Freddie Mac 2009 Annual Report Download - page 80

Net interest income also included $1.2 billion of income during 2009, primarily recognized in the first quarter of 2009,
compared to $551 million of income during 2008, related to the accretion of other-than-temporary impairments of
investments in available-for-sale securities. Upon our adoption of an amendment to the accounting standards for investments
in debt and equity securities on April 1, 2009, previously recognized non-credit-related other-than-temporary impairments
were reclassified from retained earnings to AOCI and these amounts are no longer accreted into net interest income. See
“NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” to our consolidated financial statements for a
discussion of the impact of these accounting changes.
The increases in net interest income and net interest yield on a fully taxable-equivalent basis during 2009 were partially
offset by the impact of declining short-term interest rates on floating rate mortgage-related assets that we held for
investment. During 2009, we also increased our holdings of lower-yielding, shorter-term cash and cash equivalents, Treasury
bills and securities purchased under agreements to resell. This shift, in combination with lower short-term rates, also partially
offset the increase in net interest income and net interest yield.
Net interest income may be negatively impacted in future periods by: (a) the required decreases in our mortgage-related
investments portfolio balance, through successive annual 10% reductions commencing in 2010 until it reaches $250 billion,
which will cause a reduction in our interest-earning assets; (b) the termination of the Federal Reserve’s program to purchase
our debt securities, which may increase our funding costs; and (c) any adverse changes to interest rates, as we benefit from a
steep yield curve environment. For information on the impact of our adoption of the amendments to the accounting standards
related to transfers of financial assets and consolidation of VIEs on our net interest income in 2010, see “NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Issued Accounting Standards, Not Yet Adopted
Within These Consolidated Financial Statements” to our consolidated financial statements.
Net interest income and net interest yield on a fully taxable-equivalent basis increased during 2008 compared to 2007
primarily due to purchases of fixed-rate assets at wider spreads relative to our funding costs, a decrease in funding costs due
to the replacement of higher cost short- and long-term debt with lower cost debt issuances, and a significant increase in the
average size of our investments in mortgage loans and mortgage-related securities. During 2008, liquidity concerns in the
market resulted in more favorable investment opportunities for agency mortgage-related securities at wider spreads.
Additionally, FHFA directed that we acquire and hold increased amounts of mortgage loans and mortgage-related securities
to provide additional liquidity to the mortgage market. In response, we increased our purchase activities during the second
half of 2008 resulting in an increase in the average balance of our interest-earning assets. Interest income for 2008 includes
$551 million of income related to the accretion of other-than-temporary impairments of investments in available-for-sale
securities recorded during 2008. Net interest income and net interest yield for 2008 also benefited from funding fixed-rate
assets with a higher proportion of short-term debt in a steep yield curve environment. However, our use of short-term debt
funding was also driven by the substantial levels of volatility in the worldwide financial markets, which limited our ability to
obtain long-term and callable debt funding during 2008. As a result, our short-term funding balances increased significantly
when compared to 2007. The increases in net interest income and net interest yield on a fully taxable-equivalent basis during
2008 were partially offset by the impact of declining interest rates on floating rate mortgage-related assets that we held for
investment during 2008, as well as a decline in prepayment fees, or yield maintenance income, on our multifamily whole
loans as a result of a decline in prepayments. Our decision to shift from higher-yielding, longer-term non-mortgage-related
securities to lower-yielding, shorter-term cash and cash equivalent investments, such as commercial paper, during 2008, in
combination with lower short-term rates, also partially offset the increase in net interest income and net interest yield.
Non-Interest Income (Loss)
Management and Guarantee Income
Management and guarantee income primarily consists of contractual management and guarantee fees, representing a
portion of the interest collected on loans underlying our PCs and Structured Securities. The primary drivers affecting
management and guarantee income are changes in the average balance of our issued PCs and Structured Securities and
changes in management and guarantee fee rates for newly-issued guarantees. Contractual management and guarantee fees
reflect adjustments for buy-ups and buy-downs, whereby the management and guarantee fee rate is adjusted for up-front cash
payments we make (buy-up) or receive (buy-down) upon issuance of our guarantee. Our guarantee fee rates are established at
issuance and remain fixed over the life of the guarantee. Our average rates of management and guarantee income are affected
by the mix of products we issue, competition in the market and customer preference for buy-up and buy-down fees. The
appointment of FHFA as Conservator and the Conservator’s subsequent directive that we provide increased support to the
mortgage market affected our guarantee pricing decisions by limiting our ability to adjust our fees for current expectations of
credit risk, and will likely continue to do so.
Table 13 provides summary information about management and guarantee income. Management and guarantee income
consists of contractual amounts due to us (reflecting buy-ups and buy-downs to base management and guarantee fees) as well
77 Freddie Mac