Freddie Mac 2011 Annual Report Download - page 34

under the terms and conditions set forth in the Purchase Agreement. Under the Purchase Agreement, the $200 billion
maximum amount of the commitment from Treasury will increase as necessary to accommodate any cumulative reduction
in our net worth during 2010, 2011 and 2012. If we do not have a capital surplus (i.e., positive net worth) at the end of
2012, then the amount of funding available after 2012 will be $149.3 billion ($200 billion funding commitment reduced
by cumulative draws for net worth deficits through December 31, 2009). In the event we have a capital surplus at the end
of 2012, then the amount of funding available after 2012 will depend on the size of that surplus relative to cumulative
draws needed for deficits during 2010 to 2012, as follows:
• If the year-end 2012 surplus is lower than the cumulative draws needed for 2010 to 2012, then the amount of
available funding is $149.3 billion less the surplus.
• If the year-end 2012 surplus exceeds the cumulative draws for 2010 to 2012, then the amount of available funding
is $149.3 billion less the amount of those draws.
In addition to the issuance of the senior preferred stock and warrant, we are required under the Purchase Agreement
to pay a quarterly commitment fee to Treasury. Under the Purchase Agreement, the fee is to be determined in an amount
mutually agreed to by us and Treasury with reference to the market value of Treasury’s funding commitment as then in
effect, and reset every five years. We may elect to pay the quarterly commitment fee in cash or add the amount of the fee
to the liquidation preference of the senior preferred stock. Treasury may waive the quarterly commitment fee for up to
one year at a time, in its sole discretion, based on adverse conditions in the U.S. mortgage market. The fee was originally
scheduled to begin accruing on January 1, 2010 (with the first fee payable on March 31, 2010), but was delayed until
January 1, 2011 (with the first fee payable on March 31, 2011) pursuant to an amendment to the Purchase Agreement.
Treasury waived the fee for all quarters of 2011 and the first quarter of 2012, but has indicated that it remains committed
to protecting taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their
investment. Treasury stated that it would reevaluate whether the quarterly commitment fee should be set in the second
quarter of 2012. Absent Treasury waiving the commitment fee in the second quarter of 2012, this quarterly commitment
fee will begin accruing on April 1, 2012 and must be paid each quarter for as long as the Purchase Agreement is in effect.
The amount of the fee has not yet been determined and could be substantial.
The Purchase Agreement provides that, on a quarterly basis, we generally may draw funds up to the amount, if any,
by which our total liabilities exceed our total assets, as reflected on our GAAP balance sheet for the applicable fiscal
quarter (referred to as the deficiency amount), provided that the aggregate amount funded under the Purchase Agreement
may not exceed Treasury’s commitment. The Purchase Agreement provides that the deficiency amount will be calculated
differently if we become subject to receivership or other liquidation process. The deficiency amount may be increased
above the otherwise applicable amount upon our mutual written agreement with Treasury. In addition, if the Director of
FHFA determines that the Director will be mandated by law to appoint a receiver for us unless our capital is increased by
receiving funds under the commitment in an amount up to the deficiency amount (subject to the maximum amount that
may be funded under the agreement), then FHFA, in its capacity as our Conservator, may request that Treasury provide
funds to us in such amount. The Purchase Agreement also provides that, if we have a deficiency amount as of the date of
completion of the liquidation of our assets, we may request funds from Treasury in an amount up to the deficiency
amount (subject to the maximum amount that may be funded under the agreement). Any amounts that we draw under the
Purchase Agreement will be added to the liquidation preference of the senior preferred stock. No additional shares of
senior preferred stock are required to be issued under the Purchase Agreement. As a result, the expiration on
December 31, 2009 of Treasury’s temporary authority to purchase obligations and other securities issued by Freddie Mac
did not affect Treasury’s funding commitment under the Purchase Agreement.
Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited
and we will not be able to do so for the foreseeable future, if at all. The amounts payable for dividends on the senior
preferred stock are substantial and will have an adverse impact on our financial position and net worth. The payment of
dividends on our senior preferred stock in cash reduces our net worth. For periods in which our earnings and other
changes in equity do not result in positive net worth, draws under the Purchase Agreement effectively fund the cash
payment of senior preferred dividends to Treasury. It is unlikely that, over the long-term, we will generate net income or
comprehensive income in excess of our annual dividends payable to Treasury, although we may experience period-to-
period variability in earnings and comprehensive income. As a result, we expect to make additional draws in future
periods.
The Purchase Agreement provides that the Treasury’s funding commitment will terminate under any of the following
circumstances: (a) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding
commitment at that time; (b) the payment in full of, or reasonable provision for, all of our liabilities (whether or not
29 Freddie Mac