantee ...Multifamily ...All Other ...Total Segment Earnings (loss), net of taxes ...Reconciliation to GAAP net income (loss): Derivative- and foreign currency denominated debt-related adjustments ...Credit guarantee-related adjustments ...Investment sales, debt retirements and fair...

  • Page 258
    ... for credit losses within our Single-family Guarantee segment; and (e) certain hedged interest benefit (cost) amounts related to trust management income from other non-interest income (loss) to net interest income within our Investments segment. (2) 2008 includes a non-cash charge related to...

  • Page 259
    ...securities and because the expected cash flow valuation approach uses significant unobservable inputs, we classified the guarantee asset as Level 3. See "NOTE 3: RETAINED INTERESTS IN MORTGAGE-RELATED SECURITIZATIONS" for more information about the valuation of our guarantee asset. 256 Freddie Mac

  • Page 260
    ... Value For The Year Ended December 31, 2008 Investments in securities Available-for-sale, Trading, at fair value at fair value Mortgage loans MortgageMortgageNet related related Held-for-sale, Guarantee asset, derivatives(2) securities at fair value at fair value(1) securities (in millions) Balance...

  • Page 261
    ... is attributed to instrument-specific credit risk. The difference between the aggregate fair value and aggregate unpaid principal balance for foreign-currency denominated debt due after one year is $445 million at December 31, 2008. Related interest expense continues to be reported 258 Freddie Mac

  • Page 262
    ... where quoted prices exist for the exact instrument in an active market. Our Level 2 instruments generally consist of high credit quality agency mortgage-related securities, commercial mortgage-backed securities, non-mortgage-related asset-backed securities, interest-rate swaps, optionbased...

  • Page 263
    ... the fair value. For singlefamily mortgage loans, part of the adjustments for yield, credit and liquidity differences represents an implied management and guarantee fee. To accomplish this, the fair value of the single-family mortgage loans, excluding delinquent single-family loans purchased out...

  • Page 264
    ... obligation associated with our PCs issued through our guarantor swap program prior to the implementation of FIN 45, (b) certain commitments to purchase mortgage loans and (c) certain credit enhancements on manufactured housing asset-backed securities. The fair value balance sheets 261 Freddie Mac

  • Page 265
    ... Value Hierarchy - Guarantee Obligation." Table 17.4 - Consolidated Fair Value Balance Sheets(1) December 31, 2008 December 31, 2007 Carrying Carrying (2) Amount Fair Value Amount(2) Fair Value (in billions) Assets Cash and cash equivalents ...Federal funds sold and securities purchased Investments...

  • Page 266
    ... of fair value. Other Assets Other assets consists of investments in qualified LIHTC partnerships that are eligible for federal tax credits, credit enhancement contracts related to PCs and Structured Securities (pool insurance and recourse and/or indemnification agreements), financial guarantee...

  • Page 267
    ... and long-term debt used to finance our assets. On our consolidated GAAP balance sheets, total debt, net, excluding debt securities denominated in foreign currencies, are reported at amortized cost, which is net of deferred items, including premiums, discounts and hedging-related basis adjustments...

  • Page 268
    ... fair value balance sheets, less the value of net assets attributable to senior preferred stockholders and the fair value attributable to preferred stockholders. NOTE 18: CONCENTRATION OF CREDIT AND OTHER RISKS Mortgages and Mortgage-Related Securities Our business activity is to participate...

  • Page 269
    ... required by our charter to have credit enhancement, such as mortgage insurance, on those loans with greater than 80% LTV ratios at the time of our purchase, to help mitigate the risk of loss on the portion of the loan above 80% of the property's value. We periodically estimate the current LTV ratio...

  • Page 270
    .../servicer and provided 20% of our single-family mortgage purchase volume during the year ended December 31, 2008. Given the uncertainty of the current housing market we have entered into arrangements with existing customers at their renewal dates that allow us to change credit and pricing terms...

  • Page 271
    ... off-balance sheet exposure to the trust of the same maximum amount that applies to our credit risk of our outstanding guarantees; however, we also have exposure to the trust and its institutional counterparties for any investment losses that are incurred in our role as the securities administrator...

  • Page 272
    ... Purchase Agreement since the warrant is unconditionally exercisable by the holder at a minimal cost. See "NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Conservatorship and Related Developments" for further information. Diluted earnings (loss) per common share are computed as net income (loss...

  • Page 273
    ... are excluded from the weighted average common shares outstanding - basic. Table 20.1 - Earnings (Loss) Per Common Share - Basic and Diluted Year Ended December 31, 2008 2007 2006 (dollars in millions, except per share amounts) Net income (loss) ...Preferred stock dividends and issuance costs on...

  • Page 274
    QUARTERLY SELECTED FINANCIAL DATA 1Q 2008 2Q 3Q 4Q Full-Year (in millions, except share-related amounts) Net interest income ...Non-interest income (loss) . . Non-interest expense ...Income tax (expense) benefit Net income (loss) ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...

