Freddie Mac 2011 Annual Report Download - page 127

The table below summarizes the changes in derivative fair values.
Table 32 — Changes in Derivative Fair Values
2011
(1)
2010
(2)
(in millions)
Beginning balance, at January 1 — Net asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(6,560) $(2,267)
Net change in:
Commitments
(3)
...................................................................... (36) (31)
Credit derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11) (8)
Swap guarantee derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (2)
Other derivatives:
(4)
Changes in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,383) (3,508)
Fair value of new contracts entered into during the period
(5)
........................................ 594 444
Contracts realized or otherwise settled during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735 (1,188)
Ending balance, at December 31 — Net asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,662) $(6,560)
(1) Refer to “Table 31 — Derivative Fair Values and Maturities” for a reconciliation of net fair value to the amounts presented on our consolidated
balance sheets as of December 31, 2011.
(2) At December 31, 2010, fair value in this table excludes derivative interest receivable or (payable), net of $(820) million, trade/settle receivable or
(payable), net of $1 million, and derivative cash collateral posted, net of $6.3 billion.
(3) Commitments include: (a) our commitments to purchase and sell investments in securities; (b) our commitments to purchase mortgage loans; and
(c) our commitments to purchase and extinguish or issue debt securities of our consolidated trusts.
(4) Includes fair value changes for interest-rate swaps, option-based derivatives, futures, and foreign-currency swaps.
(5) Consists primarily of cash premiums paid or received on options.
See “CONSOLIDATED RESULTS OF OPERATIONS — Non-Interest Income (Loss) — Derivative Gains (Losses)”
for a description of gains (losses) on our derivative positions.
REO, Net
We acquire properties, which are recorded as REO assets on our consolidated balance sheets, typically as a result of
borrower default on mortgage loans that we own, or for which we have issued our financial guarantee. The balance of our
REO, net, declined to $5.7 billion at December 31, 2011 from $7.1 billion at December 31, 2010. We believe the volume
of our single-family REO acquisitions in 2011 was less than it otherwise would have been due to delays in the foreclosure
process, particularly in states that require a judicial foreclosure process. While we expect the delays to ease in 2012, we
also expect these delays will remain above historical levels. We also expect our REO inventory to remain at elevated
levels, as we have a large inventory of seriously delinquent loans in our single-family credit guarantee portfolio, many of
which will likely complete the foreclosure process and transition to REO during 2012 as our servicers work through their
foreclosure-related issues. To the extent a large volume of loans completes the foreclosure process in a short period of
time, the resulting REO inventory could have a negative impact on the housing market. See “RISK MANAGEMENT —
Credit Risk — Mortgage Credit Risk — Non-Performing Assets” for additional information about our REO activity.
Deferred Tax Assets, Net
We recognize deferred tax assets and liabilities based upon the expected future tax consequences of existing
temporary differences between the financial reporting and the tax reporting basis of assets and liabilities using enacted
statutory tax rates. We record valuation allowances to reduce our net deferred tax assets when it is more likely than not
that a tax benefit will not be realized. The realization of our net deferred tax assets is dependent upon the generation of
sufficient taxable income or, with respect to the portion of our deferred tax assets related to our available-for-sale
securities, our intent and ability to hold such securities to the recovery of any temporary unrealized losses. On a quarterly
basis, we consider all evidence currently available, both positive and negative, in determining whether, based on the
weight of that evidence, the net deferred tax assets will be realized or whether a valuation allowance is necessary.
After evaluating all available evidence, including our losses, the events and developments related to our
conservatorship, volatility in the economy, and related difficulty in forecasting future profit levels, we continue to record a
valuation allowance on a portion of our net deferred tax assets as of December 31, 2011 and 2010. Our valuation
allowance increased by $2.3 billion during 2011 to $35.7 billion, primarily attributable to an increase in temporary
differences during the period. As of December 31, 2011, after consideration of the valuation allowance, we had a net
deferred tax asset of $3.5 billion, primarily representing the tax effect of unrealized losses on our available-for-sale
securities. We believe the deferred tax asset related to these unrealized losses is more likely than not to be realized
because of our assertion that we have the intent and ability to hold our available-for-sale securities until any temporary
unrealized losses are recovered.
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