Freddie Mac 2010 Annual Report Download - page 204

Housing Finance Agency Initiative
On October 19, 2009, we entered into a Memorandum of Understanding with Treasury, FHFA, and Fannie Mae, which
sets forth the terms under which Treasury and, as directed by FHFA, we and Fannie Mae, would provide assistance, through
three separate initiatives, to state and local HFAs so that the HFAs can continue to meet their mission of providing affordable
financing for both single-family and multifamily housing. FHFA directed us and Fannie Mae to participate in the HFA
initiative on a basis that is consistent with the goals of being commercially reasonable and safe and sound. Treasury’s
participation in these assistance initiatives does not affect the amount of funding that Treasury can provide to Freddie Mac
under the terms of the Purchase Agreement.
From October 19, 2009 to December 31, 2009, we, Treasury, Fannie Mae, and participating HFAs entered into definitive
agreements setting forth the respective parties’ obligations under this initiative. The initiatives are as follows:
•TCLFP — In December 2009, on a 50-50 pro rata basis, Freddie Mac and Fannie Mae agreed to provide $8.2 billion
of credit and liquidity support, including outstanding interest at the date of the guarantee, for variable rate demand
obligations, or VRDOs, previously issued by HFAs. This support was provided through the issuance of guarantees,
which provide credit enhancement to the holders of such VRDOs and also create an obligation to provide funds to
purchase any VRDOs that are put by their holders and are not remarketed. Treasury provided a credit and liquidity
backstop on the TCLFP. These guarantees, each of which expires on or before December 31, 2012, replaced existing
liquidity facilities from other providers.
•NIBP — In December 2009, on a 50-50 pro rata basis, Freddie Mac and Fannie Mae agreed to issue in total
$15.3 billion of partially guaranteed pass-through securities backed by new single-family and certain new multifamily
housing bonds issued by HFAs. Treasury purchased all of the pass-through securities issued by Freddie Mac and
Fannie Mae. This initiative provided financing for HFAs to issue new housing bonds.
Treasury will bear the initial losses of principal up to 35% of total principal for these two initiatives combined, and
thereafter Freddie Mac and Fannie Mae each will be responsible only for losses of principal on the securities that it issues to
the extent that such losses are in excess of 35% of all losses under both initiatives. Treasury will bear all losses of unpaid
interest. Under both initiatives, we and Fannie Mae were paid fees at the time bonds were securitized and also will be paid
on-going fees.
The third initiative under the HFA initiative is described below:
•Multifamily Credit Enhancement Initiative. Using existing housing bond credit enhancement products, Freddie Mac
is providing a guarantee of new housing bonds issued by HFAs, which Treasury purchased from the HFAs. Treasury
will not be responsible for a share of any losses incurred by us in this initiative.
Related Parties as a Result of Conservatorship
As a result of our issuance to Treasury of the warrant to purchase shares of our common stock equal to 79.9% of the
total number of shares of our common stock outstanding, on a fully diluted basis, we are deemed a related party to the
U.S. government. Except for the transactions with Treasury discussed above in “Government Support for our Business” and
“Housing Finance Agency Initiative” as well as in “NOTE 9: DEBT SECURITIES AND SUBORDINATED
BORROWINGS,” and “NOTE 13: FREDDIE MAC STOCKHOLDERS’ EQUITY (DEFICIT),” no transactions outside of
normal business activities have occurred between us and the U.S. government during the year ended December 31, 2010. In
addition, we are deemed related parties with Fannie Mae as both we and Fannie Mae have the same relationships with FHFA
and Treasury. All transactions between us and Fannie Mae have occurred in the normal course of business.
NOTE 4: VARIABLE INTEREST ENTITIES
We use securitization trusts in our securities issuance process. Prior to January 1, 2010, these trusts met the definition of
QSPEs and were not subject to consolidation. Effective January 1, 2010, the concept of a QSPE was removed from GAAP
and entities previously considered QSPEs were required to be evaluated for consolidation. In addition, effective January 1,
2010, the approach for determining the primary beneficiary of a VIE based solely on economic variability was removed from
GAAP in favor of a more qualitative approach that focuses on power and economic exposure. Specifically, GAAP states that
an enterprise will be deemed to have a controlling financial interest in, and thus be the primary beneficiary of, a VIE if it has
both: (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and
(b) the right to receive benefits from the VIE that could potentially be significant to the VIE or the obligation to absorb
losses of the VIE that could potentially be significant to the VIE. GAAP requires ongoing assessments of whether an
enterprise is the primary beneficiary of a VIE. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES —
Consolidation and Equity Method of Accounting” for further information regarding the consolidation of certain VIEs.
Based on our evaluation, we determined that we are the primary beneficiary of trusts that issue our single-family PCs
and certain Other Guarantee Transactions. Therefore, effective January 1, 2010, we consolidated on our balance sheet the
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