Freddie Mac 2008 Annual Report Download - page 68

Net interest income was $6.8 billion for 2008, compared to $3.1 billion for 2007. The 2% annualized limitation on the
growth of our mortgage-related investments portfolio previously established by FHFA expired during March 2008 as we met
FHFA’s criterion of becoming a timely filer of our financial statements. As a result, we were able to hold higher amounts of
fixed-rate agency mortgage-related securities at significantly wider spreads relative to our funding costs during 2008 as
compared to 2007. Our funding costs were lower in 2008, as compared to 2007, due to declines in interest rates combined
with our greater use of lower-cost short-term debt. Net interest income also includes $0.6 billion of income related to the
accretion of other-than-temporary impairments of investments in available-for-sale securities recorded in the second and third
quarters of 2008.
Non-interest income (loss) was $(29.2) billion and $(0.3) billion for 2008 and 2007, respectively. The increase in non-
interest loss during 2008 was primarily due to higher losses on investment activity, higher derivative losses excluding
foreign-currency related effects, and higher losses on our guarantee asset driven by increased uncertainty in the market and
declines in long-term interest rates. Losses on investment activity totaled $16.1 billion in 2008, as compared to gains of
$294 million in 2007, due primarily to impairments on available-for-sale securities of $17.7 billion during 2008. We believe
a significant amount of the declines in fair values represented by these impairments are due to decreased liquidity and larger
risk premiums in the mortgage market. If our assumptions concerning the future performance of these securities are correct,
we will recapture a significant portion of these write-downs as interest income, as remittances on the securities are received.
We recognized a significant increase in net derivative losses during 2008 compared to 2007 due to declines in interest rates
during 2008, resulting in losses on our pay-fixed swap positions, partially offset by gains on receive-fixed swaps principally
used as economic hedges on our outstanding debt. These losses were partially offset by increased income on our guarantee
obligation and higher management and guarantee income in 2008.
Non-interest expense for 2008 and 2007 totaled $22.2 billion and $8.8 billion, respectively, and included credit-related
expenses of $17.5 billion and $3.1 billion, respectively. Excluding credit-related expenses, our non-interest expense declined
from $5.7 billion in 2007 to $4.7 billion in 2008 and was primarily due to the reductions in losses on certain credit
guarantees and losses on loans purchased. These declines were partially offset by a $1.1 billion loss on the Lehman short-
term lending transactions. See “CONSOLIDATED RESULTS OF OPERATIONS — Non-Interest Expense — Securities
Administrator Loss on Investment Activity” for further information on the Lehman short-term lending transactions.
Administrative expenses totaled $1.5 billion for 2008, down from $1.7 billion for 2007 as we implemented several cost
reduction measures.
Segment Earnings
Our business operations consist of three reportable segments, which are based on the type of business activities each
performs — Investments, Single-family Guarantee and Multifamily. The activities of our business segments are described in
“BUSINESS — Our Business and Statutory Mission — Our Business Segments.” Certain activities that are not part of a
segment are included in the All Other category. We manage and evaluate performance of the segments and All Other using a
Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator.
In managing our business, we present the operating performance of our segments using Segment Earnings. Segment
Earnings differs significantly from, and should not be used as a substitute for, net income (loss) as determined in accordance
with GAAP. For more information on Segment Earnings, including its limitations as a measure of our financial performance,
see “CONSOLIDATED RESULTS OF OPERATIONS — Segment Earnings” and “NOTE 16: SEGMENT REPORTING” to
our consolidated financial statements.
The objectives set forth for us under our charter and by our Conservator, as well as the restrictions on our business
under the Purchase Agreement with Treasury, may negatively impact our Segment Earnings and the performance of
individual segments. For example:
• the required reduction in our mortgage-related investments portfolio balance to $250 billion, through successive
annual 10% declines commencing in 2010, will likely cause our Investments segment results to decline;
• our objective of assisting the mortgage market may cause us to change our pricing strategy in our core mortgage loan
purchase or guarantee business, which may negatively impact our Single-family Guarantee segment results; and
• the public policy objective of keeping borrowers in their homes may result in us making substantial concessions to
troubled borrowers, which could negatively impact our results.
For more information, see “BUSINESS — Conservatorship and Related Developments.”
Segment Earnings is calculated for the segments by adjusting GAAP net income (loss) for certain investment-related
activities and credit guarantee-related activities. Segment Earnings includes certain reclassifications among income and
expense categories that have no impact on net income (loss) but provide us with a meaningful metric to assess the
performance of each segment and our company as a whole. Segment Earnings does not include the effect of the
establishment of the valuation allowance against our net deferred tax assets.
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