Freddie Mac 2008 Annual Report Download - page 101

At December 31, 2008, our gross unrealized losses on available-for-sale mortgage-related securities were $50.9 billion.
The main components of these losses are gross unrealized losses of $45.4 billion related to non-agency mortgage-related
securities backed by subprime loans, Alt-A and other loans and MTA loans and commercial mortgage-backed securities. We
believe that these unrealized losses on non-agency mortgage-related securities at December 31, 2008 were principally a result
of decreased liquidity and larger risk premiums in the non-agency mortgage market. All securities in an unrealized loss
position are evaluated to determine if the impairment is other-than-temporary. The evaluation of these securities considers
available information, including analyses based on loss severity, default, prepayment and other borrower behavior
assumptions.
Other-Than-Temporary Impairments
Table 27 summarizes our impairments on our mortgage-related securities recorded by security type and the duration of
the unrealized loss prior to impairment of less than 12 months and 12 months or greater.
Table 27 — Other-than-Temporary Impairments on Mortgage-Related Securities Recorded by Gross Unrealized Loss
Position
Less than
12 months
12 months
or greater Total
Gross Unrealized Loss Position
(in millions)
Year Ended December 31, 2008
Mortgage-related securities:
(1)
Subprime . .................................................................. $ (168) $ (3,453) $ (3,621)
Alt-A and other . . ............................................................. (914) (4,339) (5,253)
MTA...................................................................... — (7,602) (7,602)
Obligations of states and political subdivisions . . . . . . .................................... (58) (10) (68)
Manufactured housing . . . ....................................................... (74) (16) (90)
Total other-than-temporary impairments . . . . . . . . . .................................... $(1,214) $(15,420) $(16,634)
Year Ended December 31, 2007
Mortgage-related securities:
Freddie Mac ................................................................. $ (17) $ (320) $ (337)
Fannie Mae .................................................................. (1) (12) (13)
Subprime
(1)
.................................................................. (11) — (11)
Manufactured housing
(1)
......................................................... (4) — (4)
Total other-than-temporary impairments . . . . . . . . . .................................... $ (33) $ (332) $ (365)
Year Ended December 31, 2006
Mortgage-related securities:
Freddie Mac ................................................................. $ (168) $ (13) $ (181)
Fannie Mae .................................................................. (31) (17) (48)
Commercial mortgage-backed securities
(1)
............................................. (62) (4) (66)
Manufactured housing
(1)
......................................................... (2) — (2)
Total other-than-temporary impairments . . . . . . . . . .................................... $ (263) $ (34) $ (297)
(1) Represents securities of private-label or non-agency issuers.
During the fourth quarter of 2008, of the $197.9 billion in non-agency mortgage-related securities in our
available-for-sale portfolio at December 31, 2008, we have identified securities primarily backed by subprime loans, Alt-A
and other loans and MTA loans with $13.6 billion of unpaid principal balance that are probable of incurring a contractual
principal or interest loss. This probable loss is due to significant recent sustained deterioration in the performance of the
underlying collateral of these securities and lack of confidence in the credit enhancements provided by three monoline
insurers. We have determined that it is both probable a principal and interest shortfall will occur on the insured securities and
that in such a case, there is substantial uncertainty surrounding the insurer’s ability to pay all future claims. As such, we
recognized impairment losses on non-agency mortgage-related securities of $6.9 billion during the fourth quarter of 2008,
which were determined to be other-than-temporary. The recent deterioration has not impacted our ability and intent to hold
these securities.
We estimate that the future expected principal and interest shortfall on these securities will be significantly less than the
impairment loss recognized under GAAP, as we expect these shortfalls to be less than the recent fair value declines. Our
estimates of expected losses increased during the fourth quarter as compared to the third quarter. The portion of the
impairment charges associated with expected recoveries that we estimate may be recognized as net interest income in future
periods was $11.8 billion as of December 31, 2008.
The deterioration in the mortgage market and resulting illiquidity has caused the government to take unprecedented
action during the second half of 2008. The decline in mortgage credit performance has been most severe for subprime loans,
Alt-A and other loans and MTA loans. Many of the same global economic factors 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