Freddie Mac 2011 Annual Report Download - page 52

preferred stock has not been redeemed, also could adversely affect our ability to attract new private sector capital in the
future should the company be in a position to seek such capital. Moreover, our draws under Treasury’s funding
commitment, the senior preferred stock dividend obligation, and commitment fees paid to Treasury (commitment fees
have been waived through the first quarter of 2012) could permanently impair our ability to build independent sources of
capital.
We expect to make additional draws under the Purchase Agreement in future periods, which will adversely affect our
future results of operations and financial condition.
We expect to request additional draws under the Purchase Agreement in future periods. Over time, our dividend
obligation to Treasury on the senior preferred stock will increasingly drive future draws. Although we may experience
period-to-period variability in earnings and comprehensive income, it is unlikely that we will generate net income or
comprehensive income in excess of our annual dividends payable to Treasury over the long term. Dividends to Treasury
on the senior preferred stock are cumulative and accrue at an annual rate of 10% (or 12% in any quarter in which
dividends are not paid in cash) until all accrued dividends are paid in cash.
The size and timing of our future draws will be determined by our dividend obligation on the senior preferred stock
and a variety of other factors that could adversely affect our net worth. These other factors include the following:
• how long and to what extent the U.S. economy and housing market, including home prices, remain weak, which
could increase credit expenses and cause additional other-than-temporary impairments of the non-agency mortgage-
related securities we hold;
• foreclosure prevention efforts and foreclosure processing delays, which could increase our expenses;
• competitiveness with other mortgage market participants, including Fannie Mae;
• adverse changes in interest rates, the yield curve, implied volatility or mortgage-to-debt OAS, which could increase
realized and unrealized mark-to-fair value losses recorded in earnings or AOCI;
• required reductions in the size of our mortgage-related investments portfolio and other limitations on our
investment activities that reduce the earnings capacity of our investment activities;
• quarterly commitment fees payable to Treasury, the amount of which has not yet been established and could be
substantial (Treasury has waived the fee for all quarters of 2011 and the first quarter of 2012). Treasury 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;
• adverse changes in our funding costs or limitations in our access to public debt markets;
• establishment of additional valuation allowances for our remaining net deferred tax asset;
• changes in accounting practices or guidance;
• effects of the MHA Program and other government initiatives, including any future requirements to reduce the
principal amount of loans;
• losses resulting from control failures, including any control failures because of our inability to retain staff;
• limitations on our ability to develop new products, enter into new lines of business, or increase guarantee and
related fees;
• introduction of additional public mission-related initiatives that may adversely impact our financial results; or
• changes in business practices resulting from legislative and regulatory developments or direction from our
Conservator.
Under the Purchase Agreement, the $200 billion cap on Treasury’s funding commitment will increase as necessary to
accommodate any cumulative reduction in our net worth during 2010, 2011, and 2012. Although additional draws under
the Purchase Agreement will allow us to remain solvent and avoid mandatory receivership, they will also increase the
liquidation preference of, and the dividends we owe on, the senior preferred stock. Based on the aggregate liquidation
preference of the senior preferred stock of $72.3 billion (which amount includes the funds requested to address our net
worth deficit as of December 31, 2011), Treasury is entitled to annual cash dividends of $7.23 billion, which exceeds our
annual historical earnings in all but one period. Increases in the already substantial liquidation preference and senior
preferred stock dividend obligation, along with limited flexibility to redeem the senior preferred stock, will adversely
affect our results of operations and financial condition and add to the significant uncertainty regarding our long-term
financial sustainability. This may also cause further negative publicity about our company.
47 Freddie Mac