Freddie Mac 2008 Annual Report Download - page 189

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Freddie Mac was chartered by the U.S. Congress, or Congress, in 1970 to stabilize the nation’s residential mortgage
market and expand opportunities for home ownership and affordable rental housing. Our statutory mission is to provide
liquidity, stability and affordability to the U.S. housing market. Our participation in the secondary mortgage market includes
providing our credit guarantee for residential mortgages originated by mortgage lenders and investing in mortgage loans and
mortgage-related securities. We refer to our investment in mortgage loans and mortgage-related securities as our mortgage-
related investments portfolio, formerly known as our retained portfolio. Through our credit guarantee activities, we securitize
mortgage loans by issuing Mortgage Participation Certificates, or PCs, to third-party investors. We also resecuritize
mortgage-related securities that are issued by us or the Government National Mortgage Association, or Ginnie Mae, as well
as private, or non-agency, entities. We also guarantee multifamily mortgage loans that support housing revenue bonds issued
by third parties and we guarantee other mortgage loans held by third parties. Securitized mortgage-related assets that back
PCs and Structured Securities that are held by third parties are not reflected as our assets. As discussed in “Securitization
Activities through Issuances of Guaranteed PC and Structured Securities,” our Structured Securities represent beneficial
interests in pools of PCs and certain other types of mortgage-related assets. We earn management and guarantee fees for
providing our guarantee and performing management activities (such as ongoing trustee services, administration of pass-
through amounts, paying agent services, tax reporting and other required services) with respect to issued PCs and Structured
Securities. Our management activities are essential to and inseparable from our guarantee activities. We do not provide or
charge for the activities separately. 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
during the year, which deteriorated dramatically during the second half of the year. Deterioration of market conditions,
including rapidly declining home prices, higher mortgage delinquency rates and higher loss severities, contributed to large
credit-related expenses and other-than-temporary impairments for the third and fourth quarters and the full year of 2008.
Conservatorship and Related Developments
On September 6, 2008, at the request of the then Secretary of the U.S. Department of the Treasury, or Treasury, the
Chairman of the Board of Governors of the Federal Reserve System, or the Federal Reserve, and the Director of the Federal
Housing Finance Agency, or FHFA, our Board of Directors adopted a resolution consenting to the appointment of a
conservator. After obtaining this consent, the Director of FHFA appointed FHFA as our Conservator on September 6, 2008.
Upon its appointment, the Conservator immediately succeeded to all rights, titles, powers and privileges of Freddie Mac, and
of any stockholder, officer or director of Freddie Mac with respect to Freddie Mac and its assets, and succeeded to the title
to all books, records and assets of Freddie Mac held by any other legal custodian or third party. During the conservatorship,
the Conservator has delegated certain authority to the Board of Directors to oversee, and management to conduct, day-to-day
operations so that the company can continue to operate in the ordinary course of business. There is significant uncertainty as
to whether or when we will emerge from conservatorship, as it has no specified termination date, or what changes may occur
to our business structure during or following our conservatorship, including whether we will continue to exist. However, we
are not aware of any current plans of our Conservator to significantly change our business structure in the near-term.
We receive substantial support from Treasury, FHFA as our Conservator and regulator and the Federal Reserve. On
February 18, 2009, Treasury Secretary Geithner issued a statement outlining further efforts by Treasury to strengthen its
commitment to us by increasing the funding available under the senior preferred stock purchase agreement, or Purchase
Agreement, from $100 billion to $200 billion. As of the filing of this annual report on Form 10-K, the Purchase Agreement
has not been amended to reflect the increase in Treasury’s commitment. For additional information on our Purchase
Agreement, see “NOTE 9: STOCKHOLDERS’ EQUITY (DEFICIT).” We are dependent upon the continued support of
Treasury and FHFA in order to continue operating our business. Our ability to access funds from Treasury under the
Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory
mandatory receivership provisions.
In November 2008, we received $13.8 billion from Treasury under the Purchase Agreement, and we expect to receive
$30.8 billion in March 2009 pursuant to a draw request that FHFA has submitted to Treasury on our behalf. Upon funding of
the $30.8 billion draw request, the aggregate liquidation preference on the senior preferred stock owned by Treasury will
increase from $1.0 billion as of September 8, 2008 to $45.6 billion. The amount remaining under the announced funding
commitment from Treasury will be $155.4 billion, which does not include the initial liquidation preference of $1 billion
reflecting the cost of the initial funding commitment (as no cash was received). The corresponding annual dividends payable
to Treasury will increase to $4.6 billion. This dividend obligation exceeds our annual historical earnings in most periods, and
will contribute to increasingly negative cash flows in future periods, if we pay the dividends in cash. In addition, the
continuing deterioration in the financial and housing markets and further net losses in accordance with generally accepted
186 Freddie Mac