Freddie Mac 2012 Annual Report Download - page 106

securities is due mainly to the receipt of monthly remittances of principal repayments from both the recoveries from
liquidated loans and, to a lesser extent, voluntary repayments of the underlying collateral, representing a partial return of our
investments in these securities. The decline in the UPB of single-family unsecuritized mortgage loans is primarily related to
our securitization of mortgage loans that we had purchased for cash. See “CONSOLIDATED BALANCE SHEETS
ANALYSIS — Investments in Securities” and “— Mortgage Loans” for additional information regarding our mortgage-
related securities and mortgage loans.
Segment Earnings net interest income decreased $1.2 billion, and Segment Earnings net interest yield decreased six
basis points during 2012, compared to 2011. The primary driver of the decreases was the reduction in the balance of higher-
yielding mortgage-related assets due to continued liquidations, partially offset by lower funding costs primarily due to the
replacement of debt at lower rates.
Segment Earnings non-interest income (loss) was $1.0 billion in 2012, compared to $(4.6) billion in 2011. This
improvement was primarily due to derivative gains during 2012 versus derivative losses during 2011 and an increase in other
non-interest income, partially offset by an increase in losses on trading securities.
Impairments recorded in our Investments segment were $1.8 billion during both 2012 and 2011. In the fourth quarter of
2012 we implemented the use of a third-party model, which enhanced our approach to estimating other-than-temporary
impairments of our single-family non-agency mortgage-related securities. The decision to transition to a third-party model
was made to increase the level of disaggregation for certain assumptions used in projecting cash flow estimates of these
securities. Absent the adverse impact from the implementation of the third-party model, our 2012 impairments were
otherwise positively impacted by improvements in forecasted home prices over the expected life of the available-for-sale
securities and lower interest rates, resulting in a benefit from expected structural credit enhancements on the securities. See
“CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities —
Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities” and “NOTE 7: INVESTMENTS
IN SECURITIES” for additional information on our impairments.
We recorded gains (losses) on trading securities of $(1.8) billion during 2012 compared to $(1.0) billion during 2011.
The losses on trading securities during both periods were primarily due to the movement of securities with unrealized gains
towards maturity. These losses were partially offset by the increase in the fair value of our trading securities as a result of the
decline in interest rates during 2012 and 2011. The increased losses in 2012 compared to 2011 resulted from lower interest
rate-related gains in 2012 as interest rates declined less in 2012 compared to 2011.
While derivatives are an important aspect of our strategy to manage interest-rate risk, they generally increase the
volatility of reported Segment Earnings, because while fair value changes in derivatives affect Segment Earnings, fair value
changes in several of the types of assets and liabilities being hedged do not affect Segment Earnings. We recorded derivative
gains (losses) for this segment of $2.0 billion during 2012 compared to $(3.6) billion during 2011. This improvement was
primarily due to the impact of a smaller decline in interest rates coupled with a yield curve steepening in 2012 compared to
2011. In addition, a change in the mix of our derivatives portfolio, whereby we increased our holdings of receive-fixed swaps
relative to pay-fixed swaps as we rebalanced our portfolio during a period of steadily declining interest rates in 2012,
contributed to the gain. See “Non-Interest Income (Loss) — Derivative Gains (Losses)” for additional information on our
derivatives.
Other non-interest income (loss) for this segment was $2.4 billion during 2012 compared to $1.3 billion during 2011.
The improvement in other non-interest income was primarily due to an increase in amortization income related to premiums
on debt securities of consolidated trusts held by third parties. This amortization income increased due to additional
prepayments on the debt securities of consolidated trusts held by third parties due in part to the low interest rate environment
and an increase in basis adjustments. Basis adjustments related to these debt securities of consolidated trusts held by third
parties are generated through the securitization and sale of retained mortgage loans or sales of Freddie Mac mortgage-related
securities from our mortgage-related investments portfolio.
Our Investments segment’s total other comprehensive income was relatively unchanged at $3.2 billion during 2012
compared to $3.1 billion during 2011, as higher gains on our non-agency mortgage-related securities were largely offset by
the impact of a smaller decline in interest rates and less spread tightening on our agency securities. Changes in fair value of
the Multifamily segment investment securities, excluding impacts from the changes in interest rates which are included in the
Investments segment, are reflected in the Multifamily segment.
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