Freddie Mac 2008 Annual Report Download - page 33

determination with respect to our assets and obligations would commence no earlier than the SEC public filing deadline for
our quarterly or annual financial statements and would continue for 60 calendar days after that date. FHFA has also advised
us that, if, during that 60-day period, we receive funds from Treasury in an amount at least equal to the deficiency amount
under the Purchase Agreement, the Director of FHFA will not make a mandatory receivership determination.
In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other reasons,
including conditions that FHFA has already asserted existed at the time the Director of FHFA placed us into conservatorship.
These include: a substantial dissipation of assets or earnings due to unsafe or unsound practices; the existence of an unsafe
or unsound condition to transact business; an inability to meet our obligations in the ordinary course of business; a
weakening of our condition due to unsafe or unsound practices or conditions; critical undercapitalization; the likelihood of
losses that will deplete substantially all of our capital; or by consent.
Capital Standards
On October 9, 2008, FHFA announced that it was suspending capital classification of us during conservatorship in light
of the Purchase Agreement. The existing statutory and FHFA-directed regulatory capital requirements will not be binding
during the conservatorship. We continue to provide our regular submissions to FHFA on both minimum and risk-based
capital. FHFA continues to publish relevant capital figures (minimum capital requirement, core capital, and GAAP net worth)
but does not publish our critical capital, risk-based capital or subordinated debt levels during conservatorship.
The GSE Act established regulatory capital requirements for us that include ratio-based minimum and critical capital
requirements and a risk-based capital requirement. Prior to September 6, 2008, these standards determined the amounts of
core capital and total capital that we were to maintain to meet regulatory capital requirements. Core capital consisted of the
par value of outstanding common stock (common stock issued less common stock held in treasury), the par value of
outstanding non-cumulative, perpetual preferred stock, additional paid-in capital and retained earnings (accumulated deficit),
as determined in accordance with GAAP. Total capital included core capital and general reserves for mortgage and
foreclosure losses and any other amounts available to absorb losses that FHFA included by regulation.
On October 9, 2008, FHFA also announced that it will engage in rule-making to revise our minimum capital and risk-
based capital requirements. The Reform Act provides that FHFA may increase minimum capital levels from the existing
statutory percentages either by regulation or on a temporary basis by order. FHFA may also, by regulation or order, establish
capital or reserve requirements with respect to any product or activity of an enterprise, as FHFA considers appropriate. In
addition, under the Reform Act, FHFA must, by regulation, establish risk-based capital requirements to ensure the enterprises
operate in a safe and sound manner, maintaining sufficient capital and reserves to support the risks that arise in their
operations and management. In developing the new risk-based capital requirements, FHFA is not bound by the risk-based
capital standards in effect prior to our entry into conservatorship.
Our capital standards in effect prior to our entry into conservatorship on September 6, 2008 are set forth below:
•Minimum Capital. The minimum capital standard required us to hold an amount of core capital that was generally
equal to the sum of 2.50% of aggregate on-balance sheet assets and approximately 0.45% of the sum of outstanding
mortgage-related securities we guaranteed and other aggregate off-balance sheet obligations.
•Mandatory Target Capital Surplus. FHFA directed us to maintain a 20% mandatory target surplus above our
statutory minimum capital requirement.
•Critical Capital. The critical capital standard required us to hold an amount of core capital that was generally equal
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 determine the amount
of total capital that we were to hold to absorb projected losses resulting from adverse interest-rate and credit-risk
conditions that had been specified by the GSE Act prior to enactment of the Reform Act, and added 30% additional
capital to provide for management and operations risk.
For additional information, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES — Capital Adequacy” and
“NOTE 10: REGULATORY CAPITAL” to our consolidated financial statements. Also, see “RISK FACTORS — Legal and
Regulatory Risks” for more information.
Housing Goals and Home Purchase Subgoals
Prior to the enactment of the Reform Act, HUD had general regulatory authority over Freddie Mac, including authority
over our affordable housing goals and new programs. Under the Reform Act, FHFA now has general regulatory authority
over us.
HUD established annual affordable housing goals, which are set forth below in Table 2. The goals, which are set as a
percentage of the total number of dwelling units underlying our total mortgage purchases, have risen steadily since they
became permanent in 1995. The goals are intended to expand housing opportunities for low- and moderate-income families,
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