Freddie Mac 2012 Annual Report Download - page 183

procedures were not effective as of December 31, 2012, at a reasonable level of assurance. In view of the mitigating actions
we have undertaken related to the material weakness, we believe that our consolidated financial statements for the year ended
December 31, 2012 have been prepared in conformity with GAAP. For additional information, see “CONTROLS AND
PROCEDURES.”
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our business activities require that we maintain adequate liquidity to fund our operations, which may include the need
to make payments of principal and interest on our debt securities, including securities issued by our consolidated trusts, and
otherwise make payments related to our guarantees of mortgage assets; make payments upon the maturity, redemption or
repurchase of our other debt securities; make net payments on derivative instruments; pay dividends on our senior preferred
stock; purchase mortgage-related securities and other investments; purchase mortgage loans; and remove modified or
seriously delinquent loans from PC trusts.
We fund our cash requirements primarily by issuing short-term and long-term debt. Other sources of cash include:
• receipts of principal and interest payments on securities or mortgage loans we hold;
• other cash flows from operating activities, including the management and guarantee fees we receive in connection
with our guarantee activities (excluding those fees we remit to Treasury pursuant to the Temporary Payroll Tax Cut
Continuation Act of 2011);
• borrowings against mortgage-related securities and other investment securities we hold; and
• sales of securities we hold.
We have also received substantial amounts of cash from Treasury pursuant to draws under the Purchase Agreement,
which are made to address quarterly deficits in our net worth. We received $165 million in cash from Treasury during 2012
(related to net worth deficits at December 31, 2011 and March 31, 2012), pursuant to draws under the Purchase Agreement.
We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain
our access to the debt markets and to have adequate liquidity to conduct our normal business activities, although the costs of
our debt funding could vary.
The costs of our debt funding could increase and its availability could decrease in the event of any future downgrades in
our credit ratings or the credit ratings of the U.S. government. For more information, see “Other Debt Securities — Credit
Ratings” and “RISK FACTORS — Competitive and Market Risks — Any downgrade in the credit ratings of the U.S.
government would likely be followed by a downgrade in our credit ratings. A downgrade in the credit ratings of our debt
could adversely affect our liquidity and other aspects of our business.”
We may require cash in order to fulfill our mortgage purchase commitments. Historically, we fulfilled our purchase
commitments related to our mortgage purchase flow business primarily by swap transactions, whereby our customers
exchanged mortgage loans for PCs, rather than using cash. However, we also provide liquidity to our seller/servicers through
our cash purchase program and it is at the discretion of the customer, subject to limitations imposed by the contract
governing the commitment, whether the purchase commitment is fulfilled through a swap transaction or with cash. Loans
purchased through the cash purchase program can be sold to investors through a cash auction of PCs, and, in the interim, are
carried as mortgage loans on our consolidated balance sheets. See “OFF-BALANCE SHEET ARRANGEMENTS” for
additional information regarding our mortgage purchase commitments.
We make extensive use of the Fedwire system in our business activities. The Federal Reserve requires that we fully fund
our account in the Fedwire system to the extent necessary to cover cash payments on our debt and mortgage-related securities
each day, before the Federal Reserve Bank of New York, acting as our fiscal agent, will initiate such payments. We routinely
use an open line of credit with a third party, which provides intraday liquidity to fund our activities through the Fedwire
system. This line of credit is an uncommitted intraday loan facility. As a result, while we expect to continue to use the
facility, we may not be able to draw on it, if and when needed. This line of credit requires that we post collateral that, in
certain circumstances, the secured party has the right to repledge to other third parties, including the Federal Reserve Bank.
As of December 31, 2012, we pledged approximately $10.5 billion of securities to this secured party. See “NOTE 7:
INVESTMENTS IN SECURITIES — Collateral Pledged” for further information.
178 Freddie Mac