  • Page 275
    ... to meet our disclosure obligations under the federal securities laws; • we have identified a material weakness in the design and documentation of controls over our counterparty credit risk analysis that impacts our significant judgments and estimates for single-family loan loss reserves and other...

  • Page 276
    ... Analysis Our counterparty credit risk analysis impacts significant estimates and judgments in our financial reporting affecting single-family loan loss reserves and other-than-temporary impairments of available-for-sale securities. The controls over these processes have not been adequately designed...

  • Page 277
    ...to current reporting pursuant to Form 8-K. Similarly, as a regulated entity, we are limited in our ability to design, implement, operate and test the controls and procedures for which FHFA is responsible. For example, FHFA may formulate certain intentions with respect to conduct of our business that...

  • Page 278
    ... level during the analysis of our December 31, 2008 consolidated financial statements to mitigate the risk of material misstatement. We will continue our efforts related to review, oversight and validation to fully remediate this material weakness. • Securities Impairment Model - Our plan...

  • Page 279
    ... officer and Board of Directors compensation will be included in an amendment to this annual report on Form 10-K on or before April 30, 2009. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding the beneficial ownership...

  • Page 280
    ... required to be filed in this annual report on Form 10-K are included in Part II, Item 8. (2) Financial Statement Schedules None. (3) Exhibits An Exhibit Index has been filed as part of this annual report on Form 10-K beginning on page E-1 and is incorporated herein by reference. 277 Freddie Mac

  • Page 281
    ... behalf by the undersigned thereunto duly authorized. Federal Home Loan Mortgage Corporation By: /s/ David M. Moffett David M. Moffett Chief Executive Officer Date: March 11, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following...

  • Page 282
    ..., Limitations, Restrictions, Terms and Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share), dated March 23, 2001 (incorporated by reference to Exhibit 4.12 to the Registrant's Registration Statement on Form 10 as filed on July 18, 2008) E-1 Freddie Mac

  • Page 283
    ..., Limitations, Restrictions, Terms and Conditions of Variable Liquidation Preference Senior Preferred Stock (par value $1.00 per share), dated September 7, 2008 (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K as filed on September 11, 2008) E-2 Freddie Mac

  • Page 284
    ... Global Debt Facility Agreement, dated July 22, 2008 (incorporated by reference to Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008, as filed on November 14, 2008) Federal Home Loan Mortgage Corporation 2004 Stock Compensation Plan (as...

  • Page 285
    ...'s Registration Statement on Form 10 as filed on July 18, 2008)†Resolution of the Board of Directors, dated November 30, 2005, concerning certain outstanding options granted to non-employee directors under the Federal Home Loan Mortgage Corporation 1995 Directors' Stock Compensation Plan...

  • Page 286
    ... dated December 24, 2008 Form of Indemnification Agreement between the Federal Home Loan Mortgage Corporation and executive officers and outside Directors (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K as filed on December 23, 2008)†E-5 Freddie Mac

  • Page 287
    ... Statement on Form 10 as filed on July 18, 2008) Amended and Restated Senior Preferred Stock Purchase Agreement dated as of September 26, 2008, between the United States Department of the Treasury and Federal Home Loan Mortgage Corporation, acting through the Federal Housing Finance Agency...

  • Page 288
    ....1 RATIO OF EARNINGS TO FIXED CHARGES 2008(1) Year Ended December 31, 2007(1) 2006 2005 (dollars in millions) 2004 Net income (loss) before cumulative effect of changes in accounting Add: Income tax expense (benefit) ...Minority interests in earnings (loss) of consolidated subsidiaries . Low-income...

  • Page 289
    ....2 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 2008(1) Year Ended December 31, 2007(1) 2006 2005 (dollars in millions) 2004 Net income (loss) before cumulative effect of changes in accounting Add: Income tax expense (benefit) ...Minority interests in earnings (loss) of...

  • Page 290
    Exhibit 31.1 CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a) I, David M. Moffett, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2008 of the Federal Home Loan Mortgage Corporation; 2. Based on my knowledge, this report does not ...

  • Page 291
    Exhibit 31.2 CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a) I, David B. Kellermann, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2008 of the Federal Home Loan Mortgage Corporation; 2. Based on my knowledge, this report does not ...

  • Page 292
    ... In connection with the Annual Report on Form 10-K for the year ended December 31, 2008 of the Federal Home Loan Mortgage Corporation (the "Company"), as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David M. Moffett, Chief Executive Officer of the Company...

  • Page 293
    ... with the Annual Report on Form 10-K for the year ended December 31, 2008 of the Federal Home Loan Mortgage Corporation (the "Company"), as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David B. Kellermann, Acting Chief Financial Officer of the Company...