Freddie Mac 2008 Annual Report Download - page 72

As described under “BUSINESS — Conservatorship and Related Developments,” Treasury and the Federal Reserve have
taken a number of actions affecting our access to debt financing, including the following:
• Treasury entered into the Lending Agreement with us, under which we may request funds through December 31,
2009. As of December 31, 2008, we had not borrowed against the Lending Agreement.
• The Federal Reserve has implemented a program to purchase up to $100 billion in direct obligations of Freddie Mac,
Fannie Mae and the FHLBs. The Federal Reserve will purchase these direct obligations from primary dealers. The
Federal Reserve began purchasing direct obligations under this program in December 2008. The support of the
Federal Reserve has helped to improve spreads on our debt and our access to the debt markets.
The Lending Agreement is scheduled to expire on December 31, 2009. Upon expiration, we will not have a substantial
liquidity backstop available to us (other than Treasury’s ability to purchase up to $2.25 billion of our obligations under its
permanent authority) if we are unable to obtain funding from issuances of debt or other conventional sources. Consequently,
our long-term liquidity contingency strategy is currently dependent on extension of the Lending Agreement beyond
December 31, 2009.
As discussed above, our dividend obligations on the senior preferred stock are substantial, and make it more likely that
we will face increasingly negative cash flows from operations.
Fair Value Results
Our consolidated fair value measurements are a component of our risk management processes, as we use daily estimates
of the changes in fair value to calculate our Portfolio Market Value Sensitivity, or PMVS, and duration gap measures.
Included in our fair value results for 2008 are the funds received from Treasury of $13.8 billion under the Purchase
Agreement. For information about how we estimate the fair value of financial instruments, see “NOTE 17: FAIR VALUE
DISCLOSURES” to our consolidated financial statements.
During 2008, the fair value of net assets, before capital transactions, decreased by $120.9 billion compared to a
$24.7 billion decrease during 2007. Included in the reduction of the fair value of net assets is $40.2 billion related to our
valuation allowance for our net deferred tax assets at fair value during 2008.
Our attribution of changes in the fair value of net assets relies on models, assumptions and other measurement
techniques that evolve over time. The following attribution of changes in fair value reflects our current estimate of the items
presented (on a pre-tax basis) and excludes the effect of returns on capital and administrative expenses.
During 2008, our investment activities decreased fair value of net assets by approximately $75.1 billion. This estimate
includes declines in fair value of approximately $90.7 billion attributable to the net widening of mortgage-to-debt OAS. Of
this amount, approximately $74.9 billion was related to the impact of the net mortgage-to-debt OAS widening primarily on
our portfolio of non-agency mortgage-related securities with a limited, but increasing amount attributable to the risk of future
losses. The reduction in fair value was partially offset by higher core spread income. Core spread income on our mortgage-
related investments portfolio is a fair value estimate of the net current period accrual of income from the spread between
mortgage-related investments and debt, calculated on an option-adjusted basis.
During 2007, our investment activities decreased fair value of net assets by approximately $18.9 billion. This estimate
includes declines in fair value of approximately $23.8 billion attributable to the net widening of mortgage-to-debt OAS. Of
this amount, approximately $13.4 billion was related to the impact of the net mortgage-to-debt OAS widening on our
portfolio of non-agency mortgage-related securities.
The impact of mortgage-to-debt OAS widening during 2008 decreased the current fair value of our investment activities.
Due to the relatively wide OAS levels for purchases during the period, we believe there is a likelihood that, in future periods,
we will be able to recognize core-spread income from our investment activities at a higher spread level than historically. We
estimate that at December 31, 2008, we will recognize core spread income at a net mortgage-to-debt OAS level of
approximately 350 to 450 basis points in the long run, compared to approximately 100 to 105 basis points estimated at
December 31, 2007. As market conditions change, our estimate of expected fair value gains from OAS may also change,
leading to significantly different fair value results.
During 2008, our credit guarantee activities, including our single-family mortgage loan credit exposure, decreased fair
value of net assets by an estimated $40.1 billion. This estimate includes an increase in the single-family guarantee obligation
of approximately $36.7 billion, primarily due to a declining credit environment. This increase in the single-family guarantee
obligation includes a reduction of $7.1 billion in the fair value of our guarantee obligation recorded on January 1, 2008, as a
result of our adoption of SFAS 157.
During 2007, our credit guarantee activities decreased fair value of net assets by an estimated $18.5 billion. This
estimate includes an increase in the single-family guarantee obligation of approximately $22.2 billion, primarily attributable
to a declining credit environment. This increase in the single-family guarantee obligation was partially offset by a fair value
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