Freddie Mac 2008 Annual Report Download - page 123

against our net deferred tax assets that resulted in reductions to our GAAP stockholders’ equity (deficit). However, we expect
this to change, particularly in light of the size of our dividend obligation in future periods.
Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited
and we will not be able to do so for the foreseeable future, if at all. The aggregate liquidation preference of the senior
preferred stock and our related dividend obligations will increase further if we make additional draws under the Purchase
Agreement or any dividends or quarterly commitment fees payable under the Purchase Agreement are not paid in cash. The
amounts payable for dividends on the senior preferred stock are substantial and will have an adverse impact on our financial
position and net worth and, to the extent they are paid in cash, will increase the need for additional funding under the
Purchase Agreement.
The Purchase Agreement includes significant restrictions on our ability to manage our business, including limiting the
amount of indebtedness we can incur and capping the size of our mortgage-related investments portfolio as of December 31,
2009. In addition, beginning in 2010, we must decrease the size of our mortgage-related investments portfolio at the rate of
10% per year until it reaches $250 billion. Depending on the pace of future mortgage liquidations, we may need to reduce or
eliminate our purchases of mortgage assets or sell mortgage assets to achieve this reduction. 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 Agreement and warrant make it unlikely that we will be able to obtain equity from private sources. For
additional information concerning the potential impact of the Purchase Agreement, including taking additional large draws,
see “RISK FACTORS — Conservatorship and Related Developments.”
We have not received funding to date under the Lending Agreement. Given that the interest rate we are likely to be
charged under the Lending Agreement will be significantly higher than the rates we have historically achieved through the
sale of unsecured debt, use of the facility in significant amounts could have a material adverse impact on our financial
results. The Lending Agreement will terminate on December 31, 2009, but will remain in effect as to any loan outstanding
on that date. After December 31, 2009, Treasury still may purchase up to $2.25 billion of our obligations under its
permanent authority, as set forth in our charter.
In an effort to conserve capital, on September 7, 2008, FHFA, as Conservator, announced the elimination of dividends
on our common stock and preferred stock, excluding the senior preferred stock issued to Treasury under the Purchase
Agreement.
On September 19, 2008, FHFA, as Conservator, advised us of FHFA’s determination that no further common or
preferred stock dividends should be paid by our REIT subsidiaries, Home Ownership Funding Corporation 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.
On October 9, 2008, FHFA announced that it was suspending capital classification of Freddie Mac during
conservatorship in light of the Purchase Agreement. FHFA has directed us to focus our risk and capital management
activities on, among other things, maintaining a positive balance of GAAP stockholders’ equity in order to reduce the
likelihood that we will need to make additional draws on the Purchase Agreement with Treasury. However, FHFA has also
directed us to pursue other objectives, such as providing relief to struggling homeowners, which can conflict with
maintaining positive stockholders’ equity. In addition, notwithstanding our failure to maintain required capital levels, FHFA
has directed us to continue to make interest and principal payments on our subordinated debt. For more information, see
“Capital Adequacy” and “BUSINESS — Regulation and Supervision — Federal Housing Finance Agency — Other
Regulatory Actions.”
The Reform 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 Magnet Fund established and managed by Treasury. FHFA
has the authority to suspend our allocation upon finding that the payment would contribute to our financial instability, cause
us to be classified as undercapitalized or prevent us from successfully completing a capital restoration plan. FHFA advised us
that it has suspended the requirement to set aside or allocate funds for the Housing Trust Fund and the Capital Magnet Fund
until further notice.
For more information on these events, see “BUSINESS — Conservatorship and Related Developments” and
“— Regulation and Supervision.”
Debt Securities
We fund our business activities primarily through the issuance of short- and long-term debt. Competition for funding
can vary with economic, financial market and regulatory environments. Historically, we mainly competed for funds in the
debt issuance markets with Fannie Mae and the FHLBs. However, we face increasing competition for funding from other
debt issuers, as many of our bank competitors are currently able to issue debt that is guaranteed by the U.S. government.
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