Freddie Mac 2011 Annual Report Download - page 120

Table 27 — Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans
(1)
12/31/2011 9/30/2011 6/30/2011 3/31/2011 12/31/2010
Three Months Ended
(in millions)
Principal repayments and cash shortfalls:
(2)
Subprime:
Principal repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,159 $1,287 $1,341 $1,361 $1,512
Principal cash shortfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6 10 14 6
Option ARM:
Principal repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 298 $ 318 $ 331 $ 315 $ 347
Principal cash shortfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 109 123 100 111
Alt-A and other:
Principal repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 385 $ 425 $ 464 $ 452 $ 537
Principal cash shortfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 81 84 81 62
(1) See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities.
(2) In addition to the contractual interest payments, we receive monthly remittances of principal repayments from both the recoveries of liquidated loans
and, to a lesser extent, voluntary repayments of the underlying collateral of these securities representing a partial return of our investment in these
securities.
At the direction of our Conservator, we are working to enforce our rights as an investor with respect to the non-
agency mortgage-related securities we hold, and are engaged in efforts to mitigate losses on our investments in these
securities, in some cases in conjunction with other investors. The effectiveness of our efforts is highly uncertain and any
potential recoveries may take significant time to realize.
In June 2011, Bank of America Corporation announced that it, BAC Home Loans Servicing, LP, Countrywide
Financial Corporation and Countrywide Home Loans, Inc. entered into a settlement agreement with The Bank of New
York Mellon, as trustee, to resolve certain claims with respect to a number of Countrywide first-lien and second-lien
residential mortgage-related securitization trusts. Bank of America indicated that the settlement is subject to final court
approval and certain other conditions. There can be no assurance that final court approval of the settlement will be
obtained or that all conditions will be satisfied. Bank of America noted that, given the number of investors and the
complexity of the settlement, it is not possible to predict the timing or ultimate outcome of the court approval process,
which could take a substantial period of time. We have investments in certain of these Countrywide securitization trusts
and would expect to benefit from this settlement, if final court approval is obtained. For more information, see
“NOTE 16: CONCENTRATION OF CREDIT AND OTHER RISKS.”
On September 2, 2011, FHFA announced that, as Conservator for Freddie Mac and Fannie Mae, it had filed lawsuits
against 17 financial institutions and related defendants alleging: (a) violations of federal securities laws; and (b) in certain
lawsuits, common law fraud in the sale of residential non-agency mortgage-related securities to Freddie Mac and Fannie
Mae. FHFA, as Conservator, filed a similar lawsuit against UBS Americas, Inc. and related defendants on July 27, 2011.
FHFA seeks to recover losses and damages sustained by Freddie Mac and Fannie Mae as a result of their investments in
certain residential non-agency mortgage-related securities issued by these financial institutions.
Since the beginning of 2007, we have incurred actual principal cash shortfalls of $1.5 billion on impaired non-agency
mortgage-related securities, of which $193 million and $823 million related to the three months and year ended
December 31, 2011, respectively. Many of the trusts that issued non-agency mortgage-related securities we hold were
structured so that realized collateral losses in excess of structural credit enhancements are not passed on to investors until
the investment matures. We currently estimate that the future expected principal and interest shortfalls on non-agency
mortgage-related securities we hold will be significantly less than the fair value declines experienced on these securities.
The investments in non-agency mortgage-related securities we hold backed by subprime, option ARM, and Alt-A
loans were structured to include credit enhancements, particularly through subordination and other structural
enhancements. Bond insurance is an additional credit enhancement covering some of the non-agency mortgage-related
securities. These credit enhancements are the primary reason we expect our actual losses, through principal or interest
shortfalls, to be less than the underlying collateral losses in the aggregate. It is difficult to estimate the point at which
structural credit enhancements will be exhausted and we will incur actual losses. During the year ended December 31,
2011, we continued to experience the erosion of structural credit enhancements on many securities backed by subprime,
option ARM, and Alt-A loans due to poor performance of the underlying collateral. For more information, see “RISK
MANAGEMENT — Credit Risk — Institutional Credit Risk — Bond Insurers.”
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