Freddie Mac 2011 Annual Report Download - page 192

During 2010, the decrease in the fair value of net assets, before capital transactions, was primarily due to: (a) an
increase in the risk premium related to our single-family loans as higher capital was applied reflecting the continued weak
and uncertain credit environment; and (b) a change in the estimation of a risk premium assumption embedded in our
model to apply credit costs, which led to a $6.9 billion decrease in our fair value measurement of mortgage loans. The
decrease in fair value was partially offset by high estimated core spread income and an increase in the fair value of our
investments in residential and commercial mortgage-related securities driven by the tightening of OAS levels.
When the OAS on a given asset widens, the fair value of that asset will typically decline, all other market factors
being equal. However, we believe such OAS widening has the effect of increasing the likelihood that, in future periods,
we will recognize income at a higher spread on this existing asset. The reverse is true when the OAS on a given asset
tightens — current period fair values for that asset typically increase due to the tightening in OAS, while future income
recognized on the asset is more likely to be earned at a reduced spread. However, as market conditions change, our
estimate of expected fair value gains and losses from OAS may also change, and the actual core spread income
recognized in future periods could be significantly different from current estimates.
OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain business arrangements that are not recorded on our consolidated balance sheets or may be
recorded in amounts that differ from the full contract or notional amount of the transaction. These off-balance sheet
arrangements may expose us to potential losses in excess of the amounts recorded on our consolidated balance sheets.
Securitization Activities and Other Guarantee Commitments
We have certain off-balance sheet arrangements related to our securitization activities involving guaranteed mortgages
and mortgage-related securities, though most of our securitization activities are on-balance sheet. Our off-balance sheet
arrangements related to these securitization activities primarily consisted of: (a) Freddie Mac mortgage-related securities
backed by multifamily loans; and (b) certain single-family Other Guarantee Transactions. We also have off-balance sheet
arrangements related to other guarantee commitments, including long-term standby commitments and liquidity guarantees.
We guarantee the payment of principal and interest on Freddie Mac mortgage-related securities we issue and on
mortgage loans covered by our other guarantee commitments. Therefore, our maximum potential off-balance sheet
exposure to credit losses relating to these securitization activities and the other guarantee commitments is primarily
represented by the UPB of the underlying loans and securities, which was $56.9 billion, $43.9 billion, and $1.5 trillion at
December 31, 2011, 2010, and 2009, respectively. Our off-balance sheet arrangements related to securitization activity
have been significantly reduced from historical levels due to accounting guidance for transfers of financial assets and the
consolidation of VIEs, which we adopted on January 1, 2010. See “NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES — Recently Adopted Accounting Guidance” and “NOTE 9: FINANCIAL GUARANTEES”
for more information on our off-balance sheet securitization activities and other guarantee commitments.
We provide long-term standby commitments to certain of our customers, which obligate us to purchase seriously
delinquent loans that are covered by those agreements. These other guarantee commitments totaled $8.6 billion,
$5.5 billion, and $5.1 billion of UPB at December 31, 2011, 2010, and 2009, respectively. We also had other guarantee
commitments outstanding with respect to multifamily housing revenue bonds of $9.6 billion, $9.7 billion, and $9.2 billion
in UPB at December 31, 2011, 2010, and 2009, respectively. These other guarantee commitments allow us to expand our
support to the housing markets in certain circumstances where securitization is not warranted or practicable. In addition,
as of December 31, 2011, 2010, and 2009, we issued other guarantee commitments on HFA bonds under the TCLFP with
UPB of $2.9 billion, $3.5 billion, and $0.8 billion respectively.
As part of the guarantee arrangements pertaining to certain multifamily housing revenue bonds and securities backed
by multifamily housing revenue bonds, we provided commitments to advance funds, commonly referred to as “liquidity
guarantees,” totaling $12.0 billion, $12.6 billion, and $12.4 billion at December 31, 2011, 2010, and 2009, respectively.
These guarantees require us to advance funds to third parties that enable them to repurchase tendered bonds or securities
that are unable to be remarketed. Any repurchased securities are pledged to us to secure funding until the securities are
remarketed. We hold cash and cash equivalents in excess of these commitments to advance funds. At December 31, 2011,
2010, and 2009, there were no liquidity guarantee advances outstanding. Advances under our liquidity guarantees would
typically mature in 60 to 120 days. In addition, as part of the HFA initiative, we, together with Fannie Mae, provide
liquidity guarantees for certain variable-rate single-family and multifamily housing revenue bonds, under which Freddie
Mac generally is obligated to purchase 50% of any tendered bonds that cannot be remarketed within five business days.
For more information on the HFA Initiative, including our participation in the TCLFP, see “NOTE 2:
CONSERVATORSHIP AND RELATED MATTERS — Housing Finance Agency Initiative.”
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