Freddie Mac 2009 Annual Report Download - page 110

expected principal and interest shortfall on these securities will be significantly less than the recent fair value declines. Since
the beginning of 2007, we have incurred actual principal cash shortfalls of $107 million on impaired securities. However,
many of our investments were structured so that realized losses are recognized when the investment matures.
During the three months and year ended December 31, 2008, we recorded $6.8 billion and $16.5 billion, respectively, of
impairment of available-for-sale securities recognized in earnings related to our investments in non-agency mortgage-related
securities backed by subprime, option ARM, Alt-A and other loans primarily due to deterioration in the performance of the
collateral underlying these loans.
The decline in mortgage credit performance has been severe for subprime, option ARM, Alt-A and other loans. Many of
the same economic factors impacting the performance of our single-family mortgage portfolio also impact the performance
of our investments in non-agency mortgage-related securities. Rising unemployment, an increasing inventory of unsold
homes, tight credit conditions, and weakening consumer confidence not only contributed to poor performance during 2009,
but also impacted our expectations regarding future performance, both of which are critical in assessing other-than-temporary
impairments. Furthermore, the subprime, option ARM, Alt-A and other loans backing our securities have significantly greater
concentrations in the states that are undergoing the greatest economic stress, such as California, Florida, Arizona and
Nevada.
While it is reasonably possible that defaults and severity of losses on our available-for-sale mortgage-related securities
where we have not recorded an impairment earnings charge could exceed our subordination and credit enhancement levels,
we do not believe that those conditions were likely at December 31, 2009. Based on our conclusion that we do not intend to
sell our remaining available-for-sale mortgage-related securities and it is not more likely than not that we will be required to
sell these securities before a sufficient time to recover all unrealized losses and our consideration of available information,
we have concluded that the reduction in fair value of these securities was temporary at December 31, 2009.
Our assessments concerning other-than-temporary impairment require significant judgment and the use of models and
are subject to change as the performance of the individual securities changes and mortgage market conditions evolve.
Bankruptcy reform, loan modification programs and other forms of government intervention in the housing market can
significantly change the performance, including the timing of loss recognition, of the underlying loans and thus our
securities. Given the extent of the housing and economic downturn over the past few years, it is difficult to forecast and
estimate the future performance of mortgage loans and mortgage-related securities with any assurance of predictability, and
actual results could differ materially from our expectations. Furthermore, different market participants could arrive at
materially different conclusions regarding estimates of future cash shortfalls.
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