Freddie Mac 2012 Annual Report Download - page 193

because we generally hold a substantial portion of our mortgage assets for the long-term and we do not believe that periodic
increases or decreases in the fair value of net assets arising from fluctuations in OAS will significantly affect the long-term
value of our investments in mortgage loans and mortgage-related securities.
Asset-Liability Management Return
Asset-liability management return represents the estimated net increase or decrease in the fair value of net assets
resulting from net exposures related to the market risks we actively manage. We do not hedge all of the interest-rate risk that
exists at the time a mortgage is purchased or that arises over its life. The market risks to which we are exposed as a result of
our investment activities that we actively manage include duration and convexity risks, yield curve risk and volatility risk.
We seek to manage these risk exposures within prescribed limits as part of our overall investment strategy. Taking these
risk positions and managing them within prudent limits is an integral part of our investment activity. We expect that the net
exposures related to market risks we actively manage will generate fair value returns, although those positions may result in a
net increase or decrease in fair value for a given period. See “QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK — Interest-Rate Risk and Other Market Risks” for more information.
Core Management and Guarantee Fees, Net
Core management and guarantee fees, net represents a fair value estimate of the annual income of our credit guarantee
activities, based on current credit guarantee characteristics and market conditions. This estimate considers both contractual
management and guarantee fees collected over the life of the credit guarantees and credit-related delivery fees collected up
front when pools are formed, and associated costs and obligations, which include default costs.
Change in the Fair Value of Credit Guarantee Activities
Change in the fair value of credit guarantee activities represents the estimated impact on the fair value of the credit
guarantee business resulting from changes in the amount of such business we conduct plus the effect of changes in interest
rates, projections of the future credit outlook and other market factors (e.g., impact of the passage of time on cash flow
discounting). Our estimated fair value of credit guarantee activities will change as credit conditions change.
Discussion of Fair Value Results
The table below summarizes the change in the fair value of net assets for 2012 and 2011.
Table 72 — Summary of Change in the Fair Value of Net Assets
2012 2011
(in billions)
Beginning balance ................................................................................ $(78.4) $(58.6)
Changes in fair value of net assets, before capital transactions ............................................... 27.2 (21.3)
Capital transactions:
Dividends and share issuances, net(1) ................................................................ (7.1) 1.5
Ending balance .................................................................................. $(58.3) $(78.4)
(1) Includes the funds received from Treasury of $0.2 billion and $8.0 billion for 2012 and 2011, respectively, under the Purchase Agreement, which
increased the liquidation preference of our senior preferred stock.
During 2012, the fair value of net assets, before capital transactions, increased by $27.2 billion, compared to a $21.3
billion decrease during 2011. The increase in the fair value of net assets, before capital transactions, during 2012 was
primarily due to an increase in the fair value of our single-family mortgage loans as the result of continued improvement in
realized and expected home prices and improvement in the overall credit environment coupled with high estimated core
spread income on our mortgage-related securities and a tightening of OAS levels on our agency securities, multifamily
securities, and unsecuritized loans. These benefits were offset by a decrease of $13.8 billion in the fair value of our single-
family mortgage loans as the result of the adoption of an amendment to the guidance pertaining to fair value measurements
and disclosures in the first quarter of 2012. See “NOTE 16: FAIR VALUE DISCLOSURES — Consolidated Fair Value
Balance Sheets” for additional details.
For loans that have been refinanced under HARP, we value our guarantee obligation using the delivery and guarantee
fees currently charged by us under that initiative. If, subsequent to delivery, the refinanced loan no longer qualifies for
purchase based on current underwriting standards (such as becoming past due or being modified as a part of a troubled debt
188 Freddie Mac