Freddie Mac 2008 Annual Report Download - page 63

• returning to long-term profitability; and
• protecting the interests of taxpayers.
These objectives create conflicts in strategic and day-to-day decision making that will likely lead to suboptimal
outcomes for one or more, or possibly all, of these objectives. Our business is also subject to significant new restrictions that
could limit our ability to achieve one or more of these objectives, including the requirements under the Purchase Agreement
that we (i) limit the size of our mortgage-related investments portfolio to $900 billion as of December 31, 2009 and,
thereafter, decrease the size of our mortgage-related investments portfolio at the rate of 10% per year until it reaches
$250 billion, and (ii) not incur indebtedness that would result in our aggregate indebtedness exceeding a specified amount,
without the prior written consent of Treasury. The balance of our mortgage-related investments portfolio and indebtedness at
December 31, 2008 did not exceed the Purchase Agreement limits.
On February 18, 2009, the Obama Administration announced the HASP, which includes (a) an initiative that will allow
mortgages currently owned or guaranteed by us to be refinanced without obtaining additional credit enhancement beyond that
already in place for that loan; and (b) an initiative to encourage modifications of mortgages for both homeowners who are in
default and those who are at risk of imminent default, through various government incentives to servicers, mortgage holders
and homeowners. At present, it is difficult for us to predict the full extent of our activities under these initiatives and assess
their impact on us. However, to the extent that our servicers and borrowers participate in these programs in large numbers, it
is likely that the costs we incur associated with modifications of loans, the costs associated with servicer and borrower
incentive fees and the potential accounting impacts, will be substantial.
As a result of the draws under the Purchase Agreement, the aggregate liquidation preference of the senior preferred
stock will increase from $1.0 billion as of September 8, 2008 to $45.6 billion. Our annual dividend obligation on the senior
preferred stock, based on that liquidation preference, will be $4.6 billion, which is in excess of our annual historical earnings
in most periods. These dividend obligations make it more likely that we will face increasingly negative cash flows from
operations. To date, our need for funding under the Purchase Agreement has not been caused by cash flow shortfalls but
rather primarily reflects large credit-related expenses and non-cash fair value adjustments as well as a partial valuation
allowance against our net deferred tax assets that resulted in reductions to our GAAP stockholders’ equity (deficit). Under
the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited and we may
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 could increase further as a result of additional draws under the Purchase Agreement or
any dividends or quarterly commitment fees payable under the Purchase Agreement that are not paid in cash. The amounts
we are obligated to pay in dividends on the senior preferred stock are substantial and will have an adverse impact on our
financial position and net worth and could substantially delay our return to long-term profitability or make long-term
profitability unlikely. For more information, see “RISK FACTORS — Conservatorship and Related Developments — Factors
including credit losses from our mortgage guarantee activities have had an increasingly negative impact on our cash flows
from operations during 2007 and 2008. As we anticipate these trends to continue for the foreseeable future, it is likely that
the company will increasingly rely upon access to the public debt markets as a source of funding for ongoing operations.”
For more information on the risks to our business relating to the conservatorship and uncertainties regarding the future
of our business, see “RISK FACTORS.”
Housing and Economic Conditions and Impact on 2008 Results
The U.S. residential mortgage market experienced substantial deterioration during 2008 and early 2009, which adversely
affected our financial condition and results of operations. We expect the residential mortgage market will continue to
deteriorate in 2009.
Home price declines accelerated nationwide during 2008, with significant regional variations. We estimate that the
national decline in home prices from the end of the third quarter of 2006 until the end of 2008 was approximately 16.8%,
based on our own index, which is based on our single-family mortgage portfolio. We believe that there will be additional
declines of 5 to 10% during 2009 based on our index. Other indices of home price changes may have different results than
our own, as they are determined using different pools of mortgage loans. The percentage decline in home prices was
particularly large in California, Florida, Arizona and Nevada, where we have significant concentrations of mortgage loans in
our single-family mortgage portfolio, which includes loans underlying our PCs and Structured Securities. We estimate that
home prices, as measured by our index, declined during 2008 by 26%, 25%, 26% and 30% in California, Florida, Arizona
and Nevada, respectively.
Unemployment rates also worsened significantly. The U.S. Bureau of Labor Statistics reported unemployment rates in
California, Florida, Arizona and Nevada of 9.3%, 8.1%, 6.9% and 9.1%, respectively, while the national rate was 7.2% as of
December 31, 2008. Although inflation moderated by year end, an upward spike in food and energy prices during 2008
further eroded household financial conditions, and real consumer spending declined significantly. Both consumer and
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