Freddie Mac 2008 Annual Report Download - page 115

2008 as 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 quarter, as well as declines in market valuations for excess-
servicing, interest-only mortgage securities, which we use to value our guarantee asset. As a result of certain government
actions, funding costs for many financial institutions declined, which caused the average rates for conventional single-family
mortgages to decline significantly during the fourth quarter of 2008.
Real Estate Owned, Net
We acquire residential properties in satisfaction of borrower defaults on mortgage loans that we own or for which we
have issued our financial guarantees. The balance of our REO, net increased substantially to $3.3 billion at December 31,
2008 from $1.7 billion at December 31, 2007. Our single-family REO property inventory doubled during 2008, with the most
significant amount of acquisitions in the states of California, Arizona, Florida, Michigan and Nevada. REO acquisitions in
the West region and Florida generally have higher average property values due to home price appreciation prior to the more
recent decreases in home prices. Our temporary suspension of foreclosure sales on occupied homes from November 26, 2008
through January 31, 2009 caused a decrease in the growth of REO acquisitions and inventory in December 2008. We
reinstated the suspension of foreclosure sales on occupied homes from February 14, 2009 through March 6, 2009. The
expiration of this suspension will likely result in continued growth of our REO inventory during 2009. See “CREDIT
RISKS — Mortgage Credit Risk — Credit Loss Performance” for additional information.
Net Deferred Tax Assets
Deferred tax assets and liabilities are recognized based upon the expected future tax consequences of existing temporary
differences between the financial reporting and the tax reporting basis of assets and liabilities using enacted statutory tax
rates. Valuation allowances are recorded to reduce net deferred tax assets when it is more likely than not that a tax benefit
will not be realized. The realization of our net deferred tax assets is dependent upon the generation of sufficient taxable
income or upon our intent and ability to hold available-for-sale debt securities until the recovery of any temporary unrealized
losses. On a quarterly basis, we determine whether a valuation allowance is necessary. In so doing, we consider all evidence
currently available, both positive and negative, in determining whether, based on the weight of that evidence, the net deferred
tax assets will be realized and whether a valuation allowance is necessary.
Subsequent to the date of our entry into conservatorship, we determined that it was more likely than not that a portion
of our net deferred tax assets would not be realized due to our inability to generate sufficient taxable income. We made the
same determination in the fourth quarter of 2008 after a thorough evaluation of available evidence, including the events and
developments related to our conservatorship, other recent events in the market, and related difficulty in forecasting future
profit levels. As a result, in 2008, we recorded a $22.4 billion partial valuation allowance against our net deferred tax assets,
including $8.3 billion recorded in the fourth quarter. As of December 31, 2008, we had a remaining deferred tax asset of
$15.4 billion representing the tax effect of unrealized losses on our available-for-sale debt securities, which management
believes is more likely than not of being realized because of our intent and ability to hold these securities until the unrealized
losses are recovered. For additional information, see “NOTE 14: INCOME TAXES — Net Deferred Tax Assets” to our
consolidated financial statements and “CRITICAL ACCOUNTING POLICIES AND ESTIMATES — Realizability of Net
Deferred Tax Assets.” Our view of our ability to realize the net deferred tax assets may change in future periods, particularly
if the mortgage and housing markets continue to decline.
Total Debt
Table 43 reconciles the par value of our debt, including short-term debt and long-term debt, to the amounts shown on
our consolidated balance sheets. See “LIQUIDITY AND CAPITAL RESOURCES” for further discussion of our debt
management activities.
Table 43 — Reconciliation of the Par Value to Total Debt, Net
2008 2007
December 31,
(in millions)
Total debt:
Par value
(1)
.......................................................................... $870,276 $781,261
Unamortized balance of discounts and premiums
(2)
............................................... (28,008) (43,540)
Hedging-related and other basis adjustments
(1)(3)
................................................. 753 836
Total debt, net . . . . . . . . . . . ............................................................... $843,021 $738,557
(1) Prior period amounts have been revised to conform to the current year presentation.
(2) Primarily represents unamortized discounts on zero-coupon debt.
(3) Primarily represents deferrals related to debt instruments that were in hedge accounting relationships. 2008 also includes changes in the fair value
attributable to instrument-specific credit risk related to foreign-currency-denominated debt.
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