Freddie Mac 2011 Annual Report Download - page 105

Segment Earnings net interest income increased $1.1 billion, and Segment Earnings net interest yield increased
31 basis points during 2011, compared to 2010. The primary driver was lower funding costs, primarily due to the
replacement of debt at lower rates. These lower funding costs were partially offset by the reduction in the average balance
of higher-yielding mortgage-related assets due to continued liquidations and limited purchase activity.
Segment Earnings non-interest income (loss) was $(4.6) billion in 2011, compared to $(6.1) billion in 2010. This
improvement in non-interest loss was mainly due to decreased net impairment of available-for-sale securities and
decreased losses on trading securities, partially offset by increased derivative losses.
Impairments recorded in our Investments segment decreased by $2.0 billion during 2011, compared to 2010,
primarily due to the impact of lower interest rates in 2011 resulting in a benefit from expected structural credit
enhancements on the securities. The impact of lower interest rates was partially offset by the impact of declines in
forecasted home prices. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities —
Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities”
for additional information on our impairments.
We recorded losses on trading securities of $(1.0) billion during 2011, compared to $(1.4) billion during 2010.
Losses in both periods are primarily due to the movement of securities with unrealized gains towards maturity. These
losses were partially offset by larger fair value gains in 2011, due to a more significant decline in long-term interest rates,
compared to 2010.
We recorded derivative gains (losses) for this segment of $(3.6) billion during 2011, compared to $(1.9) billion
during 2010. While derivatives are an important aspect of our strategy to manage interest-rate risk, they generally increase
the volatility of reported Segment Earnings, because while fair value changes in derivatives affect Segment Earnings, fair
value changes in several of the types of assets and liabilities being hedged do not affect Segment Earnings. During 2011
and 2010, swap interest rates decreased, resulting in fair value losses on our pay-fixed swaps, partially offset by fair value
gains on our receive-fixed swaps and purchased call swaptions. See “Non-Interest Income (Loss) — Derivative Gains
(Losses)” for additional information on our derivatives.
Our Investments segment’s total other comprehensive income was $3.1 billion in 2011. Net unrealized losses in
AOCI on our available-for-sale securities decreased by $2.6 billion during 2011, primarily attributable to the impact of
declining interest rates, resulting in fair value gains on our agency securities, and the recognition in earnings of other-
than-temporary impairments on our non-agency mortgage-related securities, partially offset by the impact of widening
OAS levels on our single-family non-agency mortgage-related securities. The changes in fair value of CMBS, excluding
impacts from the changes in interest rates, are reflected in the Multifamily segment.
Segment Earnings for our Investments segment decreased by $5.2 billion to $1.3 billion in 2010, compared to
$6.5 billion in 2009. Comprehensive income for our Investments segment decreased by $6.3 billion to $11.5 billion in
2010, compared to $17.8 billion in 2009.
Segment Earnings net interest income and net interest yield decreased $1.9 billion and 12 basis points, respectively,
during 2010, compared to 2009. The primary driver underlying these decreases was a decrease in the average balance of
mortgage-related securities, partially offset by a decrease in funding costs as a result of the replacement of higher-cost
long-term debt at lower rates.
Segment Earnings non-interest loss increased $5.6 billion in 2010, compared to 2009. Included in other non-interest
income (loss) are gains (losses) on trading securities of $(1.4) billion in 2010, compared to $4.9 billion in 2009. In 2010,
the losses on trading securities was primarily due to the movement of securities with unrealized gains towards maturity,
particularly interest-only securities, partially offset by fair value gains on our non-interest-only securities classified as
trading primarily due to decreased interest rates. The net gains on trading securities during 2009 related primarily to
tightening OAS levels.
We recorded derivative gains (losses) for this segment of $(1.9) billion during 2010, compared to $4.7 billion during
2009. During 2010, swap interest rates decreased, resulting in fair value losses on our pay-fixed swaps, partially offset by
fair value gains on our receive-fixed swaps and purchased call swaptions. During 2009, longer-term swap interest rates
increased, resulting in fair value gains on our pay-fixed swaps, partially offset by fair value losses on our receive-fixed
swaps.
Impairments recorded in our Investments segment decreased by $6.1 billion during 2010, compared to 2009.
Impairments for 2010 and 2009 are not comparable because the adoption of the amendment to the accounting guidance
for investments in debt and equity securities on April 1, 2009 significantly impacted both the identification and
measurement of other-than-temporary impairments.
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